ERA OF CHEAP MONEY IS NOT YET OVER

Equities rose again on the belief that the era of cheap money is not over.  The dollar fell and oil rallied.  The Fed is now off center stage and next week’s OPEC meeting and the upcoming earnings season and employment report will become the focus.

Speaking of OPEC, there are wire stories citing “credible sources” suggesting a possible production cut, the first since 2008.  Wow!  Most are openly discussing the possibility of a freeze.  There is no absolutely no conviction that a freeze will occur much less a reduction.

As noted a gazillion times OPEC ,et.al. are hemorrhaging money.  Saudi Arabia’s foreign reserve was $737 billion in August 2014.  The kingdom projected only a $35 billion decline by the end of 2015.

August its reserves stood around $550 billion and the IMF is projecting less than $400 billion by the end of 2017 if oil prices do not rise.  Moreover the IMF states that if nothing changes Saudi Arabia will be bankrupt by 2020.

I think a production freeze will occur naturally given the lack of infrastructure investment.  Citigroup writes over $1 trillion in global oil infrastructure cuts has occurred since late 2014, a record by a large amount.

The US Energy Department writes OPEC’s spare capacity is at the lowest since at least 2008, falling to about 1 million barrels, down from 4 million in late 2010, the result of pumping at record levels and lack of infrastructure investment.  Others have suggested spare capacity is less than 500,000 barrels and at current production will decline to less than 300,000 barrels.

As noted many times, 2016 is very similar to 1999 when oil prices plunged about 50%, rallied about 50% and the doubled in two years because of lack of supply and strong demand, the lack of infrastructure spending.

If OPEC’s agrees to freeze production, I believe prices could over $50 /barrel in short order.

What will happen today?

Last night the foreign markets were down.  London was down 0.23%, Paris down 0.63% and Frankfurt down 0.35%.  China was down 0.28%, Japan down 0.32%and Hang Sang down 0.31%.

The Dow should open nominally lower.  Oil is unchanged after a strong weekly advance.  The 10-year is unchanged at 1.62%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.
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