FORGET THE BISCUITS, PASS THE B&B

There's much blithering and blathering going on since the European Union's year-on-year prices recently came in negative 0.2% for December.

Those in favor of oiling up the old printing press whiffed an opportunity only these folks can never fail to pass up. Prices are not the only things falling. If one listens to this crowd, so is the sky.

The Dragster himself, ECB leader Mario Draghi, worried out loud that such a decline might set off a wait-and-see-about-prices-until-tomorrow tantrum by consumers, thus causing further deflation in prices.

For those who care to beg the difference, here's a different point of view from: http://davidstockmanscontracorner.com/the-deflation-calamity-howlers-are-dead-wrong-in

So right on schedule comes this blithering nonsense from one James Ashley, purportedly an economist at RBS Capital Markets:

“The emergence of negative inflation does forcefully raise the specter of a possible prolonged period of deflation,” said James Ashley, an economist at RBC Capital Markets. “In other words, for those policy makers who, hitherto, might have been undecided over whether or not to take further action immediately, this may be just the clarion call that was required to appreciate the gravity of the situation.”

That’s right. A single month of hairline negative inflation is a “clarion call” no less—calling for the ECB to damn the monetary torpedoes. Could it be the RBC has been busy putting its clients and its own prop funds in Italian, Spanish, Portuguese and Greek bonds on the predicate that a big fat Italian bid would be forthcoming from the ECB?

In short, the euro zone’s momentary spat of year-over-year price stability is almost entirely owing to the global decline of commodities since the China bubble driven peaks of 2012; and also the lagged effect of the Euro’s strength prior to mid-2014.

In the case of non-food commodities including energy, for example, the producer price index is down about 25% from it 2011/12 peak.  Since the euro zone imports a heavy share of its energy and industrial commodities, isn’t this decline a welcome development?

And there’s more. Commodity prices are still double their pre-2005 level. In other words, the giant global commodity bubble generated by the runaway credit boom in China, the BRICs and their EM satellites has finally started to cool, and this relief is now washing through the euro zone price indices. Rather than an existential crisis, the cooling of euro zone inflation is mainly a welcome surcease from the utterly aberrational credit bubble that was foisted on the global economy by central banks over the past decade.

GRADUALLY, THEN SUDDENLY

Here's a story we like. It's about maximum pessimism.

The gloomier it gets the more we like it. These for the most part are all good dividend paying companies with the exception of QEP. 

We know that mid-term these days let alone long-term is an unwelcome theme on the Street.

QEP's trip to the equity woodshed is based on the expectation that natural gas prices will follow crude oil over the cliff and into the abyss. We welcome the idea.

In Hemingway's "The Sun Also Rises," one of the characters is asked how he went bankrupt to which he replies: "Two ways. Gradually, then suddenly."

Truth be told that's the path to wealth. It takes time and a wide margin for error. The lower these stocks get the less margin for risk is needed. They are undervalued and misunderstood. The cure for low prices of a commodity is low prices.

Forget the falling knife meme. Coupled with the dividends, a simple regression to the mean will return serious money over either of those most unwelcome Wall Street time frames.

A stock that should be on the list below is Helmerich Payne (HP), the Tulsa-based big oil rig firm. As sector prices decline like this consolidation usually kicks in and the strong get stronger at the expense of the marginally weaker.

Exclusive: Sell-side sours on U.S. energy stocks more than any sector

11:57am EST

By Rodrigo Campos

NEW YORK (Reuters) - As if plummeting oil prices were not giving energy companies enough to worry about in 2015, Wall Street has turned against the sector, with stock analysts slashing earnings estimates.

Despite a 23 percent drop in the S&P 1500 energy sector .SPCOME since the end of June 2014, stock prices still may not account for the drastically lowered forecasts for the sector's earnings, particularly if oil prices continue to slide.

Of the 10 S&P 1500 .SPSUP sectors, Thomson Reuters StarMine data ranks energy as having the worst analyst sentiment, using a model that lists equities by aggregating metrics that include changes in estimates for company earnings-per-share and revenue.

On Tuesday, energy was dead last, with its components averaging a ranking of 14 out of 100, down sharply from 26 a day earlier. One component, Chevron Corp (CVX.N: Quote, Profile, Research, Stock Buzz), the No. 2 U.S. energy company, had a 1 in the Analyst Revision Score, meaning analysts have been more furiously lowering estimates for Chevron than for 99 percent of companies.

EPS estimates for Chevron's fourth quarter have dropped dramatically in the last month. Six different analysts have lowered earnings expectations by an average of 14.3 percent in that time, during which the stock price has actually risen by about 1 percent.

