Oil Hits Six-Month Low on Inventories

Headlines (Scroll down for complete stories):
1. Economists: Fed to Hold Pat
2. Oil Hits Six-Month Low on Inventories
3. Wharton Prof.: Retirees Can't Count on Federal Benefits
4. Mortgage Applications Bounce Back As Rates Fall

1. Economists: Fed to Hold Pat

With the economy shifting into a slower gear and inflation apparently retreating, Federal Reserve officials are likely to pat themselves on the back for engineering a soft landing and leave interest rates alone.

In the widely held view of private economists, Fed Chairman Ben Bernanke and his colleagues will decide at Wednesday's meeting to extend their pause on rate increases, believing that a slowing economy and falling energy prices are starting to relieve inflation pressures.

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"The Fed will do nothing. There is no reason for them to change the stance of monetary policy," said David Wyss, chief economist at Standard & Poor's in New York.

That would mean that the federal funds rate, the interest that banks charge each other, would remain at 5.25 percent and banks' prime lending rate, the benchmark for millions of consumer and business loans, would stay at 8.25 percent.

Before the Fed started raising rates in June 2004, the funds rate stood at a 46-year low of 1 percent and the prime rate was at 4 percent.

The Fed at its last meeting on Aug. 8 voted to leave rates unchanged after raising them for 17 consecutive times over the past two years, the longest string of rate increases in Fed history.

At the time, Fed officials stressed that they were ready to raise rates further should the need arise.

Analysts are split, however, on whether the pause will be indefinite or whether at least one more rate increase will occur before the end of the year.

While global oil prices have fallen significantly from their highs above $77 per barrel, there are still worries about inflation pressures coming from wage increases outstripping productivity gains.

Those concerns were heightened by a report earlier this month that productivity slowed in the spring at the same time that labor costs jumped by 4.9 percent after an even bigger 9 percent rise in the first quarter.

That increase, if it continues, has some analysts convinced that the Fed will raise interest rates at least one more time before moving to the sidelines.

"There are incredibly divergent views about how things are going to unfold," said Mark Zandi, chief economist at Moody's Economy.com.

Economists who believe the Fed is finished raising rates point to the drop in energy prices as a major factor that will help slow price pressures going forward. That development is already showing up in slower increases in consumer and wholesale inflation.

Also helping to lower inflation pressures has been a big slowdown in housing following a five-year boom in which home sales soared to record highs, powered by the lowest mortgage rates in four decades.

That situation has reversed this year, with sales of both new and existing homes falling. And the government reported Tuesday that construction of new homes and apartments plunged in August to the slowest pace in more than three years.

The slowdown in housing is expected to keep inflation in check. The Fed's goal in raising interest rates has been to slow the economy enough to reduce inflation pressures, achieving a hoped-for soft landing.

"Falling energy prices, further weakening of the housing sector and a few tame inflation reports have put a lid on inflationary expectations for the time being," said Thomas McManus, an economist at Banc of America Securities.

He said the funds rate is probably at its peak and will not be increased further, a change of view from early July when he was predicting two more rate hikes.

But David Jones, an economist at DMJ Advisors in Denver, said he believed the Fed would raise rates one more time, probably in October, before calling it quits.

"My guess is that they will go up another quarter-point and then hold it there through the entire first half of next year," Jones said. "By this time next year, with growth slowing, the Fed could be easing."

Whatever happens, analysts are not looking for interest rates to go up much from where they are now unless inflation gets out of hand and the Fed starts aggressively raising rates again.

Mortgage rates actually have been falling in recent weeks, with the 30-year mortgage rate down to 6.43 percent in the latest Freddie Mac survey, compared with a high this year of 6.8 percent reached in late July.

Financial markets, where long-term rates are set, have rallied in recent weeks on the belief that falling energy prices and a slowing economy will help to push inflation levels back down to the Fed's comfort zone.

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2. Oil Hits Six-Month Low on Inventories

The price of a barrel of crude oil fell to six-month low below $61 today as U.S. government data shows that inventories are at healthy levels.

Crude oil prices fell to $60.80 a barrel in trading in London today, reports Reuters.

The Energy Department reported that distillate fuel inventories, which include heating oil, grew by a much higher than expected 4.1 million barrels to 146.7 million barrels. That's more than 11 percent above last year's inventory levels. The market places more emphasis on distillate fuels as the winter months approach. Economists polled by Reuters were looking for an addition of 1.9 million barrels on average.

Gasoline inventories inched up by 600,000 barrels to 207.6 barrels. That's 6 percent above year ago levels and should spell good news for gas prices in the U.S.

Crude oil inventories fell by 2.8 million barrels to 324.9 million barrels. However, that's still 5 percent above last year's levels and above the five-year average of inventories.

"There is no support at all for crude oil coming from product markets," Eoin O'Callaghan of BNP Paribas, tells Reuters. "We are seeing all the factors that supported the market in the summer unwind."

Crude prices were also talked down by news that the world's largest exporter of oil is happy with the current price and concerns for Iran are waning.

Saudi Arabia oil minister Ali al-Naimi told reporters in Riyadh, "The oil industry is convinced that this price is reasonable."

"Prices are now rewarding to both producers and consumers and their impact on the global economy is small," he added.

The fear of conflict with Iran over its nuclear program also eased after foreign ministers from the U.S., Russia, China, Britain, France, and Germany all agreed to give EU foreign policy chief Javier Solana additional time to negotiate a deal with Iran.

"Clearly now a serious negotiation phase will follow so the chances that Iran's oil will be withdrawn from the market any time soon have gone from low to very low," said Tobin Gorey, commodity strategist with Commonwealth Bank of Australia, to Reuters.

Editor's Note:

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3. Wharton Prof.: Retirees Can't Count on Federal Benefits

Jeremy J. Siegel, professor of finance at Univ. of Pennsylvania's Wharton School, makes a case in The Wall Street Journal that Americans need to start welcoming foreign investment in order to offset the impact of retiring baby boomers.

Siegel explains that baby boomers are expecting to retire comfortably, thinking that they can rely on their pensions and government social programs such as Social Security and Medicare.

However, says Siegel, "Instead of stepping into an easy retirement, many retirees will tumble into a future marked by bankrupt government social programs and declining asset values that will quickly deplete their cherished nest eggs."

Siegel bases his prediction on geographic trends. "Aside from immigration," he says, "we know almost exactly how many people over the next 20 years are going to reach the working age of 20 and the retirement age of 65."

By 2030, there will be three people of working age for every one person in retirement, says Siegel. That's in contrast to the five to one ratio of working age to retirees today, and more than half as few as there was in 1950 when the ratio was seven to one, according to the UN Demographic Commission. In other words, there won't be enough working people to finance the Social Security and Medicare benefits that retirees expect to rely on.

As bad as that is, the number of 75 to 80 year olds in Europe and Japan will be the largest demographic segment. In Japan, the ratio of workers versus retirees will fall to a ratio of one to one by mid-century.

Therefore, Siegel says "The demands of retirees from Europe and Japan will raise the price of goods bought and sold in international markets, so there is no way the U.S., despite its younger population, can shield itself from the demands arising from the aging populations abroad." So, U.S. retirees will likely have to sell assets to finance their retirement.

But, says Siegel, "Since there will not be enough workers earning income, there will be not enough savings generated to purchase the assets retirees must sell to finance their retirement."

Siegel explains that if there is relatively more supply of, say stock certificates, looking for the few buyers of working, and therefore savings age, retirees will probably have "insufficient assets." Siegel also says that this may cause "a long and painful bear market in stocks, bonds and real estate."

Siegel says that for retirees to have a comfortable retirement, the average retirement age must rise by 10 years or more. Or, says Siegel, we could rely on high-income immigrants to come to the U.S. to ease the situation. However, the number of immigrants needed would have to be "prodigious" to offset retirees, says Siegel.

Another solution, says Siegel, would to be to accept foreign investment in the U.S. "Goods produced by the younger developing world can be exchanged for assets of the older developed world … The developing world has the capability of simultaneously providing us with goods and acquiring our assets, filling the gap left by our aging workers," explains Siegel.

Siegel terms this the "global solution to the age wave." He says that his studies show that this trade between developing and developed worlds can help reduce the projected retirement age in the U.S. from the mid-70s to the upper 60s..

Editor's Note:

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4. Mortgage Applications Bounce Back As Rates Fall

Applications for mortgages rose for the third straight week as declining interest rates prompted homeowners to refinance.

The Mortgage Bankers Association reports that the seasonally-adjusted index of total mortgage applications rose 2 percent to a five-month high of 595.8 for the week ended September 15. But that's still much lower than the same period last year when the index was at 772.2.

Digging deeper, though, you'll see that the increase in mortgage applications was driven exclusively by refinancings. Applications to refinance jumped 9.5 percent compared to a 3 percent decline in applications for new mortgages.

Homeowners generally refinance their mortgages when interest rates drop and they can reduce their monthly payment, or if they want to convert an adjustable-rate loan into a fixed-rate loan.

The average 30-year fixed mortgage rates fell to 6.36 last week, slightly up from 6.32 percent in the previous week. However, that's still down a half a percentage point from June. The rate on a 1-year adjustable mortgage inched down 1 basis point to 5.95 percent, according to the MBA.."

Editor's Note:

Sidestep the slumping housing market. Discover how to invest in sectors the smart way. Go here now.

Editor's Notes:

Bernanke's blunder could be the biggest opportunity of the last decade for savvy investors. Go here now.
In April 2004, the Financial Intelligence Report (FIR) predicted that oil prices would skyrocket from $29 per barrel to over $60 within a year. That forecast was dead-on. Our investors made a fortune on that advice. Since then FIR has been warning that oil prices would collapse in the next 12 months and could go as low as $40 per barrel. Find out the top 5 ways you can profit from the coming Oil Bust. It's already begun! Go here now.
The Baby Boom crisis is just beginning. Protect your wealth from this looming tidal wave before it's tool late. Go here now.
Sidestep the slumping housing market. Discover how to invest in sectors the smart way. Go here now.
Is there a killer lurking in your mouth? Read this before you chew your next meal or drink a hot cup of coffee. Go here now.