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By William Patalon III
Money Morning/The Money Map Report
The U.S. retail sector will be in the spotlight this week, as investors continue their efforts to gauge the health of the U.S. economy.
Such key retailers as Wal-Mart Stores Inc. (WMT), Macy's Inc., JP Penney Co. Inc., Abercrombie & Fitch Co., and Nordstrom Inc. (JWN) all are scheduled to report quarterly earnings. Then there's the April retail-sales data, which will give economists and investors alike a good look at the mindset of the U.S. consumer.
After all, consumer activity accounts for as much as 70% of the U.S. economy's growth. With the retail-sales numbers, however, keep in mind that the steeply escalating price of gasoline is almost certain to skew the overall reading.
With the U.S. Federal Reserve and the European Central Bank both expressing serious concerns about inflation, all eyes will be on this week's release of the Consumer Price Index (CPI) report, which will help reveal just how quickly and significantly energy prices are working their way to other sectors of the economy.
Listen closely as certain economists claim that "core" inflation is more telling – and provides a more-accurate picture of the economy's health – than the overall number because food and energy components are highly volatile. You see, "non-core" inflation actually includes food and energy prices. In more-normal periods, looking at "core" inflation might make more sense, since food and fuel can be prone to short-term swings that muddy the waters and make analysis tougher over shorter stretches.
But these days, no legitimate conversation about the economy or price pressures can take place without serious consideration of oil and gasoline. And what about food? With the way global commodity prices are shooting skyward, that part of the family budget can't be ignored, either.
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Memorial Day is just around the corner and summer vacations are being planned in earnest (or perhaps they aren't). Can travelers afford those family driving excursions, given the high costs of food and fuel? [Check out a related Money Morning report that details the impact soaring oil and gas prices are having on U.S. consumers.]
And what about vacations abroad? Fuel is a major element for airlines, so we can probably expect airfares to climb as fast as the jets the carriers fly. And with the way the U.S. dollar has been hammered, U.S. consumers may not be able to afford overseas sojourns anyway. Only time will tell [For a related story on the woes the weak greenback is causing consumers, please click here].
What a difference a few days can make. Two weeks ago, GS) chose to make that bold prediction that oil could reach $150 to $200 a barrel over the next six to 24 months, helping oil prices skyrocket over five consecutive record-setting sessions.appeared to put a cap on energy prices (and the price of other commodities), and "nervous" consumers breathed a (brief) sigh of relief as the summer travel months rapidly approached. Suddenly, Goldman Sachs Group Inc. (
Curiously, the Goldman Sachs prediction that ignited the firestorm in the oil-prices market was nothing more than a repeat of a prediction the investment bank had made in mid-March. Even more interesting: Money Morning Investment Director Keith Fitz-Gerald has been predicting higher prices for some time and actually beat Goldman to market with both of its predictions (which he wasn't aware Goldman was assembling, of course): Fitz-Gerald first publicly predicted a target price of $187 a barrel in December, and reiterated that prediction in mi-March; more recently, Fitz-Gerald boosted his target price to $225 a barrel.
One final note that underscores the often-contrary nature of investors and the capital markets: Given the fuss made over Goldman's "encore prediction" for oil prices of $175 to $200 a barrel, we're stunned that there was almost no response at all to CIBC World Markets' prediction that gasoline could hit $7 a gallon in four years. But that prognostication failed to even cause a stir (although, in typical fashion, we made sure to tell you all about it as part of our own oil-price forecast last week). It's worth noting what CIBC analyst Jeff Rubin had to say.
According to a statement by Rubin, crude-oil supplies are actually lower than some official estimates indicate, while demand is unlikely to fall anytime soon. Those tighter supplies and continued strong demand will drive oil and gasoline prices to roughly double their current levels by 2012.
"It is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," Rubin said. "Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years."
That's a decidedly sobering – if not a downright scary – prospect, to be sure. But there are steps investors can take, moves they can make to profit in order to offset some – if not all – of this pocketbook pain. [For just that reason, take the time to read Money Morning Investment Director Keith Fitz-Gerald's investment research report that provides three ways to profit from the run-up in oil prices. The report is free of charge].
In any case, despite a weekly inventory report that revealed greater than expected oil and gasoline supplies, crude prices pushed beyond the $126 a barrel level. Year-to-date, crude has surged about 30% and has virtually doubled from last year's pace. Energy analysts claimed that $150 crude would suggest gas prices of more than $4.50 a gallon, quite a run-up from the record of $3.67 the average consumer is now paying at the pumps.
