Most U.S. stocks gained ground yesterday, helping the S&P 500 and NASDAQ Composite end a two-day slide. However, the Dow Industrial Average failed to close in positive territory, held back by shares of Untied Technologies, Boeing and Hewlett-Packard.
Energy share helped the broad market manage a slight gain, as the price of crude rose for the first day in six. Shares of Microsoft and the biotech sector pushed the NASDAQ higher.
News floating around for a couple of months now that Citigroup will end its financial supermarket model began to take shape this past weekend and we received further indication yesterday the diversified banking institution will return to a model that looks more like the old Citicorp. The company will officially announce its plans next week; it’s been reported Citi will sell a majority stake in Smith Barney to Morgan Stanley and will likely spin-off its CitiFinancial consumer-lending unit. The new firm will focus on providing services to large corporations and affluent individuals.
Market Activity for January 13, 2009
It is also being reported Citi will set up a “bad bank” to house troubled assets and attempt to sell that unit off at some time.
That’s interesting since this is essentially the original purpose of the TARP, but for the banking industry in general. Too bad they chose to ditch this idea in favor of injecting capital into banks, which has really done nothing but allow banks to remain afloat. They won’t increase lending in this environment so long as mark-to-market accounting standards remain in place; they will simply continue to hoard the cash.
It would be highly preferable to see tax rates slashed across the board, a five-year moratorium on federal and state capital gains taxes on investments in troubled assets (which should bring the bids the market needs) and of course elimination of mark-to-market accounting in terms of basing capital adequacy ratios. But with Washington remaining obstinate, the original TARP proposal was the next best thing.
Crude-Oil
Oil futures slid 11.89% last week and fell another 8% on Monday, before rebounding 3.5% yesterday and into this morning’s trading. In the previous week crude was bid higher due to the heating up of Middle East conflicts and the game Russia continues to play with European energy supplies, but that gave way to global economic concerns and reduced demand forecasts.
Crude touched $50 on January 6, but has returned to the $30 handle, trading at $38.97 per barrel as I type.
It seems quite likely that oil prices will remain depressed so long as traders’ primary concern remains global economic contraction. In the meantime, the silver-lining is that money remains in consumers’ pockets via this low cost of energy, boosting real incomes.
Although for stocks, low oil prices currently work as a two-edged sword as we really need global economic worries to ease for stocks to resume the rally that’s brought us nicely off of the November 20 low. Oil and stocks may move in tandem for some time still.
But don’t expect energy prices to remain low as we look out over the next few months. For one, the massive amounts of liquidity the Fed has pumped into the system will explode throughout the economy whenever lending activity becomes normalized and risk aversion wanes even the least bit. This is going to push commodity prices higher and oil will certainly participate.
Another thing is the fact that energy policy over the next couple of years may not quite work the way some in Washington hope. We’ll see a focus on alternative sources, which is a good thing – especially if nuclear power is allowed to escape an onerous and inefficient permit process that delays production and drives costs far higher than they would otherwise be.
But we cannot abuse traditional energy sources, pretending as if they do not offer serious benefits both in cost to individual consumers (particularly those at the lower rungs of the economic ladder) and the economy in the aggregate.
To this point, I noticed the Senate advanced a $10 billion conservation plan last week that would set aside over two million acres among eight states. The Bureau of Land Management estimates the legislation would take nearly nine trillion cubic feet of natural gas and 300 million barrels of oil out of production in Wyoming alone.
The U.S. uses 21 million barrels of oil per day, so the 300 million figure is not huge (although we are talking about just one state), but anything other than a boost to supplies is not helpful over the long term. In terms of natural gas, the amount taken off line is equivalent to removing annual production levels of the two-largest NG production states – Alaska and Texas, according to the Energy Information Administration.
The irony here is that those most vocal on the topic of energy independence are also the primary proponents of this legislation. We have a 30 year history of voluntarily curtailing domestic energy production, which has made us increasingly more dependent on foreign energy sources.
Economic Data
The Commerce Department reported the trade gap narrowed by an enormous margin in November coming in at $40.4 billion from $56.7 billion in October. Imports plunged 12% for the month and exports were down 5.8%. The enormous decline in energy prices was a primary factor for the decline in import activity; significant weakness in consumer activity obviously played a role too.
The real trade gap, adjusting for prices, narrowed to $39.5 billion in November from $45.6 billion in October. Real exports declined 3.3%, real imports dropped 6.8%.
The export data within major regions indicates the degree of the global slowdown as year-over-year U.S. exports to China fell 10.7%, 18.9% to Asian NICs (newly industrialized countries), 15.2% to Canada and 1.1% to the European Union. This shows a synchronized global recession has occurred; so much for that “decoupling theory.”
Amazingly, U.S. exports to OPEC countries remains very strong, up 22.7% in November, although we’d expect this to grind to a halt due to the collapse in the price of oil.
(In terms of fourth-quarter GDP, this significant narrowing means trade will be less of a drag on the figure than expected. Still, we’re likely to see at least a 5.5% real rate of decline in economic growth when the reading is released on January 30, and may be solidly in the -6% handle.)
Real goods exports fell a huge 39.7% at an annualized rate over the past three months; this number was up 11.3% in the 12 months ended August 2008. This shows as clearly as anything does just how quickly things changed globally.
Real goods imports dropped 29.3% at an annual rate over the three months ending November; this figure down just 2.11% in the 12 months ended August 2008. And this shows how dramatically things have change domestically since September.
We often warn those who desire a very narrow trade balance to be careful what you wish for, you may not like it. No doubt, the degree to which import activity outpaced exports by 2005 had gotten out of control. This was due to the Fed’s mistaken monetary policy that sent real short-term interest rates negative, and thus subsidized debt. The credit expansion that ensued did have a lot to do with how wide the trade gap had become.
Yet, the gap was narrowing in 2006 and 2007 as the Fed removed that easing policy that kept rates too low for too long. In an event, a U.S. economy that had been in growth mode for the vast majority of the past 25 years resulted in a powerful and prosperous consumer base – which is still the case in the aggregate even with our current troubles. Thus trade deficits will result.
Overall, we shouldn’t fear trade deficits. This is not 18th century mercantilism. So long as we engage in pro-growth polices many of those dollars used to purchase imports come back home in the form of investment, which is what the trade-deficit curmudgeons never factor.
What we should fear are Federal Reserve monetary policy mistakes; the harm rendered by these mistakes is widespread and extremely damaging.
Let’s learn from this situation. Instead of castigating capitalism – for all of its faults it is undoubtedly the most efficient allocator of resources – we need to focus the blame on the FOMC and their Keynesian models.
For sure, an out of control Fannie and Freddie, supposedly sophisticated accounting standards that were never modeled against a full-blown decline in asset prices and congressional demands to extend credit to those with very low credit scores or be accused of “redlining” are also serious contributors to the current problem. However, none of those are large issues if the Fed doesn’t push real fed funds negative for two full years as was the case October 2002-March 2005.
Have a great day!
Brent Vondera, Senior Analyst
