The cure for high prices is high prices. The cure for low prices is low prices. That is the message from the hog cycle. When porkers are cheap fewer piglets are raised and a few years later the price of pigmeat rebounds. When pork is pricey too many piglets are raised and the market price falls.
The same thing historically applies to oil, and also gold. Back in the last years of the 1990s, oil fell to $10/barrel. The low price boosted demand and car-buyers reverted to their taste for gas-guzzlers and brought their clunkers out of the garage. The current crash will probably not result in these old cars leaving the dealer lots. Now they are near the end of their lives (except in Cuba and Panama where old US cars go to die.)
Lower oil prices will turn off some ventures: the deepest sub-salt, the least economic shale fields, and the most filthy Saskatchewan oilsands producers. Winners and losers cannot be determined without carefully examining their breakeven prices/bbl, so don’t sell across the board.
But after a few years to adjust, the output from these uneconomic oilfields will not hit the market. And then a few years on the price of oil will rise again because of shortages. In the interval we have some ideas on how to play this.
Another anomaly is that Germany has now slipped into contraction, following the other major Euroland economies, France and Italy. That is actually good news from bad. Berlin’s hardline anti-deficit hawks will have to react to Deutschland no longer being uber Alles: that heralds less flak for the likely European Central Bank launch of a Euro-own quantitative easing program, following on those of Japan and China.
Goldman Sachs says 2015 will be the year of Asia as the brokerage expects Asia-Pacific ex-Japan to return 11%. Japan will only pay out 8%, it figures. Meanwhile the US S&P is expected to fall more than the Europe Stoxx index mainly because the Fed is expected to hike rates.
The likely impact of all this money creation is bad for US companies, as profit growth will slow, one reason Wall Street was in a non-holiday mood. American stock prices have gotten ahead of themselves. But a policy switch heralds a better outlook in Euroland. That is our message for 2015 in a nutshell. I am not sure that the Japanese and Euroland central banks will produce a “Santa Claus rally” for European and Japanese equities, but I do expect better stock performance next year.
More from Portugal, Britain, Luxembourg, Colombia, Brazil, Panama, Hong Kong, France, The Netherlands, Australia, Israel, and Norway:
• At just under $1.50/sh, the latest bid for Portugal Telecom is a bummer. PT had cash flow (earnings before interest, taxes, depreciation, and amortization) last year of euros 1.1 bn. The lowball bid caused a 6.6% drop in European trading for PT which fell to euros 1.41 as nearly 17 mn shares were offloaded by panicky investors. US trading followed Lisbon.
While the Oi group gave exclusivity and a lockup to Altice, the Luxembourg holding company of Patrick Drahi, to buy its Portuguese assets for euros 7.4 bn, there are other players on the scene: the Angolan bid for euros 1.21 bn for a 25.7% stake via PT SGPS, the Portugal operating company; plus the venture capital bid for the whole company at euros 7.07 bn.
The venture capital bid from Apax Partners and Bain Capital, both of the US, was firmed late on Thanksgiving Friday by the addition of Sociedade de Investimento e Gestão (Semapa – SEMMY), a big Portuguese holding company in cement and paper. They are rumored to be preparing a higher bid. The market doesn’t believe it.
