FINANCIAL REVIEW

Proportional Response

Sinclair Noe — December 18, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 421 = 17,778
SPX + 48 = 2061
NAS + 104 = 4748
10 YR YLD + .05 = 2.20%
OIL – 1.88 = 54.59
GOLD + 9.00 = 1198.90
SILV + .13 = 15.98

If you were waiting for confirmation, you got it. The major indices went through about 7 days of doom and gloom. Maybe this has something to do with the Federal Reserve’s FOMC statement yesterday. The central bank said in its official statement Wednesday it would “be patient” in deciding when to start raising interest rates from near zero. But then it added that it sees “this guidance as consistent with its previous statement” pledging to keep rates very low for “considerable time.” When asked what “patient” meant, Chairwoman Yellen said the Fed would not begin hiking rates for “a couple” of meetings. Pressed further, she confirmed “a couple” means two. But I’m not sure whether it was hawkish or dovish; more likely it was just a continuation.

Here’s my guess and it is only a guess because I don’t know and probably nobody knows. My guess is that a lot of money has come out of oil lately and now that money is moving back into stocks. It’s the buy on the dip mentality, with a little sector rotation on the side. Whatever it was, it was the best day for the S&P 500 this year. The Dow had its biggest gain in 3 years. Not enough to take out the old highs but back within striking distance.

The MSCI All-Country World Index gained 2.18% and emerging-market stocks surged 1.8%. The STOXX Europe 600 Index advanced 3%, the most in three years. Treasuries moved lower, pushing yields higher. Oil slumped 3.2% after wiping out a 4% rally.

Goldman Sachs released a report showing almost $1 trillion in investments in future oil projects at risk. They looked at 400 of the world’s largest new oil and gas fields, excluding US shale, and found projects representing $930 billion of future investment that are no longer profitable with Brent crude at $70. In the US, the shale-oil party isn’t over yet, but there are bound to be some oil projects planned for next year that have little hope of a productive future. If the unprofitable projects were scuttled, it would mean a loss of 7.5 million barrels per day of production in 2025, equivalent to 8% of current global demand.

Meanwhile, today the chief economist for JPMorgan said the drop in oil prices could be painful for Texas and could throw the state into recession, citing the similarities to 1986 when oil prices were cut in half. The economist says there are some reasons to believe this time may be different, such as “rapid technological gains” in the energy sector that have reduced extraction costs. But he concluded that those arguments “are not so strong as to signal smooth sailing for the Texas economy.”

The Goldman tally takes the long view of project finance as it plays out over the next decade or more. But the initial impact of low prices may be swift. Next year alone, oil and gas companies will make final investment decisions on 800 projects worth $500 billion. If the price of oil averages $70 in 2015, $150 billion will be pulled from oil and gas exploration around the world. With oil prices at $65 it could trigger the biggest drop in project finance in decades.

And then the question is where will all that money go? Will it eventually be poured back into oil rigs, or will it end up financing some other, less volatile, less polluting energy source? Or maybe the money will just shift to some other place.

And the flip side is that while lower oil prices may be hard for Texas and global oil producers, it is great for consumers who keep a few extra dollars in their purse with each fill-up. The consumer drives the US economy, which drives the global economy, so that’s good news.

In economic news: Initial jobless claims fell by 6,000 to a seasonally adjusted 289,000 in the seven days ended Dec. 13, and for 13 of the past 14 weeks new claims are under 300,000.

The Federal Reserve Bank of Philadelphia’s monthly index on regional manufacturers fell to 24.5 in December from 40.8 in November.

The Conference Board’s leading economic index rose 0.6% in November, indicating the US is likely to expand at a fairly robust pace in the next few months. The coincident index, which measures current conditions, rose 0.4% in November, while the lagging index gained 0.3%.

Russian President Vlad Putin delivered a 3 hour press conference today. Putin said the problems in Russia will pass, the ruble will come back in time, about 2 years; he said Russia was facing a perfect storm of low oil prices combined with economic sanctions from the West over Ukraine. He did not say how he would fix it. The ruble continued to weaken against the dollar and the euro following the speech. For the typical Russian these are going to be a difficult times but it is tough to sympathize with Putin. Russia should not be a debtor country. It has managed this nonetheless, presumably because corporations and banks have borrowed abroad, and somehow that money has ended up invested in luxury London real estate and other things. Oligarchy is not an optimal economic model.

Sony Pictures canceled the December 25 premier of “The Interview.” The studio pulled the North Korea-themed comedy’s planned release following terrorist threats against theaters and a devastating hacker attack that leaked reams of sensitive company data. US security officials told news outlets that North Korea directly ordered the hacks, but some say the evidence is thin. The United States said the cyber-attack on Sony Pictures was a serious national security matter and the Obama administration was considering a proportional response.

I don’t know what that means. Maybe we’ll cancel the premier of a North Korean film, or maybe we can get James Franco and Seth Rogen to make more films and we’ll just swamp North Korea with mindless comedies. Or better yet, maybe we can send some Sony executives to North Korea, to motivate the workers.

One of the most shocking revelations to come out of the Sony hack is that people are still saying stupid things in email. You have to assume that everything you write in an email, instant message, or text, or any digital form of written communication, will be read by your boss and co-workers and your spouse; and if you write something incredibly stupid it might even go viral. Seriously.

The Sony hack raises a whole bunch of issues, including whether insurance would pay a claim for someone injured in an attack on a theater. And then there are first amendment questions. And then there is the whole question of cyber security, and why it was clearly lacking at Sony, and just how bad it is at other major companies, and who is liable for hacks. Some Sony employees have already filed lawsuits accusing Sony of negligence for failing to secure its network, and not taking adequate steps to protect employees once the company knew the information was compromised. In the past, companies have tried to cut costs on cyber security, because they felt the liability should fall on the hackers, even if nobody was actually tracking down the hackers. Now, the liability might fall on the company because they knowingly left the keys in the car.

Here’s a quiz for you: Have you ever heard of Kabam, Instacart, WeWork, and Stripe? Probably not. These are the names of companies that did not exist a couple of years ago and now they are worth between $1 billion and $5 billion. Instacart is a same day grocery delivery company; WeWork provides shared office space; Stripe is an online payment company; Kabam makes games for mobile devices. Companies are going from zero to billion-dollar valuations faster than ever before, despite a lack of revenue and, perhaps, even a market plan. In the frenzy, ideas that once were discarded as failures are being recycled into billion-dollar start-ups.

Have your heard about Cuba? Not the island country, but the energy drink. Shares of Cuba Beverage Company were up 140% yesterday. The jump comes on a day when President Barack Obama said the United States will begin to normalize relations and establish diplomatic ties with Cuba–the country, not the company. The company is an energy-drink purveyor with less than $10,000 in sales last quarter that was trading for 1.59 cents on Tuesday afternoon, and absolutely no link whatsoever to certain islands 90 miles off the coast of Florida but which contains the magic four letters, in the correct order? Actually, the ticker symbol is CUBV. If the ticker had been CUBA, I’m guessing it would have been a ten-bagger. Well, why haven’t you placed that buy order yet?

Food startup Hampton Creek Foods, whose goal is to replace egg products in food with plant-based alternatives, just scored $90 million in funding at a reported $500 million valuation; this for a company that wants to make fake mayonnaise. Vox Media just went through a round of funding that valued the online media company at $380 million; compare that to the $250 million sale price for the Washington Post. The big start up story this year is Uber. Actually Uber started 5 years ago, but in the past 6 months the valuation went from $18 billion to $41 billion. If it all sounds a little bubblicious, well it probably is.