Manipulated Dollar Helps Energy & Indexes

Written by Dennis Slothower
Posted January 5, 2018 at 7:00PM

Investors cheered the Dow 30 hitting a new record at 25,000 in the first few days of 2018, as the dollar fell and oil prices rallied with investors speculating that good times will last well into 2018.

Though the technology sector has been leading the charge in 2017 and in early 2018, it was not just the Dow 30 hitting 25,000 that was a milestone.

After an 18-year wait, the Technology SPDR $XLF was finally able to recapture its losses from the dotcom bubble bust to set a new high.

That isn't where we will see the biggest growth. For the 4th quarter, the broader S&P 500 is expected to grow by 10.9%, according to FactSet.

Meanwhile, the energy sector is expected to grow at 274.3%.

Remember, the largest of all markets is the currency market, and even though the Federal Reserve has raised interest rates four times since December 2016, the U.S. dollar has been under serious selling pressure for all of 2017, falling over 9%.

Historically, when the Fed raised interest rates it has made the dollar more desirable but, in this case, we are in a currency war, so the central bankers have been depressing the dollar and this in turn has caused the petro-dollar relationship to “elevate” crude oil prices based on their inverse relationship.

A falling dollar means rising crude oil prices and this has been a driving factor in 2017 and has certainly helped energy companies and, indirectly, speculation in big tech stocks.

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Thus, if we are to see any correction in the stock market, the U.S. dollar has to rally, which in turn would undercut oil prices. As long as the dollar continues to plunge, oil prices, even at $60 and rising, will maintain the bull market.

This is the key relationship to this peak bull market — even if the rest of the sectors aren’t growing much, which they aren’t.

In 2017, U.S. crude production increased by 900,000 bbl/day, with Permian Basin oil providing the cornerstone of production. This is expected to continue in 2018, with U.S. total production likely to hit 10.5 million bbl/day.

OPEC might be cutting oil production but the U.S. is more than making up for the oil reduction.

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Here’s the issue for 2018.

The IEA’s Oil Market December Report shows that overall global oil demand in 2018 will grow by just 1.3 million bbl/day.

However, the NON-OPEC oil production for 2018 will grow by 1.6 million bbl/day. Add in 32.5 million bbl/day of OPEC oil production going forward and we have a total mismatch with supply and demand.

This is the making of a massive oil glut.

What about the Tax Cuts and Jobs Act (TCJA)? Won’t that stimulate the U.S. demand for oil?

Not really. The $200 billion or so in Federal money that is hoped for and $800 billion or so in state and local matches, spread over a decade, is not going to do much for the GDP growth rate. Goldman Sachs acknowledges only a 0.2% annual increase!

In the meantime, we have three, possibly four, more rate hikes in 2018 ahead of us. It matters... and we are seeing why it matters, as business-loan growth fell off a cliff in 2017:

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Why is this happening?

There is no big mystery here. When short-term and long-term yields come together there is less and less profit for banks but a whole lot of downside risk for defaults on bank loans on the horizon. How is that going to affect the GDP going forward and the demand for oil?

We have an incredibly dangerous market, but as long as the dollar continues to fall and oil prices rise... no one cares about risk yet.

To your wealth,

Dennis Slothower Signature

Dennis Slothower
Editor, Stealth Stocks Daily Alert and Wall Street's Underground Profits

Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.

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