Why Oil’s "No-Taper" Rally Won’t Last Long
Yesterday, the Fed surprised a lot of people (including me). Despite the tough talk, the economic bicycle still seems to need training wheels.
And with the taper off the table, the markets were off to the races…especially oil.
Following the Fed’s shocker, NYMEX crude oil futures shot up over 2.4%.
It was the biggest one-day jump in crude since December 26th of last year, with the exception of the August 27th announcement the U.S. was considering military strikes against Syria.
At the open today, West Texas Intermediate (WTI) is now more than $5 a barrel above what I said was “fair value” before the Syrian crisis. Meanwhile, Brent is almost $4 above its equivalent figure.
Yet you shouldn’t get too caught up in all of this market euphoria.
Another shoe is about to drop that will put a damper on the short-term rally…
The Government Shutdown Takes Center Stage
The problems begin in the swamp, otherwise known as Washington D.C.
Given the ongoing dysfunction in the nation’s capital, we are once again hurdling toward another government shutdown. It means the debate over the need to raise the debt ceiling, along with posturing for the next government civil war over the budget are now going to occupy center stage.
Add in the attendant political grandstanding and name calling and it won’t be too long before you have another problem on your hands. And that simply means the market impact of yesterday’s Fed move (actually non-move) will be a short-term affair.
A decisive part of the taper delay was the impending fiscal battle about to go on inside “The Beltway.” It has practically become an annual rite of political passage.
As the D.C. rhetoric becomes increasingly bitter, the market will once again begin to labor under the pressure. That’s one of the reasons why the Fed decided not to act. Their decision was based on what is headed down the pike, not on what has already taken place.
For investors, that means we need to design an energy investment strategy that takes its bearings less from the actual dynamics of energy use and the prospects for supply and demand, and more from the inability of children to play nicely together inside the halls of Congress.
As was the case last year, oil prices and energy demand projections will be now more affected by perceptions rather than by concrete data. A government shutdown has a way of freezing out market gains in very short order.
This is different than what happened in the aftermath of the ill-named budget sequester. In what could have only been created in the dreary minds of politicians unable to make a decision, the sequester required across the board cuts once the Congress could not agree on rational ones.
What transpired in its wake was an exercise in rather creative bookkeeping, staggered acquisition schedules, delayed maintenance, non essential cuts, and forced one-day-a-week furloughs. The oncoming government shutdown debate, on the other hand, is something else entirely.
The Odds of a Complete Shutdown
Of course, nobody really believes that Congress will allow a shutdown, although some members are now calling for just that.
The real damage to the markets will be done in the uncertainty leading up to the next band aid, kicking the can down the street, holding our grandkids hostage “solution” these Einsteins come up with.
As a result, we are moving into cloudy times once again and that will depress market sentiment.
My personal opinion is that the more radical elements on both sides in Congress are going to be marginalized this time around. There will be sparring, logrolling, threats and verbal wars. But there doesn’t seem to be the will for another “mother of all battles.”
Still, the markets will quiver until this latest manufactured crisis has passed us by.
So what should investors do now?…
First, no investor should ever play oil prices as an overriding barometer of how the energy sector as a whole is likely to move. After all, rapidly increasing oil prices quickly usher in concerns about their impact on the economic recovery and the perceptions that increasing energy costs will widen unemployment, discourage capital investment, and result in reduced consumer spending.
Of course, we are nowhere close to that point, but these concerns could be found just beneath the words of Ben Bernanke’s statement yesterday.
The best approach to unsettling times like these is always a flexible plan, one that allows you to play the best investment opportunities while using offsets to discount risk.
At the moment, though, there is no point in taking any of these steps right now. The market will be enjoying another few sessions of “taper-free” trading. Oil prices will stabilize and then both profit taking and investor angst will combine to initiate increasing volatility.
In the meantime, we need to begin to prepare for the inevitable-the end of the “no-taper” rally and the emergence of the shutdown debate.
You can expect some initial suggestions on how to play these moves shortly.