Monday, September 22, 2008

1) Falling oil prices: The downside

By Colin Barr, senior writer

NEW YORK (Fortune) -- Oil prices are falling sharply, and that's good news. But not nearly as good as you might think.

No doubt the drop, down to $120 by mid-day Monday, gives strapped consumers relief at the gas pump. Prices have dropped below $4 a gallon and could be headed toward $3.50, going by trading in wholesale futures markets. Any decline will be welcomed by Americans struggling under the burden of falling house prices, rising layoffs and stagnant wages.

But falling oil prices also suggest that the recession the U.S. has so far avoided is well on its way, as consumers pull back from the spending spree that drove economic growth earlier this decade. A weakening economy will mean more layoffs, further pressuring already reduced spending.

"There is no doubt that with gasoline prices dipping below $3.90 a gallon we have a bit of a reprieve on the energy front," Merrill Lynch economist David Rosenberg wrote in a report Monday, "but the reality is that this is a chicken and egg game because the decline is reflecting the consumer recession."

Energy use down

Perhaps the biggest factor behind the recent 18% drop in the price of a barrel of crude is sinking North American demand. Federal Highway Administration data show the number of miles driven in the U.S. dropped from year-ago levels for the seventh straight month in May.

May's decline was the third-largest monthly drop on record since 1942, says Stephen Schork, editor of the Schork Report energy and shipping newsletter in Villanova, Pa.

Americans are driving 4% less now than they were a year ago, Rosenberg writes, while energy use in inflation-adjusted terms has dropped 2% - an event he calls "extremely rare."

The pullback comes after the recent crude-price surge - the cost of a barrel doubled between Labor Day of 2007 and July 11 - seriously damaged the industrial economy, which despite its long decline remains a crucial source of better-paying jobs.

General Motors on Friday posted a $15.5 billion second-quarter loss, as sales plunged 18% from a year ago. The company and rival Ford have slashed truck production, laid off thousands of workers and refocused on smaller cars as buyers flee the light trucks that had made the companies so much money.

Americans' decision to drive less comes at a time of rising stress. The economy has been hemorrhaging jobs and real wages, adjusted for inflation, have been flat to lower for a decade. Americans have enjoyed a rising standard of living in the meantime by borrowing - but with banks choking on subprime mortgages gone bad, the loan window is closing. Rosenberg calls a recent rise in the savings rate "a vivid sign that frugality is now replacing frivolity."

Meanwhile, the weak economy is spurring more companies to cut back. Outplacement firm Challenger Gray & Christmas said Monday that layoff announcements jumped 26% from a month ago in July. The unemployment rate recently hit a four-year high at 5.7%.

How low can it go?

One unhappy fact is that a drop in the price of oil won't bring back many of the jobs lost over the past year to the energy-cost surge. Even were gas to fall to $3 a gallon - a move that is by no means assured - no one is going to beat a path to the dealership to buy pick-ups and SUVs that are now, in many cases, being phased out. GM recently announced plans to shut four SUV plants.

On a happier note, there is hope that the decline in oil prices has just begun. While Schork says it's anyone's guess where crude will trade - "By the end of the third quarter, there's a good chance oil could be below $100 a barrel, and a good chance it could be above $150," he says - others see a chance that the commodity, having enjoyed a head-spinning runup, could also drop more than anyone expects. Economist Jim Griffin notes at the ING Investment Weekly that crude's rally earlier this year became "nearly parabolic" - a sign that the decline could be steep.

Now a return to double-digit oil may not rescue the Hummer. But as the government's fiscal stimulus program did earlier this year, it could give consumers a little more change in their pockets, either to spend, salt away - or pay down their debts.

2) Commentary by David Zwebner, CEO of CommStock Trading 

U.S. Economy
In addition to the announcement yesterday that the government is working on creating something like the Resolution Trust Corporation to take up bad loans, the government pulled out more heavy guns today. The Securities Exchange Commission banned the short selling of financial stocks through October 2nd and the U.S. Treasury said that it will insure eligible money market funds for a year, saying that the move is key to protecting the integrity of the global financial system.

Grains and Cotton
The U.S. financial panic dominated all the markets this week. If today's moves by the U.S. government succeed in breaking the cycle of selling and stop the scramble for liquidity, commodities in general, should benefit. December corn closed up 15 cents at $5.422 and December cotton was up 1.76 cents at 62.52.

Cocoa
According to the Dow Jones Newswires, the European Union issued a report, saying that the prices that cocoa farmers receive in the Ivory Coast are not enough to support the cocoa crop in the long-run. The report urges the Ivory Coast government to pay farmers a higher price, repair roads, improve credit, and reduce export taxes. December cocoa closed up $34 at $2,690.

Energies
November crude oil was higher in hopes that today's interventions will keep demand from slowing any further.

Currencies
In its monthly assessment, Japan's Cabinet Office acknowledged that the economy is "weakening," the first time it has used that word in seven years.

David Zwebner, CEO
CommStock Trading Ltd.
Tel: +972-(0)2 624-4963
Fax: +972-(0)2 624-4876
www.ecommstock.com

Interested in reading perspectives and analyses on the Forex market?  In learning what factors affect the Forex market every week and what to be on the lookout for?  In getting trade recommendations?   Email mona@ecommstock.com  to get your copy of a weekly Forex report.

Amidex: Amidex35 (Class No Load Shares), $12.81; Index, 1777.97, Daily Change, 1.13%; “A” Shares NAV, $9.87.

Global Asset Management: Capital Appreciation, $256.15; Composite Absolute Return, $875.14; Diversity, $710.88; GAMCO, $857.26; Interest Trend, $236.73; Trading IV-US$ Class, $144.19; US$ Special Bond Fund, $418.39.

Invesco: Asian Equity Core, $4.01; Bond, $24.78; Emerging Markets Bond, $18.58; European Bond, EUR 4.2861;

Gilt, GBP 12.17; Global High Income, $11.12; Japanese Equity Core, $1.350; UK Equity, GBP 4.81. 

JPMorgan Fleming: JF Eastern Smaller Co., $78.59; JF Japan, JPY 14,258; JF Japan Equity, $10.72;

JF Japan OTC, JPY 888; JF Japan Smaller Companies, JPY 30,517; JF Japan Technology, JPY 41,592; JF Korea, $32.46;

Pacific Securities, $160.44; Pacific Smaller Companies $18.59; Global Bond & Currency, $21.58;

JF America, $40.43; JF Europe, $36.98; JF Germany, EUR 17.98; JF Global Equity, $35.14.

PCP: North America, $11.85; Europe, $19.84; Emerging Markets, $16.39; Balanced, $8.16; Aggressive, $6.83.                                                                                      

Platinum (updated once a month – August 2008 Prices): All Weather, $129.99; Equity Plus, TBA;

Prot. Equity Plus, TBA; Prot. Income Plus, TBA; Cap. Prot. Income Plus A, TBA.

Scottish Provident: Adventurous 1, GBP 2.569; Balanced 1, GBP 2.135; USD Adventurous 1, $1.983;

USD Balanced 1, $1.992; USD Cautious 1, $1.937; For Preference: Baring GUF Eastern Europe, $93.99; Fidelity Funds International, $29.32; Invesco Asian Equity Core, $3.780.

Mona Liss
CommStock Trading Ltd
PO Box 7777
Jerusalem 91077
Tel: +972-2-6244963
Fax: +972-2-625 9515