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Can the Negative Energy Narrative Become Even More Intense and Myopic, a Myopicy Fueled by a 16% Drop in Crude in Just Six Trading Days?

Can the negative energy narrative become even more intense and myopic, a myopicy fueled by a 16% drop in crude in just six trading days?  Yesterday Goldman commented oil can fall to $40/barrel or another approximate 18% -20% from Friday’s close.  Will this forecast become a reality?

I vividly recall the intense energy narrative of summer 2008 where in July Goldman wrote crude could advance to $200/barrel.  The rational was convincingly strong, just as the narrative in yesterday’s report.  Oil rallied another few dollars and topped out around $148 barrel in mid-July and then plummeted into the thirties within six months because of the financial crisis.

Will yesterday’s Goldman report be viewed in a similar manner as the front cover of Time Magazine where once a story makes the front cover, the story/market has reached an apex or nadir?

Like the vast majority of market participants, I did not expect crude to fall to current levels.  As noted many times, we are now talking about countries failing versus companies.  The potential unintended geopolitical and geostrategic consequences are infinite.

Earning season commenced last night.  For the first time in many quarters, I think the odds are greater than 50% that reports will disappoint given the drop crude and strengthening dollar.  I also believe the results in the energy/capital spending sector will not be as poor as some expect but to write the obvious the forward looking statements will be greatly dissected.

Regarding the dollar, according to S & P, approximately 47% of the S & P 500 revenues and 49% of the S & P 500 profits are generated via international sales.  The dollar has been very strong.  Can an argument be made the smaller capitalized issues will outperform given the vast majority of their business is conducted domestically, an environment perhaps amplified by falling crude?  Input prices such as oil historically have a greater impact on the smaller concerns.

Commenting briefly about yesterday’s market, equities fell again because of oil.  Treasuries advanced.

Last night the foreign markets were up.  London was up 0.64%, Paris up 1.32% and Frankfurt up 1.24%.  Japan was down 0.64% and Hang Sang up 0.79%.

The Dow should open moderately higher as Alcoa surprised on the upside and offered positive forward looking outlook.  There are sixteen other S & P 500 companies posting results this week.  How will results be interpreted?  Will results be overshadowed by the plunge in oil and increase talk about a change in monetary policy?  The 10-year is up 5/32 to yield 1.89%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.