While vacationing in Bar Harbor, which is much colder this time of year than I expected, I noticed that gasoline prices have been falling. The lowest price I spotted here in Maine is $2.56 per gallon. But I see the price has been falling nationwide. This is probably due to rising inventories--perhaps caused by falling demand. My guess is that many people cut back on vacation plans this summer because they were anticipating much higher gasoline prices.
We may be in a vicious circle. First, demand strengthens. Then gas prices go up. Then high prices reduce demand, and prices fall. Then demand strengthens again, and so on and so on.
While I continue to believe oil and gasoline prices are unjustifiable high, I seriously doubt they will fall back to levels I would call cheap. As long as oil is above $60 per barrel, I will continue to worry about the economy's health.
Monday, August 28, 2006
Thursday, August 24, 2006
Housing Hits the Ceiling
With this week's release of housing data, it's clear that the residential real estate market is on a downward spiral. But will the landing be soft or hard?
Existing home sales were down 11% year-over-year. Inventories were up 40%. The supply of previously occupied homes on the market now stands at 7.3 months. The median price fell in every region of the country except the South. Overall, the median price was up just 0.9%.
New home sales are also suffering. They were down 4.3% year-over-year, and there is a 6.5 months supply of new homes on the market. The median price was up just 0.3%.
We talked a little about the existing home sales figures last night on Kudlow & Company on CNBC. Larry Kudlow believes the slowdown is good news because it makes it even less likely that the Fed will resume raising interest rates. That's certainly true. But I pointed out that if the Fed continues to stand pat, it will be because the economy has slowed too much, and not because inflation is under control.
We also talked about higher-than-expected inventories of oil and gasoline. Oil and gasoline futures prices fell in response. Optimists say gasoline will soon be down to $2.70 per gallon.
I'm constantly amazed by people who think something is cheap when it comes off its recent highs. Gasoline at $2.70 per gallon is certainly cheaper than the $3.00 or so we saw recently. However, it's much more expensive than prices just one year ago.
Furthermore, we should ask why inventories were up. I see two possible explanations: 1) Demand fell, or 2) Imports rose. Neither is good for the economy.
Back to housing. So far, prices haven't fallen. But as I said in my August 22 posting, this is most likely due to sellers making concessions. It won't be long before we see falling median prices nationwide. A soft landing is still possible in the residential real estate market. Unfortunately, a hard landing is looking more likely.
I'd also like to encourage you to watch my latest MoneyMasters interview with Vincent Catalano. Vinny is President of Blue Marble Research and author of the recently published Sectors & Styles. He explains how ordinary investors can create effective portfolios just like the pros simply by using Exchange-Traded Funds.
Existing home sales were down 11% year-over-year. Inventories were up 40%. The supply of previously occupied homes on the market now stands at 7.3 months. The median price fell in every region of the country except the South. Overall, the median price was up just 0.9%.
New home sales are also suffering. They were down 4.3% year-over-year, and there is a 6.5 months supply of new homes on the market. The median price was up just 0.3%.
We talked a little about the existing home sales figures last night on Kudlow & Company on CNBC. Larry Kudlow believes the slowdown is good news because it makes it even less likely that the Fed will resume raising interest rates. That's certainly true. But I pointed out that if the Fed continues to stand pat, it will be because the economy has slowed too much, and not because inflation is under control.
We also talked about higher-than-expected inventories of oil and gasoline. Oil and gasoline futures prices fell in response. Optimists say gasoline will soon be down to $2.70 per gallon.
I'm constantly amazed by people who think something is cheap when it comes off its recent highs. Gasoline at $2.70 per gallon is certainly cheaper than the $3.00 or so we saw recently. However, it's much more expensive than prices just one year ago.
Furthermore, we should ask why inventories were up. I see two possible explanations: 1) Demand fell, or 2) Imports rose. Neither is good for the economy.
Back to housing. So far, prices haven't fallen. But as I said in my August 22 posting, this is most likely due to sellers making concessions. It won't be long before we see falling median prices nationwide. A soft landing is still possible in the residential real estate market. Unfortunately, a hard landing is looking more likely.
I'd also like to encourage you to watch my latest MoneyMasters interview with Vincent Catalano. Vinny is President of Blue Marble Research and author of the recently published Sectors & Styles. He explains how ordinary investors can create effective portfolios just like the pros simply by using Exchange-Traded Funds.
