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I Believe Saudi Arabia has Embarked Upon a “Scorched Earth Policy”.

Oil continues to drop.  Some have commented the five month decimation in the oil sector is now “an opportunity of a lifetime” as everything has been thrown out with the proverbial bathwater.

Who or what will blink?  American companies are cutting cap ex programs which is suggesting less production in 3-6 months.  When will Saudi Arabia change its stance, a change that will have an immediate impact on prices?

I have written extensively a major possible reason why I believe Saudi Arabia has embarked upon a “scorched earth policy” is the result of America abdicating its unspoken role of the global policeman and because of such abdication, Saudi Arabia is engaged in economic warfare against Iran, Iraq, Syria and Russia.

It is widely accepted Saudi Arabia fears a nuclear Iran, a program largely believed supplied by Russia, has great misgivings about the Syrian government, fears ISIS as well a potential Iran/Iraq collaboration.  If Russia, Iran, Iraq, etc. has great fiscal issues, it is thought this will strengthen the diplomatic and bargaining position and security of Saudi Arabia.

Unfortunately all other countries/companies are collateral damage.

I can argue Russia is about 6 weeks away from blinking.  According to the Institute for International Finance (IFF), Russia’s foreign reserves have plunged from $511 billion to $388 billion during the past year.  The IFF states the danger line for Russia is $330 billion given the dollar liabilities of Russian companies and chronic capital flight.

The IFF states the total foreign debt of Russian companies and state entities is $654 billion. The Russian government is shut out from the international debt market and is unable to roll over any loans and is burning between $10 and $20 billion a month in foreign reserves.

Simplistic math suggests Russia will reach the IFF stated danger line of $330 billion in about two months if crude does not rally.  [Oil is about 55% of Russia’s economy]

To write the well-known, because of today’s environment the rouble has been killed slumping 20% alone since Christmas and Russian Credit Default Swaps (CDS) have surged in price.

Out of economic necessity will Russia blink and stop its Iranian nuclear program and arming ISIS and supporting the Syrian government?

Several weeks ago I commented since 1990 there has been about five oil shocks, each of which the price of crude has plummeted about 45% in six months.  Six months later crude retraced about 50% of the drop and 12 months later, oil is up about 80-85%. Will history repeat itself?

If  history does repeat itself, the result of a change in Russian foreign policy brought upon by Saudi Arabia’s actions,  I will argue that this is indeed a “once in the lifetime” opportunity in the energy markets.

I have not witnessed such rapid utter sector decimation in my approximate 30 years in the industry where everything has been killed regardless of merit and hyperbole is at such myopic and deafening levels.

Today is the release of December’s jobs data.  I have argued the odds are about 50% fourth quarter GDP will contain a “four handle” given the simulative effects of dropping oil.  Will today’s data offer support to this view?

Non-farm payrolls are expected to increase by 240K, private sector payrolls up 225K, a 5.7% unemployment rate, a 0.2% increase in average hourly earnings, a 34.6 work week and 62.8% labor participation rate.

To write the obvious the markets will trade off the interpretation of this data.

Speaking the markets, equities surged yesterday on hopes of further ECB stimuli and optimistic US data.

Last night the foreign markets were mixed.  London was down 0.64%, Paris down 0.71% and Frankfurt down 0.64%.  Japan was up 0.18% and Hang Sang up 0.35%.

The Dow should open but this could open moderately lower on profit taking but change greatly given the potential significance of the 8:30 data.   The 10-year is up 4/32 to yield 2.0%.

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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.