| MARKET ROUNDUP | |
| Dow | +225.48 to 17,416.85 |
| S&P 500 | +19.09 to 2.021.25 |
| Nasdaq | +45.42 to 4,683.41 |
| 10-YR Yield | +.027 to 1.751% |
| Gold | -$28.70 to $1,257.20 |
| Crude Oil | +$0.10 to $44.55 |
There was a brief moment in time recently when corporate earnings actually made a difference for stocks. But not anymore! We’re back in “oil hell” again — with every wiggle in energy prices causing a corresponding move in the S&P 500.
Just look at what happened when oil prices breached their recent low earlier today, falling to $43.58 a barrel. Stocks dropped to their lows of the day. The yield curve flattened (a real-time, downward re-evaluation of future inflation expectations). And the Canadian dollar and other “comdols” like the New Zealand and Australian dollars sank.
No doubt those trends in oil prices and foreign currencies are strong, and have been with us for the greater part of eight months. The broad averages managed to fight off the losses in sectors like energy for a few months. But despite today’s rally, financials are starting to waver now, as is technology.Â
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| Will we see oil fall to $10-a-barrel? |
So does this mean all hope is lost? Are we destined to see $10-a-barrel oil, even more pain in energy, and a bigger plunge in the broad averages? Or can something break the grip of oil over stocks?
Well, how about the fact that we’re seeing massive cut backs in energy investment among some of the world’s biggest players?
Royal Dutch Shell (RDS.A, Weiss Ratings: Not rated) is one of the biggest multinational energy giants. It just announced plans to cut a whopping $15 billion in exploration, production, and other capital spending over the next three years.
ConocoPhillips (COP, Weiss Ratings: B-) also said it would cut capital spending by another $2 billion to $11.5 billion. It had already lowered its target by 20 percent in December. Competitor Occidental Petroleum (OXY, Weiss Ratings: B-) slashed its plans by 33 percent to just $5.8 billion.
Those cuts mirror other announcements from smaller firms throughout the domestic and foreign energy industry. While the shuttering of projects, curtailment of drilling plans, and firing of workers won’t result in an immediate, massive drop in oil supply, they sure as heck alter the supply-demand outlook for coming months and years.
Since investors in the futures markets and energy stocks are naturally forward looking, these cuts could hasten the bottoming process. And with downward momentum at an all-time record high, and valuations at multi-year (even multi-decade!) lows, it looks too late to be selling to me.
| “It looks too late to be selling to me.” |
Meanwhile, it’s possible we could see other market sectors pick up the slack from energy. Utilities, health care, retail, and REITs are still hanging in there, and strong reports from companies like Boeing and Apple have rewarded investors in those names.
But I have to tell you, if we don’t see some stabilization soon in oil and gas — or a break in the relentless dollar rally that’s putting so much pressure on commodities — it’s going to be a bigger and bigger headwind for ALL stocks. So keep an eye on those other markets when deciding whether to commit more capital to equities.
What are your thoughts? Can stocks “get over” the moves in oil and gas, and start focusing on other fundamentals? Or do we need to see oil prices base for the S&P 500 to do so? Is there a broader deflationary message out there? Or is this short-term stuff? How are you adjusting your investment stance, if at all, to these latest developments?
The website is where you can get together with your fellow investors to hammer out some answers. So use this link to get the discussion going!
| Our Readers Speak |
So here we are, a little more than 24 hours after the Federal Reserve met and weighed in on the economy and inflation. Anyone invested in risky stocks got bloodied pretty badly by a 195-point drop in the Dow, a move that came on the heels of a 291-point decline the day before. We also saw incredibly violent moves in the foreign exchange and commodities markets, and a notable rise in volatility.
So in response to Reader Richard, who remarked: “You guys have been hammering a teaser about ‘Bloody Wednesday’ with much ado. Looks like you were off. What do you have to say for yourselves?” I’m not sure what more you want to see.
The Fed didn’t actually raise interest rates, but it continued to toe the line that it will likely raise later in 2015. The battle between global central banks on the policy and currency fronts is clearly ramping up dramatically too. That means more volatility — and multiple “Bloody Wednesdays” as a result of policy decisions made here and abroad — are likely coming down the pike.
Or in simple terms, ignore those risks at your own peril! Certainly, Reader Bill R. is one of those who isn’t. He noted:
“As a moderately knowledgeable 74-year old investor, I am getting to the point where all the global factors are beyond my capability to balance out. I am going to reduce my risk allocation by another 10 percent.”
Reader Donn H. also noted some of the increasing global risks, saying: “Yellen et. al are adjusting world currencies at an alarming rate. Look at sanctions on Russia. Drops their currency to like .03/USD? But guess what? We pay!
His verdict about what it all means: “Markets correct and stay sideways. And the poor get poorer in 2015.”
