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A kite rises going against the wind; and so to this forecast as we are calling for higher oil prices running contrary to most analysts (Goldman) opinion of much lower prices. However, like the blustery wind lifting a kite, the winds may subside and so too the duration of this forecast. Indeed make no mistake we are not calling for a major bottom (at least not yet); we are only forecasting a trading bottom with initial price targets of 52-55, then 62-65. The most likely time horizon is our first objective (52-55) reached by Halloween and the next target (62-65) by the middle of Q1 2016.
Our reasons are:
- Baker Hughes announces a long string of dropping rig counts as producers are cutting supplies.
- S. oil production has now fallen to 9.1 mpbd (million barrels per day) which is 25% off recent previous highs. Industry forecasts are for production to fall even further to approximately 8.6 mpbd by mid-2016.
- Production has been steadily declining in both Saudi Arabia and Russia despite indications to the contrary.
- Today, the world is less over-supplied than it was a year ago. This is not to say that a global recession may further reduce demand and therefore the supply will remain abundant, but the pressure is now easing. Global macro conditions discounting contraction have been largely priced-in over the past year’s 50%+ drop in crude … global economic stabilization over the near term may re-adjust macro models regarding oil demand. The Joint Organizations Data Initiative (JODI) already is suggesting the demand remains strong in the U.S. and China and a wide variety of other countries
- The dollar has been nudging stronger theoretically making oil less expensive in USD terms … however; oil is climbing higher despite the hurdle of a higher USD. The same inverse indicator is true with oil vs. 30 year US Treasuries.
- Technically speaking, the charts are showing signs of an impending bottom; albeit at this writing, merely near-term. We see support in oil between $42-44 and in RBOB between $1.34-1.35. A closing break of either support zones would threaten our near-term forecast of oil between $52-55 and RBOB between $1.60-1.70
Make no mistake, we are not betting the house on this outcome as we too believe there are issues going forward with central planners, money printing, zero-bound interest rates and political jousting which may include another round of threatening government shutdowns. However, we do like the risk/reward for the near-term upside in both crude oil and reformulated gas products.
Market Update; September 15, 2015
FOMC Rate Forecast
In arguably one of the most foreshadowed FOMC meetings with regards to the Fed’s decision to obtain “liftoff” from ZIRP (Zero Interest Rate Policy), the odds remain a “pick-em” with nary 48 hours till launch … or not.
There are four major options that the FOMC will consider and render their collective decision. They are:
- They do nothing. The Fed remains data dependent siting softness in recent domestic economic releases and global financial conditions deteriorating with emphasis on China, Brazil and the European Union. The immediate and short-term expectations would be positive for the risk-trade with equities bid, the USD offered, bonds flat to down and energies flat to up. There is a high probability of the risk-trade losing momentum and reversing depending upon concerns shifting during, or immediately after, the Yellen press conference beginning one-half hour after the rate announcement. Those concerns may center on why the economy, after 6+ years of ZIRP, is not stable enough to withstand even a nudge off of “free money”. The emphasis may quickly revert to the equity market turmoil in Asia and the global currency wars emanating from those countries dependent upon commodity resource revenues. We place the odds of doing nothing at 50% with a more likely “liftoff” occurring in October (see option 2).
- The Fed raises rates. The only reason this may occur is face saving and trying to avoid being labeled as the “boy who cried wolf”. If the Fed does raise rates, expect protracted language indicating that this step should not be perceived as linear going forward. The Fed will trip over itself to make clear that ensuing rate increases will only be warranted if the data remains robust AND there are signs that their inflation target of 2% is merely stuttering along due to transitory effects of lower commodity prices. They may even indicate that they will not hesitate to reverse trajectories if future data releases weaken and/or global economic conditions continue to deteriorate. IF they do raise rates, expect an increase of the Fed Funds rate by only 1/8th of a point (12.5 bps) to the high-end of the Zero Bound policy currently in effect, with an increase in the band from 0.00 – 0.25 bps to 0.25 – 0.50 bps. The biggest problem with raising rates is the potential unhinging of the carry trade and risk trades simultaneously, especially if global investors believe that this is the beginning of a much stronger dollar and higher US interest rates. The risk to the Fed is Janet Yellen being ambushed in the following Press Conference (scheduled 30 minutes after the rate announcement) especially if the stock market drops precipitously before, or while, Ms. Yellen is interrogated by an anxious media. We place the odds of raising rates at less than 30% while maintaining a more probable occurrence would be the October FOMC meeting which has no following press conference.
