Van Santos

I’ve written about the price of oil and gas a few times, and by no means am I an expert, I do have some experience on my side that allows me to objectively – and intelligently – discuss the subject.   That said, let’s get the main point out now: The price of oil is too low.

When previously talking about gas and oil prices (12/6) the price was right about $40, and as of today, December 27th, a barrel of oil fetches $37.71.  So, what is going on?

News concerning the global economy, the massive drop off in spending, and credit issues has energy traders selling as if a drop of oil will never be used again. Much like there was a dramatic upswing this past summer, the market correction is moving dramatically – and unrealistically – in the other direction. Even when OPEC announced a cut of 2.2 million barrels starting in the new year, the price oil moved lower.  In many ways it feels as if people are treating oil as if it a renewable resource all of a sudden – it’s not.

Isn’t oil a supply and demand commodity?  Yes, but the market is trading oil as if the demand falling at a rate greater than the cuts OPEC has recently announced.   As it stands today, oil is trading as if the expansion of the economy in the last 5 years never happened.  It’s acting as if the population of the world has not grown, as if China and India never grew, and as if there are less cars on the road, worldwide, today than 5 years ago. Energy traders, in the bearish mood and focus they have, are simply guessing at what a potential reality may or may not be when it comes to the price of oil in the current environment.

With price falling we can expect another impact on the economy – oil producers shutting down exploration rigs. Basically, the decline in oil price has lead to a marketplace it has become unprofitable to produce as much as they had previously.  

If downward pressure continues, which it looks as if it will until there is a catalyst to change the mood of the market, the consumer will be able to enjoy low gas prices.  Just remember, oil is not a renewable resource… the price is bound to rise once again.

The 2008 bank failures reached 25 on Friday when the Feds closed Haven Trust Bank in Georgia and Sanderson State Bank in Texas after market close.  Just a reminder, if you happen to have money in these two financial institutions, there is no reason to panic as the FDIC has insurance on all account up to 250K.

One bright spot in this news, the FDIC has already found purchasers who will re-open all branches on Monday.

With just over 2 weeks to go in the year, 25 bank failures is only 3 more than 2007.  While that is a high number, it’s not crisis mode (yet).  The rest of the economy may be…. Oh, and if you want the list of all 25 Banks that have failed this year, you can find it the the FDIC website.

As it seems I have no “normal” hobbies, I tend to do a lot of reading about the financial markets (finance, commodities, stocks) and I feel safe saying most people have no clue just how low gas has potential to get in the next few months.  While this low will be temporary, you still will be surprised.

Essentially, the bottom has fallen out of the entire commodities market.  Metals, Oil, Natural Gas and Agricultures are falling as if people will never need to drive, build or eat again.  For example, the price of oil has fallen from almost $150 this past spring to roughly $40 this past Friday and, obviously you’ve see the price of gas at the pump fall too.  All of this can be tracked back to the recession; the “pop” of the speculation bubble and the financial melt down.

Historically there is roughly a 6-week lag between the price of oil and the price of gas at the pump.  So, while oil has dropped $25 in the last month (from roughly $65 to $40) the price of gas still has more room to drop.  Based on the close price of oil today ($40), one could reasonably expect to see the U.S. average for a gallon of gas to drop to around $1.35 within the next 4 to 6 weeks.

As with all things financial market related, market “corrections” tend to over swing both ways.  Oil at $150 was way too high for current condition and supply (part speculation bubble) and oil falling like a rock is the correction of that bubble.  Where is going to stop, no one knows… but if it continues to fall, say to the level of $20 per barrel, the U.S. could see $.99 for a gallon of gas once again.

This could change at any time – an unexpected war, production interruptions, terror attack – but as long as oil continues to fall hard, gas is going to follow.

Think I am making this up?  Jan 09 Unleaded Gas Futures are now at .90

I know I’m sounding repetitive now, as I’ve said this over and over, but I need to say it once again as I am very frustrated.  Uncertainty Creates Fear!

Now you one could call me paranoid, but now I have some ability to show just how the market is impacted when Bernanke and Paulson speak in public about the current state of the market.

