|Dow||+15.38 to 18,224.57|
|S&P 500||-1.62 to 2,113.86|
|Nasdaq||-1.65 to 4,966.47|
|10-YR Yield||-.019 to 1.969%|
|Gold||+$7 to $1,204.30|
|Crude Oil||+$1.48 to $50.76|
On the surface, there wasn’t much to like about today’s inventory data out of the Energy Information Administration (EIA). Crude oil supplies rose by another 8.4 million barrels, after increasing 7.7 million the week before. Supplies have now risen for seven straight weeks, to a level that’s far above the seasonal average.
But after briefly spiking lower on the news, oil prices stabilized. Then they turned tentatively higher … before ripping a buck and a half into the close! Like a beach ball you try to hold underwater, crude oil (and energy stocks) keeps bouncing back to the surface after every bit of seemingly bearish news.
So what “crude realities” are the bears missing?
First, they’re forgetting about demand! The economic news here in the U.S. just keeps humming along. Gasoline demand has been running above year-ago levels since the tail end of 2014, as you can see in this chart from the EIA, while distillate demand is showing the same pattern.
Lousy news on the economy in Asia and Europe has offset that positive influence. But the news is getting better in both regions on the margin. That’s a message Saudi Arabia’s oil minister Ali Al-Naimi just underscored in comments overnight, adding that he foresees a more “calm” market rather than further sharp declines.
Second, they’re failing to appreciate the supply declines we’re seeing in the product market. While crude supplies were up, gasoline inventories dropped 3.12 million barrels and distillate inventories fell 2.71 million barrels.
Given the encouraging demand picture, it’s hard to see inventories of refined products climbing sharply. But it’s easy to expect them to decline further. Sure enough, gasoline and heating oil futures just rose to their highest levels since early December — a fact the bears on CNBC conveniently forget to mention when talking about crude!
Finally, they’re not paying enough attention to currencies! The relentless rise in the U.S. dollar has coincided with declines in the commodities market, including oil. But the euro hasn’t made a new low in the last month. The Australian and New Zealand dollars just rose to their highest levels since mid-January, while the British pound just hit its highest since the first trading day of 2015.
|“Energy stocks are the cheapest, most attractive they’ve looked since the mid-1980s.”|
And even if I’m not, let’s face it. Energy stocks are the cheapest, most attractive they’ve looked since the mid-1980s. They’ve already been pummeled, with any froth wrung out of them. That means the downside risk looks very limited, while the upside potential looks huge.
Now let me hear your take. What do you think about overseas and domestic demand? Is it enough to absorb the excess supply we have out there? Or do you think we’re just swimming in too much oil? Will the dollar have an impact on crude, and if so, what kind? Here’s the link to the Money and Markets website again. Don’t be shy!
|Our Readers Speak|
Janet Yellen and the future direction of interest rates were the big topic at the website yesterday, in light of the Federal Reserve Chairman’s testimony before the Senate (followed up by comments before the House today). Interpretations of what she said and what will happen next varied widely.
Reader Tommr reminded everyone of a key Fed tenet: Policymakers usually follow the path already laid out by the longer end of the Treasury yield curve:
“I have contended for many years that the Federal Reserve does not set interest rates, with the possible exception of extremely short-term rates. It generally follows the rates set by the markets! So if the markets push rates up now, the Fed will follow suit and adjust its targets to conform!”
Reader Robert C. weighed in to say he doesn’t think the Fed will raise rates in 2015, for the following reasons:
“We are in our third currency war, which we started in 2010. In his State of the Union message, the President set a goal of doubling exports in five years. Every central banker who listened that night knew that we would devalue.
“But the rise in the dollar is due to capital inflows from Europe and the rest of the world. If interest rates were raised, it would make our exports more expensive abroad then what they already are. We are on the path of self destruction.”
Thanks for the observations. But it’s worth noting that the market is already raising rates. Take the 2-year Treasury yield, one of the points on the yield curve most sensitive to Fed expectations.
Despite all the Fed’s protests about interest rates, the yield on 2s bottomed out at just under 0.2 percent in May 2013 — and it has been rising steadily ever since! It’s currently around 0.6 percent, triple the level of a year and a half ago.
So you could easily make the case the markets don’t believe the Fed. Reader Steven pithily summed up the Fed’s increasing impotence this way: “As for the Fed’s influence upon the economy, it’s all over except for the Yellen!”
