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. 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. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.
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