An Economic Bright Spot?:

According to Wikipedia, Americans consumed 138 billion gallons of gasoline in 2006. Now that gas is down about $2 a gallon, that puts $276 billion extra in the hands of consumers relative to what was expected earlier this year. Combine that with reductions in the price of home heating oil, plus reductions in the price of other imported commodities, and the benefit to consumers dwarfs the $150 billion stimulus package enacted earlier this year, which had the downside of coming out of the U.S. Treasury. Meanwhile, 10 year Treasury bonds are yielding under 3.4%, a potential boon for people looking to take out mortgages or refinance. (I read somewhere that the S&P 500 is now yielding more than the 10 year T-bill for the first time in many, many years; probably a great buy signal for stocks for those with courage and a long-term perspective.)

That doesn't mean that all the doom and gloom is wrong. But the declines noted above are a bright spot, at least for the U.S. economy.

Jestak (mail):
David, you need to do a little tweaking with your measurements or wording here; right now you're multiplying dollars-per-barrel by gallons, which doesn't compute.
11.19.2008 5:18pm
note also ( i say as a frequent commodities trader), that the commodities, specifically the grains, have also seen their bubble pop.

corn and soy have pulled back hy000ge, which means cheaper food prices for consumers. the retail foods tend to be a little sticky vis a vis the commodities trends, but the correlation is still there.

"stuff" in general is cheap. it's a buyer's market.

real estate (in many areas) has seen a return to something approaching value (still waiting for greater seattle area to show more weakness though), stocks are seeing some decent valuations if you seek value, commodities have pulled back, and interest rates are low.

i LOVE this market.
11.19.2008 5:18pm
DavidBernstein (mail):
J. Huh? Gas prices, from media reports today, are down 50% from the highs. Oil prices are down more sharply, but because taxes and other costs like refining are fixed, it doesn't result in as sharp a decrease in prices at the pump. Regular gas was over $4.00 a gallon. It's now around $2.00 a gallon. A $2 savings, multiplied by the total number of gallons consumed.
11.19.2008 5:24pm
CDU (mail) (www):
David, you say:

"Now that gas is down about $2 a barrel"

When what I think you mean is gas is down #2 a gallon.
11.19.2008 5:26pm
CDU (mail) (www):
And, of course what I meant was $2, not #2.
11.19.2008 5:27pm
Dave Ruddell (mail):

When what I think you mean is gas is down #2 a gallon.

Wait, you can now get a gallon of gas for a #2 pencil? /smartass
11.19.2008 5:28pm
delurking (mail):
As long as everyone is smartassing all over the place,
138 * 2 = 276. And I did it in my head. So there. Morans.
11.19.2008 5:37pm
DavidBernstein (mail):
Thanks for correcting my typos. No thanks for the smartassedness.
11.19.2008 5:40pm
I read somewhere that the S&P 500 is now yielding more than the 10 year T-bill for the first time in many, many years; probably a great buy signal for stocks for those with courage and a long-term perspective.
Now that we've gotten our first math exercise out of the way, would somebody care to walk me thru the math behind this assertion?

Or has demand for the 10-year T-bill gotten so high that people are paying so far over face value that it leads to a negative yield? I'm admittedly a pinhead, but that's the only way I can see the statement being correct, given where the S&P 500 has gone this fall.
11.19.2008 6:12pm
DavidBernstein (mail):
S&P yield equals dividend yield, not "return." In other words, if you buy a 10K t-bill and hold it for 10 years, you get 3.4% a year interest. If you hold 10K of an S&P fund like SPY, you get 3.6% a year in dividends, taxed at a lower rate than the interest. So, implicitly, investors are either expecting the S&P stocks to go down over 10 years, the dividend yields to decrease, or some combination that would lead to less than a 3.4% annual return, minus the tax advantages.
11.19.2008 6:22pm
zippy, i'm not sure what your question is, but I'll try to explain (i only rarely trade bonds, and never t-bills, but keep an eye on them nonetheless).

the t-bill does not have a negative yield. otoh, when traders bid up the price, the yield correspondingly goes down.

note that the bond markets (notes, bonds, etc.) is MUCH larger than the stock market(s). most people would think otherwise.

