From everyone at Treece Investment Advisory Corp., we hope that you all are enjoying your holiday season. While this is a time for friends, family and celebration, it also markets a time when the year is coming to a close and the markets are looking towards 2015. We decided to pick a handful of sectors and events to discuss that we feel are of great importance going into the New Year.
The last 12 months have been a rough ride for those in the energy sector, with prices dropping from near $110 to almost $60, a 45% drop in less than a year. As with any event of this magnitude, there is a positive side and a negative side. The positive is that lower oil prices mean lower gas prices, which in turn mean more money back in consumers’ pockets which can help provide a boost to the economy if that money is spent elsewhere. The downside is that when oil prices drop, producers see their profit margins shrink or evaporate altogether, which could result in a consolidation within the industry and could have a negative impact on unemployment. We will continue to monitor the economics and geopolitical factors behind the oil market moving forward. We do not expect oil prices to remain in the $60-70/barrel price range for an extended period of time, and distressed prices may very well present buying opportunities down the road.
Just when you thought bond yields could not drop any lower, they have. As we draft this letter 30-year treasuries currently sit just below 2.9%. Before the year is out, the Federal Open Market Committee (FOMC) will have a meeting in which they expect to discuss interest rate policy and whether they plan to maintain low rates or allow the market to dictate rates. Should rates begin to rise, we believe that they will rise rather abruptly (think early 1980’s). How high they will go remains to be seen, but the Fed cannot allow rates to rise too quickly given the value of the USD. Rising rates signifies strength in a currency, and seeing as the $USD is up over 10% in the last year, a rise in rates would surely have a negative impact on the United States’ balance of trade. Once target inflation of 2% is reached or surpassed and the $USD corrects, we expect to see rates move higher.
It has been quite a ride for the metals markets this year. There have been rampant rumors about the market being manipulated in the futures and options arena, the US driving down the price of gold to hurt reserves of our competitor nations and increase the value of the dollar. While all of these theories have merit, they are not necessarily facts. An interesting trend is that the $USD and gold bullion are both up this year, over 10% and 2% respectively. We take note of this fact as typically (although not always) these 2 values vary inversely. This demonstrates that even with a strong dollar, there is demand for gold and other precious metals. Unfortunately, mining stocks have suffered during this last volatile year in metals. We believe that given how far mining stocks have fallen in 2014 relative to the positive returns of gold bullion YTD, a buying opportunity may be presenting itself. (***Note Treece Investment Advisory Corp. has long positions in numerous domestic and foreign companies involved in precious metals mining).
Major Equity Indexes
We have made no secret that we believe large cap equities are overbought, and with the Dow and S&P 500 hitting all-time highs on several occasions this year certainly reinforces our stance. We believe that equities were driven higher by cheap money made available through TARP, QEs 1-3 and ZIRP policies. It has also become apparent that stock buybacks (companies purchasing their own stock) have been driving the markets higher to some degree. Equities are well overdue for a correction, which will not likely come until after the New Year. Advisors and brokers will “window dress” their portfolios by purchasing shares that have performed well over the last 12 months, and tax loss selling might drive some assets into new sectors. We believe that after January 1 the metals sector may be that area given the disparity between stock prices and bullion prices.
From everyone at Treece Investment Advisory Corp., we wish you a Merry Christmas and a Happy Holiday season!