Thoughts on Oil
DOW -117 = 17,730
SPX – 14 = 2077
NAS – 40 = 5101
10 YR YLD – .07 = 2.20%
OIL – 2.37 = 37.60
GOLD – 15.10 = 1072.20
Crude prices fell again in the first trading session after OPEC said over the weekend that it would maintain production at the current levels and made no decision on a new target ceiling. An oil glut has cut prices by more than 60% since June 2014. Abandoning an official output ceiling effectively codifies what OPEC has already done for the past year: ignore its previous target of 30 million barrels a day. The cartel produced 31.4 million barrels per day in October. Indonesia also rejoined OPEC on Friday (after being inactive since 2008), boosting the group’s participants to 13 members. Oil prices today dropped to levels last seen in 2009.
There has been an ongoing battle between OPEC and US shale producers with each side pumping massive amounts of oil in the hopes the other would cut production once crude became too cheap. The world isn’t going quite the way Saudi Arabia expected when it led OPEC to declare a pricing war against US shale drillers last year by flooding the market with crude oil. Far from being a quick kill, shale drillers have stubbornly held on, and OPEC has suffered along with them.
Cheap oil has already affected global markets and economies in countless ways, from disrupting Venezuelan politics to sinking the Russian ruble and introducing the world to “low-flation.” In a note to clients, Citi suggested that one of the only things propping up oil prices has been ETF holders thinking that they’ve gotten in at the bottom, even as larger money managers have increasingly given up on forecasting longer-term prices amid greater volatility.
The Labor Department last Friday said U.S. created 211,000 jobs in November after a nearly 300,000 gain in October, keeping the unemployment rate at an eight-year low of 5%. Against the backdrop of a steadily improving labor market the Federal Reserve is gearing up to raise its benchmark short-term interest rate, now near zero, for the first time since 2006. The Fed is expected to pull the trigger after its Dec. 15-16 meeting.
Federal funds futures imply a 76 percent probability of liftoff in December, and the U.S. two-year Treasury has risen by more than 30 basis points over the past two months. The dollar index moved higher following on the heels of its largest one-week loss since May. In the wake of November’s solid non-farm payrolls report, the conversation has now shifted towards how fast the Fed will have to raise rates and to what eventual level.
Venezuelan voters on Sunday delivered a heavy blow to the socialist party of President Nicolas Maduro by granting the opposition a considerable majority in the national assembly. Venezuela’s opposition leaders say they captured two thirds of the seats in congress in Sunday’s election, a super-majority that offers them a powerful mandate for profound change, including the ability to fire ministers, change the constitution, reshape the judiciary and electoral commission and start a process to recall the president. Nicolas Maduro. The official tally has the opposition far ahead but not yet with the crucial two-thirds margin.
Meanwhile, in France, the right-wing National Front party led by Marine Le Pen performed well in the regional elections held on Sunday. The party, which opposes immigration and the country’s membership in the euro currency union, more than doubled its share of the national vote compared to the 2010 election.
Germany is on pace to take in one million asylum-seekers this year. In the last 11 months, the country has taken in 964,574 new migrants, including more than 200,000 just in November; about 484,000 migrants came from Syria. Germany has accepted the largest number of asylum-seekers of all European countries, according to the UN High Commissioner for Refugees. Chancellor Angela Merkel said in September, “Germany is doing what is morally and legally obliged. Not more, and not less.”
It’s extraordinary also because it’s larger than the total number of refugees that the US—with a population of 320 million to Germany’s 80 million—has accepted in the last 10 years. Since 2005, the US has accepted a total of 675,982 refugees from regions all over the world, according to data from the Refugee Processing Center, an arm of the US Department of Justice’s Bureau of Population, Refugees and Migration.
Beijing issued its most severe smog warning for the next 3 days – the first time the municipal government has issued a so-called red pollution alert. Local authorities upgraded the air pollution alert to red from orange. Some industrial companies must stop or limit production, outdoor construction work will be banned and primary schools and kindergartens are advised to cancel classes. Even healthy people should try to avoid outdoor activity and choose public transportation. The particulates, which reached “very unhealthy” or “hazardous” levels in 28 cities in northern China in November, are caused to a large extent by man-made pollution, including the burning of fossil fuels.
China is the biggest consumer of coal in the world, by a long way. As for the coal-fired power stations? They’re still running, with thousands more planned to be built in the coming years. At a climate conference in Paris, where China is negotiating with the rest of the world on emissions, that strategy is getting harder to argue for. After this week, the idea may be harder to sell in Beijing, too.
Keurig Green Mountain said it has agreed to be acquired by an investor group led by JAB Holding in a deal with an equity value of about $13.9 billion. As part of the deal, JAB will pay $92 in cash for each Keurig share outstanding, which represents a 78% premium to Friday’s closing price of $51.70. The deal is expected to close during the first quarter of 2016. The Coca-Cola Co. which is Keurig’s largest shareholder with a 17% stake, is supportive of the deal. JAB Holding is the investment arm of the secretive Reimann family.
JAB owns a stake in Reckitt Benckiser. It also has a luxury arm which houses investments in Jimmy Choo, Belstaff and Bally, and owns perfume maker Coty. JAB struck a deal in 2013 to buy D.E. Master Blenders 1753, and later agreed a deal with Mondelez International to combine their respective coffee businesses. That created Jacobs Douwe Egberts, which describes itself as the biggest pure-play coffee company in the world; they also control Caribou Coffee and Peet’s. Overall, the company’s retail value would lag behind Nestlé’s which controls about 23% of the coffee market.
General Electric has abandoned plans to sell its appliance business to Electrolux. Both companies were being sued by the Justice Department to stop the deal, which would have combined the number two and three domestic appliance makers in the U.S.
We may be seeing a bidding war for Pep Boys. Carl Icahn has offered $15.50 a share. That bid was 3.3 percent more than the $15-a-share proposal from Bridgestone Corp. that Pep Boys agreed to in October. Philadelphia-based Pep Boys closed at $16.06. Investors are betting that Icahn, Bridgestone or someone else will be willing to pony up for a well-known brand with 800 locations in 35 states.
Yahoo shareholders still do not know how – or if – the company’s board plans to restructure the technology giant. The firm’s directors ended three days of deliberations on Friday without announcing whether they will proceed with plans to spin off its stake in Alibaba, sell its core business, shake up management, or do something else entirely. The big question on the Alibaba spinoff is the tax implications. The big question if Yahoo sells off its core business – what would be left?
Chipotle Mexican Grill is struggling to contain the damage from an E. coli outbreak at its restaurants. Chipotle fell in early trading after rescinding its 2016 forecast and projecting its first quarterly same-store sales decline as a public company. Sales at locations open at least 13 months plunged as much as 20 percent in the days after the illnesses were reported and may fall 8 percent to 11 percent for the fourth quarter as a whole. That would be the first drop since Chipotle went public in 2006.
The Arizona Regional Multiple Listing Service reports overall sales in Phoenix in November were up 6.5% year-over-year. Cash Sales (frequently investors) were up slightly at 29.1% of total sales. Active inventory is now down 8.8% year-over-year. After sluggish price increases off 2.4% in 2014, prices are already up 4% through September.
Last summer I went to Hawaii and visited Pearl Harbor and the Arizona Memorial. Oil still leaks from the tanks of the sunken Arizona. They don’t try to drain the tanks because they are in a precarious way and also because the Arizona is considered hallowed ground. They say the tanks will empty the last drops of oil when the last veteran of Pearl Harbor passes away.