TROUBLE IN OIL PATCH

Lack of agreement so far among attendees.

Word earlier today from Vienna where OPEC members are meeting from Saudi oil minister Ali Naimi was quoted as saying: "...Wednesday he believed the oil market would stabilize itself in due course, a possible clue that Saudi Arabia is comfortable with maintaining OPEC's current output ceiling of 30 million b/d." drove oil prices down.

Crude futures closed lower Wednesday, do 40 cents on the NYMEX at $73.69 a barrel.

NEW YORK (MarketWatch) — Crude-oil futures extended their slide Wednesday, ending at a four-year low on expectations the Organization of the Petroleum Exporting Countries won’t move to significantly cut oil production.

Saudi Arabia’s oil minister indicated that he wouldn’t push for a cut in production targets at the cartel’s closely-watched meeting in Vienna Thursday, The Wall Street Journal said. Other news reports also indicated a cut was unlikely.

So far any agreement to cut supply to help bolster prices looks increasingly less likely tomorrow when participants meet again. 

The Saudi oil minister's comments followed the previous day's meeting with other OPEC members and non-members Russia and Mexico when they failed to reach an agreement about cuts in  production.

Oil futures are down almost 30% from their mid-summer highs, falling nearly 4% since Monday of this week.

For more on the meeting here's a link.

http://www.platts.com/latest-news/oil/newyork/crude-futures-settle-lower-on-naimi-comments-21618873

THE DIVERGENCE TALE

It's just about that time again when the pundits will be coming out with their 2015 stock market projections.

What will the markets do next year are some of the questions these people seek to answer. The positives, the negatives, the hopes and the fears, all of these get tossed around. 

What will be the impact of a stronger U.S. dollar? Then there's that seemingly interminable interest rate game--up, down of flat?

Overseas earnings for American corporations, how big a hit, if any, will they take in 2015?  Earnings here at home, are they really all that robust as some claim? And what of mergers and acquisitions, one of the major props for this year's market, according to some, much of it platformed on cheap money?

Will the U.S. market be the big outlier, outperforming all the others, to steal a line from Carl Sandburg, becoming the "Hog butcher for the world" when it comes to equities?

In today's Financial Times, "American bulls in charge," John Authers writes: "The logic pushing investors into US stocks is ineffable."  The problem with logic is, much like linear thinking, it doesn't always get one the correct answers, especially when dealing with humans.

And that's what comprises markets, institutions or otherwise, behind all are humans. In many cases highly unpredictable humans.

Authers then quotes a research maven: "The main drivers for the bull markets have been strong earnings, interest rates being extraordinarily low and a significant amount of liquidity. That money has to got to be invested somewhere. The music is playing and you have to dance."

Not necessarily, as Authers hints at: "But the extent of the turn around when compared to the rest of the world suggests that things may have been taken too far." What Authers alludes to is the variance in value between the European market and the U.S., citing the difference in market capitalization in 2008 and later.

"In early 2008, the total value of European stock markets briefly exceeded US market capitalization by more than $1tn."  Starting with the rally in 2009 until now, "...Corporate America is worth almost $10tn more than Corporate Europe."

Recall, if you will as Authers does, that October's 9.8% sell off is the nearest thing so far investors have seen of anything that remotely resembles a correction.

It's all a good story with lots of reasons why it will get played out. That's the argument with the most reasons why it's going to happen. But what's the story with the least arguments against something happening?

That's the one that most interests us. We now know most of the reasons why the U.S. stock market is set to continue its climb to the ether. In other words, there are few naysayers predicting a real correction in 2015.

And among them they offer few points to support the view.

ITALY SAYS BRUSSELS MISREADS RECESSION DEPTH

Good laughs are difficult to come by these days until--that is, one opens the morning paper or clicks on the Internet.

There is probably not much Italy wouldn't do to get out of correcting its structural problems. 

Italy accuses the EU of using "shaky" methodology when figuring out countries' fiscal policies. Now if their is a country on the planet that knows more about using shaky fiscal methodologies, it's got to be Italy.

