2015 Outlook

I was thinking about it today and there’s probably more potential events overhanging the macroeconomic world at once right now than I can recall at any one point in the past, although I could have just been blindly unaware. So I made a list in no order, feel free to add / detract.

Keeping in mind that US equity markets are at record levels and P/E Multiples:

  1. Russia / Ukraine

  2. Low Oil: At sustained prices below $80, it becomes a threat to much of the US O&G industry as well as Venezuela, Russia, Iran and others. Secondary effect hurts US rails through reduced demand from US refineries as domestic / overseas price spread does not support rail shipments and US Gulf Coast petrochem producers by eroding their advantage vs ROW. On a broader level it functions as a wide based global stimulus reducing mfg costs and padding consumer economies. Also tangentially impacts CAT, Bell Helicopters, etc.

  3. Low Commodity prices overall in metal and ag sectors. Low ag pricing from recent bumper harvests outpacing supply while demand for metals has slacked. Metal prices obviously hurting mining co’s and along with ag pricing filter through to CAT and Deere.

  4. Slowdown in China: Pausing to look at #2 and #3 makes you wonder if growth in the region hasn’t stalled more sharply than anticipated and what the knock-on effects could be within that giant. If the US is picking up the pace but commodities are continuing to decline it may be pointing towards a much deeper issue within China than is currently being addressed.

  5. Crisis in Japan: Recent Moody’s downgrade and GDP concessions show Abenomics may not be taking proper hold. A PM replacement and subsequent policy reversal on presumably failed 3 arrow stimulus could hit deep. At the core the main issues of population shrinkage and debt levels have not been addressed in any meaningful way.

  6. Asian contagion: Fears that strengthening USD in the coming years could hurt economies such as Indonesia and India through rising USD denominated commodity prices are currently forgotten in light of through #2 and #3.

  7. Pipelines: threat to US rails which are expending record CAPEX on oil cars, yard capacity and engines to address capacity overages and backlogs. Could be completely nullified through pipeline construction. Pipelines are aggregate positive to economy.

  8. Reshoring of MFG to N/A: Also aggregate positive for the region, could exacerbate #4 & #5.

EDIT (12/12/14):

  1. Europe is already shaking things up, this is going to become a recurring 2015 theme again after a year off. This isn’t a real stunner at this point, but just one more thing to add to the mix.

I think #2 creates other impacts, which may end up soaking up some of the slack from the energy sector.

I don’t see a lot of reason to be bullish in 2015. I think energy will recover to $80/bbl +/-. Other than that, bleak year ahead.

P/E isn’t at record levels though. It’s definitely in the high range, but pretty well in-line with the later stages of the business cycle. The key difference is this business cycle is way longer than a normal five-year cycle. The Fed has kept volatility down and forced people into risky assets for nearly six years now. We may be in the 8th inning of this cycle, but this baseball game is taking 10 hours instead of 3.

With the punchbowl being taken away, most people expect volatility to increase and correlations to come down (further) in 2015. The U.S. economy is expected to continue to slowly grow and until we see wage inflation (which might just be starting) the Fed isn’t going to tighten.

So, 2015 will be more exciting, but I think we’re still in for a moderately positive year, and a year where active management may be rewarded.

I don’t think there is an exceptional amount of stuff happening next year. If anything the past couple of years have been crazy with elections/new leaders all over the world (Japan, China, India, Brazil) and the end of QE.

Putin just had to scrap his South Stream Pipeline project (gee, wonder why), which would have further increased Russia’s influence in Eastern Europe. Instead, Eastern Europe is pissed he cancelled it. As much of a badass as people think Putin is, he may have bit off more that he can chew here and we could see him have a come to Jesus moment (unlikely) or “palace” coup. that is going to be big news for 2015.

I am really not as concerned about a “taper tantrum” part 2. The Fed has done a much better job of telegraphing rate hikes than they did with the end of QE. It won’t be good for “fragile five” investors, but it won’t be the end of the world either. Which sucks, because stampedes like that create active management opportunities. Really, the global story will continue to be how far the USD can rise against the easing in Europe and Japan.

