Oil

March 2, 2011

Equity markets are opening with a slight bid this morning after falling yesterday. Oil has been the story of the past two weeks, and the commodity is up slightly this morning, just over $100 per barrel in spite of record oil and gasoline inventories here in the US. Yesterday the February ISM was in line with expectations at 61.4, the best level since May ’04. New Orders and Backlogs rose while manufacturing inventories fell back below 50 for the 1st time since June. Customer Inventories fell 5.5 pts to 40, matching the lowest since July, and both well below new orders. Prices paid rose .5 pt to 82, the highest since Aug ’08. Of 18 industries surveyed, 14 reported growth. The ISM had the following caveat to the strong headline figure, “there is also concern as industries related to housing continue to struggle and the prices index indicates significant inflation of raw material costs across many commodities.”

Bill Gross wrote this morning that treasury yields are 150bps too low. In his total return fund he cut US government bonds to 12% of assets from 22% in December. Cash in the fund is now at its highest in a year at 5%.

Qaddafi spoke this morning in Libya, saying he won’t leave the country. Oil exports have stopped in the country as major oil companies such as BP have pulled their people from the country for safety. CIA analysts are predicting that Libya will become the first failed Arab state.

A recent analysis of the 2010 US Census shows that the move to urban life is outpacing demand for life in the suburbs. Many big cities had growth versus prior declines.

The SEC has charged former Goldman Sachs partner and board member Rajat Gupta with insider trading. He is accused of giving tips on Goldman as well as Proctor & Gamble, where he also served as a director, to Raj Rajaratnam, the founder of the Galleon Group. Rajaratnam’s trial for insider trading begins this week.

The government agreed to a temporary spending bill that would cut $4 billion from the budget and keep the government running for two more weeks. The deal holds most discretionary spending at last year’s levels.

The NFL collective bargaining agreement expires tomorrow night at midnight, and the players could be locked out by Friday. Owners are meeting today in VA for two days to decide what to do when the agreement ends. Negotiators met yesterday to determine how to share $9 billion in revenue.

In testimony yesterday, Ben Bernanke said that oil price rises were temporary and, while a short term burden on some families, there is no long term concern. In justifying the size of QE2 at $600 million, he stated that every $150mil in stimulus was the equivalent of a 25bps interest rate cut, and the economy last fall needed a 75-100bps bump to avoid a double dip recession. Remember this information is coming from the guy who said in 2007 the housing crisis would be contained to the sub-prime market.

A US Chamber of Commerce study concluded that state labor and employment laws are costing the US more than 700K jobs. Paring back laws that exceed federal standards would add 40K new companies, and eliminate costs of $1.7 trillion per year. The study focused on issues such as wages, hours, working conditions, discrimination, family and medical leave, and collective bargaining.

APAC markets were very weak last night, and European markets are weak today on concerns of higher oil prices. The Saudi Arabian market fell 7% yesterday and another 4% today, and is now down 11% on the year and 19% in the past 20 days.

Have a great day

Ned