Six of the largest 10 energy companies, accounting for 33 percent of the sector's market capitalization, have a ranking of 9 or less in StarMine's Analyst Revision Score.

The outlook has continued to worsen as crude futures prices kept sliding to new 5-1/2 year lows. U.S. crude oil recently fell below $50 a barrel after trading above $100 for the most part between February and July of last year. [O/R]

"We believe it is more likely that oil goes to $20 before it goes to $80, and we think that oil prices are likely to remain low for a long time," Brian Reynolds, chief market strategist at Rosenblatt Securities in New York, wrote on Tuesday.

Marathon Oil (MRO.N: Quote, Profile, Research, Stock Buzz), Hollyfrontier (HFC.N: Quote, Profile, Research, Stock Buzz) and QEP Resources (QEP.N: Quote, Profile,Research, Stock Buzz) are among the other handful of energy companies with a 1 Analyst Revision Score.

On Tuesday, Bank of America/Merrill Lynch cut its rating on Chesapeake Energy (CHK.N: Quote, Profile, Research, Stock Buzz) and Laredo Petroleum (LPI.N: Quote, Profile,Research, Stock Buzz) to "underperform" and EOG Resources (EOG.N: Quote, Profile, Research, Stock Buzz), the seventh-largest energy company on the S&P 1500, was downgraded to neutral.

Expected earnings growth for the S&P 500 energy sector's .SPNY in the fourth quarter was at -19.8 percent, according to Thomson Reuters IBES data, down from a 6.4 percent growth expectation on October 1. The first quarter looks even worse - an expected decline of 32.2 percent..

GOOSE AND GANDER TIME?

We've talked before about the importance of looking for the unseen.

Nearly everyone by now realizes the initial benefits and the obvious beneficiaries of lower oil prices. If utilities companies are capital intensive, and they are, the early beneficiaries of softer energy prices are for the most part the energy intensive.

You know the usual suspects, transportation firms, retailers and restaurants, the drive to work crowd, to mention a few. But at some point, often a bit farther down the road, low prices carry the prospect of whacking the economy with a bigger hurt than many suspect.

It's kind of a reverse law in itself of what's good for the goose ain't always good for the gander.

With crude yesterday falling for the first time in over five years below $50 a barrel, fear about global growth grow.  Couple that with other troubles like the Greece situation and a U.S. dollars that seems to have recently discovered steroids, visions of deflation and slow growth have replaced those of any sugar plums that might arrive via cheap gasoline prices.

And that's what more than one well known investor is talking about in this piece recently on Zero Hedge.

http://www.zerohedge.com/news/2015-01-05/jeff-gundlach-if-oil-drops-40-geopolitical-consequences-could-be-terrifying

DAILY MEDIA HYPE

Part of the fun and education of prowling around the Internet is discovering others who share your own experiences about what we call the media-market complex.

Like we keep repeating be your own person, accept the responsibility that comes with it and, by all means, do your homework.

This is from Daily Speculations.

The Financial Media, from Jeff Watson

January 5, 2015 | Leave a Comment

Media advice is of little worth, except for a fade perhaps. After all, the primary purpose of the typical financial reporter is to make his/her quota in inches. Quantity over quality. The purpose of the financial media is to sell ads, make money, and hook you like a fly fisherman casting a fly at a trout. The TV financial media has been taken over by guest experts(touts). I avoid reading or listening to them like the plague as I prefer to make my decisions looking through my own lens, not the lens of others(who are observers, not players), second hand.
This broken down old grain trader looks at the financial media with a very flinty eye, much like one looks at the guys at the track who sell tout sheets when you walk past the turnstyle. Make your own decisions, keep your own counsel, and play your own hand. If you need advice, there are private subscription services, for a high price, that might, sometimes be worth listening to, but unless they have skin in the game avoid them like the plague.

Craig Mee writes: 

Everyone is now a salesman trying to justify themselves…listener beware. Funny how the country boys seem to do less talking and more listening and see things more clearly. I suppose that happens when you're not selling your soul on every deal as a means to pay the rent.

IT'S THAT TIME AGAIN

It's that time again, although you usually see articles like this throughout the year.

It's time to lay down some thoughts about 2015 and how to increase your chances to be successful in the land of investments where most often it takes two eyes rather than one to remove the veil.

Here's our list.

1.  Do your homework.

2.  Look for the unseen, not the seen.

3.  Related to #2, understand what everyone knows is usually not much help at best and incorrect at worst. Former President Dwight Eisenhower once noted: "If everyone is thinking the same thing, nobody is thinking."

