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First Quarter 2015 Forecast and Opinion

The most dramatic price movements in the first quarter took place in the currency markets. In contrast to the improving US economy with higher interest rates on the horizon, the European Central Bank has embarked on an historic $1.16 trillion stimulus plan in order to stem a recessionary wave of deflation occurring on the Continent. This, plus the plunge in oil prices (which is measured in dollars) has driven the US dollar to highs against all other currencies not seen in years. The effect is exacerbated by the Federal Reserve terminating its “QE” stimulus program last October.
At what point does a strong dollar begin to impact US corporate earnings, as multinational U.S companies face the double threat of their products becoming relatively more expensive abroad and other foreign competitor’s products becoming cheaper in the US? Dollar strength is already taking a bite out of profit expectations, particularly of large multinational firms. Last year analysts expected first-quarter S&P 500 profits to grow by 9.5%, and by 11.6% for all of 2015. Now, first-quarter profits are expected to fall by 4.9% in Q1 and to grow by only 2.1% for all of 2015. Consequently, U.S. companies with a strong domestic orientation, as well as European companies benefiting from a stronger dollar are outperforming.
Emerging markets are experiencing a significant net outflow of capital for the first time since the financial crisis. Oil producing countries with large current account deficits, like Russia and Venezuela, have experienced severe setbacks in their economies and their credit ratings. There is no lack of worrisome events worldwide whose outcomes are unpredictable: The Greek government is losing credibility as it attempts to refinance its debt, ISIS continues to spread its violence in the Middle East, Iran nuclear negotiations could still break down, and Israel may strike Iran militarily if they do.
Yet stock market volatility, as measured by the VIX index, is below average, which suggests that we may be in for increased price fluctuation ahead.
The US Department of Energy is forecasting a sharp slowdown in US shale oil production growth. The number of US oil rigs in operation has fallen to 802 from a high of 1609 last October. The number of active rigs in past oil recessions usually declines between 40 and 60%. Given that the oil rig count fell by very little last week, speculation is building that the price of oil has finally bottomed out. It remains to be seen whether a nuclear deal with Iran has a successful conclusion. If it does, there will be an additional estimated 1 million barrels of oil per day which has largely been built into the market. If the Iran deal falls through, it is likely to push prices higher. Last week, US oil production actually declined somewhat, while demand growth surprised on the upside. Americans are driving more, and gasoline consumption has increased by a half million barrels per day due to low prices. Any military surprises in the Middle East this year will squeeze oil prices sharply higher.
The US job number issued last week was considered a disappointment. While the unemployment level remained at 5.5% there were only 126,000 jobs created in March, considerably less than the 264,000 figure for February and far less than the 200,000+ job creations per month over the last 12 months. This is most likely attributable to three factors: a higher dollar, bad weather, and the slowdown in the oil industry leading to job layoffs. Nonetheless, the labor force participation rate, now at 62.7%, is at its lowest level since 1978, which contradicts the rosy picture painted by the standard unemployment rate. This data supports the view that interest rate increases by the Fed will be put off further in time.
Whether or not the Federal Reserve hikes interest rates as expected, it is unlikely that the bull market for stocks comes to an end until short and long term interest rates are considerably higher.

The S&P 500 rose 0.4% over the first quarter, the Dow lost 0.3%, and the Nasdaq gained 3.5%.
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Grant Rogers

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This report has been prepared by Metis Capital Management LLC. This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst responsible for the preparation of this report may interact with trading desk personnel, sales personnel, other analysts, journalists, and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Metis Capital Management LLC is under no obligation to update or keep current the information contained herein. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. Metis Capital Management LLC accepts no liability for any loss or damage arising out of the use of all or any part of this report. Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Metis believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

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