Tuesday, August 22, 2006
Housing Numbers Coming Up
Yesterday, during an appearance on CNBC, I said I would focus this week on housing numbers. The National Association of Realtors will release existing home sales figures tomorrow morning at 10:00 am EST. I'm expecting less than 6.6 million homes sold in July and more than 7 months of supply in inventory.
But I'm really more interested in prices. The median price in June was $231,000. That was up just 0.9% from June 2005. The median price in July 2005 was $228,000. Some investors are worried that the July 2006 price will fall below this number.
However, prices are skewed by concessions and incentives. For example, suppose a house sells for $230,000, but the seller agrees to swallow $5,000 worth of renovations and closing costs. The net price is $225,000. Yet the reported price of the transaction is $230,000.
As I explained on CNBC, if such givebacks were factored in, we could have already seen a year-over-year decrease in prices.
New home sales for July come out on Thursday. The expectation is about 1.1 million, which would be almost 20% less than July 2005's figure. Again, I will be looking more closely at prices.
Today's earnings report from Toll Brothers is a clear warning that the industry is slowing. Toll Brothers has a trailing PE ratio of less than 5, so many investors believe the stock is dirt cheap. But earnings are expected to decline. In fact, based on the fiscal 2007 estimate, the PE is more than 8. That's still pretty low, but it's usually not a good idea to invest in a negative growth stock. Even though the price has fallen back to 2004 levels, it could go lower.
But I'm really more interested in prices. The median price in June was $231,000. That was up just 0.9% from June 2005. The median price in July 2005 was $228,000. Some investors are worried that the July 2006 price will fall below this number.
However, prices are skewed by concessions and incentives. For example, suppose a house sells for $230,000, but the seller agrees to swallow $5,000 worth of renovations and closing costs. The net price is $225,000. Yet the reported price of the transaction is $230,000.
As I explained on CNBC, if such givebacks were factored in, we could have already seen a year-over-year decrease in prices.
New home sales for July come out on Thursday. The expectation is about 1.1 million, which would be almost 20% less than July 2005's figure. Again, I will be looking more closely at prices.
Today's earnings report from Toll Brothers is a clear warning that the industry is slowing. Toll Brothers has a trailing PE ratio of less than 5, so many investors believe the stock is dirt cheap. But earnings are expected to decline. In fact, based on the fiscal 2007 estimate, the PE is more than 8. That's still pretty low, but it's usually not a good idea to invest in a negative growth stock. Even though the price has fallen back to 2004 levels, it could go lower.
Friday, August 18, 2006
Older and Wiser, or Just Older?
I just celebrated my 50th birthday. Some would say I'm older and wiser. Others, that I'm just older. Whatever I am, I'm still bearish on stocks.
Nonetheless, we did see a bit of a rally this week. That was primarily the result of better-than-expected PPI and CPI numbers. This gave credence to the Fed's theory that a slowing economy will dampen inflationary pressures. As a result, investors are now betting that the Fed will not have to resume raising rates.
The rally was also bolstered by oil prices, which fell quite a bit after BP's announcement that it wouldn't have to shut down Prudhoe Bay production completely as it initially said.
Now, let's see if I've got all this straight: Stocks rallied because economic growth is slowing and oil is only $70 per barrel. For some reason, it doesn't make much sense to me.
I expect GDP to grow at about 2.5%. That's not bad, but it's not exactly a reason to jump into stocks. Furthermore, $70 per barrel for oil is cheaper than the recent high, but it isn't cheap. Seven years ago, oil was less than $20 per barrel. Just three years ago it was around $30. So I'm supposed to be impressed that it's fallen all the way back to $70?
As for inflation, despite the seemingly good news this week, it's still a worry. The CPI is up 4.1% year-over-year. The core rate is up 2.7%. Year-to-date, the CPI is up 4.8% on a seasonally-adjusted basis.
Yes, I'd agree that right now there's a good chance the Fed won't raise rates at its Sept. 20 meeting. But before betting on that, I'd want to see more data. We'll get plenty of that between now and the Fed's next meeting.
Nonetheless, we did see a bit of a rally this week. That was primarily the result of better-than-expected PPI and CPI numbers. This gave credence to the Fed's theory that a slowing economy will dampen inflationary pressures. As a result, investors are now betting that the Fed will not have to resume raising rates.
