Succinct Summations week ending February 13th
Positives:
1. The S&P 500 and the Russell 2000 hit new all-time highs.
2. Eurozone GDP rose 0.3% versus expectations of a 0.2% gain.
3. Import prices declined 8% y/o/y.
4. Interest rates have crept up a bit, the ten year is back over 2%, and stocks haven’t crashed, yet.
5. The Nasdaq Composite closed at the highest levels since March 2000.
Negatives:
1. Initial jobless claims came in at 304k vs expectations of 287k.
2. Retail sales ex-autos and gasoline gained just 0.2% vs the expected 0.4%.
3. Mortgage applications fell for the fourth straight week.
4. University of Michigan Consumer Confidence fell to 93.6 from 98.1.
5. Italian GDP came in slightly negative, has not had a positive gain since early 2011.
BONUS #1: (video)
Choice Words on Behavioral Finance and Dick Fuld | The Big Picture
BONUS #2:
What do falling oil prices mean for the U.S. in the short and long term? - The
The
Washington Post
What do falling oil prices mean for the
U.S. in the short and long term?
Since
early 2014, the price of oil has plummeted. It peaked last year at $105 a
barrel and is now about $50.
The
consumption and production of energy is a major component of the global
economy. The huge drop in price has a significant impact in the United States —
on corporate profits, employment and capital spending. Still, there has been a
lot of misinformation — scare-mongering, really — about falling oil prices. A
little context here can go a long way.
The
economics of lower oil prices are nuanced and complex. Consider the questions
it raises. What is the economic impact? Is the decrease in energy prices good
for consumers and manufacturers? Or are falling prices a sign of waning
economic activity? How much will corporate profits be hurt? What does this mean
for hiring? And for your portfolio?
The
overall impact of falling energy prices is felt in two steps. The immediate
response is a decrease in energy sector profits. About 10 percent of the
Standard & Poor’s 500-stock index’s profits are at risk. This relatively
new information — the drop only started in September — is still making its way
into the markets. The digestion of this information has created fear and market
volatility, knocking the broad indices down by almost 5 percent. However, it is
likely this is only temporary. Look for it to lead to an increase in consumer
sentiment and spending, greater corporate hiring and bigger capital
expenditures later this year.
What’s
at work? Three factors drive the price of most commodities, including
petroleum: the U.S. dollar, supply and demand.
Oil is
priced in dollars. And it will trade inversely to the price of the world’s
reserve currency. When the U.S. greenback fell in 2001 to 2008 (down 41
percent), the price of oil climbed over 500 percent ($22 a barrel to $147). As
the dollar rallied 30 percent over the past five years, the price of crude oil
has more than halved ($105 to $48). Think of the dollar as the measuring stick
of oil; when the ruler changes size, so does the price of the measured goods.
Demand
is the next factor. The United States — the world’s biggest consumer of oil
(we use twice as much crude as China) — is not showing its usual post-recession
uptick. Along with slower growth rates in Asia and the ongoing weakness in
Europe, the global demand is softening.
A
number worth noting: Americans drove 2.764 trillion miles in 2014, according to
the government. From the November 2007 pre-crisis peak, total miles driven by
all vehicles fell 3.65 percent.
In the
meantime, hybrid car sales have climbed — the United States has about 3.5
million hybrid electric automobiles, second only to Japan. Even “clean diesel”
car sales increased 25 percent in the first six months of 2014 (versus total
U.S. car sales, up 4.2 percent).
That’s
just transportation. As a fuel for electricity generation, oil is losing market
share versus natural gas — it’s cheaper, cleaner and more reliable.
Supply
is the last piece. Two notable changes from the past have
occurred in the production of crude oil in United States and the behavior of
Saudi Arabia.
The
United States is producing nearly twice as much oil than it has in decades. It
averaged a little over 5 million barrels a day in the 2000s. At the end of
2014, we were pumping over 9 million barrels per day. If these gains continue,
the United States could become energy self-sufficient within a decade.
Saudi
Arabia has responded to falling oil prices differently than they have in the
past. Typically, its response to falling prices has been to cut back their
production. That supply constraint was usually sufficient to brings prices back
up. This time, they have chosen not to.
The
immediate impact of lower prices has been negative. Up until now, oil
exploration has been a source of high-paying employment. About 500,000 jobs
were created in the energy sector since the recession ended. Capital
expenditure — spending on rigs, pipelines and more — in the sector has also
been robust. With falling prices, such spending is down.
Longer-term,
however, the effects are more positive. Like so much else in the markets,
energy prices are, by and large, a “zero-sum game.” One company’s loss is
another’s gain. As exploration and drilling companies suffer a profit squeeze,
transportation, retail and utilities benefit from lower fuel costs. Eventually
the longer-term positive of lower energy expenses should replace the short-term
negative.
The
psychology of businesses and consumers adjusting to lower prices leads to a
delay in changes in behavior. Doubts that the price change is permanent thwart
additional spending. But the longer prices stay low, the more significant the
changes. We have seen an uptick in the sales of SUVs, pickups and trucks —
high-margin vehicles, sold primarily by General Motors, Ford and Chrysler. The
longer oil prices stay low, the more of these profitable trucks will be sold.
Look at
the entire nation of drivers: Every day oil is down $50 from recent highs, my
back of the envelope calculations say American motorists collectively save up
to $750 million on gasoline. Per day! If prices were to stay below $60 until
September, that’s a windfall of up to $300 billion.
After a
few quarters go by, consumers and businesses cannot help but notice more cash
in their pockets and on their balance sheets. That is likely to benefit
consumer and capital expenditures (corporate spending). Price drops could also
give a kick to employment.
So long
as the United States avoids a recession — and as of now, one does not appear on
the horizon — look for the recent bumpiness to turn into economic gains and
increased corporate profits. Neither of which is bad for your portfolios.
Ritholtz is chief investment officer of Ritholtz Wealth Management. He
is the author of “Bailout Nation” and runs a finance blog, the Big
Picture. On Twitter, @Ritholtz
No comments:
Post a Comment