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By William Patalon III
Money Morning/The Money Map Report
As the post-Memorial Day hangover lingers, and $4 per gallon gasoline becomes a national reality, expect more and more daily energy prognostications.
Goldman Sachs Group Inc. (GS) already is on record for $200-a-barrel oil. As you all know, our own Keith Fitz-Gerald – Money Morning's investment director – has projected a crude-oil price of $225 a barrel. Do I hear $250? What about $5 a gallon gasoline by July 4th?
Sometimes, these daily price gyrations take on lives of their own, but at the end of the day, the basic laws of supply and demand always work themselves out.
The upcoming week's hectic economic calendar could go a long way to clarifying the "Are we in a recession, yet?" discussion. Crucial news from manufacturing and labor highlight the week and any renewed strength in these sectors could put an end to the "R" talk for the time being (or until next week). In fact, the National Association of Business Economic forecast 0.4% economic growth for the 2nd quarter and a much stronger 2.2% gross domestic product (GDP) pickup in the 3rd quarter as the U.S. Federal Reserve and those tax rebates begin to work their ways through the system. Suddenly, economists are projecting a rebound and cries of recession have become somewhat muted (and replaced by cries of inflation).
Year Close (2007)
Qtr Close (03/31/07)
Dow Jones Industrial
10 yr Treasury (Yield)
+ 1 bps
Now that Memorial day has come and gone, investors seem to be monitoring the daily energy trades even more closely than usual (if that is possible) for signs that prices have peaked and Americans will be able to afford summer travel again. Well, in the aftermath of the holiday, gas prices actually continued their trek toward that dreaded $4/gallon level and hit a new national average of $3.96 late in the week. In fact, 11 states and the District of Columbia already are reporting average prices at the pump in excess of that psychological barrier.
While crude prices fell from last week's record highs of $135/barrel, the ongoing "supply/demand vs. speculation" debate rages on. In one corner…The Department of Energy said that exports from the top oil producers dropped by 2.5% in 2007 and are on pace for a similar showing this year. While much of the increased demand focus has been on China, oil consumption throughout the Middle East (and Saudi Arabia, in particular) has skyrocketed in recent years, thus, leaving less to export and meet the growing demand abroad. On the flipside, conspiracy theorists cry wolf that prices have been running without any regard to true supply/demand issues. They point to escalating trades in commodity (petro) futures indexes and make Internet bubble comparisons (remember those fun days?) as explanations for the wild price swings. This week, the regulators got involved (typically a day late and a dollar short) as the Commodity Futures Trading Commission initiated a probe into potential market manipulations by energy insiders.
And suddenly those increased water cooler discussions about the dreaded "I" word are starting to move from speculation to reality. Dow Chemical announced a 20% across the board price increase to "mitigate the effects of raw material costs." German-based DHL soon will be "outsourcing" its North American delivery biz to competitor UPS as its seeks to reduce costs. Discounter airline JetBlue will not be adding to its fleet as expected because it too suffered the ill-effects of rising fuel prices that have prompted major changes throughout its industry (can you say consolidation?). Likewise, automakers continued to struggle from consumer activity (rather inactivity) as both Ford Motor Co. (F) and General Motors announced major reductions to their respective workforces. Apparently, the "rich and famous" have been impacted far less than others as Polo Ralph Lauren and Tiffany both reported better than expected quarterly earnings. Even Dell Inc. (DELL) surprised many analysts with a solid quarter on strong sales in Asia. Turning to financials, shareholders finally approved the JP Morgan Chase & Co. (JPM) acquisition of The Bear Stearns Cos. (BSC) (like they had much of a choice), though $10 a share is a far cry from the $170 the stock traded at in early 2007.
Investors took their clues from declining crude prices this week and again looked for value in the equity markets. The major indexes traded higher (often at the expense of fixed income). In fact, the yield of the benchmark 10-year drifted back above 4.0% for the first time in about five months as talks of inflation seemed to overshadow prior recessionary fears (see below). Still investor sentiment can change on a dime these days and next week brings significant economic releases that are sure to be over-analyzed. Until then, happy motoring (at $4/gallon).
If the consumer truly accounts for 2/3 of the growth of the economy, the latest confidence readings cannot be good news. The Conference Board reported that its confidence index fell for the 5th consecutive month to its lowest level in almost 16 years. Meanwhile, the competing U. of Michigan sentiment survey plummeted to a 28-year low. (So, whatever your index of choice…the consumer appears to be in hibernation.) Then again, what consumers SAY and what consumers DO are often two very different things. Of note, orders for durable goods dropped by 0.5% in April; HOWEVER, once aircrafts and autos were factored out of the equation, sales of these high ticket items actually rose by 2.5% last month. In fact, orders for appliances and electrical equipment surged by over 25%, the best reading ever reported. Overall consumer spending also increased in April, though the naysayers quickly point out that much of the gains were reflective of higher prices as opposed to increased sales. (Bear in mind, any over-analysis of the data can lead to a variety of diverse and confusing conclusions about consumer activity…so pick your poison, but don't read too much into any one number).
This past week also found the revision of the 1st quarter GDP which had initially been reported as growth of 0.6% during the January through March months. Again, the pessimists in the bunch claimed that recession already was in our midst, and (by true definition) two consecutive quarters of negative activity were closing in. Instead, the revised GDP reflected a 0.9% gain in the 1st quarter, a weak showing by any measure, but still positive and far from recessionary.
Can any afford to travel?
Consumer Confidence (05/08)
5th straight decline and worst reading since Oct. 1992
New Home Sales (04/08)
Increase still left sales at lowest level in 17 years
Durable Goods Orders (04/08)
Excluding transportation, best showing in 9 months
GDP (1st Qtr)
Revision shows slightly stronger quarterly growth
Initial Jobless Claims (05/24/08)
More claims reveals softening labor market
Personal Income/Spending (04/08)
Increase in spending offset by rise in prices
The Week Ahead
Construction Spending (04/08)
ISM – Manu (05/08)
Factory Orders (04/08)
ISM – Services (05/08)
Initial Jobless Claims (05/31/08)
Unemployment Rate (05/08)
Nonfarm Payroll Additions (05/08)
Consumer Credit (04/08)
News and Related Story Links:
- Money Morning Special Investment Research Report:
Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.