Reader Hawk was even more emphatic about what may come next. The comments:
“I believe that we are in a deflationary cycle. I think there are more goods and services being produced than can be consumed. I also think that housing development will continue to stagnate as debt levels of new buyers (i.e. college graduates with student loans) will curtail new purchases. The price of commodities e.g. oil (along with by-products) and copper are collapsing and I think will continue to do so. I also think pension plans will have a hard time getting returns they have projected mainly because of low and getting lower interest rates.”
That’s a long list of risks, Hawk, and I appreciate your view. I’m not all-in on a broad, deflationary view yet — in part because other parts of the U.S. economy are still hanging in here even as oil prices fall.
Plus, lower oil prices now are sowing the seeds for higher prices later. I say that because energy companies are now idling hundreds of drilling rigs, firing thousands of workers, and shelving tens of billions of dollars worth of exploration and production plans.
But new information comes in from the markets every day. So I’ll process it, and keep you updated on my evolving views! And if anyone else wants to add their two cents to the discussions on energy prices or currencies or Fed policies, the website is there for your use.
| Other Developments of the Day |
That rosy glow in tech-land from the earnings out of Apple (AAPL, Weiss Ratings: A+)? Yeah, so much for that! Wireless phone chipmaker Qualcomm (QCOM, Weiss Ratings: B) wiped it all away by slashing its earnings and sales outlook for 2015. The company blamed problems in China and a key customer’s decision not to use one of its latest chips.
As always, I welcome your comments on these stories and the other news of the day I may not have mentioned. Go to the website to weigh in.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 23 comments }
someone please explain to me just why falling oil prices should cause the general market to decline. For years the high price of oil from foreign sources was blamed as a ” tax on the American consumer ” Now that over 60% has been knocked off that price, with more to come and all those dollars kept in our pockets some people try to blame this phenomenon for the few drops in the market.
I can understand that people cannot make accurate prediction of market prices in general but it is more of a mystery when they quarrel over the reasons for a decline. In fact the market is not yet in any serious decline. Look at the actual prices, not the temperature.
Falling oil prices are not the reason for a decline in the stock market only the excuse being used. The economy will benefit if the United States becomes energy independent, but does the powers of government and the powers of big business even want to be energy independent, it will take away their financial power and financial manipulation especially for big banking powers. Banking is taking money out of the oil industry. Leaving the growth of our economy from the oil industry and energy independence in the dirt. Why? Political control and manipulation of the economy to stop growth, so the stock market declines. Wait 6 months find a mid size oil and gas company with acreage that gives a dividend and buy their stock, the world can not run without oil and gas.
I,m with you we cant move without oil and gas so buy up soon
Who knows.I think the Fed has been the main force,moving stocks higher.If they decide they can’t raise interest rates,because the Dollar would rise even more,then stocks should rise.I think,unless/until inflation becomes a problem and/or the Dollar crashes,the Fed will continue to supply the fuel for higher stock prices.
Manipulation is the word. Someone thought it would be a good idea to stop those frakers So drop the price so low producers can’t make obscene profits. Crash the stock market so all the high rollers can profit from their puts. The is just the thing big O wants,.don’t let the coming crash go by without taking advantage of the crisis. The My IRA THING is a wolf in sheep’s clothing. Guess who will run this program? The Social Security System. They have such a good track record. Could this be another lie?
From what I could tell, the O&G industry is something like 5% or a little less of our GDP. I know someone in the industry and they are hurting big time. I think the big concern is that this could be an inflationary canary in the mine. Once the metals bounce a little over the next week or two and then start their decline…..things could get ugly. Who knows what other items or stocks might start joining in??
When I look at a longer term oil chart….it really looks VERY nasty. I see a continuing decline to somewhere around 40, maybe a bounce…..and then more destruction down to at least 30.
It seems to me the market suffers trip wire sensitivity with the slightest ripple energizing millisecond reaction using expensive systems by huge traders, leaving the rest of us in the wake. Volatility is the operative word here. Oil & gas have a history of large swings, some of which are contrived, some due to world events such as 911. Virtually everyone runs for the bunker when something bad happens,poised to react. Buying blue chip stocks at bargain prices such as now is one of those opportunities, which rarely come the way of us commoners. If you do your homework and are patient you can enter into the rarefied atmosphere of the 1% and make some money either in raw materials or energy currently. I’ve selected both. Civilized society doesn’t exist on air alone.
Hi Mike
Interesting to hear from some bloggers in the UK and others that holidays to America are going to be much more expensive with a high flying Dollar. Makes me wonder about the effect of currency wars and whether the US can afford to raise interest rates in the near future???
The private investment company I work for has been in business since 1921. It’s capital is allocated about half to oil and gas and half to stocks and bonds. The generally accepted investment theory is that when oil is up stocks will be down and visa versa. This has allowed the company to maintain an even keel thru every type of investing climate for all these years. The action of the last several years would indicate that this theory is no longer valid. We have , of course, done well with both going up but have the rules now changed so that we can expect both to crash? After many years of success I all of a sudden have the sick feeling I don’t know what I’m doing. My generation has never really experienced a real deflationary event. Perhaps we are about to learn why deflation was so feared by our fathers and grandfathers. Jim
How long can the countries that are in OPEC hang in and not ask for changes in production. Many of these members use oil profits for over 90% of their budget to run the country. They cannot survive at these prices and many need $90 – $100 oil.