Well, on second thought it might be a toss-up between them and France. But the point is made. 

We don't doubt Brussels bureaucrats brush the numbers a bit. But many of the tactics they use they most likely learned from the Italians. 

Italy's Finance Minister Pier Carlo Padoan in a recent Times interview was quoted as saying: "The EUs measure of output gaps--or the amount by which a country's gross domestic product falls short of its potential--was outdated and underestimated the depth of the recession that followed the financial crisis." 

The size of output gap is important because it's a metric the EU uses to calculate structural budget deficits. The greater the gap, the greater the room the EU gives to a country over its fiscal matters.

Get ready. Here comes the punch line.

The EU's measure of the Italian output gap is 3.5 per cent of GDP. Mr. Padoan noted that this figure was significantly lower than the equivalent from the Organization of Economic Co-operation and Development, of which he has been chief economist. The Paris-based body had estimated Italy's output gap to be 5.1 per cent this year, with new and possibly higher projections due next week.

Mr. Padoan added that if the latter number were  used, "Italy  would be in structural surplus now and....for a long time. We would be in a different world, no requests for additional resources. we would have to do nothing. It would change a lot.

This should really be called job security for stand up comedians. They need not worry. If only bureaucrats and politicians could tell the truth for once we wouldn't need stand up comedians.

MORE ON OIL

While we're on the subject of oil today based on China's interest rate cut and the upcoming OPEC meeting in Vienna, we've said in the past if you're long oil, you're long the Russian ruble.

There is little doubt the sanctions and the falling energy prices are hammering the ruble. But Russia is not alone as sinking oil prices hit others, especially Venezuela. Lately, talk has centered on Saudi oil ministers playing the counterintuitive game by holding off on cutting production to put some economic pain on U.S. shale producers. http://online.barrons.com/articles/is-the-u-s-shale-boom-about-to-go-bust.

Here's an interesting read from Platts, the big global energy information provider, that might suggest that's could be changing.

Russia discussing possible measures to cut oil output: minister

Moscow (Platts)--21Nov2014/841 am EST/1341 GMT

Russia is discussing possible measures to cut oil production to support falling oil prices and believes the situation may require "coordinated action" by major oil producers, energy minister Alexander Novak said Friday.

"Such an issue is being discussed," he told reporters on the sidelines of an industry event, when asked if Russia was considering a possible cut in its oil output.

But he added that the issue "requires thorough consideration" and "there is no such decision as of now." Novak pointed out that the Russian budget is heavily dependent on oil earnings.

In addition, the country's oil technology doesn't allow it to cut or raise crude output quickly, he said. 

He said Russia expects to continue discussing the situation on international oil markets with Venezuela and other countries during a visit to Vienna next week.

"All crude producing countries are concerned about the recent drop in oil prices from levels at which they have stayed over the past three years," Novak said.

"This requires a thorough analysis and possibly the development of some coordinated action," he said, when asked what topics he planned to discuss in Vienna.

Novak declined to elaborate on any possible measures.

"It would be too premature to tell you about Russia's proposals as they need discussion with our colleagues first," he said.

Novak said there are a number of countries "that are also major producers" that are likely to take part in the discussions, although he didn't name any.

Early this week, Venezuelan foreign minister Rafael Ramirez visited Moscow, where he met with Novak and Rosneft CEO Igor Sechin.

Following the meeting, Rosneft said that Venezuela and Russia plan to hold an international conference in Vienna Tuesday, two days ahead of the OPEC meeting there.

The conference was initially expected to take place in Caracas but was moved to Vienna at Venezuela's request, Rosneft said, prompting speculation that Sechin is heading to the Austrian capital to meet with OPEC representatives before their meeting.

The same day, Venezuelan President Nikolas Maduro was reported as saying that Ramirez was coordinating efforts to organize a meeting of representatives of countries -- both OPEC members and non-OPEC members -- to discuss the situation on the oil market.

Ramirez, a former oil minister who still heads Venezuela's delegation to OPEC, was on an overseas trip ahead of the OPEC meeting as Venezuela looks to gather support for a plan to halt the slide in global crude prices.

