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By William Patalon III
Money Morning/The Money Map Report
When Morgan Stanley (MS) predicted that oil prices would reach $150 per barrel by mid-summer, its analysts certainly didn't mean it would happen all in one day.
But a confluence of powerful catalysts – that aggressive prediction, some militant interest-rate language from the European Central Bank, Middle East conflict worries and a lousy employment report – launched oil prices into their biggest one-day gain in history, setting a new record high in the process.
Make this bet: All eyes will be on oil prices today. And depending on what happens today, it's entirely possible that oil prices will be the story of the week – all week. Let's watch and see [Check out the related special-investment story elsewhere in today's issue of Money Morning by clicking here].
On another note, can anyone save Lehman Brothers Inc. (LEH)? With the challenges the brokerage house faces, are we looking at another Bear Stearns Cos. Inc. (BSC)? Or have the "gloom-and-doomers" – who wage war using rumor and innuendo as their weapons of choice – gone too far, a reality that would only benefit short-sellers and speculators?
With U.S. Federal Reserve Chairman Ben S. Bernanke having run his mouth a tad more than necessary last week, central-bank watchers over-analyzed his views on the greenback,s, and the impact of the stimulus package.
The dollar took yet another beating on Friday. And that downward trend may well continue.
Economic reports will keep investors on their toes this week. Coming up this week: Trade balance tomorrow (Tuesday); Fed Beige Book (Wednesday); retail sales (Thursday); consumer price index (CPI) (Friday).
The Beige Book release will allow Fed watchers another look into the mindset of Bernanke and Co., though, by now, most "experts" expect the next rate move to be higher (although that was before the weak unemployment report, and before the ECB threatened to raise its rates, too).
The recent positive news about consumer activity will be confirmed (or denied) as the May retail sales report provides more insight into the initial effects of the stimulus package. While discounters will reap the biggest benefits, the bigger test will come when we see how the "big-box" department stores and the luxury retailers manage to fare.
The late-week CPI release will give economists a good feel for just how much the escalating food and energy prices are feeding into inflation – meaning we can no longer buy into the Fed's whole spiel about looking past the overall number to focus on the so-called "core" numbers, which exclude "volatile" food-and-energy prices.
Story continues below…
With Sen. Hillary Clinton's Saturday withdrawal from the Democratic presidential campaign, it's all over but the shouting (and the backstabbing, political spinning, name-calling, negative ads, rumors, polls, debates and everything a good residential campaign season needs). Both parties having finally made their choices, and the American people now can begin dissecting the differences between senators John McCain and Barack Obama. Among those differences:
- Taxes: McCain plans to make recent cuts permanent and reduce the corporate rate. Obama will keep cuts in place (unless you make over $250,000) and will probably raise the capital-gains-tax rate.
- Health Care: McCain will focus on the individual and will incentivize folks to get insurance. Obama will turn to the government and install company mandates to bring costs down.
- Gas Prices: McCain flirted with the economically worthless (and perhaps damaging) idea of a "gas-tax holiday." Obama, like most economists, opposed such a measure. So let the campaign season (and partisan bickering) begin.
Financials were again in the news this week (what a shock) with Lehman, Merrill Lynch & Co. Inc. (MER) and Morgan Stanley – as well as bond insurers MBIA Inc. (MBI) and Ambac Financial Group Inc. (ABK) – all suffering the wrath of Standard & Poor's Inc. through ratings downgrades. Bank of America Corp. (BAC) and JP Morgan Chase & Co. Inc. (JPM) may not be far behind.
Of all the companies in this group, Lehman, in fact, seemed to be in the weakest position, inviting comparisons to Bear Stearns as rumors circulate that Lehman's management team is looking to sources in South Korea for a capital infusion of $4 billion.
Write-downs and losses prompted a few executive casualties as Wachovia Corp. (WB) said bye-bye to its chief executive officer and Washington Mutual Inc. (WM) stripped its CEO of his chairman's title. From an earnings perspective, Thomson Reuters Corp. (TRI) projected that aggregate profits of Standard & Poor's 500 Index companies declined by 17.5% in the first quarter with financials leading the way. On a more optimistic note, transactions seem to be back in favor as for $28 billion, and The J.M. Smucker Co. (SJM) will to buy Folgers from The Procter & Gamble Co. (PG) for just under $3 billion. (Apparently, nothing goes better with some dark roasted java than strawberry jam.)