- The Fed lowers rates or establishes QE4. NIRP (Negative Interest Rate Policy) to succeed ZIRP? Not yet likely, however the Fed’s nanny, Goldman Sachs, has been trying to influence such incantations. Goldman economic generals, past and present, including Larry Summers, Bill Dudley (currently voting member of FOMC) and Jan Hatzius have been beating this drum if for nothing else to move the needle to the “do-noting” option. The pernicious Goldman will stop at nothing to maintain another round of free money including their insidious rant about the “market has done the job for the Fed” siting their preposterous homegrown Financial Conditions Index which proposes that “free money” is too tight of an economic condition. IF the Fed does march to this drummer, than they will likely site the disinflationary effects of the strong dollar causing decelerating wage pressures, disintermediation of global commodity currency countries and export weakness of US multi-nationals. We place the odds of lowering rates or establishing QE4 at less than 5%.
- Leaving rates unchanged while removing (or lowering) the interest paid to banks on reserves held at the Fed. This move could provide a spark to the risk-on trade (higher equities, etc.) AND save face with the more “hawkish” critics seeking liftoff from ZIRP. In theory, this should also provide impetus for the banks to circulate, in the form of loans, some of the $2.7T they are currently holding in reserves at the Fed whilst quietly being paid to do so. The theoretical increased lending would then be circulated throughout the system leading to an increase in the turnover or velocity of money in circulation. This of course would provide upward inflationary pressure which has long been the quest for the Keynesian central planners. The only problem with this theory is that there is $2.7T held in reserves and nary the demand for loans or the risk-taking interest in providing the same. Although this may be the least daunting or best option the Fed can choose, this policy decision is likely to stir a hornet’s nest of volatility as nervous money stands ready to shift in an electronic moment worldwide. We place the odds of this outcome at less than 20%.
We conclude with the sage quip of Yogi Berra; “In theory, theory and practice are the same. In practice, they are not.” Regardless of the well-intended policy decision of this FOMC, the rabbit hole is getting deep and the light above is rapidly losing illumination.
Market Update – September 8, 2015
The Next 10 Days should remain with elevated intra-day volatility across all global equity, currency and commodity based EEM’s. Special notice to Japan, China and Brazil with huge intra-day fluctuations in their equity markets (China & Japan) along with outsized currency volatility (Japan & Brazil).
The FOMC’s wrap up of their September meeting occurs on Thursday, September 17th. Expect the following:
- Nothing as it remains on ZIRP (Zero Interest Rate Policy) with continued opaque emphasis on being “data dependent” yet expecting to move off ZIRP in the coming meetings (October or December).
- 30% chance FOMC moves from ZIRP to “near ZIRP”. This would be done by “lifting” the ZIRP target from 0-25bps to 25-50bps. Fed Fund’s (FF) are currently trading around 15 bps. Possible move to the lower end of the new “near ZIRP” target of 25-50bps with a 1/8 pt. (12.5 bps) increase in the FF rate to approximately 25 bps, or the lower end of the new near ZIRP.
- IF there is any increase in the target FF rate, expect a disclaimer under the banner of “emphasis that the trajectory will NOT be a measured pace of increases, but remain data dependent”. FOMC will likely remain constructive on the US economy, concerned about global currency/equity volatility and belief that the US inflation target of 2% is on track with the current lower levels of inflation only transitory. The FOMC will site the improved job market and potential wage price pressures building. Their employment concerns will come from the vast increase in “new” jobs coming from the service sector and part time employment. They will quietly castigate Congress for their absentee management of the US economy and their dependence on the Fed to do the heavy lifting.
- Commentary about the impending US gov’t shutdown is likely to be mentioned with an admonishment to Congress to avoid such a showdown with the Obama administration. The words will likely fall on deaf Republican ears.