The rally was also bolstered by oil prices, which fell quite a bit after BP's announcement that it wouldn't have to shut down Prudhoe Bay production completely as it initially said.
Now, let's see if I've got all this straight: Stocks rallied because economic growth is slowing and oil is only $70 per barrel. For some reason, it doesn't make much sense to me.
I expect GDP to grow at about 2.5%. That's not bad, but it's not exactly a reason to jump into stocks. Furthermore, $70 per barrel for oil is cheaper than the recent high, but it isn't cheap. Seven years ago, oil was less than $20 per barrel. Just three years ago it was around $30. So I'm supposed to be impressed that it's fallen all the way back to $70?
As for inflation, despite the seemingly good news this week, it's still a worry. The CPI is up 4.1% year-over-year. The core rate is up 2.7%. Year-to-date, the CPI is up 4.8% on a seasonally-adjusted basis.
Yes, I'd agree that right now there's a good chance the Fed won't raise rates at its Sept. 20 meeting. But before betting on that, I'd want to see more data. We'll get plenty of that between now and the Fed's next meeting.
Monday, August 14, 2006
Stagflation a Real Possibility
Today's rally fizzled. Despite being up more than 100 points in the middle of the day, the Dow eked out only a 10 point gain.
The initial rally was credited to BP's announcement that it won't completely shut down production in Prudhoe Bay. The apparent end to fighting between Israel and Hezbollah also helped push stock prices higher.
But the gains melted away when investors became pessimistic about the PPI and CPI numbers, which will be released over the next two days. The fear is that inflation is running higher than the Fed's comfort level. Despite the recent pause, investors are afraid the Fed will have to resume raising rates.
The Fed is in a pickle. Economic growth is slowing, but inflation is rising. The Fed stopped raising rates because it was more worried about slowing growth than rising inflation. But if this week's inflation numbers are higher than expected, the Fed will have to push interest rates higher.
The Fed has been hoping that slowing growth would reduce inflation. But so far at least, there isn't any evidence of that. If Wednesday's core CPI comes in at 0.4% or higher, stocks could suffer a strong sell-off.
In addition, keep an eye on housing starts, which will also be announced on Wednesday. The housing market has been slowing faster than many on Wall Street had expected. Anything less than 1.8 million starts will contribute to Wednesday's stock market sell-off.
The initial rally was credited to BP's announcement that it won't completely shut down production in Prudhoe Bay. The apparent end to fighting between Israel and Hezbollah also helped push stock prices higher.
But the gains melted away when investors became pessimistic about the PPI and CPI numbers, which will be released over the next two days. The fear is that inflation is running higher than the Fed's comfort level. Despite the recent pause, investors are afraid the Fed will have to resume raising rates.
The Fed is in a pickle. Economic growth is slowing, but inflation is rising. The Fed stopped raising rates because it was more worried about slowing growth than rising inflation. But if this week's inflation numbers are higher than expected, the Fed will have to push interest rates higher.
The Fed has been hoping that slowing growth would reduce inflation. But so far at least, there isn't any evidence of that. If Wednesday's core CPI comes in at 0.4% or higher, stocks could suffer a strong sell-off.
In addition, keep an eye on housing starts, which will also be announced on Wednesday. The housing market has been slowing faster than many on Wall Street had expected. Anything less than 1.8 million starts will contribute to Wednesday's stock market sell-off.
Thursday, August 10, 2006
Barbara Marcin on MoneyMasters
Barbara Marcin is the current guest on my MoneyMasters video program. She manages the Gabelli Blue Chip Value Fund, which focuses on large-cap value stocks that are temporarily out of favor.
It sounds like a boring way to invest, but it's been very effective. Her portfolio has outperformed her benchmark, the S&P 500, every year but one since she began managing it in 1999. So far this year, she is up almost 6%, which is well ahead of her benchmark.
She explains on the video why she is so fond of the financial sector right now. In fact, almost 22% of her portfolio is concentrated in this sector. Citigroup is her favorite financial services company.
We also talked about Sanofi-Aventis, which co-markets Plavix with Bristol-Myers Squibb.
