Happy New Year!
Caveat Emptor- Let the Buyer Beware. Let’s be completely honest, the drop in gasoline prices has been good for all of us. Crude oil reality means there is more oil supply than demand. Oil prices have seen similar drops through the years and are usually swift. In 1981, oil prices peaked at $40 a barrel and fell to $6 a barrel in 1986. In 2008, oil reached $147 a barrel and proceeded to drop to $38 a barrel in March 2009. The free market has a self-correcting element that fixes short-term anomalies separating fiction from reality. If we do have an oversupply, it will quickly rectify itself. Energy demand has grown 3% annually for the last fifty years. Most of us do not own oil rigs, refineries, and pipelines. Many experts are forecasting the American consumer will benefit upwards of a Trillion dollar savings as a result of the decline.
Carpe Diem -Seize the Day. The continued low interest policy by the Federal Reserve continues to aid and abet corporations and consumers to borrow money to promote overall economic growth. Regardless, if the unemployment rates are fabricated, the economy does appear to be on the mend. Recent Fed minutes continue to maintain low rates for the future and to be ready to raise rates when necessary. The end of the Quantitative Easing programs is being cautiously implemented though the inflation targets of 2% have not been attained. The tremendous appetite for U.S. Treasury bonds continues to keep bond yields historically low.
E Pluribus Unum – Out of Many, One. The King Dollar has been strong since June paving the way for lower commodity prices. The approaching 18 Trillion dollar U.S. budget deficit made it difficult to ever believe the dollar could rally. The most recent budget surplus in the past six months points toward some Fiscal austerity in Washington. The good news is that the US is in better economic shape than most of the other parts of the world. The financial markets would welcome corporate income tax reform in the coming months in a big way.
Vox Populi – The Voice of the People. The financial markets have recently attained record market levels with very little fanfare. Yet, many investors remain on the sideline! Price earnings ratios have risen from 11 times 2009 earnings to 16 times 2015 earnings. Price earnings ratios for the overall market can be an excellent barometer to determine if expectations are too pessimistic or optimistic. With the DJIA trading above 18,000, we believe that optimism has crept into the market. Add the recent decline in all major commodity classes, the perfect storm is in place for higher prices in 2015.
Magnum Opus – A Great Work. The true beneficiaries to lower fuel costs include almost every industry category. The obvious include transportation, chemicals, utilities and industrials. Ultimately, the real winner will be the consumer who will unleash billions in retail spending, housing, travel, automobiles, and entertainment. Larger cars will be purchased instead of smaller cars. Airline travel tickets should drop after the first of the year as jet fuel costs subside. Restaurant and retail companies should see improved sales. Particularly, luxury items should experience sales growth. Home prices should experience some price appreciation as lower fuel costs leave a little extra in the bank account.
Quid Pro Quo – This For That. The primary industry group not to enjoy the price decline in oil is the energy related companies. Already, energy services companies are idling deep-water rigs, shallow water rigs and eventually will be capping land wells. Recent data published shows that day rates charged by drillers are down 25% from three years ago. We would expect that the number of oil rigs operating will drop from the current 1,900 rig level to the 1,000 rig count reached the back in 2009. Fracking oil shale will be less advantageous for companies as breakeven for that process is approximately $45 per barrel. We are at the precipice of change should oil prices stay at $50 or below for an extended period of time.
Mea Culpa – My Fault. Fuel efficiency will not be as important. Solar panels have a breakeven of 40 years based on 15 cent per kilowatt of electricity. If you have solar stocks, sell them now. More than likely solar companies will go broke. Wind farms have a breakeven of 24 years based on the same price of electricity. The fifty percent drop in energy price would certainly make wind mills less important. GE and Trinity Industry will definitely have to rethink their wind farm strategies.
Ceterus Paribus – All Else Being Equal. Predicting oil prices is a perilous task and we did not do a good job as prices fell 50% since June 30, 2014. We do not see the supply being great enough to single handedly cause such a drop. Other geo-political issues may have contributed to the price drop including Russia’s invasion of the Ukraine. Similar to 1998, the Russian economy has weakened considerably from sanctions imposed by the ECU and the U.S. The price drop has been so severe we wonder why oil prices ever got as high as they did!
Modus Operandi – Mode of Operating. The commodity price reset has occurred. We believe that over the next twenty four months all commodities will rise in price if interest rates remain low. Usually, the financial markets perform well during the year before the Presidential election year. With guarded optimism, we believe that when the economy continues to improve sheer demand for all industrial products will improve.
We do appreciate your confidence placed in our investment management and believe that the long term investors will always do better than short-term investors. We look forward to serving you in 2015 and truly wish you a Happy New Year.
Russell L. Robinson
Robinson Investment Group
5301 Virginia Way, Suite 150
Brentwood, Tennessee 37027