Yesterday's DI Afternoon Comment
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Two Weeks to Go! Time to Get Back on the Fed Bandwagon
So far, we’ve had two trading days in September and there has been barely a whisper about U.S. economic policy and the upcoming Fed meeting—until now.
This morning, traders and investors are giving a collective yawn to the news about Intel’s job cuts and Ford’s new CEO appointment as everyone gets ready for the biggest day of the week for economic data.
With only two weeks to go until the next all-important FOMC meeting, every report released by the Government is going to be analyzed in every way as economists and media pundits try to predict what the Fed is going to do next. Will the Committee hike again, continue to pause or simply determine that the one-and-only Greenspan/Bernanke rate cycle is finished.
Diligent Investor Sticks to its ForecastThe
Diligent Investor has analyzed all of the economic data released since the August 8th FOMC meeting, and we have determined that the Fed is finished. There are no reasons or justifications for this Committee to tinker with economic policy because the U.S. economy is stable, but vibrant. The Fed has done its job, and it has done it well.
I wouldn’t go as far as giving this Committee a standing ovation for their work, though. Even though they didn’t bow to pressure from the public—or more importantly, Wall Street—to hike more aggressively, they did make a few rookie mistakes along the way.
One key error has been simply talking too much. This group has been quite chatty by doing a number of public speeches about economic policy while not realizing that every noun, verb, adjective and preposition is being monitored by the financial press. Even the Fed Chairman couldn’t escape the public eye when he made some minor comments to one of the most recognized financial journalists of our generation.
Mistakes will be madeBut, live and learn. Mistakes will be made as the Fed continues to steer the U.S. economy in what will be some of the most challenging events in our lifetimes. As long as the mistakes are not catastrophic (i.e., stagflation, recession, or do I have to say it—depression), the Fed will keep inflation in check and keep the U.S. economy growing at a 2.5 to 3.0 percent clip.
But, today is today and the data released will determine market reaction. Volume is expected to be at normal levels as traders return from their Labor Day hangovers and get back to the business of living in a capitalist society—making money!
Full Menu of Economic NumbersFirst up on the docket is the revised second quarter productivity numbers at 8:30AM EST. Wall Street consensus is figuring a 1.5% improvement, which should not move the needle to alarm Fed members.
Also at 8:30AM will be the release of the closely monitored unit labor costs, which are actually expected to be revised lower. If the number comes in below 4.1%, look for U.S. stock futures to jump on the news.
At 10:00AM, we will have the Institute of Supply Management’s non-manufacturing index. This figure is expected to edge slightly higher to 55% in August from 54.8% in July.
Then, at 2:00PM is the much-anticipated Fed Beige Book, which typically sets the stage for the next FOMC meeting.
And not to be outdone by the flood of economic reports, oil will get into the mix of things when the EIA inventory data is released at 10:30AM. The oil bulls will be running if inventories take a dip.
Stay tuned as the ingredients for another wild day on Wall Street come together.
Until tomorrow,
Todd M. Schoenberger,
Editor
Diligent Investor
http://www.diligentinvestor.net/http://www.dynamicmarketalert.com/
The September 5th DIAC
Striking Oil! How Chevron’s Discovery will help America and Investors
With oil prices still hovering around the $70 a barrel range and the price for a gallon of unleaded gas averaging $2.75 this week, the United States still remains as vulnerable as ever when it comes to supply disruptions and can’t afford to relax in its pursuit of oil exploration or development of alternative fuels.
Well, fortunately for us, our domestic big oil companies are taking matters into their own hands by searching and exploring for the commodity in an effort to maintaining an adequate supply while keeping with demand. Considering three-quarters of the world’s oil supply is off limits to our big oil companies, finding new pools of crude off of our shores is critically important to their—and our—survival.
Black Gold Gushes in the Gulf
Just announced this morning, Chevron Corp. (NYSE: CVX) has successfully completed what it called “a record setting production test” on a well located about 270 miles southwest of New Orleans in the Gulf of Mexico. Chevron said the well sustained a flow rate of 6,000 barrels of crude a day. Unfortunately, the equipment used is not able to maintain more than 6,000 barrels, but we’ll take what we can get.
Chevron owns 50% of the well, with companies like Devon Energy (NYSE: DVN) and Statoil (NYSE: STO) holding the remaining 50% equity interest. All three companies are estimating the new oil field to hold between 3 billion and as much as 15 billion barrels worth of oil and gas reserves. If 15 billion barrels are found, it would boost oil reserves by 50% in the United States.
Discovery may take Years to Produce
Unfortunately, there will be no immediate impact as a result of this discovery as this crude will not be processed into fuel for at least 3 years. However, it will provide a much needed psychological boost to an American population already on edge regarding Middle East violence which could possibly lead to a severe disruption to global oil supplies.
Now, hopefully our lawmakers on Capitol Hill will realize how important oil-friendly measures like the off-shore drilling act—more formally known as the Deep Ocean Energy Resources Act of 2006—are important to helping America end its relationship with foreign oil. The short session—a mere 19 days long—is important to pushing this measure through and permitting additional exploration off of our domestic shores.