4.  In boxing it's the one you don't see that does the damage or hurts the most. In case you don't recognize it, that's a metaphor for asking yourself what have I not looked for or not thought about that could go wrong?

5.  Neophyte investors--usually like young marriages--buy with only one direction in mind--up. The high divorce rate in general tells those who pay attention other directions are possible.

In one of my previous incarnations I was working my usual ER shift when a big, strapping ex-professional pro football lineman rolled in late one night with a badly swollen, painful red hot great toe infection, the kind that usually ends up getting I&D,

He seemed in a lot of pain as he hobbled over to a gurney and pulled his house slipper off.

"What's your pain level on a scale of 1-10 ?"

"10, man. It's a 10," he shot back without the slightest hesitation.

"That's pretty high," I offered in one of my more empathetic tones.

"Naw, this ain't nothing, doc. I've been through some real pain."

"Such as, "I probed , alluding to his pro football days.

"Naw, that ain't nothing either, doc. I was married for 10 years, man!"

Since at that very time I was going through a painful split with my then live-in girlfriend, I recognized a kindred spirit, infected toe or otherwise.

It was what William Butler Yeats, in his longtime unrequited love for Maude Gonne warned about, the dangers of wooing spirits not kindred of your own soul. It's the same in the market: Do your homework.

Understand what you're getting into and have a ready, viable exit plan before you execute the trade.

I opened his toe, sutured a drain in, put him on an antibiotic and some painkillers while we swapped stories through what was a slower than usual night absent the routine overdoes, MIs, car wrecks and gunshot victims.

6.  Extrapolation, though we all do it, is just another version of taking too much for granted. There's an old joke about the alcoholic who said: " For years his dog never bit him until one night he came home sober." Things change.

Extrapolation in the market is buying or staying with last year's hot sectors, expecting more of the same.

6.  Here's another one: A+B = C. That may apply to numbers but not when A is Alice, B is Bob and C is Charles. Behind the market are millions of individual consciousnesses. Basic market psychology, especially for the general population, is it's more comfortable to buy when asset prices are rising.

Yet some of history's most notable investors like Buffett and the late Sir John Templeton talked about looking for what Templeton called "maximum pessimism."

7.   Related to the above is one of life's biggest myths, one that bureaucrats, politicians and even psychologists never seem to get, that people behave rationally. If you believe that, you've never driven a car in Southern California. And when it comes to investors you can take that to the 10th power.

If you think all these investors the past few years chasing yields, any and practically all yields despite the risk, will turn out unblemished, you've never seen or suffered a bad case of acne.

8.  It's not supposed to be easy. One of the big stories of 2014 is how indexers outperformed the alpha-added crowd. But there was a time not so long ago when the indexers didn't do too well versus the money management boys and girls.

Indexing is the one-size-fits-all trap, the same trap that money management offers when it's leading the parade. And it will again. It's a close relative to the belief that people behave rationally most of the time as they well might. But check your newspaper or click on the Internet or television and tell me how much irrational behavior you see every day.

9.  Learn that just because you know something it doesn't mean everyone else does. And the law of reversibility applies here also.

10. When I was a young guy coming up my dear old mother gave me a simple two part piece of advice that proved quite effective avoiding unwanted trouble. "Take a glass of water before you go to bed and nothing after. Either that or wear protection."

If you're going to play around the markets, don't forget to bring along your own protection. A healthy dose of skepticism not cynicism is a good start.

11. And this one is related to all the others, but it can't be stressed enough--Do your homework.

SOON IT WILL BE A NEW YEAR

 

We've said it before and we'll say it again, we like energy stocks for 2015. And if you note some decent dividends, we like them even more.

But we like these energy puppies even more than that for 2016-2017.  We expect coming off these over-sold conditions a rally in 2015. Going out further we think they'll deliver some serious profits plus some nice payouts along the way.

No doubt plenty might warn of a value trap with further declining oil prices, maybe dropping from the current level to $30 or so. And that's always a real possibility, but that scenario includes the assumption everything goes as planned with no serious surprises.

The one thing you can count on there will be some surprises in 2015, just no one knows for sure where and what.

Now let's take a quick look at what the pundits are predicting investors buy for the new year. Right off the top is the U.S. Dollar as it's expected to continue its upward move owing to the divergence meme.

Cheaper oil prices they say means more for non-staple spending, so this falls into the consumer discretionary category like autos and satellite media and certain retailers, eschewing essentially staples like food, utilities and energy.

Another mene soon to makes the rounds if it hasn't already is the good-news-becomes-bad news, forcing the Fed off the dime when it comes to interest rates. And sort of a sidebar to that theme is the sooner rather than later debate.

