The Week in Review: Greece, Oil, and Goats - Alaska Permanent Capital Management


The Week in Review: Greece, Oil, and Goats

Stocks were up for the week as the S&P 500 set a new all-time high on Friday with a close of 2,110. For the holiday shortened trading week, both the S&P 500 and the Dow Jones Industrial Average rose 0.7%, while the NASDAQ Composite gained a healthy 1.3%. So far in 2015 the S&P 500 has returned 2.8%. Changes in bond yields were relatively muted, with the longer end of the curve (5 to 30 year maturities) gaining about five basis points. The ten year U.S. Treasury now yields 2.11%.

The cat and mouse game into which Greece’s financial problems has degenerated continued this week. First Greece presented a plan for moving forward with hopes of dropping the severe austerity it has been under for several years. Almost immediately, Germany comes out and rejects that plan as a no go. Finally a “last minute” deal in meetings on Friday emerges as the parties came together and reached an agreement. It’s funny how these things always work out at the “last minute.” The need for this Greek theater is more political than financial, as all parties want to make it appear to their home constituents that they are sticking to their guns and driving a hard bargain.

It is slightly amusing though that the crux of the Greek financial crisis has never really been about Greece. The world would still be awash in Kalamata olives and thick creamy yogurt regardless of whether or not the Greek federal government decides to pay its bills. The reason this has been such a long and drawn out contentious issue is that the outcome is ultimately about the integrity of the euro area and sending a message to other profligate and much larger European economies.

The rational and possibly cheaper thing to do with a bankrupt country such as Greece would have been to kick it out of the euro zone a long time ago. While doing so sends a message that those who don’t follow the rules will be punished, it also sends a message of instability and uncertainty to investors and does little to foster the correct atmosphere for economic growth. It also sets a precedent that if one country can leave, then anybody can leave. On the other hand, while giving generous terms of debt forgiveness to Greece would be an easy fix to its problems, doing so would have greatly increased the risk of contagion. While European nations could have – and to a certain extent already did – absorb losses on Greek debt, similar write-downs in economies such as Spain, Italy, and France would have come at a far higher cost. Thus the dance continues. Greece remains in a state of economic distress, but for the time being looks to have another four months to hopefully get things back on track. Stay tuned next week though, as the deal announced on Friday hinges on an “action plan” that Greece must submit on Monday.

If people weren’t talking about Greece this week, then they were probably talking about the price of oil. West Texas Intermediate settled on Friday at $50.34 per barrel, down just about $2.50 from last week. Alaska crude oil also declined for the week, but continues to trade at its usual premium over WTI at $55.84 per barrel. The decline was helped along on the news that crude oil inventories rose by 7.7 million barrels to the highest level in 80 years. There is now 425.6 million barrels of oil in storage here in America. To put that into perspective. The U.S. uses about 19 million barrels per day, so the current amount stored would last for about three weeks.

There was not a lot of economic data out this week due to the Presidents’ Day holiday on Monday. Minutes from the January meeting of the FOMC were released, which the market interpreted as more dovish than expected. The stock market likes an accommodative Fed and picked up a bit on Wednesday with the release. In the minutes the Fed expressed concern over raising rates too soon and went on to say “that a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions, undermining progress toward the committee’s objectives.”

In news from corporate America this week, Wal-Mart announced wage increases for roughly 500,000 employees. Starting in April the company plans to increase the minimum amount it pays to $9 per hour, or $1.75 more than the federal minimum wage. In aggregate, the higher wages are expected to cost Wal-Mart roughly $1 billion per year. Higher income certainly has the potential to help consumer spending and can encourage inflation which is something the economy has been lacking as of late. Also, such a move by a company this big can spur other businesses to do the same.

Happy (Lunar) NEW YEAR!!! Thursday was the beginning of another lunar cycle and the first day of the year of the goat, or sheep, or ram. It actually kind of depends on who you ask. The confusion arises because the Chinese character “yang” translates to “horned animal” and thus technically covers all three. If you are born during the year of the “yang” you probably won’t describe it as a sheep though, as the animal is seen as a docile and week follower in Chinese culture. Nevertheless this week saw the beginning of the largest annual human migration on earth as literally hundreds of millions of people travel in China back to their hometowns to be with family for the weeklong celebration. As a result markets are closed in China through the middle of next week.

Have a great weekend everyone! Good luck to all the Iron Dog racers. With the lack of snow, they’re going to need it.

Nicholas Case
Senior Investment Analyst


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