Oil's Phony Recession Leads To Phony Recovery

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Includes: COST, DIA, IWM, QQQ, SN, SPY
by: Dana Blankenhorn

Summary

Retail sales fell on lower oil prices, hurting stocks.

They should rise on higher oil prices, but the operations have not changed.

Time for the oil patch to show its hand.

The collapse in oil prices during 2015, which twice drove futures to the $30 level, created an interesting response at the retail level.

Stocks went down.

It should not matter that the value of gas sold at Costco (NASDAQ:COST), for instance, dropped, since the company's margin on those sales remained the same. Yet twice in the last year the company's stock has gone through a mini-collapse after it announced earnings that "missed analyst expectations" on this very issue. If you got in after those reports you have done quite well.

Well, gas prices are going back up. In Atlanta they are finally crawling up over the $2 level. It's easy to see the trend when Costco gas costs about the same as that at big station rivals like QuikTrip - when prices were collapsing Costco had as much as a 15 cent/gallon advantage.

But what will this mean the next time Costco reports earnings, which is now expected in late May? The top line is going to be bigger, comparisons will be weak, and since the dollar will be weaker imported earnings will look bigger. Expect the stock to fly.

The reality will be different. The reality will be that Costco is going through continuing, methodical, steady growth. The top line goes up anywhere from 5-7% per year, with growth slowing as oil goes down and the dollar goes up, then rising when the trend reverses. But those trends have nothing to do with how the company manages the business, or how it performs. They're background noise.

You can make some good money on background noise.

What happens to Costco happens elsewhere. Just as you saw a lot of phony deflation last year, as the Syria wore ground on and oil producers threw their own short-term economic interests onto the fire, so you're going to see all that reverse as 2016 proceeds, with Russia retreating and the guns falling silent.

The real economy will be straitened - the suburbs and exurbs that benefited from low oil prices over the last year are going to see reversals - but the strength of the U.S. relative to other nations will not change. This will be apparent in the oil patch.

The "dead men drilling" which now claim they can make money at $40/barrel will have to prove that to their bankers, and we may finally get the bankruptcies and reorganizations we have been expecting for the last year and a half.

My favorite "dead man" to watch is Sanchez Energy (NYSE:SN), because some family members leased land to them some years ago, allowing my kids to graduate from college debt-free. The company actually eked out a small profit last quarter, narrowing the operating loss to $6.5 million, but they still have more debt than assets, and the balance sheet mainly lives on hope. If $40/barrel proves sustainable, will the bankers let them continue in that way, or will they force a sale to "stronger hands" at a discount to the current stock price? My guess is the latter.

None of this - the price of gas, the price of oil - has much to do with how anyone is operating. Oil production is being maintained, people are still shopping. But it's going to look to economists like a U-shaped economic bottom. And those who bought times were tough earlier this year are going to look smart for no more reason than that.

Disclosure: I am/we are long COST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.