Weekly Recap & Outlook – 06.24.11

Tower Private Advisors


  • Commodities sliding
  • Countries opening the Strategic Petroleum Reserve spigots . . . what’s that all about? Votes?

Prior Posts

Capital Markets Recap

This represents an interesting collection of observations–make that, an opportunity for me to blather on and on about nothing terribly profound, something one reader in particular finds utterly unuseful. Were it up to him we’d just publish the table above, sans clever comments. Alas, you get what you pay for; i.e. blather coming.

In no particular order…

  • To those who say that interest rates can’t fall further . . . they’ve done just that, falling, this week, with the 10-year Treasury Note falling to 2.87%, its lowest level of the year. That’s a 20% drop since April, just what the stock market needs.

  • There was curious performance in U.S. equities this week, with the high-Beta indexes outperforming the low-Beta, large-cap indexes. Maybe I’m talking my book, but the market wants to rally; it just needs a catalyst. Another high-Beta area is emerging markets, that region of the world with relatively-stellar finances, but with a serious bought of monetary policy tightening in response to inflation driven by commodity price strength . . . see the final bullet point below. Hmm . . . may be time to nibble on emerging markets.
  • It’ll be some time before that catalyst is Europe, it seems. Greece and related woes continue to clobber that region’s indexes. And we find ourselves wondering just how much of the Greece situation’s likely outcome (choose one; they’re all bad) is priced into securities. On the one hand, it seems that no one can see any positive development coming out of Europe. On the other hand, markets are not far off their peak levels. In the chart below, the arrow rises from the point JPMorgan bought Bear Stearns to the contagion effect that eventually caught up Lehman Brothers in its bearish maw. That ought to be the script on everyone’s mind.

  • Commodities are in sell-off mode, as evidenced by, well, their prices, and confirmed in the resource heavy country indexes of Canada and Australia and the dollar’s strength. Also, $1,500/ounce and the neighborhood seems to be a daunting resistance level for gold. I say it’s going back to $1,410.


Top Stories

I think the biggest news story of the week was in the Prior Posts, above, about the release of oil from various strategic petroleum reserves, which looks fishier and fishier.  If you’re interested, there’s an interesting look at the U.S.’s SPR here. According to the Department of Energy, there have only been two other releases from the SPR. The first was in 1991, at the beginning of Iraq war, part 1; the second was in 2005, when Hurricane Katrina hit. The third was when the Trilateral Commission world wanted to make up for Libya’s reduced output because of the potential impact on crude oil prices. Sounds like a critical moment–and the spigots didn’t get opened a minute too soon. Fortunately, the Rothschilds oil czars came to the world’s rescue after crude oil prices had only fallen by 18%. So, something’s up, but what? Dennis Gartman, in his eponymous Letter, had this to say (the emphasis is mine).

We shall mince no words here and we mean what we say: this decision was the most blatantly political decision we have seen by a group of political leaders in more years than we wish to believe possible. There was, there is and there shall be nothing that mandated this decision, unless of course there is something truly untoward about to happen geopolitically that perhaps we are not aware of but perhaps the leaders of Europe and the US are. In this latter instance we very obviously have our doubts, and until something truly untoward does happen, this decision was wrong… and very badly so.

But, hey, in a sense, who cares?

What it means right now–and more so in the future–is more money in consumers’ pockets, and more money in consumers’ pockets means more spending on other stuff. Credit Suisse issued a report today called Taking Measure of the Decline in Gas Prices. In it they estimate that retail gas prices are headed toward a national level of $3.36/gallon (I saw $3.39 in Fort Wayne, yesterday). If prices reach that level they estimate that consumer will have an extra $48 billion more in their pockets than at the peak. Even at those reduced prices, however, total 2011 outlay on gasoline would be $78 billion higher than last year. The same report points up the difficulty that the Administration faces in trying to kick start the economy. The first two latin words any first year economics’ student learns are ceteris and parabis. Together, they mean “everything else equal,” and we all know that everything else is never equal. For example, the 2011 Social Security payroll tax cut provided consumers with a $112 billion windfall; higher gas prices will eat up 70% of that.

Unless you’re an oil producer this is all good. For that matter, if you’re an oil producer you’ll eventually see an increase in gallons sold, although, according to the Credit Suisse report, “gasoline demand…is inelastic in the short run,” meaning that a drop in the price will not be made up by an increase in volume.

Here is what it comes down to, in my opinion, why the SPR were released; it’s in the second-to-last paragraph in the CS report:

Releasing oil from the Strategic Petroleum Reserve is analogous to foreign exchange market intervention. The trick from an execution perspective is to catch an off-side market that has already begun to turn from a local peak (or trough). Official intervention then reinforces the market’s move. From this perspective, the official intervention in the oil market this week looks to have been artfully executed.

Well, they certainly caught everyone off guard. What’s more, there is a huge open interest in crude oil futures. That means there’s plenty more selling that can be done.

What’s more–this is getting sort of silly, the “what’s more” bit–is that the dumb money, the Speculators have a near record net-long (longs minus shorts) position. These folks will get out of Dodge faster then a Congressperson caught in a compromising position (maybe that was an entirely appropriate, albeit too graphic, word choice).

Surely, no one is surprised by this news:

Look out, falling oil price ahead. That should provide a solid impetus for a strengthening second half economy, although that’s a widely-held view.

This Week

There wasn’t much going on this week in econoland.

  • Initial Jobless Claims continued to rise–employment is on the fast track to nowhere.
  • First quarter Gross Domestic Product, in its third incarnation was revised upward by 0.1% to 1.9%.
  • Durable Goods Orders improved–and just so I can include a picture, they remained in the upward trend we’ve seen since early 2009.

Next Week

Quite a few important releases out next week.

Key indicators to watch

  • Personal Income, Spending, and Saving (Monday) – June
  • Initial Jobless Claims (Thursday) – weekly
  • University of Michigan Consumer Confidence (Thursday) – final June
  • ISM Manufacturing (Friday) – June

Housing related

  • Case Shiller Home Price Index (Tuesday) – April
  • Pending Home Sales (Wednesday) – May

Regional indicators

  • Dallas Federal Reserve Manufacturing (Monday) – June
  • Richmond Federal Reserve Manufacturing (Tuesday) – June
  • Chicago Purchasing Managers report (Thursday) – June
  • NAPM – Milwaukee (Thursday) – June

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2 Responses to “Weekly Recap & Outlook – 06.24.11”

  1. Betty Claymiller says:

    Graig, please do keep up the lighter comments. I enjoy them very much. Although a lot of what you print is over my head, those keep me coming back for more. Someday things will soak in…

  2. Thanks for the kind words, Betty. With regard to the over-my-head stuff, I keep working on that in the odd event that my Mom should check in on the blog and wonder what in the world I do for work.

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