FINANCIAL REVIEW

Dow Up, Oil Down, Quit Your Job

Sinclair Noe — November 13, 2014

Podcast: Play in new window | Download (Duration: 13:16 — 6.1MB)

DOW + 40 = 17,652
SPX + 1 = 2039
NAS + 5 = 4680
10 YR YLD – .02 = 2.34%
OIL – 2.79 = 74.39
GOLD + .20 = 1162.90
SILV – .01 = 15.77

Record high close for the Dow Industrials.

The Nasdaq Composite hasn’t seen record highs since the spring of 2000, when it closed at 5048, which is just 368 points, or about a 7% move from here. If you were unlucky enough to have bought the PowerShares QQQ exchange-traded fund, an ETF that tracks that top 100 non-financial stocks in the Nasdaq, on March 10, 2000, you’d still be in the red on that investment.

Tech companies are once again in a leadership role. While Microsoft, Apple and several other tech leaders of today are trading at higher prices than 15 years ago, Intel and Cisco are still well below their 2000 peak prices. Of course the largest company in market cap is Apple at $660 billion. Apple shares have surged more than 40% so far this year, creating more than $160 billion in market value for shareholders, which coincidentally is about the same market cap as IBM, which was once considered the big player in tech. Today, Microsoft passed Exxon to become the second largest company in terms of market capitalization. Exxon has a market cap of $400 billion; Microsoft is worth $408 billion. Exxon’s declining fortunes can be tied directly to the price of oil.

Have you stopped by a gas station in the past few days? I did. I paid $2.78 a gallon. Gas prices have been falling for the past 48 days, and the nationwide average is now $2.92 a gallon, the lowest since December of 2010.

Crude oil prices were down again today after OPEC said demand for its oil will drop next year, and Saudi Arabia remained silent about a possible cut in production. There is another OPEC meeting in 2 weeks, and it is possible that OPEC members Venezuela and Nigeria will cut production, but today the Saudis merely reiterated their policy of stable global markets as they rejected rumors of a price war.

Global demand for oil from OPEC, which pumps a third of the world’s oil, will drop to 29.20 million barrels per day (bpd) next year, almost a million bpd less than what it currently produces. Oil production around the world has been strong in recent years. A boom in the US has pushed domestic production up 70 percent since 2008. At the same time, demand for fuels is growing more slowly than expected in Asia and Europe because of weak economic growth. The US economy is faring relatively well, but more fuel-efficient cars and changing driving habits are keeping domestic gasoline demand low.

Meanwhile, the International Energy Agency says the 30% drop in oil prices over the past 4 months will damage the US shale oil boom and cause supply problems down the road. The low prices could deter investment in production, which will eventually hurt supply. Deutsche Bank said recently that 40% of US shale oil production scheduled for 2015 would be “uneconomic” if prices drop below $80 a barrel; that might be what the Saudis are hoping for. It may be tough to shake out those domestic producers; technology has advanced dramatically.

Meanwhile, oil stocks, shares in oil companies, have not taken the same hit as oil. Sure Exxon-Mobil and Chevron are off their highs, but they have rebounded from mid-October lows; just not as much as the rest of the market. Oil broke a very important level of support at $80 a barrel, which is now the new level of resistance; and the next level of support is $75, broken today. Oil is now extremely oversold but almost nobody seems to think it will go much lower from here; and if it does, there will undoubtedly be production cuts. Of course, the contrarian in me says that nobody is expecting oil to go lower, so it probably will. The point here is nobody knows, so let the market tell you.

Today, the Energy Department revised its outlook for gas prices, saying the average price for gas in the US will be below $2.94 a gallon in 2015; that implies oil prices won’t move above about $84; that forecast included a few caveats about production and possible supply disruptions. The EIA also slightly lowered its prediction for growth in U.S. oil production because lower prices will force some drillers to cut back. Production is expected to reach 9.4 million barrels a day in 2015, down from a previous estimate of 9.5 million barrels per day. Still, that would be an increase of 4 percent over this year and the highest domestic crude production since 1972.

Still, $2.94 a gallon is a 44 cent drop from the outlook issued just a month ago; and that’s 45 cents a gallon less than the average price paid this year. And that works out to about $60 billion in savings. It’s almost like everybody will be getting a raise.

Lord knows we need a raise. This is the first “recovery” where median household income has dropped, and continues to drop. The unemployment rate has dropped to 5.8%. Jobs are coming back but wages aren’t. Every month the job numbers grow but the wage numbers go nowhere. Most new jobs are in part-time or low-paying positions. They pay less than the jobs lost in the Great Recession. And wages are less predictable. Most Americans don’t know what they’ll be earning next month and two-thirds are living paycheck to paycheck. When that is the case, workers who have a job tend to stay on the job, even if the wages are stagnant.

That may be changing. The Bureau of Labor Stats published the Job Openings and Labor Turnover Summary, or JOLTS, for September. There were 4.7 million job openings on the last day of September, down slightly from 4.9 million in August. But more employees quit their jobs: 2.8 million in September compared to 2.5 million in August. These are voluntary separations. This means workers have confidence they can leave their job for greener pastures. The number of job openings are up 20% year-over-year compared to September 2013. Quits are up 16% year-over-year.

It’s definitely good for wages. The unemployment rate comes down, but wage growth lags behind. When labor markets finally begin to tighten and the economy nears full employment, that’s when wage growth accelerates. And we are starting to see a shift in attitudes. Consumer confidence has been firming. More Americans are working, more people are changing jobs, and gasoline prices are down; so even if workers haven’t seen an increase in the paycheck, they have more money to spend, and that might fire up more consumer spending.

We are wrapping up earnings reporting season. Today, Walmart posted diluted earnings per share came to $1.15 in the third quarter, narrowly beating estimates of $1.12 a share, and above the $1.14 it booked in the same quarter last year. Total revenue for the quarter grew 2.9 percent from the previous year, to $119 billion. Same store sales were up for the first time in 2 years.

This has been another strong earnings season and US companies are now sitting on mountains of cash. Capital Economics and Audit Analytics figures companies now have $1.9 trillion in cash held in the US, and $2.1 trillion in cash held offshore.

A follow-up to yesterday’s news of $4.25 billion in fines for a half dozen banks involvement in rigging the foreign exchange markets. I know that sometimes it sounds like we repeat the news. The rigging of Forex markets sounds a lot like the rigging of Libor markets or derivatives markets, but the thing that really makes the Forex rigging a bigger problem is that it happened after all those other manipulations. The Forex investigations ran through October of last year. And that means there was absolutely zero deterrent impact from the billions of dollars in fines for Libor, or all those other fines. Did managements really not know, or even suspect, something was wrong? Did they just turn a blind eye? Or did they just not care?

In a rational world, the customers would move their business to firms with higher standards. That is not going to happen because investment banking is almost a closed shop. The six firms involved in the settlement are five of the biggest banks in the world. Clearly billion dollar fines have not altered bad behavior. No doubt criminal convictions would concentrate minds on the trading floor and in the executive suites. Maybe we should rethink the idea that banks have some inalienable right to control foreign exchange markets or interest rate markets with reckless abandon. Six years after the financial crash, some of the world’s biggest banks are still out of control. In other fields, firms with shoddy practices fear the loss of their license to operate. Big banks don’t, but should. At the very least, it should be time to consider suspensions; a six month ban on foreign exchange trading; maybe a three month ban on bond trading. That would shake things up, for the better.