The impact of Oil is unmistakeable -- from crimping consumer spending to affecting major purchase decisions to weighing on equities -- it is neck and neck with interest rates for the most influential market factor lately.
The WSJ notes that high oil prices is crimping SUV sales. The big, inefficient and deadly vehicles (which always seem to be in my way) are Detroit's most profitible cash cow. Don't think the secular bull market in energy over the past few years hasn't contributed to GM's woes.
And yet, Gasoline remains cheap. That's right, it is a relatively inexpensive commodity. It takes 100 million years to create; Then it needs to be explored and found, drilled into and pumped out of the ground, shipped, refined in gasoline, then transported to your local gas station where some guy pumps it into your car for about two and half bucks a gallon -- and thats for high octane premium.
(Sold to me -- I think its a steal).
Hey, its not like you don't have other options. The Journal and Consumer reports put out a chart of "most fuel-efficient vehicles by category." There are lots of hybrid models coming out. You could go pure electric. Or, you can adapt your driving habits to be more fuel efficient (I drive a stick, but not for that reason).
As a kid who grew up loving muscle cars, I assumed that by the time I was 40 gas would be $5 a gallon (which it is in Europe). So I don't complain about gas under $3. I tank up thankfully. Then I turn off the dynamic skid control, lay a patch of rubber and carve up some twisty back roads. That much fun for that little money is a bargain at twice the price.
How cheap is this drilled, transported, refined gasoline? Cheaper than water:
Be glad your car doesn't run on Scope, Whiteout, Pepto Bismal or Nyquil. > > UPDATE: April 1, 2005 11:45am Yes, I was being a bit snarky in my description of Gasoline as cheap. If you are of middle income or higher, than Gas is indeed an inexpensive part of your budget. However, if you are on a tight budget, than its an increasingly burdensome expense lately. We see this in the same store numbers from Wal Mart and Target -- WMT in particular -- as the stock has made fresh 52 week lows; their clients are much more price sensitive than Target's . . . >>
Other "Refined" Products Compared with Gasoline:
Price per Gallon
Lipton Ice Tea
$9.52 per gallon
$10.00 per gallon
$1.59 /20 oz
$10.17 per gallon
$10.32 per gallon
$1.49 /9 oz
$21.19 per gallon
$1.39 /7 oz
$25.42 per gallon
$33.60 per gallon
$84.48 per gallon
$178.13 per gallon
$123.20 per gallon
$21.19 for WATER - and the buyers don't even know the source. No wonder Evian spelled backwards is Naive.
Rising Gasoline Prices Threaten Viability of Biggest SUVs
Jeffrey Ball And Joseph B. White
The Wall Street Journal
March 22, 2005; Page B1
Be glad your car doesn't run on Scope, Whiteout, Pepto Bismal or Nyquil.
UPDATE: April 1, 2005 11:45am
Yes, I was being a bit snarky in my description of Gasoline as cheap.
If you are of middle income or higher, than Gas is indeed an inexpensive part of your budget. However, if you are on a tight budget, than its an increasingly burdensome expense lately.
We see this in the same store numbers from Wal Mart and Target -- WMT in particular -- as the stock has made fresh 52 week lows; their clients are much more price sensitive than Target's . . .
Media Appearance: Power Lunch (3/30/05)
I am back on CNBC's Power Lunch with Bill Griffeth and Sue Hererra, between 1pm and 2pm today. We'll be talking about earnings, investing, stocks and the market.
I have to assume some of the discussion will be on Monday's Bearish call. I hope to discuss where investors can hide during a downturn. Once again, I am teamed with big Joe Besecker of Emerald Asset Management. (Its Joe's turn to buy lunch, too!)
UPDATE: March 30, 2005 10:26pm
Whenever I do anything on CNBC, I get the same coupla questions over and over.
The most common one is "What's it like?" So I brought my Exilim Digital Camera and took a few snaps.
