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The Confessions Begin: Goldman, BofA Warn Crude Crash Will Have Negative Impact On GDP, Earnings
"The plunge in oil prices is unambiguously good for the US economy
- Virtually every "pundit" with a business suit, who collected a $200 CNBC appearance in the past 3 months
A week ago we showed that, using Gallup polling data, the crude crush has clearly led to a "spending surge" among US consumers: whereas a year ago all US consumers spent $96 per day, this December, with crude and gasoline prices roughly half off, Americans spent a self-reported whopping, drumroll, $98 per day.
Worse, as is well-known the biggest marginal beneficiary of low gas prices are not wealthy US consumers, for whom the elasticity of gasoline (and crude) prices is irrelevant, but poorer households, those making under $90,000 a year. It is here that the spending spree was an even more unprecedented $1 more, from $84 a year ago to $85.
That's the good news.
The bad news is that contrary to conventional wisdom, as even Bank of America and Goldman now admit, sliding crude prices will have an increasingly more negative impact only not on economic growth but S&P earnings... something we said from day one.
Here is Bank of America becoming increasingly less cheery:
Despite conventional wisdom, investors seem to be on edge, with the 10-year yield below 2% and equities stumbling. Global disinflationary fears are growing, with concerns that the US will not be able to decouple from weakness abroad. And despite the benefits of cheaper gasoline, reports of a recent shale default and cuts to energy capex are putting the focus on downside risks. In our view, those risks are contained.
In our Year Ahead piece, we highlighted the downside risks to the energy patch from falling oil prices. At that time, based on our 2015 oil forecast of $90/bbl, we saw around 0.1%-pts of risk to GDP. But continued declines in the oil price suggest mounting risks. Here, we gauge the downside risk to growth if oil stays at $50/bbl. Already, rig counts have fallen to 1482 in the first week of January from a high of 1609 in October last year (Chart 1), suggesting declines in exploration/drilling outlays.
Although that 8% drop appears modest relative to history (we saw a 60% decline in the 2009 recession), Chart 1 shows that there’s about a four-month lag in the response of rig counts to weaker oil prices, so there’s likely more pain to come. Indeed, our Oil Services team sees a near 15% decline in rig counts in 2015. It’s important to note that the relationship between oil production and rig counts is non-linear. As our Commodity Strategy team points out, early reductions in rigs don’t necessarily imply falling output as operators may initially shift resources to more economic wells, keeping production intact. As prices fall further, the decline in rigs may eventually trigger greater curtailments in production. Thus, we see a notable lag of several months in the response of production to weaker prices.
The good news is that oil and gas extraction accounts for only 1.8% of GDP directly, suggesting a small hit to the overall economy. For example, if energy production were to fall by 10% in 2015 (just shy of the 14% decline in the recession) the decline in production would slice 0.2% off of GDP.
Needless to say, oil is not only 10% lower than the $50/bbl price when this note went to print on Friday, but is about 50% below BofA's 2015 oil forecast. So... what were we talking about again?
And then there is BofA recalling that Investment is a very distinct component of GDP.
With the oil price falling, capital budgets in the energy sector have come under renewed pressure. According to Census Bureau’s Annual Capital Expenditure Survey, roughly 90% of energy capex is allocated to structures investment – namely outlays for exploration and wells. Spending there tracked an annualized rate of $140bn in the first three quarters of 2014, a sum that accounts for a whopping 30% of total non-residential private fixed investment in structures (Chart 2), or about a 1% of GDP.
In our view, there are important downside risks to the outlook for capital spending. Already, a number of energy firms have announced cuts to capital budgets recently, expressing caution in an environment of falling energy prices. If we use history as a guide, there are five notable periods of decline in energy capex since the early-80s coinciding with falling energy prices.
Based on the magnitude of the capital spending decline in response to falling energy prices historically (Table 1), we think that if the oil price in 2015 averages $50/bbl (marking a 50% decline relative to 2014), energy sector capex could fall by 40%. That’s about 1% of downside risk to non-residential structures, all else equal, or a hit of 0.3%-0.4% of GDP.
Or, one could just read what we warned back in November when we explained that the "Imploding Energy Sector Is Responsible For A Third Of S&P 500 Capex." We are happy that Wall Street has finally caught up with what our readers knew 2 months ago.
And then there is Goldman, where the first Mea Culpa came from equity strategist David Kostin who said:
Reduced energy capex will also hurt profits in other industries. In contrast, lower oil is a positive for the US consumer, but likely not enough to offset the Energy sector drag on overall market earnings.
The direct negative effect of lower oil prices on Energy earnings is clear. Energy firms account for 8% of S&P 500 market cap and 11% of earnings, and EPS have a strong historical relationship with the commodity. Given this historical relationship and oil futures prices, Energy earnings are likely to drop by more than 50% year/year in 2015. This fall would result in an S&P 500 earnings drag of roughly $65 billion, or more than $7 of EPS vs. 2014.
Better get that multiple-expansion thesis going then. Oh wait, it was Goldman which two months ago said Multiple Expansion Is Over. Well then...
But it gets worse, because according to Goldman the biggest driver of stock upside in 2014 and also in 2015 - stock buybacks - is about to be punched in the face.
Buybacks are also at risk. Energy accounts for 9% of S&P 500 buybacks, in line with their market cap weight. In the past decade, Energy firms have increased the share volume of repurchases during periods of falling crude prices and stock valuations, but buybacks have nonetheless declined in dollar terms. A decrease in Energy buybacks proportional to the fall in oil would represent a $35 billion headwind to the aggregate $107 billion (+18%) growth we forecast for S&P 500 buybacks in 2015. However, the slow start so far in 2015 is not unusual: January is typically quiet, accounting for just 3% of annual repurchase activity, while February sees double that amount.
In short: dear BofA and Goldman, welcome to the red pill party.
To summarize what we have said since September, here is Bloomberg:
Forecasts for first-quarter profits in the Standard & Poor’s 500 Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut.
Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010. At the same time, volatility has surged in the American stock market as oil’s 55 percent drop since June to below $49 a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults.
One big market risk from lower oil is the prospect that it will freeze energy-related capital spending, according to Savita Subramanian and Dan Suzuki, strategists at Bank of America Corp. Earnings in the S&P 500 may be as much as $6 a share lower than analysts forecast this year should oil stay below $50 a barrel, they estimate.
“Either there is nothing to worry about and crude is going quickly back to $70 plus, or we have entered an earnings down cycle for an appreciable portion of the market,” said Michael Shaoul, who helps oversee $10 billion as chief executive officer of Marketfield Asset Management in New York. “I don’t see much room for a middle ground and I don’t think the winners will cancel out the losers.”
Precisely. And to complete the humorously circle, here is some more delayed comprehension comedy:
“My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now,” Dan Greenhaus, the New York-based chief strategist at BTIG LLC, said in a phone interview. “The whole thing has moved much more rapidly and farther than anyone thought. People were only taking into account consumer spending and there was a sense that falling energy is ubiquitously positive for the U.S., but I’m not convinced.”
Yes, Dan, in retrospect everything is much more obvious. And thank you Dan for finally SHIFT-F7ing "unamobgiously good" and teaching us the übiqutiously positive" synonym. Even if Wall Street's value-added is boosting one's SAT vocabulary, we will take it...
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EXACTLY. The big players who have been short are making this call to close out and to get all retail shorting. UCO in the $7s will be one helluva investment within a year or two.
dan greenhause is an assclown
"My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now"
Obviously might? If something might be true, it isn't obvious. There's no "might" about it; he was obviously wrong.
OIL should find temporary support near these levels, but most assuredly, the trend is still down. Oil is a long way from finding a bottom.
http://www.globaldeflationnews.com/oil-light-sweet-crudeelliott-wave-upd...
"Global disinflationary fears..."
Disinflation, negative inflation, etc. I think he means deflation.
I think disinflation is a decent term. The whipsaw that was inflation and now is deflation will be seen by history as the worst thing monetary policy could have done to the economy. It's like building a house on a shore that is known for tsunamis: first the inflation levels infrustructure, then the deflation has everyone wade through the rubble shirtless and shoeless.
