But the oil-price crash was supposed to goose consumer spending.
The price of oil continues to crash relentlessly. WTI trades at $49.80 as I’m writing this on Monday after hours, down 5.5% for the day, and down 54% since June 2014.
The oil-price plunge is eating into the American oil boom, munching on income statements and balance sheets of drillers that have gorged on junk debt. It’s chewing up junk bonds and leveraged loans. It’s frying oil and gas stocks. It’s starting to wreak havoc among suppliers to the industry. Layoffs are starting to cascade across the oil patch, company by company, as capital expenditures and operating expenses get slashed in an effort to stay liquid long enough to make it through the oil bust.
Oil busts are terrible creatures in oil and gas states, such as Texas, Oklahoma, or North Dakota. The last one persisted for a long time. It took down banks, housing, restaurants, oil-field equipment manufactures and their suppliers, grocery stores…. Pickup truck sales plummeted, boat sales dried up. Jewelry stores fell on hard times.
This time, it’s different. Fracking is immensely capital intensive. Wall Street is up to its ears in it. Hedge funds and private equity firms will join banks in taking the hits on their equity stakes and on the debt they hold.
But forget that. What we’re inundated with is the tsunami of benefits of lower oil prices. Airlines make extra billions by offering the same crummy service without lowering airfares, though their fuel costs drop. Utilities come out ahead for similar reasons. Toll road operators will be able to raise tolls and extract more money from drivers who’re sitting on what they’ve saved at the pump, according to Wells Fargo. It expects airports to shine, “specifically large international gateway airports with significant cargo operations.” Because consumers will buy more imported stuff with money they saved on gasoline. Alas, much of that gasoline is an entirely American-made product all along the chain, from the technology required to extract crude to the gallon of regular dispensed by a machine.
Whatever money consumers save on gas lowers the consumer-spending component of GDP. If consumers spend all this money on something else, consumer spending stays flat. It just gets shifted around. But many people won’t spend the money on other things. That this equation doesn’t compute, though consumers like it, is clear [This Is Why the Oil-Price Crash Will Maul the US Economy].
And it’s starting to show up in the corporate numbers.
Based on exuberant consumers, overjoyed by what they saved on gas, the Consumer Discretionary sector of the S&P 500 should be regaling investors with positive revenue and EPS guidance for Q4. But the opposite is happening.
Of the Consumer Discretionary companies in the S&P 500 that have issued any guidance for Q4, 24 have issued negative EPS guidance, according to FactSet. That’s 89%! It’s the worst in the data series going back to 2006. It’s 73% above the 5-year average. Even during the Financial Crisis, it wasn’t this bad.
However, the prior record of 22 wasn’t set during the Financial Crisis. It happened in Q1 and Q2 last year when polar vortices and a variety of other issues were blamed.
Only 11% – or 3 companies – issued positive guidance, tied for worst place with Q1 2006, when the housing market was “plateauing.” Then there’s the nagging fact that 10 of these companies have issued negative revenue guidance, with only 1 company issuing positive revenue guidance.
The Consumer Staples sector was even worse: of the 5 companies in the S&P 500 that issued guidance for Q4, all of them were negative.
But there’s more to it. The chart below by FactSet shows the corporate manipulation of the hype-mongers on Wall Street, with the goal of bringing down the estimates so that the adjusted, pro-forma, non-GAAP, ex-items EPS numbers, this great American fiction, can beat the lowered estimates. The charade makes sense from a corporate perspective in this crazy market that, according to FactSet, “has rewarded companies issuing positive EPS guidance more than average and punished companies issuing negative EPS guidance less than average.”
Quarter after quarter, negative guidance rose while positive guidance dropped. And in Q4, they’ve gotten completely out of whack, a quarter when the hoped-for boost provided by lower gasoline prices disappeared in a reality where consumers are being wrung dry by economic growth that is happening somewhere else, but not in their wallets.
Of the 24 Consumer Discretionary companies in the S&P 500 that have issued negative EPS guidance, 13 are in retail, with Specialty Retail accounting for 8 of them.
FactSet calls the missing boost to earnings and revenues “surprising.” Seven of the 24 Consumer Discretionary companies that issued negative guidance “specifically discussed lower oil and gas prices,” and they had seen either “no positive impact to date, or that the positive impact was being offset by other negative factors.”
Ross Stores explained its lower guidance this way:
There are so many other factors, some good like the decline in unemployment rates or the anniversary of cuts in government programs, but some bad factors as well like the increase in part-time work or the lack of wage growth for low income workers. [….] So we really don’t know to what degree gas prices helped or to what degree they’ll help going forward.
Dollar Tree commented on the potential for reduced trucking costs due to lower diesel prices: “But it has to move quite a bit to have a significant effect on the overall cost because the fuel is just one component of the overall trucking rate that we end up paying.”
