How This Crude, Crude World Impacts Your Pocketbook
Monday, May 25, 2009 | Barbara CohenRating:
Last week, the feds released the Treasury International Capital (TIC) System report that covers U.S. and foreign securities. Today we want to walk through that report in detail. But before we do, as it is Memorial Day holiday in the USA, I thought I would also show you just how impacted we all are by crude oil futures.
Each summer, the United States has three holidays -- Memorial Day at the end of May, Independence Day on the 4th of July, and Labor Day at the beginning of September (end of summer). Here's a table I put together showing the effect that crude oil futures have on gasoline prices right before the three-day holiday weekends. And to truly illustrate the point, I actually went all the way back to 1991.
|
Year |
Before |
During |
|
1991 |
1.06 |
1.14 |
|
1992 |
1.08 |
1.12 |
|
1993 |
1.06 |
1.10 |
|
1994 |
1.00 |
1.05 |
|
1995 |
1.09 |
1.19 |
|
1996 |
1.15 |
1.26 |
|
1997 |
1.19 |
1.21 |
|
1998 |
1.01 |
1.06 |
|
1999 |
0.99 |
1.11 |
|
2000 |
1.35 |
1.50 |
|
2001 |
1.46 |
1.63 |
|
2002 |
1.20 |
1.36 |
|
2003 |
1.50 |
1.45 |
|
2004 |
1.73 |
2.00 |
|
2005 |
1.90 |
2.07 |
|
2006 |
2.50 |
2.78 |
|
2007 |
2.50 |
3.19 |
|
2008 |
3.29 |
3.91 |
|
2009 |
1.95 |
2.30 |
The "before" data is about 2-3 weeks before the Memorial Day holiday.
"During" reflects the actual three-day weekend.
As you can see, in the earlier years, the effect of changing crude oil futures was not nearly as dramatic as it has been in the last few years. So, even if you don't trade crude futures (yet), you are still very much affected by them.
Of course, the powers-that-be would write off this trend as "supply and demand." But is it "coincidence" that last Wednesday, right before the three-day Memorial Day weekend, gasoline availability was down 4.3 million barrels? Yet, the number of miles driven in the United States fell by 3.6%, a reduction of nearly 108 billion miles.
And for the previous couple of weeks, crude oil and gasoline supplies had been plentiful. In fact, this week -- right before the three-day weekend -- crude oil futures topped $62 per barrel, rising to their highest level in more than six months.
So, if it seemed to you that virtually every Memorial Day, the price of gasoline goes up ... well, you were right.
Speaking of trends that impact our nation in general and us as investors, let's move on to the latest TIC report.
A (Slightly Less) Nervous 'TIC'
By far and away, this is the most important report that comes out monthly. It reflects foreign investment coming into the United States. Unfortunately, it is produced two months behind. (Most other economic reports are "in the rears" by only one month.)
This report shows the impact of March stock recovery, with the S&P 500 rising nearly 20%. Remember, March was the first month where the stock market finally began to recover. The jury is still out as to whether we saw a bear-market rally or the start of a bull market. Hopefully, this report will shed some light.
In March, the following major purchases were made in Treasury bonds:
(the figures are in millions)
- France (9,751), China (14,985), Japan (18,365), Cayman Islands (7,897), Bahamas (4,880), Hong Kong (1,196)
- Total bond purchases 55,763
(This should give us a clue on the money-flow trends.)
- China (-2,000), Japan (27,468), Cayman Islands (2,421), Hong Kong (4,426)
- Total bond purchases 21,643
It's interesting that France purchased Treasuries, when in the prior month it sold them. Almost all the other European countries sold Treasuries; they did not buy them. Those countries need to raise cash themselves, so they are not in the market for U.S. bonds. And if we compare to January, Europe has drastically sold off U.S. Treasuries.
Unfortunately, no country was in the market for corporate bonds during March. This means that companies are still having difficulty raising capital. We know that banks are not lending, and when no country buys corporate bonds, it is very difficult for companies to expand.
