Markets to Open Slightly Higher, Oil Dips, More Dismal Housing Data
December 30, 2008- The futures are indicating higher openings this morning for the broader markets as traders focus on the Conference Board’s Consumer Confidence Index for December and position for the first week of trading in 2009. Also adding to a slightly upbeat tone this morning is news that the Treasury Department is going to provide GMAC Financial Services a $5 billion lifeline from the $700 billion bailout program. The Federal Government is officially a hedge fund at this point. A dismal retail spending season has already been priced into stocks at this point, as are the continued eroding conditions in the housing market. The Case Schiller index reading showed that home prices dropped more than estimated to a little more than 18% - the biggest drop on record.
Libya has ordered companies to cut another 20,000 barrels in production per day starting on January 1, bringing its total output reduction to 270,000 barrels per day. OPEC had decided on December 17 to cut oil production by 2.2 million barrels per day, but this hasn’t stopped oil prices from continuing to trend lower.
One of the interesting developments to watch on the oil front is China’s decision to use the selloff in oil prices as an opportunity to shore up its reserves. The world would do well to watch China here, which has demonstrated its financial shrewdness and ability for long-term planning in the past decade. It is no secret that, at 6% of the total current consumption of global oil (while the U.S. is at about 25%) China is going to be requiring a larger piece of the overall consumption pie in the future. Just consider the fact that about 6 in 100 in China drive cars while in the U.S. the ratio is closer to 70 in 100. This fact alone makes it seem remarkable that oil prices could be trending as low as they have in the past couple months.
In any case, China apparently understands what its requirements will be as it prepares for growth and its continued emergence as a world leading economy. It will definitely need oil reserves to continue to make this transition seamlessly. And the dip in oil prices has provided a timely opportunity for it to build up its reserves, which is what it is doing now. Oil prices are down $0.44 this morning to $39.58.
The dollar is slightly softer against the euro this morning which is getting 1.4126. 2009 is going to be a dismal year for the dollar as the U.S. adds trillions to its national debt. The question is when our foreign lenders begin to lose their appetite for our debt. Not many world empires have been in the situation the U.S. is in have remained an empire. Debtor nations have always lost their status as world leaders. History has proved this out. The U.S. is treading a dangerous line indeed.
Meanwhile, gold prices are lower as well this morning, down $6.40 to $868.90. Our outlook on gold remains bullish, and we think $1,000 prices are on tap in the first half of 2009.
On the corporate front,
· J.C. Flowers, Dune Capital Management & Paulson & Co. are making a bid on failed thrift IndyMac. Previous to the government easing restrictions on these kind of purchases, private equity could only purchase up to 24.9% stakes in banks without becoming a bank holding company. But this is a brave new world at now. This will be an interesting development to watch. In terms of what we expect in today’s session, the markets haven’t priced in all of the negative news yet, and we could see more downward pressure by the close.
This is the worst year since 1931, and traders just want to get out. Most of them are not even in town this week, and this means lower volume and increased choppiness in trading. The DJIA closed down 31 points yesterday to 8,483 on really light volume (about 3.3 trillion shares traded). Expect about the same level of volume today. We think the DJIA could very well move down to the 8,000 level again before its sets up for a January rally (let’s call it the Obama Hope Rally). So we would recommend our readers to remain disciplined, focus on the bowl games and don’t get tempted to buying stocks until you see the DJIA pull back on volume.
Wit, Wisdom, Fools and Folly
Adam Sieminski said the range of oil in 2009 will largely depend on geopolitical circumstances. The problems in Gaza shouldn’t impact oil too much, but he acknowledged the region is important. If the current conflict broadens to Iran, this could oil price up to $80 to $85 per barrel. The lower end of the range is driven by the outlook for the world economy. He referred to the Bloomberg survey which expects an average of about $60 and he said he is at the lower end, around $50. He thinks oil demand could decline by about 1 million a day or so.
Asked about China, and the fact that it is restocking supply, and whether that will impact prices, he said the purchases could add 100 to 150 thousand barrels per day and this will help support prices. Also, OPEC will likely continue to cut production. But the key, Sieminski said, is the economy, and it will be tough for oil to get back above the $60 level. In the short run, the decline in oil prices is helpful for consumer spending. The problem is that it will slow down supply in the longer run and we will have less oil production.
Fast Facts
· “Chimerica” is probably an apt term. China’s purchases of U.S. Treasuries has jumped in October to $652.9 billion, up $65 billion on a month-over-month basis, or about 11.2%. The U.S. On a year-over-year basis, China has added $193.8 billion in purchases, or 42.2%. China owns the U.S. Japan has actually lessened its holdings from $601.7 billion in October, 2007 to $585.5 billion in October, 2008. The UK, which is the third largest holder of U.S. securities, has increased its holdings from $155 billion in October, 2007 to $360.2 billion in October, 2008, a whopping 132% increase. · The U.S. debt is up to $10.69 trillion this morning.
