Joel Bowman, checking in today from Houston, Texas... Stocks faltered yesterday (albeit from record highs). Gold rose 10 bucks. Nothing much to see here...
On a day-to-day basis, minor moves in the markets tell us very little about what's going on in the world around us. Even a big swing - a "fat finger" event, say... or a "flash crash" - can be of little help.
One swooning swallow does not a spring make...
Of course, the chattering class is rarely without an explanation for why a market zigs or zags. Yesterday, it was falling energy prices - and those companies dependent on their
not falling - to blame for dragging markets lower.
The wires relayed the data:
NEW YORK (AP) - U.S. stocks fell on Monday as oil prices turned sharply lower and spooked investors into dumping shares of drillers and other energy-service companies.
The drop in oil weighed on stocks from the start of trading. Weak trade figures out of China and news that Japan's recession is deeper than initially thought suggested demand for crude would be lower in those two economies. Among the big losers were two Dow Jones industrial average components, Chevron, down 3.7%, and Exxon Mobil, off 2.3%.
"Wait a minute," we hear our dear reader object. "I thought lower energy prices were supposed to be a
boon for the economy?"
And our dear reader would be right... sort of. Lower prices at the pump allow Americans to save a little cash... or at least to be able to spend it elsewhere.
Yesterday's
New York Times informed us all about the wonderful windfall of tumbling energy costs...
So far, the drop in oil prices has been a boon for consumers. The national average price for a gallon of regular gasoline was $2.67 on Monday, according to the AAA auto club, $0.27 lower than a month ago and $0.59 below a year ago. Energy experts say that every $0.10 drop in gasoline prices translates into a $120 in annual savings for the typical family that consumes 1,200 gallons a year.
Of course, not everyone saves that extra dough. They might do a little extra holiday shopping, for example, or grab a basket of wings at America's rapidly expanding,
ahem, "breastaurant," Twin Peaks. (A Texas-born phenomenon, the Hooter's competitor outpulled its rival by a million bucks a store last year. Unsurprisingly, they're popping up all over the country, giving some indication to the general, somewhat unsettling direction of things...)
Now, do a hundred more sports bars make the world a better place? Does more time at the mall over the Christmas break deliver us from evil, amen? Does an economy that relies overwhelmingly (roughly 70%) on consumer spending indicate a solid foundation on which to construct a better future?
We have no idea. And we're certainly not about to argue with consumer choice...
Either way, our point is simply that the effects of falling oil prices will not be felt evenly across the economy. That's because, in short, there is no such thing as "the economy"... at least not one divorced from the millions of individuals acting within it. Some of those individuals are consumers... others producers. The effect of $63 oil (or $50 bananas... or $0.20 Ferraris) impacts those individuals very differently.
Here in Houston, America's energy capital, lower energy prices mean lower profits for energy producers. Fewer profits mean less investment. Less investment means fewer jobs.
Just yesterday, as the price of the world's favorite goo was dipping to a five-year low, ConocoPhillips announced it would cut investment spending in 2015 by 20%. The news came after BP announced it planned to cut middle-management jobs - among other positions - in the months ahead.
According to data from Norwegian consultancy Rystad Energy, oil and gas companies are set to make final investment decisions (called FIDs) on no fewer than 800 projects totaling nearly half a
trillion dollars next year.
Even if oil rebounds to $82.50 per barrel - as analysts predict it will by next year - "around one-third of the spending, or a fifth of the volume, is unlikely to be approved."
That's the opinion of Rystad's head of analysis, Per Magnus Nysveen.
"At $70 a barrel," he says, "half of the overall volumes are at risk."
Of course, it's not the stuff that bubbles up in the desert of Saudi Arabia that's "at risk." Similarly, another 5% or 10% drop in price is unlikely to have the Kuwaitis shaking in their sandals.
But don't worry about the big guys. They're not likely to give up the ghost in our lifetime. As for the new American wildcatter, we're not so sure. All that horizontal-drilling equipment and hydraulic-fracking technology can't be cheap. And the lifetime of the subsequent wells are not like the abundant elephant fields upon which the Saudi's fortunes rest.
As the price declines, weaker hands are forced from the market. Questionable projects are pulled. Money flows back to the deepest pockets.
And let's not forget, we're still well above some analysts' forecasts. What happens if, as the number crunchers at Morgan Stanley expect, prices continue to decline... to $43 per barrel?
What happens to the economic viability of projects built on difficult-to-squeeze rocks?
What happens to the banks that overextended loans during the boom years? (BMO Financial identified BOK Financial, Cullen/Frost Bankers and Zions Bancorp as "Banks with high concentrations of loans to energy producers" at 19%, 14% and 8% of total loans, respectively.)
And while mom is happily driving the kids to soccer practice and dad is ordering another round of beers at Twin Peaks, what will happen to "energy independence" here in America?
We wait to find out...
Marc is going to show you how to collect up to $85,410 in just a few simple, chess-like moves.
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