Looking Ahead

"Never make predictions, especially about the future." - Casey Stengel

As this is the last blog of 2015 it is traditional to look ahead to 2015 and see what the tea leaves hold.  As projections are notoriously haphazard and more often than not incorrect, take this blog as nothing more than tongue in cheek as if we seriously believe that we can forecast the future then we should probably be admitted to the hospital with the padded cells.  With that said here goes!

Oil prices to remain low.  My first prediction is that oil will continue to remain below the expected threshold of $85 a barrel in 2015.  This will be great for the consumer and will continue to provide the US economy with a much needed boost.  By the way this boost will be far more effective than the $4 trillion blown on asinine Federal Reserve money printing solutions and could make a real impact on the economy.

Interest rates will remain below 3% on the 10-year note.  Interest rates will continue to confound the experts who continually say that there is a bubble and that these have to go higher.  For all I know we could could easily see ourselves with a 10-year Note below 2% come year end 2016.

Deflation will continue to plague the rest of the world and will be of concern to the Federal Reserve.  I would not be surprised to see another round of quantitative easing in a vain attempt to reignite inflation but as the majority of the deflationary inputs will be from oil and technological advances, such an attempt will once again fail so it would be best if they kept their backsides firmly on their money printing fingers!

GDP growth will confound the experts and remain lackluster at less than 3%.  Even with the tailwinds of low oil prices and interest rates the consumer will continue to pay down debt rather than go out on a limb for the simple reason that the job market and opportunities will remain in the hands of large business and government which will continue to cripple the middle class thereby reducing spending and continuing the trend of slow growth.

Stock markets will continue their slow grind higher with more and more frequent knee jerk draw downs.  While it pains me to say it I cannot see (unless there is severe deflation which I doubt, or a black swan event which is far more probably and unknown) what will stop the spiral higher.  The only reason I am pained to say it is that I still believe that the higher it goes the more pain will be felt when things are revealed showing the economy to be less rosy than the current market multiples suggest, but for now it appears that the bull market will rage on.

Gold and silver need fear, greed or inflation to propel them higher and until one of those show up it may be a continued struggle for the metals.  That said I still believe in the long term outlook for them but until we get one of those three horsemen it may be one step forward and a knee jerk reaction back down throughout the year.  The gold price breaking below $1,100 an ounce is not off the table but improbable in my view.

So there you have it, my attempt at stabbing at an unknown enemy in a dark room the size of the titanic.  I hope that all of you have an excellent holiday period and I wish you all a very prosperous New Year, I am sure we can all use one!

Escape Velocity

"The U.S. can continue to improve, but can we lift off, can we attain escape velocity when the rest of the world is challenged?" - Mohamed El-Erian

With only 6 trading days left in the year it seems pretty safe to say that we will end the year in positive territory.  With interest rates at just above 2% on the 10-Year Note providing a good support for the market it appears that there is little reason to expect a 12% drop during some of the slowest trading days of the year, so I should be relatively safe in this prediction.  Looking to 2015 the question is can the United States economy blast out of the range of slow growth that it has been stuck in for the past five years?  Can it achieve "escape velocity"?

The term "escape velocity" is a reference to a rocket that is trying to shake the shackles of the earth's gravitational force.  If it has enough fuel and power to boost itself free then traveling through space, or in this case expanding the economy is far easier.  Since 2009 the economy has been sputtering along at sub 2% growth, however with unemployment dipping below 6%, interest rates at historic lows, oil prices 50% off their 2014 highs and with the hoards of cash sitting on company balance sheets it seems as if the rocket is finally primed for lift off.

The main issue is the drag that is the rest of the globe but there are others.  First off is the unemployment numbers which hide the inequality of income and the bulges of unemployment at the youth levels.  Furthermore the anemic growth in hours worked and payroll increases is exacerbating the problem and keeping consumer spending low. These numbers therefore do not accurately reflect the actual conditions of the labor market and explain why Janet Yellen is continuing to keep interest rates low even after the Federal Reserve's target unemployment rate of 6% was exceeded.

This inequality of income is exacerbated by the massive shift in wealth from the middle and lower classes to the top 3% of the country.  This inequality is solidifying the divide between small business and large companies.  The latter has access to capital and opportunities that small businesses are barred from and this is the reason for the slow growth in wages and the stubborn unemployment numbers.  Growth, as I have repeatedly mentioned in this blog, comes from entrepreneurs that create small businesses which in turn hire people creating a burgeoning middle class that buoys the economy.  Recent legislation and Federal Reserve policies have created this lopsided business environment and until the policies change this will result in continued weak growth.

That said the lower price of oil is definitely having a positive impact on the consumer so there is still a hope that growth can exceed 2.50% next year but with the slowing of Europe, Japan and China I would be highly surprised to see United States growth in excess of 2.00%.  While this may not be exactly what the doctor ordered at least there are continued signs of life and from where I sit when you consider the problems around the globe it is nice to be located in an economy that may once again lead the charge.

I wish all of you a very happy, safe and festive holiday season.

