Record bacon prices and other 2015 forecasts

A good day for stocks got even better after the Federal Open Market Committee released its latest statement, which indicated it would be patient with interest rates. The Russian ruble stayed depressed but regained some of the ground it had lost the past several days.

Led by Chevron Corp., the Dow jumped 288 points, with all 30 components gaining ground; the S&P 500 Index surged 40; and the Nasdaq was the biggest percentage gainer, up 96 points, or 2.12%. Advancers led decliners by close to eight to one on the NYSE and four to one on the Nasdaq. The prices of Treasuries weakened. Gold futures rose 20 cents to close at $1,194.50 an ounce, and the price of crude oil benefited from a report that showed a decrease in stockpiles, rising 54 cents to settle at $56.47 a barrel.

In earnings news:

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The crude oil sell-off and municipal bonds

Oil rig in AlaskaThe rapid decline in oil prices since midsummer has been driven by a confluence of excess supply and geopolitical factors. While much of the investment world’s attention has been on the disruptions sinking oil prices have had on energy sector stocks, currencies, and global politics, investors in municipal bonds should also take note, as many U.S. state and local budgets depend on oil exploration and production revenues. More important, oil’s influence on inflation and economic growth—both globally and domestically—will also influence monetary policy and the level of Treasury yields, which serve as an important reference point for municipal yields.

Some oil-reliant states have prepared better than others

Investors naturally look toward the large energy-producing areas of the U.S., namely Texas, Alaska, Louisiana, and North Dakota. Oil’s current price below $60/barrel, particularly if it is prolonged, will likely have an impact on the budgets for these states and selected issuers within the states. However, a closer look is required to avoid rash decisions, as each of these states has varying underlying risks.

Will municipals hit an oil slick?
Dr. Brian Jacobsen and Lyle Fitterer discuss the effect of dropping oil prices on the revenue stream of municipalities and municipal investments in this special edition of our On the Trading DeskSM podcast.

Alaska’s risk may seem the greatest, as 90% of the state budget is tied to oil- and gas-derived revenues. Additionally, the state originally budgeted oil prices at $105/barrel in fiscal year 2015 (period ending 6-30-15). Recently, the state has updated its forecasts to $76/barrel. While the state’s forecast is above current trading levels of crude oil, Alaska is somewhat insulated by its extremely large financial reserves, currently at levels larger than the entire state’s budgeted expenditures, as officials recognize its economic concentration in a single sector.

Texas also remembers the havoc that oil declines wreaked on its budget in the mid-1980s. In part due to its previous overreliance on oil revenues, Texas has diversified its economy over the past 25 years. The state also maintains a large rainy-day fund totaling nearly 9% of expenditures (among the highest percentage nationwide) and has used a more conservative price of $80/barrel for fiscal 2015 budgeting, reducing the prospect of a large midyear budget deficit.

Louisiana’s situation is more tenuous. Its forecast assumed $97/barrel oil for fiscal 2015, and the state maintains leaner cash reserves compared with Alaska and Texas and has a larger statewide energy sector concentration than Texas.

Lastly, my home state of North Dakota has seen a recent boom. Near term, the state used a conservative $80/barrel price for forecasting, and debt from the state remains so rare that it offers very little by way of ripple effect to the market. Even among these four energy-centric states, the fundamental story is quite different.

Beyond states, we continue to monitor how oil may carry into other sectors.

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Clickbait headlines aren’t fooling website users

Stocks were poised to pare early-day losses but fell again shortly before the closing bell sounded. Today’s session began with oil prices and Russia’s currency dropping to record lows. While oil staged a recovery by the day’s end, Russia’s future remained uncertain after emergency rate hikes from the country’s central bank failed to pare steep sell-offs. Stateside, investors are watching for signals about the potential for U.S. rate hikes as the Federal Reserve wraps up its policy meeting tomorrow afternoon.

The Dow dropped 111 points, with 23 of its 30 components retreating; the S&P 500 Index fell 16 points; and the Nasdaq lost 57. Decliners led advancers by four to three on the NYSE and five to four on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $13.40 to close at $1,194.30 an ounce. The price of crude oil, which has fallen nearly 50% since June, reversed course to gain 2 cents and settle at $55.93 a barrel.

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Will crude oil rout trigger a market correction?

Oil pipelineSummary

  • I think the drop in oil since June and in the S&P 500 Index from its November high represent a relatively slow deflating of a bubble in low-quality energy names, and the setback to the broader market is likely to be limited.
  • The Federal Open Market Committee (FOMC) will, in my view, continue to exercise caution and patience when it comes time to raise its target for the federal funds rate.
  • While a correction is possible, I think it would be relatively tame—at least, as far as corrections go—with a downside of around 1,850.

