Oil Slides to Lowest Level in 4 Years - Alaska Permanent Capital Management


Oil Slides to Lowest Level in 4 Years

PantagesWTI is trading around $76 and Brent has broken through $80 as OPEC appears unwilling to reduce output to ease a supply glut.

ANS oil is at $75. Experts say Alaska needs $117 to balance the budget. Dermot Cole, writing in the ADN on October 16, opines “with oil between $80 and $90, the state will be piling up annual deficits of $2 billion or more, funded with easily accessible savings (budget reserves) that could last five or six years. That is not counting the $50 billion Alaska Permanent Fund.”

While apparently the Governor’s race remains too close to call, whoever wins may want to demand another recount! Life is going to be tough in Juneau if oil prices stay this low – just ask former Governor Tony Knowles what it was like in the late 90’s when oil traded at $20 a barrel.

US Stocks are all flirting with record highs across the board for most indices. The S&P 500 was up 0.4% last week and is up 12.4% year to date. The 10 year Treasury bond yield climbed 2 basis points to close Friday at 2.32%.

Walmart hit an all-time high as Q3 earnings topped forecasts and same store sales grew for the first time in seven quarters. M&A deals continue with Halliburton in talks to buy Baker Hughes. It would be the largest takeover of an energy company in years.

The all-important holiday shopping season is underway. The National Retail Federation says sales will rise 4.1% versus a year ago. The holiday season typically generates 30% of sales and 40% of profit for many retailers. Shop.org expects online holiday sales to grow between 8% and 11% over last holiday season.

A Nordstrom’s executive summarized the changing retail environment nicely: “We used to compete on price with the store across the street, and now it’s the entire world via the internet.”

US retail sales bounced back in October gaining 0.3% month-over-month compared to a decline of -0.3% in September. Also good for retailers, Bloomberg’s consumer comfort index jumped to its highest level in almost 7 years.

Japan’s Nikkei 225 continued to surge. It’s at seven year highs and up over 20% (yen) over the last month. In dollars it’s only about +11% owing to a falling yen/rising dollar. Part of this is a reaction to the shock and awe strategy of the Bank of Japan to go all in with quantitative easing a few weeks ago. In addition, Japan’s $1.2 trillion national pension fund’s decided to shed billions of bonds and buy stocks.

Rumors that Japanese Prime Minister Shinzo Abe will decide next week to postpone an anticipated sales-tax increase, judging that the country’s economy is too weak to withstand the burden, and call a general election to seek public support for his economic program.

The OECD’s composite leading indicators – designed to anticipate turning points in economic activity relative to the long-term trend – revealed continued weak growth in Europe in September.

On Friday we learned that GDP in the Eurozone grew 0.6% last quarter on an annualized basis. It was up just 0.3% in Germany, which accounts for 30% of economic output. Greece’s economy grew the fastest while Italy shrank. The numbers were better than expected but still left the Eurozone GDP about 2% lower than its peak in 2008.

The WSJ notes that this sluggish pace “underscores concerns that the region is stuck in a rut of declining investment and high unemployment at a time when other large economies such as the U.S. and U.K. are seeing more vigorous and jobs-rich recoveries.”

WSJ: Optimism Rebounded Among Small-Business Owners in October. Small-business owners were more upbeat about hiring, capital spending and sales expectations in October. The National Federation of Independent Business’s small-business optimism index increased 0.8 to 96.1 in October. It was one of the highest readings so far in this expansion.

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The economic calendar is jammed full next week. Regional PMI surveys, housing starts and inflation will give a clearer picture of the 4Q economic outlook.

APCM will be making several presentations next week –all on Wednesday!  We will be speaking at the Alaska Municipal League Investment Pool (AMLIP) breakfast at 7:30 at the Captain Cook. Then it is off to the Marriott for a 9 am presentation on Trends in State and Local Government Finance to the Alaska Government Finance Officers Association (AGFOA). That afternoon we will be back to the Cook at 3:15 speaking to the Alaska Municipal League (AML) on Investment Strategies for state and local governments.

Jeff Pantages
Chief Investment Officer


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