Quote of the Day
I will study and get ready and perhaps my chance will come.
Abraham Lincoln
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The situation in Libya has not deteriorated any further but then again it has not improved any. The opposition group still retains control of all of the areas including the oil port of Brega that forces loyal to Gaddafi have tried twice unsuccessfully to recapture even with airstrikes. The market eased a bit yesterday on a combination of a mediation proposal by Venezuela's Chavez and the Arab League...an unlikely duo since they are mostly autocratically ruled governments and the uprising in Libya is about freedom. Today Gaddafi forces are putting checkpoints around Tripoli as the opposition group has called for a protest in Tripoli after the noon prayers.

The situation in Libya is showing all of the signs of a problem that is going to last for an extended period of time. Civil unrest or war or whatever you want to call it is what is evolving with neither side anywhere near ready to back off. The opposition group quickly rejected the Venezuelan mediation plan and Gaddafi continues to vow he will fight to very end. The west continues to call for Gaddafi to depart including President Obama who yesterday called for him to leave the country. Discussions continue in the West as to the merits and feasibility of establishing a no fly zone over Libya but so far this is just discussions. The US now has a military presence around Libya. Also both Russian and China voiced their objection in the UN Security Council over any movement to authorize force or a no fly zone in Libya by the West. So this week is going to end much like last week with a major oil producer still in turmoil, oil flow reduced strongly and no end in sight at the moment.

In spite of all of the ongoing turmoil in North Africa and the Middle East as well as the ECB signaling they may raise interest rates as early as April investor/traders embraced global equity markets yesterday as shown in the EMI Global Equity Index table. Over the last twenty four hours all ten bourses in the Index gained ground with only Brazil still showing a year to date loss. The Index is up by 1.5% for both the week and the year to date. The better than expected macroeconomic data that has come out over the last forty eight hours has been very supportive for equities especially the positive pre jobs data in the US. The ADP numbers on Wednesday and yesterday's weekly initial jobless claims both came in much better than expected.
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The positive economic data has actually created a bit of excitement that this morning's US nonfarm payroll data may even exceed the market consensus. The market consensus is calling for an increase in total payrolls of about 185,000 jobs with the headline unemployment rate ticking up by 0.1% to 9.1%. However, over the last two days the whisper number is well over the 200,000 level which helped push the US Dow close to a 200 point gain on Thursday. In fact the market could be setting up for a failure if the number is less than 200,000 new jobs. If so it will likely be met with disappointment and could result in a bit of selling moving back into the equity markets and thus the oil complex. The data will be released at 8:30 am EST and will set the stage for trading in most all asset classes for at least the rest of today and possibly into next week.

Investor/traders are juggling a variety of conflicting signals...positive macroeconomic data, a signal that the ECB may raise interest rates and higher oil prices as a result of the freedom protests in North Africa and the Middle East. The vast majority of macroeconomic data hitting the media airwaves is all based on what now looks like a different world... a world with oil prices about 20 to 25% below where they are at the moment. The oil price shock of the last few week has yet to show up in any of the macroeconomic data or reported (4th quarter results latest available) corporate earning. In a couple of weeks we will begin to see some economic data that has been impacted by the oil price shock as well as corporations starting to possibly adjust their going forward guidance. We will then see if the picture for global economic growth looks as good as it looks based on the current data.

The fact that a developed region like the EU signaled that the ECB may raise short term interest rates as early as April to fight inflation risk is a clear signal that inflation is quickly becoming a problem in not only the emerging market world but also in the developed economies of the world. Europe is already growing at a very slow pace and if the ECB raises interest rates in April it is likely a signal that a tight monetary policy will be in place resulting in a further slowing of an economy that is just implementing austerity programs in many member countries as they manage their sovereign debt issues. Net result will be a slowing of oil consumption growth (which could be a good thing for the world today).

The third fact in the market place is the high price of oil or better said an oil price surge. Most global economies can more easily absorb a slowly rising oil price environment. However, most economies have a lot of difficulty in absorbing and adjusting to a surge in oil prices like we have seen over the last several weeks. It is inflationary, it is disruptive and it quickly impacts consumer spending which in a country like the US represents about 70% of GDP. If prices continue to rise and stay at post $100/bbl levels for an extended period of time it will quickly begin to take its toll on not just the US economy but on most economies around the world. Although non-dollar denominated countries will not feel the pain of high prices as more quickly as in the US or any dollar pegged economy since the US dollar has continued to decline and is approaching levels not seen since last November. Since oil is sold in cheap dollars... in non-dollar countries/regions (like the EU) they are consuming the oil in a much stronger currency or in essence buying it at a discount versus the dollar.

The high price of oil is already starting to impact buying habits and/or at least potential buying habits. The following chart compares the US average retail gasoline price with daily consumption in the US and the resulting increase in spending on gasoline. As shown in the table the average retail price of gasoline has increased by about $0.37/gallon according to data published by AAA on their website in just the last month. Compared to last year at the same time the US consumer is paying about $0.77/gallon more to fill their tanks or about 28% higher. The surge in prices has translated into the US consumer spending almost $220 million dollars per day more to buy gas than a month ago and $326 million dollars per day more compared to a year ago. That sure looks like it is inflationary and it certainly looks like the consumer is going to begin to pare back spending in other areas as there is only a finite amount of money available in the average consumers discretionary budget.
The above example is only for gasoline. The US consumes over 20 million barrels per day of oil which is quickly working its way through the infrastructure and will show up at some point in the form of higher costs for goods and services that also has to be absorbed by the consumer. So to think that higher prices are not already starting to impact economic growth is not a good assumption. If higher oil prices persist it also raises a question in my mind as to the sustainability of the upward momentum we have seen in the equity markets in the US as well as globally.
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My individual market view is detailed in the table at the beginning of the newsletter. I am maintaining my overall view to be in sync with my bullish bias for all of the reasons I have been discussing over the last week. But again I raise the caution flag that prices are a bit overdone and susceptible to a correction. Any event can trigger a sudden change in the direction of prices as we saw over the yesterday. Be cautious and use tight, trailing stops in your short term trading book. Today is likely to be all about the nonfarm payroll number.

I am maintaining my Nat Gas view at neutral but moved my bias back to cautiously bearish even though I still think the Nat Gas market is still range bound but now that the market has breached another key technical support level it is likely to continue to drift lower in the short term.

Currently oil markets are mostly higher as shown in the EMI Price Board table below.

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Best regards,
Dominick A. Chirichella
dchirichella@mailaec.com