Oil is Lower, Is OPEC helping out your Christmas?

OPEC helping the USA economy

OPEC Helping Your Wallen

On Tuesday, the U.S. Census Bureau reported that housing starts increased 1.5% month over month in October to a seasonally adjusted annual rate of 1.228 million, up from September’s revised rate of 1.21 million, however, below expectations of an increase to a 1.23 million rate of sales. With October’s reading, housing starts are down 2.9% from the same time last year.

As for building permits, units authorized in October fell 0.6% month over month to a seasonally adjusted annual rate of 1.263 million, in line with expectations of 1.26 million. This follows a revised September reading of 1.27 million. With September’s monthly decline, permits are down 6.0% from the same time last year.

Summary

Economic Outlook
Oil

All in, I believe the reading serves to back our view that an aggressive Fed is making debt-inducing purchases such as homes, simply unaffordable due to the impact on mortgage rates, which increase monthly payments – this is, in turn, causing builders to slow down on the pace of home starts in fear that demand will begin to wane in coming months. That said, while the reading was technically a “disappointment” as it missed expectations, I remind you that because I want the Fed to walk back it’s hawkish commentary, I are inclined to view bad as good as it could give the Fed the data it needs to provide a more dovish tone at the next meeting.

On Wednesday, the Commerce Department reported that new orders for manufactured durable goods dropped 4.4% in October to $248.5 billion, following a 0.1% decline in September (revised down from +0.7% previously reported). The reading greatly missed expectations of a 2.6% decline. Excluding transportation equipment (airplanes and automobiles), new orders were up 0.1% in October, missing expectations of a 0.4% advance. Excluding defense, new orders decreased 1.2% last month. New orders for non-defense capital goods, excluding aircraft (i.e., core capital goods) were unchanged in October, missing expectations of a 0.2% monthly increase. This followed a 0.2% decline in August and a 0.5% decline in September.

All in, while the reading did miss expectations, I am viewing it as a positive. Recall, this is counter-intuitive as strong readings point to a strong economy, something I always want to see. However, strong readings may also bolster the Fed to raise rates too quickly and therefore derail the economic expansion I have been witnessing. Therefore, our thinking is that with every disappointing reading comes another piece of evidence the Fed must consider when making rate change decisions and hopefully, given enough disappointing readings, the Fed will choose to slow its pace of rate hikes. Remember, what I want now is a rise in December and guidance that they will hold off on further hikes until the data deems it necessary.

Also on Wednesday, the National Association of Realtors (NAR) reported that existing home sales — completed transactions for single-family homes, town homes, condominiums, and co-ops – increased 1.4% in October to a seasonally adjusted annual rate of 5.22 million. This followed six consecutive months of declines. With October’s reading, which was above expectations of an increase to a 5.2 million unit adjusted sales rate (or +0.97% MoM, before), existing home sales are down 5.1% from the same time last year. Perhaps the most important takeaway from the report, speaking on the results, NAR chief economist Lawrence Yun stated, “Rising interest rates and increasing home prices continue to suppress the rate of first-time home buyers. Home sales could further decline before stabilizing. The Federal Reserve should, therefore, re-evaluate its monetary policy of tightening credit, especially in light of softening inflationary pressures, to help ease the financial burden on potential first-time buyers and assure a slump in the market causes no lasting damage to the economy.”

However, as I’ve noted, there are signs of a slowdown on the horizon, a key factor in our calls for the Fed to come out less hawkish on future rate hikes. To this point, Williamson also noted that, “the November survey does raise some warning flags to suggest growth could slow in the coming months. In particular, the growth of hiring has waned as companies grew somewhat less optimistic about the outlook. Goods exports also appear to be coming under increasing pressure, often linked to trade wars rules dampened demand. However, it should also be remembered that some pullback in growth was to be expected after October’s numbers were boosted by a post-hurricane rebound, especially given the historically high levels of production, order books, and employment.”

Key Global Economic Readings

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OIL

On the commodity front, oil prices remain under pressure as the U.S. continues to produce at record levels, the dollar remains strong (making U.S. oil more expensive for foreign buyers and therefore adding additional pressure on prices) and OPEC and Russia have yet to announce a production cut agreement. Moreover, compounding the immense output, prices are also being pressured by fears of a global growth slowdown, growth expectations being a factor correlated to future demand expectations.

While the dynamic of increased supply and waning demand will likely continue to result in pressure on prices in the near-term, I want to provide you with a few thinking points that I rule currently weighing internally, and factors I believe help members in better analyzing their own portfolios.

First, on the bearish side of the equation, there is the fact that President Trump has come out in strong support of Saudi Arabia following the killing of Saudi journalist Kamal Khashoggi, despite U.S. intelligence agencies implicating high-ranking Saudi officials in his killing. The reason this could be viewed as bearish is that it could cause Saudi Arabia to rethink its previous calls for a production cut in order to appease President Trump’s calls for lower oil prices.

That said, on a more-bullish note, with WTI now hovering around the $50 level, I could start to see support as U.S. producers (depending on the producer) are now starting to reach break-even levels, meaning that another leg lower could result in losses and therefore prompt producers to reduce output so as not to incur losses or go free cash flow negative. Operating within free cash flows have been a key focus of producers and investors in recent months.