More internal deterioration in the US stock market has occurred since our last SER Monthly issue due to the deepening trade war with China, and US President Trump’s “The Chosen One” tweets exacerbating the issue.
We’re grateful that we have our new Manager, Subscriptions & Marketing, Cera Dixon, handling all our SER tweets, providing a rational filter!
With China’s move last Friday to add 5-10% tariffs on US goods, impacting more industries (semi-conductors, grains, auto’s and energy) in retaliation for the pending September 1st US tariff increases, the stock market dropped by 623 points for the Dow Industrials. Since the beginning of August we have now had four nasty down days for the markets. We expect many more painful days as we head into October. The Dow has 5,000 more points of downside in our opinion. From the high of 27,400 to the potential low around 20,000 implies a correction of 27%.
Last Wednesday, WTI rose to US$57.13 as the initial report from the EIA was positively received. But as the details were released, the price fell because the inventory decline was caused by net imports declining. By day’s end the price has gone negative and with China’s trade ‘tit for tat’, the price fell by US$1.46/b to US$53.89 with a low on Friday of US$53.33/b. Energy stocks, having already been hit hard, are likely to get shafted some more as the general stock market decline unfolds and inter-market margin call pressure hurts the sector. Over the last month the S&P/TSX Energy Index dropped 12% from 137 to 120. We expect the final bottom for this Index to be below 110. For some time we have been saying that Crude Oil should plunge to the US$44-48/b level for WTI, which is now unfolding. Stocks are cheap and we are nibbling on high dividend yield securities for our personal holdings.
We added to our position in Vermilion Energy last week at $19.20 per share which, at that price, provides a 14.3% yield on the 23 cents per month payment. We are not in the camp that expects the dividend to be cut. In February 2016 when WTI fell sharply to US$26/b, VET continued to pay their monthly dividend regularly despite some calls to gut it. Management likes the dividend model which they see as sustainable and they could cut some of their capex if things get more dire.