Here is some evidence via Newsbusters:

That message and others like it have had an impact on financial markets. Altogether, it has lost a total of 2,507 points during the 21 days listed on the Federal Reserve Board’s Web site that Bernanke delivered public remarks. That’s more than half of the 4,127 points the market has lost in that time.

 

Jerry Bowyer, chief economic advisor to BenchMark Financial Network and columnist for National Review told the Business & Media Institute it is reasonable to assume this is more than just a coincidence and the barrage of live media coverage of Bernanke has something to do with it.

 

“Yup. It’s quite reasonable,” Bowyer said. “After all CNBC usually runs the Dow on a split screen with Bernanke speaking on the other. I’d also look at Paulson - same pattern seems to hold.”

 

It’s an issue of trust, according to Bowyer - Wall Street is leery of Washington.

 

“Big Picture: the investor class doesn’t trust the political class, even if they are Republican,” Bowyer said.

The administration needs to speak with one voice because the credibility of the U.S. is in question when public officials are providing two difference views of the situation.  It really makes it look like someone isn’t at the helm of the ship.

About three weeks ago I wrote the following:

I see the impact of economic conditions every day – people out of work, making hard decisions from one day to the next due to income related concerns – but this is nothing compared to about 30 years go, let alone the great depression.

It’s really scary how much can change in about 18 days.  Really scary.  During the time that has passed the following information became public.

• Housing starts were significantly less than expected
• Consumer prices dropped by 1%, the most ever in the 61 years of tracking pricing data 
• Jobless Claims are close to 1982 levels and unemployment is expected to hit 7.6% in 2009 
• The survival of GM, Ford, Chrysler and Citibank have all come into question (Granted, the big three have been in question for some time but their losses became massive in the last three months)
• The use of funds in the TARP switched from buying bad assets to purchasing stakes in banks providing no floor for bad mortgages
• Interest Rates are expected to go to 0 by mid January
• The TED spread, the difference between the interest rates on interbank loans and t-Bills, is showing signs that volatility is increasing again

All of these events point to more potential danger.  

What bothers me, aside from how quickly things are changing in the economy, is how this downturn reflects the great depression.  No, I am not talking about the Great depression that started in 1929 but the “Real” great depression (also known as the Long Depression) that started with the Panic of 1873.

In the Great Depression of 1929, economies of the world suffered huge drop in output and massive rise in unemployment all while deflation began to set in.  The root of the great depression can be traced to a number of things but a hyper stimulated economy, bank and political policies, plus the rise of income taxes are the overriding factors in causing events to unfold.

Sure, the U.S. (and the world) has seen a booming economy for some time, as well as poor bank and political decisions but the Long Depression of 1873 started with, of all things, mortgages.  

In the 1870s, much like the last several years, mortgages were quite easy to obtain and as a result a building boom took place.  The value of property seemed to skyrocket and borrowers took on significantly more credit than they could afford. Once the economies of the world realized that fundamental economic forecasts were overly optimistic a sudden market correction started to take place. 

Financial institutions started to collapse under the weight of bad mortgage debt, banks started to hold back credit, and interbank lending rates (what is called the TED today) skyrocketed.  The waves of the financial collapse caused small factories to shut their doors, unemployment rising to almost 25%, riots taking place in all major cities, and people roaming the nation looking for work.

Understand, I am simply drawing parallels here, I am not implying that this is our future.  I am not on some fatalistic kick that says the nations of the world are set to replay the past but the comparison of the current economic climate is scary with you look at what took place in 1873.

Assuming the actions take by economic powers worldwide hold off another depression, the environment is now set for deflation followed by massive inflation. While I don’t expect another great depression today, I think we will witness something the US has not seen in roughly 80 years - a falling standard of living and a declining middle class

Simply put, no one knows what is going to happen next.

Yes, the financial markets are hurting. Yes, credit is contracting. Yes, earning are shrinking… But this is hardly the worst economy in 100 years.

