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By William Patalon III
Money Morning/The Money Map Report
Although consumers and businesses have gotten a bit of a reprieve at the gas pump as of late, the escalation in oil prices we've seen over the past year has led to some major changes in overall consumer behavior. Many car-owners have dumped their gas-guzzling pickup trucks and SUVs at the nearest used-car lot and used the proceeds to buy some gas-sipping rides. Companies with large distribution networks have redesigned their shipping schedules, crafting more efficient routes that accommodated larger truckloads.
The upshot: Gasoline sales tumbled during the first half of the year as domestic demand fell to its lowest level in five years. In fact, the U.S. Department of Transportation reported that Americans drove almost 5% less in June than a year ago, and also said that the buses, subways and light-rail systems that make up the nation's public/mass-transit systems climbed by 3.4% in the first quarter of the year.
Lately, U.S. gasoline stations have been forced to adjust their prices (again) after prices at the pump dropped below $3.80 a gallon – a hefty decline from the prices of $4 a gallon and higher that motorists were forced to deal with as the summer driving season began.
Even in China, oil imports dropped substantially in July on shrinking global demand. (It will be interesting to see if – and by how much – the Summer Olympic Games affect these numbers. And even if the games prompt a spike in demand, some analysts are now predicting that a post-Olympic economic "lull" will afflict Mainland China – watch for our analysis of that theory in an upcoming issue of Money Morning).
This energy-price conundrum doesn't stop there, either, as such geopolitical "wild cards" as the Russian invasion of Georgia continue to whipsaw prices. Even with such tensions, however, energy traders brushed aside concerns about major supply disruptions – not the response we would've seen just a few months back. Late last week, in fact, oil prices took cues from the newfound strength in the dollar and dropped below $112 a barrel, a number not even imaginable in mid-July, when crude-oil prices reached a record level of $147.
All's well on the Energy Front, it seems.
Don't you believe it (as we've said on more than one occasion during the past year). In the near term, crude-oil prices could well keep declining … but it's only going to take one "real" scare – a terrorist attack, or some sort of event that creates protracted supply worries – to cause oil prices to spike in a big way.
And in the long run, demand is going to keep rising in such emerging-market countries as China and India. That can only send oil prices higher. [For a related story on oil prices in today's issue of Money Morning, please click here].
On the Horizon
The July inflation report (Part II) will be reported tomorrow (Tuesday), with the release of the wholesale price gauge, the Producer Price Index (PPI). Since energy prices have declined in recent weeks, analysts should take these numbers with a grain of salt, as the July data still will reflect the previously higher levels.
Of greater relevance, perhaps, is the Index of Leading Economic Indicators, due out Thursday. The leading indicators often serve as a foreshadowing of future activity so U.S. Federal Reserve Chairman Ben S. Bernanke and friends should take note of that report.
More retailers post earnings this week, including Limited Brands Inc. (LTD), The Gap Inc. (GPS), AnnTaylor Stores Corp. (ANN), and The Home Depot Inc. (HD). By now, however, most investors realize that consumers remain cautious about the economy, and that most related companies (other than discounters) have continued to struggle. Maybe the lower gas prices will help turn things around for these and other businesses in the coming months – that is, as long as the current trend in energy remains "friendly." [For a related story on consumer sentiment in today's issue of Money Morning, please click here.]
We've all watched as the once-pristine reputation of former Fed Chairman Alan Greenspan has been tarnished by the credit crisis, and by some of his recent public pronouncements that were aimed at putting the blame on others (possibly impacting book sales). But that's okay, as investors are now eagerly awaiting the authorized biography of the "real" market maestro – Berkshire Hathaway Inc. (BRK.A, BRK.B) Chairman Warren Buffett. The book, "The Snowball: Warren Buffett and the Business of Life," published by Bantam Dell Publishing Group, is due on bookstore shelves Sept. 29.
While certain optimistic analysts claimed that the worst of the credit crisis had ended, the latest news from the financial front indicated otherwise. Swiss banking giant UBS AG (UBS), fresh off $5 billion in new mortgage write-downs, will divide its investment banking and wealth management operations into two separate units – and some analysts believe it may look to sell off the banking arm over the next few years.