Japanese Tsunami 2011 -
https://www.youtube.com/watch?v=j0YOXVlPUu4
Europe to anounce 20% of QE will consist of building a strategic patrolium reserve for all of Europe, they will be dollar cost averaging into the market.
Draghi says, "Pigs can fly, and so will Europe!" Promises hookers for all unemployed workers ages 18-35.
But they ALREADY count hookers as part of the GDP!
Don't blame the OIL on GDP drop, blame the fucking weather.
So what person in their right mind would pay Goldman anything for their terrible forecasts?? They had forecast $90 a barrel oil and now cut it to $41 a barrel? If I was anywhere near that far off in my job as an analyst I would be long gone!
"I man went to the doctor and he gave him 6 months to live.... he couldn't pay his bill, so he gave him another 6 months!" - Henny Youngman
Oily karma is catching up with Kissinger:
http://www.politico.com/story/2015/01/henry-kissinger-fracture-shoulder-114176.html
Was that due to a pushup contest with Reid?
Or maybe a 'friendly' boxing round with Putin....
Actually, I'm buying and this just strengthens my resolve, particularly when GS AND Cramer get bearish. We just need taxi drivers to start telling us to short crude and we'll have the most predictive triumvirate ever assembled....
Two dollars more per day sounds like inflation to me.
Lower crude prices are good news for all, except some oil reserve owners and marginal cost drillers/frackers. The macro impact is positive. Does SA really think they can be the last supplier standing at $40/barrel? Sounds like a going-out-of-business sale to me. Even if they're that punch-drunk, it can't last more than a few years. Is this a conspiracy with the US government and Fed promising to make up SA losses for a year or three? Possibly. If they too think that even the short-term effects are net positive. Or, Obama might back it because it hurts frackers, and in his green brain he thinks that's good - even though cheap oil means more will be burned, not less, Obama don't really do math y'know.
This price crash is disruptive but it's a good thing overall, even the oil majors can probably increase their upstream margins.
Here is the Baltic Dry Index:
http://www.bloomberg.com/quote/BDIY:IND/chart
It has been forecasting a declining world economy since the beginning of 2014, long before the drop in world oil prices. The index is now in the crapper, so how low can we go?
Thank You.
This shit helps keep me sane.
OMG these poor energy execs might have to stop issuing debt to buy back and inflate their stock $$. Oh the fucking CALAMITY. AHhhhhhhhhhhh.
BULLISH !
bad news always is good news.
I'm thinking the markets will end the day green! Just sayin....the levitation from the opening 30 minutes has been ongoing for the last couple of hours...
UAE Energy Minister says current oil prices are unsustainanle and unreasonable. Either OPEC is starting to crack, or Goldman and JPM have completed their switch from oil bears to oil bulls. The rest of the week should be interesting to see who is going to release the algo-driving headlines.
Having learned their lesson from 2008, OPEC has quietly led a drive to replace glass mayonnaise jars with plastic ones. Plastic mayonnaise jars are not suitable for storing oil and gasoline, thus denying the American consumer the chance to take advantage of low oil and gasoline prices by using those plastic containers for storage.
Maybe Tyler has a reading comprehension problem, but BOA does not say that falling oil prices will have a negative impact on GDP. They say that that there will be a hit from extraction and capex. It doesn't say what the net imapct would be.
you fn guiys keep going on about deflation. there is no deflation. energy costs are not counted on the inflation/deflation side of the data. energy costs are counted on the fantasy account side of the ledger that every family spends more than half of their disposable income on every month, food and energy.
no worries.
to be fair, you have to give credit to those who said(me) that the money would only transfer to an expenditure with a better multiplier(walmart). i was right by more than 2% per 100 dollars spent. i could have leveraged that 40 times with money that cost nothing for 6 month trade that would save the navajo tribe. the wonderful world of qe.
Whistleblowers are lining up. The all work for the big banks and see a huge payday for reporting on the crimes of the banksters. SEC and DOJ are interviewing all week long. Expect some "nail gun" accidents soon!