Then there was Reader David, who took issue with my characterization of past Fed actions. His view:
“You’ve been critical of the Fed for years now, but the fact is that the U.S. economy is doing better than anywhere else in the world, employment is growing, and the deficit is declining rapidly.
“Sure, not everything is peaches and cream, particularly middle class incomes. But that problem has been around for decades, not just since the crash. So things are going pretty well despite the Fed doing exactly the opposite of what you would have it do, and inflation hasn’t gone out of control as you and others had been predicting a few years ago. Did you ever think that maybe, just maybe, the Fed deserves a little bit of credit for the U.S. economy doing so well, and that perhaps they really know what they’re doing?”
My answer: Sorry, but no. I don’t think they deserve much credit for the current state of the U.S. economy, and no, I don’t think the Fed has a very firm grasp on the economy.
Fed policymakers from Alan Greenspan to Ben Bernanke to many of their compatriots and successors have repeatedly screwed up by keeping policy too easy over the past couple of decades. Their actions helped fuel the dot-com bubble indirectly … and directly contributed to the biggest housing bubble in U.S history.
Some of the things the Fed did during the crisis that they themselves helped create succeeded in stemming the bleeding in 2008-2009. But the economic recovery that followed the Great Recession occurred despite the Fed’s actions, not because of them.
Indeed, it’s natural for economies to gradually heal after devastating crashes. I contend that we would have seen ours recover regardless of whether or not the Fed bestowed hundreds of billions of dollars in free money on Goldman Sachs and other financial institutions.
Finally, all that QE-provided money from the Fed and its overseas counterparts is helping underwrite the very economic inequality that Yellen and her fellow policymakers claim they are so worried about. It does so by fueling asset price gains, which accrue to those with the most wealth, while doing little to improve wages and while impoverishing those who live off interest income.
And while we’re at it, that QE money has helped fuel the biggest bond market bubble in world history. We actually have negative interest rates in some locations — meaning lenders (bondholders) are now actually paying interest to borrowers (various governments and even corporations issuing bonds).
Bottom line? My view on the Fed comes down much more along the lines of Reader Herb, who said the following of Yellen: “That woman sounded like she had a mouth full of pudding and had very little idea of what she is doing. She does not instill any comfort from what she says and I believe she does not have a clue.”
Regardless of whether you agree with me, I appreciate hearing from you. So don’t forget to hit up the website and throw your hat in the ring on the Fed or any other topic!
|Other Developments of the Day|
“Janet Yellen Puts Fed on Path to Lift Rates” — That’s the headline the Wall Street Journal went with in the wake of her testimony before Congress yesterday. The only question is the precise timing, which depends on incoming economic data.
On the earnings front, Lowe’s Cos. (LOW, Weiss Ratings: A) delivered strong earnings and sales growth one day after competitor Home Depot (HD, Weiss Ratings: A) wowed Wall Street. Profit surged 47 percent to $450 million, or 46 cents per share. That beat the 44-cent per share average forecast.
On the flip side, computer, printer, and corporate software and hardware giant Hewlett-Packard Co. (HPQ, Weiss Ratings: B+) laid an egg in its latest quarter. Revenue fell 5 percent to $26.8 billion, adjusted earnings per share barely budged from a year ago, and the forecast for future results left investors with a bad taste in their mouth.
Southwest Airlines (LUV, Weiss Ratings: A) didn’t conduct proper rudder inspections for more than 100 planes. But after scrambling and negotiating with the Federal Aviation Administration, it managed to keep flying rather than pull a fifth of its fleet offline while it conducted emergency catch-up checks.
Jurors found ex-Marine Eddie Ray Routh, who was charged with killing “American Sniper” Chris Kyle, guilty in a Texas court yesterday. The capital murder charge carries with it a sentence of life in prison without the possibility of parole.
Will the Department of Homeland Security get its funding? Many Republicans want to withhold money from the agency in order to force President Obama to roll back his immigration reforms. A Senate effort to break the logjam faces an uncertain outlook in the House, all ahead of the Friday deadline when DHS will run out of dough.
Want to weigh in on corporate earnings? The latest political squabble in Washington? Anything else in the news right now? Use the website as your outlet!
Until next time,