Wednesday, December 17, 2014

Waiting on Janet

The market is waiting on the Fed. The big question is, how will the week end, and will the recent blood-letting in the markets finally end.

Today, the Federal Reserve issues its latest policy statement at 2 pm. Wall Street will be holding its breath, waiting to see if the Fed changes language saying it will keep interest rates close to zero for a “considerable time” even after its bond-buying stimulus measures have ended.

Remember, reactions to Fed-Speak can be short-term.  Longer-term, we need to look at the background economy, and what that potentially means for profits and prices.

Oil Could Go Lower

This week, the United Arab Emirates’ energy minister said OPEC will stand by its decision not to cut output even if oil prices fall as low as $40 a barrel. What’s more, OPEC will wait at least three months before considering an emergency meeting.

To be sure, Suhail Al-Mazrouei was talking about the international oil benchmark, Brent Crude.  Since West Texas Intermediate (the U.S. benchmark) usually trades at a discount to Brent, prices could be lower here. Yikes!

On December 12, Free Market Café published my article titled, “Three Pitfalls for Energy in 2015.” I lay out some other forces that could push prices lower.
Now for the good news.

·         It won’t be a straight line. We’ll see rallies and plateaus along the way.
·         Also, energy stocks will probably bottom long before the price of energy.
·         Finally, the market is punishing companies that primarily produce natural gas along with oil producers. But the outlook for some nat-gas producers, transporters, pipeline companies and so on is quite good. That’s a disconnect we can take advantage of.

And don’t write off oil, either. There are some pipeline companies and transporters that can continue to do well.

Economic Outlook

The oil price drop stoked fears of major dislocations across asset classes. The fear is we could see a worsening emerging market currency crisis or maybe junk debt collapse. I’m not saying that will happen, just that Wall Street is worrying, even obsessing, about these perils now.

And sure, we are seeing weakness in Europe, where deflation fears are raising their ugly head. China’s manufacturing is slowing down, too.

In other words, investors worry about a global recession. That’s why foreign investors are piling into U.S. Treasuries at the fastest pace in two years.

On the other hand, U.S. economic news continues to be good, unless you’re in the oil business. Retail sales rose 0.6% in November after rising 0.5% in October. U.S. manufacturing surged last month, with the largest increase in 9 months. Wow!

Sure, maybe the U.S. is “the best house on a bad block.” Or maybe lower oil prices are fuel for a global economic boom that isn’t recognized yet.

For now, the market holds its breath to see what the Fed will say at 2 pm today. Stay tuned.

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