A Ripple Effect
We are seeing effects in unemployment numbers. This week, the continuing claims for unemployment were 631,000. And in the Federal Open Market Committee meeting minutes, Fed Chairman Ben Bernanke said he anticipated employment to worsen.
His original expectations were for unemployment to reach 8.8% by year-end. As we are already at that point, his new projections now put unemployment between 9.2 and 9.6%. This does not include any who has fallen off of unemployment because they cannot find work anywhere else.
Corporate stock purchases made a significant improvement, going from -5,143 to 13,150. This shows that foreign countries are still not interested in lending money to companies through corporate bond offerings, but they are willing to buy corporate shares.
Bottom line ... countries know that corporations can default on their bond issuances or decide not to pay the interest, thus leaving the country with worthless paper. With the recent economic downturn, this has occurred with many companies.
With stocks, though, countries feel it is a safer risk model -- knowing they can sell the shares and take a small loss if need be, as opposed to watching their entire investment evaporate.
Recuperation, Maybe -- But Not Quite Recovery
One important difference between February and March. After adjustments and loan repayments, income was positive by 37,507 (in milions). In February, it was 4,140 and in January, -5,143. That's a huge difference and an important step toward U.S. recovery.
At the end of 2008, the United States' total liabilities payable in dollars and foreign currency were $4.6 trillion. If the United States cannot pay its debts, its economic outlook could be downgraded by Standard and Poor's to "Negative," just like what happened to Great Britain this week.
A downgrade in credit rating results in significant consequences, requiring Treasury bond interest rates to rise in order to attract new investors. It was Britain's downgrade -- and the fear that the S&P will do the same to the United States -- that sent the market down 130 points on Thursday.
Again, the jury remains out on the bear-market rally vs. a bull market. Foreign investment in stocks and Treasury bonds improved significantly in March. Wouldn't that be a sign that the bull market has begun?
But, interestingly enough, since the Dow Industrials reached a high of 8,574 the week of May 4, it has yet to regain that high again and closed this week at 8277. Whether we're in a bear-market rally or entering a bull market ... the evidence is inconclusive. But either way, we're in for a ride and it's going to be anything but boring!
(Please let us know what you think about Barbara Cohen's article.)
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Barbara Cohen
Contributing Editor
The Tycoon Report
Economic Calendar for the Week of May 25-29
TUESDAY, MAY 26
10 a.m., Conference Board Consumer Confidence
* Importance (A-F): This release merits a B-.
* Source: The Conference Board.
* Release Time: 10 a.m. Eastern on the last Tuesday of the month (data for current month).
* Raw Data Available At: http://www.tcb-indicators.org
The Conference Board conducts a monthly survey of ,5000 households to ascertain the level of consumer confidence. The report can occasionally be helpful in predicting sudden shifts in consumption patterns, though most small changes in the index are just noise. Only index changes of at least five points should be considered significant.
The index consists of two sub-indexes -- consumers' appraisal of current conditions and their expectations for the future. Expectations make up 60% of the total index, with current conditions accounting for the other 40%. The expectations index is typically seen as having better leading-indicator qualities than the current conditions index.
Highlights
* The Conference Board's Consumer Confidence report for April experienced a notable pickup from March, rising to 39.2 from 26.9. That was the highest reading since last November, yet it still falls well short of the 62.8 reading seen for the same period a year ago.
* The Present Situation index jumped to 23.7 from 21.9, but the Expectations index climbed to 49.5 from 30.2 as respondents were a bit more optimistic about business conditions, the availability of jobs, and income gains.
* There was a slight pickup in plans to buy an automobile, a home and major appliances within six months.
Key Factors
* Consumer confidence remains relatively low, and understandably so given the continued rise in the unemployment rate. Nonetheless, the stock market rally through March and economic data in the same period that suggested the economy was in a bottoming process were welcome sources of support for depressed attitudes.
* The pickup in consumer confidence is good to see, but it invites the telltale reminder that income gains are the real driver of spending. Until there is a sense that the employment situation is in a sustained uptrend, we'd expect to see volatility in the consumer confidence series.
