The Pain of 1982, IEA Slashes Oil Demand Forecast, As GE Goes, So Goes the Market, and More!

by Addison Wiggin & Ian Mathias

  • Consumers feeling all the pain of 1982… Bernanke, Paulson prescribe “Doritos” cure
  • IEA slashes oil demand forecast… Why it still won’t mean a return to $80 oil
  • As GE goes, so goes the market… What Wall Street is overlooking
  • A bold gold forecast…and the reason to take it with a grain of salt
  • Are we in a commodities bubble? Let the debate begin!

Consumer confidence is at its lowest point this morning since the dark days of the double-dip recession in 1982, when unemployment approached 11%.

The University of Michigan reported its index fell to 63.2 in April — down from an already low 69.5 in March. And a far cry from the 69 most economists expected.

An alternate measure, RBC’s CASH Index — a poll of consumer attitudes and spending by household — fell to 29.5, the lowest since its inception in 2002. A year ago the CASH Index stood at 85.

As if in preparation, the Treasury secretary and Fed chairman were out in tandem yesterday defending their “Doritos”-style economic stimulus plan: “Spend all you want. We’ll make more…”

“The U.S. economy,” warned Secretary Paulson speaking before the Council of Institutional Investors in Washington, “has turned down sharply. Risks continue to be to the downside.”

But have no fear, he assured his Wall Street constituents: Those $600 rebate checks coming next month from the IRS will make everything just swell again. “We believe that given how they are targeted, that they will make a real difference in the economy.”


The Dynamic Duo: “Spend all you want. We’ll make more…”

The “financial distress that we are seeing now is among the most severe episodes of the postwar era,” Ben Bernanke acknowledged for his part yesterday. But he stopped short of suggesting the present-day U.S. economy is like the run-up to the Great Depression.

Drawing on his academic studies during his pre-Fed days at Princeton, he told the World Affairs Council that back in the ’30s, the Fed allowed banks to fail, prices to fall and the money supply to contract.

“We now know the lessons from that,” says the helicopter man. “We are certainly going to make sure that the financial system remains in good functioning order.” The part about “regardless what happens to the dollar” was merely implied.

“Maybe at the end of the third quarter,” Goldman Sachs CEO Lloyd Blankfein said, offering encouragement to his shareholders yesterday, “or the beginning of the fourth.”

The credit crisis is nearing the end he believes, but he makes “no promises” as to how much longer it will last. Lloyd’s football analogy went thud when he said the fourth quarter typically lasts longest. Aren’t they all about 15 minutes each?

Maybe, subliminally, he’s expecting overtime.

The International Energy Agency slashed its forecast for growth in world oil demand this morning.

As late as January of this year, the IEA saw demand growing by 2 million barrels per day during 2008. Now it expects growth of 1.3 million barrels — its sharpest downward revision since Sept. 11.

But that doesn’t mean a return to $80 oil — yet. The slowing demand in the U.S. and Europe is being usurped by rising demand in China, India and the other emerging markets.

“The case for ‘decoupling’ [of the U.S. from the global economy] has some merit,” says the IEA’s monthly report. “For the first time, a sharp U.S. economic downturn is not expected to cause such significant impact in key emerging countries as in the past.”

“China and India are only beginning to consume oil at any meaningful level,” Chris Mayer points out. Right now, they are consuming oil at a rate the U.S. did in the early years of the 20th century.”

“We don’t need China to start guzzling oil like we do. Even if it moves half the distance between it and Hong Kong, that’s a lot of extra demand. What’s more likely, China stays at 1910 oil usage or moves somewhere closer to, say, 1950s U.S. oil usage? I think the latter.”

Demand will keep going up. And with it, prices will remain high.

U.S. stock markets opened this morning down over 100-points on earnings from General Electric. GE almost never comes in below analysts’ expectations. Today, it did. GE reported a 6% drop in first-quarter earnings, concentrated in its financial services division.

More interesting to us are the results from GE’s infrastructure arm, which makes up 40% of the company’s earnings. That division’s earnings are up 17%, thanks to continued demand from Asia and the Middle East.

But what a difference a day makes. Yesterday, traders took good news wherever they could find it. They found it at Wal-Mart and Costco.

The nation’s biggest retailer announced a 0.7% increase in U.S. sales for March. The nation’s biggest warehouse chain recorded a 7% increase. Traders celebrated by sending both the Dow and the S&P 500 up 0.5%.

The rest of the retail sector — the non-discount, non-warehouse species — is a wasteland, especially for those that sell clothing. Limited Brands, Gap and American Eagle all posted greater declines than expected.

Department stores? A disaster. Same-store sales at Kohl’s plunged 16%. Thomson Financial found 17 of 23 retailers missed their sales estimates in March.

Curiously, Wal-Mart says its two big areas of strength right now are groceries…and big-screen TVs. So people aren’t necessarily giving up discretionary spending; they’re just going down-market to do it. Vizios, not Sonys.

The Nasdaq was a tad perkier — up 1.3%. Tech issues in general benefited from the “high-stakes battle” for Yahoo. Yawn.

If you haven’t been peeping, here’s the quick-and-dirty version: Microsoft wants Yahoo, but Yahoo is a tease. In a couple of passive-aggressive moves, Yahoo has been openly flirting with Time Warner, while secretly pining for his younger brother AOL. And at the same, necking with Google — something about a two week “AdSense” fling — testing the waters for a more long-term relationship.