A few things:

• The last time the stock market was at 10 earnings or less was during the 1970s into the early 80s
• At the peak inflation during that period was 14.8% during that period; today it sits at 4.94%
• Unemployment during that period reached 10.8% versus the 6.1% today
• The marginal top tax income rate was (peak) was 69.125% compared to the 35% today (read more money in the pockets of the consumer now)

I see the impact of economic conditions every day – people out of work, making hard decisions from one day to the next due to income related concerns – but this is nothing compared to about 30 years go, let alone the great depression.

I’m just sayin’

The signs were all around but, apparently, no one was paying attention:

“In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders….

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring….

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

No one, except the New York Times.

Another day is upon us, as is another Bailout bill. The Senate will vote this evening (7:30 Eastern) on a bill that is essentially the same except that it includes raising the FDIC insurance limit to $250,000 per account, up from $100,000, as well as the addition of a $8 billion tax cut for hit by natural disasters in the Midwest, Texas and Louisiana. Is this what the bill needs for Republicans to support the effort? If it passes the Senate, will the House pass the bill as well?

Wall Street seems to be asking the same questions as well as volatility is high in this trading session. The DOW is currently down 135 points, off session lows, trading at 10,713. As if the bailout wasn’t enough for traders to be worried about, more “mixed” financial data was released today, which may be adding to the down market.

Mixed, you ask? Yes – mixed. The manufacturing index fell to 43.5% in September, which is mighty close to indicating a recession, and mortgage applications plummeted 23% from the previous week. However, yesterday consumer confidence posted an unexpected rise and only 8,000 jobs were lost in the private sector for the month of September when Economists were forecasting a loss of 60,000.

While the stock market is quite volatile these days, and the credit markets are virtually frozen, I am starting to ask the question if the bailout is truly necessary. The world didn’t end when the first bill failed, business still went on, and there were not long soup lines… Yes, we will see the long term pain by not opening up the credit markets, mass bankruptcies and unemployment could be witnessed in the very near future but maybe that is what needs to happen…

I still view the whole situation as a correction, not a collapse and, as such, I am starting to waiver on the need for the bailout.

UPDATE: a few interesting tidbits

Want to see possible evidence the economy is slowing, the US has higher than expected crude supplies - translation: less oil is being used by consumers.

Investors are skeptical of the vote taking place this evening and they should be!

After the failed vote on Monday, and the major decline with the stock market, the question on the minds of the general public seemed to be “What happens next”.  Well, it appears the next steps have been identified. Wednesday evening, at 7:30 PM, the Senate will vote on a version of the bill.

The next question the general public should be asking is what differentiates what is moving forward in the Senate from what was denied in the House. On first glance - nothing major.  The only thing that really sticks out is the request to raise FDIC insurance limits from $100,000 per account to $250,000 in an attempt to prevent any further runs on financial institutions.  

Let’s assume, for a moment, this will pass the Senate. Why are we to think this will pass the House? Nothing has changed; nothing is significantly different as of yet, so why will 12 more lawmakers vote in favor of passing the bill?

The question I have, if passed, is how are the people who formally voted no benefiting by voting yes?  That is really the question.

Late Saturday evening congressional leaders and the current administration reached a deal on the financial bailout which includes a staggered spending rate and is open to companies who deny “golden parachutes” to senior executives leaving the company. A bailout is what Wall Street was looking for, as noted by the drastic swings in the past two weeks, but how is the market reacting to the news?

Rather unimpressed, actually.

As of 12:01 AM Monday, September 29th, DOW futures are down 67 points showing that the market is heading to a lower open. Look at other markets currently open and one can see the rest of the world isn’t too excited about the plan either. The Nikkei is down half a percent and the Hang Seng is two percent in the red.

Maybe the poor performance of the market is due to the fact that the Bill still needs to be signed into law, maybe a poor economy is finally playing into the market, or maybe the stock market is unhappy with what is being proposed.

This week has the potential to be wild, let’ see what happens.

UPDATE: 12:36 AM

Asian markets are heading lower due to an increase in interest rates, sending property and resource stocks lower.  Financial stocks, however, rose - it looks as if the financial markets are reacting in a positive manner to the bailout.