JP Morgan Chase & Co. (JPM) announced additional losses of $1.5 billion in July and then followed in the footsteps of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS, and others, by agreeing to settle with regulators for billions (plus fines) over the sale of risky securities. In non-financial news, Wal-Mart Stores Inc. (WMT) bucked the negative retail trend by reporting a 17% increase in quarterly profits as strong international sales helped overcome the domestic slowdown. Meanwhile, Macy's Inc. (M) issued a warning that earnings for the year will not meet prior expectations and J.C. Penney Co. Inc. (JCP) and Abercrombie & Fitch Co. (ANF) missed analysts' outlooks, as well. Despite the rise in commodity prices, food services company Sysco Corp. (SYY) [not to be confused with techie Cisco Systems Inc. (CSCO)] posted a 10% gain in quarterly earnings. Given the ongoing economic concerns (see below) and the "challenges" faced by financial-services companies and retailers, congressional Democrats are pushing for another stimulus package, a move with political implications during the presidential election year.
Looking at the fixed income sector, bonds moved higher late in the week on a stronger dollar and the yield on the benchmark 10-year fell below the 3.90% level. While pressures on financial stocks (Citi, JP Morgan, or Bank of America Corp. (BAC)) propelled the Dow Jones Industrial Average lower at mid-week, other equity indexes held up quite nicely. As energy prices keep falling, some investors believe that corporations will enjoy improved expense outlooks in the months to come, causing certain share prices to react accordingly. Many companies already have begun making helpful adjustments.
Year Close (2007)
Qtr Close (06/30/08)
10 yr Treasury (Yield)
While talks of the dreaded "R" word come far less frequently these days (although there's still some concern about the "S" world – stagflation), economists remain pessimistic about the rest of the year (and beyond). Some economists previously believed the country would experience a nice rebound by the second half of 2008, though the latest economic projections call for 1.2% growth in the third quarter and a feeble 0.3% increase in the fourth.
A recent CEO survey showed that 90% of top execs polled considered domestic conditions to be "fair" or "poor." The Fed Beige Book warned that the overseas demand for "Made in America" goods was beginning to soften, and manufacturers were growing more concerned that the recent strong international activity would no longer help cushion the domestic weakness. In fact, the European Union (EU) economies actually fell by 0.2% in the second quarter and consumer confidence dropped to its lowest level in more than five years. Perhaps the European Central Bank can hold off on those rate hikes after all.
Even former Fed Chief Alan Greenspan (remember him?) thinks the housing sector will not show signs of a turnaround until the first half of 2009. Greenspan also criticized the Bush Administration over its handling of the Fannie Mae (FNM) and Freddie Mac (FRE) debacles, perhaps attempting to shift blame away from himself for his role in the "lax" regulatory oversight of housing and the mortgage industry.
Looking inside the weekly numbers, retail sales dropped in July as cautious consumers stayed away from the malls and seemed to be waiting for the absolute last minute for any back-to-school shopping needs. Even removing the weak auto sales data from the equation, retailers suffered their worst showing in five months.
Meanwhile, the July CPI surged by its fastest pace in 17 years and the core statistic (excluding the volatile food and energy components) increased slightly more than expected, as well. However, since average gas prices have declined by more than 20 cents a gallon in the past few weeks, some analysts expect that the August (or possibly September or October) CPI release will look far better (unless, of course, a situation like the Russia/Georgia conflict heats up or a sizable hurricane wreaks havoc on oil platforms in the Gulf of Mexico).
Weekly Economic Calendar
Balance of Trade (06/08)
Smallest trade deficit in 3 months
Retail Sales (07/08)
Worst showing in 5 months
Grew at fastest rate in 17 years
Initial Jobless Claims (08/09/08)
Slight decline though 4-week average highest in 6 years
Industrial Production (07/08)
Better than expected showing for manufacturing sector
The Week Ahead
Housing Starts (07/08)
Initial Jobless Claims (08/16/08)
Leading Eco. Indicators (07/08)
News and Related Story Links:
- Money Morning Special Investment Report:
Profit Opportunities From the New Cold War.
The Producer Price Index (PPI).
Index of Leading Economic Indicators
Authorized Warren Buffett biography due September 29.
- Money Morning Economic Analysis:
Soaring Consumer Prices and Mounting Foreclosures Threaten 2008 Economic Growth.
- Money Morning Economic Analysis:
Sales Down as Unemployment Rises and Home Values Decline.
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.