Here's What Jet Fuel Tells You About How to Invest in Q1

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It should come as no surprise to you that I have a secret "jet fuel indicator."

Or that it tells you something crucial about how to invest right now.

Or that it has everything to do with tax data. (You didn't really think you'd get away with this, surely.)

The U.S. Treasury publishes the Daily Treasury Statement every day virtually in real time, with just a one-day lag, and follows up a couple of weeks later with the slightly more detailed Monthly Treasury Statement. The daily and monthly tax data is useful in that it tells us what to expect when the lagging economic data indicators are released later.

Unlike economic data, tax data isn't statistically massaged. Tax data gives us actual numbers on how the U.S. economy is performing in real time. It tells us whether the statistically manipulated and late-arriving economic indicators are promoting a false narrative.

But I also look at the data from the U.S. Energy Information Administration on Gasoline Demand and Jet Fuel Demand for another near real time indicator of how the U.S. economy is faring right now.

That helps us with our trade timing. But the information is mostly useful in telling us what the Fed will be seeing when it gets the data. It helps us to know whether incoming economic data will keep the Fed on track or not.

Here's what the fuel tax data is telling us now about how we should approach our trading and investment strategy.

Rich People Travel More, Regular Folks Travel Less - And That Hurts The Economy

The December data tells us that the U.S. economy top-line growth numbers should remain positive, as households in the upper income strata continue to skew the economic numbers heavily toward the plus side. But other data shows that the bulk of the American people are barely treading water in this economy. While top-line growth will keep the Fed on track for tightening, ultimately the long-term health of the U.S. economy and U.S. business profits will depend on broader participation.

In the shorter run, a tightening Fed will soon result in the end of this rally and the beginning of a bear market later this year. There's nothing in this data that would deter that. Here are the particulars...

One of the largest components of excise taxes is the Highway Trust Fund tax on gasoline. That data is only provided in the Monthly Treasury Statement that comes out on the eighth business day of the following month. Like all excise taxes, it is based on unit sales, not dollar value.

Specific excise tax collections have a two-week reporting lag relative to the period that they were collected. Gas taxes collected in December were virtually flat. That followed a gain of 3.5% in November, which came on the heels of an 8.8% drop in October. They had been rising at an accelerating clip since December 2016, hitting +5.5% in July 2017. They have softened since then, indicating that more people are driving less than they did a year ago.

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Households with drivers cover a broad swath of the U.S. middle class. The U.S. Department of Transportation says that 91% of U.S. households own vehicles. The recent softness in gas taxes doesn't exactly suggest a broad-based, vibrant economy. But there's nothing here that would deter the Fed from its path to reduce the money supply. The Fed is only concerned about the appearance of growth represented in the totals, regardless of the evidence that most Americans are struggling.

The EIA reports gasoline demand weekly with a lag of less than a week. This is another source of near real-time data that the media ignores. But it is useful to us as an indicator of how the economy is doing right now. December consumption rebounded, but the three-month moving average of the annual growth rate remains below 2%, hardly a sign of broad-based economic growth.

The aviation fuel tax (table above) rose 4.5% year over year in December. That was after an 8% gain in November. Air travelers tend to be a more affluent group than drivers on average. And more affluent consumers tend to fly more often. This is another sign of a bifurcated U.S. economy, where those at the upper end of the income spectrum are doing well and spending enough to keep the top-line growth numbers perking along while the rest of the country treads water.

The Energy Information Administration (EIA) data on gasoline and jet fuel illustrates this bifurcated economy. The growth of jet fuel demand, as shown by the weekly amounts of jet fuel supplied to the market, has far outstripped the growth of gasoline demand.

Aviation fuel supplied to the market in December rose by 15.6% year over year. The 12-month average growth rate is 3.9%. Growth has been slowing since last March, but these are still solid figures. People who fly, who tend to be more affluent, are still flying more.

But gasoline consumption has been moribund. The annual growth rate rebounded in December, but only to +2.2%. That was after an extremely weak November, when product supplied to the market fell by 3.9%. The 12-month average growth rate is still -0.3%. With gas prices rising since last summer, people have been driving less. The rebound in December has not broken the downtrend that began last summer.