Market Brief
Oil prices continue to see volatility, as a recent Energy Information Administration weekly inventory report showing U.S. gasoline supplies fell 3.5 million barrels last week, causing oil prices to jump more than $4. However, until that report was released a decline in overall US demand had caused oil to ease off recent highs, with prices closing at the lowest level in nearly three months on Tuesday. The decline in prices was driven in part by comments from OPEC’s president that oil markets were being adequately supplied and that much of the recent price increase could be tied to geopolitical tensions. The price for light, sweet crude for September delivery closed Tuesday at $122.19 a barrel, the lowest closing price since May 6’s $121.84 a barrel. Oil has fallen 15% from its trading peak of $147.27 set July 11, though prices remained nearly 65% higher than they were 12 months ago.
In addition to OPEC comments, decreasing US demand for gasoline has caused some decline in both oil and gasoline prices. Although prices for gas remain near $4 per gallon, a 36% increase over where they were last year, early this week the price of regular unleaded gasoline at the pump averaged $3.941 a gallon, according to a nationwide survey from AAA.
The economy has seen some other positive news outside of easing energy prices, with orders for durable goods and consumer confidence posting surprisingly strong numbers. The Commerce Department reported June durable goods orders showed a 0.8 percent increase, the strongest gain in four months and much better than the 0.4 percent decline that economists had been expecting. Much of the increase was driven by military spending, with a second straight double-digit increase in orders for defense capital goods boosting big-ticket factory orders in June. Excluding defense, orders were up just 0.1%, but the rebound in manufacturing could indicate better than expected economic growth when second quarter numbers are released.
Consumer sentiment, while still low, showed a bounce back from the 28 year low of 56.4 hit in June. The Reuters/University of Michigan index of consumer sentiment for July came in at 61.2, beating expectations but still far below the level of a year ago when the confidence index was at 90.4. The Conference Board said its overall monthly measure of consumers' mood rose to 51.9 this month, the first rise since December. Economists polled by Reuters had expected a reading of 50.0 for July.
However, inflation continues to be the biggest concern for the Fed and the overall economy. To date, most inflation has come from food and fuel, as retailers have resisted passing along price increases from manufacturers, but with prices manufacturers paid for crude materials rising 70 percent for the three months ended in June, retailers will be hard pressed to continue to absorb the cost increase. Given the Fed’s recent report on economic activity, most observers expect the Fed to keep rates steady at its next meeting on August 5th, as boosting rates to fight inflation would hurt the slow economy. The Fed report indicated that "the pace of economic activity slowed somewhat since the last report" issued in June and consumer spending was "sluggish or slowing" in nearly all the 12 Fed regions.
Deal Overview
Although clean energy has been dominating the headlines and grabbing a significant amount of venture capital recently, traditional energy sources remain big targets in the M&A market. Coal mining company Cleveland-Cliffs announced July 16th an $8 billion merger with smaller rival Alpha Natural Resources. The deal has faced some resistance from Cleveland-Cliffs’ largest shareholder, Harbinger Capital, who is believed to want Cleveland-Cliffs’ to put itself on the market. Harbinger may be looking to capitalize on a rapidly consolidating coking coal market, where prices have jumped from $90 a ton last year to over $250 a ton this year. The price increases have caused several mining and steel giants to snap up coking coal interests. Mining giant Teck Cominco announced Tuesday it will buy the Fording Canadian Coal Trust for close to $14 billion in cash and stock and ArcelorMittal recently purchased two West Virginia coal mining operations. ArcelorMittal and Posco, the Korean steel company, have also recently purchased stakes in Australian mining company Macarthur Coal.
Despite a slowing economy and a slow venture-backed IPO market, venture capital performance showed positive returns across all investment horizons ending March 31, 2008, according to Thomson Reuters and the National Venture Capital Association (NVCA). Venture returns across all horizons, except the five-year horizon, outperformed public market indices, NASDAQ and the S&P 500, through March 31, 2008. According to a recent KPMG survey, the venture-backed IPO market is not expected to pick up steam until 2010 or later. According to the survey 40 percent of respondents expect a turnaround in 2010, 24 percent in 2011 and 15 percent in 2012.
