11/14/12   Saudi America

Editor’s Corner

Ron Rowland

One of the more interesting pieces of news to emerge this week came from the Paris-based International Energy Agency (“IEA”).  It claims the U.S. is now on track to become the world’s largest oil producer by 2020, surpassing both Saudi Arabia and Russia.  This new projection, significantly different from a year ago, is the result of U.S. shale oil production.  However, even if we become the largest producer, it won’t be enough to satisfy our own demand, so we will still be dependent on imports.  The IEA report also acknowledges the U.S. energy consumption shift from oil to natural gas and predicts natural gas use will exceed that of crude oil by 2030. 

There hasn’t been much reaction in energy related equity or crude oil prices, but natural gas prices have shot up about 8% the past few days.  Some have likened the new energy revolution in the U.S. to the internet revolution of the 1990s.  It is an interesting development to say the least, and one that will likely produce many new investment opportunities in the coming years.

In his first press conference since winning re-election, President Obama said “We should not hold the middle class hostage while we debate tax cuts for the wealthy.”  He urged Congress to immediately extend tax breaks for the middle class as a separate activity from debating how to go about getting the wealthiest 2% of Americans to pay more.

CEOs are descending on Washington today, presumably to give President Obama an earful about the damage that could be inflicted on the U.S. economy if action is not taken to stop the country from driving over the fiscal cliff.  The countdown is now at 47 days and happens to overlap with our major holiday season – a time when most of our elected officials try to get out of town instead of tackling important issues.

Retailers reported a drop in October sales after coming in ahead of expectations in September.  The two-month combination appears to be a wash.  The latest Producer Price Index (“PPI”) report came in lighter than expected, indicating that inflation is still not a concern.  The 10-year Treasury yield closed below 1.6% today, providing additional evidence that inflation worries are not on the minds of investors.

Investor Heat Map: 11/14/12

Sectors

Last week there was a near three-way tie for the top of the sector rankings, and this week we saw a shakeup.  Leadership is now in the hands of Industrials – the only sector not in the red.  However, it has no margin of safety as its momentum score is barely on the plus side of zero.  The selling of the past week puts all other sectors into negative trends, although the first few could easily be interpreted as being neutral.  Consumer Discretionary held on to its second place position while those around it changed.  Financials resided in the first place spot a week ago but has now slipped to third.  Health Care is close behind, having swapped places with Materials, which is now fifth.  The remaining groups are looking decidedly negative, and it’s hard to put a positive spin on any of them.  Consumer Staples has not shown its “defensive” nature in this recent market action.  Despite predictions of the U.S. becoming the new “king of the oil patch,” the domestic Energy sector has been taking a beating.  The bottom three sectors are the same as a week ago, only more dreary looking.  Technology still has a grip on last place, although Utilities or Telecommunications could soon replace it.

Styles

Seven Style categories registered positive momentum readings last week, and today there are none.  Mid Cap Value held its #1 ranking even though its score dropped by 19 points.  It’s trying to hold above its 200-day moving average and could potentially find some support there.  Mid Cap Blend and Mid Cap Growth moved up to take over the second and third spots, giving Mid Caps control of the top.  They are followed by another trio as the Large Caps have come together to grab fourth, fifth, and sixth.  A week ago, the Large Cap categories were spread far and wide with Large Cap Value in second and Large Cap Growth in tenth.  The three Small Cap groups are now all near the bottom with Mega Cap and Micro Cap joining them.  The Value over Growth segmentation of the past few weeks has now been replaced by a capitalization stratification.

Global

China is still on top with a positive momentum score but has lost most of its zing. The country’s smooth leadership transition and latest economic reports appear to be getting a warm reception from investors.  Pacific ex-Japan has solidified its #2 position and is now challenging China for the top.  Emerging Markets moved up a notch to third place and is the last of the positively trending regions.  Europe heads up the list of eight global categories in the red today.  Austerity protests are becoming a fact-of-life in many parts of the region.  Close behind are EAFE, Canada, and the U.K., which are all in the same positions they were a week ago.  The bottom four categories of World Equity, U.S., Japan, and Latin America are the same four as last week, although there is a change in the order.  In our last update, Japan was last and the only Global category in the red.  It moved up a notch this week, but it is now just one of eight on the negative side of the ledger.

 

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

 


“Historians will one day marvel that so much political and financial capital was invested in a green-energy revolution at the very moment a fossil fuel revolution was aborning.”

Wall Street Journal op/ed piece on 11/13/12, the day after IEA report that US was on track to be world’s largest oil producer by 2020


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