Dow lost 11 with selling into the close, advancers over decliners 4-3 & NAZ fell 15. The MLP index jumped 7+ to the 432s & the REIT index was fractionally lower to the 347s. Junk bond funds slid lower (see article below) & Treasuries rallied, bringing the yield on the 10 year Treasury to about 1.9%. Oil advanced, but is only in the 47s, & oil is working its way back to 1200.
AMJ (Alerian Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](http://www.kitco.com/images/live/gold.gif?0.1743146966549074)
Federal Reserve Vice Chairman Stanley Fischer said raising interest rates from near zero “likely will be warranted before the end of the year” & subsequent increases probably won’t be uniform or predictable. “A smooth path upward in the federal funds rate will almost certainly not be realized” as the economy will encounter shocks such as the surprise plunge in oil prices or future geopolitical crises, Fischer said. Policy makers last week opened the door to a rate increase as soon as Jun, while also indicating in their forecasts they will go slow once they get started. “Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data,” said Fischer. Labor market readings would be an important guide. “We’ve got two very positive numbers for the first quarter of 2015 and we’re waiting for another one,” Fischer said. US employers added 534K new jobs in the first 2 months of 2015 & the jobless rate fell to 5.5% in Feb. He also said that while forward guidance on rates remains important, its role may diminish. “It is likely that explicit long-term forward guidance will play less of a role in monetary policy after liftoff than it has during the past few years,” he added. “As monetary policy is normalized, interest rates will sometimes have to be increased, and sometimes decreased.” After the first increase, Fischer said there’s no plan for the FMOC to follow a “steady rate of increase from zero to the longer-run normal nominal federal funds rate,” as it did a decade ago, or to raise rates by 25 basis points every meeting, or every 2nd or 3rd gathering. Fischer said that while the ECB bond purchases have helped strengthen the dollar, they are a net benefit to the US economy by spurring growth in Europe & demand for American exports. He added that much of the dollar’s appreciation reflects other factors, including the stronger performance of the US economy relative to the euro area.
The promise of low borrowing costs for longer just doesn’t pack the punch it used to. Last week should have been fantastic for the $1.3T US junk-bond market: the Federal Reserve scaled back its prediction for how quickly it will raise benchmark interest rates while also expressing confidence in the US economy. That’s almost an ideal world for junk bonds. Yet investors yanked $1.3B from mutual funds that buy the debt last week, & they’ve pulled $2.9B this month, according to data compiled by Wells Fargo Dollar-denominated high-yield bonds, while rallying some immediately after the Fed statement on Wed, have lost 1% in Mar after gaining 2.4% the month before, Bank of America Merrill Lynch index data shows. This very same environment, a gradually strengthening economy coupled with near-zero rates, has produced big returns for years. Junk debt has posted average annual gains of 15.6% since 2008. Riskier companies ostensibly will be able to keep refinancing their debt at relatively low rates for the foreseeable future while also benefiting from the economic expansion. But there are a lot of new risks out there that could undermine the value of junk bonds. Oil prices have plunged, pressuring the balance sheets of energy companies that have sold record volumes of speculative-grade debt. Greece is perhaps closer than ever to leaving Europe’s shared currency & China’s meteoric growth is slowing significantly. So bond traders have been much jumpier this year as the Fed starts preparing its first rate increase in 9 years. They tend to have less appetite for risk when the market becomes less predictable. The tranquilizing effect of 6 years of central-bank stimulus is wearing off in the credit markets, leaving in its wake some fickle junk-bond buyers.
Schlumberger (SLB), the world's #1 oilfield services provider, said it expects the oil & gas industry's spending internationally on exploration & production to drop by 10-15% in 2015. A 50% drop in global oil prices since Jun has prompted oil & gas producers to cut back spending & shore up dwindling cash reserves. The fall in spending will keep production subdued & could lead to a further increase in oil prices in H2, CEO Paal Kibsgaard said. Kibsgaard said while North America production would grow in 2015, it would likely fall in 2016, leaving a supply gap that will have to be filled by intl producers. Kibsgaard said there had been a "dramatic" collapse in land drilling activity in North America & that an increase in the number of uncompleted wells would delay a recovery in US land drilling activity.
