NEW$ & VIEW$ (30 OCTOBER 2014)

Today: Fed down, Fed up. China, Europe, oil and equities.
Fed Closes Chapter on Easy Money The Federal Reserve said it would end its long-running bond-purchase program, concluding a historic experiment that stirred disagreement among policy makers, economists and investors about its impact.

(…) “There has been a substantial improvement in the outlook for the labor market since the inception of [the] current asset-purchase program,” the Fed said in its policy statement, released Wednesday after a two-day policy meeting. “Moreover, the [Fed] continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability.” (…)

If all goes as they expect, officials will now turn their attention in the months ahead to discussions about when to start raising interest rates and how to signal those moves to the public before they happen. For now the central bank stuck to an assurance that it will keep short-term interest rates near zero for a “considerable time.” (…)

Twice before officials declared they would stop printing new money to buy bonds, only to restart the process when growth, hiring and inflation appeared to sag. (…)

Underscoring its own uncertainty, the Fed’s official rate assurance included a new qualifier about the economic outlook: If the job market improves more quickly than expected or inflation rises, rate hikes could come sooner, and it could wait longer if the job market or inflation slow. (…)

Officials noted “solid job gains” and said labor-market slack is “gradually diminishing,” signs of economic vigor that might spur early rate increases. Since July the Fed had been saying it saw “significant” slack, a phrase it struck this time around.

But Fed officials also noted falling energy prices and downward pressure on market expectations of inflation, signs of low inflation that give them leeway to wait before raising rates. Inflation has been running below the Fed’s 2% target for more than two years. (…)

Critics of the Fed for years have argued the strategy risked stoking inflation, devaluation of the dollar and market distortions.

The worst fears about bond buying haven’t come to pass. Inflation, as measured by the Commerce Department’s personal consumption expenditure price index, has been unchanged at 1.5% since September 2012. The dollar, as measured by the Fed’s broad dollar index, is up 6.7% in value compared to the world’s other currencies. Meantime, the price of gold, which some investors believe should rise when inflation fears pick up, has fallen from $1730.60 per ounce to $1229.20, a 29% decline. (…)

Fed officials say they are prepared to use bond buying again, but disagree about the circumstances that would warrant it. (…)

The U.S. dollar rose in early European trade Thursday, after the Federal Reserve met expectations by calling an end to quantitative easing, but caught the market off guard as it adopted a more optimistic tone on the economy, leading some strategists to bring forward forecasts for a first rate rise.


China Backs Growth in Housing Again as Slowdown Prompts U-Turn With China headed for its slowest full-year expansion in a generation, the government has listed housing as one of the six consumption areas to be encouraged after years of trying to cool the property industry.

(…) China will “stabilize” property-related consumption and make it easier for people to access mandatory housing savings, the State Council said in a statement late yesterday after Premier Li Keqiangpresided at a regular meeting.

The last time China’s State Council documents mentioned “stabilizing” housing consumption was in April 2009, when the government was rolling out a massive stimulus plan to shield the economy from a global slowdown. (…)

“The announcement marks a U-turn in stance towards the property sector after years of attempts to cool it down,” Dariusz Kowalczyk, a Credit Agricole CIB strategist in Hong Kong, wrote in a note today.

It’s the first time in recent years that the central government officially declared direct support for the housing market, according to Credit Suisse Group AG. (…)

The Chinese government, which started tightening lending to property developers and buyers in April 2010 to prevent asset bubbles from expanding, has also signaled plans to reverse course on home financing, with the central bank on Sept. 30 relaxing mortgage rules for homebuyers who have paid off existing loans.

“The government’s stance on the property market has changed to encouragement from caution,” said Johnson Hu, a Hong Kong-based property analyst at CIMB Securities Research. “It realizes the importance of real estate consumption. Most cities no longer need curbs on housing-price increases.”

