The year started off on a pretty solid note for the economy, as
decent data in the U.S. has buoyed stocks while the European debt
crisis appears to be under control, at least for now. This has been
further confirmed by the latest bailout of troubled Greece in which
more than $170 billion was forked over to help keep the nation out
of default and in the euro zone. Thanks to these trends, many are
beginning to feel more confident about the economy once again for
the first time in while (see
Three Construction ETFs For An Economic
Recovery
).
This renewed confidence has also had an impact on the commodity
market as well, specifically in terms of energy products. Oil has
been surging to start the year as more economic activity and
geopolitical tensions have boosted the price for this vital
commodity. As a result of this, some cyclical sectors, specifically
those that are very susceptible to movements in the price of oil,
have seen an overall good start to the year but have been under
extreme pressure as of late. This is best evidenced by one of the
most sensitive segments of all, the airline industry and the main
ETF tracking it.
Unsurprisingly, the surge in oil prices, as WTI crude hit
$105/bbl. and Brent rose to $121/bbl., has crushed airline related
equities in recent trading sessions. In fact, the
Guggenheim Airline ETF (
FAA
)
was pushed to a nearly 6.2% loss on the day, among the worst
sectors to start the holiday-shortened week. The product was led
lower by its heavy holdings in three stocks,
Delta (
DAL
)
which makes up 17.2% of the fund,
United Continental (
UAL
)
at 16.6% of FAA, and discount carrier
Southwest Airlines (
LUV
)
at 14.2%. DAL was lower by about 7.5% while UAL fell by 9.0% and
Southwest was down 'only' 3.5% in comparison. Given this
significant weakness in the fund's top three components, in
addition to similar performances from the rest of the top ten
holdings, investors shouldn't be surprised to see that the product
has a terrible session in Tuesday trading (also read
FAA In Focus As AMR Lands In Bankruptcy
).
Nevertheless, FAA is still up double digits so far in 2012,
having added more than 13% to its total in the time period.
However, it should be noted that gains were up to about 27% in
year-to-date terms before high oil prices spooked investors in the
space. Now, FAA has lost about 7.3% in the past five trading
periods, suggesting that the Guggenheim fund could be grounded for
the foreseeable future, especially if oil prices remain high.
Thanks to this issue, it is important to keep in mind how rising
commodity prices can impact other investments, and sometimes
overshadow broader economic trends. Without this oil problem, it
isn't unreasonable to expect that airlines would continue to be a
top performer heading into the second quarter of the year. However,
given the current trend in oil prices, as well as the mounting
tensions with Iran, investors could see more oil price increases in
the later part of the year, potentially keeping airlines under
pressure. As a result, a play on other sensitive industries, like
industrials or consumer discretionary firms, could be ideal at this
time should oil price increases continue to dominate the headlines
in the commodity world (read
Three ETFs For An Iranian Crisis
).
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Author is long LUV.
DELTA AIR LINES (
DAL
): Free Stock Analysis Report
SOUTHWEST AIR (
LUV
): Free Stock Analysis Report
UNITED CONT HLD (
UAL
): Free Stock Analysis Report
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