Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

The Damage Caused By the Oil Bear Will Spread Far and Wide

Commodities / Crude Oil Dec 21, 2014 - 06:14 PM GMT

By: Money_Morning

Commodities

Michael E. Lewitt writes: Oil prices continued to fall this week but stock markets shrugged off the disarray this continued to cause in global markets after Janet Yellen whispered soothing words in their ears after the Fed's last meeting of the year on Wednesday. Mrs. Yellen has become a "bull whisperer" – fearful of upsetting the equity market, she cloaks her words in indirection and equivocation in an effort to keep them calm as she prays for an economic lift-off that will take her institution off the hook.

Unfortunately, her patient is likely to be very disappointed, for it would take an economic miracle the likes of which hasn't been seen in this country since the years after the Second World War to deal with the mountain of existing debt and future liabilities that are going to bury us.


For the moment, however, the bull was assuaged with the Fed's promise that it would be "patient" before raising interest rates, unleashing a furious charge that reversed almost all of the 4.8% that the market lost over the previous six days.

Strange Things Happen on Quadruple Witching Day

The Dow Jones Industrial Average closed the week up 3% at 17,807.37, 150 points below its all-time record closing high of 17,958.79 on December 5. Only two days before, it had closed at 17068.76. The S&P 500 closed up 3.4% at 2070.73, a mere 5 points off its record closing high on December 5 of 2075.37. Two days earlier, it had closed down at 1972.74. The Nasdaq Composite Index closed up 0.4% and ended the week at 4265.38. Friday was quadruple witching day and when the moon is rising all types of loony behavior appears. This week was no exception.

Bond yields backed off with the stock market rally and the yield on the benchmark 10-year Treasury bond ended the week at 2.178% after flirting with the 2% level earlier in the week. The TIPS market is still signaling very low inflation expectations with the 5-year breakeven trading at a remarkably low 1.2% and the 10-year breakeven at 1.65%. These are also levels that previously led the Fed to initiate new rounds of QE the last times we saw them after the financial crisis.

At least one Fed governor, Minnesota's Kocherlakota, appears to be in a panic that the Fed might act to soon to raise rates and create an unacceptable risk that the economy might fall into Japanese-like low inflation funk. It must be mighty cold up there in the northern plains because in places like New York City and Miami, or on the NYSE and Nasdaq, the prices of real estate, art and stocks and bonds are skyrocketing in price and showing little signs that inflation is contained.

Fortunately Mr. Kocherlakota is in the minority; leaving our fate in the hands of former tenured professors is going to be hard enough to explain to our descendents when we have to explain to them why the monetary policies we have followed for the last few years failed so miserably.

Never Mind the Economists, Send in the Psychiatrists

At this point, reading the mind of the market requires a psychiatrist more than an economist and likely it always has. It appears that the Fed blinked once again in the face of market volatility. Rather than telling the market to "suck it up" and prepare for higher rates, Fed Chair Yellen went out of her way to soft-pedal her message. If markets rallied so dramatically at signs that the Fed will be "patient," Lord only knows how hard they are going to sell off when the Fed actually dares to raise rates as they are certain to do one day.

Markets may have paid too much attention to the delivery and not enough to the substance of what Mrs. Yellen said last week. Real U.S. GDP has grown at better than 3.0% for five of the last six quarters, the unemployment is well below 6% and inflation is hovering near 2%. The substantive message from Mrs. Yellen and most other Fed officials (with the notable exception of uber-dove Kocherlakota) is that rates will be hiked in the middle of next year. Based on the stock market rally this week, that does not appear to be a message markets are prepared to hear. The market is still pricing in significantly lower interest rates than the Fed is forecasting over the next one, two and three years.

While the Fed is a notoriously poor forecaster, markets are scarcely better. In view of slowing global growth and steady U.S. growth, the most reasonable expectation is for a flatter yield curve in 2015 with the Fed lifting the short end of the curve and the market pushing down the long end of the curve. That would spell a move toward recession sometime in 2016 or 2017, something few people and the S&P 500 certainly are not forecasting.

Most Forecasts Are Out the Window Now

It will take a while for markets to adjust to the new oil order. According to a recent Bloomberg survey, the median WTI forecast for 2016 is still $86/barrel. In case anybody is looking, that is $33/barrel or nearly 60% above current prices. These forecasts are based on now outdated cost data and will have to be adjusted lower.

Virtually nobody projected the price of oil to drop by more than 40% since the summer, so current projections for it to bounce back should be heavily discounted. It appears that the sharp price drop was caused by both supply and demand factors, neither of which is going to turn around overnight. Furthermore, the sharp drop in oil has begun to create unanticipated consequences that will affect markets in the year ahead, the collapse in the Russian ruble being the first of many.

The carnage in oil stocks and bonds is considerable. The average yield on the energy sector of the high yield bond market, which represents roughly 17% or $200 billion of the market, moved above 10% this week for the first time. To place that in context, this yield was much closer to 6% as recently as the summer. Bonds of some large issuers such as Samson Enterprises have plunged to the high 30s while their bank debt has traded down into the 70s.

The Oil Pain Isn't Evenly Distributed

The market has begun to tier, however, with fracking companies faring much worse than E&P (exploration and production) companies, larger E&P companies faring much better than smaller E&P companies, and refining companies generally faring better than oilfield services companies (although there is a great deal of pricing disparity among the latter two groups).

In many cases, investors are throwing the baby out with the bathwater, however, creating attractive investment opportunities for investors who can identify companies that can withstand tough times. Losses in the bond market are being exacerbated by increasingly poor liquidity as bond dealers step back from the market, a situation made worse by their desire to hold low bond inventories at year end. Tax loss selling in stocks and bonds is also likely contributing to the bloodbath.

The average yield on the Barclays High Yield Bond Index has now increased to 7.3% from as below 5% at one point earlier this year. The question for investors is whether energy will prove the trigger for a long overdue re-pricing of this market, which has been underpricing risk for the last couple of years.

The damage from lower energy prices will radiate into other sectors and some of the sectors that would be expected to benefit from lower oil prices such as retail are suffering their own structural problems. The days of 5% yields are likely over, and it isn't a moment too soon.

Editor's Note: Michael Lewitt publishes the highly regarded The Credit Strategist, and was recognized by the Financial Times for forecasting both the financial crisis of 2008, and also the credit crisis of 2001-2002. His 2010 book, The Death of Capital: How Creative Policy Can Restore Stability (John Wiley & Sons) was included in the curriculum at the University of Michigan and Brandeis University.

Source : http://moneymorning.com/2014/12/21/the-damage-caused-by-the-oil-bear-will-spread-far-and-wide/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules