Monday, March 6, 2017

Lower markets on fears of Fed rate hike next week

Dow lost 51 (off session lows), decliners over advancers 2-1 & NAZ fell 21.  The MLP index was up pennies, going above 330, & the REIT index drifted 1+ lower to the 347s.  Junk bond funds were off a tad & Treasuries did little today.  Oil was off pennies (more below) & gold hardly budged.

AMJ (Alerian MLP Index tracking fund)

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Live 24 hours gold chart [Kitco Inc.]

OPEC will increase its production capacity by about twice as much as previously thought, led by expansion in Iran & Iraq, the International Energy Agency (IEA) said.  OPEC will raise output capacity by 1.95M barrels a day in 2016-2022, with 1/3 of the gains concentrated in Iraq.  Last year it predicted growth of 800K barrels a day from 2015-2021.  While OPEC is leading an effort by global producers to clear a glut this year by reducing output, the organization is getting ready to meet rising demand in coming years.  Iraq is rehabilitating its oil industry after years of conflict, while Iran is seeking foreign investors after the lifting of nuclear-related sanctions.  “The group is building capacity even as it reduces in 2017, in anticipation of higher demand,” said the IEA.  “Capacity growth is concentrated in the low-cost Middle East, with Iraq leading the gains.”  Iraq will retain its position as OPEC's 2nd-biggest producer, adding 700K barrels a day to reach 5.4M a day in 2022, according to the IEA, which last year saw the nation hitting 4.6M by 2021.  Most of the increase will come from oil fields in the south of the country, such as the Majnoon project.  Iran will expand capacity by 400K barrels a day to reach 4.15M in 2022, which said the forecast hinges on whether the accord to lift intl sanctions remains in place.  Having been released last year from trade restrictions, the country has introduced a new contract model to attract foreign investors.  With supplies from outside OPEC also projected to rebound sharply next year, it’s unclear whether there’ll be enough demand to immediately absorb extra crude from OPEC.  Demand for the group’s output will be at 33M barrels a day in 2018, roughly in line with the amount it pumped before cutting production.  Even if Saudi Arabia, OPEC's biggest member, continues its policy of holding back some output for emergency use, the IEA's data point to considerable excess capacity next year.  Whether or not the group chooses to prolong the current agreement on output limits, “it is difficult to imagine a return to the unbridled production that sent prices crashing to their lowest in more than a decade,” the agency said.

IEA Doubles Forecast for New OPEC Oil by 2022

Oil prices whipsawed, turning negative after the International Energy Agency forecast potential shale oil growth & waning European refined product demand, which bodes poorly for global efforts to remove a glut.  In a session driven by headlines, oil earlier strengthened slightly after Iraq's oil minister said OPEC would likely need to extend its production cuts in H2.  US shale oil production may grow by 1.4M barrels per day by 2022 with prices at about $60 per barrel, IEA said, & more than 3M bpd of capacity growth could be generated if prices rise to $80 a barrel.  At the same time, demand for European refined products is seen weakening.  West Texas Intermediate crude fell 26¢ a barrel $53.07.  The market has been rangebound for more than 60 days, constrained by concerns that US production growth may counter OPEC's agreement to reduce output during H1.  Iraq's oil minister said the production cuts will likely need to be extended into H2.  Iraq is ready to join in such an effort.  Iraq agreed to lower its production by 210K barrels per day under the deal but it had originally sought to be exempt from any cuts, saying it needed the revenue to fight an Islamic State insurgency.

Oil Whipsaws as Production Seen Rising, More OPEC Cuts Discussed

Costco seemed to mostly ignore its online business until the start of its current fiscal year, about 6 months ago, when CFO Richard Galanti began devoting more time to explaining its e-commerce efforts.  In its 2017 first Q1, which covered the 2016 holiday season, Galanti noted that while overall digital sales had risen by 7% year-over-year, the numbers during the Black Friday period were much better.  During the week of Thanksgiving & the 2 that followed, he said, digital sales had risen by the low-to-mid teens.  Those aren't in league with the competition, but the holiday result showed that the company might be a viable digital player.  Add in the fact that Galanti also spoke about the company investing in its digital operation, specifically by adding merchandise, as well as making it easier to check out & improving the returns process, & it started to become clear that the company no longer considers online sales an afterthought.  Traditionally, the company has been all about its brick-&-mortar locations.  COST sees digital sales as a way to increase sales to members.  Doing more business with the company may be most attractive to people who hold its rewards credit card, who get 2% back on all eligible purchases from the chain.  People with an Executive Membership get an additional 2% back on all purchases up to $750.  An Executive Member who pays with the company's rewards credit card gets 4% cash back.  COST built on its Q1 momentum by growing digital sales 12% in Q2 2017.  The company did that by doing 3 things: adding more merchandise, improving the user experience for its website & improving distribution logistics.  "In terms of improving experience and functionality of the site, we've improved search, we've shortened the check-out process, and we've improved our member's ability to track their orders, and we'll continue to do some more of that," Galanti said.  "Just recently, we automated much of our returns process, not only providing members a much better quality of service, but also reducing by more than 20%, in just the first couple of months, our call center volume related to returns."  The stock dropped 3.51.  If you would like to learn more about COST, click on this link:

Costco Is Quietly Becoming a Digital Player

Costco (COST)

Fed jitters are affecting the stock market.  While the stocks had a stellar rise in recent months, rate hikes were not a bother.  Now that the hike is near (next week), the addiction to low interest rates is haunting traders.  Considering all the commotion in  DC, today's retreat is mild & the larger issue of a vastly overbought market continues to get little attention.  The Dow chart below still looks pretty, making the bulls very happy.

Dow Jones Industrials


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