For those of you in the Houston area, Daniel Frishberg, who does the MoneyMan Report for BizRadio is broadcasting this week from the Waldorf Astoria Hotel here in New York City. I co-anchored the program last night and thoroughly enjoyed it. He brought a number of his listeners up to New York with him and I enjoyed meeting many of them. Houston is obviously full of very sophisticated investors who are interested in a lot more than just oil. Although I've been to Texas many times, Houston is one city I have yet to visit.
It sounds like a boring way to invest, but it's been very effective. Her portfolio has outperformed her benchmark, the S&P 500, every year but one since she began managing it in 1999. So far this year, she is up almost 6%, which is well ahead of her benchmark.
She explains on the video why she is so fond of the financial sector right now. In fact, almost 22% of her portfolio is concentrated in this sector. Citigroup is her favorite financial services company.
We also talked about Sanofi-Aventis, which co-markets Plavix with Bristol-Myers Squibb.
For those of you in the Houston area, Daniel Frishberg, who does the MoneyMan Report for BizRadio is broadcasting this week from the Waldorf Astoria Hotel here in New York City. I co-anchored the program last night and thoroughly enjoyed it. He brought a number of his listeners up to New York with him and I enjoyed meeting many of them. Houston is obviously full of very sophisticated investors who are interested in a lot more than just oil. Although I've been to Texas many times, Houston is one city I have yet to visit.
Monday, August 07, 2006
How Soon Will Oil Hit $80?
I woke up this morning, turned on the radio, and learned that BP had begun a shutdown of the Prudhoe Bay oil field in Alaska, which will take 400,000 barrels per day off the market. It wasn't long before the phone started ringing. MSNBC wanted me to comment, and so did Here & Now, a radio program out of Boston that airs nationally on NPR.
Here's my take on the situation: Just a few short years ago, 400,000 barrels per day would have had virtually no impact on the market price of oil. That's because there was plenty of slack in the system. If you shut down production in one part of the world, some other country could easily make it up.
These days, there isn't as much slack. Oil prices have gone through the roof because of increased anxieties caused by falling slack and rising demand. In addition, many of the major producing nations are anything but stable. Iraq isn't producing anywhere near its potential, oil workers in Nigeria are constantly under attack, Venezuela's president is actively seeking ways to hurt the U.S. economy, and Iran is hinting it may use oil as a weapon in response to economic sanctions relating to its nuclear enrichment program.
Iran has also threatened to retaliate if Israel attacks Syria. One form of retaliation may be to restrict the flow of oil out of the Persian Gulf. When traders have this much to worry about already, the sudden and unexpected loss of 400,000 barrels per day of production is enough to push prices considerably higher.
OPEC says it has plenty of spare capacity to make up for Prudhoe Bay's loss. Even today, Saudi Arabia could easily make up the difference alone. The Saudis are probably producing about 9 million barrels per day, and could probably push that up to 11 if they had to. But the Saudis can't produce much more than that without significant investments.
Nonetheless, I have to wonder if OPEC sincerely wants to bring oil prices back down. OPEC officially expresses concern about elevated oil prices and how they may harm global economic growth and oil demand, yet member countries certainly don't seem to mind drowning in the flood of cash these high prices are bringing them.
As for the Strategic Petroleum Reserve, it's holding about 690 million barrels of oil. It takes about 13 days for that oil to reach market once President Bush gives the order to release it. If he's thinking of doing it, he should do it soon.
Losing 400,000 barrels per day of production will not cause any shortages. But it will cause oil traders to bid up the price. We are getting very close to $80 per barrel. That translates to about $3.20 per gallon for the national average retail price of gasoline, which is already at $3.04 according to the AAA.
Here's my take on the situation: Just a few short years ago, 400,000 barrels per day would have had virtually no impact on the market price of oil. That's because there was plenty of slack in the system. If you shut down production in one part of the world, some other country could easily make it up.
These days, there isn't as much slack. Oil prices have gone through the roof because of increased anxieties caused by falling slack and rising demand. In addition, many of the major producing nations are anything but stable. Iraq isn't producing anywhere near its potential, oil workers in Nigeria are constantly under attack, Venezuela's president is actively seeking ways to hurt the U.S. economy, and Iran is hinting it may use oil as a weapon in response to economic sanctions relating to its nuclear enrichment program.
