TOO BAD THE MARKETS WERE NOT CLOSED FOR A SNOWDAY

Today is the commencement of the 2 day FOMC meeting. No change in monetary policy is expected. I am certain the central bank will know the fourth quarter growth rate. Analysts are expecting a 0.8% increase for the period, the slowest pace since the 0.6% gain registered during last year’s weather induced first quarter slowdown.
The major reason for the slowdown…trade and inventories. Commenting about inventories, the previous four years producers entered the first quarter fully stocked. Growth slowed, partially the result of winter weather. Today inventories have been pared thus impacting fourth quarter growth but perhaps creating an environment for growth later in the year.
Regarding trade, it is a combination of slowing foreign growth and the dollar. Some have estimated that the surging dollar has subtracted about 0.2% from growth.
Core GDP, which is GDP less inventories, trade and government spending—or the GDP data the Federal Reserve relies heavily upon—is expected to rise by 1.9% for the quarter. For 2015 “core GDP” is expected to increase by 2.7%. Currently analysts expect core GDP to be around 2.5% in 2016.
This data does not suggest the economy is falling off the proverbial cliff. Nor does it reflect the environment consistent with recent stock prices.
Speaking of which, the S & P 500 fell over 1.5% as oil declined over 7.5%. The narrative is rising about the impending financial collapse of many oil producing countries and the subsequent calls for a reduction in production.
The narrative is also rising about the short positon in crude. According to Bloomberg, the amount of derivatives/futures on oil is about 80 times greater than production, a proportional amount of script that was bought when gold spiked to over $1,900 an ounce in September 2011.
Gold collapsed to around $1,000 in the following months, contrary to “expert” forecasts. Last night gold closed around $1,100/ounce.
As noted many times, there is a record short interest in oil and a record number of puts purchased on oil. The amount of “script/derivatives” outstanding on oil is at a record 80x greater than production with Barclay’s reporting there is a record number of “unhedged short positons.”
Currently there is little spare global capacity as investment in the oil sector has been slashed $1.8 trillion between now and 2020 from 2014 levels. Currently spare capacity is 2% versus 8% five years ago and 30% in the 1980s, also according to Barclays.
What happens to prices if there is a supply disruption or if demand is stronger than expected as was the case in 1999, the last major oil bear market? In 1999 prices jumped over 50% in 20 days.
As noted, I don’t think domestic growth is as weak as the market may be suggesting.
What will happen today?
Last night the foreign markets were down. London was down 0.37%, Paris down 0.07% and Frankfurt down 0.26%. China was down 7.32%, Japan down 2.35%and Hang Sang down 2.48%
The Dow should open flat as oil’s decline has stopped for the moment. I think it is significant that China was crushed last night and the US markets appear to be opening unchanged.
Regarding, was yesterday the capitulation day? I don’t have a clue for prices always go lower or higher than anyone would expect. The 10-year is up 2/32 to yield 2.0%.