Consumption is an “important engine of economic growth,” the Cabinet said yesterday, adding that the government will also support e-commerce, environment-friendly products and tourism. It didn’t provide details.


PBoC loosened mortgage policies on September 30th in order to stabilize the property market. During the National Holiday, sales did increase by 14% and 21% Y/Y when compared to 2013 and 2012 respectively. We expect that successive loosening of property policies will help stabilize property sales further. (CEBM Research)

  • Sluggish Demand for Excavators Continued in September

According to the Chinese statistical database Wind, China’s excavator sales in September fell -33% Y/Y to 4,599 units, a result of limited new projects. In the
first 9 months of 2014, total excavators sold amounted to 76,533 units, down 15% Y/Y (-14% YTD in August and -13% YTD in July). Loader sales in June were 10th, indicating -24% Y/Y growth. (CEBM Research)

German Jobless Numbers Fall

In seasonally adjusted terms, the number of jobless fell 22,000 in October, data from the country’s labor agency showed Thursday, in contrast to the expectations of analysts polled by The Wall Street Journal last week, who saw the jobless numbers rising by 2,000.

The seasonally adjusted jobless rate remained unchanged at 6.7%, the Nuremberg-based labor agency said.

Merkel Proposes Curbing Unions as Strikes Cripple Germany

Merkel’s government, in a proposal released this week, is pushing to limit the role of smaller labor groups in wage negotiations.

“We are observing a tendency for strikes by small unions with big consequences that result in many, many people suffering,” Merkel told reporters. “We’ve made the decision” to change the law to limit collective-bargaining power to one party per business, she said.

Even before this year’s strikes, which include walkouts by Inc. (AMZN) workers, labor unrest in the country has been rising. The number of companies hit by industrial action soared in 2013 to 1,384, the highest in two decades, according to data published by the Federal Labor Agency. While unions say they’re pushing for pay gains to make up for stagnating household incomes, companies argue they can’t afford higher wages as Europe’s biggest economy flirts with recession. (…)

The number of German workers participating in walkouts in 2013 stood at the highest in five years, while working days lost were the most in six years, according to Federal Labor Agency data. Unions argue raises are necessary because wages have been flat. Adjusted for inflation, household incomehas not risen between 2006 and 2012, according to the Hans-Boeckler-Foundation, a labor-affiliated organization. (…)

German exports to Russia tumble

In August, Germany exported goods to the value of €2.3bn to the Russian Federation, a decline of 26.3 per cent on August 2013, Germany’s federal statistical office said on Wednesday.

Between January and August 2014, German exports to Russia declined by 16.6 per cent to €20.3bn compared with the same period a year earlier. (…)

The US and Canada imposed sanctions, too, and both have seen sharp drops in arrivals from Russia.

Before the Ukraine crisis, the number of Russian trips to the US had been growing substantially – up 36 per cent in January compared with the same month in 2013, and by 30 per cent across the first three months of 2013.

But growth in trips to the US slowed in the second quarter to13 per cent. Russian arrivals in Canada deteriorated even further. In July arrivals were down 17 per cent.

In Europe, Poland, Italy, Germany and Spain suffered a sharp fall in arrivals. Before the annexation of Crimea, Russia was becoming one of Europe’s most important source markets, accounting for 6 per cent of all arrivals in the continent, said Oxford Economics.

Turkey, Greece and Cyprus, however, decided against imposing sanctions and all three countries saw an increase in Russian tourists. (…)

Russia is the fourth most important export market for German machinery manufacturers, many of which are small and medium-sized. (…)

The data released on Wednesday show that exports of German motor vehicles and vehicle parts were hardest hit, dropping 27.3 per cent between January and August, compared with the same period in 2013.

Exports of machinery dropped 17.2 per cent and chemical products dropped 5.9 per cent.

