September 2, 2008

Key Word: Liquidity

By Bruce Six, Senior Vice President - ALM

With Hurricane Gustav moving inland and Hurricane/Tropical Storm Hanna projected to turn sharply to the north and move up the east coast the cost of oil has dropped significantly to as low as $105.46 this morning. That is well below the 200 day moving average for oil and below the technical support level of $109. Where we had market projections last week of oil moving as high as $200 before the end of the year, we now hear the so called “experts” projecting oil could fall below $100 in the near future. Counter these projections with calls from some OPEC partners (Iran) calling for production to be cut to support prices at levels they have become accustomed to.

Just like the faith I have for the American consumer to spend every dollar in their pockets (plus a few dollars more), I have equal faith that Americans will resume their driving patterns and love of big SUV’s if gas prices break back into the sub-$3.00 range. Regardless of any of these other arguments the core fact that oil is down has the stock market up and talk of at least a bottom for the economy creeping into the news. It’s very early to call a bottom but the impact on interest rates and what the Fed wants to do will be felt in the coming months. If the economy has bottomed and growth is on the horizon then prepare for higher interest rates as the Fed gears up to fight inflation in earnest. If the economy continuous to struggle but lower energy cost allow the inflation numbers to ease than expect the Fed to be on hold for a while. The key number to watch for some indication will come at the end of this week with the non-farm payroll number on Friday. The market is expecting -75 thousand jobs with the unemployment rate staying at 5.7%.

Credit unions need to fine turn their liquidity projections if this idea if a “market bottom” in the stock market starts to take hold in the minds of the members. As members think they can get into the beginning of the next bull market in stocks they could start taking money out of credit union money market accounts and certificates as they mature. If the idea that real estate has hit bottom (talked about by market heavy weights like Warren Buffett) credit unions could see members pulling shares out to purchase homes and apply for mortgages further dragging down on liquidity. Each credit union has to monitor their own market to see what their members are thinking but keeping some money liquid in short investments should provide the ability to be nimble and react to the markets regardless of the direction of liquidity and rates. Lastly, just to confuse things a bit more, watch for the word “deflation” as we move into the winter. If the economy takes a deflationary turn, rates will fall further.