Fed’s anticipated tough inflation stance comes amid doubts about economy
The Associated Press June 22, 2008
After the Federal Reserve’s meeting this week, the Fed policymakers are expected to voice a tough stance on inflation. Talk about poor timing.
Though Wall Street’s inflation concerns have not abated — crude oil remains above $134 a barrel — worries about the health of the U.S. financial system and broader economy have returned in force.
Last week, Citigroup Inc. warned that it expects substantial debt losses in the second quarter; two bond insurers lost their Moody’s “AAA” rating; Fifth Third Bancorp said it needs to raise $2 billion in capital; the broker MF Global said widening credit spreads will dampen its profit.
This means the market is going to have a hard time stomaching any hint from policymakers that an interest rate hike is on the way. When borrowing gets more expensive, the economy tends to get even more anemic.
“I don’t know that there’s anything they can say in their policy statement that would cause the market to breathe a sigh of relief, or cause a big updraft in the market,” said Richard Sparks, a senior equity analyst at Schaeffer’s Investment Research in Cincinnati. “The best they could do is remain neutral. ... But I agree with most people that they’re more likely to emphasize price pressures rather than the potentially weakening economy.”
Few investors expect the Fed to increase the key interest rate at its meeting Tuesday and Wednesday, after lowering it incrementally over the past year. Many don’t expect a rate hike until the fall, or until early next year. But nearly all believe, after speeches by Fed officials over the past few weeks, that policymakers are finished with lowering rates due to the plunging dollar and soaring energy costs.
“There’s no question the Fed is walking on a tightrope here. They’re in a box,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. He pointed to the sluggish economy, the threat of rising inflation, and flooding in the Midwest that is destroying crops.
“If they were to raise (rates), that could put further weakness in economic activity. But by the same token, by raising, that could help stabilize the dollar and help reverse inflation,” Cardillo said.
Wall Street’s trifecta of troubles — the economy, inflation and financials — drove the Dow Jones industrial average down by 3.78 percent last week. It closed below 12,000 for the first time since mid-March. The Standard & Poor’s 500 index ended the week down 3.10 percent, and the Nasdaq composite index closed 1.97 percent lower.
“Right now, I think we’re kind of moving lower because there’s nothing positive on any front,” Sparks said.
In addition to the Fed meeting, this week brings data from S&P/Case Shiller on April home prices, May orders for durable goods, May sales of new and existing homes, and — in perhaps the most revealing report for the market — personal income and spending in May.
The Commerce Department’s personal spending reading is expected to show a 0.6 percent increase, according to the median estimate of economists surveyed by Thomson Financial. Income is anticipated to have increased by 0.4 percent, while inflation at the personal spending level — as measured by the Core Personal Consumption Expenditures Deflator — is predicted to have ticked up by 0.2 percent.
Another important piece of data is the Commerce Department’s final reading on first-quarter gross domestic product. The estimate was revised up last month to 0.9 percent, and economists, on average, expect the government to ratchet it up again to 1.0 percent.
The earnings calendar, meanwhile, is light this week, with most companies readying to report in July. But results from food companies — Kroger Co., General Mills Inc., Monsanto Co. and ConAgra Foods — will likely be in focus as Wall Street assesses how agricultural commodities costs are affecting businesses and consumers.
Other key earnings releases this week include Nike Inc., Oracle Corp., Research In Motion Ltd., Discover Financial Services LLC, Lennar Corp., Palm Inc. and Rite Aid Corp.
Stratospheric crude oil prices precipitated by speculation are wreaking havoc on the U.S. economy.
Based on income tax withholdings data from the Daily Treasury Statement, the wages of all U.S. workers on payrolls were unchanged on a year-over-year basis in the past two weeks (Friday, June 6 through Thursday, June 19) and rose 1.1% year-over-year in the past four weeks (Friday, May 23 through Thursday, June 19). Both of those growth rates are well below the 2.8% year-over-year in May, and they are consistent with an economy that is contracting sharply.
