By William Patalon III
Money Morning/The Money Map Report
Last week's crude and gasoline inventories dropped more than expected as the effects of Hurricane Gustav resulted in some production disruptions. Gustav, which struck last month, was the fourth-most-destructive storm to hit the United States, causing $20 billion in damages.
And then came Hurricane Ike.
Ike made landfall in the Galveston area of the U.S. Gulf Coast on in the pre-dawn hours Saturday (the day I was penning this column) as a Category 2 storm with winds hitting 110 miles per hour. Ike's path toward Houston makes it the first storm to hit a major U.S. metropolitan area since Hurricane Katrina eviscerated New Orleans in 2005, Bloomberg News reported.
We won't know how much direct damage those high winds from Hurricane Ike will cause for several days at least. From the initial reports,.
But the indirect costs are already appearing.
At least 13 Texas refineries shut down as Ike approached, the equivalent of more than 19% of the nation's oil-refining capacity, Bloomberg said.That will certainly limit fuel deliveries across the country in the days and weeks to come – a reality that will likely result in higher gasoline and energy prices.
The Gulf Coast refineries and ports are the source of about 50% of the oil and gasoline used in the eastern half of the U.S. market. Refineries operated by Exxon Mobil Corp. (XOM), Valero Energy Corp. (VLO), ConocoPhillips (COP), and Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) were affected.
The bottom line: Gasoline shortages may occur across the southern United States and up to Washington because of the production losses caused first by Hurricane Gustav and now by Hurricane Ike, a U.S. Energy Department official told journalists on a conference call Friday.
"We expect to see constrained supplies of refined products," said Kevin Kolevar, the Energy Department's assistant secretary for electricity delivery and energy reliability. "The administration will utilize every tool at our disposal to lessen the likelihood of limited fuel supplies," including tapping the Strategic Petroleum Reserve.
In the days to come, traders will monitor the situation closely as operators assess the damage (in both equipment loss and duration). Now that Labor Day has passed, many so-called "experts" expect the demand for gasoline to weaken as the peak vacation period ends and most kids have returned to school, another catalyst for low energy prices (if only the Atlantic Hurricane season would cooperate).
The U.S. Federal Reserve holds its regularly scheduled meeting of policymakers on Tuesday, and even with the increasing dissent within the interest-rate setting Federal Open Market Committee (FOMC), most observers anticipate little more than some tough talk about the weak economy and potential threats of inflation [For a preview of the upcoming FOMC meeting, please click here].
As commodity prices continue to decline, many economists believe that the concerns over price pressures may subside somewhat in the months to come, thus allowing the Fed to focus on the struggling housing and labor markets. Combined with the Fed policy statement at the conclusion of the meeting, a nice array of economic reports (housing, manufacturing and inflation) will help paint another picture of the current state of the economy. Retailers still hold out hope that the frugal consumer will wake up one day soon, recognize that oil and gas prices have dropped (even with the recent hurricanes), and open up their pocketbooks (in a big way) in time for the holidays.
In the meantime, keep an eye on Lehman Brothers Holdings Inc. (LEH), as a collapse there could signal still more problems in the U.S. financial-services sector.
This past week the federal government announced a "bailout" of Fannie Mae (FNM) and Freddie Mac (FRE), the leading financial institutions that earlier this year were financing 80% of all new U.S. mortgages. The U.S. Treasury is prepared to inject up to $200 billion to support (rather take over) these Government Sponsored Enterprises (GSEs) that are so critical to the nation's housing sector and the global financial markets.
In fact, as I pointed out in an investigative analysis for Money Morning late last week, the bailout was prompted not by the nation's housing woes, but by a fear that countries such as China and Japan might stop buying our bonds [To read that investigative analysis, Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout, please click here.]
While the taxpayers will undoubtedly face much of the burden of the bailout (some estimate that taxpayer burden will reach $300 billion or more), and shareholders lost most of whatever value was left in the stock, many analysts hailed the move as the "beginning of the end" of the housing bust. Apparently, the Bush Administration insiders believed that the risk of a global financial system collapse was simply too much to risk, should Fannie and Freddie be left to work out their own "challenges" without any government intervention.
While the jury remained out over what structures and roles the subsequent entities will maintain, analysts see some positives for the housing market developing in the aftermath of the bailout. In fact, mortgage rates already have declined to their lowest levels in five months (an admittedly nice start).
At the same time, the federal government has now guaranteed another $5 trillion in debt – a move that effectively doubles the outstanding public debt on the nation's balacne sheet.
News was not quite so rosy for Lehman Brothers, as the company struggled to raise much-needed capital and investors seemingly lost any and all confidence in management. While the Korea Development Bank (KDB) was initially thought to be the perfect "white knight," the deal failed to materialize and the newest option includes the sale of its asset-management (Neuberger Berman) and private-equity units. The stock already has lost more than 90% of its value since November and more pessimists have emerged as the company looks (begs) for a buyer (any buyer).
In more-positive (albeit non-financial) news, McDonalds Corp. (MCD) showed that Big Macs are recession-proof as sales in August rose by a greater-than-expected pace; even The Walt Disney Co. (DIS) reported better-than-expected results as the weak dollar and strong global sales helped the company's performance.
Year Close (2007)
Qtr Close (06/30/08)
Dow Jones Industrial
10 yr Treasury (Yield)
While most recent economic polls have been predicting "doom and gloom" for the future state of affairs, the Duke University/CFO Magazine survey of 1,300 corporate financial executives actually reported some positive views. These CFOs have become more optimistic this quarter than last (28.5% vs. 21%) and about half of the respondents believe that an economic recovery will begin by mid-2009.
By contrast, the opinions of those European CFOs surveyed have become far less bullish, revealing that the United States may be moving closer to a rebound than many of our trading partners (potentially good news, though a bad sign for future exports).
Investors had to wait until the end of the week to get the latest picture on the domestic economy. Early on, the dueling deficits were in the news as the trade deficit was reported at its highest level in 16 years and the Congressional Budget Office predicted a $400 billion-plus budget shortfall for this year – growing even higher in 2009.
However, the real economic news of the week did not come until Friday with the release of the August retail sales and Producer Price Index (PPI) data.
On a positive note, wholesale prices plummeted by 0.9%, the largest percentage decline in almost two years; even core PPI (ex-food and energy) reflected very few inflationary pressures. Meanwhile, sales in August fell by 0.3%, disappointing analysts who expected a nice rebound on the lower energy prices (maybe next month will provide a better reading).
Weekly Economic Calendar
Consumer Credit (07/08)
Smallest gain in consumer borrowing for the year
Initial Jobless Claims (09/6/08)
Reflected continued weakness in labor market
Balance of Trade (07/08)
Highest trade deficit in 16 months
Declining rate reflects drop in energy prices
Retail Sales (08/08)
Surprising decline in August
The Week Ahead
Industrial Production (08/08)
Fed Policy Meeting Statement
Housing Starts (08/08)
Initial Jobless Claims (09/13/08)
Leading Eco. Indicators (08/08)
News and Related Story Links:
- Bloomberg News:
Ike Forces Shutdown of 19% of U.S. Refining Capacity.
2008 Atlantic Hurricane Season.
Hurricane Gustav 2008.
Strategic Petroleum Reserve.
- Money Morning News:
Lehman Desperate for a White Knight as Shares Continue to Tank.
- Money Morning Investigative Analysis:
Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout.
- Zacks Investment Research:
McDonald's Keeps On Cooking.
Producer Price Index.
- Money Morning Stock Analysis Story:
Buy, Sell or Hold: Valero Energy Corp.
- The Associated Press:
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. 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.