Although Russia accounts for less than 3 per cent of Germany’s exports overall, the crisis – coupled with a slowdown in other emerging markets – has rattled German business confidence. (…)

Fingers crossed ECB’s Lending Survey Is Cause for Cautious Optimism

Demand for loans was positive across all three categories in the three months to October. The figure for non-financial corporations stands at six. That for home
purchases is 23 and for consumer credit is 10. Those figures are the differences between the sum of the percentages of banks reporting an increase and those of
banks reporting a decline in demand. That demand has coincided with an easing of lending standards by banks, a development that may continue in the months ahead with lenders having put the ECB’s first comprehensive assessment behind them.

Loans to non-financial corporations, adjusted for sales and securitization, declined 1.8 percent year over year in September and the equivalent figure for households rose only 0.6 percent, according to data released by the ECB on Monday. The country breakdown suggests those aggregate figures hide some bad news, especially from Italy. The demand figures for loans for businesses and those for consumer credit both stood at minus 13 for the nation.

Net demand for loans for fixed investment stood at minus six in the most recent survey. (…)  Net demand for loans for fixed investment stood at minus 20 for Spain, minus 13 for Italy and minus 14 for the Netherlands.



Nerd smile Now that the EU bank stress test is past, EU banks may be more willing to let the denominator (i.e. loans) grow. Bankers are not completely stupid. Why would they risk failing the 2014 stress test by allowing loans to rise just before the test? The big question now is not whether loans rise but rather how fast.

OPEC Chief Says Output Likely to Stay Unchanged OPEC’s oil output is likely to remain around the same level next year as it has this, despite the recent sharp slide in global oil prices, its secretary-general said.

OPEC’s oil output is likely to remain around the same level next year as it has this, while the group is unlikely to cut the ceiling on its production at a meeting next month despite the recent sharp slide in global oil prices, its secretary-general said Wednesday

“I don’t think 2015 will be far away from 2014 in terms of production,” Abdalla Salem el-Badri told reporters on the sidelines of an industry conference in London. (…)

Mr. el-Badri said the ‘call’, or likely demand for OPEC oil next year would likely be between 29.5 million and 30 million barrels of oil a day next year, roughly the same as this year. (…)

Mr. el-Badri said oil price weakness would likely hit output of shale oil hard, suggesting OPEC expects oil’s weakness to eventually temper supply growth.

“At this [current] price, 50% of tight oil will be out of the market,” he said. (…)

Some analysts now believe oil prices will only recover when some of the extra shale oil supply starts to be removed from the market, rather than when and if OPEC decides to start cutting production.

Mr. el-Badri said tight oil projects typically need oil prices at $90 to $100 a barrel a day to break even. OPEC’s estimate of the price at which such projects become uneconomic is higher than most in the industry, including that of the International Energy Agency which says most tight oil production is sustainable at $80 a barrel.

Mr. el-Badri said, however, that the impact of lower oil prices on supply would only start to be felt next year as shale oil-producing companies would have hedged themselves against the price drop in the near-term. (…)

High five Wait, wait:

Energy Boom Can Withstand Steeper Oil-Price Drop Oil prices would need to fall at least another $20 a barrel to choke off the U.S. energy boom, industry experts say, though some smaller American producers would face serious problems from a more modest decline.

(…) Abdalla Salem el-Badri, OPEC’s secretary general, predicted Wednesday that if current prices hold, half of the U.S. oil that is fracked from shale formations will be uneconomic, leading companies to stop producing it.

That view is at odds with most U.S. forecasters, who say output can remain steady at current prices because companies have cut their costs by finding ways to produce oil more efficiently. For example, the amount of oil coming from each new well in South Texas has nearly doubled since 2012, federal data show.

Marianne Kah, chief economist of ConocoPhillips , said oil prices would need to fall to $50 a barrel “to really harm oil production” in U.S. shale basins. She said 80% of the American shale sector—in which ConocoPhillips is a major operator—is profitable at prices between $40 and $80 a barrel for benchmark West Texas Intermediate crude.

Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, said he believed prices would have to fall much further to put significant pressure on the U.S. energy boom. “I am not sure if $80 is enough,” he said. “You might need $60 or $65 to really see a stress test.”

Occidental Petroleum Corp. ’s chief executive said last week that he saw plenty of drilling opportunities in the Permian Basin in West Texas at current prices. “We think there’s a lot of economic oil at $75,” Steve Chazen said on a call with analysts. “Do I think there’s a lot of economic oil at $50? No, I don’t.”

The Permian, where U.S. drilling activity is heaviest, will be profitable for companies to drill at U.S. oil prices of $57 to $75 a barrel, depending on location, according to research from Robert W. Baird & Co. As a result, companies active there, such as Chevron Corp., Apache Corp. and Pioneer Natural Resources Co., are likely to keep drilling.

The Eagle Ford Shale, located farther south in Texas and home to Marathon Oil Corp. ,Anadarko Petroleum Corp. and EOG Resources Inc., would remain economic at even lower prices—$53 to $65, according to Baird. North Dakota’s Bakken Shale, which is the focus of companies including Continental Resources Inc., Whiting Petroleum Corp. and Hess Corp. , comes in at $61 to $75 a barrel.

High five To be sure, even small price drops could begin to affect production around the margins. “The clear losers in a low-price environment are going to be smaller companies that are overleveraged,” said Daniel Katzenberg, a Baird analyst. The downturn will be particularly tough on companies drilling in areas without much history of oil production. Costs tend to be high in these areas, which include the Tuscaloosa Marine Shale in Louisiana and Mississippi and some relatively unexplored shale formations in Oklahoma. (…)

Pointing up “If you didn’t overpay for acreage, you will get by just fine,” said Ken Morgan, director of the TCU Energy Institute at Texas Christian University in Fort Worth. “But if you paid an arm and a leg to get in the game, banking on $95 oil, there could be trouble and significant belt-tightening ahead.”

Even so, companies have strong incentives not to dial back on drilling. They are likely to be reluctant to let go of their well-site crews after training them to operate efficiently.

And nobody wants to be the first to cut production, a move that would help competitors. “If you think it’s hard to get 12 OPEC nations to act in concert, try getting thousands of independent operators to agree to react to lower oil prices,” said R.T. Dukes, a senior analyst at Wood Mackenzie.

Many companies have hedged their oil production, ensuring a good price for part of it. And energy producers’ debt typically isn’t due for several years. (…)

Punch Lower commodity prices always result in supply curbs. It is always the marginal producer who is forced to cut as margins and financing quickly disappear.

Thumbs down Poloz says Canada’s economic growth at risk if low oil price persists

Looking at month-end data, nothing really happened in October. The 200-day m.a. held and keeps rising along with earnings (chart from Ed Yardeni)

Stock Rally Leaves Technical Analysis in the Dust There are times when technical analysts can do little but watch the price action. The past two weeks have been one of those times.

(…) “Resistance hasn’t mattered,” he wrote, “being stretched hasn’t mattered; and high profile earnings misses have not mattered. What has mattered is a persistent bid that has shown no signs of slowing down (yet).” The S&P 500 has jumped 9% in less than 10 days, and while the market has seen six separate 9% rallies since November 2012, none have come this quickly, Mr. Cappelleri noted.

Yesterday was a particularly strong day, he noted. The S&P 500 hit two key technical markers: It regained its 50-day moving average in the morning, and hit hit 1978 in the afternoon, around 3 p.m., a number that completed a “head and shoulders” pattern. The last hour saw buying explode.

It wasn’t just the S&P 500 that enjoyed the benefits. The Dow Transports have hit new highs on Tuesday. Just two weeks ago traders and investors were looking at the airlines, looking at the Ebola headlines, and putting two and two together. “The index has tacked on 13.9% since then,” he noted, and the Russell 2000 added nearly 3% just yesterday.

