Oh my! Definitely NOT a Boring Week.... - Updates and Thoughts by Howard Isaacson
- isaacsonhoward
- Jan 18, 2015
- 5 min read
After a series of days that were not so good in many ways, patience paid off with many positives to end the week.
Though the Dow ended the week at 17,512, down from 17,737 the prior week, at least Friday it was up by 1.1% and 191 points. The S&P 500 ended at 2,019 on Friday, up 1.3% on the day, but down from 2,045 the prior week. http://www.marketwatch.com/
The yield on the 10 year treasury closed Friday at 1.84%, up from a low of 1.7% hit on Thursday, after ending last week at 1.95%. We were at 2.25% on Friday, 12/26. The market is indicating rate hikes are less likely than just a few weeks back.
The Swiss National Bank surprised the markets and removed their three year old “cap” of 1.2 Francs per Euro just two days after they publically affirmed they would keep it in place! This created a shock to the FX markets never seen before and the Swiss Franc appreciated by 30% against the Euro in hours. http://www.ft.com/intl/cms/s/0/75138b30-9cb1-11e4-971b-00144feabdc0.html#axzz3PCKMF9M7 The shock caused trading losses at most of the major banks and exchange houses, as well as for small speculators and brokerage firms.
The Euro continued to fall against the Dollar:
Source: Marketwatch.com
Oil, continued upwards (thankfully) in price, though just by a tad after retesting and bouncing off lows. See the chart below:
Source: Morningstar
Natural gas also had strong week, after testing lows as well:
Natural gas is much more of a domestic market, versus the oil markets, which are global in nature. It is much easier to import/export oil than natural gas. Per America’s Natural Gas Alliance, approximately 98% of the natural gas used in the US is produced in North America. The recent move in natural gas can be attributed to the combined effects of continued reductions in rig counts and unusually cold temperatures in the US.
Per the weekly Baker Hughes rig count, total rigs in use declined by 74 in the US, including 55 oil rigs and 19 gas rigs. The natural gas rig count is down 5.8% week over week and down 15% from the same time last year. Oil rigs have finally declined to levels lower than the same time last year, though there are still 1,366 rigs drilling new oil wells in the US operating. http://phx.corporate-ir.net/phoenix.zhtml?c=79687&p=irol-reportsother
Natural gas prices can be significantly influenced by temperatures. December had been unusually mild and these past two weeks a bit colder than usual.
Weather services six weeks back were predicting a warmer than usual winter. It appears they have revised their models. Weather Service International just released their latest forecast thru April:
Before we get off the subject of natural gas, I wanted to share the following chart issued by Williams projecting future natural gas use in the US and where the increasing production is expected to be used.
There were lots of contradicting data and moving parts in the US and global economies this past week:
Earnings reports started coming in. Alcoa did well, but some of the banks reporting took steps backwards in earnings levels. Overall, there have been more positive “surprises” than negatives this first week. http://www.zacks.com/earnings/earnings-calendar
On Friday, two of Greece’s largest banks have requested access to emergency funds from the Central Bank, in preparation for a possible bank run. http://www.wsj.com/articles/greeces-syriza-leads-in-polls-as-general-election-looms-1421592527?autologin=y
Fitch revised Greece’s outlook to Negative, ahead of their elections on January 25th. The election results could impact their emergency funding and economic programs from the IMF and ECB, as well as their use of the Euro. http://greece.greekreporter.com/2015/01/17/fitch-lowers-greece-credit-outlook-to-negative/
The National Federation of Independent Businesses released their Small Business Optimism which spiked higher to 100.4 versus the prior month’s 98.1. This was the highest since October 2006. http://www.nfib.com/surveys/small-business-economic-trends/
Mortgage Bankers Association released their mortgage applications figures. Mortgage rates were at their lowest level since May 2013 and applications to refinance spiked by 66% and to purchase by 24%. http://www.housingwire.com/articles/32593-mortgage-applications-surge-incredible-49
Headline retail sales numbers for December disappointed the markets, after seasonal adjustments, retail sales fell by 0.9%. The raw data showed tremendous increases month over month and solid gains year over year, so there may have been some issues in the “adjustment”. See my post on this for more: http://t.co/MyPMESZZ3t
The Energy Information Administration released their forecasts for 2015 and 2016. They forecast Brent to average $58/bbl in 2015 and $75/bbl in 2016. Even with current prices, they expect that US production will average 9.3 million barrels per day in 2015 and 9.5 million in 2016, up from 9.2 million barrels in December 2014. http://www.eia.gov/forecasts/steo/
New jobless claims increase to 316,000, up 19k. http://www.dol.gov/ui/data.pdf Prior week’s levels were revised higher as well. These were unexpected negative surprises.