Dow Jones Industrials
AMJ (Alerian Index tracking fund)
| CLK15.NYM | ....Crude Oil May 15 | ....47.56 |  | ...0.99 | (2.1%) |
Federal Reserve Vice Chairman Stanley Fischer said raising interest rates from near zero “likely will be warranted before the end of the year” & subsequent increases probably won’t be uniform or predictable. “A smooth path upward in the federal funds rate will almost certainly not be realized” as the economy will encounter shocks such as the surprise plunge in oil prices or future geopolitical crises, Fischer said. Policy makers last week opened the door to a rate increase as soon as Jun, while also indicating in their forecasts they will go slow once they get started. “Whether it’s going to be June or September, or some later date, or some date in between, will depend on the data,” said Fischer. Labor market readings would be an important guide. “We’ve got two very positive numbers for the first quarter of 2015 and we’re waiting for another one,” Fischer said. US employers added 534K new jobs in the first 2 months of 2015 & the jobless rate fell to 5.5% in Feb. He also said that while forward guidance on rates remains important, its role may diminish. “It is likely that explicit long-term forward guidance will play less of a role in monetary policy after liftoff than it has during the past few years,” he added. “As monetary policy is normalized, interest rates will sometimes have to be increased, and sometimes decreased.” After the first increase, Fischer said there’s no plan for the FMOC to follow a “steady rate of increase from zero to the longer-run normal nominal federal funds rate,” as it did a decade ago, or to raise rates by 25 basis points every meeting, or every 2nd or 3rd gathering. Fischer said that while the ECB bond purchases have helped strengthen the dollar, they are a net benefit to the US economy by spurring growth in Europe & demand for American exports. He added that much of the dollar’s appreciation reflects other factors, including the stronger performance of the US economy relative to the euro area.
Fed’s Fischer Says Rate Rise Probably Warranted by End-2015
The promise of low borrowing costs for longer just doesn’t pack the punch it used to. Last week should have been fantastic for the $1.3T US junk-bond market: the Federal Reserve scaled back its prediction for how quickly it will raise benchmark interest rates while also expressing confidence in the US economy. That’s almost an ideal world for junk bonds. Yet investors yanked $1.3B from mutual funds that buy the debt last week, & they’ve pulled $2.9B this month, according to data compiled by Wells Fargo Dollar-denominated high-yield bonds, while rallying some immediately after the Fed statement on Wed, have lost 1% in Mar after gaining 2.4% the month before, Bank of America Merrill Lynch index data shows. This very same environment, a gradually strengthening economy coupled with near-zero rates, has produced big returns for years. Junk debt has posted average annual gains of 15.6% since 2008. Riskier companies ostensibly will be able to keep refinancing their debt at relatively low rates for the foreseeable future while also benefiting from the economic expansion. But there are a lot of new risks out there that could undermine the value of junk bonds. Oil prices have plunged, pressuring the balance sheets of energy companies that have sold record volumes of speculative-grade debt. Greece is perhaps closer than ever to leaving Europe’s shared currency & China’s meteoric growth is slowing significantly. So bond traders have been much jumpier this year as the Fed starts preparing its first rate increase in 9 years. They tend to have less appetite for risk when the market becomes less predictable. The tranquilizing effect of 6 years of central-bank stimulus is wearing off in the credit markets, leaving in its wake some fickle junk-bond buyers.
These Junk Bond Outflows Show Just How Jumpy Buyers Have Become
Schlumberger (SLB), the world's #1 oilfield services provider, said it expects the oil & gas industry's spending internationally on exploration & production to drop by 10-15% in 2015. A 50% drop in global oil prices since Jun has prompted oil & gas producers to cut back spending & shore up dwindling cash reserves. The fall in spending will keep production subdued & could lead to a further increase in oil prices in H2, CEO Paal Kibsgaard said. Kibsgaard said while North America production would grow in 2015, it would likely fall in 2016, leaving a supply gap that will have to be filled by intl producers. Kibsgaard said there had been a "dramatic" collapse in land drilling activity in North America & that an increase in the number of uncompleted wells would delay a recovery in US land drilling activity.
Schlumberger Sees Drop in Industry E&P Spending
Today's rally was unconvincing with selling in the PM, especially at the close. A rise in oil received the main attention but it still languishes below 50. While this seems like the end of the world for investors, oil is a commodity which goes thru up & down cycles over the years. Prices were depressed in the late 1990s & late 1980s. They came back. Lower capital spending & increased demand, especially from overseas, will eventually bring back higher oil prices. Investors need patience.
Dow Jones Industrials
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