What about now? Do the charts tell Mr. Cappelleri anything about where the market’s going? Well, those two key technical markers having been hit, there isn’t much upon which traders can key, he said. “They are behind us, leaving no live formations to key off of. That and support being light means that we should be prepared for the expected volatility in the day’s final two hours.”

What about now?

  • Earnings are coming in more than OK with 69.0% of the S&P 500’s market cap (299 companies) having reported. RBC Capital says that so far, earnings are beating by 4.5% while revenues have surprised by 0.8%. Expectations for Q3 keep rising and are now for revenue, earnings, and EPS growth of 4.2%, 7.2%, and 9.3%,
  • Guidance has not worsened, so far anyway.
  • The Fed has acknowledged that the U.S. economy looks better, in spite of China and the EU.
  • Interest rates have declined thanks to China and the EU.
  • The dollar is strong.
  • Core inflation has slowed a little from 1.7% to 1.5%.
  • Total inflation will slow materially in coming months thanks to falling oil and commodity prices.

Trailing EPS are likely to reach $114.50 after Q3. With inflation at 1.5%, the Rule of 20 says that fair P/E is 18.5 = 2118 on the S&P 500 Index, 7.2% above this morning’s apparent opening of 1975.image

China Opens Door on Credit Cards China is taking a step toward easing its grip on credit cards, potentially allowing foreign companies like Visa, MasterCard and other electronic payment processors to have a greater presence there.

The State Council, the nation’s cabinet, said in a statement on the main government website late Wednesday that qualified domestic and foreign firms can apply to set up bank card-clearing operations, a process that involves settling payments between banks and vendors. (…)

Currently, China UnionPay Co. has a near monopoly on processing and clearing yuan-denominated payments made via bank cards and credit cards. The state-controlled firm has close ties to China’s central bank. In an email, a spokesman from China UnionPay said that the company “welcomes competition” and “supports and will implement the decision to open up access to the bank card clearing market.”

Plastic from Visa, MasterCard and American Express Co. already is accepted in China and those companies process transactions there if they are made on cards that are issued by banks from another country. But Chinese banks aren’t able to issue cards with U.S. card processors unless they also are branded with China UnionPay. (…)

The move came as a surprise to card executives in the U.S., according to a person familiar with the situation.

Although the U.S. players would welcome the chance to enter the Chinese market, it likely will take some time for that to happen. Terms of any acceptance by U.S. companies haven’t been disclosed, such as whether firms such as Visa and MasterCard would have to apply for a license in China. (…)

Meanwhile, UnionPay has grown increasingly strong and is potentially in a position to withstand the imminent arrival of competition from overseas. It has expanded globally, and its tricolor logo has become more common on ATMs and sales counters around the globe, meaning Chinese consumers can use the same card at home and abroad. (…)

Ninja Nato jets intercept Russian aircraft ‘Significant military manoeuvres’ conducted in past 24 hours

More than two dozen Russian military aircraft, including six nuclear bombers, have conducted “significant military manoeuvres” on the edges of Nato and European airspace since Tuesday, causing jets to be scrambled from eight countries as well as Nato’s own Baltic air policing force.

The incidents – three of which occurred on Wednesday and one on Tuesday – followed last week’s violation of Nato airspace by a Russian spy plane, the first since the end of the cold war. Taken together they constitute the most serious air provocation mounted by the Kremlin against the alliance this year, if not in more than a decade, according to Nato officials. (…)

The most significant intercept on Wednesday occurred in the North Sea. A force of eight Russian aircraft, including four Tu-95 long-range strategic nuclear bombers and four refuelling aircraft, were detected flying in formation at about 3am central European time flying from mainland Russia over the Norwegian Sea.

Six aircraft turned back, but two bombers continued southwards, close to the Norwegian coast and followed by F16s sent to intercept them by the Royal Norwegian air force. When the Russian aircraft then turned over the North Sea, RAF Typhoons were scrambled to intercept as they approached UK airspace. Portuguese fighters were later deployed as they came near the Iberian peninsula.