As long as oil prices stay above $120 per barrel, the economy is more likely to slow than strengthen, and companies are not likely to announce much float shrink. With real wages falling, large numbers of jobs being shed, gas prices exceeding $4 per gallon almost everywhere and home prices falling about 1% per month nationally, this year is going to be tough for American consumers.
Believe it or not, there is plenty of oil in the world. What is in short supply are investors willing to go short oil futures. The open interest on oil futures worldwide is 2.6 million contracts. With oil prices at $135 per barrel, each contract is worth $135,000. To control $135,000 of oil, investors have to put up no more than $10,000.
A hefty $1.3 billion per month flowed into commodity trading advisers (CTAs) in the first four months of this year, and $700 million per month flowed into commodity exchange-traded funds (ETFs) in the first five months of this year. Those amounts do not even include investments through other vehicles by hedge funds and pension funds. The latest issue of Barron's reports that $55 billion flowed into commodity investments in the first quarter of 2008, and probably at least one-third of that amount was directed into long-only investments in oil.
In any case, if half of the $2 billion per month inflow into CTAs and commodity ETFs were used to go long oil futures, it would be enough to go long 100,000 contracts, which is equal to 4% of the open interest on oil futures. In other words, open interest would grow roughly 50% per year just from inflows into CTAs and commodity ETFs.
What is happening now is not demand destruction, it is a financial disaster. The U.S. consumes 21 million barrels of per day. At $135 per barrel, the U.S. spends $1.0 trillion per year on oil, which is equal to 15% of the $6.8 trillion in take-home pay of everyone who pays taxes. If oil prices rose to $200 per barrel, the U.S. would spend $1.5 trillion per year on oil, which would be equal to 22% of take-home pay. Moreover, those percentages of 15% and 22% do not even include the cost of coal or natural gas. In other words, the U.S. will be broke long before oil prices hit $200 per barrel, and the rest of the world would be sure to follow.
Another way to put the oil crisis into perspective is to compare increased spending on oil to inflows into savings and investment vehicles. For every $60 per barrel increase in the price of oil, the U.S. spends an additional $450 billion annually, or $38 billion per month, on oil. In the past twelve months, the inflow into savings and investment vehicles--bank savings, certificates of deposit, retail money market funds, and all long-term mutual funds--was $744 billion, which is $296 billion more than the additional money the U.S. would spend each year on oil if the price of oil rose by $60 per barrel from its current level.
From April through June, the inflow into savings and investment vehicles was $35 billion per month, down 43% from $61 billion per month in the same period last year. In other words, the U.S. will generate almost no savings if the price of oil stays at $135 per barrel. If the price of oil rises even modestly from its current level, the U.S. will be operating at a deficit.
If regulators raised the margin requirement for oil futures to 25% from no more than 7.5%, the oil market would crack. Unfortunately for oil users, regulators are unlikely to boost the margin requirement, unless outside pressure becomes unbearable, because the income of commodity exchanges and traders would plummet.
But there are two other solutions to the oil crisis.
The first is requiring major players in the oil futures market to disclose their total positions of all kinds in crude. Given the importance of oil to the U.S. economy, everyone should be able to know who is going long crude oil in a big way. Institutional owners must report what stocks they own at least semiannually. Why should they not be required to report the amount of crude oil they are long?
The second solution is for oil consumers to make a concerted effort to go short oil futures. The U.S. government has been spending $280 million per month, pumping 70,000 barrels of oil per day into salt caverns. Instead of buying oil, why not go short 35,000 contracts monthly at $8,000 per contract, in other words selling high the crude we bought relatively low? What if other major crude oil users also went short oil futures each month? What if the Japanese government, airlines, trucking companies and utilities spent several billion dollars to go short oil futures each month until the oil market came to its senses?
It is insane for the world to go broke while oil traders and a handful of gangsters who control their national oil production make huge fortunes.
3 comments:
This week could get ugly for Wall Street
Fed’s anticipated tough inflation stance comes amid doubts about economy
The Associated Press
June 22, 2008
After the Federal Reserve’s meeting this week, the Fed policymakers are expected to voice a tough stance on inflation. Talk about poor timing.
