Lots of data today.
At 7:30 we get Challenger Job Cuts followed at 8:15 by the ADP Employment Report, Factory Orders and ISM at 10 am and Crude Inventories at 10:30 about which time Uncle Ben will be testifying to Congress. Also today, we should be getting the EU's revised GDP (expected to be down 2.5%) and PPI, which is likely to be another negative number (deflation). Of course we are focused on oil inventories, which are forecast to fall 1.4Mb but we have been playing for a BUILD in gasoline and a BUILD in distillates (not in crude as they are not shipping us any) despite the fact that MasterCard does show a 2.2% increase in gas demand from last year.
A 2.2% increase in demand after dropping gasoline prices from $3.90 last Memorial day to $2.40 (38%) this past holiday weekend is showing a demand INelasticity from the bottom. Gasoline, which is consumed in the US to the tune of 390M gallons PER DAY, cost US consumers $3.50 or more ($1.36Bn/day) through October of last year and dropped as low as $1.59 ($620M/day) for the week of Dec 29th, giving US consumers $22Bn in extra spending money in December as they drove to the mall to shop. Just 5 months later, gasoline is back to $2.50 a gallon nationally, a $129.5Bn annual INCREASE. That's $1,295 for every single American household going up in smoke.
Why is it that conservative pundits are outraged if there is a penny tax put on something yet they stand mute when a $1,295 surcharge is placed on every American family by the energy cartel? This is not a Dollar issue, the Dollar was 80 in December and has been higher than 80 until last week (now 78). Even at 78, it's only down 2.5%, hardly justification for a 66% increase in gas prices. And how is it possible that our conservative financial media doesn't see that spending whatever it takes to move to alternative energy that will keep gas spending at $1.50/gal ($213Bn/yr) is worth it compared to the possibility of $5 a gallon ($711Bn) being sucked out of the US economy?
The problem is, as I mentioned last week, that it's not 100% sucked out of the economy. Before we send $711Bn in gasoline money (and that's half of what US consumers spend on energy) over to our friends in Iran, Venezuela and other OPEC nations, there are lots of middlemen who get a "taste" by skimming some off the top. Those traders and companies, from XOM to Goldman Sachs to T Boone Pickens skim a small percentage from every barrel and they make MUCH more money when the consumers are paying MUCH more for energy.
XOM, for example, makes a net income of about 10% of sales. Last year, XOM alone sold $477Bn worth of oil and refined products and made a net profit of $45Bn ($82Bn before taxes). In 2003, gasoline averaged $1.50 a gallon and XOM sold $237Bn of product and made $21.5Bn after taxes. Obviously then, XOM does MUCH better when we are paying $4 a gallon than $1.50 a gallon and it is in the commodity-pushing community's best interest to make prices as high as possible. The problem is, that in order for XOM to make $20Bn more, it costs US consumers $700Bn in higher energy costs. That is money that is diverted away from other purchases. $700Bn is 14.2M $50,000 jobs – it's 2.8M $250,000 homes, it's 20M $35,000 cars – get the picture?
The problem is the system is set up so ALL the rewards for the energy industry are geared towards charging MORE. It makes no sense to pour $700Bn a year ($7,000 per family) of consumer purchasing power into something that literally goes up in smoke and leaves nothing of lasting value. We get the same industrial output at $425Bn (at $1.50 a gallon of gas) of national fuel consumption as we do at $1.2Tn (at $4 per gallon) so there is no net benefit to the American PEOPLE (and think globally time 5 as we are 20% of global consumption) to have higher fuel prices. That extra $5Tn that is sucked out of the global economy at last year's fuel prices is 10% of the global GDP. If we can't get our government to take action – surely the non-energy corporations of the world can see that it would be in their interest to form a lobby to stop this madness.
I propose that it would be in the interest of our government and governments around the world to provide energy as CHEAPLY as possible to the people. This can be accomplished very easily by placing a severe excess profit tax on energy companies and offering tax breaks if they can achieve downside targets for energy prices. Let's create a model where XOM can give an annual report that says "We managed to negotiate low oil contracts and encouraged enough alternate energy use in the US to keep gasoline at $1.50 a gallon in 2009, that earned us a tax credit of $10Bn which, added to our $40Bn of pre-tax earnings made our best year ever."
So our government would NOT collect $36Bn in tax from XOM and let's assume they account for 10% of the energy industry (and we sure hope so with $500Bn in sales!) and PAYS them $10Bn for saving US consumers $700Bn over last year's prices. Multiply that by 10 and it costs our government $450Bn to put $700Bn back into the economy. $700Bn that won't be sent overseas and will stay in our own economy and create jobs and it's $3.5Tn global dollars put in consumers pockets so they can buy our products (maybe even cars) as well. Actually, since the $450Bn the government puts in would be a "tax break" that will also go back into the economy – maybe we can even get the conservatives on board for this one!
