Oil Prices and Spending
Interesting. Libyan rebels rejected the cease-fire offer, suggesting that the world will be without Libya’s 2 million barrels a day for an undetermined amount of time. And oil prices still fell better than 3% yesterday.
MasterCard Spending Pulse, a data-tracking service, reports that, for the week of April 1, Americans bought 2.4 million gallons less than the year before. Another service, Oil Price Information Service, says that gas stations are reporting sales falling by around 3%.
The best case scenario for falling oil prices is that they fall because supply is ample. The worst case is that oil prices fall because consumers are spending less. That inevitably brings up the fear that economic growth will slow on lower consumer spending. And when growth is already tepid, that’s clearly not good.
We can’t ignore the fact that oil prices fell in tandem with stock prices. This could be a simple pullback ahead of earnings. But I’m always on the lookout for the start of a more ominous trend.
*****Higher gasoline prices affect the consumer just like higher material costs affect companies. When you have to spend more on necessities, there’s just less money left over. For consumers, this “left over” amount is discretionary income. For companies, it’s profit margin.
And profit margins, and how they impact earnings, will be a big concern during this earnings season.
*****Alcoa (NYSE:AA) beat earnings estimates by a penny yesterday, even though the company missed on revenues. Despite the miss on revenues, Alcoa was able to pass on a higher price for aluminum to its customers.
But those higher costs are often paid in foreign currency. It appears the revenue miss was a result of exchanging a weak dollar into stronger local currencies.
*****The New York Times reports that average pay for U.S. CEOs rose 12% last year. The average employee got a 2% pay raise last year. Some of the increase in compensation for CEO certainly came in the form of rising stock prices.
Still, the disparity is hard to miss. And it’s likely to get worse. With 44% of federal government spending concentrated on entitlement programs (Medicare, Medicaid and Social Security), there seems to be little doubt that these programs will be cut in some way.
As PIMCOs Bill Gross wrote in his Investment Outlook for April:
As others, such as Pete Peterson of the Blackstone Group and Mary Meeker, have shown much better and for far longer than I, the true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 trillion more! This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.
If so, and if the USA were a corporation, then it would probably have a negative net worth of $35-40 trillion once our “assets” were properly accounted for, as pointed out by Mary Meeker and endorsed by luminaries such as Paul Volcker and Michael Bloomberg in a recent piece titled “USA Inc.” However approximate and subjective that number is, no lender would lend to such a corporation.
This is why Gross believes that Treasury bonds have little value. It’s why CNBC’s Jim Cramer believes the IMF will be at our door soon if we don’t deal with this debt load. And it’s why entitlement cuts are coming.
*****Stocks look poised to test some lower support levels. For the S&P 500, there is support at 1,320 and 1,301. Stocks bounced at 1,320 yesterday, but we could see a further drop to 1,301.
TradeMaster Daily Stock Alerts' Jason Cimpl tells us that:
The news, and weather, is rather gloomy this morning, but do not let that change your attitude. The bulls own this market, and today is likely another dip to be bought. 1301 remains both a target and area of support, and I expect it will hold. If we get another low volume morning drop, it is likely I will add more longs into that decline.
Jason's readers just took yet another impressive profit yesterday. The stock was a small specialty retailer, Joe's Jeans (Nasdaq:JOEZ). Jason recommended the stock at $0.85. And TradeMaster Daily Stock Alerts members sold the stock yesterday at $1.18 for a sweet 40% gain.
Jason closed the trade ahead of Joe's earnings report. And the stock is down big this morning. I understand Jason may get back into Joe's on the earnings weakness.
But in the meantime, his readers have another position that's up 21% currently. But Jason thinks the stock has another 50% to go. You can get details HERE.