A Balanced Diet?

As the oil price continues to crater it is starting to have an impact on the market.  Oil stocks are dropping fast and countries that rely predominantly on oil exports are starting to feel the pain.  As an example Exxon Mobil is down 15% since August, the Indexes of Oil Refining and Oil Pipelines are also down 15% over the same period while the Oil and Gas Equipment and Services Index is down almost 50%.  This is having an impact on the overall market and when one considers that most analysts have factored in an average price for oil of $85 a barrel in 2015, the price of crude oil will have to make a dramatic recovery from its current price of $58 to set that bar in 2015.  If oil continues to spiral lower that number will have to be taken lower meaning that there is a lot more pain to be felt not only in the oil stocks but the oil producers.

Saudi Arabia has always been the most prolific oil producer in the globe, able to manipulate prices to suit itself and its OPEC friends.  The last time oil fell this far the Saudis cut supply and watched as their neighbors continued pumping oil and stealing market share from their generosity.  They have learned their lesson and this time around they have not taken the gloves off but have continued full ahead with pumping.  They can afford to as they have almost $1 trillion stashed away in foreign reserves.  The laggards of Russia, Iran and Venezuela are really feeling the pinch as none of them have this luxury.  Their currencies are now in free fall causing widespread inflation in their countries.  It is only a matter of time before there is widespread civil unrest in these areas and this will have global impacts but that is for another blog.

So it is interesting then that my trading has formed what I term a "balanced diet".  I have four long positions and four short positions.  The longs (investment that expect the price to rise) are Gold, Silver, 10-year Treasuries and Corn.  The first three are a direct result of the weakness being seen in the market and the rush for people to seek protection.  Gold and Silver in particular look like their day in the sun may return soon after a three year hiatus while Corn is benefiting from global demand and a perceived lack of the ability to supply.  Whether this works out that way we will see as with reduced crude prices comes the ability to plant more crops so this may not work out but only time will tell.

On the short side (investments that are expected to fall in price) are Crude Oil (still), Natural Gas, the S&P 500 and Copper.  All of these are pointing to a weakening global economy which is interesting as the fall in the price of Crude Oil should benefit global output.  Today the consumer sentiment numbers were published and they were the highest since 2002.  A large part to this is the benefit that the consumer is seeing in the reduced price at the pump and this is having a direct impact on their spending ability.  So with the double benefit of global growth and consumer sentiment you would expect the market to benefit but the current fear is that  the lower crude prices will pull the globe into a period of deflation.

Already Europe and Japan are struggling with deflation and even China and the United States are seeing inflation well below their respective targets.  Could the decades of fighting the inflation beast finally be the death of it resulting in the emergence of something far more sinister?  This is what concerns the market at present and this is why it looks like it will test its October lows in the not too distant future.  Maybe having a balanced diet is the answer - as long as it includes a few pieces of Hawaiian Fudge!

Year End Yawn

"Success breeds complacency.  Complacency breeds failure.  Only the paranoid survive." - Andy Grove

"There is no place for arrogance or complacency in racing because you are up there one minute and on your backside the next." - Tony McCoy

Year end is rapidly approaching and with the holidays it seems that there is a lot of complacency in the market.  This is understandable given the wild ride it has been in 2014 but as the first statement above shows complacency is often followed by failure.

Looking at the market the VIX (an index that tracks market volatility) is close to an all time low, gold stocks have continued their downward spiral and the stock market ticks higher daily.  It appears as if all market participants have finished their turkey, yawned and are nodding off.  January seems like a decade away but for those of you still awake you should remember this past January when the market was roiled almost 10% and it appeared that there was no end to the downward spiral.  Fast forward to today and outside of October the market has been pretty much a straight line up putting investors into a daze akin to autopilot with the subliminal message repeating in their ears from the Federal Reserve; "just buy the dips, just buy the dips, just buy the dips ...".

While I am certainly not predicting that 2015 will be the year of the bear, at this time in the year there is still the opportunity to exit positions using losses to offset profits.  Furthermore it could be a good time to readjust your investments to ensure that you either take advantage of the coming volatility or that your portfolio is protected.  For short term trades there are the volatility indices TVIX or on the gold side JNUG or NUGT while for longer term protection you can always look to long term put options on key positions if you do not want to exit the position itself.

From a technical standpoint it certainly appears as if gold and silver have one last hurdle to clear before breaking out to the upside and with all the short term negativity against the metals it appears that 2015 may be their day in the sun.  If that is the case I would expect a massive upside gain as they have been beaten down for the past 3 years to the tune of more than 70%.

The reason I bring this up is that with the end of year coming it may be time to look outside of technology and at industries that have been beaten down as these will be the ones that will produce the largest returns in 2015 plus they will provide downside protection.  Furthermore with quantitative easing over and the weakness that is being shown by the international community it seems likely that 2015 will be filled with volatility and all of the above positions will take advantage of this.  Just a thought before you let the sandman take control of your senses as waking up with a jolt in 2015 would be no fun at all.