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In Many Ways the First “Real” Trading Day of 2015 was a Continuation of the Themes That Were Present During Last Day of 2014.

In many ways the first “real” trading day of 2015 was a continuation of the themes that were present during  last day of 2014…oil falling with no end in sight and energy shares following the drop in crude.

I have read countless number of stories/reports suggesting crude will continue to fall because of slow economic growth and over production.  As all know crude has declined from June’s level of $110 barrel to $50 yesterday.

When will this narrative change?  I would like to return to July 2008 for a possible answer.   July 2008 oil spiked to $147 with no apparent peak in sight.  Somewhere in my files I have the Goldman report stating crude will reach $200/barrel within 12 months for the then well-known and overwhelmingly accepted reasons.  To the best of my knowledge there was not a single person who suggested oil will hit $33 in January 2009 as it did because of the financial crisis.

Citicorp wrote yesterday lower oil prices may provide a stimulus as much as $1.1 trillion to global economies with the US benefitting the most as the US is the world’s largest energy consumer by a large factor.  The US Energy Information Agency states the US consumes about 30% of global production thus suggesting a $330 billion stimulus.

Merrill Lynch states the typical US house consumes 1,200 gallons of gasoline a year.  For every $0.10 drop in the price of gas, the typical household saves $120.  If this statistic is accurate, the typical American household will save about $2,400 annually if prices remain at this level.

Merrill further writes families with income below $50,000 spent an average of 21.4% of their income on energy, nearly double the share in 2001.

Much has been written about income inequality.  Will this drop in gas/energy costs become the great equalizer?  $2,400 a year in gas savings is huge for those whose income is lower than $50,000 as such is a 4.8% after tax raise.

Will the decline in energy permit fourth quarter GDP to have a “mid to high four handle?”  Real time data for December is lacking so to suggest such is nothing other than rhetoric.  However with this written, I conjecturally think the odds are around 50%.

As written above, a major reason for the drop in oil is supply, perhaps exacerbated by slowing global demand.  US economy is three times larger than its closest competitor; China.

The US uses 18 million barrels daily.  China 10 million and the third largest economy, Japan uses 4.7 million barrels daily.    Logic stands if the largest oil consumers have just received a huge stimulus, economic activity will follow which will ultimately increase demand, hence prices.

Will this occur?  July 2, 2016 headlines will answer the question.

What will happen today?  Factory orders and the ISM non-manufacturing data is released.  Will this data be ignored because of oil or the December labor report released on Friday?  I can argue this report can potentially offer considerable input into fourth quarter growth estimates.

Last night the foreign markets were down.  London was down 0.50%, Paris up 0.08% and Frankfurt up 0.51%.  Japan was down 3.02% and Hang Seng down 0.99%.

The Dow should open nominally higher following a four day 3.4% sell off in the S & P 500.  The 10-year is up 11/32 to yield 1.99%.  Oil is down about $1/barrel.

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Ken Engelke

Chief Economic Strategist Managing Director

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