Exxon’s trading symbol is XOM:NYSE. At various times it has been the largest (non-sovereign) company in the world, depending on its share price. And it certainly one of the most profitable – in the quarter ending Dec 31/08 (Q4, for short), Exxon said it distributed $10 billion to shareholders (which I believe is a bit of fancy wordsmithing, and I’ll get to that in a minute…)
But the point is, XOM is THE bellwether oil stock. And the oil price is now seen as the barometer of health for the world economy. So as Exxon’s stock goes, so could the world markets and your portfolio.
When I look to see what the price of oil is going to do, I like first to the stock chart of XOM. It shows a similar chart to the various oil/gas or energy sub-indexes on the NYSE, AMEX or TSX, but it adds stock volume to the equation.
The stock is drawing what is called a pennant formation, where the bottom line from the pennant can be drawn from the October lows of the stock up to today, and the top line can be drawn from the February top down to today. Chartists say that when those lines intersect, a big move will happen. I included the red line because that pennant shows oil could still base out for another 2 months before making a move.
On the bullish side, volume patterns in the last 3 months of XOM tell me that oil will break out to the upside – there is more volume on the up moves in the pennant formation. On the bearish side however, “pennant formations are among the most reliable of continuation patterns and only rarely produce a trend reversal…They represent situations where a steep advance or decline has gotten ahead of itself, and where the market pauses briefly to “catch its breath” before running off in the same direction.” (Technical Analysis of Financial Markets, John J. Murphy, New York Institute of Finance, Copyright 1999 page 142)
Two different charts below tell a similar story. The first is the AMEX Oil and Gas Index, and the second is the TSX Capped Energy Index. You see the sharp pennants on both of them, also looking like they are going to cross soon – indicating some kind of move in oil price is coming (the red line in the TSX chart does intimate, like XOM, that basing could continue for another 2 months). The AMEX chart is bullish, with a slight up channel from the October lows. But the volume on TSX chart is decidedly bearish, with greater volumes on the down days. Time will soon tell us.
And remember – our job is not to correctly predict or guess the future, but rather to profit from whatever direction the market is moving – so we don’t care if it’s up or down. Therefore I’m not going out on a limb predicting anything. It all depends on where global investor psychology is and if we all believe the stimulus plans around the world will be effective.
The point is that rightly or wrongly, oil is right now looked at as THE barometer of the world’s economic health. And XOM is the bellwether stock in the sector, so watch it closely. It should be a good indicator of how the rest of your portfolio will do this year – until the market gets fixated on something else.
And the charts say something is going to happen very soon.
Now back to Exxon itself. During the fourth quarter of 2008, ExxonMobil says it distributed a total of $10 billion to shareholders, including dividends of $2 billion and share purchases to reduce shares outstanding of $8 billion. So they bought back $8 billion of their own shares in the open market and cancelled them.
This is called a share buyback, but I call it disappointing. I am against share buybacks. And unfortunately I see this all too often, even in junior, growth oriented companies (that really rankles-it aids management stock options much more than shareholders). If there is excess money in the treasury that management doesn’t know what to do with, give it to shareholders in the form of a dividend. A high dividend helps stock price as much as a buyback. After all, it is shareholder’s money. When you are a shareholder, when you own stock, you are a part owner of the company.
This is not a new issue in the capital markets and I’m not going to get into it here. A succinct summary of the pros and cons of buyback can be read here: http://blog.qovax.com/2008/10/29/share-buybacks-pros-and-cons/
I believe that buybacks are not the best use of shareholder money.