Here's what it looks like to stare into the maw of the camera:
click for larger photo
Just a little intimidating . . . (but you get used to it eventually)
The new CNBC studios in Englewood Cliffs
click for larger photo
are huge, and the studio offices are just gynormo; behind the white screen is where the sets are.
Oh, and the other question I get all the time?
It seems that every other guy on Wall Street has a crush on Becky Quick: "What's she like?"
She's very very nice (and actually does most of here stuff extemporaneously -- no teleprompter)
New Column up at Real Money (03/30/05)
The powers that be moved the latest column, Repositioning Before the Coming Selloff, over to the free site.
Repositioning Before the Coming Selloff
3/30/2005 7:18 AM EST
Chart of the Day has yet another fascinating chart. This one looks at inflation-adjusted S&P 500 earnings:
click for larger chart:
"Today's chart illustrates that inflation-adjusted S&P 500 earnings have surged since the latter part of 2002 and and currently rest at a level that is very near the highs of 2000. Investors will continue to pay close attention to the upcoming round of quarterly reports to determine if earnings can maintain their recent uptrend and support a further increase in stock prices. Stay tuned..."
This chart suggests quite a few things to me:
Rapid economic reinflation (post crash) fell to the corporate bottom line;
Low interest rates helped companies clean up their balance sheets;
Low wages increased profits;
Tax cuts had a very positive impact on earnings.
I would be remiss if I failed to point out one last thing: As the chart reveals, the last time we saw a surge in profits -- 1999-2000 -- we were near the peak in the market. Its a pretty straight forward analysis: As earnings momentum peaks and then fades, markets are vulnerable to corrections. Not the 15% I called for on Monday, but real, major, ugly crashes.
Also, note that with this post, I have added the category "earnings."
Chart of the Day
New Column up at Real Money (02/29/05)
Here's an excerpt:
"Yesterday morning, I warned clients to use any lift to sell equities. CNBC reported on the call in the afternoon, and many readers have asked for a more detailed explanation.
Last week the market became so oversold that a corrective bounce was due. We saw that move begin in Monday's rally. But don't get too excited yet: I expect this bounce to last a week or so -- two at most -- before the markets start heading south again in a selloff that I expect to last until early summer, and bring the Dow down to the 8,800 to 9,000 level.
As such, I have been advising clients to use any lift as an opportunity to exit most of their long positions. In particular, I have been exhorting managers to sell cyclical, rate-sensitive and high-beta holdings.
I have aggressively sold equities, and I am now about 50% cash. I expect to be in even more cash by next week . . ."
Repositioning Before the Selloff
3/29/2005 2:15 PM EST
One of the more interesting charts is the SPX, pre-1990-91 Recession. If markets truly had forecasting abilities, then one would presume they would have sold off in advance of the recession.
click for larger graphic
Instead, this chart shows the index rallied right into the start of the contraction. That is hardly predictive. In this instance, the markets acted coincidentally to the recession, instead of predictively. The beginnings and ends of recessions are marked by The National Bureau of Economic Research, and are based on quantitative data.
Calculated Risk declares recession forecasting a "mug's game" -- but also agrees to play. He does not see a recession as imminent. That's consistent with my own expectations for a contraction in 2006/07 time frame.
Other sources have had some success with recession forecasting. As one commentor here noted, ECRI has a good record forecasting economic turns.
Yesterday, I linked to Jim Stack (InvesTech Research) recent recession alert, which was reproduced at Forbes. I've been a subscriber, and I find Stack's research very interesting, his track record good, and its costs relatively inexpensive.
Is There an Upside to Downloading?
The Grokster case gets heard today in the Supreme Court. One of the tactics the music industry has used is to throw down the plight of the starving working musician. It plays on the emotions, personalizes the impact of piracy, replacing the corporate victim with reconizable face.