For now, the Organization of the Petroleum Exporting Countries (OPEC) seems content to maintain its current production output and blames failed U.S. economic policies for the dire domestic conditions. The cartel next meets in September and only recently gave slight overtures that an early consultation may be in the cards. (Don't hold your breath.) Now comes news that Venezuelan President Hugo Chavez may be supporting rebel forces in Colombia, a move that could bring sanctions against his country (and prompt retaliation in the form of reduced oil sales). Meanwhile, two presidential hopefuls – Democratic Sen. Hillary R. Clinton and Republican John McCain continue to push for a "gas-tax holiday," despite consensus economic views that such policy would benefit oil companies far more than consumers. Finally, a bit of good energy-related news. In an attempt to boost sluggish sales, Chrysler Corp. introduced its "Let's Refuel America" gimmick in which new car purchasers can lock in the price of gasoline at $2.99/gallon for the next three years (Of course, they have to buy a Chrysler, Jeep, or Dodge to participate).
Earnings season did little to reverse the negative mood set by the energy sector as a few big financials – Fannie Mae (FNM), UBS AG (UBS), Wachovia Corp. (WB), and American International Group Inc. (AIG) – reported poor quarters with few optimistic signs for the months ahead. Even Berkshire Hathaway Inc. (BRK.A, BRK.B) took a significant hit on certain derivatives, though Warren Buffett claimed such contracts ultimately will prove profitable. (Interesting how Buffett criticized everyone from regulators to politicos to investors for the credit crisis and then revealed some "challenges" in his own house last quarter). The Yahoo! Inc. (YHOO)/Microsoft Corp. (MSFT) deal appears to be dead in the water (for now), as Microsoft founder Bill Gates and Chief Executive Steven Ballmer head back to the "Corporate Strategy" drawing board in the ongoing competition with Google Inc. (GOOG), and Yahoo co-founder and CEO Jerry Yang tries to find another white knight while explaining to shareholders why he may have taken money out of their pockets.
Equity investors took a break (hopefully short-lived) from the recent optimism and focused on the negative energy and earnings news. In reality, last week brought little substantive corporate or economic developments; many took the opportunity to lock in profits from the recent bullish run. As those tax rebates hit their mailboxes (see below), consumers soon should have a few extra bucks to take to the malls, put a down-payment on a Chrysler, or pay for a few tanks of gas.
Dow Jones Industrial
10 yr Treasury (Yield)
With little in the way of economic data released last week, the talking heads captured the limelight with some (contrasting) views on the state of the times. European Central Bank President Jean-Claude Trichet revealed his "significant" concern about inflation and, subsequently, left the ECB's primary interest rate unchanged at 4.0%. Likewise, Kansas City Fed President Thomas M. Hoenig warned of "troublesome," "serious," and "unacceptably high levels" of price pressures (though, as a non-voting Fed member, no one seems to much cares what he has to say). Meanwhile, Treasury Secretary Henry "Hammerin' Hank" Paulson indicated that the Administration believes the "worst is likely behind us," while his boss praised the economic stimulus package in which 130 million folks will soon be receiving tax rebates to help boost consumer spending.
The economy got a surprising shot-in-the-arm from the services sector as the non-manufacturing ISM index revealed expansion for the first time in four months. About 80% of economic activity is derived from the services sector, so the data may have offered further proof that Paulson and friends may be right. Consumers took advantage of the lower interest rates last month as April borrowing (particularly auto loans) climbed at its fastest pace in four months. Retailers experienced mixed results during April as shoppers continued to favor discounters and wholesale clubs like Wal-Mart and Costco Wholesale Corp. (COST) over apparel stores like Limited Brands, Inc. (LTD), The Gap Inc. (GPS), and Nordstrom. Meanwhile, the UBS-International Council of Shopping Centers retail sales survey showed that activity in April far exceeded expectations.
Weekly Economic Calendar
ISM – Services (04/08)
Surprising sector expansion
Consumer Credit (03/08)
Best showing in 4 months
Initial Jobless Claims (05/03/08)
Level of claims declined more than anticipated
Balance of Trade (03/08)
Larger than expected decline
The Week Ahead
Treasury Budget Statement (04/08)
Retail Sales (04/08)
Initial Jobless Claims (05/10/08)
Industrial Production (04/08)
Housing Starts (04/08)
News and Related Story Links:
- Seeking Alpha:
Non-core Inflation Firmly in Double-Digit Range.
- Money Morning News Analysis:
Soaring Oil and Gasoline Prices Worry Cost-Conscious U.S. Consumers.
- Money Morning News Analysis:
- Money Morning Financial Analysis:
- Money Morning Oil Price Analysis:
Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China.
- Money Morning Special Investment Research Report:
Three Ways to Play Money Morning's Prediction That Oil Prices Will Reach $187 a Barrel.
- Money Morning Special Economic Forecasting Series Project:
Outlook 2008: How to Profit When Oil Bubbles Up Above the $100 Level.
Crude to hit $175, Says Goldman Sachs.
Goldman Sachs and the oil bulls.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.