Ramirez visited Moscow after a meeting earlier this month with Saudi Arabian oil minister Ali Naimi in Venezuela; Algerian President Abdelaziz Bouteflika and the country's oil minister, Youcef Yousfi, in Algiers; and with Iranian oil minister Bijan Zanganeh in Tehran. 

RUSSIAN OIL OUTPUT

Meanwhile, Russian crude production is already under pressure as natural decline in West Siberia requires a dramatic increase in drilling, which is difficult due to sanctions against Russia and falling oil prices. Nonetheless, Novak said the ministry had not reconsidered its forecast for 2015 because of falling prices.

The energy ministry expects crude production in Russia to amount to 525 million mt, or around 10.5 million b/d, this year, up 0.3% year on year, and to remain at the same level next year.

Novak reiterated that Russian output currently exceeds levels set by the national strategy until 2020, which sees the output at between 505 million and 520 million mt/year.

And "it has becoming more and more difficult to maintain this level" due to a falling reserves base, he said.

Novak, however, declined to say at what price, the ministry estimates, the decline in crude production would accelerate.

"You should remember that a fall in price is being mitigated by the weakening ruble, which supports oil producers' earnings," he said.

The ruble has hit a number of historic lows recently against the dollar and euro.

But the ruble is falling at a similar pace to oil prices, compensating for a drop in oil exporters' earnings. While the bulk of their earnings are in dollars, most of their expenditure is in rubles. --Nadia Rodova, nadia.rodova@platts.com

--Edited by Jonathan Dart, jonathan.dart@platts.com

Similar stories appear in Oilgram News See more information at http://www.platts.com/Products/oilgramnews

 gamwe

OIL RALLIES ON CHINA RATE CUT

Oil above $80 a barrel on China rate cut and possibility of OPEC cutting production.
www.cnbc.com

It was the first cut in the benchmark interest rate since 2008. Usually any cut in interest rates by a bigger central bank pushes up the price of gold owing to possible inflation fears. The move is an attempt to bolster the flagging Chinese economy and another beggar thy currency stroke.

It is also a response to the shockwaves the Bank of Japan recently sent through the market when it announced it was going full throttle on easy monetary policy.

Global markets seemingly are taking the hint by rallying as Dow futures are up 110 points, and S&P futures are up 12 points. In Europe, France's CAC is up 1.7%, Germany's DAX is up 1.8%, and Spain's IBEX is up 2.1%.

The U.S. market has been for days making nibbling new highs on nibbling volume, a worrisome sign for many.  "Now…about this lethargic stock market. The recent market hasn’t merely been slow; it’s been one of the sleepiest markets in history. Every day, it seems, the indexes climb higher, but only microscopically. The S&P 500 just closed out a five-day run where it didn’t close higher or lower by more than 0.1%. That hasn’t happened in 50 years." http://www.crossingwallstreet.com

Meanwhile, in Europe ECB President Mario Draghi announced: "It is essential to bring back inflation to target and without delay." The comment weakened the euro against the dollar and indirectly should push gold prices higher. Target inflation, currently 0.4%, is 2.0%. www.businessinsider.com/draghi-inflation-must-rise-without-delay-2014-11

YOUR STILL ON YOUR OWN

How do you define short-term view?

Well, that's up to you. But one of our definitions comes from all the negative talk about the price of oil--that is, energy.

Mutual funds are noted for looking at the market from quarter to quarter. They are performance prisoners. A couple of years ago gold ended what many believed was a 12 year bull market run-up. All along the way short-term views were calling for its decline.

Energy until the recent downturn enjoyed what was pretty much a three year upswing. Now according to many, those much-despised hydrocarbons are joining gold. Main stream media has tossed both to the Wall Street bone yard without benefit of the customary elegies.

The reasons are legion: a strong dollar, much supply and little demand, China, deflation risks, a sickly European Union and so on. What's important here is many of the naysayers are talking like the world is set go on a steady Japanese economic diet like the one they've been munching on for a couple of decades.

Anything is possible. Obama Care could turn out to be the greatest healthcare advance since the use of leeches. But we doubt it. And we doubt that it's time to start playing taps for crude. Hard currency and goldbug haters were wrong about gold for 12 seasons. As any rabid college football fan knows that's a long wrong that would put lots of highly paid head coaches looking for work.

But then media talking heads aren't held to the same high standards as football coaches.

At the start of 2014 all the economic stars were aligned, so the investment palaver went, for bond prices to decline and interest rates to fall and shorting the Treasury bond market was a no-brainer.  Ask some of the macro crowd how that turned out.

What a lot of investors seem to be overlooking or failing to consider is the strong dollar surge, falling oil and gasoline prices, might be signaling the end of the low interest rate cycle and not the perpetuation of it, as in one final exhaustion leg down.

On Monday the Society of Professional Forecasters (Now there's group we can get fully excited about!) announced the Fed's favorite price index would only rise 1.5%, down from a previously forecast 1.8%. And the outlook for next year got sliced also to 1.8% from a previous 2%.

Several years ago we recall reading that the investment record of MENSA members, you know those brilliant people with the high IQs everyone envies, failed to match the S&P 500 index. And it wasn't even close. Those SPF people say the Fed's 2% inflation target won't get hit until 2016.

Because something hasn't happen doesn't mean it isn't going to happen. And that's where all the celebrating about all the money printing not causing any inflation might prove premature.

Corporate profit margins are up but are they anything to write the folks at home about? Not hardly, since little of that jangling change went into capex and most of it into mergers and rewarding share holders. It's called the lessor of two risks. Why incur the wrath of more government regulations when one can take the easy road?

This whole scenario smells like an upcoming year where everything has to go just perfect to avoid the untoward.

In the meantime, remember what's important. You're still on your own. So do your homework.

WATCH THOSE DENTAL PLANS

When a media outfit like Bloomberg publishes a story, "Obama Sign-ups Were Inflated With Dental Plans," you know something is up with that cat in the Oval Office.

Of course his minions will claim it was an honest error when in truth it was one of those accidental deliberate moves made in the hope nobody would discover it.

You don't accidentally toss 330,000 dental plans into the pool to raise the number of sign-ups to a nice sounding round number so you can broadcast more than seven million signed up

The accurate number, Bloomberg reports, (Take that term accurate loosely; this is Bloomberg, an Obama supporter.) with "full  healthcare is 6.7 million as of Oct. 15, a spokesman for the U.S. Department of Health and Human Services confirmed today, saying the U.S. won’t include dental plans in future reports."

 The new count puts enrollment short of a 2013 estimate by the Congressional Budget Office, adopted last year as a goal by the Obama administration, that 7 million people would be         enrolled this year. Federal officials said in September they had 7.3 million people would be enrolled in coverage through new government-run insurance exchanges. They didn’t distinguish between medical and dental plans, breaking from previous practice without notice.

So what they previously did, they suddenly without benefit of clergy didn't do anymore.

Obama might want to bring in Attorneys General Eric Holder before Holder leaves to investigate. That would get to the bottom of it.
 

THE PAULIE SPECIAL

Blue plate specials don't always get announced around noontime at those big warehouse outlets.

No sir. Some times they are offered from the bowels of media giants like the New York Times and show up on really big stages like Japan. Specials are supposed to be just that--special. 

And here's one we think is especially special. So much so we called it the Paulie Special.

You'll notice after a close reading the advice attached to the Paulie Special makes perfect sense. And we're sure you can't wait until it's playing at venue near you.

OMG Japan's Prime Minister is Acting on Advice He Has Received from Paul Krugman

Paulie writes at NYT:

Shinzo abe is dong the right thing. seeking to delay the next rise in consumption;
that is good economic policy, and also a fairly new experience for me--I met with
a national leader, made a case for the right policy, and he's doing it!

