Words of Wisdom on the economy from Mitch Zacks

Investment Analysis Clubs Saul’s Investing Discussions
1

Received this interesting investing letter from Mitch Zacks at

Zacks Investment Management
Attn: Wealth Management Group
One South Wacker Drive, Suite 2700
Chicago, IL 60606

Here’s an excerpt. (They told me I could quote him if I gave credit and didn’t do it all the time).

As of this writing, 399 of the S&P 500 companies have reported and total earnings in aggregate are down -2.3% from the same period last year on -4.2% lower revenues - not the picture we want to see…

I don’t think there’s a need to get too worried and, in fact, I think there are three compelling reasons to remain optimistic…

1) An Investor’s Three Favorite Words: “Better than Expected” - of the 399 companies that have reported, 69% of them beat their earnings per share estimates and 50% of them have reported higher than expected top-line revenues. The stock market loves positive surprises…

2) Strip Away “Energy,” and Earnings Are Positive - If a sector is as notable a drag on aggregate S&P 500 earnings as Energy, for analysis purposes it makes sense to strip it away to see how the other sectors are truly performing. And, when you do that, you discover things aren’t as bad as they may seem: total earnings for the Energy sector in the S&P 500 index are down 60% from the same period last year on 30% lower revenues. So, when you take the Energy sector out of the equation, total earnings for the rest of the S&P 500 are up 5% on a 2% increase in revenues. That’s reasonable growth…

3) Consumer-Related Sectors Are Strong - consumer spending represents about two-thirds of the U.S. economy and it rose +0.2% in June after a +0.7% uptick in May. This growth shows up in the Consumer Discretionary, Retail/Wholesale, and Autos sectors; three of the best performing sectors in Q2 demonstrating consumer spending strength.

The auto industry is on pace for its best year in a decade and the Consumer Discretionary and Retail/Wholesale sectors saw some of the most robust year-over-year revenue growth in Q2. This, I think, should give investors some reassurance about the real state of the economy.

I like that common sense approach.
Saul

38 Likes
2

Hi Saul,

First time poster to your board.

Being a devotee of peak oil and fossil fuel energy study, one must be wary of the downturn in energy companies, at least over the medium to long term. Though the recent slide in energy company earnings is easily attributed to a drop in oil and gas price, the fall in price itself may not simply be a matter of energy surplus. Weak demand may indicate oil is increasingly unaffordable for many. Also, a barrel of oil possesses less energy that a typical barrel of oil 30-50 years ago, yet requires greater energy to extract, and is thus worth less.

A collapse in the energy sector may be the mother of all leading indicators.

3 Likes
3

Hey paralwaysgood!

You said: Also, a barrel of oil possesses less energy that a typical barrel of oil 30-50 years ago, yet requires greater energy to extract, and is thus worth less.

Fascinating. I am curious about both sides of this equation. First, why would a barrel of oil possess any less energy now than it did in the past? This may seem like a stupid question from someone who doesn’t know (Guilty!), but this stuff (the oil) is millions of years old, why would 30 to 50 years make a difference?

Second, why does it take more energy to extract? My guess would be deeper wells, less accessible fields, etc… Is that right?

Finally, how do you know? Where do you get your information?

Thanks for adding to the dialog. Great post.

Jeb
Owner of no energy stocks
See all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx

3 Likes
4

Being a devotee of peak oil and fossil fuel energy study, one must be wary of the downturn in energy companies, at least over the medium to long term. Though the recent slide in energy company earnings is easily attributed to a drop in oil and gas price, the fall in price itself may not simply be a matter of energy surplus. Weak demand may indicate oil is increasingly unaffordable for many.

Interesting. Certainly things seem to be slowing in China and that could cause a reduction in demand (as it has in other natural resources they used to gobble up). The ongoing sluggishness in the economny could cause a reduction. However, it is clear that supply has gone way up. The US has become a net exporter of oil. Fracking has not only greatly increased the supply of NatGas, but also the supply of oil.

