What to know today

  • Market interest rates are a thing too.
  • Oil and gas are still in demand.
  • Dividends are good, full stop.

It’s a Bit of a Spike

The yield on the 10-year US Treasury note is rising.

Did you know that, even after Federal Reserve Chair Jerome Powell turned this into one big rate-cut watch back in December, market-based interest rates have been rising?

It’s true: According to Dow Jones Market Data, the benchmark 10-year US Treasury yield has risen almost 75 basis points through May.

The 10-year yield made its biggest move of the year on Tuesday, jumping 7.1 basis points to 4.524 percent. It was up again, to 4.619 percent, on Wednesday. 

It hit a 2024 peak of  4.706 percent on April 25. The 52-week high, 5.022 percent, was set on October 23.

The word on the Street is there were more sellers and buyers on Wednesday because rising market interest rates are starting to wear on investors’, traders’, and speculators’ optimism.

Seems a pretty fair assessment, in the absence of any other compelling rationale.

The yield on the 10-year US Treasury note made its biggest jump of the year on Tuesday, May 28, and was up again on Wednesday, May 29.

Financial media types love to use points as opposed to percentages when we talk about the Dow Jones Industrial Average because they sound bigger. It’s pure drama, people.

And you love it as much as we do.

But, understand, when we talk about the Dow falling more than 400 points, because the index is up around 40,000 now, it’s only 1.06 percent.

What’s more impressive, the 400 or the 40,000?

The Dow’s steeper selloff relative to the S&P 500 and the Nasdaq Composite is perhaps explained by UnitedHealth Group $UNH.

The insurer was down 3.76 percent after management cited a potential “near-term disturbance” for Medicaid reimbursement rates in some states.

UNH, which closed at $484.72 on Wednesday, is No. 1 in the price-weighted Dow.

On a day marked by another big deal in the oil and gas patch but also by another soft US Treasury auction, not even Nvidia $NVDA could put things green.

At least we have some incoming data to consider.

The release of initial jobless claims data – a noisy set – this morning at 8:30 a.m. ET is a nice prelude to the release of April PCE Price Index data – which includes the Federal Reserve’s favorite inflation measure – tomorrow at 8:30 a.m. ET.

It won’t be conclusive as far as the Fed is concerned.

But, then again, nor will the April core PCE print.

deep dive

Oil and Gas Producers Unite

Scale is the name of their game.

What’s alternately referred to as the “shale boom” or the “shale revolution” has made the United States “energy independent.”

“Energy independence” means, in short, that the US is a net exporter of hydrocarbons, including crude oil and natural gas.

It’s a development with major economic and political implications, on both domestic and international fronts.

One question raised by a period of major consolidation since 2023 is whether US oil and gas production has peaked again.

Bloomberg devoted an episode of its podcast, The Big Take, to “The Beginning of the End of the US Shale Boom” almost exactly a year ago, on May 26, 2023.

The end of the US shale boom would also impact economics and politics, here and abroad. 

The thing is, that’s not what’s happening.

What Exxon Mobil $XOM and Chevron $CVX and ConocoPhilips $COP seek is scale, plain and simple.

According to the US Energy Information Administration, US oil production reached a record in 2023, with average output of 12.93 million barrels per day.

US oil production reached a record in 2023, with average output of 12.93 million barrels per day.

Last year’s output exceeded the previous record of 12.31 million barrels per day established in 2019.

The most recent data from the Energy Information Administration show that average daily production so far in 2024 is 13.12 million barrels per day. That’s ahead of last year’s pace by 1.4 percent.

As for natural gas, the EIA said US output reached a record of 125 billion cubic feet per day in 2023, up by 4 percent compared to 2022.

Production in January was 124.6 billion cubic feet per day on an annualized basis, slightly behind last year’s pace due to seasonal factors.

But January 2024 output was 1.1 percent higher than January 2023 output.

So both oil and gas output continue to trend upward. Rig counts are down slightly year over year. But elevated crude prices will likely support production growth over the visible horizon.

Consolidation is the natural order of things in the oil and gas industry. In fact deal-making activity stands out right now because there’s not much happening elsewhere.

And, following on the introduction of fracking, the industry continues to innovate production techniques and extend the lives of existing assets.

Indeed, long live this boom, this revolution, this independence.

deep dive |
May 30, 2024

Oil and Gas Producers Unite


Give Me Dividends… And Give Me Buybacks

Capital returns are signs of good health.

My perspective has broadened enough over the years so that I no longer disfavor share buybacks.

Still, I’m a dividend guy. I like dividends. I’ll confess that bias too, along with the old affinity for the long-term “up and to the right” price action of the stock market.

Share buybacks are cool, another nice form of return of capital. But widows and orphans can’t live on share buybacks. Only regular cash payouts satisfy the needs of income investors.

Whether you prefer dividends or buybacks, the mere fact that a company is using either or both as part of its capital management strategy is generally a good sign.

A company in position to share rewards with its shareholders is a healthy company.

And today we’re talking about three companies well-positioned to add regular dividends to their existing buybacks.

Wolfe Research has identified Skechers USA $SKX, O’Reilly Automotive $ORLY, and PayPal Holdings $PYPL as potential dividend-payers.

From the Research Desk, we learn that Skechers USA $SKX, O’Reilly Automotive $ORLY, and PayPal Holdings $PYPL have the balance-sheet strength and the consistent free cash flow generation to support expanded capital returns.

Wolfe Research notes that SKX features a free cash flow yield of 3 percent.

UBS says the shoe company will benefit from strong pricing, improving sales, and fixed cost leverage, as earnings growth exceeds expectations.

Like SKX, ORLY’s free cash flow yield is approximately 3 percent based on Wolfe Research’s forecast, while PYPL leads the trio at 7 percent.

Morgan Stanley also identified PYPL as a potential dividend-payer based on its net cash position and its free cash flow.

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