Look for oil to take another trading breather today, especially now that the summer driving season has officially ended, and provide a terrific buying opportunity for investors looking to jump back into the oil bull market. Stocks like Chevron, Devon Energy and Statoil should do well today, but these stocks will do well even without additional oil field discoveries. Simple global demand will continue to drive these and other oil companies higher.
Until tomorrow,
Todd M. Schoenberger, Editor
Diligent Investor
http://www.diligentinvestor.net/http://www.dynamicmarketalert.com/
The Friday, September 1st DIAC
Petrodollars! How Oil is making the U.N. Irrelevant to Iran and Putting Pressure on your Portfolio
Facing the prospect of economic sanctions by the United Nations and potential violent force from Western countries, Iran essentially told the U.N. to take a hike as it plans to move forward with its uranium-enrichment program.
Some would say this is a bold move by Tehran, but considering we’re talking about a showdown with the jellyfish United Nations, it is hardly a show of strength. If anything, it sends a message to the world that Iran could care less about potential economic sanctions because it’s making obscene amounts of money from higher crude oil prices.
Oil is the ultimate weaponAs the fourth largest exporter of oil in the world, Iran knows that its ultimate weapon isn’t a nuclear bomb but rather a barrel of oil. If Iran cuts off supplies to the world—even a small percentage of production—it would be catastrophic to the global economy.
Today, the world requires 84 million barrels of oil a day to survive and oil producing countries are only pumping 85 million barrels a day out of the earth. Any slowdown to this production (i.e., hurricane, war, etc.) would immediately cause a spike in oil prices and a collapse of all stock markets around the world.
You can see this reaction here in the United States. With talk about Hurricane Ernesto heading to the Gulf of Mexico, we witnessed oil prices spike and a drop in our domestic stock indices. Fortunately, the storm shifted to the east, thus maintaining oil production in the region and causing oil prices to settle down—and, more importantly, lift our stock markets higher. (Consequently, the S&P 500 hit a three-month high in the days after oil fell below the $70 a barrel level.)
“What to do” meeting on September 7thNow, the concern regarding oil has shifted to Iran and it’s up to the world’s leaders to solve the riddles of this defiant country. A meeting has been scheduled for September 7th to figure out “what to do.” I wish them luck because if this situation isn’t resolved diplomatically soon, we’re going to have some serious problems with our portfolios as we close out 2006.
Investments will take a hitHere’s why: After seeing higher oil and gas prices this summer, consumer spending dropped. This is because people have less discretionary income due to the fact that it’s costing $80+ to fill up their SUVs. In August we were somewhat relieved to see prices at the pump recede just a bit (average price per gallon of gas this week is $2.87, was $3.05 in June).
The drop in gas prices certainly helped with consumer spending as the Government just this week said spending increased by 0.8% in July. This uptick in consumer’s opening their wallets is partially attributed to the slight drop in gasoline prices. As a result, stores like Wal-Mart reported higher retail sales for this period. This morning, Starbucks even reported that August same-store sales were up 5%.
$100 a barrel, $4.00 at the pumpNow, let’s consider if Iran shuts off the spigot for exporting oil and tells the world—especially the United States—to go find the commodity somewhere else. Well, we’ll definitely see prices for crude come close to the elusive $100 price and have gas clip $4.00 a gallon in this country. Considering the holiday shopping season is almost here, retailers, for one, will be hit hard and cause a negative ripple effect on consumer staples.
Prices for crude at $100; gas topping $4.00 a gallon; potential for more violent conflicts in the Middle East—these are the ingredients for horrible market conditions and dire results for your portfolio.
Is there a way for investors to make money?Yes, there is! Look at oil stocks; Companies like ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) because a quick solution for the United States to steer clear of further escalating issues with Iran is to get off of foreign oil. And—we’re close.
When the Senate returns from summer recess, they will be continuing the debate regarding off-shore drilling. It’s inevitable that this measure will pass, thus opening the door for companies like XOM and COP to move in and virtually save America from any price hikes due to further antics from Iran.
Regardless, though, it’s important to safeguard your portfolio during these tumultuous times. However, investors looking for some profit seeking moves to take advantage of higher oil prices and off-shore drilling, consider some of the blue-chip oil companies for your portfolio.
Have a safe and enjoyable holiday weekend,
Todd M. Schoenberger, Editor
Diligent Investor
On CNBC this morning, September 5th!!
I'll be on CNBC this morning starting at 10:45AM EST, Tuesday, September 5th. I'll be a part of a roundtable debate on oil and Iran's influence on the commodity.
Hope you can tune-in.
The 8/30 DIAC
Fed Minutes Cause Economists to Scratch Their Heads
There were a couple of notable comments from the FOMC’s August 8th minutes that were released yesterday that are leaving many economists scratching their heads and wondering if the Fed’s economic staffers need a refresher course on Economics 101.
After reading the minutes a good half dozen times, I came across the following statement and had to keep going back to it because I thought it may have been a mistake: …housing, energy, policy lags and reduced wealth effects are going to “hold economic growth below potential over the next six quarters.”
