Fire! Hurricane! Watch out…


Don’t look now if you do a lot of driving.

The bullish momentum behind oil just keeps building. You know about the Iranian sanctions and the collapse of Venezuela.

Now, we have damages and hurricanes to contend with as well.

Canada’s largest refinery is reporting a major fire. Thankfully, no one appears seriously injured.

But it produces over 300,000 barrels a day of petroleum products. Half of this gasoline, for example, is exported to the USA.

We don’t know how much damage is done or how long the downtime will be. But anything lost makes the oil market even tighter than it is now.

Not only that, but down on the US Gulf Coast, another hurricane is menacing the whole place. This one’s called Michael.

BP has already shut down four crude oil operations near Florida. Further disruption could come to pipelines and shipping, according to Argus Media.

All this is even more nasty for us here in Australia. Our dollar is weak and doesn’t look like it’ll be turning around anytime soon.

Except if you happen to own oil stocks that earn US dollars. That’s not a bad place to be right now for Aussie investors. There’s precious little else that’s getting anyone excited in the market.

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There’s another wildcard that can come into play here, too. I’m talking mergers and acquisitions. The more cash that pours into the coffers of oil companies, the easier it is for them to go shopping.

It’s not happening yet here on the ASX in a big way, but things are beginning to rumble overseas.

Last month saw a drilling firm called Transocean in the USA announce a US$2.7 billion deal to acquire a rival called Ocean Rig.

Now, the Financial Times reports that another driller called Ensco is going to join with a competitor to create a US$12 billion offshore specialist.


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This kind of thing is unlikely to slow down any time soon.

And don’t discount the opportunities around this in the US stock market, as well. The energy sector is set to see the biggest rise in third-quarter earnings over last year.

They could be up a whopping 95%.

See for yourself…

Source: Financial Times, FactSet

The fourth quarter is shaping up to be just as good, if not better.

The rallying oil price is also going to flood the sovereign wealth funds of places like Norway, Saudi Arabia and the Gulf states with billions of dollars in cash.

They’re going to have to invest it somewhere.

This dynamic might be part of what sends US stocks even higher next year…

After all, US stocks are still reporting good earnings. They saw growth of more than 20% in the first half of the year. Right now, the consensus across the market for the third quarter is 19%.

We’ll see how this plays out as the companies start reporting over the next few weeks.

This makes any major sell down in the USA unlikely, in my view.

That doesn’t mean things won’t – or can’t – be volatile.

Random events heat up oil even more

High oil feeds into inflation expectations.

So we can’t ignore what’s happening in the US bond market, either.

Yields are creeping up. They’re likely to go higher.

I’ve seen an interesting observation this morning, too.

A group called Nautilus Capital have a graph showing that the ‘yield curve’ of US Treasuries (bonds) is turning up from a major low.

See for yourself again…

            Source: Nautilus Capital

If you read yesterday’s Profit Watch, you’ll know this dynamic should – all else being equal – be good for the US banks.

It’s notable that the US financials were up in Monday’s trade, when the tech stocks were weak. tell subway survey

A lot of people have been watching for the yield curve to invert this year, which traditionally signals a potential US recession.

We look to be moving further away from this scenario as it stands today.

That means 2019 has every chance to continue this US bull market run.

It won’t be a smooth ride, though.

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We have the simmering US and China spat. The US midterm elections are due next month, and there’s nothing bipartisan about American politics right now.

And the market will be eyeing off the potential escalation of Trump’s tariffs early next year.

There’s the potential for them to go from 10% to 25%.

So there’s plenty of volatility that can move the market.

But there are potentially profitable trades amongst the noise.

I’ve said the same thing for most of the year: oil stocks and financials top the list as far as the US market goes.


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Callum Newman,
Editor, Profit Watch

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