For the mid-week ending December 9, 2015, the Dow and S&P 500 are down again as crude oil price drop. In other news: massive insider selling is causing market concerns; oil and gas pipeline stocks are the worst performer in the energy sector; and, middle-class Americans are no longer the majority.
As last week, the Dow and S&P are down this mid-week. The primary cause for the decline in the markets is the drop in crude oil prices (now below $37). As a result, the Dow is down -2 percent (355 points), and the S&P 500 is down -2.1 percent (44 points). The oil route has caused many international indexes to drop over two standard deviations below their 20-day moving averages. The current question amongst investors is when the demand for oil will overcome the supply, and it appears that this will not occur in the short-term. The fact that many oil companies are cutting their dividend seems to indicate to some analysts that the energy sector may be close to a bottom.
Corporate insiders have been selling their shares at alarming levels, and this could start a selling spree for investors as well. Research firm TrimTabs has reported Wednesday that insider selling has now reached $7.6 billion for November, the fourth highest monthly level ever recorded. The companies with the highest level of insider trading are: Microsoft ($1 billion); Facebook ($730 million); CA Technologies ($600 million); and, Fitbit ($400 million). TrimTabs also reported that the high level of insider trading is occurring when stock buybacks are also hitting record levels.
Oil and gas pipeline stocks are the worst performers within the energy sector. Their average YTD return is -42 percent. Hit the hardest are Master Limited Partnerships (MLPs) which saw their boom during 2011 and 2014 period. The poster child for MLPs, Kinder Morgan went public in a private equity-backed IPO in 2011 and proceeded to go on a buying spree making it one of the largest oil and gas pipeline players. By mid-2014, Kinder Morgan sold most of its MLPs for $70 billion, essentially abandoning the MLP structure it helped to create. With the drop in oil and gas stock, Kinder Morgan’s market cap is now down to $35 billion, forcing the company to slash its dividend. The selling advantage of MLPs was that they were not susceptible to fluctuations in the price of oil; however, it turns out that they are highly susceptible. This has become a huge wake-up call to the wealth management industry that did not fully understand the mechanics of MLPs.
Middle-class Americans are no longer the financial majority. The middle class is now outnumbered by the classes above and below as it falls further behind financially. According to a PEW report, the income of the middle class has fallen -4 percent during the 2000 and 2014 period, while medium wealth (assets – debt) has fallen -28 percent (during the period of 2001-2013). In 2015, the highest income tier grew from 4 percent in 1971 to 9 percent currently, and the lowest income tier has risen from 16 percent in 1971 to 20 percent currently. The middle-income tier is defined as households with an income between 67 percent and 200 percent of the overall medium household income. The report finds that the middle class has been declining for more than four decades, with the share of Americans living in middle-income homes falling from 61 percent in 1971 to 50 percent in 2015.
If you’re trading options, it is suggested trading Put credit spreads for the remainder of the week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1991 and 2105 (2 standard deviations) by this Friday.
For more information about options, see the ‘Suggested Links’ below.