Target saw “some encouraging signs, including lower gas prices,” but spending by consumers remain “quite volatile.” It blamed the promotional nature of “the competitive environment.”
Macy’s also saw some “positive factors,” such as “lower gas prices, lower unemployment, and healthy financial markets,” that is soaring stocks. But then there’s the “reality of the recent trend caused in part by customers spending more of their disposable dollars on categories we don’t sell, like cars, healthcare, electronics, and home improvement.”
Royal Caribbean Cruises blamed the strong dollar, whose negative impact on earnings was only “partially offset by reduced fuel prices.”
Lower fuel prices just couldn’t compensate for the other issues they were facing: 9 mentioned higher costs – vexing inflation that doesn’t officially exist; 8 blamed the strong dollar, though it would lower costs; 3 blamed sales, which is a hard thing to admit to, and 3 blamed the old standby, competition and higher promotional costs.
Retail prices of gasoline have fallen by an average of $1.12 a gallon from a year ago, according to the EIA. And this is how it gooses consumer spending and cranks up the economy? Some sectors are making more money, such as airlines, because their costs are going down, not because consumers save so much money that they’re flying more. If consumers spend more overall, it will be for other reasons. And those other reasons, as the retailers have pointed out, might crumble in face of the numerous negatives consumers are still facing.
But those would be the lucky ones, not in the oil and gas business, not living and working in the oil patch, where the oil-price collapse and financial engineering are coagulating into a toxic mix. Read… Oil-Bust Contagion Hits Hedge Funds, Supplier Layoffs Begin
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Excellent article, Wolf!
There is one point I didn’t see about airlines, utilities and transportation company fuel costs.
All of those companies hedge their fuel costs to some extent. So, the amount of their cost savings, if any, depends on the percentage of fuel purchased at the hedged price vs. the percentage purchased at a currently lower spot price, and also the duration of the hedge contract.
True. The big unknown. But we’ll eventually find out, at least partially.
Investment stops in the shale Ponzi scheme killing off jobs in that sector.
The drop in oil price has virtually no impact on consumer spending (because everyone is flat broke already and already massively over-stretched).
In the past, the drop in the price of oil would spur growth. But no longer because oil at even 40 or 50 bucks is still too expensive.
Richard Heinberg had it right when he entitled his energy-related book The End of Growth.
All that remains in terms of our fast vaporizing civilization (that was build on easily extractable energy) is for the fat lady to sing.
Oil exploration costs rocket as risks rise
Finding oil and gas to replace the world’s fast dwindling reserves is increasingly risky as rigs probe areas once seen as too difficult or too dangerous, and costs are rocketing, which could imperil future supply.
The cost of discovering each new barrel of oil and gas has risen three-fold over the last decade as technology has pushed the frontiers of exploration into ever more remote areas.
As old fields run dry, oil companies are drilling wells in some of the most inhospitable regions, where political, physical, geological, geographical, technical and contractual risks are high, and they have had remarkable success.
Note the date of that article… oil was closer to $100 a barrel at the time. Imagine what $50 oil is doing to bottom lines and capex.
We will NEVER run out of oil. What will happen is the cost to extract what remains is too high for the economy to deal with, so we will collapse, and what oil is in the ground at that time, will remain in the ground. Forever.
The fat lady started singing in 2008-2009, but she was quickly washed out to sea by “Benocchio” Bernanke’s wave of counterfeit electronic money-printing.
Most people have assumed she drowned. But I think that after 6 long years, the fat lady has finally swum back to shore, donned her blue bikini, and is now sunbathing on the beach, gorging on Hostess HoHos to build up her strength. My sense is that she’s getting ready to start singing again.
This time though, I think the Central Banksters may have run out of tricks. They’re already at a zero interest rate. I doubt they could get away with negative interest rates for very long, while “moar” money-printing would run the risk of obliterating what’s left of the middle class, not to mention destroying whole sectors of the economy such as life insurance and annuities.
This could get interesting very quickly. I think it might be time to stock up on popcorn and watch the show.
Got a big giggle out of this, thanks Bob.
Hard times cause people to alter their behavior. My grandparents were forced to live frugally and frankly many people of that generation were all waiting for the other shoe to drop and never trusted the banks again. I grew up with those lectures. All the gas price is doing right now is letting people breathe a little easier for a while. Maybe for a while they won’t run out of money before they run out of month. I stopped at the Verizon kiosk at the Flying J to get an idea of what a new I-phone would set me back. The young man told me I could upgrade to a newer Droid for free. He grudgingly quoted me a price but kept arguing that the droid would be faster etc. completely missing the point that I don’t WANT to learn a new operating system or pay for new chargers and a case for a phone I DONT WANT. I decided my venerable I-phone 4 will last a bit longer, and that it’s fast enough do my purposes. Not that long ago I might have made the jump but now not so much. With uncertain times I imagine I’m not alone in my thinking as the lack of increased business underscores this.
