We have either had the start of a significant pull back over the last week, or we have had the complete near tern pull back already. I tend to think it is the former. Goldman Sachs' Chief Forecaster, David Kostin, just revised his three month target on the S&P500 to 1275 (1250 for year end). Plus there has been a plethora of bad economic news. Spanish and Italian 10 year bond yields have been steadily rising of late. Greece is said to be in a depression. Many are starting to question Spain, just as they previously questioned Greece. Spain has unemployment officially in the 23% range, but unofficially it is said to be much higher. The official statistics apparently don't count the large number of aliens in Spain who are suffering from much higher unemployment. Just today Spain reported that its February Industrial Production fell by 5.1% year over year. The situation all sounds extremely ominous to me, especially considering Spain's huge real estate loan default potential. This is without even mentioning the rest of Europe. I worry about the negative global economic situation and the negative effects it may have on the U.S. markets. I also worry that the bulls in the U.S. will somehow manage to ignore all of the negative signs. I feel to trade or invest effectively I should be ready for either scenario, although I am encouraged in my downside bias by the MarketWatch article this morning entitled, "The Bundesbank will stamp out this rally."
Interestingly almost all energy prices have fallen dramatically (natural gas, solar, and coal), except oil, which has remained stubbornly high at least partially due to the Iran nuclear situation. Oil has fallen in the last week to near a support level at $100/barrel. It can now bounce, or it can fall to one of its lower support levels at $95, $90, $80, or even $75. $90 is looking like a likely near term target. This is assuming there is no geopolitical blow up with Iran (or something comparable). Not many people, including me, have the nerve to short oil directly with the Iran issues in the forefront. However, I have come up with a scheme for shorting oil stocks as a vehicle for shorting oil. In each case I have identified at least one other reason for each stock to perform poorly. Each stock might well move down without oil moving down at all. The two stocks I am looking at are World Fuel Services Corp. (INT) and Murphy Oil Corp. (MUR). For each stock I have a specific second or even a third reason that the stock price should fall (beyond a retreat in oil).
World Fuel Services Corp. engages in marketing, selling, and distributing aviation, marine, and land fuel products and related services worldwide. If INT is basically servicing different types of service stations worldwide, it should experience significant margin pressure as those servicers in turn experience pricing pressures in a slowing world economic environment. In tough economic times, people will conserve on fuel. They will want to pay less for it. They will travel less. This should translate into lower revenues and earnings for INT in the coming quarters. INT trades at a reasonable PE of 15.43. It has an almost negligible dividend of 0.40%. Analysts earnings estimates for next quarter have been lowered in the last three months. Further quarters results could follow. Helping this thought along is the analysts' rating downgrades of the stock over the last three months. The ratings have gone from 3 strong buys and two buys three months ago to 1 strong buy, 2 buys, and 2 holds currently. This is a very bad trend. I tend to think it partially validates my thesis that INT's margins will be squeezed in future quarters. The two year chart below lends some technical direction to the trade.
The stock is currently at $41.82 (the close on Tuesday April 10, 2012). The stock price has already passed through its 50-day SMA on its way down. The 50-day SMA has already begun to turn down toward its 200-day SMA. If a market/oil sell off continues, the 50-day SMA should soon push through its 200-day SMA on its way down. This is a technical sell signal. This should bring support levels at $32 to $33 into play. A conservative investor might want to resist pulling the trigger on this trade until the 50-day SMA is more definitely set up to cross the 200-day SMA heading lower. The fundamental problems on INT may take time to make themselves clearly seen, but the fundamental theory of the trade seems solid.
Murphy Oil Corp. engages in the exploration and production of oil and gas properties worldwide. In addition it owns and operates 1,128 retail gasoline stations in 23 states in the U.S. Its Chairman recently died, and it has yet to replace him. This uncertainty in leadership will help the stock to fall. The U.S. economy is expected to slow as the impact of the deepening EU recession is more significantly felt in the U.S. This should put pressure on gas station margins as people conserve gas (drive less), and insist more fervently on lower prices. On top of this MUR produces natural gas in the U.S. This production will suffer from the strongly down trending U.S. natural gas prices (currently at $2.04/mmBTU). At year end 2011 MUR had production of 195mmcfpd and 13,300 bopd in North America. It has dramatic expansion plans for its Eagle Ford and Montney developments in both oil and natural gas. It has plans for roughly 1Tcf recovery from its Tupper development in British Columbia.
In MUR the cash flow and the CAPEX are matched up very closely. If there is a significant hit to the cash flow, that might well translate into delayed development due to inadequate CAPEX to fund it. This might hurt the stock as much as the below estimate EPS and revenue results. In my quick perusal, I could find no mention of hedges for the North American natural gas. If this is in fact the case, the falling natural gas prices may have significant effects on MUR's bottom line. Readers might want to try themselves to determine the MUR natural gas hedge situation, but it seems unlikely to me at this time that MUR is close to fully hedged in North American natural gas (if at all). The low and falling natural gas prices should help to make MUR a good oil stock to short. Further MUR has generally been an under performing oil stock for the last five years. That reputation alone should help a short trade in MUR. The two year chart of MUR provides some technical direction for the trade.
The price of MUR has already plunged sharply through its 200-day SMA (a sel signal). The 50-day SMA appears to be heading down toward the 200-day SMA. On the basis of the price plunge alone, one would say MUR is in a strong downtrend. This is a good set up for a short. The only bad thing is that we have missed a good part of the move in this case. Due to the strength of the move down, MUR seems likely to reach its $42-$43 support level or its $40 support level. There is also support near $50, which should not be completely ignored. The downtrend also pertains to analysts ratings over the last three months, which have moved significantly downward during that time. MUR only has a hold rating currently. It has missed EPS estimated in two of the last four quarters. Its sales revenue forecasts for both FY2012 and FY2013 indicate a small contraction in revenues. With the added problem of natural gas prices in North America, this should put more pressure on earnings than the company is currently acknowledging. I don't believe the likely service station margin deterioration is factored in either. If oil prices fall dramatically, MUR may fall below any of the above cited support points.
Please do further investigation on these ideas you before you actually short either stock. If you happen to own either of them, I would be inclined to sell the stock at least for the near term. If you love either, you can likely buy it back later more cheaply.
Good Luck Trading.