Markets were relatively flat yesterday even as a large technology firm posted disappointing fourth quarter results. The decline was muted because the ECB said it will propose 50 billion euros of asset purchases a month through 2016 and from a rebound in oil prices.
OPEC’s Secretary General El Badri stated “oil prices will rebound rather than extend their decline as low as $20 barrel because a collapse since June is not merited by global supply and demand….prices will stay where they are at now and should slowly rebound.”
Will this happen? As noted several times, there have been five major oil declines since 1990 sending crude down an average of 48%. Six months after prices bottomed, oil had recovered about 52% of the decline. Past performance is not indicative of future performance however there are a preponderance of oil producers— producers including Russia, Norway and England—who’s cost of production is over $70/barrel.
Perhaps the theme of 2015 will be “Expect the unexpected to occur but only on steroids.” In my view there have already been five major shocks in just the first three weeks of the New Year.
First is the rebound in gun sales. In mid-December the major gun manufacturers warned of sluggish sales. The inverse has occurred (and should have been expected given the increase in FBI gun checks which have been rising about 30% per month since August). While this is not a macroeconomic event, it is an indicator of nervous sentiment given the lack of an obvious catalyst.
Second the abandoning of the caps on the Swiss Franc for only two days before the announced policy change, the Swiss National Bank said caps would remain in place for 2015.
Third is the strong advance of gold, up over $100/ounce since December 31, 2014.
Fourth, the huge drop in the 10 and 30 year Treasury bond yields, the strongest start ever for these pivotal benchmarks.
Fifth, the global change in attitudes towards Islamic extremists, a change led by France.
Will oil rebound? As I have commented several times, we are not talking about the survival of companies but rather the survival of countries.
Some might comment the above remarks are from one who is long both guns and oil, which I am. However I am firm believer in the creed “that it is not what one does but rather why one does it.”
If one makes investment decisions via macroeconomic, geopolitical and geostrategic perspectives/outlook, 2015 will be challenging with fortunes made based upon the correct assumptions. Following the herd and the dominating narrative could be dangerous.
Last night the foreign markets were mixed. London was up 0.51%, Paris down 0.08% and Frankfurt down 0.38%. Japan was up 0.28% and Hang Sang up 0.70%.
The Dow should open nominally higher ahead of expected ECB QE. There are also 16 S & P 500 companies posting results today, results to date that have been mixed. The 10-year is off 15/32 to yield 1.93%.
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