December 29, 2016

Stocks opened mixed this morning as the post-Christmas doldrums continue. The Dow and the S&P 500 are flat at the moment. Defensive sectors are leading (consumer staples, utilities, telecoms). The VIX Index is up 3% to 13.4. Gold miners are having a very strong day. But banks and semiconductors are lower. The US dollar is down a bit today but has been rising steadily since September. A stronger dollar usually means better economic growth but it also puts a damper on profit growth for US multi-national companies. So it will be a concern for 2017. Oil is retreating a bit from 17-month highs. WTI crude is hovering around $53.90/barrel. But the chart really sets up well and suggests oil could run up to $61/barrel in no time. Bonds are up on the day as yields retreat. The 5-year and 10-year Treasuries are trading at 1.98% and 2.49%, respectively.

The energy sector has staged quite a comeback this year. In fact, the S&P Energy Sector Index is up 24%. Crude oil touched $26/barrel in early 2016 and is now double that price. That has helped US oil companies to repair balance sheets and many will soon return to profit growth. Bloomberg says US shale oil drillers are now “ready to play chicken with supply and demand again.” Drilling activity is already responding to higher oil prices. But the CEO of Continental Resources says the industry will be more disciplined this time. Companies are leaner and more efficient. Pioneer Resources says it can restart an idle drilling rig and begin producing oil in just 3-4 months. The company wants to boost production by 15% next year. Capital discipline and flexibility in responding to OPEC moves will be critical for US producers in 2017.  

Initial claims for unemployment insurance (“jobless claims”) have trended lower throughout 2016. Last week’s tally was 265,000 claims, which is historically very low. The four-week moving average of new claims is sitting at 263,000. When I say historically low, I mean we’re hovering around the lowest levels since the 1970s. And yet Bloomberg estimates we could see further reduction in claims next year because about 1 million people are actively seeking employment.

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