Big Picture
* Consumer sentiment indices get way too much attention. The simple fact is that sentiment does not correlate with consumer spending and thus has little predictive value. Consumer spending correlates more closely with income. Sentiment tends to reflect well-known factors such as unemployment rates and gas prices more than it predicts future spending patterns.
THURSDAY, MAY 28
8:30 a.m. Durable Goods Orders
* Importance (A-F): This release merits a B.
* Source: The Census Bureau of the Department of Commerce.
* Release Time: 8:30 a.m. Eastern around the 26th of the month (data for month prior).
* Raw Data Available At: http://www.census.gov/ftp/pub/indicator/www/m3/index.htm
The durable orders release measures the dollar volume of orders, shipments, and unfilled orders of durable goods (defined as goods whose intended lifespan is three years or more). Orders are considered a leading indicator of manufacturing activity, and the market often moves on this report despite the volatility and large revisions that make it a less-than-perfect indicator.
These problems can be minimized by looking at the breakdown of orders. The total number is often skewed by huge increases in aircraft and defense orders. An increase based solely on strength in one sector tends to be discounted, while the market is more impressed with broad-based increases in orders.
Highlights
* The headline number for March durable orders was better than expected, as it was down 0.8% versus a consensus estimate of -1.5%. Excluding transportation, orders declined 0.6%, which was also better than expected (consensus -1.2%).
* There were downward revisions for the February data for both components. Orders were shown to be up 2.1% versus an originally reported increase of 3.4% while the ex-transportation number was up 2.0% versus an originally reported increase of 3.9%.
* Looking within the March report, shipments were down 1.7% after a 0.8% decline in February. That won't factor well for Q1 GDP. Meanwhile, the continued weakness in business investment was evident with a 1.7% drop in the shipment of non-defense capital goods, excluding aircraft. That followed a 0.1% increase in February and a 9.4% decline in January.
Key Factors
* This report is mixed news at best as far as expectations are concerned and it isn't particularly good news as far as the economy is concerned.
Big Picture
* Durable goods orders trends have been very weak in late 2008 and early 2009. This reflects the collapse of confidence in the business sector and poor credit market conditions. The rate of decline should ease and orders might stabilize in mid- or late 2009, but the outlook has to be described as grim. Overseas demand is particularly weak and exports are plunging. The business sector is in a deep slump.
FRIDAY, MAY 29
8:30 a.m. Gross Domestic Product
* Importance (A-F): This release merits a B.
* Source: Bureau of Economic Analysis, U.S. Department of Commerce.
* Release Time: Third or fourth week of the month at 8:30 a.m. Eastern for the prior quarter, with subsequent revisions released in the second and third months of the quarter.
* Raw Data Available At: http://www.bea.doc.gov/bea/dn1.htm
Gross Domestic Product (GDP) is the the broadest measure of economic activity. Annualized quarterly percent changes in GDP reflect the growth rate of total economic output. The figures can be quite volatile from quarter to quarter. Inventory and net export swings in particular can produce significant volatility in GDP. The final sales figure, which excludes inventories, can sometimes be helpful in identifying underlying growth trends as inventories represent unsold goods, and a large inventory increase will boost GDP but might be indicative of weakness rather than strength. The broader components of GDP are: consumption, investment, net exports, government purchases, and inventories. Consumption is by far the largest component, totaling roughly 2/3 of GDP.
In addition to the GDP figures, there are GDP deflators, which measure the change in prices in total GDP and for each component. Though the Consumer Price Index is a more closely watched inflation indicator, the GDP deflator is another key inflation measure. Unlike CPI, it has the advantage of not being a fixed basket of goods and services, so that changes in consumption patterns or the introduction of new goods and services will be reflected in the deflator.
Highlights
* First-quarter real GDP dropped at a 6.1% annual rate in part because inventory contraction sliced a whopping 2.8% off the change. Real final sales, excluding inventories, fell at a 3.4% annual rate. Inventories count, though, as the lower levels reflect sharply lower production.
* The business data in GDP were terrible. Investment in software and equipment fell at a 33.8% annual rate. Non-residential construction spending (offices) fell at an amazing 44.2% annual rate. Both of these categories will continue lower. Businesses remain in retrenchment mode even if the rate of decline might slow.
