In the markets:
A sharp late-week rally wasn’t enough to reverse U.S. market declines for the week as the Dow Jones
Industrial Average ended the week down -1.43%, despite a 314 point rally on Friday. Similarly, the S&P
500 LargeCap index declined -0.81%, the S&P 400 MidCap gave up -1.36%, and the SmallCap Russell
2000 lost -1.38%. Dow Transports bucked the trend and gained +1.52% but Dow Utilities, the leading
year-to-date sector, ended the week down -2.2%.
In international markets, almost all major indices were negative with Japan the biggest loser, plunging 11.1%. In North America, Canada’s TSX declined -3%. European markets also had a difficult week as the
Netherlands dropped -5.4%, France’s CAC 40 declined -4.89%, Germany’s DAX pulled back -3.43%, and
the United Kingdom’s FTSE declined -2.4%.
In commodities, precious metals shone brightly as Gold gained +$64.40 an ounce to end the week at
$1,238.50, up +5.49%. Silver added +$0.76 to $15.79, up 5.06%. Crude oil ended the week at $29.02,
down -6.39%, despite a huge +10.7% rally on Friday.
In U.S. economic news, initial claims for jobless benefits fell 16,000 last week to 269,000, a bigger
decline than expected and the lowest reading this year. Jobless claims have now remained below
300,000 for almost a year. Despite financial markets seemingly signaling trouble ahead for the U.S.
economy, the labor market remains resilient. Continuing jobless claims remain near long-term lows of
2.239 million.
The Labor Department’s “Job Openings and Labor Turnover Survey” (JOLTS) report showed openings
rose to 5.6 million in December, up 250,000 from November. Hires climbed to 5.36 million from
November’s 5.26 million, the highest reading since the fall of 2004. The number of people quitting their
jobs hit a 10-year high of 3.06 million, up 200,000 from the previous month, indicating a higher level of
worker confidence in their ability to find better jobs.
U.S. retail sales rose a better-than-expected +0.2% in January, according to the Commerce Department.
Core sales (ex-autos, restaurants, and building supplies) rose +0.6%. Non-store retailers such as Amazon
outperformed all retail segments with a +1.6% gain, up +8.7% annually.
Import prices continue to fall, down -1.1% last month, matching the decline seen in December.
Expectations had been for a greater drop. Year-over-year, import prices declined -6.2%. Export prices
also fell, down -0.8% on the month and down -5.7% from a year ago.
Despite all predictions to the contrary, mortgage rates fell below 4% again and mortgage applications
surged +9.3% last week. Purchase applications were little changed, but refinancing demand hit a oneyear high, up +15.8%.
Small business sentiment fell to its lowest level in nearly 2 years, said the National Federation of
Independent Business (NFIB). NFIB’s small business optimism index fell -1.3 points to 93.9, continuing a
downtrend for over a year and the lowest since February of 2014. In the NFIB report, 21% of small
business owners see economic conditions worsening—the lowest business conditions outlook since late
2013. Despite weaker readings in credit conditions, earnings trends, and sales a net 27% of companies
raised compensation—the highest reading since 2007. A large part of the rise in compensation was due
to the minimum wage hikes that took effect in 14 states on January 1st, pushing up labor costs. The
broader labor issue remains that small businesses continue to have difficulty finding qualified
candidates. A full 29% of businesses report having job openings and 45% reported few or no qualified
candidates.
New York Federal Reserve President William Dudley said key sectors of the U.S. economy are in good
shape and more resilient. He stated that the financial system is stronger with banks better capitalized
and that household balance sheets are in much better shape. He reiterated Fed Chair Janet Yellen’s
statement that economic expansions don’t die of “old age”.
In Canada, the Bank of Canada is selling off most of its remaining gold reserves, mainly by selling gold
coins. The country held just US$19 million worth of gold as of last Monday. For most of last year, the
country’s gold reserves stood at more than US$100 million.
In the Eurozone, the economy grew 0.3% in the 4th quarter—matching forecasters’ views. Among the
larger countries, Spain gained +0.8%, its 2nd significant quarterly gain. Germany and France rose +0.3%,
and Italy managed a +0.1% gain.
In Germany, industrial production declined, widely missing analyst expectations of a +0.5% gain.
German production fell -2.3%, the worst since October 2012. Capital goods production declined -2.6%,
consumer goods fell -1.4%, and energy-related production decreased by -3%.
Around the world, Central Banks have been using the tools at their disposal to spur economic growth in
their respective zones. The Bank of Japan surprised markets two weeks ago by adopting a negative
interest rate on bank funds deposited with the central bank—the idea being that it would get the banks
to stop hoarding reserves and force them to put that money to work. Instead, banks appear to have
used the money to purchase Japanese government bonds which remain in such high demand that the
10-year bond yield went negative for the first time this week. Since then, Japanese bank stocks have
plunged -25%.
European Central Bank President Mario Draghi once more pledged to do “whatever it takes”, and
further backed it up with a claim that there are “no limits” to how far the ECB will go to avoid a
Eurozone breakup and to spur economic growth. Nonetheless, European bank stocks have plunged 60% over the past year.
By contrast, in the United States, the Federal Reserve took a different tack by hiking rates in December
and anticipating more hikes in 2016. The intention was to put upward pressure on inflation and hence
interest rates, but the opposite appears to have occurred. Investors rushed into Treasuries where the
yield on the 10-year has plunged from 2.29% at the time of the hike to 1.73%. Steven Ricchiuto, chief
economist at Mizuho Securities USA writes that, “The counterintuitive currency market behavior
suggests markets are beginning to recognize that monetary policy can’t solve the deflation problem
confronting the global economy.”
Finally, with oil selling at less than $30/barrel and the US’ major oil terminal at Cushing OK almost to full
capacity, let’s revisit the “Peak Oil” scare of just a couple of decades ago. Peak oil is an event based on
geologist M. King Hubbert’s theory that there is a point in time when the maximum rate of extraction of
petroleum is reached, and after that point the rate of petroleum extraction begins a terminal decline,
ending in the destruction of our oil-based economy. Indeed, petroleum production for the lower 48
states of the United States did reach a peak in early 1970 and then began a multi-decade decline.
However, the dramatic increases in production since 2010 have reversed the decline, and pushed total
production back to within spitting distance of that 1970 peak.
Hydraulic fracturing, the ability of refiners to process oil shale and oil sands, and new advanced drilling
techniques that are able to breathe new life into old oil fields have all served to dramatically increase
North American oil production and have essentially reversed the phenomenon of “Peak oil”.
To remind us of the “Peak Oil” hysteria of the last several decades, here is a collage of magazine and
book covers that now can be relegated to the Library of Bad Predictions:
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)