2015 Was Not a Great Year for Stocks

By far the worst performing asset class for 2015 followed by AFM was the MSCI Emerging Markets Index, which was down nearly 15%. Based on the numbers I found this morning, it’s a very volatile index:

MSCI Emerging Markets Index TR

Yet, even with all that volatility, it still performed a lot better than the S&P 500 over the same period. NOTE: The iShares MSCI Emerging Markets ETF (EEM) began trading on 4/14/2003. Since that day, it has had a 10.51% average annual rate of return vs. 8.95% for the iShares S&P 500 Index ETF (IVV).

Here is the up-to-date report through 2015 (click on the graphic to download the PDF).

Total Returns for Various Indexes - Dec 2015

IEA: Oil Prices to Remain Low Until 2020

From this morning’s Fortune CEO Daily email:

Oil prices are unlikely to return to $80 a barrel before the end of the decade, the International Energy Agency said this morning. And if OPEC continues its policy of pumping oil at record rates to increase market share, they could remain close to $50 a barrel through 2020.

The agency’s World Energy Outlook is closely watched by the industry, and its new report is likely to dash any remaining hopes of a quick oil rebound. Slower global demand, improvements in efficiency, and growth in alternative energy sources are all taking their toll. You can read the full report here.

The agency also noted that wind and solar energy accounted for half of all new power plants in 2014 – while growth of coal is slowing, after rising to 29% of the global energy mix from 23% in 2000. But the agency warned that more conventional generating capacity will have to be put in place in the coming decades to deal with the intermittent nature of wind and solar. You can see the effects these days in Texas, where an abundance of wind energy has led companies to offer free electricity between 9 p.m. and 6 a.m.

It’s amazing to me that experts can predict this, but they couldn’t predict the drop in price in the first place. I don’t remember seeing or reading anything forecasting oil prices dropping in 2013 or 2014. Anyone else? Did I miss something?

Maybe this will put to rest the idea that big oil sets the price of oil. I can promise you that if they did control the price, oil wouldn’t be sitting at under $50 per barrel right now.

A Look at the U.S. Dollar

Take a look at the chart of the five-year history of the U.S. Dollar’s relationship with the Euro:

Back in August 2003, one U.S. Dollar purchased .9184 Euros. As of last Thursday, one U.S. Dollar only purchased .637 Euros, a decline of 30.64%! To put it in perspective, imagine you are going to take a trip to Europe. You reserved a hotel that is €200 per night or $313 per night (€200 ÷ .634 = $313). Leaving out inflation, that same hotel room would have only cost you $217 per night back in August 2003. That’s quite a difference. This is why other countries are griping about the falling dollar: it makes their goods and services more expensive compared to the U.S. Dollar.

Of course there’s another side to this: goods and services purchased in the U.S. with Euros are now cheaper. Using the example from the previous paragraph, a hotel that is $200 per night will cost a European tourist €127 per night. That same hotel would have cost them nearly €184 per night back in 2003 (again, ignoring inflation), or 44% more.

The dollar’s fall also makes imported goods and services more expensive here in the U.S., which means U.S.-produced goods and services are now more affordable when compared to imports and it also makes our goods and services cheaper overseas. This is good for us but bad for other countries.

There are negative aspects to the dollar’s fall. The biggest in my opinion, is with the price of oil. According to OPEC’s President, Chakib Khelil, each 1% drop in the value of the dollar against the Euro, means a $4 increase in the price of a barrel of oil. (I’m not sure how he came up with those numbers.) The dollar is down about 7% against the Euro so far this year. Based on that, about $28 of oil’s $50 price rise can be attributed to the falling dollar.

These trade-offs (and lots of others) are what make the study of economics so interesting.

I’m not saying the dollar’s fall is a good thing, but it does have some benefits.

WSJ Editorial: We Can Lower Oil Prices Now

I read a very interesting opinion piece in the Wall Street Journal titled, We Can Lower Oil Prices Now. The author of the editorial is Martin Feldstein, who was chairman of the Council of Economic Advisers under President Reagan and is a professor at Harvard and a member of The Wall Street Journal’s board of contributors. What he says makes a lot of sense. Especially this (I hate to cut and paste so much of the article but I need it all to illustrate his point):

Unlike perishable agricultural products, oil can be stored in the ground. So when will an owner of oil reduce production or increase inventories instead of selling his oil and converting the proceeds into investible cash? A simplified answer is that he will keep the oil in the ground if its price is expected to rise faster than the interest rate that could be earned on the money obtained from selling the oil. The actual price of oil may rise faster or slower than is expected, but the decision to sell (or hold) the oil depends on the expected price rise.

