Wednesday, February 11, 2015

Perspectives from Above the Noise – Week of February 9, 2015


The standoff between the new leaders of the Greek government and the European Central Bank (ECB) grew more tense last Wednesday when the ECB restricted the access of Greek banks to its direct funding lines. As a result of that move, junk-rated collateral offered by Greek banks will no longer be acceptable by the ECB for regular financing, and that news caused a sharp late-day selloff in U.S. equities. An important point, however, is that Greek banks will still have access to emergency liquidity assistance from the Bank of Greece, backstopped by the ECB, with the primary difference being a higher rate of interest than regular ECB financing operations.

The big domestic data point for the week came on Friday with the monthly nonfarm payrolls report. In contrast to several recent economic reports indicating a slowdown in U.S. activity, the jobs report continued to indicate strong momentum in the labor market.

For the week, the S&P 500 rose +3.03%, the Dow Jones Industrial Average added +3.84%, and the MSCI EAFE (developed international) gained +1.66%.

Here are the 3 stories this week that rose above the noise:

Despite Low Oil Price Outlook, U.S. Oil Output “Party” should Last to 2020

Since falling to a low of $44.50 per barrel on January 29, U.S.-based crude (WTI: West Texas Intermediate) has rebounded nearly 20 percent to trade near $53. Despite this gain, Citibank issued a note to its clients on Monday warning that that the recent rally may be a “head fake,” and that crude could possibly fall to as low as $20 per barrel.

The bank expects a bottom in the oil market between the end of the first quarter or early in the second quarter, as shale producers may end up cutting rigs by about 50 percent. Prices will start to rise when the buildup in inventory ends and companies start to draw down inventory for a sustained period. A lack of storage may be a major obstacle in the second quarter and could cause a "production crunch," the analysts said.

Despite this, the International Energy Agency (IEA) said in its monthly oil report that the recent crude oil price correction will cause the North American supply “party” to mark a pause, but will not bring it to an end. The report forecasts that the United States will remain the world’s top source of oil supply growth up to 2020, defying expectations of a more dramatic slowdown in shale growth. The IEA said oil prices could face further weakness in the first half of 2015 due to continued increases in inventories, which could come close to revisiting the record highs reached in 1998.

Jobs Report Shows Growing Economic Strength

Gene Epstein provides a summary of the very strong recent employment data in a recent Barron’s article. The employment data remains a bright spot for the U.S. economy, and again in January failed to show the type of deterioration recently evident in other economic indicators.

In addition to several measures of employment growth reaching the best levels since the late-90s in recent months, the most recent jobs report also indicated the best monthly gain in average hourly earnings in six years. As Epstein points out, this provides some reason for optimism that growth will remain resilient in 2015 and also increases the odds that the Fed will announce its first rate hike before the end of the year.

Fed’s Powell Seeks Greater Confidence on Inflation Rebound

Federal Reserve Governor Jerome Powell prefers that the Federal Reserve wait for signs that inflation will increase to the Fed’s 2 percent target before raising interest rates. The Fed has a dual mandate—to promote maximum employment and provide price stability. In Governor Powell’s view, the employment situation is improving, but inflation remains too low.

In fact, inflation has fallen short of the Fed’s inflation target for 32 consecutive months. Powell stated that the Fed can be patient, because low inflation buys the Fed some time before raising interest rates. Although he is pleased with recent improvements in the labor market, he feels there is still a lot of slack in the economy based on the slow pace of wage growth and the large number of individuals working part time for economic reasons.

Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.

International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.