Oil barrelsgdas/Getty Images/iStockphoto
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
Twelve months ago I wouldn't have expected to see oil under $50 a barrel in my lifetime but that's nonetheless what we have this morning. With the oil price falling so much faster than any fundamental valuation metric, CME Group Chief Economist Bluford Putnam believes asset allocation changes by pension funds and other institutional investors are behind the strength of the sell-off in crude.
"During 2003-2010 there was a shift toward bullish energy allocations by institutional funds and retail investors. That trend has reversed, and it may have a year or more to run. Under this scenario, the price of oil can go well below any perceived fundamental supply/demand equilibrium, driven by long-term and evolving asset allocation decisions."
"Oil price lessons from 1983" – Euromoney
The Blackstone Group LP 's Byron Wien is one of the most revered figures on Wall Street and his annual list of potential market surprises is widely read every year. Mr. Wien's 2015 list is generally bullish on U.S. markets in the belief that even if the Federal Reserve raises rates too early, an accelerating economy will drive the S&P 500 higher by 15 per cent.
The surprise list is wide ranging, covering technology (he expects hacking will become a big problem) , Japan ("shock and awe no longer works") and oil. His expectations for China were, for me, the most jarring,
"China reports that it is no longer growing at 7% and that more fiscal and monetary stimulus is needed to grow at even 5% and to prevent a hard landing."
"Byron Wien Announces Predictions for Ten Surprises for 2015" – Blackstone.com
Global growth fears have pushed G3 bond yields under one per cent on average to the lowest levels ever recorded. Cited by FT Alphaville's David Keo, Citigroup's Steven Englander writes, "this is not happening during the panic phase of a crisis, but after the panic is over and we have had significant recoveries in asset prices globally. More a sign that investors think we are going nowhere for a long time."
"Your new average, 2015 edition" – FT Alphaville
At the end of 2014, which really wasn't that long ago, investors were being warned to prepare for higher North American interest rates. The conventional wisdom, however, is changing quickly. Jeffrey "the New Bond King" Gundlach and Bill "The Old Bond King" Gross have both suggested that the path for U.S. interest rates is flat or lower.
Mr. Gunlach, founder of DoubleLine Funds and manager of $60-billion (U.S.) is predicting that ten year Treasury yields will fall 75 basis points to 1.40 per cent in 2015 and Mr. Gross forecast yesterday that the expected rate hike by the Federal Reserve will be delayed until late 2015 at the earliest and likely 2016.
"The Consensus Is Wrong — Interest Rates Could Sink To Levels We Haven't Seen In Decades" – Business Insider
"BILL GROSS: The Fed Might Not Raise Rates In 2015" – Business Insider
"Bond king's outlook could be good news for Canada" – Barlow, Inside the Market
Bloomberg is describing a federal Chinese review of local government finances as "judgment day" for many municipalities. Local Government Finance Vehicles (LGFVs) have been a source of concern for a number of years, particularly by Nomura International Ltd economist Zhiwei Zhang. In what amounts to a massive vendor financing scheme, local governments have been lending money to real estate developers through LGFVs so the developers can purchase land from the government. Bloomberg reports,
"Borrowing costs soared by a record amount last month before today's deadline for classifying liabilities, on speculation some local government financing vehicles will lose government support after the finance ministry starts reviewing regional authorities' debt reports. Yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December."
In many cities where the federal government withdraws support, they will have a lot of trouble raising enough money to cover existing liabilities.
"China's Cities Face Judgment Day on Debts as Costs Soar" – Bloomberg
See Also: 'As China slows, metals prices take a hit" – Institutional Investor
Tweet of the Day: "@dividendmaster do you buffoons on @CNBC really think its just oil thats dropping? its copper , cotton , coal , nat gas , pork bellies.....its ALL commods"
Diversion: The Naked Gun movie came to life, "Here's what happens when a fireworks factory explodes" – Sploid
Scott Barlow