It should come as no surprise to you that I have a secret “jet fuel indicator.”
Or that it tells you something crucial about how to invest right now.
Or that it has everything to do with tax data. (You didn’t really think you’d get away with this, surely.)
The US Treasury publishes the Daily Treasury Statement every day virtually in real time, with just a one day lag, and follows up a couple of weeks later with the slightly more detailed Monthly Treasury Statement. The daily and monthly tax data is useful in that it tells us what to expect when the lagging economic data indicators are released later. Unlike economic data, tax data isn’t statistically massaged. Tax data gives us actual numbers on how the US economy is performing in real time. It tells us whether the statistically manipulated and late arriving economic indicators are promoting a false narrative.
But I also look at the data from the US Energy Information Administration on Gasoline Demand and Jet Fuel Demand for another near real time indicator of how the US economy is faring right now.
That helps us with our trade timing. But the information is mostly useful in telling us what the Fed will be seeing when it gets the data. It helps us to know whether incoming economic data will keep the Fed on track or not.
Here’s what the fuel tax data is telling us now about how we should approach our trading and investment strategy.
Rich People Travel More, Regular Folks Travel Less – And That Hurts The Economy
The December data tells us that the US economy top line growth numbers should remain positive, as households in the upper income strata continue to skew the economic numbers heavily toward the plus side. But other data shows that the bulk of the American people are barely treading water in this economy. While top line growth will keep the Fed on track for tightening, ultimately the long term health of the US economy and US business profits will depend on broader participation.
In the shorter run, a tightening Fed will soon result in the end of this rally, and the beginning of a bear market later this year. There’s nothing in this data that would deter that. Here are the particulars.
Gas Taxes and Gasoline Demand: One of the largest components of Excise Taxes is the Highway Trust Fund tax on gasoline. That data is only provided in the Monthly Treasury Statement which comes out on the 8th business day of the following month. Like all excise taxes it is based on unit sales, not dollar value.
Specific excise tax collections have a two week reporting lag relative to the period that they were collected. Gas taxes collected in December were virtually flat. That followed a gain of 3.5% in November, which came on the heels of an 8.8% drop in October. They had been rising at an accelerating clip since December 2016, hitting +5.5% in July 2017. They have softened since then, indicating that more people are driving less than they did a year ago.
Households with drivers cover a broad swath of the US middle class. The US Department of Transportation says that 91% of US households own vehicles. The recent softness in gas taxes doesn’t exactly suggest a broad based, vibrant economy. But there’s nothing here that would deter the Fed from its path to reduce the money supply. The Fed is only concerned about the appearance of growth represented in the totals, regardless of the evidence that most Americans are struggling.
The EIA reports gasoline demand weekly with a lag of less than a week. This is another source of near real-time data that the media ignores. But it is useful to us as an indicator of how the economy is doing right now. December consumption rebounded but the 3 month moving average of the annual growth rate remains below 2%, hardly a sign of broad based economic growth.
The aviation fuel tax (table above) rose 4.5% year over year in December. That was after an 8% gain in November. Air travelers tend to be a more affluent group than drivers on average. And more affluent consumers tend to fly more often. This is another sign of a bifurcated US economy, where those at the upper end of the income spectrum are doing well and spending enough to keep the top line growth numbers perking along while the rest of the country treads water.
The Energy Information Administration (EIA) data on gasoline and jet fuel illustrates this bifurcated economy. The growth of jet fuel demand as shown by the weekly amounts of jet fuel supplied to the market, has far outstripped the growth of gasoline demand.
Aviation fuel supplied to the market in December rose by 15.6% year over year. The 12 month average growth rate is 3.9%. Growth has been slowing since last March, but these are still solid figures. People who fly, who tend to be more affluent, are still flying more.
But gasoline consumption has been moribund. The annual growth rate rebounded in December, but only to +2.2%. That was after an extremely weak November, when product supplied to the market fell by 3.9%. The 12 month average growth rate is still -0.3%. With gas prices rising since last summer, people have been driving less. The rebound in December has not broken the downtrend that began last summer.
