12/22/10   Taxes Drive Oil Inventory Down

Editor’s Corner

Investor Heat Map 12/22/10

Taxes Drive Oil Inventory Down

Ron Rowland

Which way is the economy headed?  Today the Commerce Department issued the final revision to its third quarter Gross Domestic Product report.  Last month’s official estimate had GDP growth at 2.8%.  Today that figure came down to 2.5%.  This was a much bigger drop than the Bloomberg News survey of economists had expected.  This news, combined with weak employment, inflation, and other economic indicators suggests that growth is still sluggish at best.

On the other hand, why are crude oil prices surging if the economy is stuck in slow motion?  Crude hit a two-year high today above $90 a barrel as energy stockpiles fell much more than expected.  Some news reports characterized the energy action as a sign of economic strength.  An opposing view is to acknowledge that most of the drawdown was in facilities along the Gulf Coast where local property taxes are based on year-end value.  The industry is fully aware of this cost and intentionally minimizes oil in storage in order to minimize tax liabilities.  Supplies actually rose in other places like Cushing, Oklahoma, where inventory was at the highest level since August. 

Taking oil out of the picture leaves a more sanguine forecast.  Economic recovery is slow, and what little we do see is probably a temporary effect of a Federal Reserve money-pumping operation.  Economists who boosted their fourth-quarter forecasts based on good retail sales may have to make some revisions of their own once the holiday cheer fades away.

None of this kept stocks from continuing to rally.  In the S&P 500, all the trend indicators are bullish and the index is on track to record a double-digit gain for the year.  Treasury bonds continued to fall, though there was a small bounce in the last few days.  The ten-year Treasury yield rose as high as 3.56% on December 16 and ended today at 3.35%.  Long-term interest rates have jumped a full percentage point in only two months.  The U.S. Dollar Index was also firm even as long-term trends pointed down for the world’s reserve currency.  This too may be a calendar-related event as institutions try to adjust their balance sheets to meet year-end targets.  Gold was also resilient, and the long-awaited major correction has yet to materialize.


The top 70% of the sector rankings were unchanged this week.  The only movement was in the laggards as the defensive trio did some minor reshuffling.  Health Care moved ahead of Consumer Staples, helped by gains in biotechnology and medical equipment stocks.  Materials kept its hold on the top spot with strong commodity prices providing support.  Energy, the other commodity-related sector, held the #2 spot as crude oil moved over $90 and many analysts predicted $100 oil soon.  Industrials remained strong, buttressed by the recent Industrial Production report which was up 5.4% from a year ago.  Capacity utilization, however, is still well below its historical average.  Fourth-place sector Consumer Discretionary was boosted by higher auto sales.


You have to look very close to see any changes in our Style rankings this week.  Large Cap Growth and Mid Cap Value exchanged places with Mid Cap Value gaining a slight upper hand this week.  All the other Style groups kept their same relative positions with Small Cap Growth still in the lead.  With the market still favoring small caps over large caps and growth over value, this is no great surprise.  Mega Caps are still on the bottom of the list as this relatively risk-averse category gets no respect in the current rally.


This week we have quantitative proof that America really is #1.  The U.S. took over the premier spot in the Global ratings as Japan and World Equity pushed Canada out of the way.  The world’s two largest stock markets now occupy the top.  Since the U.S. and Japan together represent a majority of the world’s market capitalization, the cap-weighted World Equity benchmark naturally rose with them.  Similarly, the dominance of Japan in the EAFE index helped pull that category higher in the rankings despite continued weakness in Europe.  The European Union is in danger of slipping back into a downtrend, but for the moment China’s negative trend – and last-place position – remains unchallenged.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“I am not really concerned about deflation…Inflation is not in a bad place right now. Low inflation is not a bad thing.”

Philadelphia Fed president Charles Plosser


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