Our own view is to look where others either are not looking or shying away from like emerging markets. Though it may turn out not to be, it should be clear that Abenomics and the ECB are going to pump some air into those paper assets. But the surprise that the air gets pumped but the impact takes a holiday is a possibility few are expecting.

And not many are expecting all that liquidity sloshing around to generated the unexpected, whatever that might turn out to be. Like the U.S. Supreme Court Justice who some time back noted he couldn't define pornography but "I know it when I see it." Like central bankers everywhere, you'll most likely know it when you see it, too, in the past tense, however.

Even if the Fed acts in 2015 there's some historical data suggesting that the market continues to climb during the earlier stages of rising interest rates.

There are of course other risk factors more subtle floating out there like certain proposed international trade deals that have little to do with trade and much with further obliterating national sovereignty. One of the more ironic is the Fed's bead on reeling in the risk TBTF banks can carry on their dockets.

Here you have what at best is a quasi bank, most likely the most dangerous of the entire banking species, riding herd on banks while no one--and we mean no one--hold the reins to reeling in them and the risks they continue to take.

What much of this adds up to, so say the experts, is lots of volatility. Volatility is like a lot of things in life, however, it's your friend so long as you're on the correct side of it.

So stay alert. Soon it will be a new year with new surprises.

DIVERGENCE MEME

We've mentioned more than once the diversion meme. It appears such has now become the dangerous consensus. Here's a quote from Marc to Market.

This divergence theme that we have been writing about for more than six months has now become the consensus.  Consensus views are often wrong.  We look at ways the consensus can be wrong about the divergence.  There are three basis ways the divergence consensus can be wrong: The US disappoints.  The eurozone surprises to the upside.  Investors are too pessimistic on Abenomics.   If everyone agrees, what could go wrong?


This is not to suggest that the consensus view will miss the mark this time. It's just to raise a caution flag that all investors should have when lots of folks are lining up on one side of the economic vessel. Last year's bond market performance is an example that ought to be fresh in most investors' minds.

There's much liquidity splashing around out there and it looks as if more is on the way. Adding to that liquidity pool is cheap oil prices. Just last week Japanese 10-year government bond yields slipped to their lowest-ever level, 0.31%, as buyers were willing to accept just three yen of interest for every 1,000 yen invested.

Yields on shorter dated bonds were even lower as government officials show how desperate they are to create some inflation. The two year bond auctions there last week for the first time had investors accepting negative yields, in other words, paying the government to take their money.

Some of us here in the U.S. believe we've been doing just that for a long time.

The two-year bonds were yielding minus 0.003%, doesn't sound like a way anyone is going to get wealthier anytime soon with Japanese core inflation running at 0.7%.  Japan's government debt by some estimates is twice the size of the economy and Moody's recently down graded the country's credit rating, causing a brief blip in inflation that was shorter than some Hollywood celebrity marriages. 

The  whole globe appears to be crying out for some inflation. There's plenty of it out there, but it depends on who and how they get to measure it.

2015 S&P 500 PREDICTIONS

 

Here's some predictions for the S&P 500 for next year from the Wall Street crowd. You might want to file them somewhere and keep track as the year progresses.

Wednesday in an abbreviated session the S&P 500 closed at 2,080 with many expecting the Santa Claus rally to continue to the end of the year.

Wall Street S&P 500 targets for 2015:

Bank of America Merrill Lynch 2,200

Barclays 2,100

BMO 2,250

Citigroup 2,200

Credit Suisse 2,200

Deutsche Bank 2,150

Goldman Sachs 2,100

JPMorgan Chase 2,250

Morgan Stanley 2,275

Oppenheimer 2,311

RBC 2,325

UBS 2,225

Wells Fargo 2,222

BlackRock 2,160

Fundstrat Global Advisors 2,325

EXCHANGE RATES

Currency exchange rates matter, especially when it comes to the game of beggar thy neighbor, something we will likely see more of in 2015 as countries try to export their way to economic nirvana.

Everyone knows that oil is down nearly 50% since mid-June. But take a look at the Japanese yen; it's dropped nearly 20% since summer against Uncle Sam's greenback.  As one observer recently noted "..it's actually cheaper now to buy a new iPhone in Tokyo and have it shipped over than it is to buy one here in the U.S."

On a trade-weighted basis the yen is down over the last two years nearly 25 percent. If you can't stimulate domestic buying then do what other major export nations do, debase your currency. The euro tells a similar story. The risk of further ECB easing in monetary policy supposedly set to begin early next year looms large for weakening the euro.

In essence Europe needs a weaker euro to compete with a weaker yen.

