TUESDAY WAS THE INVERSE OF MONDAY

Yesterday oil fell as did equities as the correlation between the two is extremely close, a correlation that has been in existence for over 20 months. The catalyst for oil’s decline; Iran stated it will refuse to halt its planned output expansion and Saudi Arabia dashed hopes that the output freeze is the first step towards a coordinated OPEC/non OPEC supply cut in coming months.
It is now common knowledge that even OPEC itself—the supplier of 50% of the world’s crude—underestimated the velocity of and depth of the oil price fall after its November 2014’s decision not to cut output.
As mentioned many times the sustainability of many oil producing countries is now greatly threatened. According to the International Monetary Funds, eight of the thirteen OPEC members including Iraq and Iran are staring into the economic abyss with crude at these levels, perhaps economically failing in six months. Russia is also on the verge of teetering where according to the IMF Russia will be broke in 9-12 months.
As I stated yesterday, the announced Saudi Arabian/Russian freeze many only be symbolic given that both countries are producing around 110% of capacity with little ability to increase levels.
As I also noted Iraq, Russia and Iran lack funds to increase production in 2016 and there is a credible argument, perhaps validated by country officials production will actually decline in 2016 given lack of infrastructure spending.
What will change the extremely negative narrative? If history is of any guide, stronger US/global growth and a decrease in supply. I have argued—and so has almost everyone else—supplies will fall given the massive drop in western infrastructure spending, the first back to back annual decline in over 30- years. There is typically a 9-12 month lag between and such a drop in production if is it to occur, should be noticeable in the immediacy.
What about global growth? JP Morgan’s Jamie Dimon stated the consumer’s balance sheet is in excellent shape. Several large home builders have commented 2016 home sales/construction is strong.
As widely known, 70% of the US economy is from the consumer, a consumer whose spending is historically directly correlated to housing. Will growth surprise on the upside?
Perhaps the only concrete statement to make is expectations are extremely low where almost any growth may shatter the gloomy one sided narrative.
I will argue espousing a political/macroecomic outlook is perhaps the most important variable in determining market performance. The economy/the markets are at a major intersection. Either the market has it right and consensus is wrong or vice versa. If the consensus view is correct, equity values (and oil) should rise with value greatly outperforming momentum growth given there is the greatest differentiation between the two since 1980 according to JP Morgan.
Last night the foreign markets were down. London was down 1.41%, Paris down 2.07% and Frankfurt down 2.38%. China was up 0.88%, Japan was down 0.85% and Hang Sang down 1.15%.
The Dow should open moderately lower as oil is down about 3%. The 10-year is up 6/32 to yield 1.69%.