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.
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