Except, of course, that its all a lie. Consider this Congressional testimony:
"Hello, my name is Roger McGuinn. My experience in the music business began in 1960 with my recording of “Tonight In Person” on RCA Records. I played guitar and banjo for the folk group the “Limeliters.” I subsequently recorded two albums with the folk group the “Chad Mitchell Trio.” I toured and recorded with Bobby Darin and was the musical director of Judy Collins’ third album. In each of those situations I was not a royalty artist, but a musician for hire.
My first position as a royalty artist came in 1964 when I signed a recording contract with Columbia Records as the leader of the folk-rock band the “Byrds.” During my tenure with the Byrds I recorded over fifteen albums. In most cases a modest advance against royalties was all the money I received for my participation in these recording projects.
In 1973 my work with the Byrds ended. I embarked on a solo recording career on Columbia Records, and recorded five albums. The only money I’ve received for these albums was the modest advance paid prior to each recording.
In 1977 I recorded three albums for Capitol Records in the group “McGuinn Clark and Hillman.” Even though the song “Don’t You Write Her Off” was a top 40 hit, the only money I received from Capitol Records was in the form of a modest advance.
In 1989 I recorded a solo CD, “Back from Rio”, for Arista Records. This CD sold approximately 500,000 copies worldwide, and aside from a modest advance, I have received no royalties from that project.
The same is true of my 1996 recording of “Live From Mars” for Hollywood Records. In all cases the publicity generated by having recordings available and promoted on radio created an audience for my live performances. My performing work is how I make my living. Even though I’ve recorded over twenty-five records, I cannot support my family on record royalties alone.
In 1994 I began making recordings of traditional folk songs that I’d learned as a young folk singer. I was concerned that these wonderful songs would be lost. The commercial music business hasn’t promoted traditional music for many years. These recording were all available for free download on my website on the Internet.
In 1998 an employee of MP3.com heard the folk recordings that I’d made available at mcguinn.com and invited me to place them on MP3.com. They offered an unheard of, non-exclusive recording contract with a royalty rate of 50% of the gross sales. I was delighted by this youthful and uncommonly fair approach to the recording industry. MP3.com not only allowed me to place these songs on their server, but also offered to make CDs of these songs for sale. They absorbed all the packaging and distribution costs. Not only is MP3.com an on-line record distributor, it is also becoming the new radio of the 21st century!
So far I have made thousands of dollars from the sale of these folk recordings on MP3.com, and I feel privileged to be able to use MP3s and the Internet as a vehicle for my artistic expression. MP3.com has offered me more artistic freedom than any of my previous relationships with mainstream recording companies. I think this avenue of digital music delivery is of great value to young artists, because it’s so difficult for bands to acquire a recording contract. When young bands ask me how to get their music heard, I always recommend MP3.com."
Before the U.S. Senate Judiciary Committee July 11, 2000
“The Future of Digital Music: Is There an Upside to Downloading?”
Statement of Roger McGuinn
Songwriter and Musician (Formerly with The Byrds)
Americans tuning out recorded music
Interesting stat: The average amount of time that Americans spend listening to recorded music annually has dropped significantly over the past 7 years:
Graphic courtesy of Yahoo, USA Today
From 290 hours per year, down to 195. That's a 32.7% decrease over less than 7 years.
Why? Between surfing the net, playing video games, or watching DVDs, people now spend about one third less of their time just listening to music. Interestingly, those other activities have some degree of music in them: Video Games are a big user of music as are Film Soundtracks and Concert DVDs. The 10 hours or more per week I listen to Streaming Radio simply was not an option pre-broadband.
Gee, I wonder if that significant decrease in recorded music consumption -- concurrent to the explosive rise in Gaming and DVD sales -- might have anything to do with the CD sales slow down?
Let's drill into the details, via the US Census Bureau Report:
Number of hours Americans spent using various types of media in 1998 and 2003
|Activity||Hours, 1998||Hours, 2003 (proj.)||Change (hours)|
(Source: US Census Bureau, Statistical Abstract of the United States: 2003, p. 720.)
