Oil touches an 11 year low.

* Oil continues to slide…
* Spanish election impasse could weigh on euro.
* China allows the first increase in 11 sessions…
* Gold tries to rally on softer dollar…

And Now. Today’s A Pfennig For Your Thoughts.

I spent some time this weekend with Frank touring ‘middle Missouri’. Frank’s family has farmed some very fertile bottom ground along the Missouri river for years, and Frank has turned a piece of that property into what will hopefully become quite a hotspot for hunting waterfowl. Unfortunately the birds weren’t flying much this weekend, so the property was more of a ‘refuge’ but we still had a great weekend enjoying the outdoors. Frank will kick off today’s Pfennig with his own reflections of the weekend so take it away Frank:

Time in the country reminds me that the Fed isn’t the only place where government attempts to shape markets into an image it likes. As we drove across the Missouri River bottom Saturday morning a glance to the north and the south revealed the towering vapor plumes of competing ethanol plants in full steam. A search of the literature from independent sources tends to suggest that the subsidies and emphasis is more about redistribution than economics. When discussed by industry and politicians though it’s wrapped up nicely with a bow on it. I’ll admit that as a small time corn producer I benefit but as always there are legions of unintended consequences.

Another fuel component, Brent Crude, was reported late Sunday by various news channels to be traded at the lowest level in 8 years. If this was happening all by itself we could draw conclusions about the glut of new oil or Saudi supply. Could it be a plot to cripple Russia? Who knows. Maybe one or more of those is the answer but oil isn’t alone.

All the basic commodities have fallen sharply in the past year. And they feel like they are headed lower. But the cost of money is bucking that trend with the Fed stepping in to require the cost of short term money to rise. Sage observers shouted: watch the euro head to parity this afternoon. And so it fell a bit. Maybe it will get there – we feel there may be a little more dollar strength before a decline. But it’s a reminder on the eve of many annual market predictions that it’s hard to get it right.

Thanks Frank. As he mentioned the price of oil is grabbing all of the headlines, and while it may have hit an 8 year low on Friday I see where it continued to fall over the weekend to touch its lowest level in more than 11 years at just below $34 per barrel. The lower prices are the result of a combination of lower demand and higher global supply – but the real question for investors is which is the ‘real’ story. Oil production is running close to record highs as OPEC has continued to keep the oil flowing in spite of the lower prices. And if that was the only story driving oil lower, the lower energy prices wouldn’t be causing any real concern (except if you are in the oil business). From all indications, the price of oil will remain low through 2016 as more barrels entering the market from Libya, Iran, and even the US. But the lower prices also indicate that the demand side is also weak and that is certainly a bit more concerning. We will have to wait and see if demand can stage a comeback with both the US and China staging an economic recovery.

Obviously the fall in oil has put pressure on all of the commodity currencies with Mexico, Canada, Norway and the pound sterling all pushing lower vs. the US$. The euro is riding out the concerns over the Spanish elections, holding onto the $1.08 handle with the markets looking to move it even higher. The election in Spain didn’t settle on a clear winner, setting the scene for potential weeks of political stalemate in Europe’s third largest economy. Spain’s stock market was down 2 percent following the results but has seemed to find a bottom. There is a possibility that a new election will need to be called, which could drag this political uncertainty out up to a year which is not good news for the euro.

One currency which investors have been looking to instead of the euro has been the Swiss franc which will probably end 2015 as one of the only currencies with a slight gain vs. the US$. Switzerland’s current account surplus widened in the third quarter according to data released by the SNB. The rise was mainly due to an increase in investment flows which rose 8 billion francs year on year to 12 billion. Investors desire to hold the Swiss francs has increased this year after the SNB abandoned its three year old peg to the euro back in January. A positive current account surplus is one thing which supports a country’s currency as it indicates the long term strength of the country and therefore it’s currency.

