The three news items which drove equities on Wednesday were the drop in oil prices, the drop in IBM’s stock, and the Fed’s Beige Book. I recently called IBM a zombie stock because of its revenue declines. The weakness is finally being reflected in the stock as it is down about 11% since March 1st. WTI oil was down 3.66% to $50.49. Just as I said I was wrong about the latest rally in oil on Tuesday, it fell the most since March 8th on Wednesday. The Dow had another day of underperformance as Goldman Sachs pushed it lower Tuesday and IBM pushed it lower Wednesday. The Dow is weighted according to the price of the stock instead of by market cap like other indices. Both IBM and Goldman Sachs are in the triple digits, so they have a big effect on the Dow. It was down 0.58%, but the Russell 2000 was up 0.38%. The Russell 2000’s underperformance had been supporting the idea that the Trump trade was over because de-regulation was supposed to help the small caps. The outperformance of the Russell 2000 may simply be a mean reversion.

Oil fell to the lowest price since March 31st because of the EIA’s latest report. The report showed gasoline stockpiles were up 1.5 million barrels which was the opposite of expectations which had them falling 2 million barrels. This 1.5 million barrel increase in inventories made up for the 1 million barrel supply increase in crude oil. The chart below shows the large increase in crude oil inputs. They were up 241,000 barrels per day from last year’s average, reaching 16.9 million barrels per day. This increase was driven by a 260,000 barrel per day boost from Gulf Coast refiners. As you can see, inputs are the largest they’ve been in the past five years, surpassing the highs seen 2016.

In a previous article, I described how index funds have been propping up weak firms because they buy stocks regardless of their performance. The term ‘dumb money’ is used to describe non-professional investors. I would describe index buying as a ‘dumb strategy’ as investors scoop up IBM stock which has had a track record of revenue declines. IBM has also issued debt to fund acquisitions to grow its revenues, which still manage to fall. The 1990s were driven by hope as the internet was a revolutionary service. This bubble is driven by financialization as growth is hard to come by. Investors wish the 1990s growth was here. At least those firms had potential.