* Residential construction spending continued to plunge, and was down at a 38% annual rate.
* Government spending fell at a 3.9% annual rate as state spending and defense spending contracted. This was another factor in the overall weaker GDP number compared to estimates.
* Raw Data Available At: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Key Factors
* The bulls will grab onto the fact that real personal consumption expenditures rose at a stronger-than-expected 2.2% annual rate. In a typical business cycle, consumer spending picks up first, and this might be a signal of better times to come. Bears will note that the gain comes off horrible fourth-quarter spending, and that January and February are light consumer months in which gains can be exaggerated by strong seasonal factors.
* Our opinion is that not too much should be read into the apparent consumer strength. Unemployment is going higher, wage gains are limited, and credit remains constrained.
* The analysis of the GDP data depends on whether the good consumer spending gain is seen as a leading indicator. That makes sense in normal cycles. This cycle is heavily dependent on government action and credit market conditions. Consumer spending could head down again in the second quarter, and risks remain high for the economy.
Big Picture
* The trends in the economy were moderately poor through the summer of 2008. Then, in September, the trends tanked along with the stock market. Some tech firms noted a significant drop-off in demand right after the mini-panic of mid-September. These worsening trends were readily apparent in the fourth quarter GDP numbers, and will remain so into 2009 as well. Consumer spending is weakening and will only take a significant turn for the better once the declines in payroll moderate. Business investment is also in a sharp retrenchment. The stronger dollar clearly hurt export demand.
A lot now depends on overall psychology and perceptions of how well the government responds to the financial market and other problems such as exist in the auto industry. The economic outlook is now as much a function of government action as it is of the traditional correlations and trends among macro-economic variables.
9:45 a.m. Chicago Purchasing Managers Index
* Importance (A-F): The Chicago PMI merits a B.
* Source: Kingsbury International Ltd. and Institute for Supply Management -- Chicago Inc.
* Release Time: Typically the last business day of the month at 9:45 a.m.
There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The New York and Philadelphia Fed's surveys are the first each month, followed by the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the national Institute for Supply Management data and are of little value.
The purchasing managers' reports are measured like the national ISM -- 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the New York, Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark. These surveys can be of some help in forecasting the national ISM data.
Highlights
* According to the Institute of Supply Management, Chicago and Kingsbury International Ltd., the Chicago PMI jumped to 40.1 from 31.4 in March. That is the highest reading since September and comfortably above the consensus estimate of 35.0.
* There was encouraging news (or should we say "less bad"?) on several fronts. The new orders index rose to 42.1 from 30.9; order backlogs increased to 36.9 from 21.3; inventories fell to 30.6 from 34.9; employment picked up to 31.8 from 28.1; production improved to 38.1 from 32.7; and prices paid dipped to 28.4 from 34.1. Supplier deliveries fell to 45.4 from 48.4.
* The full report is available at www.kingbiz.com
Key Factors
* The line between expansion and contraction is 50, so the April reading can be interpreted as saying that activity in the Chicago area is still contracting, but at a slower rate than before. That understanding matches the economic view provided by the Fed in the Federal Open Market Committee policy directive.
Big Picture
* The Chicago PMI has little overall economic value, and is only watched by the financial markets because it is usually released one day in advance of the similar national ISM manufacturing survey. A significant move in this regional survey will therefore sometimes be seen as having predictive value for the ISM index.
9:55 a.m. University of Michigan Consumer Sentiment Index
* Importance (A-F): This release merits a B-.
* Source: The University of Michigan.
* Release Time: Preliminary: 10 a.m. Eastern on the second Friday of the month (data for current month); Final: 10 a.m. Eastern on the fourth Friday of the month (data for current month).
The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading. Like the Conference Board index, it has two subindexes -- expectations and current conditions. The expectations index is a component of the Conference Board's Leading Indicators index.
Big Picture
* Sentiment readings are a reflection of a variety of events rather than an accurate tool for forecasting consumer spending. Gas prices and political events can have an outsized impact on sentiment. In general, these data are of very little economic value.