The aircraft did not file flight plans, had turned off their transponders and did not respond to any radio calls from civilian or military controllers.

Simultaneously, jets from the Nato Baltic Air Policing mission based at Šiauliai in Lithuania had to be scrambled to intercept a force of seven Russian fighters, including two MiG-31 Foxhounds, two Su-34 Fullbacks, one Su-27 Flanker and two Su-24 Fencers.

Turkish jets were also sent up to monitor two Russian strategic bombers escorted by two Russian fighter jets approaching their airspace from across the Black Sea.

On Tuesday, German, Danish, Finnish and Swedish jets had to be scrambled to deal with another big incident in the Baltic, instigated by a force of seven Russian jets identical to that a day later.

Though the Russian jets had filed a flight plan, and were using transponders, they kept radio silence with air traffic controllers despite attempts to contact them, according to Nato. (…)

NEW$ & VIEW$ (29 OCTOBER 2014)

Today: Capex are clearly rising in the U.S. Earnings beat but oil will bite in Q4.

Weak Durable-Goods Orders Stir Concerns on Growth

Orders for durable goods fell 1.3% in September from the prior month to a seasonally adjusted $241.63 billion, the Commerce Department said Tuesday. It was the second straight monthly decline. Economists had expected a 0.7% increase.

A key measure of business investment in the report suggested worries about global growth could be weighing on U.S. businesses. Orders for nondefense capital goods excluding aircraft, a proxy for spending on equipment and software, fell 1.7% in September. (…)

Thumbs up Thumbs down Some economists lowered their forecasts for growth in the third and fourth quarters based on Tuesday’s report on durable goods. TD Securities now expects third-quarter growth of around 3.2%, down from an earlier estimate of 3.5%, and fourth-quarter growth of between 2% to 2.5%. The forecasting firm Macroeconomic Advisers raised slightly its forecast of third-quarter GDP growth to 3.6% from 3.5% based on shipments data in the durable-goods report, but lowered its fourth-quarter forecast to 2.4% growth from 2.7%.

Punch This is an important but highly volatile stat that moves in spurts. Monthly data declined in 5 of the first 9 months of 2014 but the total increase so far this year is +8.1% (10.8% annualized). Last 4 months: +3.9% (+12.2% annualized). Capex is growing very nicely in the U.S.



U.S. Earnings Reassure as Growth Lags America’s companies have a message for markets: Don’t panic yet. Though growth remains weak, the largest U.S. companies as a group are reporting better earnings.

(…) the largest American companies as a group are reporting better third-quarter earnings, thanks in large part to rising demand in the U.S. for everything from beer cans to trucks to heating and cooling systems. (…)

Third-quarter earnings are expected to rise 8.1% from the same period a year ago for the 500 largest U.S. companies by stock-market value, according to Thomson Reuters. That reflects actual results from half of those companies and estimates for the rest. It would be the strongest third-quarter growth in three years, though slower than this year’s second quarter. Revenues, meanwhile, are on track to rise 3.8%. (…)

Executives at other companies have also pointed to signs of rising demand in the U.S. such as improved employment, a rebounding housing market, and even indications that consumer confidence is returning. That momentum is expected to continue into the fourth quarter, boosting earnings again even as revenue growth slows slightly, according to Thomson Reuters. (…)

Colgate-Palmolive Co. , which makes toothpaste, pet food and other products, predicted accelerating U.S. demand, and Southwest Airlines Co. said bookings for November and December were good, with no apparent harm from concerns over Ebola or the economy. Flowserve Corp., which makes pumps and valves for the energy and other industries, said Friday that it expected North American refinery upgrades, pipeline construction and other activity to remain strong, despite lower oil prices.