Though Wall Street’s inflation concerns have not abated — crude oil remains above $134 a barrel — worries about the health of the U.S. financial system and broader economy have returned in force.
Last week, Citigroup Inc. warned that it expects substantial debt losses in the second quarter; two bond insurers lost their Moody’s “AAA” rating; Fifth Third Bancorp said it needs to raise $2 billion in capital; the broker MF Global said widening credit spreads will dampen its profit.
This means the market is going to have a hard time stomaching any hint from policymakers that an interest rate hike is on the way. When borrowing gets more expensive, the economy tends to get even more anemic.
“I don’t know that there’s anything they can say in their policy statement that would cause the market to breathe a sigh of relief, or cause a big updraft in the market,” said Richard Sparks, a senior equity analyst at Schaeffer’s Investment Research in Cincinnati. “The best they could do is remain neutral. ... But I agree with most people that they’re more likely to emphasize price pressures rather than the potentially weakening economy.”
Few investors expect the Fed to increase the key interest rate at its meeting Tuesday and Wednesday, after lowering it incrementally over the past year. Many don’t expect a rate hike until the fall, or until early next year. But nearly all believe, after speeches by Fed officials over the past few weeks, that policymakers are finished with lowering rates due to the plunging dollar and soaring energy costs.
“There’s no question the Fed is walking on a tightrope here. They’re in a box,” said Peter Cardillo, chief market economist at New York-based brokerage house Avalon Partners Inc. He pointed to the sluggish economy, the threat of rising inflation, and flooding in the Midwest that is destroying crops.
“If they were to raise (rates), that could put further weakness in economic activity. But by the same token, by raising, that could help stabilize the dollar and help reverse inflation,” Cardillo said.
Wall Street’s trifecta of troubles — the economy, inflation and financials — drove the Dow Jones industrial average down by 3.78 percent last week. It closed below 12,000 for the first time since mid-March. The Standard & Poor’s 500 index ended the week down 3.10 percent, and the Nasdaq composite index closed 1.97 percent lower.
“Right now, I think we’re kind of moving lower because there’s nothing positive on any front,” Sparks said.
In addition to the Fed meeting, this week brings data from S&P/Case Shiller on April home prices, May orders for durable goods, May sales of new and existing homes, and — in perhaps the most revealing report for the market — personal income and spending in May.
The Commerce Department’s personal spending reading is expected to show a 0.6 percent increase, according to the median estimate of economists surveyed by Thomson Financial. Income is anticipated to have increased by 0.4 percent, while inflation at the personal spending level — as measured by the Core Personal Consumption Expenditures Deflator — is predicted to have ticked up by 0.2 percent.
Another important piece of data is the Commerce Department’s final reading on first-quarter gross domestic product. The estimate was revised up last month to 0.9 percent, and economists, on average, expect the government to ratchet it up again to 1.0 percent.
The earnings calendar, meanwhile, is light this week, with most companies readying to report in July. But results from food companies — Kroger Co., General Mills Inc., Monsanto Co. and ConAgra Foods — will likely be in focus as Wall Street assesses how agricultural commodities costs are affecting businesses and consumers.
Other key earnings releases this week include Nike Inc., Oracle Corp., Research In Motion Ltd., Discover Financial Services LLC, Lennar Corp., Palm Inc. and Rite Aid Corp.
Jim Cramer: The Flip-Flop that Ought to be Illegal
....How can it be that Bear Stearns Hedge Fund guys are going to JAIL for their misdeeds, but, Jim Cramer gets away with THIS?
Sky-High Oil Will Make U.S. Go Broke
Charles Biderman, TrimTabs
06.23.08, 7:00 PM ET
Stratospheric crude oil prices precipitated by speculation are wreaking havoc on the U.S. economy.
Based on income tax withholdings data from the Daily Treasury Statement, the wages of all U.S. workers on payrolls were unchanged on a year-over-year basis in the past two weeks (Friday, June 6 through Thursday, June 19) and rose 1.1% year-over-year in the past four weeks (Friday, May 23 through Thursday, June 19). Both of those growth rates are well below the 2.8% year-over-year in May, and they are consistent with an economy that is contracting sharply.
