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2014 trends to watch: oil glut and airline oligopoly

By Sreeni Meka

The U.S. Federal Reserve has started tapering its long-term bond purchasing. The bond market has adjusted since the shift in monetary policy by the Fed last year with the increase in long-term rates and declining bond prices. In my opinion, as long-term interest rates start going up, funds invested abroad will start coming back home.

Also, as the Fed stated, if short-term interest rates or real interest rates start going up, that will put upward pressure on the dollar relative to other currencies. Another consequence of the shift may be declining commodity prices, including gold, silver and oil.

On other side, an increase in interest rates bring funds invested abroad back to US. That has already been evident in the drop in emerging market currencies in countries like Argentina, Brazil, India, Indonesia, Turkey and Venezuela.

I'm not sure how much the quantitative easing has helped the US economy. However, in my opinion, it has hurt the banking industry. The Fed action kept the yield curve less steep; banks had no incentive to lend their deposits.

In my opinion, by the time the Fed completes its bond purchase program, long-term rates will go up again to historical levels, which are much higher than current rates. In addition, the yield curve will further steepen, which is generally considered a boon to banking sector.

2013 was one of the outstanding years for the stock market returns. The Covestor Long Term Value portfolio returned 39.7% (net of fees). As far as 2014, we can predict the economy is going to be healthier, but we don't know what the general stock market is going to do next year. I have now way of knowing for sure, but I believe it will head higher this year.

Many leading economic indicators are exhibiting very positive trends. Average weekly hours on private non-farm payroll are stable, unemployment insurance claims are lower, the trend in new orders for durable goods and nondefense capital goods are trending up.

New residential construction is picking up, money supply is increasing and yield curve is steep. Will markets in 2014 follow the economic trend? I believe the chances are high that they will.

In my opinion, 2014 will be a remarkable year for oil industry. Energy exports might actually exceed imports.If so, that will contribute to GDP growth.

The glut of oil coming from Canadian Oil sands, Bakken shale and Marcellus shale is burdening transport lanes. Crude oil stock levels are high at Cushing, Oklahoma, and the that is keeping a spread between the domestic West Texas intermediate (WTI) and the Brent crude from Northern Sea.

I believe the biggest beneficiaries of this trend will be oil refineries in the midwest and to a lesser extent domestic refiners in the gulf region. In 2014, I believe there will be some consolidation in the refining industry.

In my opinion, another trend to watch in 2014 is going to be higher travel costs, thanks to the airline industry's recent consolidation. Six major airlines have become three big mega-carriers that are an oligopoly when it comes to domestic and international routes.

I believe the only competition to these big three is Southwest Airlines (LUV) on domestic front and JetBlue (JBLU) on certain international flights.

Recently Southwest airlines announced it is going to get into international markets. The repeal of Wright Amendment gives Southwest airlines the right to fly direct routes from Dallas Love field to any other city. Despite a huge run in Southwest's stock last year, I believe the carrier's shares may still have bright outlook in 2014 in my opinion.

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
Sreeni Meka

Sreeni Meka

Sreeni is long-term value investor, investing for past eighteen years. Sreeni has accumulated in-depth knowledge in equities and derivatives through

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