Of course, there is noting wrong with attempting to limit a tax burden. It should be
part of an overall program to shrink government involvement in an economy. But Paulie, 
no doubt, wants government spending to expand, with the government gong into debt to
fund the spending

How serious should Abe really take Paulie? Paulie's view on rice inflation in Japan
should be a clue. Paulie writes in the same NYT post:

But Japan isn;t suffering from stagflation; neither is Europe. They are, instead, suffering
from low inflation or deflation.How serious should Abe really take Paulie? Paulie's view
on price inflation in Japan should be a clue.

Low inflation/deflation?

Here are the latest CPI numbers out of Japan:
   

CPI JP recent months

period	inflation
september 2014	3.280 %
august 2014	3.290 %
july 2014	3.400 %
june 2014	3.607 %
may 2014	3.707 %
april 2014	3.410 %
march 2014	1.610 %
february 2014	1.512 %
january 2014	1.410 %
december 2013	1.611 %

 

 http://www.economicpolicyjournal.com/2014/11/omg-japans-prime-minister-is-acting-on.html

 

INTERESTING CHART

Here's one of those why worry charts from http://www.crossingwallstreet.com/archives/2014/11/equity-returns-and-the-yield-curve.html, one of the better websites we visit from time to time.

In the interest of fair disclosure, we have no connection to it nor have we ever spoken with its proprietor. But it's a site in our humble opinion often worth the read.

There's no such thing as a perfect indicator. As noted below this one flashed an early bullish signal months too early in 2008. So as always continue doing your homework.

Equity Returns and the Yield Curve

I did some research and found this fascinating stat. When the spread between the 90-day and 10-year Treasury yield is 121 basis points or more, the stock market does much better than when it’s 120 basis points or less.

Here’s how it works. Since 1962, the S&P 500 has averaged a 1.42% annualized gain when the yield spread is 120 points or less (that doesn’t include dividends). But it’s averaged 10.47% per year when the spread is 121 basis points or more. That’s a big difference.
Over the last 53 years, the spread has been 120 basis points or less about 41% of the time, and it’s been 121 basis points or more the other 59% of the time.
The spread has been over 121 points continuously for nearly seven straight years. In fact, the indicator’s only big miss came in early 2008 when it flashed bullish several months too early.
The yield spread is currently 230 basis points. If the 10-year yield stays at this level, then, according to our indicator, we don’t have to start worrying about stocks until the 90-day yield gets over 1%. It’s currently at 0.04%.
Here’s the spread over the last 30 years (the black line is at 120 basis points):

ECONOMIC HOUSE PAINTERS

Nearly everyone today is talking deflation, deflation, deflation.

Among the savvy that alone ought to be a sign.

At some point, however, deflation is like that card game Texas Hold 'Em, it's all in the market.

So to the Martin Wolfs of the economic world, spare us, sir, your crybaby columns calling for more  Keynesian nonsense.

Wolf's latest lament in the Financial Times, "The curse of weak global demand," is beginning to sound a lot like the late Freddy Fender's "Before the next teardrop falls." Wolf and his fellow Keynesian bellyachers keep urging Mario The Dragster Draghi and his fellow band of bankers to do something before the next teardrop hits the ECB balance sheet.

For Wolf and his minions there are two culprits--austerity and what Wolf apparently with a straight keyboard typed: chronic demand deficiency syndrome. That's correct. You're reading that right. Now let's all hear it for CDDS.

Anyone who doesn't recognize this as stand-up comedy material doesn't understand stand-up comedy. Where is Monty Python when he's needed? If we aren't careful we will all have something to really worry about like finding CDDS right up there with STD, PTSD, ADHD and 20 million other acronyms.

"Extreme policy has been ineffective," Wolf claims, "because economies suffer from such deep seated ailments." Conspicuously missing from Wolf's list of deep seated ailments is bloated global bureaucracies and their historical obsession with economic scatology.

In all of Wolf's wailing there's scant mention of just letting the market do what markets always do when unfettered by government meddling and nonsense--let those who ought to disappear disappear. It's called repairing the structure, not just slapping a fresh coat of paint on the exterior until the next time.

Like many others of similar bent, Wolf clearly missed his life's calling.