As long as oil prices stay above $120 per barrel, the economy is more likely to slow than strengthen, and companies are not likely to announce much float shrink. With real wages falling, large numbers of jobs being shed, gas prices exceeding $4 per gallon almost everywhere and home prices falling about 1% per month nationally, this year is going to be tough for American consumers.
Believe it or not, there is plenty of oil in the world. What is in short supply are investors willing to go short oil futures. The open interest on oil futures worldwide is 2.6 million contracts. With oil prices at $135 per barrel, each contract is worth $135,000. To control $135,000 of oil, investors have to put up no more than $10,000.
A hefty $1.3 billion per month flowed into commodity trading advisers (CTAs) in the first four months of this year, and $700 million per month flowed into commodity exchange-traded funds (ETFs) in the first five months of this year. Those amounts do not even include investments through other vehicles by hedge funds and pension funds. The latest issue of Barron's reports that $55 billion flowed into commodity investments in the first quarter of 2008, and probably at least one-third of that amount was directed into long-only investments in oil.
In any case, if half of the $2 billion per month inflow into CTAs and commodity ETFs were used to go long oil futures, it would be enough to go long 100,000 contracts, which is equal to 4% of the open interest on oil futures. In other words, open interest would grow roughly 50% per year just from inflows into CTAs and commodity ETFs.
What is happening now is not demand destruction, it is a financial disaster. The U.S. consumes 21 million barrels of per day. At $135 per barrel, the U.S. spends $1.0 trillion per year on oil, which is equal to 15% of the $6.8 trillion in take-home pay of everyone who pays taxes. If oil prices rose to $200 per barrel, the U.S. would spend $1.5 trillion per year on oil, which would be equal to 22% of take-home pay. Moreover, those percentages of 15% and 22% do not even include the cost of coal or natural gas. In other words, the U.S. will be broke long before oil prices hit $200 per barrel, and the rest of the world would be sure to follow.
Another way to put the oil crisis into perspective is to compare increased spending on oil to inflows into savings and investment vehicles. For every $60 per barrel increase in the price of oil, the U.S. spends an additional $450 billion annually, or $38 billion per month, on oil. In the past twelve months, the inflow into savings and investment vehicles--bank savings, certificates of deposit, retail money market funds, and all long-term mutual funds--was $744 billion, which is $296 billion more than the additional money the U.S. would spend each year on oil if the price of oil rose by $60 per barrel from its current level.
From April through June, the inflow into savings and investment vehicles was $35 billion per month, down 43% from $61 billion per month in the same period last year. In other words, the U.S. will generate almost no savings if the price of oil stays at $135 per barrel. If the price of oil rises even modestly from its current level, the U.S. will be operating at a deficit.
If regulators raised the margin requirement for oil futures to 25% from no more than 7.5%, the oil market would crack. Unfortunately for oil users, regulators are unlikely to boost the margin requirement, unless outside pressure becomes unbearable, because the income of commodity exchanges and traders would plummet.
But there are two other solutions to the oil crisis.
The first is requiring major players in the oil futures market to disclose their total positions of all kinds in crude. Given the importance of oil to the U.S. economy, everyone should be able to know who is going long crude oil in a big way. Institutional owners must report what stocks they own at least semiannually. Why should they not be required to report the amount of crude oil they are long?
The second solution is for oil consumers to make a concerted effort to go short oil futures. The U.S. government has been spending $280 million per month, pumping 70,000 barrels of oil per day into salt caverns. Instead of buying oil, why not go short 35,000 contracts monthly at $8,000 per contract, in other words selling high the crude we bought relatively low? What if other major crude oil users also went short oil futures each month? What if the Japanese government, airlines, trucking companies and utilities spent several billion dollars to go short oil futures each month until the oil market came to its senses?
It is insane for the world to go broke while oil traders and a handful of gangsters who control their national oil production make huge fortunes.
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