Fuel Data Suggests A Protective Strategy for Q1
The gas and aviation tax numbers suggest that there’s enough spending by those at the top to keep the topline economic data perking along at a healthy growth rate, certainly healthy enough to keep the Fed on its path of tightening money and credit by shrinking its balance sheet.
This data illustrates that while the top line data continues to show moderate growth, a broad swath of US households is being forced to reduce consumption as their incomes fail to keep pace with rising costs that are undermeasured by the BLS and BEA in the CPI and PCE reports. The gains among upper income earners skew the top line numbers positive, but if large numbers of Americans are forced to spend less on consumption, the profits of US business will come under pressure over the long run.
In the short run, over the next year or two, solid topline data will keep the Fed on course to continue pulling money out of the financial system. I have estimated that that will begin to impact the US stock market by the end of the first quarter or shortly thereafter.
It is already adversely impacting the bond market. On January 19, the 10 year Treasury yield broke out above the critical 2.60 level where it had previously reversed twice before in late 2016 and early 2017. This suggests that the 10 year will now head toward 3%. As the Fed keeps pulling money out of the markets in increasing amounts over the course of this year and as Treasury supply increases the pressure on bonds will only build.
The pressure on stocks will build as Treasury yields rise. While I can’t pinpoint exactly when stocks will turn, the S&P 500 has hit the most recent long term cycle projections of 2800-2830, and the first quarter of this year still shapes up as a likely turning point. I have recommended raising cash systematically each month with the goal of reaching 60-70% cash by the end of January, or by the end of the first quarter. That percentage will vary depending on your age, income, and personal risk profile. But the selling program should remain in place.
As for selling short, the time is near, and we’ve just posted a recommendation for a single “set it and forget it” trade on the short side that should earn big profits over the next year or two. Go here now to get that free report.
A Word of Caution on the Yellow LAMPP
The Long Term LAMPP remains green as it continues to hang precariously just above the 78 week moving average. A drop below that line would trigger a red signal.
When the debt ceiling is finally lifted and the Treasury returns to the market at full speed, the LAMPP will turn red within weeks, if it hasn’t already by then. It is so close to the line that it could come at any time. But it is most likely to occur once the debt ceiling is lifted and any restrictions on new Treasury issuance are eliminated.
This month Fed draining operations are increasing to a total of $20 billion per month, from $10 billion. This will drain cash from the banking system. That will rise quarterly to $50 billion per month in October.
$97 billion in Treasuries on the Fed’s balance sheet will mature in the first quarter. The Fed will tell the Treasury to repay $36 billion of that. That money will disappear from the banking system. It will reduce the amount of cash that feeds demand for securities.
The Short Term LAMPP edged back up into yellow territory in mid December. A yellow light of course means proceed with caution, or in the case of the market, buy with caution. Yellow signals on the Short Term LAMPP have worked well when the line was falling from green territory. However, each time the short term LAMPP line has moved up from red territory to even minimally above the 100% line, the market has rallied.
When the line is on the way up, the traffic light concept has worked best. Traffic lights change from green to yellow to red. The message there is proceed with caution or stop. But traffic lights turn from red directly to green. There is no intervening yellow. The message is simply, GO!
Over the past 11 years, this has worked for the short term LAMPP as well. When the line has turned up and crossed from red territory to above 100%, the message has been simply, GO.
So even though we can think of the Short Term LAMPP as being green at the moment, and swing trades from the long side have been working and could continue to work for a little while longer, I would not be buying long term positions. The Long Term LAMPP is too close to turning red to be doing that.
In addition, any short term trading from the long side should be watched closely for support breaks. As for swing trading from the short side, I would concentrate on that only when the Long Term LAMPP turns red. Prior to that, I would pick and choose shorts cautiously.