- - Thursday, February 23, 2012


For what was expected to be a short and relatively quiet week in the capital markets, given a light economic data calendar, this past week has been anything but short or quiet.

Over the holiday weekend, Iran cut off oil exports to Britain and France, and that vaulted U.S. crude for April delivery nearly 2 percent to $105.08 per barrel, a nine-month high. Despite progress on the Greek bailout, some of the eurozone’s largest banks revealed billions of euros lost through write-downs on Greek loans. Greece’s latest rescue includes a debt swap with private bondholders who will forgo 53.5 percent of their principal by swapping new debt for old.

Sticking with Europe, the European Commission shared its view that the eurozone economy will fall back into recession and contract 0.3 percent overall in 2012. This is a reversal from its November forecast that called the 17-nation eurozone economy to expand a meager 0.5 percent this year.

In addition to expected contractions in Greece and Portugal, the negative revision reflects expected contractions in Belgium, Spain, Italy, Cyprus, the Netherlands and Slovenia, which is offset to some degree by meager growth in Germany and France in the coming months.

Also this week, Obama administration unveiled a plan to cut the top corporate tax rate from 35 percent to 28 percent and includes steps to simplify the tax code as it eliminates a number of loopholes. The plan, however, does continue preferential treatment. One easy example: Tax breaks afforded manufacturers would cap their rate at 25 percent, while other companies would pay the aforementioned 28 percent. Still, 28 percent remains more than the 25.5 percent average rate for the 34 countries that comprise the Organization for Economic Cooperation and Development.

Despite all of the above this week, one of the key concerns on most minds — from the consumer to the TV pundit — has been the rise in domestic gas prices, which are already 13 percent higher vs. year ago levels according to AAA’s Daily Fuel Gauge Report, and poised to go higher in the coming months.

Last year, gas prices averaged $3.50 per gallon and the typical American household spent $4,155 filling up at the pump, or 8.4 percent of what the median family made. That 8.4 percent was the highest percentage since 1981 and compares to 4.8 percent in 2009 according to the Department of Labor.

In early February, before the current issues with Iran mentioned above, the U.S. Energy Information Administration called for gas prices to average $3.55 per gallon this year before rising to $3.59 in 2013. Considering the national average for gas is currently $3.52 per gallon according to EIA data, odds are it will bump up its outlook when it releases its next update March 6.

No matter how you slice it, rising gas prices will have a direct impact on consumer wallets at the pump, as well as indirect effects as prices for goods and services, including food, move higher in the coming months owing to higher fuel costs. With unemployment still high and wage growth constrained, that means consumers will once again be looking for ways to stretch their spending dollars, and businesses will need to be content with a higher cost structure.

In 2008 and 2009, increasingly frugal consumers opted to eat at home in order to balance their budgets. With gas prices and food prices set to rise in the coming months, I suspect we will once again see consumers looking for ways to make ends meet. In my mind, that means a shift toward vendors that offer greater value per dollar, such as Costco Wholesale, Marshalls and T.J.Maxx, over premium vendors. This also means recent traffic gains by casual dining restaurants, such as Red Robin Gourmet Burgers, the Cheesecake Factory and others, could be vulnerable.

Chris Versace is editor of the PowerTrend Brief and PowerTrend Profits newsletters. Visit them at ChrisVersace.com or follow him on Twitter @chrisjversace. At the time of publication, Mr. Versace had no positions in companies mentioned; however, positions can change.

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