Still bearish: at what point do we stop discussing if the recovery is taking place?
Yesterday the S&P/CaseShiller 20 City Home Price Index for January was released, increasing 0.32% month-on-month to 146.32. Although this was well above the 0.25% decline predicted by analysts, January remains 0.69% below January 2009 and 20.5% below the 2004-08 timestep.
In comparison, August last year saw a 1.08% increase in the index as buyers rushed to take advantage of an $8,000 tax credit due to expire at the end of November. The only problem is, the U.S. Congress voted to extend that credit until the end of April, so where did the sales go? Perhaps buyers in January were simply too snowed in to go house shopping.
Or they are beginning to worry about a double dip in the real estate market.
Why does this matter for energy prices?
Two reasons, fundamental and speculative.
Fundamentally, real estate is a synecdoche for the economy in general. Speculatively, traders are thinking outside the box.
Yesterday, Carl Quintanilla from CNBC was at the International Energy Forum in Cancun and reported that oil traders “believe the going rate for crude will have more to do with the strength or weakness of the dollar and less to do with the supply-demand equation.” (Read Quintanilla's report here.)
We mentioned as much in yesterday’s issue of , stating that traders should begin paying more attention to macroeconomic factors as an indicator for crude prices.
Thus traders looked at yesterday’s strong consumer confidence release and pushed natural gas and the liquids higher in hopes that January’s home sales were simply dampened by weather. Consumer confidence for March rose by 13.14% to 52.50, slightly below January’s 56.50 but still 95% higher than March 2009’s 26.90.
In relative terms, not since August have we seen such a large month-on-month increase in confidence. This led to strength in the front month of the gasoline curve. The contract for May delivery rose from a 0.06% discount to a 0.11% premium i.e. traders are beginning to presume that presumed demand will be strong relative to supplies.
As a sidenote, RBOB is heavily dependent on consumer demand due to the summer driving season, whereas because distillate fuels such as diesel are used for intermodal (i.e., commercial) transport, the heating oil contract is tied to commercial demand.
The only problem is, traders assumed the same in January, and were surprised when consumer confidence in February dropped to an 11 month low. Thus crude prices failed to break above $85 and the economy stayed in the doldrums.
Is a drop in consumer confidence a harbinger of economic weakness? Unfortunately, yes. During the recession of 1980, which lasted between January and July, consumer confidence fell from 85.9 in January to 50.1 in May before trending up to 87.2 in November as the recession ended. In February 1981, confidence fell back down to 69.0. By July, the second dip of the double dip recession had begun, confidence resumed trending lower and the recession lasted until 1982.
So the question is whether February’s drop and March’s recovery are within tolerance levels or have they broken away from the upward trend established in the first half of 2009.
In the Chart of the Day in today’s issue of , the downtrend had a tolerance level around 7.9% of the confidence value. Thus, even though some months saw increases, it was not until May’s 55% break above trend that we could be sure consumer confidence was trending higher. If we assume a similar trend will hold for the recovery, February’s value was 20.3% below the trending forecast, while March’s value is 9.04% below the forecast. This is not a bullish indicator.
At this point math becomes subjective, and analysts can argue that the drop takes place faster than the rise, and higher volatility should be allowed.
This is understandable, but at what point do we stop discussing if the recovery is taking place?
The market is finally beginning to latch on to what we have been harping about for months – things do not look as peachy as they did in Q3 ’09. Until we see strong figures – perhaps from Friday’s job data – maintains its bearish outlook.
Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.