The Empire State Manufacturing Index was a pleasantly shocking 9.95 versus an average consensus of 5.0 and a prior reading of -1.23. This was driven by high levels of optimism, increases in new orders and gains in employment. There were also some hints of possible upward pressure on process. http://www.newyorkfed.org/survey/empire/empire2015/2015_01Report.pdf
Counter to the Empire State Manufacturing Index was the Philadelphia Fed Survey for the same period. The Philly Fed index came in at 6.3 versus a consensus of 20.0 and a prior reading of 24.3. This indicates a slowing of growth in their region. (Interestingly, the Empire State contracted in December from November and rebounded in Jan. Maybe the Philly Fed index will show faster growth in February. http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/2015/bos0115.cfm
Americans have the most positive view on the economy in 7 years, based on Bloomberg’s read of the Consumer Comfort Index which increased to 45.4 from 43.6 in the prior week, the highest level since July 2007. http://www.bloomberg.com/news/2015-01-15/consumer-confidence-in-u-s-increases-to-highest-since-july-2007.html
The Consumer Price Index, without food and energy, was flat versus the prior month and up 1.6% from prior year. With all components, CPI was down 0.4% m/m and up 0.7% y/y. http://www.bls.gov/news.release/cpi.nr0.htm For those hoping that the Fed defers raising rates, this was very good news, as the Fed is very concerned with ensuring deflation does not take hold in the US economy.
In contrast to the adjusted retail sales number mentioned above, the University of Michigan’s Consumer Survey found the Sentiment Level at 98.2 versus prior month of 93.6 and consensus of 94.0. This is the highest level since January 2004. The figures indicate improving consumer consumption. http://www.sca.isr.umich.edu/
In addition to Greece's elections next weekend, this week we will see the ECB’s decision on Quantitative Easing. It is widely expected that they will launch a major bond purchasing program that shares the risk among Euro members. The German Bundesbank has voiced concerns of Germany absorbing risks from other counties and the ECB is trying to make their efforts reasonably palatable to the German voters, as the last thing Europe needs is change in political leadership in Germany. Unlike the Fed in the US, which can unilaterally decide how to manage the US economy, the ECB must deal with the individual countries’ Central Banks and the bureaucracy that the EU brings. The markets could negatively react if the announced efforts are considered “too small” or the strategy details considered “ineffective”. There will be a press conference following their meeting on the 22nd. The results could be could for the markets or not, depending.
This coming week will also bring additional earnings announcements for more than 200 companies, the bulk coming before market open and after close, on Tuesday, Wednesday, and Thursday.
Markets will be closed on Monday for MLK Day of Service. For more information on what sets this day apart from other national holidays, see http://www.nationalservice.gov/special-initiatives/days-service/martin-luther-king-jr-day-service-0.
The new week will bring new opportunities and challenges. Our concentration remains on fundamentals, growth, yields, and future opportunity.
Here is an interesting article that discusses the potential for electric and battery power progress to overtake the US “need” for oil to move our economy. http://www.bloombergview.com/articles/2015-01-16/get-ready-for-life-without-oil
If there are areas that you would like to see addressed in these Commentaries, please feel free to share your thoughts.
I wish you a great week!
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