The table above, covering the five year period 1998-2003, comes from by Alex Halderman and Ed Felten of "Freedom to Tinker:"
The music industry likes to complain about sales lost to piracy, but figures that show huge sales declines only tell part of the story. Before we blame this trend on infringement, we have to make several assumptions, including that the demand for music (whether purchased or pirated) has remained steady.
Figures available from the US Census bureau suggest otherwise. Data on "Media Usage and Consumer Spending" abstracted from a study by Veronis Suhler Stevenson show the average number of hours spent listening to music by US residents age 12 and older has declined steadily since 1998 (from 283 to a projected 219 in 2003, a 21% decline). Meanwhile, home video, video games, and consumer Internet have seen dramatic gains. This suggests that people are turning to new forms of entertainment (i.e., the Internet, video games, and DVDs) at the expense of recorded music.
UPDATE March 29, 2005 10:41am
Sun, Mar 27, 2005
Recorded Music Being Replaced by Other Media
Alex Halderman and Ed Felten
Freedom to Tinker September 30, 2004
Statistical Abstract of the United States/Shannon Reilly and Gia Kereselidze
Devils and Dust
"Before its on the Radio, its on AOL."
If you thought AOL was annoying before, listen to this: Every 30 seconds or so, a voice intones -- right over Bruce -- "AOL Music, First Listen."
I counted at least 5 of these announcements during the course of this song. Really, really god-damned annoying. Like the lousy DJs who talk over the beginnings and ends of songs. Only this was right in the middle of the tune. Repeatedly.
If there goal was to get me to dislike AOL even more, than they succeeded gloriously. I am cancelling our one remaining family AOL account. And, I can no longer own TWX stock, as I have given up on any thoughts of a turnaround in a company that is this dysfunctional, and (lets just blurt it out): stupid.
How completely and totally do they not understand their music customers? Simply astounding . . .
The Trap is set: Last Chance to Reposition
Markets have reached the point where they are so
oversold they are due for a corrective bounce. But I expect this bounce to be
short. It should be used as an opportunity to exit most long positions,
especially those that are cyclical, rate sensitive, or of the high
We suggest using the lift over the next 2 weeks to sell aggressively.
Several factors point to a rally: AAII sentiment shows Bulls at 23%, down from 45% two weeks ago; Bears now measure 41.9%, up from 24.8% over the same time period. Internal measures show moderate short term oversold conditions. NYSE Oversold indicator now measures -58.12 (below -50 is significant). The NYSE McClennan Oscillator reading of –256 oversold (-200 is significant) similarly suggests a pop.
Despite all these oversold signals, we remain concerned about the ongoing deterioration in Market internals and the Macro environment. The Advance/Decline Line continues to soften, as have Nasdaq 52 week Highs/Lows (See chart nearby). Fund Flow is light, and Trend lines have also broken. Upside moves are unable sustain any gains, as Momentum fades.
The Macro-economic environment is also weak: GDP has softened, personal income is not keeping up with prices, just as consumers have lost the ability to do cash out refis. Money Supply has been throttled back, and the Yield Curve has flattened. An oversold market that cannot rally on positive news reveals weakness; The Market’s inability to respond positively to a major upside revision from GE also does not bode well. It also suggests a market lacking leadership, as well as a decreasing appetite for US equities.
We also believe that the counter-trend rallies in the Dollar, Gold and Oil are of a short term, corrective nature. They can run long enough to sucker in lots of traders. Once they resume their prior trends, we will see plenty of players trapped higher, and desperate to stop the pain.
Finally, while everyone suddenly discovered last week that (Horror!) producer AND consumer prices have been going up, we are starting to become increasingly concerned about the macro impact of Derivatives. From Fannie Mae (FNM) to AIG to GE to Bershire Hathaway, too many US companies have turned into heavily camouflaged Hedge Funds. Skipping over the esoteric details, this will end badly.
This is an intermediate top call.
Take advantage of higher prices, as I expect this rally to run out of steam by early April. The Market risk is a sell off into the Summer.