September 17, 2019

How high could the crude oil market go after 5% of global output was taken out by 10 unmanned drones striking at the largest oil processing facility in Saudi Arabia and the second largest oil field? The answer is unknowable. Any price spike will be a consequence of how fast oil production is restored and whether the fingers pointed at Iran will result in military escalation. Iran has denied any involvement in the event.

The oil price was rather weak before this bombing and questions must be raised as to how this military escalation is related to the Saudi Aramco IPO. While geopolitical risks do lower the valuation of the IPO, would the higher price of oil raise the overall value of Aramco at a lower multiple? In other words, who benefits from this strike – the Iranians, the Saudis, or the hardliners that want a war with Iran at any cost?

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

If one were to look at the PHLX Oil Service Index performance in 2019, one would see that it had taken out all kinds of key levels to the downside and was leading the oil price lower. The oil price had topped out in early May and was seeing declining peaks, which is bearish, but the summer driving season (which ends this month), was keeping it afloat. Does a Saudi Aramco IPO in the seasonally weak September-to-March period make sense? An oil price spike before the IPO would help, one would think.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Personally, I think the weakness in the oil price was one of the main drivers in the mess in the Chinese economy. While some of the weakness can be attributed to the surging U.S. oil production, the other side of the price equation is demand. And China is the largest importer of crude oil in the world.

It is not well understood outside of trading circles that industrial metals are heavily correlated to the price of crude oil, and, as far as I know, there is no shale drilling boom when it comes to industrial metals, where China is also the number one buyer on global markets. Still, they are notably weak.

Implications for Bond Prices if There is a Military Escalation

A military intervention with Iran will mean sharply higher oil prices, even if the global economy is weak. It will also mean sharply higher Treasury bond prices. In September, the 10-year Treasury yield is up from 1.43% to 1.90%. If there is a Chinese trade deal, the 10-year can go to 2.30%, but without a Chinese trade deal and with an Iranian military intervention, the 10-year yield could hit new 52-week lows.

Let me say flat out that I do not believe the U.S. economy is so weak that the 10-year should be under 2%, but with the ECB’s QE in overdrive, no Chinese trade deal, and an Iranian military intervention, interest rates can drop rather dramatically. The reverse will happen if all benign outcomes materialize.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The reason why I don’t think the economy is weak is that the junk bond market is doing rather well, with junk bond prices showing a fresh 52-week high. That would not be happening if the U.S. economy were weak. Junk bond prices are partly about interest rates, but to a larger degree they are about the health of the economy, or the price of credit risk. As far as I am concerned, the price of credit risk is low.

I have had a lot of conversations with clients about the recent inverted yield curve in the U.S. Treasury market. Does it indicate a coming recession? It could, but I do not believe this is a “kosher” inversion.

Let me elaborate. There has never been a time in the history of the United States bond market when there has been anywhere close to $17 trillion of negative-yielding global bonds while a U.S. yield curve has been inverted. It can be argued that because there is so much negative-yielding global debt the U.S. yield curve is inverted, as German bunds, for example, are pulling Treasury yields lower.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In the developed world, the U.S. has the highest interest rates. If all developed interest rates were headed to zero, how could the U.S. manage to have higher interest rates, given the global flows of capital?

I do not believe it is possible.

About The Author

Ivan Martchev

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev


Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.

Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report.

Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.

None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation of any offer to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for you. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.

One cannot invest directly in an index. Results presented include the reinvestment of all dividends and other earnings.

Past performance is no indication of future results.

FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not intended or written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.

IMPORTANT NEWSLETTER DISCLOSURE: The hypothetical performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported hypothetical performances should be considered mere “paper” or proforma hypothetical performance results and are not actual performance of real world trades.  Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier Investment Products’ portfolios and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters contain hypothetical performance that do not include transaction costs, advisory fees, or other fees a client might incur if actual investments and trades were being made by an investor. As a result, newsletter performance should not be used to evaluate Navellier Investment services which are separate and different from the newsletters. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or hypothetical Newsletter performance claims, (which are calculated solely by Investor Place Media and not Navellier) should be referred to InvestorPlace Media, LLC at (800) 718-8289.

Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.

Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report. Request here a list of recommendations made by Navellier & Associates, Inc. for the preceding twelve months, please contact Tim Hope at (775) 785-9416.

Marketmail Archives