The next six quarters will take us into 2008! If that’s the case, then why all the hints and whispers about inflation concerns and another rate hike? It doesn’t add up and, frankly, is quite inconsistent from what I expect from our Fed Governors, and more specifically, Chairman Bernanke.
9 to 1 Signals an End to the Rate Cycle
Let’s get down to business: The Fed is finished with the rate cycle and any mention of a potential hike in rates is pure baloney.
It seems that I’m not alone with this assessment; even the Committee is looking to be in agreement. We were first told that the initial vote to pause rates was “a close one,” but as it turned out the vote was 9 to 1 (Lacker was the only hold-out).
If there are any inflationary concerns for the U.S. economy, they can be attributed to the higher energy prices and after reviewing the current Gross Domestic Product figures, we can be reassured that 1) the Fed has done its job, and 2) the economy has landed and it’s landed softly.
Remember, if you decide to review the Fed’s minutes, closely analyze the actual language used. You’ll read about inflation “risks”, and that’s exactly what they are—just risks, not the “base case”.
History tells us that if the Fed pauses for at least four months, the probability of the next policy change being a rate cut is 100%. The period between a tightening cycle and an easing cycle is, on average, eight months.
Now, further evidence to solidify this argument that the Fed is done: Going back the last 35 years, the FOMC has never had a rate hike when the U.S. GDP figure was less than 3%, and the Q2 print came in at 2.5%.
In other words, the U.S. economy would have to skyrocket within the next couple of months to push our GDP figure higher, and therefore warrant any tightening by the Fed. And, it’s not going to happen.
Remember These Dates
The two dates to circle on your calendar are March 20/21 and May 9. That is when we’ll see a new rate cycle begin—a Bernanke only rate cycle. Look for the Fed to begin cutting rates at one—or maybe both—of these meetings.
Thank you, Chairman Greenspan. Your final rate cycle is in the books. You can now go and relax and enjoy your retirement.
Until tomorrow,
Todd M. Schoenberger, Editor
Diligent Investor
www.DiligentInvestor.netwww.DynamicMarketAlert.com
Yesterday's Diligent Investor Afternoon Comment
Fed Minutes to be Released; The Most Popular Non-Event of the Day
Dear Reader:
With one week left until the unofficial end of summer, investors would think traders may take some time off to rest up for the usual September massacre in the markets. Trading volume was lower yesterday, but it probably has more to do with this week’s parade of economic data than a final visit to the beach.
Financial headlines have been dominated by the one-year anniversary of Hurricane Katrina and its effects on the Gulf region and the energy markets. Today, that same theme will be discussed on all of the financial channels—at least until 2:00EST.
Topic A Again—The Fed
Yes, folks, it’s time to start talking about the Fed again. This afternoon, the Federal Reserve will release the minutes from the August 8th meeting when Fed policy makers chose to take a breather during the current rate cycle and forego an 18th consecutive rate hike.
Traders and investors and media pundits and economists and pretty much anybody with an interest in U.S. economic policy will be looking closely at the language used by the Fed officials to gauge their concerns over the unpopular I-word: Inflation.
Everybody wants to know if the August 8th pause was just that…a pause or an actual end to the first and only Greenspan/Bernanke rate cycle. At the
Diligent Investor, we have been adamant about our position that the Fed is done with this cycle and we can now look forward to an easing cycle to begin in late first quarter or early second quarter of 2007.
The biggest reason for our opinion that the Fed Governors are done is GDP growth. I went back some 35 years and not one time could I find a Fed that hiked rates when the current GDP rate was less than 3 percent. For those keeping score, the second quarter GDP print was 2.5 percent.
Now, the revised Q2 GDP report will be released tomorrow morning and I’m predicting the number to print higher, maybe even 3 percent. Either way, though, this Fed is finished. Inflation is not a concern and any issues with higher-than-comfortable core rates can be attributed to higher energy prices.
Bottom line: Inflation is in check, the Fed has done its job (well) and the country is growing at the targeted rate of 2.5 to 3.0 percent. And, this is the rate the U.S.A. needs to grow just to maintain a level rate of employment. Anything lower, you’ll hear a lot of talk about a recession. Anything higher, you’ll hear about additional interest rate increases.
So, tune-in to your favorite financial channel at 2:00EST and be prepared for a non-event. I predict the word “inflation” to be mentioned 27 times in the minutes (last minutes release had the word mentioned 38 times). As you can see, the trend is looking good, as the Fed policy makers are feeling more and more comfortable about the current state of the U.S. economy.
Until tomorrow,
Todd M. Schoenberger, Editor
Diligent Investor
www.DiligentInvestor.net
On CNBC this afternoon
Tune into CNBC this afternoon for its "Closing Bell" show. I'm going to be interviewed by Maria Bartiromo and Bob Pisani. They'll be quizzing me on the economics of oil and how Hurricane Katrina affected not just the people in the damaged areas, but also every U.S. consumer.
Be sure to tune-in.
Sweet Action!!
I won today's Wall Street Journal Newshound contest. Check out the link: (
http://wsj.com/Newshound)
I won a t-shirt, but more importantly I get to brag to my co-workers. Fun times!
Check out the DIAC later today for more info:
www.DiligentInvestor.net.
Todd
