Rising Rates, Oil Prices Could Trample Green Shoots

Rising bond yields based upon inflation fears and a decline in crude oil inventories dominated Wednesday’s market events. Both have far reaching implications for the consumer in terms of rising interest rates and potentially higher fuel prices.

Notes & Comments for June-09-2009

• Economic Data: For the month of April-2009, the International Trade deficit fell to -29.2bn vs. previous month’s -27.6bn and consensus estimates of -28.5bn. Some highlights of the report were petroleum products and consumer goods. With oil prices on the rise, the petroleum deficit increased to -15bn. Ex-petroleum, the trading deficit for goods, expanded to -23.9bn. Consumer goods imports were up $0.4bn. Overall, the report was of no benefit to today’s market. Quarterly Services Survey for Q1-2009 declined -0.9% quarter-over-quarter and -3.2% year-over-year. Related Securities: USO; XLP; XLY; XLK

• Bond Watch: Tuesday’s $65bn auction of 3 year treasury notes had very little impact on interest rates, but Wednesday’s much awaited $19bn auction of 10 year notes was a different story. Russia brought attention to the fact that the emperor has no clothes by stating its intention to reduce the percentage of its U.S. debt held in forex reserves. Roughly $140bn of its $404bn in reserves are held in treasuries. vs. the trillions of dollars in U.S. outstanding debt. Divorcing one’s forex reserves from U.S debt is not so easy as it is the largest and most liquid bond market in the world. America’s entitlement to this monopoly is being questioned and challenged. Crafting a tangible response, i.e substitute reserve currency, will take time. Nevertheless, interest rates on the 10 year note ticked as high as 4.00% in Wednesday’s trading. Related Securities: IEF; TLT; TBT; UUP; UDN; FXE; FXB; FXA; FXC; FXY

• Real Estate: For the week of June-05-2009, the MBA Purchase Applications index came in at a low 270.7 vs. previous week’s 267.7. Rising mortgage rates are the main culprit as the average 30 year mortgage increased 32 bps to 5.57%. This should be a surprise to anyone. As a result of Wednesday’s volatility in the bond market, 30 year fixed mortgages are now at 5.74% and will probably exacerbate the housing bubble. Applications for home buyers fell -7.2% to 611 while the refinance component of the report contracted -12% to 2605.7. Related Securities: XHB; FNM; FRE; KRE

• Energy Markets: the EIA reported a -4.4bn draw-down in crude oil stocks for the week of June-05-2009. Oil prices rose in reaction to the support and also helped the energy related stocks buck Wednesday’s market trend and stay in the black with positive performances. Related Securities: OIH; XLE; USO

So much for Wednesday. The day’s data may have been light, but it packed a mean punch. Rising interest rates and energy prices could trample those green shoots and hopes of a consumer led recovery. (Note to self: Find out what those consumer bulls are smoking. It must be pretty good stuff.)

(These notes and comments are not intended to be a comprehensive analysis, but instead merely highlight current themes and events for the convenience of readers and encourage them to make and share their own conclusions.)

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[jimp:]

Isn't escalating oil prices an excellent catalyst for alternative energy? Why not buy solar (TSL,) or invest in Rare earth metals (LYSCF) that some green technologies rely on (Prius,etc.)?

Jun 11 06:06 AM

[Mad Hedge F...:]

And cover them with herbicide. I chatted with Jeff Rubin last night, former chief economist with CIBC World Markets, who reaffirmed my own hyper-bull case for crude in bucketfuls. He was in San Francisco, admiring our civic planning and mass transit system, as part of a tour to promote his new book “Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization.” We are in the bottom of the ninth inning of the hydrocarbon age. The next super spike will take us to over $100/barrel within 12 months of the beginning of an economic recovery, and much higher after that. The problem is that we are losing 4 million barrels/day through depletion just when demand is increasing. The only offset will be dirty, foul, huge carbon footprint, $100/barrel Canadian tar sands, which will double, to account for 40% of our imports. The biggest increase in consumption is in OPEC itself, where consumption has ballooned to 13 million barrel/day and oil is being wasted on a prodigious scale, compared to only 7 million b/d in China. Gas there costs only 25 cents/gal, utilities in Saudi Arabia pay only three cents/gallon for bunker fuel, and Dubai is blowing 3,000 b/d equivalent running an indoor ski resort. Oil over $100/barrel will bring globalization to a screeching halt. Economies will go local because it will cost too much to transport goods, as we have in the past. No more California avocados in Toronto. More importantly, no more Chinese steel in the US, or any other heavy exports, which will lead to a resurgence in domestic manufacturing and the jobs that come with it. Last year $90 of the $600 cost of Chinese steel went to shipping costs. $10/gal gasoline will take 50 million of our 240 million cars off the road. Even if we replace them with electric cars, we don’t have the power grid to juice them. Chinese exports will collapse, but so will their Treasury purchases, meaning no more bailouts for us. Oops. Subprime neighborhoods will get plowed back into farmland so we can eat. I think Jeff is dead on about oil prices. But as necessity is the mother of invention, some of his predictions about their impact on international trade are a bit extreme for me.

Jun 11 10:40 AM

[WayneS:]

The problem with gasoline prices are they are too volitile. The price should have stayed at $4/gal. People were just starting to learn conservation. "Green" now only means an angle to make money, not save the environment. People could easily save on car costs (fuel and maintenance) by learning to drive properly. This would also cut down on the supposedly dangerous GHGs. But, there is no money to be had in conservaton.

Jun 11 12:25 PM

[austrian63:]

Oil will most likely pass the $100/bbl point before year-end. Mad-Hedge Fund Traised good points above re: the world getting smaller. It will take time for economies to adjust. In the interim, expect much higher prices for food, clothing, raw materials, along with energy and interest rates (cost of money). In essence, the scarcity of resources will become apparent except for labor.

Much higher production costs and currency devaluation will depress the dmand for labor in the U.S. There can be no gain without pain. We cannot have booms that seriously misallocate resources fueled by massive money supply growth without the pain of re-adjustment. The more our government does to prevent the short-term pain of recession the more likely we will have long-term pain. This will become more apparent as energy prices begin spiking again late this year and in 2010.

Jun 11 01:18 PM

[CLH:]

petterr---You havent seen anything yet. After the govt. takes over medical care at more then twice the present cost and continues to lose money running auto plants and banks you will find out what real debt is. Remember the best way to destroy socialism is bankrupcy. USSR in 1990. They learned their lesson --will we?

By the way Mr Hill, cheaper bonds and more expensive oil are both positive for the market.

Jun 11 03:19 PM

[Duude:]

I really don't buy the theory that high priced oil will lead to a reversal of globalization. My reasons are that large cargo ships won't be adding all that much more marginal expense than what unions can and will add to the cost of anything. While unions have taken a shellacking since the 1970's, the Obama administration and Congress are absolutely intent on passing 'card check' which will dramatically alter the American industry's ability to be competitive even with the added transportation in shipping. What's more is that they also plan on adding additional manufacturing costs with cap & trade which will obviously make the emerging nations the most competitive nations in the world. The only thing stopping them is if our government starts introducing trade barriers, which is hard to know at this juncture.

Jun 11 06:06 PM