2015 has started with big moves. Where are we going? - Updates and Thoughts by Howard Isaacson

The Dow started the year with the worst start since 2008, then it was up by the largest gains in 3 weeks, and on Friday we were down 170 points. Year to Date we are off about ½ of 1%. Lots of noise, but no real change.

The S&P 500 index, moved to 2045 and had been 2089 on 12/26 and 2071 the prior Friday. The Dow ended at 17,737 and had been 18,054 on 12/26, up from 17,805 the prior Friday. http://www.marketwatch.com/

Source: Money.CNN.com

The yield on the 10 year treasury now sits at 1.95%, after hitting a low of 1.9% earlier this week. We were at 2.25% on Friday, 12/26.

Source: marketwatch.com

Here is a 3 month chart showing the appreciation of the US Dollar versus the Euro. It is currently at 1.184, near a 5 ½ year low. (This is great news if you are going to travel to Europe!)

Source: marketwatch.com

The following is a 3 month chart of Crude oil. Note that it hit a new low earlier in 2015 and is now a tad above it.

Source: Marketwatch.com

Recent economic news:

• Unemployment nationally declined to 5.6% and nonfarm payroll employment increased by 252k workers in December. Figures from November were revised upward from 321k to 353k workers. (Both excellent economic news.) Over 2014, the number of unemployed declined by 1.7 million workers! Average hourly earnings, though, were down by 0.2%. This came as a surprise and was a reversal of the increase from November. Over 2014, average wages increased in line with inflation at 1.7%. http://www.bls.gov/news.release/empsit.nr0.htm

• The number of unemployed workers continues to decline and this is consistent with the economic strength the US is experiencing. The stagnant wage rates indicate that, even in the face of record corporate profits, employees are not getting increases more than inflation. Some economists have commented that most raises occur at the start of a calendar year; so we will wait patiently to see changes in the Jan and Feb numbers. (The key to sustainable economic expansion is a rising wage base driving enhanced quality of life….)

• Planned “Mass Labor” Job Cuts fell to the lowest level in 2014 since 1997, per http://www.challengergray.com/tags/job-cut-report (Good news.)

• Seasonally–adjusted Weekly initial unemployment claims fell by 4,000 to 294,000. The running 4 week average is approximately 10k workers lower than in the prior month. (This signifies continued moderate employment strength. ) Unadjusted claims for the week increased 9.1% to 425,399 from the prior week. Prior year’s comparable figure was 488,537. (Good news.)

• The Fed’s balance sheet assets are holding steady at approximately $4.5 trillion. http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm (This indicates that the Fed is replacing bonds that they own that mature with new bonds they are buying in the market place. Thus, though Quantitative Easing no longer exists, the Fed is active in the marketplace on the “buy side” of treasuries.)

• The Consumer Comfort Index, which indicates Americans’ views on the US economy and their confidence, increased to 43.6, the highest level since 2007. http://www.bloomberg.com/news/2015-01-08/u-s-consumer-confidence-rebounded-to-seven-year-high-last-week.html (This is an indicator that consumers likely will continue to increase spending in 2015.)

• Chain Store Comparable-Store Sales for December were up by 4.9% in December 2014, versus a 3.4% increase in December 2013. Total sales increased by 6.3%. Excluding the impact of gasoline prices, demand rose 7.1%. January’s comparable store sales are expected to increase by 4-4.5% versus 3.3% in 2013. http://www.theretaileconomist.com/december-2014-monthly-sales.html (This clearly indicates a higher level of spending, though we saw above that wages have not grown this fast, but the number of employed is up.)

• Consumer Credit increased at an annual rate of 5% in November, according to figures released by the Federal Reserve this week. Revolving credit balances increased by 2.8% over the past 12 months, and non-revolving has increased by 7.8% over the one year period. Non-revolving includes auto, home, and education loans. http://www.federalreserve.gov/releases/g19/current/g19.pdf (It is comforting to see that consumers are not borrowing significantly on credit cards to support their spending. But see the chart below for the growth in the “debt to income” figure.

• Factory Orders declined for the 4th consecutive month in November with declines in most sectors. Shipments declined as well. Both Unfilled Orders and Inventories increased to its highest levels since 1992, after increasing in 19 of the past 20 months. http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf (This shows that there is definitely a bit of slowness within the economy. That all is not “full speed ahead”.)

• Motor vehicle sales for December were down 1.7% versus November and was 200k units below economists’ expectations. Sales for the year were the highest since 2006. http://www.bloomberg.com/news/2015-01-09/u-s-retakes-the-helm-of-the-global-economy.html

• The number of oil and gas drilling rigs actually in use in the US at the moment is down by 61 over the past week, the biggest weekly change since 1991! At the same time, the number is only 4 rigs lower than at the same time last year. The number of rigs in the Permian declined by 28, though it remains 31 rigs higher than 1 year ago. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother In looking at the weekly gas/oil data split, oil rigs in use declined from their high of 1,609 on 10/10/2014 to 1,421 on 1/9/2015. Gas rigs have declined from 356 rigs on 11/7/2014 to 329 on 1/9/2015. Rig counts on 1/3/14 were 1,378 and 372 for oil and gas, respectively.