Maybe they know something that we don’t!
In a situation like this…..it is every country for his own interests. Unity falls by the wayside.
Hey Mike I noticed you don’t mention the Patriots anymore.Is there a reason for that???Maybe something to do with the footballs??Or maybe it is Aaron Hernandez and the trial–they should give him a break…after all,he only killed three people.
Sorry,couldn’t resist,good luck Sunday.I will get back to serious financial stuff after the game.Should be a great game with two really good teams.
I don’t know what to do and so I wait.
“I Am Loving it” First McDonalds could improve their bottom line if Steve Easterbrook would tour their chain as a customer and take notes, especially with their inside counter customer service. I have observed tis chain has to many employee, for service rendered.
“I Am Loving it” Energy Sector stocks deflating, I really see great buying opportunities, on the long side and even greater high yields in Energy dividends, on the short side. You need to do your home work and pay more attention to “Dollar for Dollar investments” were you can get the best value for each dollar invested. “I am Loving Oil & Gas”
Why register for a job when you can make more money by taking the gov’t handouts then doing odd jobs for cash under the table. DBS should give a report on the underground economy.
Stocks WILL continue to be hostage to oil/commodity crash which is the canary in the coal mine for deflation. This is absolutely NO different from stocks being held “hostage” to the sub-prime mortgage mess from 2007 to 2009. Absolutely same problem and result with simply a different asset class. Problem is UNLIKE 2008, the European Sovereign Debt Crisis, the Chinese Real Estate Bubble, the Geo-Political problems and Cold War 2, the World’s Middle Class finances…the High Yield Debt Crisis etc…etc..were NOWHERE NEAR AS BAD AS THEY ARE NOW. ALL indications are pointing to a MAJOR correction that now appears to be in motion
Right you are. This one will make 2008 look like a pleasant picnic in the park.
About that comment concerning pensions not earning , was that in the customary investiture of bonds that is why some predict a jumping out of bonds into equities by the pension funds managers in a desperate gasp for return in a futile effort to prevent a crisis and at the same time drive the dow to unheard of highs! I wonder how deflationary spin affects a bond crisis anyone?
Re the oil market, it seems to me there are two scenarios: (1) The Saudis accomplish their objectives (which may include pushing prices to well below U.S. high costs for producing shale oil, which is–what–$50/barrel?), at which point OPEC pulls itself back together and starts selling all the barrels it can produce at just below U.S. production costs (given that OPEC conventional production costs are somewhere around $20/barrel), which will put OPEC back into control of world prices, which–going forward– should establish a new trading range from about $20/barrel to about $50; or (2) OPEC members can’t stand the pain of falling prices, they reestablish cartel discipline and accept a smaller share of the world market.
Another factor may be the Canadian Tar Sand Oil, and the Keystone Pipeline. I have not studied the tar sand production cost structure. It is generally said that it takes 90 dollars to produce a barrel of tar sand oil. I think that cost includes capital costs of buying those giant sized tar sand hauling tractors, building tar sand oil extraction plants, roads, etc. I guess (pure guessing) that the operational cost to produce, and to transport a barrel of tar sand oil may be much lower to maybe on the same level as Arabian oil.
Frac/horizontal drilled natural gas production costs are approaching zero dollars by using the liquid faction of wet gas to pay for the production cost, leaving the frac natural gas production costs to approach zero for those frac-gas produced from wet-gas shale-fields. The US Northeast Macellus shale frac gas field can produce so much frac natural gas, that it will eventually be piped to most of the US, leaving the Canadian natural gas out of the US market, so that the tar sand producers can eventually buy the Canadian natural gas for a song for use in tar sand oil extraction. Plus, these giant sized tractors can be converted to using natural gas power. Once, the tar sand infrastructures have been paid for, operation costs can be fairly low by using the eventually cheap natural gas. There is a lot of tar sand oil out there in Canada. Unlike frac/horizontal shale oil holes, which peters out in a year so that new holes have to be drilled frequently, a tar sand “hole” (patch) keeps on producing at full bore until the sands run out, which is almost never as these tar sand patches are huge, and once the patch runs out, the tractors can be easily moved to another patch without drilling any holes.
One of the stated goals of tar sands is to enable the US to displace “foreign” oil, which really means to displace Arab oil (tar sand oil is really still foreign oil for the US, as one does not see Canadian government offices flying any Star and Stripes flags in front of them.) The question is how low can tar sand oil production costs get (not counting the already spent capital costs,) and whether they can get the cost below frac/horizontal drilled shale oil in the US.
Steve I think you have thought this out very well and it will happen its far to expensive to frack oil than to lift it so the fun begins eh
Ask Larry — Why is silver going up while gold going down>