Oil fell during the early part of last week on declining demand before reversing course Thursday and Friday en route to a two-day, $16 surge to a new high –– due to a weak dollar, Mideast turmoil and a Morgan Stanley prediction of $150 a barrel oil.
As drivers in more states find $4 gasoline becoming a reality (weekend cable news reports stated that $5 a gallon gasoline would seem be a reality in California), the RBC Capital Markets Group of the Royal Bank of Canada (RY) released a survey that showed that 90% of Americans are altering their spending patterns to cope with the new price realities. The Cheesecake Factory Inc. (CAKE), Brinker International Inc. (EAT) – the owner of the Chili's Bar & Grill chain) and Starbucks Corp. (SBUX) are among those companies suffering ill-effects of "bargain dining." General Motors Corp. (GM) plans to cease production at four domestic truck plants and may be selling its once-popular Hummer line (a combination SUV/urban-assault vehicles.
Continental Airlines Inc. (CAL) became the latest airline to fall victim to the energy crisis, announcing 3,000 job cuts and reduced routes.
For four days, volatility ruled the day as investors experienced drastic mood shifts amid favorable retail data and continued financial company woes. On Friday, however, the bears returned in a big way. The weak May unemployment data and dramatic oil surge instilled widespread panic with the Dow falling almost 400 points. Expect a continuation of the daily volatility throughout the summer as investors try to mix in a vacation (or two), while making heads or tails about these energy and labor trends. But does anyone deserve an extended vacation more than Hillary?
Year Close (2007)
Qtr Close (03/31/07)
Dow Jones Industrial
10 yr Treasury (Yield)
As noted above, Fed Chair Bernanke returned to the limelight last week with a few Greenspanesque comments that "rattled" economists and investors alike. His surprising mention of the weak dollar seemed to confirm that inflation is much higher than recession on his radar screen these days, and put prospects for a future rate cut somewhere between "slim" and "none." While Dr. B. sees price pressures as "unwelcome," he does not expect a repeat of the double-digit inflationary times of the 1970s. Bernanke also believes that the $168 billion fiscal stimulus package, as well as the Fed's own rate cuts, will positively impact the economy in the second half of the year (though his "somewhat better economic conditions" comment was not quite as strong as many would have liked to hear).
While manufacturing activity increased slightly in May, the ISM index still revealed overall sector contraction. On the other hand, stronger-than-expected factory orders helped put a positive light on the future of the sector. Housing continued to offer little reasons for optimism as construction spending declined again, while the rate of foreclosures climbed to a record high in the first quarter and potentially claimed another victim, Ed McMahon, who is $644,000 in arrears on his $4.8 million mortgage. (Maybe the Publishers Clearing House Sweepstakes folks will ring his doorbell with some good news, soon).
Consumers took those government rebate checks straight to Wal-Mart Stores Inc. (WMT) and Costco Wholesale Corp. (COST) last month as both discounters reported better-than-expected same-store sales. In fact, the UBS AG (UBS) International Council of Shopping Centers sales survey showed that retail activity soared 3% in May, well in excess of prior projections. On the labor front, the unemployment rate surprisingly soared to 5.5%, its highest level since October 2004, and the biggest one-month increase in 22 years. The economy lost 49,000 jobs last month, its fifth consecutive decline and another sign of continued sluggishness.
Weekly Economic Calendar
Construction Spending (04/08)
Continued weakness in home building activity
ISM – Manu (05/08)
Better than expected showing, though sector contraction
Factory Orders (04/08)
Increase in non-durable goods orders like paper products
ISM – Services (05/08)
2nd straight month of non-manufacturing sector growth
Initial Jobless Claims (05/31/08)
Decline in claims offered promise for labor market
Unemployment Rate (05/08)
Highest rate since October 2004
Nonfarm Payroll Additions (05/08)
5th straight monthly payroll decline
Consumer Credit (04/08)
Higher than expected borrowing from personal loans
The Week Ahead
Trade Balance (04/08)
Fed Beige Book
Budget Statement (05/08)
Initial Jobless Claims (06/07/08)
Retail Sales (05/08)
News and Related Story Links:
- Bloomberg News:
Oil Rises to Record on Weakening Dollar, Morgan Stanley Outlook.
- Bloomberg News:
Clinton Concedes Race, Throws `Full' Support to Obama.
Publishers Clearing House.
- International Council of Shopping Centers:
U.S. chain store sales jumped 3 percent in May.
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 at Money Map Press. 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.