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The almighty consumer accounts for two-thirds of the economy's growth (or, at least, that's what the "experts" always claim). Well, last week, they received some pretty mixed signals about consumer activity: past, present, and future. While the world's top retailer, Wal-Mart Stores Inc. (WMT), surprisingly increased its earnings forecast for the third quarter, few others had anything positive to report. Clothing stores ranging from Limited Brands Inc. (LTD) to The Gap Inc. (GPS) to J.C. Penney Co. Inc. (JCP) to Nordstrom Inc. (JWN) announced weaker sales in September and all reduced their outlooks for the rest of the year, a pretty concerning trend heading into the holiday season. Many of these retailers are already trimming prices in an attempt to get folks to catch the shopping bug a bit early this year. However, a recent survey by NPD Group showed that 40% of consumers will not even begin to focus on their gift buying until after Thanksgiving (better late than never, we always say…) While naysayers already started predicting plenty of coal for each stocking come December, the U.S. Commerce Department reported stronger-than-expected retail sales in September (see below). Mixed signals, indeed.
Alcoa Inc. (AA) kicked off another much-anticipated earnings season by announcing higher profits, largely due to the sale of its interest in a Chinese aluminum company. Management also increased its share buyback program, a move often perceived as positive for the future of the firm. PepsiCo Inc. (PEP) and General Electric Co. (GE) each reported double-digit earnings growth and attributed their gains to international/global sales. While consumers may be staying away from the malls, they haven't lost their appetites for Big Macs as fast-food giant McDonalds Corp. (MCD) projected another strong quarter. And, as we demonstrated here with a Money Morning investment analysis, Yum! Brands Inc. (YUM) used yet another strong quarter to demonstrate that this appetite for fast food (KFC, Taco Bell and Pizza Hut) is becoming a global phenomenon – reporting strong results from China and the rest of Asia.
Heading into earnings season, many analysts raised concerns about the subprime mortgage mess (so what else is new?) and the impact it had on companies within the financial services and housing sectors. Microchip Technology Inc. (MCHP) tried to blame its quarterly woes on the subprime fiasco, but analysts generally weren't buying. Only time will tell how many companies really are affected.
A few key mergers were proposed this week and corporate boardrooms seem to be buzzing again about the ‘art of the deal,' and with promising transactions. Software leader Oracle Corp. (ORCL) took aim at rival SAP AG (SAP) by offering to buy BEA Systems Inc. (BEAS) in a $6.7 billion deal, but Oracle CEO Larry Ellison had the door slammed in his face. GE's media division, NBC Universal (now known in some circles as "Nothing But Chicks"), will be acquiring Oxygen Media and its network that targets women viewers. Last year, the company bought web site iVillage, which caters to a similar audience. Male beer guzzlers took note of the proposed merger of the domestic operations of Molson Coors Brewing Co. (TAP) and SABMillerPLC to create the number two U.S. brewing company behind Anheuser-Busch Cos. Inc. (BUD). The deal will likely undergo a strict regulatory review for antitrust implications.
The bulls are celebrating a milestone five-year anniversary as the prior bear market (remember the dot.com bubble?) ended in October 2002. Stock-market investors reacted positively to Tuesday's release of the minutes from the Sept. 18 meeting of Federal Open Market Committee (FOMC) policymakers (see below), and economists now believe more rate cuts are in the cards. While earnings season produced some decent early results, the jury is still waiting for the large investment houses to report.
Techs led the charge this week as news of the Oracle acquisition helped investors overlook a negative report on Chinese Internet firm, Baidu.com (BIDU). The Nasdaq climbed to its highest level in six and a half years. Bonds moved lower with the sudden renewed interest in stocks. (If only consumers could renew their interest in shopping…I'm just kidding, honey).
Economically Speaking: Fed Minutes, Inflation Worries…
"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside…Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead." On those "concerning" notes, the Fed unanimously agreed to take "the most prudent course of action" and cut the Fed Funds Rate by 50 basis points (half a percentage point) last month.
The love-fest for Chairman Ben S. Bernanke began in earnest as a WSJ.com poll showed that 76% of economists surveyed believe that the aggressive move was appropriate, and 90% gave him favorable marks in his role as Fed Chief. (Somewhere out there, a man named Greenspan is both bitter and jealous.)
In addition to the minutes, some key economic reports were released last week. The significant recalls of Chinese products have started to impact the global trade picture as the U.S. deficit dropped to its lowest level in seven months.
Retail sales jumped by 0.6% in September as strong car sales helped overcome the weakness in apparel demand. The large increase was surprising given the poor sales results that had been reported by the nation's retailers just a day earlier. Unseasonably warm weather and ongoing credit concerns have given many shoppers some good excuses to put off buying those winter wardrobes.
Energy prices soared by 4.1% and PPI jumped by 1.1% in September, though the more closely watched core number (ex-food and energy) rose by a mere 0.1%. Keep up the good work, Dr. B. Sorry about Talladega, Sterling (Keep your chin up!). Happy 70th, Dad. Good Investing…