Oil prices have always fluctuated and will continue to. The Saudis would sometimes step in and reduce supply,they vowed notto this time in an attempt to kill the leveraged frackers who are flooding the market with supply. Looking forward, we can guess Iran will start pumping 500k barrels a day - another addition to supply.

Also, a barrel of oil possesses less energy that a typical barrel of oil 30-50 years ago, yet requires greater energy to extract, and is thus worth less.

I have to agree with Jeb on this. Same 100 million year old dinosaur goop as 30-50 years ago. There are different grades of oil, with density and sulfur making a difference in refining costs and therefore value…(light to heavy, sweet to sour)
http://www.eia.gov/todayinenergy/detail.cfm?id=7110
but I think that has changed over the year much. Maybe.

A collapse in the energy sector may be the mother of all leading indicators.

Maybe, it was certainly the only strong employment sector in the US for a while. Or maybe it is a trailing indicator of world economic growth.

If I was to fear one thing, it would be China blowing up, not cheap oil.

4 Likes
5

Hello TMFJebbo,

The statement summarizes the prevailing philosophy of the pundits on www.peakoil.com. Why oil extracted 30-50 years ago yielded higher energy must have something to do with the chemical composition of light vs. heavy crude oil. Much of the easy to obtain oil was light crude that floated at the top of the large pools of oil superfields, such as the Ghawar field in Saudi Arabia.

Light crude oil receives a higher price than heavy crude oil on commodity markets because it produces a higher percentage of gasoline and diesel fuel when converted into products by an oil refinery. Heavy crude oil has more negative impact on the environment than its light counterpart since its refinement requires the use of more advanced techniques an the use of contaminants.

The sweet light crude oil Western Texas Intermediate (WTI) is used as a benchmark in oil pricing.

(Last two paragraphs taken from http://www.indexmundi.com/commodities/glossary/light-vs-heav…)

One of the prominent analysts at the Peak Oil website recently made this comment:

"There seems to be a phenomena that if someone is told something enough times that they will believe it. The media, and about everyone else has been pounding the “cheap energy” scenario. Someone should ask “how cheap, and “cheap for whom”?

For the end consumer, who has to pay the entire energy bill, oil at least, is not cheap. On a BTU bases the end consumer is paying 18% more today for a BTU from crude than they did in 1970. That is based on nominal dollars. In 1970 a barrel of oil was $3.18 and the end consumer received 126,035 BTU from a gallon of crude. In 2015, at today’s price, a barrel of oil is $43.75 and the end consumer gets 63,345 BTU from a gallon of crude."

As I said before, there is a theory commonly cited on peakoil.com that oil will not behave according to a standard economic model, and that the price will fall rather than rise as the commodity becomes more scarce. The general reason for the price decrease is an ability to power the economy; hence, it’s lack of utility results in a falling price. A leading proponent of this theory is Gail Tverberg, whose website is called Our Finite World. Her most recent post is quite comprehensive, and typical of her work:

http://ourfiniteworld.com/2015/08/10/how-economic-growth-fai…

All of your comments about the difficulty of modern oil extraction are correct. We’ve touched upon this subject on METAR, where most sensible people have faith that an alternative energy source will power society once oil is depleted, but I’m not convinced. I’m clearly no expert, and somewhat of a dilettante on the subject, as I try to stay generally well informed, trying to trust who makes the most sense to me.

Thanks for asking.

8 Likes
6

Dangit. I hit “submit” instead of “preview”.

Change sentence to: “The general reason for the price decrease is an inability to power the economy”

7

I am just not buying it. First, I am convinced there is tons of oil that has not been found, furthermore, our technology will improve in surprising ways, like it did with fracking.

Second, we will be just fine by the time we get close to running out of oil. Prices will increase until other forms of energy are more economical, which leads to mass production, which leads to price decreases from efficieny. We start using things like nanocarbon to build lightweight high capacity batteries for cars and storage of solar power in our homes and solar farms. We will turn to safe salt-core nuclear reactors, who knows, maybe fusion.

We will all be fine. Small bumps in the road, but our knowledge grows exponentially over time and we will invent and find all sorts of energy sources. Dilithum crystals captain?

4 Likes