September 17-18th is a Triple Expiration. The biases of these expirations are generally UP. Combined with the FOMC announcement on the 17th will render the SPX especially volatile as traders adjust positions AND close-out large carried positions based on an average Implied Volatility of 30% over the past month.
NASDAQ levels: (current level at 4265)
4290-4300 resistance followed by key area of 4320. A move above 4320, or a close above 4320, should quickly test 4360 and then a possible upside surge to 4431.
4215 support followed by a key support level between 4155-4165. A move below, or close below 4155, might quickly test 4115 with further drops to 4065. Selling pressure below 4065 coupled with the November VX expiration surging above 30 will likely drop the Nasdaq 100 below 3950 within days.
I am of the belief that the true investing new year (any year) begins after the Super Bowl which is……February. I liken January to the first half hour of trading in the market; lots of noise, conflicting opinions and scattered quick movements. This is followed by the “real market” where order flow can be recognized and rational decisions may be derived; February as it were. So here’s to a happy and profitable 2015.
That said, going forward what does 2015 hold for investors? There is nobody on the planet that can say with certainty how this year will play out but here are some “experienced thoughts” (meaning I am past thirty) that should have a high propensity of accuracy. First, after significant rare high returns in markets the last few years we can expect much more muted returns, or (gasp) even negative returns. The bull is now six years old, quantitative easing has ceased (for now), economic growth is strong (or looks like it) and the unwinding of low interest rates is being discussed by the Federal Reserve (at least in the U.S.). Geopolitical events coupled with social unrest and widening income gaps worldwide create both headwinds and opportunity.
This new year will be packed with uncertainty which will result in…..increased volatility. We saw glimmers of this increased volatility the last few months of 2014. Will interest rates rise with increased economic activity, or fall with economic slowdown and/or worldwide flight to quality? Will earnings come under pressure with currency fluctuations and slowdowns in emerging countries, or grow with increased economic activity? Will the new Fed Chair keep interest rates low with so much worldwide uncertainty, or actually begin to let rates rise? How will the dis-inflationary environment play out? Will China slow significantly, Europe pull out of its “funk”, oil recover or Russia default on loans to the West? Obviously no one knows, including myself (gasp,) so how should a portfolio be structured? Hedged, hedged and hedged.
I believe our current concentrated portfolio is structured, and balanced, to capture meaningful returns in 2015 all the while being fully hedged to mitigate any surprise market disruptions, corrections or significant declines. All of the stocks in the portfolio pay handsome dividends and, with a couple of new additions, have strong upside potential. With “risk off” stocks (telecoms, utilities), basic material and drug stocks and energy components the portfolio is slightly less defensive and slightly more aggressive moving forward. I like the energy transmission/transportation sector (beaten down with still growing worldwide energy needs), food production enhancement firms (growing worldwide population to feed), pharmaceutical research firms (disease prevention) and the telecoms/utilities (safe, growing dividend income).
So, summing up, 2015 will be uncertain leading to higher (and spikes in) volatility. Be hedged…..fully hedged and expect the “unexpected”. We are.
Here is to a safe and prosperous 2015!
By Ronald M. George and William Taylor
September 23, 2014
Amerca’s Role in the Middle East – Friends and Foes
Oddly enough, an ascribed Arabic proverb, dating to the 4th century BC, suggests “the enemy of my enemy is my friend.”
There is now a 21st century edited version of that proverb; once again emanating from the land of Arabia but this time will need Aristotle to discern the logic; it goes something like this: “the enemy of my enemy is only my friend until my enemy is overthrown by America, a new government is transitioned and then my enemy of my previous enemy becomes my new enemy along with the new government of my former enemy.”
By Ronald M. George and William Taylor
August 19, 2014
Russia was once described by Sir Winston Churchill, as “a riddle wrapped in a mystery inside an enigma.” Those words, spoken in 1939, eloquently described the Western sense of Moscow as inscrutable and a menacing country that plays by its own rules; perhaps they are no different now with the extraordinary exception that today’s Russia is dressed in diplomat’s pinstripes folded around a pugilist’s muscle with a checkbook of an oil baron……….