Seriously Bearish Stock Market News - Downward Pressure On Exxon's Margins
Companies / US Stock Markets Nov 03, 2007 - 02:39 AMBy: Brian_Bloom
The following table shows Exxon's Gross Profit Margins over various periods:
| PERIOD ENDING | 30-Jun-07 |
31-Mar-07 |
31-Dec-06 |
30-Sep-06 |
| Total Revenue | $ 98,350,000 |
$ 87,223,000 |
$ 90,028,000 |
$ 99,593,000 |
| Cost of Revenue | $ 55,658,000 |
$ 47,597,000 |
$ 26,554,000 |
$ 64,537,000 |
| Gross Profit | $ 42,692,000 |
$ 39,626,000 |
$ 63,474,000 |
$ 35,056,000 |
| GP % | 43.4% |
45.4% |
70.5% |
35.2% |
| YEAR ENDING | 31-Dec-06 |
31-Dec-05 |
31-Dec-04 |
|
| Total Revenue | $ 377,635,000 |
$ 370,680,000 |
$ 298,035,000 |
|
| Cost of Revenue | $ 213,255,000 |
$ 213,002,000 |
$ 163,547,000 |
|
| Gross Profit | $ 164,380,000 |
$ 157,678,000 |
$ 134,488,000 |
|
| GP % | 43.5% |
42.5% |
45.1% |
Source: http://au.finance.yahoo.com/q?s=xom
The following was a headline in today's media: Slim gasoline margins drive down Exxon earnings
Source: http://news.yahoo.com/s/nm/20071101/bs_nm/exxon_results_dc_5;_ylt=AlXjMljrA_kSOUko8.czEGdmMfQI
The following is a quote from this article: “ Refining margins crashed by as much as 90 percent from record highs reached in May, as the summer driving season ended, oil prices surged and gasoline prices did not keep up with the price increases.”
Assuming management competence, there can only be two reasons why the gasoline price was unable to keep pace with the rising oil price:
- Politically, it is unacceptable for Exxon to keep raising gasoline prices in the lead up to a Presidential Election
- The market is showing signs of price elasticity. i.e. If Exxon raises its price further, it can expect volumes to fall.
Here is an analysis of its volumes:
Output – Energy Equivalent Barrels Per Day
|
|
|
3rd Q 2007 |
3rd Q 2006 |
% Diff |
| Crude Oil (000's barrels per day, ave) | 2,536 |
2,647 |
-4.2% |
||
| Natural Gas (millions cu ft/day) | 8,302 |
8,139 |
2.0% |
||
| Oil equivalent Production | |||||
| (000's energy equivalent barrels/day) | 3,920 |
4,004 |
-2.1% |
||
Source: http://www.hemscott.com/news/rna/item.do?newsId=52587579683734
The overall reduction might be a function of dwindling supplies, loss of market share or contraction of market size because of market lash back to price rises.
However, the bottom line is that energy drives the world economy. If output of the largest oil company in the world is falling, and its margins are being squeezed, then this can only be bad news for the US economy.
Last week, through a pure coincidence, I came across two separate articles about the effects of sleep loss on the human psyche, and the fact that almost half of the US population is now losing sleep over money and financial security issues, whilst 75% are worried about these matters.
Source: http://www.nypost.com/seven/10252007/news/nationalnews/stress_mess_in_u_s_.htm
http://news.yahoo.com/s/nm/20071024/hl_nm/sleep_emotions_dc_3;_ylt=AsprYyGRHO5u5kwKcInWF1hmMfQI
There is now no question in my mind that the so called “exponential blow-off” third up-leg in equity prices is off the table. It is no longer an option.
Yes, it could be argued that the majority of the wealth of the nation (for investment purposes) lies in the hands of the 25% of the population which is not worried about money. It could also be argued that they will still invest – even if the other 75% is in a state of mental depression. But we need to keep our feet on the ground. The incremental value of the market arises from incremental earnings of all companies in the economy. If “energy” drives the economy, and energy output is falling, and 75% of the population is feeling depressed, then company profits are not going to be rising from here – except if a tsunami wave of export activity manifests. Yes, a falling dollar will stimulate exports, but what is the USA going to export, and who are they going to sell it to?
If consumers (if not investors) are feeling glum, and if company profits do not rise, then how will it help if the Federal Reserve moves to either further increase the money supply or further reduce interest rates?
Below is a 20 year chart of the share price of the mightiest financial institution on the planet. (Courtesy Bigcharts.com)
Note the On Balance Volume sell signal. Investors have been bailing out.
Below is a chart of Freddie Mac. Note the breakdown from its rising trend.
What these charts are telling this analyst is that the sub-prime mortgage problems and the flow-on credit problems are still working their way through the system.
Below is a 3% X 3 Box reversal Point and Figure Chart of the Standard and Poor Industrial Index ($SPX). (Courtesy, Stockcharts.com)
It is currently showing a “Triple Top” formation
What has the effect of all this fear been?
The following is a Point and Figure chart of the Gold Price (courtesy stockcharts.com). It is showing a (now believable) Bullish Price of Objective of $1,400 per ounce, but without reference to time.
Roughly five years ago I published my first in the current series of articles on the gold price. In summary, the message of that article was, “Be careful what you wish for.”
Conclusion
The US markets are showing signs of having arrived at a critical juncture. The announcement of downward pressure on Exxon's margins – in the face of declining sales volumes – is seriously bearish news. Given that the psyche of US consumers is now biased towards fear, flowing from concerns about money and security, any “left field” bad news is likely to be poorly received by investors.
In context of the above, the “critical juncture” seems likely to be biased towards fragility.
By Brian Bloom
www.beyondneanderthal.com
Since 1987, when Brian Bloom became involved in the Venture Capital Industry, he has been constantly on the lookout for alternative energy technologies to replace fossil fuels. He has recently completed the manuscript of a novel entitled Beyond Neanderthal which he is targeting to publish within six to nine months.
Author's comment - It appears that the authorities have not yet come to understand the subtleties and/or the nuances of the statement that “energy drives the world economy”. An unholy alliance between the Banking Industry, the Fossil Fuel Industries, Big Business and the Politicians has given rise to a life-threatening accident that is now waiting to happen.
The time has come for the world to begin migrating to a new platform of industrial, consumer and transport technologies which will be driven by electromagnetic energy. There are three such energy technologies which are introduced in my novel, Beyond Neanderthal , which is targeted for publication in March 2008. The logic which underpins these technologies is compelling. If embraced, they have the capacity to usher in a new era of human evolution.
By means of its entertaining storyline, Beyond Neanderthal explains both the logic and the technologies themselves, and also articulates a clear pathway forward. If taken, this pathway will enable us to extricate ourselves from the quagmire into which we have been led by the unholy alliance of self-interested groups. There is still a window of opportunity to act – but the evidence suggests that this window will begin to close around 2012. Please register your interest to acquire a copy of the novel at www.beyondneanderthal.com .
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