It isn’t all roses. Companies like telecom giant AT&T Inc. and drug maker Merck & Co. reduced sales targets for the year, and crane maker Terex Corp. lowered its earnings forecasts for the rest of the year. Those offering guidance for next year’s profits present a mixed picture: Nearly as many had lowered projections as had raised them, according to Wells Fargo analysts on Monday. And U.S. retailers, many of which have yet to report results, remain under pressure. Discounter Family Dollar Stores Inc. said it faced fewer store visits and more sales of low-margin food, tobacco, laundry detergent and other consumable merchandise, though average transaction values rose.

Stagnation in Europe and slower growth in China are tempering forecasts, as is the stronger dollar, which makes American products less competitive and lowers the dollar value of overseas sales. The tone also reflects life during a slow recovery now entering its sixth year in the U.S., in which even good news can be anticlimactic. (…)

Optimism about U.S. demand was often tempered by concerns about other regions.(…) Improved business activity in the U.S. was evident in reports from transportation and shipping companies. United Parcel Service Inc. called third-quarter business-to-business deliveries the strongest in several years and said it expects shipments in December to rise 11% from last year’s already frenzied pace.

Railroad CSX Corp. expects stable to favorable demand in the fourth quarter in 96% of its markets. The company expects coal shipments to increase as utilities build up winter inventories, oil and gas shipments to hold up, and demand to remain strong for building products and for metal in the energy and automotive industries. (…)

Meantime, AutoNation Inc. on Tuesday predicted further growth in car and light truck sales into next year as retail sales of new and used vehicles rose 8% during the third quarter. Alcoa Inc., the aluminum giant, cited strength in the North American market for heavy trucks and trailers as well as improving demand for beer in cans. (…)

ISI says that estimates are now for Q3 EPS rising 6.2% YoY, up from +4.1% on Oct. 10 and +5.2% on Oct. 17. But RBC Capital’s tally as of yesterday night suggests +9.0%:

  • This season revenues and earnings have beaten by 0.8% and 4.3%, respectively. While large companies tend to have the greatest impact on the beat rate, strength appears broad based. With 267 companies reported, 200 (~75%) have surprised to the upside on earnings.
  • 64.8% of the S&P 500’s market cap has reported. Expectations are for revenue, earnings, and EPS growth of 4.0%, 6.8%, and 9.0%, respectively. Assuming an historical beat rate, EPS is on track to come in near 10%.

Note that this is in spite of a 7.8% YoY decline in commodity-sensitive companies’ EPS so far in Q3. The 12 U.S. energy companies that had reported 2 days ago showed a 28% YoY increase in EPS as the drop in oil prices will really only bite in Q4.

Energy groups bruised by oil price tumble Drop in cost of crude by 25% since June bites into profits

(…) The effect could be even greater in the final quarter, since the oil price has been falling more sharply since the end of September than it did in the three prior months.

Crude has dropped 25 per cent since mid-June, driven lower by surging supplies of shale oil from the US and a slowdown in global demand, particularly in China, the world’s second-largest petroleum consumer.

Some are predicting that it could fall even further. Goldman Sachs forecast on Sunday that oil will average $85 a barrel in the first quarter of 2015, down from an earlier forecast of $100. Brent, the international benchmark, was trading up 22 cents on Tuesday at $86.06 a barrel.

Instead of reducing output to boost prices, some members of Opec, the oil producers’ cartel, which gathers next month for a hotly-anticipated meeting, have been discounting exports in order to defend market share.

“We are going to wait until Opec has met and until we are significantly through the fourth quarter before taking definitive action,” Mr Gould said, referring to future spending plans.

The price fall has been a boon for consuming nations, especially the US. The International Monetary Fund has said that a $20-a-barrel oil price decline could translate into a 0.5 per cent increase in world gross domestic product: if economic confidence were improved as a result, that figure could rise to 1.2 per cent.

But for oil producing nations, it is bad news. Mexico was forced to redraft part of its 2015 budget after the price fall upended its revenue assumptions. The economies of Brazil and Russia have also been badly hit by the slump.