Oil is down 40% since June, and the S&P 500 Index has dropped nearly 4% from its November high. Energy stocks are down the most, which stands to reason, as the drop in price is likely due to more than increased demand resulting from lower prices. Within the high-yield bond market, energy-related names have suffered, though the wreckage has spread to other nonenergy-related names. I think this is a (relatively) slow deflating of a bubble in low-quality energy names, and the setback to the broader market is likely to be limited.

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Outlook 2015: Part 2— follow the shift from U.S. to foreign growth (video)

Capital Market Strategists John Manley, Brian Jacobsen, and Jim Kochan with Wells Fargo Funds Management, LLC, help investors follow the shift from U.S. to foreign growth and understand what opportunities that may represent.

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Cognitive biases and holiday discounts

Following one of the worst weeks for stocks in years, sinking oil prices continued to exert a downward drag on the markets. Industrial production was unexpectedly strong in November, but weakness began to crop up in the New York region.

The Dow fell 99 points, with 25 of its 30 components retreating; the S&P 500 Index slipped 12 to fall below 2,000; and the Nasdaq dropped 48. Decliners led advancers by three to one on the NYSE and five to two on the Nasdaq. The prices of Treasuries were mixed, with the 30-year weakening and the 10-year strengthening. Gold futures fell $14.80 to close at $1,207.70 an ounce, and the price of crude oil continued its slide, sinking $1.90 to settle at $55.91 a barrel.

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Are oil prices greasing the skids of deflation?

Manley on the StreetThat’s Right – You’re Wrong; 1939 movie starring Kay Kyser

“Fasten your seatbelts; it’s going to be a bumpy night.” —All About Eve, spoken by Bette Davis

I published a blog post several weeks ago that wondered aloud if we might be in store for an echo of the equity market’s experience in 1984. That was the year that saw the last real inflation scare to hit stocks. It came as the Federal Reserve (Fed) allowed the economy to emerge from a deep recession, and some data indicated very strong (perhaps too strong) growth in the United States. The thought process was simple: “If inflation weren’t dead but only sleeping, it would rear its ugly head once the constraints of recession were removed.” It was an elegantly simple thesis that could not be disproved but only tested. It was also dead wrong. Inflation was moribund, and after a few maneuvers by the Fed, markets moved substantially higher over the next several years to celebrate its demise.
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Japan’s election: 2013 all over again?

Japan’s Prime Minister Shinzo Abe received a tremendous vote of confidence as his Liberal Democratic Party (LDP) won a commanding lead in Japan’s lower house of parliament. The elections, called by Abe after a sales tax increase in April dipped the economy into a recession, should make it easy for Abe to move forward with reforming the agricultural and health care sectors while also ushering in important changes to corporate governance laws. Along with the LDP’s coalition partner, the Komeito, the lower house of parliament can override any veto from the upper house of parliament, making it easy to push forward with reforms.
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Falling oil prices spook stocks but boost consumer confidence

The International Energy Agency revised its 2015 forecast and said that global oil demand will be lower than previously expected. The announcement increased investors’ concerns about the global economy and sent markets sharply lower.

The Dow lost 315 points, with all 30 of its components declining; the S&P 500 Index fell 33; and the Nasdaq was down 54. Decliners outpaced advancers by nearly three to one on the NYSE and by nine to four on the Nasdaq. Treasury prices strengthened. Gold futures dropped $3.10 to close at $1,222.50 an ounce, and the price of crude oil slid $2.14 to settle at $57.81 a barrel, its lowest level since May 2009.

For the week, the Dow declined 3.70%, the S&P 500 Index decreased 3.46%, and the Nasdaq fell 2.66%.

In Earnings News:

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Bad bots bilk brands to the tune of billions

Fueled by strong retail sales data, stocks bounced back from yesterday’s sell-off but ended the day with pared gains, thanks to slumping oil prices. The Dow rose 63 points, with 24 of its 30 components advancing; the S&P 500 Index gained 9 points; and the Nasdaq added 24. Advancers led decliners by four to three on the NYSE and by three to two on the Nasdaq.The price of the 30-year Treasury strengthened, while the price of the 10-year Treasury weakened. Gold futures fell $3.80 to close at $1,225.60 an ounce. The price of crude oil fell 99 cents to settle at $59.95 a barrel, slipping below $60 a barrel for the first time since 2009.

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