I'd like to stay optimistic but we still have a few issues.
There is, of course, $117 oil – this is a lot! We should not "be happy it isn't $120," we need to be unhappy that it's over $100. Then there is the record-breaking dollar low we hit yesterday, which I warned about in the morning post and there's still that pesky housing crisis, with another 50,000 families losing their homes since I brought it up last Wednesday.
Barry Ritholtz is concerned that withholding tax revenues are strongly signaling a recession and I have to agree that this is a very grim looking prognosis that may be on the money. There is no doubt that the consumers are hurting and my bullish premise is based on the fact that the dollar will come back (through outside intervention, not because our Administration gets a clue) and oil will come down to $90, dropping a quick $600M a day back into consumers' hands.
If this DOES NOT HAPPEN (and soon) then we DO NOT have a bullish premise. Oil has been over $100 for 2 solid months now, after averaging $92 in Q4 and $96 in Q1. With a Q2 average of $110 so far, we are looking at a $55 per barrel increase over last Q2. At 20Mb a day of US consumption, that's $1.1Bn PER DAY that is not going to pay mortgages or buy IPods or Levis. So, at this pace, US consumers will have $400Bn less to give to US corporations (other than energy companies, which send half that money to Foreign nations who send part of that money to terrorists who want to kill us) while global consumers will be out an additional $1.2Tn for a global total of $1.6Tn more than last year going to oil alone. That's "only" 3% of the global GDP, which is how we are surviving it so far but if we take out the 20% of the GDP that IS energy companies, now we are talking $1.6Tn out of $40Tn or a 4% hit on the real economy.
It is a true testament to the Global economy that we can withstand such a shock but clearly we are bursting at the seams with oil driving other commodity prices causing a wave of poverty and starvation that is only just beginning to take hold and is getting more difficult to reverse with each day our "leaders" neglect to address it. The Economist features this on the current cover so I won't get into it now but PLEASE read this.
Inflation is not just a problem hitting the poor, French and Italian consumer spending has dropped off considerably and US numbers are not looking promising. As I warned last month, there is not enough free capital left in the system for commodities to rise without taking a bite out of something else. You know things are bad when, depsite inflation, Mother's Day spending is projected to decrease this year!
Surprisingly, you didn't HAVE to be an oil company to be doing well in 2007. The new Fortune 500 lists the 20 biggest profit makers of 2007 and only Dow components XOM and CVX along with COP represented the energy hood. Despite the mortgage crisis JPM, BAC, GS and WFC made the list on the financial side while diverse companies like GE, MSFT, BRKA, WMT, T, JNJ, IBM, PG, MO, PFE, CSCO, HP and INTC.
Our top 100 companies took in $6.5Tn in revenues and made $366Bn in profits, including a $38Bn loss by GM, a $29Bn loss by Sprint and another $$10Bn of flubs by various other companies who were early victims of the economy. On this list, XOM took in $372Bn and made $40Bn, CVX took in $210Bn and made $18Bn, COP took in $178Bn and made $12Bn, VLO took in $97Bn and made $5Bn, MRO took in $60Bn and made $4Bn, SUN took in $42Bn and made $1Bn and Hess took in $32Bn and made $2Bn. That's $1Tn that went to energy companies in the top 100 last year that generated just $82Bn in reported profits, about in-line with our non-losing companies.
What will next year look like if we maintain $120 a barrel for oil? The $2Tn required by the energy sector to make another $82Bn in profits (assuming they are not just jacking up the price for fun) will come out the same impoverished citizens that it came from last year. So the extra $1Tn MUST come AWAY from the $5.5Tn in revenues taken in by the non-energy companies. THAT'S ALMOST 20% folks. Couple that with rising costs that cannot be passed on to the consumer and we could be looking at a major, major melt-down ahead – just my little warning for the week!
China rolled back taxes on stock transaction and boosted the Shanghai Composite 4.2% this morning, we'll see if that sticks… That gave the Hang Seng a 350-point boost but the Nikkei stayed flat as the dollar clung to the ledge at the bottom of the cliff it already fell off. Rice is the latest victim of speculation as prices are up 150% this year even though there is no actual shortage. We can expect an international move to reign in speculators of all stripes this summer.
Europe is off about half a point ahead of our open as GSK disappoints along with SGP, who's acquisition of Oragon BioSciences cost them far more than expected. The BOE also disappointed the markets as their minutes reveal they may be done raising rates, which is chasing money out of Europe leaving US, once again, the least sucky place to park capital! This has been our goal all year right? Sure it's a pretty lame goal, but it's all we can aspire to so we're going to embrace it while it lasts…
Our earnings last night and this morning are a mixed bag but guidance is still holding up and that's what I'm watching closely. DAL lost a shocking amount of money, effectively losing the entire value (a loosely defined term) of their company in one quarter. For every $4 of revenues Delta took in, they lost $1.50, the more they fly, the more they lose, spending $1.4bn on fuel in Q1 (and it's worse now) and the CEO, who must not be very good at math, says fares need to rise 15-20% in order for them to make money. Doug Steenland, CEO of Northwest (DAL's prospective partner, who lost $4Bn of thier own money last Q), said that cost-cutting measures "have largely been exhausted."
Well there's $10Bn of that $1Tn being sucked up by oil – I wonder who will get hit next?
The question for the economy is will oil continue to rise and rise and rise and bankrupt every other company on earth or will there be some blowback that pops the oil bubble? I'm betting pop as an oil republic is no more stable than a banana republic in the end, the world doesn't need oil when it can't afford to fly jets or buy cars. This was part of our investing premise in BA, who saw the future and designed the most fuel-efficient plane ever built (or hopefully soon to be built anyway), as Doug says – other cost cutting measures have been exhausted, they MUST buy the planes.
Once again it's up to Apple to save the markets tonight. Today's earnings were good enough to keep us above my 12,700 mark for the day and Apple's last earnings, on 1/22, didn't do much for Apple themselves but they sure did get the market out of a funk. We're trading 700 points higher today than we were back then, It's going to be a wild one!