But Microsoft, not used to having its advances spurned, is taking lessons in seduction from Rupert Murdoch’s News Corp. Murdoch, out of nowhere, is ogling Yahoo’s assets himself.

Those in the know suspect it’s all games and a straight “hookup” with Microsoft remains the most likely scenario, with Murdoch, Time Warner, AOL and Google all left out in the cold.

We expect videos to surface on MySpace or Facebook at any moment.

The dollar index, which reached above the 72 for a while yesterday, is back in 71 territory. Today, it takes $1.58 to equal one euro.

Gold is holding its own around $929.

If you’re trading gold, you might want to take notice of yesterday’s forecast from GFMS, a London-based precious metals consultancy. It sees gold spiking to $1,100 within the year…followed by a crash back to $600.

“Investment demand alone is supporting the present rally,” reasons its report “while jewelry demand is essentially unchanged.” The firm’s research director, Neil Meader, sees an eventual U.S. economic recovery with a return to rising interest rates. Once that happens, “The whole basket of drivers we’ve seen supporting the price will unwind.”

“GFMS’s analysis of the economic situation is conventional,” writes Ed Bugos, “and discounts the magnitude of the inflationary cycle. It’s not telling investors they should own gold to protect themselves from the ultimate effects of the unprecedented worldwide manipulation of money and interest. It can’t. But there is no sign of stopping those policies.”

As it happens, Ed shares GFMS’s medium-term outlook of gold shooting up before a sharp correction — though not back to $600. “Anything is possible,” he says, “but that price wouldn’t last a week.”

GFMS’s comments on gold reflect the conventional wisdom on commodities in general today: With prices rising as fast as they have, are commodities in a bubble?

“The changing behavior of commodity investors and speculators increases our conviction,” says Bank Credit Analyst, “that commodities are on an eventual path toward a mania-like overshoot.”

A Moscow Times columnist frets that falling oil prices might send Russia hurtling back toward the economic tumult that accompanied the end of the Soviet Union, or at least the crisis of 1998.

Kevin Kerr doesn’t think so. “I even got into a little debate on this topic with two of the staff writers at Barron’s and one from The Wall Street Journal,” said Kevin as he made his rounds of the business news channels yesterday. “They peppered me with questions, one after the other. One was adamant that the grain markets are clearly in a bubble and that global demand is a myth and that this year’s crops in the U.S. will be more than plentiful to cover demand.

“Actually, I told him I think it’s the exact opposite. After all, blizzard conditions in Minnesota and more flooding in Indiana mean planting is out of the question. It’s April 10 now… tick-tock, tick-tock, every day closer to May means less and less yield and certainly more risk for corn if it’s planted late. Come July, much of it will just wither away.

“If anything, we are in abut the fourth inning of this game and prices have a long way to go.” He’ll learn the straight skinny firsthand, next week. Stay tuned.

Another U.S. airline filed for bankruptcy this morning — the fourth this month. This morning, it was Frontier’s turn, following Skybus, Aloha and ATA’s lead. But unlike the others, Denver-based Frontier plans to continue operations.

Indeed, it may well have more planes in the air today than American, which canceled another 570 flights today to inspect wiring.

Hedge funds may be down, but they’re not out. The pension funds and endowments that provide the lifeblood of hedge funds (which now number around 10,000) are seeing lower returns this year…but they’re still forking over their “2 and 20.”

BarclayHedge says the typical hedge fund lost 4.4% in the first quarter — an industry record — but rather than yank their money out, the pension funds and endowments are switching in and out of funds more rapidly, depending on who’s up and who’s down.

“People may be pulling out of managers, but they are not shutting down programs,” says Jane Buchan, head of Pacific Alternative Asset Management, described by Reuters with a straight face as “a $10 billion fund of funds that selects hedge funds for pension funds and endowments.” Makes us wonder if we missed our calling.

“I say BS to your reader coming to the aid of Greenspan!” exclaims a reader who clearly doesn’t buy into this week’s Reputation Rehab Tour. “Greenspan’s guilt is easily explained, and it was his leading the charge for the removal of the Glass-Steagall Act in 1999. Everything, and I mean EVERYTHING, can be traced back to this ultimate act of stupidity and greed! By that ONE act, he has opened the gates for another 1929 all over again!”

The 5 responds:
Call us CRAZY, but we’re always suspect of comments that come in replete with ALL CAPS and!!!! points!

“Amen!” say a host of readers, agreeing with our suggestion for improving Starbucks’ business.

“Starbucks has the WORST-tasting coffee I’ve ever had,” write one reader. “McDonald’s is better, Dunkin’ Donuts is better…even the Chock Full o’Nuts I make at home is better. I’ve had coffee at podunk gas stations out in the middle of nowhere that was better!”

“Starbucks coffee is like dishwater compared with the coffee in most cafes and restaurants here in Melbourne,” another reader writes from down under. “Even McDonald’s in Australia has better coffee.”

“For my money,” says the one dissenting vote, “Starbucks makes great coffee — the best to be found, except for truly boutique roaster shops. I just don’t go there much anymore, because (unlike the government) I won’t borrow from the Chinese to fund current spending, and I’m too addicted to Exxon Mobil’s product.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

rspertzel

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