Jed Clampett (Beverly Hillbillies) isn’t happy today! With the price of crude dropping another 5% and below the $47 level he has lost more than half of his network… at least on paper and he were real. The headlines have been full of the oil news and how it relates to the markets, the economy, housing, taxes and just about any other variable they squeeze into the story. This was the one variable we were hoping would calm as earnings season kicks off tonight with Alcoa announcing their fourth quarter results. Why the big tumble in price? Bigger mouths talking about price destruction. First, Goldman Sachs released a report that cut demand estimates for 2015 and then Prince Alwaleed of Saudi Arabia stated oil will never see $100 again. Big platforms with big comments rattled the price of crude. Throw in the media attempting to explain contango and the world of oil got even more confusing for investors.
The greatest challenge still facing the sector is oil stocks are still going to correct further as the impact of lower prices gets factored into earnings. XLE fell 3% today, but it could tumble another 10-20% before finding a bottom or base. I am not attempting to be a prognosticator, but looking at the impact of extended oil prices at the current levels or below $55 per barrel makes for an ugly picture or balance sheet.
Housing is another sector in the path of lower oil prices. Texas and North Dakota will likely see a slowing in growth relative to expansion in the fracking business, and with natural gas supplies back up it will only compound the issue relative to job expansion in these and other states. How much of an impact is yet to be seen, but it is definitely worth our attention going forward.
All this talk pushed the volatility index back above 20 intraday and close at the 19.5 mark. This is the uncertainty about the price impact creeping back into the markets short term. Throw in economic worries, global worries and earnings… and it makes for interesting trading as we progress through the first quarter.
What does all this mean? There in lies the uncertainty factor. Similar to when the banks imploded, no one could determine with any real clarity the overall impact to the economy. While the price of oil is not as dramatic in nature, it still has a profound impact on the global and domestic economies as seen in the 70’s when oil receded from all time high prices. There are patches of the US and world economies that will suffer more than others, but the impact will be felt… the question is to what extent and for how long? I hate to throw out the patience word again, but it is key currently to keep your money out of harms way as this all unfold and some clarity is gained looking forward.
Taking all the noise into account the ten-year treasury bond yield fell to 1.91% today. Money is looking for safety and the flight to quality has been under way again the last two weeks with the yield dropping on the thirty-year bond from 2.85% to 2.49%. That is a 13% decline in yield that equated into a 7.2% rise in the price of the long bond. Anxiety creates the rotation to safety and it has only been compounded by the global effect in Europe and the emerging markets.
I am willing to continue the one day at a time approach for now. Look for more specifics in the trading notes tomorrow morning.