7:30 Update: Challenger Job news is BTE, with just 111,182 job cuts announced in May, down 16% from Aprils 132,590. I'm very concerned with the leadership coming from government and non-profit job cuts, especially in light of what we are seeing in California and it was government hiring that saved our last Non-Farm Payroll Report. "This decline in job cuts could be short-lived," CEO John Challenger said in a statement. "The second quarter is typically the lowest quarter of the year when it comes to job cuts. Corporate downsizing may continue to remain slow during the summer months, but if the past is any indication, we could see the pace accelerate again in the latter half of the third quarter through the end of the year." Employers have announced 822,282 job cuts so far this year. That is more than double the 394,193 job cuts announced through this point of 2008.
As you can see from this fun chart, the stock market crash of 1929 was only the very beginning of the Great Depression where even the government statistics pegged joblessness at 25%. To say we have it licked at 9.2% just 6 months after our own crash makes me wonder exactly what kind of student of the Great Depression Ben Bernanke really is. You can see the sharp turn on FDR's new deal (he was elected in Nov '32) but that program created millions of jobs – something we have not seen from the Obama administration so far and declaring an early victory is a dangerous step towards government inaction.
Asia had a decent morning with the Hang Seng picking up a point and the Nikkei more or less flat at 9,741 as they hugged that 9,750 line all day. Obviously, 10,000 would be a REALLY big deal to cross on the index, which topped out just over 18,000 in 2007 so 10,800 is the 40% line off the top for the Nikkei and 9,100 is their "must hold" level at 50% off. The Hang Seng peaked out around 31,500 and 18,900 is their 40% line. The Hang Seng topped out at 18,961 on a spike in their afternoon session before dropping 400 points to close at 18,576. As I predicted earlier in the year, one of the world's best economy at the moment is Australia, who just announced that they GREW 0.4% in Q1 over last year, smashing expectations.
Europe, where the dollar bears want to set up the new global reserve currency, is also a mess. They are down about a point across the board this morning as European spending AND exports contracted the most in 14 years in Q1 while investment also fell off a cliff. As we expected, the EU GDP shrank 2.5% with Household Consumption falling 0.5%. Exports were down 8.1% and Imports were no better, down 7.2% – these are only the worst numbers in 14 years because the EU was formed 14 years ago and they don't have anything farther back to benchmark! Unemployment hit a 10-year high and we'll see what Trichet has to say when he gives his forecast tomorrow and outlines the ECB's next policy steps.
“The declines in exports and investment are mind-bogglingly large,” Kenneth Wattret, chief Euro-region economist at BNP Paribas in London, said today. “The economy is in dire straits so the pressure is still there on the ECB to do more unconventional things.” Today’s report showed that from a year earlier, the Euro-area economy shrank 4.8 percent in the first quarter, compared with a 1.7 percent contraction in the previous three months. The statistics office had initially put the annual contraction at 4.6 percent. The EU PPI was down 4.6% from last year, that is SEVERE deflation and not a good sign for the Q2 outlook. Expectations are for a 4% decline in EU GDP for 2009.
Our babe in Berlin, Angela Merkel, is fed up that her people are having to choose between food and fuel and spoke out against the Central Banks this morning: "I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line. We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years' time." Ms. Merkel also said the ECB "bowed somewhat to international pressure" when it said last month it plans to buy €60 billion ($85 billion) in corporate bonds — a move that is modest in comparison to asset-buying by its counterparts, the U.S. Federal Reserve and the Bank of England. Ms. Merkel's critique jibes with statements from Axel Weber, the head of Germany's central bank and a member of the ECB's 22-person Governing Council. He has warned that too-loose monetary policy could fuel future inflation.
Our ADP numbers were pretty much in-line at "just" 532,000 jobs lost in May, giving another 532,000 Americans extra time to go outside and dig for those green shoots we keep hearing about. Keep in mind when you hear these figures that we are doing BETTER than most countries in the world and that we are less than 5% of the world's population so when you hear 500,000 Americans lost their jobs in May, you can be pretty sure that they were joined by 10M other people around the world who will not be getting a paycheck next week. No wonder Ms. Merkel is frustrated when she feels that both the ECB and our own Fed are just not getting the big picture.
We'll see what our big picture looks like after the energy report this morning but the shenanigans I warned about last Friday continue with JPM using OUR TARP MONEY to rent a 2M barrel tanker in order NOT to deliver heating oil to US consumers so they can jack up the price. At $35,000-40,000 a day, JPM is using the money our government gave them at a rate of $1M a month to keep $130M worth of oil (that they bought with the money our government gave them) out of the weekly inventory report where those barrels may harm JPM's speculative position. HOW IS THIS EVEN LEGAL? This is PURE speculation. JPM has no need for this oil and no clients looking for delivers – they are buying oil for the sole purpose of driving up prices and selling it for more than they paid for it, creating a false demand for 2M barrels (and this is just one example out of hundreds) when there is, in fact, a record global glut.
We are, of course, short on oil and we were still short but mainly in cash yesterday as the S&P and NYSE once again failed to make our 40% lines. Now we'll be watching to see if the Dow, Nasdaq and Russell can hold their marks on what finally looks like a down day.
