The Explainer breaks down Texas regional outlook in the face Oil Slump
B
y Marc L. Flaster
NEW YORK New York (Texas Insider Report) Oil prices at these levels are now a fact of life. It is going to take some time for the plunge in energy costs
to work its way through the Texas economy. For some areas it will be good others not so good.
Production is not the problem its exploration and development. The recent volatility and eye-opening collapse in oil prices has yet to work itself through the economy both domestically and internationally.
In the past 18 months a total of 4 Texas banks have added their ranks to the public equity market. And almost all economic analysis or remarks to date relate to the immediate effect in converting currencies energy development budgets and Russian sanctions.
The Federal Reserve Banks Open Market Committee known as the FOMC issued commentary after its most recent meeting last week and sees no reason to be concerned with events occurring in the rest of the world either oil related or terrorist sponsored.
Both considerable time and new word patience are in the statement. In my book when someone is vague they either have no answer or do not understand what they are doing. Both to me represent the current Fed membership.
It looks like a rate hike may not happen until well into 2016.
In addition Chairwoman Janet Yellens endorsement at the post meeting press conference looks at energy prices as a minor influence on U.S. domestic progress.
With these thoughts in mind we are driven to no other conclusion than that the Fed is not just blind to the world at large but also un-interested as well. Monetary policy is therefore on automatic pilot the course set by past Chairman Bernanke.
Investors will continue to be threatened by the FOMC wolf at the door for all the year to come and maybe beyond.
- The data will show the effect of the change in energy expectations.
- The economy may continue to struggle.
- Dis-inflation will become more apparent in the price matrix.
- The commodity dependent emerging markets are a real source of pain and civil unrest.
- The dollar should remain strong relative to our trading partners and that means that there will continue to be an attraction for world monies to come here.
Having shared these brief thoughts with you (
for a more detailed report see my December 9th 2014 Marc-it-Wise) some Other
interesting facts to note:
- The dollar is strong against all our major trading nations
- Oil in world markets has fallen 35 in price over the past 12 months
- The Russian ruble has fallen 30 against the dollar
- Saudi Arabia needs $99 oil to balance its budget this year; the state is the largest employer as well as offering a heavy subsidy in refined products for the masses;
- Iran needs $140 oil to balance its budget
- Venezuela needs $117 oil to balance its budget
- At $100 oil revenues provided 40 of the Russian budget
- Mexico has invited the five largest oil companies in the US to come and help Pemex manage its oil interests and develop the tremendous proven reserves
- China imports 60 of its oil and with an economy in the sinkhole these savings could soften the damage
- Japan imports all its energy needs and with nuclear off the table oil and coal prices weakening are a welcome relief
- Switzerland shrinks its gold reserves to protect its currency as prices weaken
- Industrial commodity prices continue to fall as output increases to generate foreign exchange for those in need.
And to make this wonderful change in the tug of war in world politics we have a President who is bent on conservation alternative energy development whatever the cost and myopic concentration on global warming.
A fools nightmare!!!
The recent stock market performance of the Texas banking companies reflects more opportunity than pending difficulties. The Texas economy by this observer is vibrant and in the major metro areas robust. The marketing of 3 new banks entering the ranks of the public markets gave a strong endorsement of the diverse economy of Texas.
There may be some fallout from the decline in oil prices but the leverage in the banking system by order of Congress and impressed by supervisory threats has left the financial intermediaries less exposed with higher capital reserves. It cannot be completely dismissed that a change is in the wind but not to the extent of a major deconstruction of the local economy.
The Feds commitment to continue to prime the pump will become more evident as each meeting passes. Already the report at this meeting was that the plan in place may not change for several meetings to come.
As a result he stock market should continue to benefit and bond yields may maintain current levels.
Another mini-refi wave is probably coming. Bear in mind that the Fed has a $4.5 trillion balance sheet and the cash flow from that is being reinvested to maintain that balance. For the mortgage bond market that appetite is larger than when the Q/E programs were in place.
Again oil prices at these levels are now a fact of life. Just like ACA is here to stay. The world is going to adjust even if the Fed and its FOMC committee remains blind to its consequences.
We have entered an Alice in Wonderland world. Dont follow Janet down the rabbit hole.
Marc L. Flaster has advised financial institutions in balance sheet management for over 35 years and is a founding principal of Sandler ONeill Partners L.P.
The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated. Readers are advised to complete their own due diligence and analysis.