Iran has also threatened to retaliate if Israel attacks Syria. One form of retaliation may be to restrict the flow of oil out of the Persian Gulf. When traders have this much to worry about already, the sudden and unexpected loss of 400,000 barrels per day of production is enough to push prices considerably higher.
OPEC says it has plenty of spare capacity to make up for Prudhoe Bay's loss. Even today, Saudi Arabia could easily make up the difference alone. The Saudis are probably producing about 9 million barrels per day, and could probably push that up to 11 if they had to. But the Saudis can't produce much more than that without significant investments.
Nonetheless, I have to wonder if OPEC sincerely wants to bring oil prices back down. OPEC officially expresses concern about elevated oil prices and how they may harm global economic growth and oil demand, yet member countries certainly don't seem to mind drowning in the flood of cash these high prices are bringing them.
As for the Strategic Petroleum Reserve, it's holding about 690 million barrels of oil. It takes about 13 days for that oil to reach market once President Bush gives the order to release it. If he's thinking of doing it, he should do it soon.
Losing 400,000 barrels per day of production will not cause any shortages. But it will cause oil traders to bid up the price. We are getting very close to $80 per barrel. That translates to about $3.20 per gallon for the national average retail price of gasoline, which is already at $3.04 according to the AAA.
Friday, August 04, 2006
The Fed Will Pause
Today's jobs report significantly increases the odds that the Federal Open Market Committee won't raise rates when it meets on Tuesday. Non-farm payrolls increased by just 113,000 in July, which was weaker than the 135,000-145,000 expectation. In addition, the unemployment rate edged up to 4.8% from 4.6% in June, and hourly earnings increased by 0.4%, which was slightly greater than expected.
The latest GDP report already provided strong evidence that economic growth is slowing. Today's data virtually guarantees no rate hike on Tuesday. However, like I said in the August issue of the Forbes Growth Investor, the Fed won't be pausing because it licked inflation. If it pauses, it will be because it is concerned that economic growth is slowing too much. This isn't something to cheer.
Although some economists are already predicting a coming recession, I still believe growth will continue. Unfortunately, it won't be at the healthy rates many had been predicting. That's one reason why I remain bearish on stocks.
I continue to believe high energy prices will cause significant problems in coming months. The good old days of $20-30 oil are gone. I have to admit I am surprised by how well consumers have held up so far with oil at $70. But I'm convinced prices this high will soon take a toll.
Perhaps the latest Starbucks report is a harbinger of things to come. Starbucks (SBUX) reported disappointing growth and the stock took a big hit. Management blamed it on too much demand for blended drinks that take a long time to prepare. That's unique. Growth slowed because demand was too strong. With gasoline prices pushing north of $3 per gallon, I suspect the real story is that consumers are wondering how much sense it makes to pay $16 a gallon or more for coffee.
For those of you who like to wake up very early, you can hear my comments about the Fed's upcoming meeting on Tuesday morning on ABC's World News This Morning. I'll be on about 4:30 am. Yes, it's live. No, I won't be drinking Starbucks.
The latest GDP report already provided strong evidence that economic growth is slowing. Today's data virtually guarantees no rate hike on Tuesday. However, like I said in the August issue of the Forbes Growth Investor, the Fed won't be pausing because it licked inflation. If it pauses, it will be because it is concerned that economic growth is slowing too much. This isn't something to cheer.
Although some economists are already predicting a coming recession, I still believe growth will continue. Unfortunately, it won't be at the healthy rates many had been predicting. That's one reason why I remain bearish on stocks.
I continue to believe high energy prices will cause significant problems in coming months. The good old days of $20-30 oil are gone. I have to admit I am surprised by how well consumers have held up so far with oil at $70. But I'm convinced prices this high will soon take a toll.
Perhaps the latest Starbucks report is a harbinger of things to come. Starbucks (SBUX) reported disappointing growth and the stock took a big hit. Management blamed it on too much demand for blended drinks that take a long time to prepare. That's unique. Growth slowed because demand was too strong. With gasoline prices pushing north of $3 per gallon, I suspect the real story is that consumers are wondering how much sense it makes to pay $16 a gallon or more for coffee.
For those of you who like to wake up very early, you can hear my comments about the Fed's upcoming meeting on Tuesday morning on ABC's World News This Morning. I'll be on about 4:30 am. Yes, it's live. No, I won't be drinking Starbucks.
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