There are of course considerations of risk, and of the impact of price changes on long-term consumer behavior, that complicate the oil owner’s decision – and therefore the behavior of prices. The Organization of Petroleum Exporting Countries (the OPEC cartel), with its strong pricing power, still plays a role. But the fundamental insight is that owners of oil will adjust their production and inventories until the price of oil is expected to rise at the rate of interest, appropriately adjusted for risk. If the price of oil is expected to rise faster, they’ll keep the oil in the ground. In contrast, if the price of oil is not expected to rise as fast as the rate of interest, the owners will extract more and invest the proceeds.

The relationship between future and current oil prices implies that an expected change in the future price of oil will have an immediate impact on the current price of oil.

Thus, when oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

That would explain why OPEC isn’t falling all over themselves to produce more oil. Why would they want to do anything that would lower the price? I do think it’s almost criminal for OPEC’s president to come out and make predictions on the price of oil. What does he think is going to happen when oil is trading at $140 and he says it’s going to $170? Surely he knows he has the ability to drive prices!

Anyhow, read the entire editorial. He makes a lot of sense.

How Big of an Impact Has the Falling Dollar Had on the Price of Oil?

OPEC’s starting to tick me off. First they say they are ‘unhappy’ about high oil prices. Then, Bloomberg.com reported recently that OPEC’s President is predicting oil to go to $170 per barrel by the end of the year:

OPEC President Chakib Khelil predicted that the price of oil will climb to $170 a barrel before the end of the year, citing the dollar’s decline and political conflicts.

“Oil prices are expected to reach $170 as demand for fuel is growing in the U.S. during the summer period and the dollar continues to weaken against the euro,” Khelil said today in a telephone interview. The leader of the Organization of Petroleum Exporting Countries also serves as Algeria’s oil minister.

I’m skeptical of this assertion because oil is up over 54% so far this year, while the dollar is down about 7.5% against the Euro. Unless I’m not understanding exchange rates, the dollar’s fall can only be attributed to a 7.5% rise in the price of oil. The rest is either due to supply and demand or speculation (though as Meg wrote this morning, that might not be the case). I doubt that the Fed will continue to allow the dollar to fall. I’m also skeptical of Khelil’s claim of rising demand in the U.S. throughout the summer. I bet we’ll see a drop in demand as some people just can’t afford to drive anywhere.

It bugs me when these guys come out and say stuff like this. It almost seems to be a self-fulfilling prophecy.

What’s the Solution to Our Energy Needs?

I’m getting sick of talking about oil. Why? Because NOT ENOUGH is being done. Oh sure, congress dragged in the oil executives and berated them over high fuel prices and threatened to slap them with windfall profit taxes (what the heck is that supposed to accomplish?). It was a great PR stunt to make it look like our elected officials give a flip about what the average American is going through.

Sadly, most politicians don’t have a clue and they don’t care that they don’t have a clue.

If they cared, they would be trying to strike a balance between meeting today’s needs with tomorrow’s needs. But, they aren’t doing squat. I mean, why the heck aren’t we drilling in America?

While energy “independence” is an impossible dream, there’s no doubt the U.S. has vast undeveloped fossil-fuel deposits. A tiny corner of the Arctic National Wildlife Refuge contains an estimated 10.4 billion barrels of oil and would be the largest producing oil field in the Northern Hemisphere. Yet the Senate blocked that development as recently as last month. The Outer Continental Shelf is estimated to contain some 86 billion barrels of oil, plus 420 trillion cubic feet of natural gas. Yet of the shelf’s 1.76 billion acres, 85% is off-limits and 97% is undeveloped.

Engineers recently perfected refining solid shale rock into diesel or gas, which may amount to the largest oil supply in the world – perhaps as much as 1.8 trillion barrels in the American West. That’s enough to meet current U.S. oil demand for more than two centuries. Yet as late as 2007, Democrats attached a rider to the energy bill that prohibits leasing the federal interior lands that contain at least 80% of America’s oil shale. The key vote was cast by liberal Senator Ken Salazar from Colorado, of all places.

Source: $4 Gasbags, WSJ

Granted, the Wall Street Journal’s editorial board is usually going to side with business, but if what they say is true, then we owe it to ourselves to at least consider drilling in the U.S. Surely we have the technology to drill without jacking up the environment.

I think drilling along with developing biofuels is the way to go. Surely that’s got to be better than sending all that money to the Middle East.

What are your thoughts? How do we solve our energy needs? Do you think our government is doing enough?