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Weekly Market Update – January 2, 2015

Markets ended the day little changed on light volume Friday as early enthusiasm was muted by a disappointing manufacturing report.  The Dow managed a 10-point gain to start the New Year, its only foray into positive territory this week.      

Construction spending fell .3% in December while the pace of manufacturing fell to a six-month low. Though the data was weaker than expected, manufacturing as a whole continued to expand, consistent with overall economic growth of 3-4%. 

Oil fell $.73 Friday to $52.54 per barrel amid choppy trading.  Oil prices continue to struggle and our energy-related securities have been a drag on recent performances, but we anticipate a recovery in 2015 as the current supply/demand issue stabilizes.  Why do we expect crude to go up?  Basically, no one can make any money at these low crude prices.  Therefore, almost all energy companies are making large reductions in their oil drilling budgets.  Some reductions are up to 75%.  There is about a six month lag before we will see a reduction in production associated with the lower spending on drilling.  This is because it takes about six months from the time drilling starts on a well until it is connected to a pipeline.  Wells drilled in August are just coming on line now.  As production first flattens this spring and then falls, crude prices will rebound and so will the energy related preferreds and equities.

OPEC meets on 6/5/15 which also could trigger a rise in crude prices.  Several members of OPEC are relatively small countries that have a large portion of their budgets funded by oil sales: Algeria, Libya, Venezuela, Iran, and Nigeria. Except for Algeria, these countries do not have large cash reserves.  Russia attends OPEC but is not a member.  If all of the OPEC countries and Russia cut production 3%, the oil surplus would end.  That was the proposal on Thanksgiving Day which the members rejected.  Most just wanted Saudi Arabia to do the cutting.  So rather than a 3% reduction in production, they got a 45% reduction in price.  This is not the type of economics that can persist.

Next week’s economic calendar highlights include weekly jobless claims on Thursday and the December jobs report on Friday.  Expect weekly jobless claims to settle in the 290,000 – 300,000 range (from 298,000 this week), the number of jobs created in December to be around 250,000 (from 321,000 in November) and the unemployment rate to remain at 5.8%.


Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464