The West (a.k.a. energy consumers) has a choice. An ugly choice, but a choice nonetheless: Iran without nuclear weapons, or cheap oil–cheap here defined as something approximating ~$60 (if you can call that cheap).
Rest assured, the label will fit if oil’s at, say, $100 a barrel. In any case, the West (along with China, Japan and other dependents on imported oil) can’t eat their energy cake laced with geopolitically friendly frosting and have it too. Or so it seems, as news of Tehran’s tenacity on its nuclear program continues to invade, harass and otherwise threaten the outlook on matters of war and peace, energy and security.
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STRATEGIC THINKING–AVAILABLE IN A CONVENIENT 5-YEAR BITE SIZE
Five years is a long time. Long enough to shatter old myths, forge new ones, and remind investors that luck is no trivial factor. A little skill couldn’t hurt either. In any case, we submit for your consideration the trailing five-year annualized returns for the major asset classes through yesterday, followed by some observations.
IN SEARCH OF CLARITY (AGAIN)
Does he or doesn’t he think asset prices are crucial for setting monetary policy? One could be excused for having a less-than-clear grasp of the answer after digesting the talk dispatched by New York Fed President Timothy Geithner yesterday at the New York Association for Business Economics in Manhattan. Throughout his speech he alternatively endorsed and distanced himself from the value of asset prices as practical tool in the setting of interest rates.
SECTOR SCORECARD
The stock market has charged out of the gate in 2006 with a head of steam. The S&P 500, every institution’s favorite benchmark for large cap stocks, is ahead on a price basis by 3.3% through yesterday, January 10. But wait, there’s more: small caps are still hot, as they have been in recent years. The S&P 600’s significantly higher year-to-date rise of 5.3% easily tops the gain for its large-cap brethren a la the S&P 500.
What’s driving equity returns thus far in 2006? The answer rings familiar, to judge by recent history in the performance of the ten sectors that comprise the S&P 500 and S&P 600. In a word, energy is again leading the charge, as it has been for several years now. Indeed, as the two graphs below illustrate, energy stocks are at the head of the performance rankings for both large- and small-cap categories.
CONSUMER CREDIT STUMBLES TWICE
Like the proverbial canary’s demise in the coal mine, the initial rumblings of things to come can be subtle, and therefore easily misinterpreted. With that caveat, we’re cautious of reading too much into yesterday’s news from the Fed that consumer credit dropped for the second consecutive month in November, as the chart below reveals. The October/November stumble is the first back-to-back monthly decline since 1992.
…..DOES THE STUMBLE HAVE LEGS?
DOLLAR DOUBTS RETURN WITH A VENGEANCE
Baptism by fire looks like the operative phrase for describing the first order of business when Ben Bernanke succeeds Alan Greenspan at the Fed at the end of the month.
The central bank’s principal ward, otherwise known as the dollar, is looking increasingly ill as 2006 rolls on. As of Friday’s close, the U.S. Dollar Index shed 3.9% from the recent highs set back in November, with more than half of that loss coming last week. Adding insult to injury, gold is rallying again, pushing again to highs not seen in 25 years.
M3–THE FINALS DAYS
It’s nearly curtains for M3, the broadest measure of money supply currently published by the Federal Reserve. “Currently” being the operative word here, since the Fed will cease M3 updates in March.
Dying, but not yet dead. Indeed, in the limited time left for M3 the series is showing some spirit for one final run skyward. In the latest weekly money-supply data published yesterday, M3 advanced by 8.1% for the week of December 26, 2005 v. its year-earlier level. The somewhat narrower gauge of money supply known as M2 grew by roughly half as fast, rising 4.1% over the same span. In fact, that’s no surprise. The spread between the two rates of increase has been growing ever wider as 2005 unfolded (as the chart below reveals), suggesting that there may be more difference between M2 and M3 than the central bank likes to admit.
WATCHING THE WHEELS GO ‘ROUND
Maybe you call it a bubble; maybe you don’t. But whatever descriptive label you prefer, the real estate market looks set to figure prominently in economy in 2006, one way or the other.
Indeed, some pundits think Joe Sixpack’s relationship with housing will reach a critical juncture this year. With that in mind, the Levy Economics Institute of Bard College has penned a fresh analysis of real estate, provocatively titled: Are Housing Prices, Household Debt, and Growth Sustainable?
OLD QUESTIONS IN A NEW YEAR
The new year on Wall Street kicked off with a bang. The S&P 500 yesterday jumped 1.6%, with all 10 sectors in the venerable index gaining ground as well. The S&P 500, as a result, is again within shouting distance of the highs set last month, which were the loftiest since 2001.
Hope, in short, is alive and well thus far in 2006. But for all the initial celebration, debate about what comes next rages like never before, and with the stakes arguably higher this year than last it’s getting harder for investors to take a wait-and-see attitude.
…..THE BAROMETER OF HOPE
Source: Stockcharts.com
FROM RUSSIA, WITH SPITE
The first energy crisis of 2006 was brief, but it may be telling.
Russia, flexing its muscles as the biggest source of energy exports outside of the Middle East, put the kibosh on New Year’s celebrations in Ukraine by shutting off the tap for natural gas to this former province of the Soviet Union. After a bit of stop-and-go negotiations, Moscow has relented, turning the gas back on, but not without casting aspersions on any good will that’s accrued in recent years regarding Mother Russia’s reliability as an exporter of crude and natural gas.
Source: Energy Information Administration