I hope most of you are reading this after coming back from happy hour. I am on my way after this post!
Well it was another red day on Wall St. as oil and the financials(thanks AIG) continue to pressure the markets. The market seems to be more obsessed with oil versus the financials. Oil is putting tremendous pressure on the transportation stocks as well as the consumer.
Fed Ex tried to sneak this little warning out after hours due to the pressure of higher oil prices combined with a slower consumer:
"May 9 (Bloomberg) -- FedEx Corp., the second-largest U.S. package-shipping company, said fourth-quarter earnings will be below its earlier forecast after surging fuel prices raised costs by at least $100 million more than estimated.
Profit per share for the quarter ending May 31 will be $1.45 to $1.50, compared with a March forecast of $1.60 to $1.80, the Memphis, Tennessee-based company said today in a statement. FedEx also blamed ``restrained demand'' for express and freight shipments because of the cooling U.S. economy."
FedEx's new forecast follows a similar reduction last month by larger rival United Parcel Service Inc. in its full-year outlook. UPS cited a ``dramatic'' slowing of the economy. Both companies are struggling with jet-fuel and diesel prices that have climbed to record highs. "
Don't you love how they try to quietly put these warnings out there on a Friday after hours? The more alarming part of this warning is the blaming of "restrained demand". This is a nice way of saying the consumer sucks right now.
If you want to see an economy stop right in its tracks then let oil go to $200 a barrel like Goldman Sachs predicts. The consumer is already buckling from their mortgage payments and credit debt. Throw $5-7 a gallon gas into the equation and it will be lights out.
Oil reached a new high today:
"May 9 (Bloomberg) -- Crude oil rose above $126 a barrel in New York to a record as the dollar weakened against the euro, prompting investors to buy commodities as a hedge against the currency's decline.
``Oil is a safe haven because of the weak dollar and how badly the financial sector has been doing,'' said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts."
Final Take:
Something has to give here folks. If oil continues its meteoric rise then I don't see how the consumer doesn't fall to its knees. This will result in higher default rates on foreclosures, credit cards, and any other form of debt.
This in turn will put more pressure on the banks who will react by lending even less which will deepen the credit crisis. As oil rises, the Fed may have to step in and raise rates if the economy starts to collapse. This will then put huge pressures on housing prices forcing them way down. Housing and the financials then take a huge blow.
I really don't see how we can get out of this without a major correction/recession. The issues pressuring the economy are all intertwined and form a downward spiral that feeds on itself until we eventually have a blowup.
Oil is only one small component of this spiral. However, its the one component that can deliver a knockout to the consumer with one punch by going to $150-200 a barrel. If oil drops to $70 a barrel I don't think it will matter by then. The damage will have already have been done, and we will be in the middle of a consumer led recession which are always worse then business recessions.
If anyone has an alternative or thoughts please add a comment. Everything I read and hear on the street leads me to the same conclusion.
2 comments:
FedEx and UPS have more exposure to oil prices, sure, but I think it's a precursor of what to expect from so more businesses that use transportation in one form or another. Of course, they're doubly hit because most of their shipments are commercial, and so they have fewer packages traveling on higher costs, but I would expect most distribution-heavy retailers to have a similar reaction. Another after-markets revelation!
Your 'final take' is spot on, and it doesn't take a genius to see that the dollar devaluation is deeply hurting here. Gas in the UK - for example - is currently running an average of $10.50/gallon, but this is a country well adjusted to high gas taxes and the 5-10% price increase in the last year hasn't kicked them so hard (even though they complain about it).
It's time to start thinking about the fact it will hit $160-200 soon, and how to change our usage. Our cars are ridiculous (check out the manufacturers when they complain about 14 mpg standards) and our consumption and waste is out of control, so we either figure out how to live in a world where oil is a valued resource, or wither up and die.
Or find another country in the sand to bomb the crap out of.
Minton
I see it the same way. I heard car dealers can't give SUV's away right now.
We will all be running around in smart cars pretty soon.
Our consumer behaviours will have to change too. More money will be spent on energy versus buying that plasma TV.
Our spending junkie habits will need to change as it will cost more to live.
Interesting times for sure!
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