The dollar index, a benchmark that weighs the dollar against its major trading partners, recently traded above 90 for the first time in eight years. Part of the reason for the upturn is the so-called revised strength in the U.S. economy coupled with the safe harbor meme, but there is much behind the scenes scrambling to make the U.S. the buyer of last resort.

Think of it as the now popular divergence theme MSM and others  seem to love so much which recently got a booster shot from the economic revisionist crowd.

Even the British pound fell to its weakest level in 16 months against the dollar, trading at $1.55. Commodity currencies have likewise taken a bath as fears of the global slowdown grew starting with China.

That brings us to the Chinese yuan. The dollar of late has been up against that currency also. A cheap yuan was something American politicians not too long ago use to complain regularly about, often threatening the Chinese if they didn't push it higher.

The yuan now has another currency, the yen, snipping at its heels since the trade-weight yuan has risen nearly 20 percent over the last few years, much of that rise owing to the weaker yen.

Keep in mind that China, Europe and Japan are big energy users. Could these lower energy prices put an unaccounted for source of liquidity into the mix that causes further unexpected mispricing of assets?

THE NIGHT BEFORE THE NIGHT

It was the night before the night before Christmas and Asian stocks along with the U.S. dollar appeared to be celebrating early.

Much of the emphasis seems to be coming from those well-known members of the Economic Revisionist Illuminati who revised U.S. third quarter growth up to five percent.

The dollar up, the yen down, an exporter's best dream. Forget the sea. What you have here is easy money on the left, easy money on the right and the lack of any foreseeable threat of rising interest  rates smack dab in the center.

Otherwise known as Japan, the European Union and the United States. Like the three wise men of the season, this noted triumvirate is also off on an journey. 

 Abe, Draghi and Yellen, sounds like a law firm bolted down on the 75th floor in a Gotham high rise. Here's more from Reuters.

(Reuters) - Asian stocks gained and the dollar stood tall on Wednesday thanks to surprisingly robust U.S. economic growth, helping investors head into the Christmas holidays in a more relaxed mood after the global market turbulence of the past two weeks.

Risk appetite was sharpened by from revised data showing the U.S. economy grew at 5.0 percent in the third quarter, the quickest pace in 11 years and the strongest sign yet that growth has decisively shifted into higher gear.

That drove both the Dow .DJI and the S&P 500 .SPX to record closing highs overnight.

MSCI's broadest index of Asia-Pacific shares outside Japan.MIAPJ0000PUS gained 0.2 percent. The Shanghai Composite Index SSEC bucked the trend and shed 2.6 percent as profit-taking seen earlier in the week appeared to gain momentum. [.SS]

South Korea's Kospi .KS200 was up 0.4 percent and Tokyo'sNikkei .N225 rallied 1.2 percent.

"America's strong economy is pushing the dollar up and the yen down, and that's a big plus for Japanese exporters to the U.S.," said Hiroyuki Nakai, chief strategist at Tokai Tokyo Research Center.

The strong U.S. GDP prompted markets to bring forward the timing of a likely hike in interest rates by the Federal Reserve, which last week gave an upbeat assessment of theeconomy.

The bullish outlook pushed up Treasury yields and gave an already strong dollar fresh momentum. The two-year U.S. Treasury yield US2YT=RR rose to a high not seen in almost four years in light of raised interest rate expectations.

The greenback fetched 120.320 yen JPY=, edging closer to a 7-1/2 year peak of 121.86 yen touched earlier this month. The euro sank to a fresh 28-month low of $1.2165 EUR=.

"Risk appetite is returning at a faster pace than expected, thanks to the temporary pull-back in Russia risk and a well-balanced statement from the Fed last week," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.

However, given thin holiday trading conditions and continued instability in crude oil prices, equities and currencies could be volatile, he said.

The Russian ruble plunged to an all-time low in mid-December on the back of lower oil prices and Western sanctions, which make it almost impossible for Russian firms to borrow from the West.

The ruble has since regained some lost territory, shored up by informal capital control measures designed to head off a repeat of the inflation and protests that marked Russia's 1998 financial crisis.

Weighed by industry data that showed a surprise build in domestic stocks, U.S. crude oil dipped 38 cents to $56.74 a barrel CLc1 after gaining $1.86 overnight on the U.S. growth figures. [O/R]

"It's ironic. The U.S. economy is starting to boom and crude oil prices are contracting in the opposite direction," said Ben Le Brun, market analyst at Sydney's OptionsXpress.

Gold traded close to a three-week low as the improved sentiment dampened investor appetite for the safe-haven metal. [GOL/]

Spot gold XAU= was up 0.3 percent at $1,179.21 an ounce, within distance of the three-week trough of $1,170.17 hit on Monday.