The data out of yesterday’s Energy Department report, namely the trend among refiners that suggests they don’t currently expect a bounce back in demand, didn’t help matters – we’ll touch on that below.
Financial, basic material and industrial shares took the brunt of the damage.
Mid and small cap stocks got hammered. The S&P 400, a measure a mid capitalization shares, took a 4.38% hit. The Russell 2000 and S&P 600, the main measures of small cap shares, lost 4.72% and 4.73%, respectively.
Market Activity for May 13, 2009
Crude
Crude oil for June delivery remained near the $60 level despite the negative news on the consumer. The weekly Energy Department report showed an unexpected decline of 4.63 million barrels in supplies – inventories were forecast to rise one million barrels. U.S. supplies remain above the five-year average but have come off of the 19-year high that had been hit over the past three weeks.
Domestic demand is not showing signs of a rebound, so the reduction in stockpiles wasn’t a demand-driven event. Rather, oil imports hit a 10-year low as refineries decided to draw down existing stockpiles – unusual activity for this time of year with the summer driving season just around the corner; it suggests refiners are not especially optimistic that gasoline demand is making a comeback anytime soon.
That said, one cannot ignore the fact that production in China has shown signs of life over the past two months and the market is surely focused on the dollar that is trending lower. Then when the economy gets a boost from the inventory dynamic and the fiscal stimulus that has yet to occur (even if the bounce will prove very short term in nature) we could see traders push energy prices higher on rising GDP forecasts. It will probably take some pretty bad news to drive crude below the $50 handle again. Certainly activity out of China, where their stimulus (worth 20% of their GDP) is just starting to kick in, is unlikely to wane.
Mortgage Applications
The National Association of Realtors reported their mortgage apps index fell 8.6% after a 2% rise in the previous week. An 11.2% decline in refinancing activity (it appears we’ve seen most of this activity run its course) pushed the index lower – refis currently make up 72% of the index. However, purchases managed a slight gain of 0.5% after the strong 5% rise in the previous week
Import Prices
The Labor Department reported that import prices for April rose for a second straight month, up a large 1.6% (three times the forecast) after the 0.2% gain for March. This increase was all due to petroleum prices as the oil component jumped 14.6% and petroleum products (lubricants, kerosene, diesel fuels, aviation fuels, etc.) raged higher by 15.4%. Petroleum and petro-related import prices are up 30% over the past three months as they rebound from the plunge of the previous six months.
On a year-over-year basis import prices remain down big at -16.3%. But as commodity prices continue to rise this reading will erase its YOY negative reading and may quite possibly show the extremely elevated readings of summer 2008 by this time next year.
Retail Sales
The Commerce Department reported retail sales declined 0.4% in April, following a downwardly revised 1.3% drop for March. As stated yesterday, I thought the reading would show an increase (the expectation was for no change) as the Easter holiday fell in April this year. This often boosts the number, and quite possibly the reading would have been even worse if not for this calendar event.
Excluding auto sales the figure showed a slightly larger decline, down 0.5%. Auto sales were one of the only bright spots in the report – this component rose 0.2% as dealers, via help from government financing, were able to offer very low rates again after a few months in which they had trouble accessing credit markets.
The sporting goods and books segment also posted an increase, up 0.3% for the month and health stores, which have registered only one monthly decline over the past seven months, saw sales rise 0.4%.
Outside of these areas the rest of the report was ugly, particularly after the previous month’s large declines. The segment weakness we found most interesting was in the grocery store and gas station components.
Gasoline prices were pretty much flat in April, so the significant 2.3% drop within the segment can’t be explained by falling prices. Grocery stores posted a large 1.1% decline in April – considering the Easter holiday had to help the reading somewhat that’s a big decline. Both of these numbers scream joblessness – less driving due to the loss of employment and consumers tightening their belts for even the primary necessity reading of the report, groceries.
(Digressing for a moment, policy makers may have been able to stem this surge in the jobless rate if they had aggressively cut tax rates on capital, labor income, corporate taxes and repatriated income when it became apparent the economic world had changed last fall. This would have boosted disposable incomes, created incentives for businesses to boost capital spending, eased job cuts to some extent, and offered a higher floor for stock prices. But the Bush administration chose to return to the rebate check strategy, which never works, and the Obama administration explains that they will raise tax rates and create entire new entitlement programs, thus boosting government spending and driving massive deficits for years to come. I’m not saying all would have been right with the world, there was a major credit event that took place, but the policy direction chosen is clearly not the correct prescription and lower tax rates would by definition have boosted after-tax incomes, profits and capital return expectations. It would also have been dollar supportive, which is not the case right now; when run for the safety of the Treasury market comes off, the dollar will be in big trouble because of higher tax rates on capital and the massive debt issuance that will result over the next few years)
Department and clothing store sales fell 0.5% and 0.2%, respectively. These declines are logical, if consumers are going to reduce groceries, they’re surely not buying that new spring line of clothing; especially since credit-card lines have been cut (and you can bet that legislation to restrict interest rate changes on credit-card balances will result in even less availability). Electronic store sales fell 2.8% after a large 7.8% decline in March – massive discounting is likely playing some role here, it’s not totally a volume thing.
Looking out over the next year, we’ll see months in which consumer activity pops, which is likely to occur to some extent for May after two months of decline. This may cause the so-called pundits to believe the consumer is back, again. However, the need to boost cash savings, as the two major savings vehicles (stocks and houses) have taken a pounding, will weigh on activity for an extended period of time – and if energy prices surge again, that will act as yet another drag on the retail figures.
The consumer makes up 70% of GDP (that number is clearly going back to 65% over the next year or two), so as this segment remains weak we will greatly depend on the business side to boost economic growth. Of course, government is moving in to take a much larger role, but it can provide only a short-term boost, and over the longer-term this government spending will depress growth as it saps capital from the private sector. Washington needs to be very careful in its vilification and crowding out of the private sector; policymakers must tread with caution with regard to higher tax rates and regulations. If they choose to progress down the current path, they’ll find the business side will remain very cautious and continue to reign in its capital spending projects.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment