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By William Patalon III
Money Morning/The Money Map Report
A hectic week on the economic calendar is highlighted by the initial look at second quarter gross domestic product (GDP). Remember, a recession is defined as two consecutive quarters of negative growth, so doomsayers have targeted this week's release as confirmation of their pessimism.
Fortunately, the analyst consensus holds that the economy expanded at a faster pace than the 1% rate of the first quarter, putting us safely outside of recession territory. Investors get another view inside the struggling labor market where layoffs (mainly among financials) have resulted in overall job contractions for five consecutive months.
Economists hope for another positive showing for manufacturing from the ISM index, especially on the heels of last week's strong durable goods data. Finally, Exxon-Mobil Corp. (XOM) and Chevron Corp. (CVX) headline this week's installments in the ongoing earnings season as investors get a reprieve from the weak financial releases and see just how much record oil and gas prices have padded the pocketbooks of those energy-sector executives [, in Money Morning's new "Buy, Sell or Hold" feature.]
The Federal Communications Commission late Friday approved the $3.3 billion merger of Sirius Satellite Radio Inc. (SIRI) and XM Satellite Radio Holdings Inc. (XMSR), a move that means the still-nascent industry might actually be able to operate at a profit. [Please click here for a complete news story on this satellite radio merger posted elsewhere in this issue of Money Morning.]
With the immediate threat of a Freddie Mac (FRE)/Fannie Mae (FNM) failure looking less and less likely, investors were able to focus more on the heart of earnings season. Thus far, the results have been mixed (or confusing) at best. Of course, financials took top priority (again) as the nation's largest bank by asset size, Bank of America Corp. (BAC), saw its profits decline by more than 40%, much to the delight – that's right, delight – of investors who feared much worse. Wachovia Corp. (WB) followed up with a trifecta of bad news:
- A greater than expected loss.
- A dividend cut.
- And some employee pink slips.
And yet, its stock price was up for the week as investors began to believe the worst of the news may be behind us (a feeling that will only last until the next bit of bad news hits).
Outside of the financial world, investors had plenty of reasons to grin. Heavy equipment-maker Caterpillar Inc. (CAT), oil giant ConocoPhillips (COP), communications staple AT&T Corp. (T) and the world's biggest drugmaker Pfizer Inc. (PFE) each announced strong earnings. Even Internet retailer Amazon.com Inc. (AMZN) shrugged off prospects for weak consumer activity and raised its year-end forecast. Southwest Airlines Co. (LUV) accomplished what none of its competitors could do by reporting its 69th consecutive profitable quarter, thanks to some "ingenious" hedging moves. On the downside, US Airways Group Inc. (LCC), UAL Corp. (UAUA), and JetBlue Airways Corp. (JBLU) suffered along with the rest of their winged brethren; Costco Wholesale Corp. (COST) showed that even discounters can struggle during dire times (apparently consumers can't afford bulk purchases); and Ford Motor Co. (F) posted its worst quarter – ever. [Please click here for a "Buy, Sell or Hold" analysis of Ford shares elsewhere in today's issue of Money Morning.]
United Parcel Service Inc. (UPS) had trouble dealing with the higher gasoline costs, while Texas Instruments Inc. (TXN) lowered its outlook for the year. Some reports required a tad bit more analysis. While Apple Inc. (AAPL) rejoiced over its "best June quarter for revenue and earnings" in its history, it disappointed investors with a weaker-than-expected end-of-year forecast.
Toymaker Hasbro Inc. (HAS) benefited from strong demand for "Iron Man" products, though management worried about the holidays as the company finds itself forced to pass along higher gas prices to consumers. Merger talks resurfaced (another sign of business optimism) as drugmaker Roche Holding Ltd. (OTC ADR: RHHBY) will acquire the remaining shares in Genentech Inc. (DNA) it doesn't already own. Finally, Carl Icahn will have more say in the future of Yahoo! Inc. (YHOO) deals as he and his "cronies" will be given three seats on that "infamous" board.
Consumers got an even greater reprieve from recent energy woes as oil prices continued their decline, and crude even dropped below $123 for the first time in several weeks. Likewise, gas prices declined to just above $4 a gallon nationally (a drop of 10 cents per gallon) as the higher weekly inventory report revealed a continued slide in demand, and as service stations owners looked to regain those gas-guzzling customers.
While investors tried to make sense over the recent earnings reports, some took solace in the lower energy prices, and hope the "trend" continues as summer travel winds down and the holiday shopping season approaches.
A surprisingly weak housing report put a damper on the newfound optimism from the oil decline and prompted some late-week selling that moved the Dow Jones Industrial Average Index into the red for the week. Still, the general mood seems to be changing, as investors are more willing to dip their toes back into the equity pool – though let's hope they do so without badly stubbing their toe in the process.
Year Close (2007)
Qtr Close (06/30/08)
10 yr Treasury (Yield)
With the dreaded "I" word – inflation — monopolizing much of the water cooler discussion these days (except here around Money Morning's water coolers, where the "S" word – stagflation – is getting nearly equal time…) two million Americans were able to join in and explain why escalating costs are not necessarily a bad thing (at least, not for them). The federal minimum wage rose from $5.85 to $6.55 an hour last week, on its way to $7.25 in 2009. While higher oil-and-gas prices have been seen as the primary culprits for the recent pressures, expect some new wage inflation concerns to emerge as businesses look to pass along these higher costs to consumers.
Housing reports highlighted the economic data of the week, and in general, "experts" agree that any rebound is still a long way from coming. For starters, home prices fell in May by 4.8% from last year's levels. Existing home sales plunged by 2.6% in June, more than twice the estimate of most analysts, and more than 15% below the level of activity a year ago.
New home sales dropped by ONLY 0.6% in June, a better-than-expected showing that did little to reverse the concern of the prior (weaker) releases. On the bright side (yes, there is always a silver lining), durable goods orders experienced its best showing since February, a strong sign that manufacturing is not suffering as badly as housing.
Likewise, a consumer sentiment index rose (ever so slightly) as Americans felt better about spending those refund checks that were part of that government economic stimulus package. The U.S. Federal Reserve's Beige Book showed that policymakers continued to grapple with how best to handle the dual crises (slow growth vs. inflation), though Fed Chairman Ben S. Bernanke seemed confident that the country could avoid the stagflation of the 70s.
For now, most economists expect the Fed to leave rates unchanged at the August 5 Federal Open Market Committee meeting. After all, raising rates to combat inflation could prove harmful to the already weak economy; while cutting rates to stimulate growth could lead to further price pressures.
Weekly Economic Calendar
Leading Eco Indicators (06/08)
Down on weakness in labor and stock market
Fed's Beige Book
Slow economy combined with rising inflation
Initial Jobless Claims (07/19/08)
Highest level since post-Katrina period
Existing Home Sales (06/08)
Much larger than expected decline
Durable Goods Orders (06/08)
Most favorable report since February
New Home Sales (06/08)
Weak (but better than expected) report
The Week Ahead
Consumer Confidence (07/08)
GDP (2nd qtr)
Initial Jobless Claims (07/26/08)
Unemployment Rate (07/08)
Nonfarm Payroll Additions (07/08)
Construction Spending (06/08)
ISM Index – Manu (07/08)
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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.