• Crude Oil inventories are down 3.1 million barrels here in the US to 382million barrels. Inventories in the US had been higher for three different periods in 2014. http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W See this chart:

• Natural gas inventories fell by 131 Bcf from the prior week.

Other relevant info:

The chart above is important as the recent weakness in Natural Gas Prices has been blamed on expected lower levels of demand driven by above normal temperatures.

The European Central Bank will be meeting on January 22nd. Europe is now formally battling deflation with a documented annual decline of 0.2% in prices. It is highly expected they will implement a quantitative easing program. This is now priced into the market, IMHO. If they do not announce QE then the market will likely react. http://online.barrons.com/articles/no-way-out-ecb-and-qe-1420858473

Japan has announced an addition of $26billion to their annual budget for extra stimulus spending. Japan’s government is forecasting annual GDP growth of 0.7% after contracting during 2014. http://www.reuters.com/article/2015/01/09/us-japan-economy-budget-idUSKBN0KI0MJ20150109

The Greek populace will be voting on January 25th. If the radical left wing party that is currently leading the polls wins, then there may be signicant repercussions within Greece and their membership of the Euro Zone. http://www.nytimes.com/2015/01/12/business/international/after-elections-greece-will-be-in-race-against-time.html?_r=0

With the recent terrorist attacks in France and the “activation” of terror sleeper cells over the past day, there is increasing fear through out France and Europe. http://www.cnn.com/2015/01/10/europe/charlie-hebdo-paris-shooting/ This certainly can have many effects on the French and European economy. QE and stimulus and fast police actions can mitigate the impact, though we must wait to see what unfolds.

Earnings season begins on Monday with the announcement from Alcoa. Kinder Morgan will announce on Tuesday. Major banks will be announcing each day between Wednesday and Friday. Intel will also announce earnings on Thursday. http://www.cnbc.com/id/15906175 Earnings will of course include performance for the past quarter and for many, some insight into the coming quarter and 2015. Possible negative impacts can arise from the changes in energy prices, and the significant appreciation of the US Dollar.

The steep decline in oil prices can certainly have both positive and negative impacts. Here is a timely graph from Bloomberg and Oxford Economics looking at the global GDP with $40 oil:

One of the biggest tiny pieces of news this week may be that the Saudi Arabian Oil Co. reduced the discount offered to Asian buyers of Saudi oil. The discount had been the largest in 14 years at $2 per barrel in January, and will be $1.40 in February. Their increase of the discount in the 4th Q 2014 was taken as an indication in the market that the Saudis would sell at any price to defend market share. http://www.bloomberg.com/news/2015-01-06/saudis-raise-price-of-main-oil-grade-for-asian-buyers.html It may be that the narrowing of the discount is an indication that there is a limit to what they will do to maintain market share……

Thoughts:

Though there likely will continue to be volatility, there are many reasons for optimism regarding the equity markets. The US economy continues to move forward, consumers are spending, banks and other institutions are lending, and people are working. Innovation continues to move forward in so many areas, including pharmaceutical, medical, technology, communications, automobiles, manufacturing, etc. Great opportunity is in the areas of innovation.

With the economic issues around the globe, the Fed needs to be cautious as to how and when to raise rates, esp. in terms of the effect on the exchange rates and US corporate profits. (Interestingly, this week the futures started to indicate that the rate increase is more likely in the 4th Q than in the 3rd or 2nd in 2015. There is also a possibility that the Fed may possibly defer increasing rates until 2016. (As noted above, rates have moved lower since the start of the year.)

Oil can not go down to $0 per barrel and stay there. It will bottom (if it has not already), firm, and then rise. It is only a question of when. Many energy related companies were profitable at $40 oil the last time it occurred. Many companies will remain profitable this time as well.

The impact of Keystone is a wild card, as it will increase the flow of Canadian tar sands oil to the Gulf. This could bolster supply in the US and also facilitate supply for an export market. If we then export, there can be greater demand for US product, potentially, in addition to greater supply.

In earlier weeks, we looked at the users of oil and gas, especially the commercial and industrial uses. The demand for natural gas is expected to continue to increase as the US moves in the “green” direction and as coal use is further reduced. New factories are coming on line and the industry continues to move forward. One cold spell could certainly have an impact on gas prices. Greater signals from the Saudis can also put a floor on oil pricing.

CapitalRock and all of our team continue to work hard on behalf of our clients. We are excited about the opportunity that the new year holds and we look forward to a successful and good year for us all!

#howardisaacson #economy #rates