Bank of America? Fuck you, you stupid, lying, incompetent suits!
Nationstar Mortgage, LLC? Fuck you too! No wonder insiders are selling their stock, it is dropping like a rock because...oh, yeah, YOU folks have more than one person who is spilling the beans on the fact that Nationstar is...JUST LIKE OCWEN and we know how that is turning out.
Bank "advisors"? If they say it is raining it means they are pissing on your shoes.
So bank bailouts and nasty inflations are good after all!!!
Que surprise!
ZH approved!
Workers of the world unite!
This place really has taken the hypocritical oath.
Any savings on gas are going towards Obamascam payments.
Would the Saudis and zionist bankers team up to crush Western oil and buy the dip?
Would the Russians join them?
What is the historical record for oil prices during world wars?
I haven't seen any major oil facilities tken out by any party, why?
Are they all on the same team?
How much of US oil is actually owned by Saudis and Russians?
GDP is a totally bogus, meaningless number, the primary importance of which is derived from the number of people who treat it as important. It's like we're living in a Dr. Seuss book.
What I see on the chart:
2013Dec $174 vs 2014Dec $177
2013Dec $084 vs 2014Dec $085
We all know people behave (and spend) differently during different months, so the above is the only potentially meaningful comparison... and the increases are LESS than real inflation, and probably LESS than imprecision in the measuring technique.
This article could also support a reason why Credit Card Companies are now offering 1 year free credit or rewards points or other lower percentage Interest rates.
- It is time for a Credit Card Battle, Credit War
We ship everything either by air, rail or truck, or all three. If fuel prices go down it would seem costs are reduced all along the retail chain. Why is this not happening? It isn't the $20 a week you save on gas, but shouldn't everything be less costly? It sure works the other way around - if fuel prices go up so do prices.
Great time to hike bonuses!
Oh, man. Get out of the big cities before you get fried!!!
Who is the lucky banker that's get to buy the assets of these near bankrupt shale companies for pennies on the dollar?
Profits Profits Profits!!!
Beware of false Profits!!!
Why is this author saying spending only went up $1 in the last year even though oil prices dropped?
Cutting oil prices doesn't give a person more money to spend overall, it just means that they don't have to spend so much on gasoline and can spend it on something they like instead. Duh!
Huge numbers out of China on oil and iron ore imports. Hard to imagine a global glut when China imports 20% MOAR oil in December than in November!
But their iron ore and coal imports are way down.
Stop the alligator tears Goldman. We warned you twice, you continued to vote for this worthless nigger. One whiff that you need a bailout. I think you’ll understand the outcome. Lloyd Blankfein, I don’t care if you think you’re the best thing to sliced bread. You don’t make the calls. The job assigned objectives, clean up the mess. A broom and dogshit shovel is your daily operational responsibilities as CEO of Goldman Sachs. Suck it up, and wake up to reality.
BofA - "In our view those risks are contained"
They sure are. The Fed will fix it.
QE 4 will consist of buying oil and burning it
$44 handle
$10, enjoy hummer!
44.88 wow. and a great big flag to take it down to 44.50. bond yields will crash here soon. other commodities are all crashing. ol t boone might have a point. hard to get a real handle on where this is heading of course stalks are heading for all time highs. hard to understand if all that margin call money is going back into equities. i understand the t-bill play.
About as meaningful as their fucking swirlagram.
Expensive crude oil is bad and cheap crude oil is bad too? You guys are really doomers, aren't you?
Cheap crude oil means more money in workers pockets, end of story. And that's a good news.
Typically wealth is accumulated faster by rich people; now, thank's to cheaper crude oil, this negative trend has been weakened.
Ignorance is bliss...
absolutely, more bullshit propaganda telling us how good $100/barrel oil is for the economy. ESAD bankers.
"In our view, these costs are contained."
Here we go again...
May 17, 2007, Ben Bernanke: "The subprime mess is grave but largely contained."
Bernanke Believes Housing Mess Contained - Forbes