Weird Weakness In Key Economic Indicator

The weak payroll numbers out this Friday (according to the government, nonfarm payrolls added 120,000 new jobs in March, down from 240,000 jobs added in February and below consensus expectations of 200,000) echo a disturbing trend I’ve been seeing lately in another key economic indicator. The U.S. Energy Information Administration (EIA) U.S. Total Gasoline Retail Sales By Refiners has fallen off a cliff from 40.3 million gallons per day (MGD) in January 2011 to 28.4 MGD in January 2012 (the last available data) — the lowest monthly number ever in the data series, which began in January 1983.  On the surface, the weakness in this number seems to imply significant economic weakness in the United States. However, it is unclear how much of the decline is related to cutbacks at the ConocoPhillips, Sunoco and HOVENSA refineries ahead of threatened permanent closures of these refineries (due to claims of unprofitability and economic unsustainability). The fast rising crack spread –the difference in price between gasoline and crude oil — seems to imply a gasoline supply issue (too little supply) rather than a lack of demand.

Should the crack spread continue to expand, Western Refining (WNR) should benefit. They refine and market crude oil and refined products in West Texas, Arizona, New Mexico, Utah, Colorado, and the mid-Atlantic region. However, I view the closing of major refining capacity in the U.S. as unlikely since the government views a loss of this capacity as a national security threat. But until the government intervenes, the crack spread may continue to rise. The bottom line: the weakness in U.S. Total Gasoline Retail Sales By Refiners may reflect an industry supply issue rather than a weakening economy. This makes Western Refining an interesting speculation.

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About jstradingnotes

I spend a lot of time analyzing the economy and securities. The effort has enabled me to generate multi-thousand percent returns on my trading capital over the past twelve years. The next few years offer an incredible opportunity to take outsized gains from the markets. Large structural imbalances in the major western economies will result in enormous market volatility as the imbalances get resolved, offering generational money-making opportunities. The major imbalances are excessive sovereign debt, crazy risk concentration in major banks, and enormous derivative exposure in the financial sector. A systemic shock can easily create a default cascade through the financial system where one failure precipitates another and another and so on. Central banks are very aware of the risks, and they are filling the financial system with liquidity by printing new money, risking massive inflation in a few short years for the United States and Europe. China has 2-3 trillion in dollar exposure, and they would like to have far less for fear of continued currency devaluation (they've lost billions holding dollars as the value erodes). As the size of their holdings prevent them from rapidly liquidating their dollar assets (which includes U.S. treasuries), they are instead spending their dollars on resources (copper mines, rare earth metal mines, oil wells, etc.). Lately they have been accumulating gold assets, perhaps with a view to making the Renminbi convertible into gold and displacing the U.S. dollar as the international reserve currency. Their gold buying is enormous and presents an easy investment thesis: ride the Chinese horse and buy gold and gold stocks. In this blog, I'd like to share some of my trading ideas and insights on the markets as these exciting times unfold.
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