I haven’t checked, but ohai could probably tell us that insurance against USD rise is the most popular trade and I’m sure his desk is making money off of that (meaning it’s getting expensive).

I like the feedback. Hopefully we’ll get some more people to weigh in. If you think I missed a topic, feel free to add.

the Canadian federal election and potential legalization of marijuana if some coddled 42-yo rich kid gets voted in, which is likely.

The Canadian election won’t even move Canadian markets. All three parties are pretty much status quo, with maybe the NDP being a threat to business (though they’d likely have to moderate themselves to win and if they won). The outcome is irrelevant. Personally I favour minority governments of any stripe as nothing gets done and taxes and spending stay level. Good possibility of this outcome.

LendingClub’s IPO may be something of note. There is some fund opening up now which will invest solely in financial disrupters and not in traditional banks. This sector of the market is growing as non-traditional lenders continue to have exponential growth in several segments. That plus low rates seems like credit availability may get a little too loose. Collateral values on loans seem to have inflated because of the low cap rates used. All-in-all, if credit gets loose people may have more exposure than they think.

At this point, I’m 100% convinced that rawraw works for Lending Club.

Ha ha, you don’t think the first of these “shadow banks” going public may not increase the pace at which they show up, lend money, and potentially blow up? This market is much bigger in China, for example: http://www.cnbc.com/id/102238059

^ I notice you didn’t deny working for the company…

^ and yet, he still doesn’t deny his employment at LC…

Ha ha, I don’t work at LC. They are just the best example. None of you would know ondeck, because you guys don’t follow this sector. But I could’ve used them the same. The point still remains that this sector is changing quicker than I think most realize.

OnDeck Capital, an online site for lending to small businesses, said on Thursday that it had estimated the price range for its initial public offering at $16 to $18 a share amid growing interest in so-called alternative lending platforms.

At the midpoint of that range, the company would raise $154.1 million after expenses. The company’s underwriters also have an option to buy 1.5 million shares, which would increase the amount raised to nearly $178 million.

The company said it had originated more than $1.7 billion in loans since starting in 2007.

http://dealbook.nytimes.com/2014/12/04/ondeck-prices-its-i-p-o-amid-interest-in-alternative-lending-platforms/?_r=0

^ okay, so you’re clearly a lobbyist for the P2P loan sector.

Yeah, the 8 factors are good…2015 is creepy and anyone who can’t see that needs their head examined IMO. Add to that #9 – US 2015 rate uncertainty, impact of no QE unknown, and a pretty lame economy overall, propped up by irrational nationalism and fake govt numbers. That said there is still money to be made, until there isn’t. I’m making a killing off Shanghai large-cap A-shares right now, and currency-hedge Japanese shares. We don’t need the fundamentals to be good to make money, just get out before it corrects.

While US economy is already on a good path with robust consumer spending and increasing capital spending, the recovery in Europe is still fragile. Low energy prices might work as additional stimulus.

Monetary policy will stay expansionary, QE (and maybe buying corporate bonds) from the ECB is expected to start in 1Q15. Rate hikes by the Fed should be small steps, accompanied with justifications by Yellen, similar to Greenspans rate hikes from 2004 to 2006.

Valuation multiples seem to be high but are due to monetary easing, with lower P/Es in Europe than in the US. US price indices are on record highs, compared to the German DAX which still is appr. 15% under its record highs. European companies should benefit from EUR depreciation…

The main negative I see for 2015 is that the US rate cycle is about to start ticking up again. That is usually a good predictor that the stock market will peak within the next 18 months. Of course with QE still going strong in Japan and Europe, its not so straightforward to see how this plays out globally.

We can do this exercise every year and we’ll find at least 10 possible events every time.

I had an opportunity to join early stage start-up in P2P sector, but couldnt do it, give me financial constraints (Familiy + Mortgate + etc). If it will ever make it big i will go cry on AF, so you can tell me i told you so