Interest Rates in a Freefall
By: Tim McPartland,
Interest rates are tumbling quite hard this morning in a sign that the global economy is a basketcase–no surprise to us. Also in what has become a daily mantra crude oil is falling by about another buck–we suspect crude prices are racing to the bottom and will overshoot reality to the downside–also not a surprise to us. With all the derivatives being used in the U.S. by the ‘players’ there is seldom a time that prices don’t get pushed to extremes.
Interesting to note that as interest rates continue to fall preferred stock CEF’s and ETF’s seem to be stuck at a level 2-3% below 2014 highs. There is a fear factor at play here, in particular with the energy related preferreds, that will make it difficult for them to move higher until crude oil bottoms.
We had posted the drilling rig count yesterday–it was off 3% and this is the first part of getting the crude oil market back on track. Now we need to carefully watch the oil inventory reports on Wednesdays to see when/if we get a break in either lower production or higher usage. Unfortunately this creates a catch-22 of sorts as we are refining all we can already–so much higher usage on a prolonged basis can only happen with imported refined product, which gives foreign refiners motivation to produce. We can’t export crude oil (by law) so we need to lower imports to use domestic oil in our refineries-which gives our producers motivation to produce. It’s a big ugly circle that will take some time to work out–but it will work out. Honestly it is quite a mess.
Yesterday was a day we have expected for a while–a good sized stock selloff. Generally we lost around 1/3% off the accounts. The new 2015 model performed as expected although who likes to start off the year with a 1/3% loss. On the other hand it could have been worse and we are always thankful to be positioned correctly when the big downdrafts hit. There is no reason to think we won’t see more days similar to yesterday in the very near future. When you are at the top of the valuation matrix it is easy to fall down.