There may also be less savings at the gas pump because cars are substantially more efficient now.
Except that most consumers are driving old cars with lousy mileage. From NBC news: “A new study shows the average age of cars and trucks in America has hit a new all-time high of 11.4 years…16-year-old cars and trucks make up 21.1 percent of vehicles in the U.S. (that’s 53.3 million).”
Only 25% of the population is buying a new car while younger people can’t afford a car or the insurance. The article doesn’t explain that the rest of the people are doing (walking? public transportation? bikes?).
And just because I’m saving $20 in gasoline doesn’t mean squat when my prescriptions cost $150 and groceries are $100.
I agree with Julian. Consumers are completely up to their necks in debt and are going to use an savings to repair their balance sheets.
Last month was”synergies in the oil drill bit merger in TX. today it gets better! way way better! U S Steel just announced it is laying off 614 at the tube steel plant in Lorain OH and another 142 in Tx . These plants if memory serves me correctly all make steel related to oil rig drilling for nat gas and oil. Am I correct here people?
I wasn’t driving or shopping much to begin with. The savings from gas the last couple of months bought me two pizzas with extra cheese.
1) let me say that the experts who try to make sense of our perverted economic system should not be known as analysts or economists,…..henceforth they should be called “financial alchemists”,people seeking impossible answers that can’t be found through objective reasoning!There is very little that is logical in our manipulated economy.
2)We can become lost in the graphs & charts with all sorts of issues & ideas.The difficult problem is to pull the few really relevant issues & separate them from the secondary concerns.
A) The oil component is just one very large card in a house of cards,pull that card away & the whole house of cards collapses.I believe that the Saudis didn’t drop their oil prices to sink their competitors, they did it to attack their mortal enemies in Iran & Russia.A nuclear Iran,given the go ahead by Washington, was something that the Sunni Arabs considered a mortal threat to their very existence.The financial problems they were causing was considered collateral damage.
B) Regardless of what caused the Saudis to cut their prices,that cut is causing financial chaos!
Why can’t this problem be considered an economic bubble brought on by mostly political considerations on the part of Saudi Arabia?A politically caused economic crisis,…….a Black Swan event that was not anticipated by the hustlers & speculators in the financial & commodities sectors.These people are way over leveraged & their positions are getting killed.Am I supposed to feel bad for them? The argument is that the public will get hurt if the financial elites take big losses.That may be so,but these paper billionaires are going to eat us up alive anyway if allowed to continue to”wheel & deal”risk free.
If the price of oil was brought down this far I assume that at this lower price Saudi Arabia is still making a profit.If this is so & if we are in a supposedly free & competitive market,why wasn’t oil subject to market forces to begin with,…. how was it manipulated so high in order to brought down so low?
If all this is true then the price of oil was artificially created”bubble price”which is now in a politically induced correction to price discovery.Further,if the above is true then all of the leveraged investments in the oil sector were malinvestments made with cheap credit.If this market was not in a manipulated bubble these investments would not be failing because in a normal & free market they would not have been made to begin with!
If this is a huge financial correction in energy,what will it be like when other segments of our “economy on steroids” hit the wall & also go into financial correction? How many big business’s will survive “price discovery”,most have business models which cannot survive a new & reduced price structure that will be forced upon them!
Add to this the fact that most of this paper wealth is leveraged & non existent in the real world the only
outcome must be massive financial default!
Your logic is impeccable, Retired. Therefore it will be ignored and you’ll be called names! But never fear — I APPRECIATE IT. So will others you will never know are there. It’s fun being a catalyst. Or a curmudgeon. Or a coin stacker, gold bug, tin foil hat…
Wanted to add that this isn’t just about oil, the entire commodities complex has crashed over 50%. Everything from iron ore to coffee is down hard. What we have on our hands is a deflationary spiral that will end with the complete destruction of quadrillions of paper wealth destroyed.
Oh, don’t think there are quadrillions of wealth? Surely there is, just not all officially accounted for.
That Ross is blaming a poor outlook on the proliferation of part-time work and crappy wages is hilarious. According to its most recent 10K: “As of February 1, 2014, we had approximately 66,300 total employees, including an estimated 48,900 part-time employees. Additionally, we hire temporary employees especially during the peak seasons.” Glassdoor.com estimates that Ross sales associates make a princely hourly wage of $8.09. Ross spends almost $6 million more compensating its five “key executives’ than it does on employee benefits. Half-billion-dollar annual stock buybacks keep the dollars flowing to the top five.
Totally agree. Hilarious and sad. They’re all doing it. And then they can’t figure out why people don’t buy enough of their merchandise.