Weekend Dec 24 2016
Wrapping Up the Year
Wednesday December 21, 2016 Pre Market Open
I am filing the column early this week to allow our editors to meet Holiday deadlines. Let’s look back and then a bit forward in the markets.
Since 2014 we had warned that there was no reason for crude oil to be trading over $100. Indeed with fracking and OPEC and Russian exports, supply was expanding but price was not dropping. That prediction or warning finally came true. West Texas Intermediate tumbled al the way to the mid 20s. Share prices of energy and service companies fell dramatically. Some had to take bankruptcy. Frantic headlines warned that the supply would likely never drop. Oil prices turned right around, and we caught that also, in February and marched right up to $50. Since then it re-tested the $40 level and is now attacking recent highs at $53.
Prices firmed on the ‘news’ that OPEC would cut production and yes, even Russia would join in. In truth, Russia had been expanding output already. It simply agreed to keep output at the now expanded level. With no enforcement mechanism, we doubt there has been any real cut in production. Indeed, production here in the States is as strong as ever. And the long term US rig count is turning back up.
Instead we sense a shift in social mood towards commodity prices throughout this past year. Gold and silver bottomed in December-January 2016 and had quite a run of 30%. Iron ore prices bottomed along with energy prices. And now we have a serious cold front across the northern US. No one wants to be short oil futures in a blizzard.
Heating oil nearly doubled from $.90 to $1.70. Unleaded gasoline nearly matched the numbers running from $.90 to $1.60 today. That kept sales of SUVs and pickups expanding this year.
Natural gas had a great run. It just about doubled from the $1.60 level of last March to near $3.80 this month. Prices are now pulling back from an overbought condition. We suggest a spring target of $4.50.
We suspect that commodity prices as an asset class bottomed in 2016. We expect big advances in the future. That is reflected in rapidly increasing interest rates. The surprise on the upside, after endless dithering by the FED, may well be much higher rates much faster than our Central Planners expect.
Our calls on the stock market were not so successful. But then neither were the polls on the Presidential Election. The better view is that the Dow Transports peaked in November 2014. A correction then took place right into early 2016 dropping the index from 9250 to its 50-month moving average around 7,000 at that time. The news of the election has resulted in near all US stock indexes soaring. The Transports have risen from 8,000 to 9,500 since the election. The promise of regulation roll back and a green light for US Energy Production has prices and Trump’s popularity on the upswing.
What is happening is that the markets are pricing in positive social mood for 2017. Historically, the seventh year of a decade has seen problems in the past.
1957 ushered in a recession causing Ike’s popularity to drop. The markets topped in 1966 and began falling in 1967. The 1970s were just lousy, period. Ask Jimmy Carter if you doubt me. October 1987 brought us a bear market that came and went in about four months time. Interestingly, one can view John Templeton on Wall Street Week after that one day 20% drop on Youtube.. He correctly observed that the crash might already be over.
Stocks advanced in 1997. But the market struck back, peaking in 2007 and then crashing in 2008. Markets are at new highs now, just as they were in 2007.
Readers can follow along in more detail on my free weblog at
http:/www.themarketperspective.com
Enjoy the Holidays and plan on a Happy New Year.
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