BP reported that underlying replacement cost profit, analysts’ preferred measure of performance, fell 19 per cent to $3bn in the three months to September, compared with $3.7bn a year ago.

At BG underlying earnings fell 29 per cent to $759m in the three months to September, from $1.07bn a year earlier, in part due to lower production in Egypt and Kazakhstan.

BP’s Mr Gilvary insisted the company’s balance sheet “can more than comfortably handle a period of $80 a barrel (oil)”. “We have a lot of flexibility to withstand low oil prices,” he said. BP’s strategy was aimed, he added, at providing “resilience through periods of oil market volatility”.

But he stressed that $80 a barrel was the threshold at which BP typically sanctions projects, in an indication that any further slide in prices could impact its future investments.

BP also said there were some advantages in the low oil price. Leasing rates for rigs in places like the Gulf of Mexico could fall, easing cost pressures on big oil companies. “I think a period of $80-$85 a barrel offers more opportunities for us than threats,” Mr Gilvary said, adding that these could include asset acquisitions.

Why the Drop In Oil Prices Caught So Many By Surprise It’s not just Wall Street banks such as Goldman Sachs Group Inc. that got it wrong. Energy consultants and even the U.S. government didn’t foresee the sharp slide in oil prices, which have tumbled 25% since June. What did they miss?

(…) The risk of discord within the Organization of Petroleum Exporting Countries and the possibility that violence in some oil-producing nations wouldn’t interfere with oil production.

For the past three years, oil production in the U.S. has been booming but Brent, the global oil benchmark, has largely held above $100 a barrel. That’s because sanctions on Iran and unrest in Libya, Nigeria and elsewhere kept oil off the market, allowing supply and demand to stay balanced even as U.S. production grew. Heading into this year, it looked like a pretty good bet to assume that supplies outside the U.S. would stay constrained, and many analysts called for Brent to hold above $100 again in 2014.

This summer, those assumptions fell apart as Libyan production came roaring back, Kurdish output looked set to rise and Iraqi exports held steady despite an insurgency. At the same time, weak demand in China and the eurozone came into view. The combination of these factors pressured prices lower.

Then, the widely shared assumption in the oil market that OPEC would collectively cut production to keep prices high started to look shaky. Saudi Arabia, the world’s biggest oil exporter, has indicated in recent weeks that it is comfortable with a lower oil price, and prices have fallen in response to these signals. (…)

The U.S. Energy Information Administration was also caught by surprise. The agency, which releases month-by-month forecasts, called for Brent to average $102 a barrel this month in the forecast released in December. By July, the EIA was saying that Brent would average $110 a barrel in October. In its latest forecast, released Oct. 7, the EIA settled on a $97 a barrel average for this month.

But as EIA Administrator and former Deutsche Bank analyst Adam Sieminski joked in a presentation in New York last week, his forecasts have been right only about 60% of the time.

Brent is currently trading around $86 a barrel and has averaged $88.42 a barrel so far this month, according to Factset.

Call me Well, they were also all wrong on most other commodities. But don’t worry, there are very good reasons for all these wrong calls…

Bloomberg’s Rick Yamarone:

The Economist had a series of interesting commentaries this past week, with the article on the winners and losers of cheap oil especially insightful. After
reading this, I made a few calls to experts in the oil, energy and drilling sectors, and I now believe that the price of oil could return to $65 per barrel. Global conditions
are deteriorating, demand is waning and supply is growing. The economics argue for cheaper oil.

We shall see…

Confused smile The ‘Other’ Recession Indicator Is Flashing Red

As Evergreen Gavekal notes, the ratio of coincident-to-lagging conference board indices has an admirable record as a recession forecaster… and is at its lowest level since Sept 2009.

Tell me, how long did you really look at that chart and what did you see that supports Gavekal’s statement that this indicator has an “admirable record as a recession forecaster”.

If there is one thing this admirable chart forecasts is the end of recessions…