Amazon vs. Dow Theory
In June 2014, oil traded between $105 and $112 a barrel. Saudi Arabia was feeling pretty good about itself. And just like any self-respecting schoolyard bully would, the Saudis decided the best way to celebrate was to beat somebody up.
They thought it would be easy to pick on U.S. shale companies. After all, drilling was very expensive at that time. And the companies had a fair amount of debt...
U.S. shale didn't just win; it was a complete and total rout. The beating was so severe that the Saudis now have to be the ones to cut their own production in order to keep prices high for their shale overlords. Ouch.
Oil has driven the global economy for 120 years. 10 years ago, we were seriously discussing peak oil. Today, we've got more of it than we can use, and demand is barely moving.
Engines are more efficient. Electric cars are coming (over a million will sell in China this year). Uber is everywhere. Heck, kids don't even want to drive anymore.
None of these are huge immediate catalysts. But add them up, and they are enough to put a lid on demand growth.
Even now, the smartest people in the room are terrified to say that oil has completely lost its significance as a leading economic indicator. After 120 years, they'll tell you the current dynamic seems more like a blip.
I don't think this is a blip. I think it's likely that demand will never drive oil prices again. It's all about supply. Oil is being disrupted from all sides now. And we've only gotten a glimpse of what the ramifications will be.
Disruption: The Most Powerful Catalyst
For investors, disruption is an awesome and terrible force. Get on the wrong side of it, and you could be ruined (GE and Blackberry). Because disruption changes the rules, but there's no announcement, no memo to say the rules have changed. You figure it out when your money's all gone.
But invest with the disruptors of the world, and you can make money by the bucketful.
Right now I've got a story of disruption running through my head that you need to hear about...
It's nearly Christmas. We've spent billions online ordering gifts for friends and families. Every day more boxes get left on the front porch.
The surge in online shopping and delivery is an amazing thing. Retailers hire thousands. UPS and FedEx do, too.
Now, I see that in some cities (like LA and NYC), Amazon has set up huge temporary tents to serve as staging areas for local deliveries. Trucks roll in, drop off boxes. Individual Amazon Flex drivers roll in, pick up some boxes, and head out to leave them on our porches.
Amazon Flex is a lot like Uber. Drivers pick their schedule and operate off a smartphone app (which I'm pretty sure is powered by Twilio (NYSE: TWLO), a company I told Wealth Daily readers about a couple years ago and that my Wealth Advisory subscribers have a 188% gain on).
Vacant lots in Manhattan are being temporarily converted into staging areas for local delivery. The Wall Street Journal reports that the veterans of the logistics biz are “scratching their heads.”
Sure, it's driven by necessity. But Amazon is doing stuff that no other company has even thought of. It is disrupting every aspect of retail. And you can see the result in the Sears and J.C. Penneys of the world. I think we will be putting FedEx and UPS in that category soon, if Amazon has its way...
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I talk markets with my good friend Christian DeHaemer several times a week. He's got the best macro instincts of anyone I've ever met. Yesterday, he told me to check out the Dow Transportation Index.
Now, if you don't know, the Dow Industrials and the Dow Transports combine to make one the first market-timing indicators: Dow theory.
The theory observes that the Industrials make stuff and the Transports deliver stuff. So both indices should look good when the economy is cooking. Right now, the Dow Industrials don't look great.
But the Transports, holy moly! They look awful. The Transports hit 52-week lows yesterday, and they sit about 12% above two-year lows.
The Dow Industrials are already down 10%. That index would have to fall another 20% to get to two-year lows. That's over 5,000 points.
I decided to have a look at the Transports components to get a little more color of what's going on there. Here's what I found...
The railroads — Kansas Southern, CSX, and Union Pacific — look fine.
Avis and Ryder have both been darn near cut in half this year. The airlines — Southwest, Alaska Air, JetBlue, Delta, American, and Continental — are close to their 52-week lows.
The trucking companies look bad, too. Landstar, UPS, FedEx, and J.B. Hunt are all down for the year and at 52-week lows. C.H. Robinson is flat for the year, sitting at roughly the middle of its range.
Airlines and truckers have the biggest influence on the Dow Transportation Index. And the Transports are starting to signal a bear market, according to Dow theory.
And it seems to me that this might all be because of Amazon. I looked through the truckers' earnings estimates. They have all been revised lower by a few pennies. (Don't forget oil prices are low, which should be good for earnings, because fuel is a big expense for these companies.)
Could it be that Amazon's logistics solutions are affecting the earnings growth for these companies, and thereby flashing an early bear market signal? And if so, is there any reason to believe this will change? I'm not sure yet...
But what I do know is this: Amazon might be the most disruptive company the world has ever known. As an investor, you want to be on Amazon's side.
That doesn't necessarily mean just owning Amazon stock (it's kind of expensive). There are a few companies that are allied with Amazon, like Twilio, that can multiply your wealth for years to come. You can check out a few of them here.
Until next time,
A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.
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