Market Update – February 17, 2015

Much has been made of the steep drop in gasoline prices over the last year. We hear terms like it’s “a tax cut for consumers,” as many analysts extoll the “enormous” benefits from savings at the gas pump.

 

Index	Weekly Return % thru Feb 13, 2015	YTD Return % Dec 31, 2014 – Feb 13, 2015
DJIA1	+1.09	+1.10
NASDAQ Composite2	+3.15	+3.33
S&P 500 Index3	+2.02	+1.85
FTSE Developed ex- North America Index4	+1.45	+3.57
Bond Yields	Feb 13 Yield & Weekly Change	Yield – % a/o Dec 31, 2014
3-month T-bill	0.01      -0.01	0.04
2-year Treasury	0.66      +0.01	0.67
10-year Treasury	2.02      +0.07	2.17
30-year Treasury	2.63      +0.12	2.75
Commodities	Feb 13 Price & Weekly Change	Year end 2014
Oil per barrel5	$52.65             +0.31	$53.27
Gold per ounce6	$1,232.50             -8.50	$1,206.50

Sources: U.S. Treasury, MarketWatch, St. Louis Federal Reserve, CNBC

 

The reality – it’s a transfer of wealth from oil producers and related activities to consumers and the non-energy sectors of the economy. While we await the longer-term benefits of lower prices at the pump, it seems as if a day doesn’t go by that there isn’t another report of layoffs in the energy industry or a company announces it is slashing outlays on exploration.

 

In other words, some are experiencing the pain of falling oil prices.

 

Case in point, Pioneer Natural Resources (PXD $158) is among the leaders in the shale energy revolution. It announced last week it is slashing capital spending to $1.85 billion this year, or a 45% reduction from 2014. What’s fascinating is that it forecasts production could rise by as much as 10% in 2015 (Investor Relations).

 

Apache Corp. (APA $67) said last week it will average 17 oil rigs in 2015, down from 91 rigs in the third quarter of 2014; yet, oil production is expected to be “relatively flat” versus 2014 (Investor Relations). Those are incredible efficiencies being squeezed out of fewer wells, but it keeps production at elevated levels and could create headwinds for higher prices. Longer-term, that’s a plus for the overall economy.

 

Capital spending by businesses is an economic driver, and cutbacks could create a few bumps in the economic expansion, at least in the short-term.

 

According to the latest Annual Capital Expenditures survey released by the U.S. Census Bureau, businesses spent $1.3 trillion in 2013 on new investments in structures and equipment. That’s a hefty sum.

 

What’s surprising to many is that oil and gas extraction and supporting activities led the way, accounting for $179 billion of that total. In fact, the oil and gas industry accounted for over $1 in every $8 businesses spent on new investments in 2013 – see Figure 1. Note that it has been taking an increasingly large share of overall capital spending.

 

 

Further it nearly topped the next three categories combined: electric power generation ($86.4 billion), hospitals ($51.8 billion), and telecom, cable and broadband providers ($49.2 billion).

 

Granted, oil and gas doesn’t have the sex appeal of aerospace ($7 billion) or semiconductors ($16.6 billion). But it generates economic growth via capital spending and high paying jobs (Bureau of Labor Statistics).

 

While cutbacks won’t go unnoticed, we’re still waiting for consumers to spend their newfound windfall. Last month, retail sales fell 0.8%, as a 9.3% decline in sales at gasoline stations led the way (U.S. Commerce Dept.).

 

But gasoline prices continued to fall in January so it makes sense that we’d see lower sales from gas stations. If you minus out gasoline stations, which help to filter out changes in gas prices, and auto sales (a volatile sector), so-called core sales were up just 0.2% in January. That follows an unchanged reading in December.

 

What it suggests is that most consumers are either banking their savings or paying down debt, at least for now. While we have seen periods of temporary weakness before (see Figure 2), they didn’t come against the backdrop of rising consumer confidence, falling gasoline prices, and the recent ramp-up in job creation.

 

Note: core sales exclude auto sales and gasoline station sales

 

But there is one category that has seen a surge in spending. Sales at restaurants and bars are up 11.3% versus one year ago, according to U.S. Commerce Dept. data. It’s the best level since at least 1993.

Created 2015-02-17 23:27:26