Chuck is still on vacation, but he just can’t stop sending us tidbits to share with you readers, so here is the latest thoughts from Chuck:

I know, I know, I said when I go on vacation, I clear my head of financial stuff. But the newspapers, the TV’s, the radios, everywhere you go, you can’t escape talk about the Fed’s Rate Hike last week. And that got me thinking. Monetary policy has always held the idea that to combat inflation, you simply raised interest rates. Paul Volcker is the poster child for that idea, right? So, the Fed has said over and over again that they want the economy to achieve an inflation rate of 2% (currently 1.3%). So, the inflation rate is below their target, right? So to achieve that target wouldn’t a Central Bank keep rates where they were or even cut them further, if their inflation rate target couldn’t be met? To raise rates, when inflation is below your target, is betting against your goal! Think about that, for this is a subject that no one is discussing out there. The Fed hiked rates, that’s a given, but what’s not a given is how much that rate hike and the subsequent rate hikes they have said they will make in 2016, are going to combat their goal of a rising inflation rate! Seems to me, that the Fed is only giving lip service to the inflation target. And I’m good with that! And oh, while I’m on the subject future rate hikes. The Fed says 4 more in 2016. I say no more than 2, before the roof comes crashing in on the economy. And let’s not forget that that 2016 is an election year…

Thanks again for sharing your thoughts with all of us this morning Chuck! There certainly doesn’t seem to be any signs of inflation in commodities! Today we really don’t have any data which could move the markets, but tomorrow we will get the final update of GDP for the 3rd quarter which is expected to show a slight drop from 2.1% to a figure of 1.9%. We will also get the PCE price data which is expected to remain at a 1.3% increase during last quarter. Finally we will see US Existing home data for October which is expected to show a large (6.1%) increase in prices YOY but flat sales after a drop of 3.4% in the previous month.

Gold is up slightly as it takes advantage of a softer dollar. The precious metal rallied on Friday afternoon after the US dollar fell against the Japanese yen as questions arose concerning just how much additional monetary stimulus the Bank of Japan would be bringing to the table in the coming year. Unfortunately the lower oil prices capped any real chances of a rally for gold. As I mentioned earlier, the price of oil hit an eleven year low decreasing the need for investors to use gold to ‘hedge’ against inflation. Chuck sent me some thoughts from one of the desk’s favorite commodity experts, Jim Rogers which he spotted in the Daily Reckoning this weekend and I think his thoughts are a perfect way to cap off today’s Pfennig:

“But we’re well aware of the collapse in gold prices in the past five years from an all-time high of $1,900 per ounce in August 2011 to about $1,050 per ounce today — a 45% drop from the high.

This move came as no surprise to Rogers. He told me that “no commodity goes from a baseline to a permanently new high without a 50% retracement along the way.”

By his reckoning, gold formed a base at $200 per ounce in 1999. The 2011 high of $1,900 per ounce meant a gain of $1,700 per ounce over the base.

A 50% retracement of that $1,700 move up meant that gold would hit a low of $1,050 per ounce (down $850 per ounce from the high). That’s exactly where gold is today.

Jim said he already had the allocation of gold he wanted in his portfolio but would buy more if it overshot to the downside, say $950 per ounce. In any case, the Jim Rogers’ 50% retracement observation suggests that the current level for gold represents an excellent entry point…”

Currencies today 12/21/15. American Style: A$ .7160, kiwi .6745, C$ .7165, euro 1.0858, sterling 1.49, Swiss $1.0062. European Style: rand 15.0775, krone 8.7965, SEK 8.5505, forint 289.12, zloty 3.9010, koruna 24.859, RUB 71.261, yen 121.37, sing 1.4110, HKD 7.7517, INR 66.3312, China 6.4753, pesos 17.10, BRL 3.9777, Dollar Index 98.759, Oil $34.25, 10-year 2.2022%, Silver $14.14, Platinum $867.42, Palladium $556.43, and Gold $1,070.11

That’s it for today. I had a great time touring ‘middle Missouri’ with Frank over the weekend, and even though we didn’t fire a shot it was still nice to be out in the field. Brendan and I made it home in time to attend a Christmas party which is thrown by one of his high school buddies – it was great seeing all of the families and hearing how the boys are doing since graduating a couple of years ago. Today is my little sister’s birthday, so Happy Birthday Tracy! And today may be the birthday of Mike Harrell’s newest addition to his family. Mike’s wife was scheduled to be induced today, so hopefully everything goes as planned and Mike and his wife can welcome their second son into his growing family! I hope everyone has a Marvelous Monday and a great start to your holiday week!

Chris Gaffney, CFA
EverBank World Markets