the obvious difference between notes/bonds etc. and stocks (in regards to yield) is that the former are "guaranteed" but not the latter.

distressed companies can lower their dividends (yield) but unless the entire govt. implodes and the US govt. doesn't honor it's bonds/notes, they are guaranteed.

what i think you are failing to understand is that - ceteris paribus - as stock prices fall, yield goes up.

this is true for individual stocks, and for an index. the s&p happens to be a cap weighted index.

the OPPOSITE is true with bonds. as bond prices go UP, yield goes down.

look at an individual stocks. assume that stock ABC pays a .25 dividend 4 times/year

it's stock price is $50

that would be a 2% yield (.25*4)/50

you are getting $1 for every $50 (one share) you buy/yr

however, if ABC stock goes to 25, you get a 4% yield.

(.25*4)/25 = your 4% yield.

so, in this market, where stock prices have been crushed (dow was 14k+ not too long ago. is now about 8k), yields have gone up. it's an inverse relationship.

one thing value investors look at is P/E. another is yield (of the S&P).

this is a contrarian indicator. iow, "buy when there is blood on the streets" not a momo (momentum) indicator, where people chase trends.

fwiw, as a longterm investment vehicle, you can use SPY, the ETF for the S&P 500 to buy the S&P.

i greatly prefer the RSP, which is the equal weighted (vs. cap weighted) S&P 500.

i could give a 10 page dissertation on WHY, but I'll leave it at that.
11.19.2008 6:28pm
btw, forgot to add there are many investment strategies that take into account relative yields to attempt to buy value.

one method (which i use in one of my accounts) is the 'dogs of the dow' method. there are several variations of the dogs of the dow, but the basic methodology is to periodically (set period) assess what are the dow stocks that have taken the biggest "hit" so to speak and buy them. one metric to use is yield, when using dogs of the dow.

historically, dogs of the dow is a contrarian and value strategy.

it has also outperformed the classic dow by ~3% per annum (last 30 yrs of data).

of course past performance is no predictor of future results bla bla bla
11.19.2008 6:36pm
Taking this one step further, what would happen if we started drilling here to produce enough oil to bring imports down to zero? (For the purpose of argument only, we'll assume the dubious proposition that we can't drill enough to change the price.) That would mean an additional 196 billion dollars ($276 x 70%) would stay in the US instead of going to other countries, most of which do not have our best interests at heart. In addition, that's lots of new high-paying jobs and income tax revenues to the governments at all levels.

We can do this environmentally safely now. Why aren't we?
11.19.2008 6:56pm
Now Bernstein is offering economic blogging? Next he's going to claim that he foresaw that the housing bubble was unsustainable and would eventually collapse.
11.19.2008 7:12pm
Eli Rabett (www):
As Krugman said on Sunday, the reason there was no capital investment during the depression was that there was no demand and lots of idle factories. The same problem is what has driven the cost of oil down. If demand picks up the price of oil will follow. This is pretty much the sort of push pull trap that Japan has been in for years.
11.19.2008 7:26pm
the usage in 2008 is significantly lower than what it was in 2006, hence the actual gallons as well as $ saved should be a bit smaller than Prof. B's numbers. but his basic point stands.
11.19.2008 7:28pm

Now Bernstein is offering economic blogging? Next he's going to claim that he foresaw that the housing bubble was unsustainable and would eventually collapse.

anybody with a brain saw the housing bubble was unsustainable and was going to collapse.



the operative questions are when, how much, and for how long.


the scariest words in investing are when you hear "it's different this time"

sorry. it isn't.

bubbles have occurred for as long as capital markets have existed - tulips, gold, oil, sugar, coffee, salt, stocks (many times), etc.

my two favorite bubble signs were

1) CNBC interviewing a real estate investor in miami, who claimed "you can't lose" and that all you have to do in real estate is buy, then sell 6 months later for guaranteed profit

2) CNBC interviewing two vegas strippers who were now rich real estate flippers. seriously.

i have a coworker who claimed that "seattle is different" and that our real estate market would NEVER pull back. it might stabilize and be stagnant, but "it's different here".

this was about 6 months before...

wait for it...

seattle real estate started dropping

plus ca change d00d
11.19.2008 8:20pm
... tulips?

11.20.2008 1:45am