Friday, February 5, 2016

Still, Oil and Central Bankers...

There’s just so much to report---and comment on---after yet another volatile week! So much so that to do it justice would be asking you to devote way too much of your weekend (let alone a Super Bowl weekend) to take it all in. So I’ll simply focus on the two no-brainers, oil and the Fed.     to enlarge the charts, click, wait a second, then click again...


While there were some moments early in the week (as highlighted on the chart), it appears as though stocks are content following oil in whatever direction it wants to go. This, I can virtually promise, will not be a long-term relationship (it's an infatuation that will ultimately wear off), but for now it remains the “trade”…

Oil and spx 2-1 to 2-5

As for the fundamentals: Bottom line, there’s (per the chart below) currently more global production of oil---for whatever reasons---than there is demand. Thus, the crazy low price and, thus, the cancelling of billions of dollars worth of projects, and, thus, the crazy notion (given OPEC’s campaign to put the marginal competition completely out of business) that OPEC and Russia are on the verge of cutting production to support the price.

Oil Supply Demand Chart

That cancelling of projects and the shuttering of unprofitable production would explain the EIA’s projections for late this year and into 2017.

As for the correlation to stocks; here’s from last week’s update (click here for the full story with charts):
After the nightmare that was the 2008 recession, and the memories of the late ’90s “Asian Contagion”, anything that smells of stress in the credit, and currency, markets is going to send the equity market into a tizzy.

The Fed…

The Fed sent three speakers into the world this week. Two voiced their concerns about the present global state of affairs and suggested that a cautious approach was warranted going forward. The third cited a strengthening U.S. labor market (confirmed by Friday’s jobs report) as sufficient reason to stay the course and continue to move rates higher this year.

Stocks early-week separation from oil coincided with Fed vice president Stanley Fisher’s voicing his concerns (i.e., he softened his typically hawkish tone). I.e., the market rallied on his commentary.

Friday’s jobs number, while missing the consensus estimate, unveiled a consumer with a larger pay check and an increasing number of hours worked. Couple that with flat corporate output and you get a scary-bad productivity reading. And, put simply, higher labor costs without higher output mean higher prices! Which means Esther George (the confident one of the three Fed members I mentioned) may be onto something. Which I'm guessing inspired traders---who were bullish because they thought stocks would see no competition this year from higher interest---to sell big time on Friday (although the day did not have a panicky feel to it).

(Side note: The notion that lower productivity ultimately equates to higher pricing is sound. However, we should seriously doubt that true productivity in today’s economy can be fully measured with the tools at hand. For example; sometime before Christmas (I won’t confess to how much time before Christmas) I went shopping for my wonderful wife’s present. In the olden days I’d have had to check out of the office at around, say, 1 o’clock in the afternoon and head to a mall where finding a parking spot would’ve been a most time consuming (and tactical) adventure. Of course you know the rest in terms of crowds, checkout lines, inventory of my item, color, size, etc. I.e., the joyful experience of finding just the right thing for the love of my life would have no doubt taken me long into the evening. Instead, I walked the 10 steps from my office to the office of Nicholas, the heir apparent (the ultimate buyer, actually) of the firm, and said “hey, I need to get Judy an Apple Watch for Christmas”. He said “cool” and immediately began typing those magic words, “”, onto his keyboard. Within literally five minutes (it was of course a most joyful five minutes of shopping for the LOML) I was back at my desk being productive---knowing that the very next day the UPS guy would be hand-delivering the goods that’ll make me look like a prince the day after that (oops!).

Again, there’s no way the utterly poor productivity numbers of late are catching all of the gains realized by today’s technology.)

Here’s how the Dow traded last week. I noted the moves when Fed funds futures discounted noticeable changes in the likelihood of a December 2016 rate hike (the first was on Fisher’s comments, the second was on the jobs number). The chart implies that the market remains very sensitive to the Fed (as well as oil):

Fed probabilities and market 2-1 to 2-5

Realistically, I see virtually zero chance of a rate hike at the March meeting (too soon to say about June). Here’s why:

Citigroup’s U.S. Economic Surprise Index, which compares actual economic readings against economists’ expectations, says that the Fed (given that it’s staffed by economists) likely overestimated the economy’s near-term prospects when it signaled four 2016 rate hikes after last December’s meeting. Thus the very low odds of a March rate increase:

Citi Econ Surprise Index US

Plus, the Fed has, in no uncertain terms, voiced concern over the conditions existing outside our borders. Here’s Citi’s index for the Eurozone:

Citi Econ Surprise Index EU

For China (hmm, not as bad):

Citi Econ Surprise Index CHINA

For Japan:

Citi Econ Surprise Index JAPAN

And for emerging markets in general:

Citi Econ Surprise Index EM

To wrap it up for the week, here's me, briefly, on the technicals:

Enjoy your weekend!


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