Daily Insight

U.S. stocks extended upon Tuesday’s losses after FedEx posted quarterly results that were lower than expected and Fifth Third Bancorp cut their dividend by 65% -- a dividend that they had just boosted three months back.

Stocks began the day lower and never looked back. We bounced around in negative territory, looking like some momentum may get the broad market to the plus side, but it failed to materialize and we ended lower by roughly 1%.

The FedEx news showed how higher energy costs – and Fed mistakes, in my view – are having some widespread effects. The company stated that while activity was relatively weak (largely in terms of the higher cost Express Air deliveries), the big issue for the quarter was their inability to keep up with rising energy costs. FedEx does have to deal with a two-three month lag when it comes to increasing fuel surcharges and when crude prices rise so abruptly this reality exacerbates the issue. They also mentioned full-year guidance will be in a range of $4.75-$5.25 per share, well below the estimate of $6.00.

To no surprise, financial shares pushed the broad market lower on the Fifth Third news, but the group was not the worst performer as consumer discretionary shares held that unwanted position. All 10 major S&P 500 industry groups declined.

A number of uncertainties are keeping stocks range-bound, as we’ve mentioned for some time now. Some of these questions are economically endogenous, such as future tax and trade policy, the price of energy and the duration of the housing correction, and some are exogenous, such as geopolitical risks, namely Iran and their terrorist-group proxies.

But we shouldn’t forget that a number of economic indicators remain quite upbeat, while others have shown signs of improving of late.

For instance:

• Retail sales have rebounded nicely after a few months of lackluster activity. Retail sales ex autos and gas stations receipts (adjusting for the rise in pump price and showing that consumers have the aggregate resources to purchase other items) are up a powerful 10% at an annual rate over the past three months.
• Business sales remain on an upward trajectory, rising at an 8% annual pace over the past six months. As a result, inventory levels remain very near record lows. The production needed to increase stockpiles will catalyze growth in the back-half of the year, in our view.
• The labor market is holding up quite well and even though we’ve lost jobs over the past five months, just 4% of the 8 million jobs created during the previous five years have been erased. We’ve lost a net 324,000 payroll jobs since January; during the typical economic downturn we see this amount of losses in one or two months’ time.

In addition, once the Fed gets it right and boosts their benchmark rate to 3.00% by year end – that’s my personal call at least – oil will come off these highs and stocks, the economy and the consumer will receive a substantial boost.

We were without a major economic release yesterday, but get back to it this morning with the weekly jobless claims figure. Recall, last week we saw a boost to the 380,000 level – for new readers we want to get back to 365,000-375,000 for now. Any sign that we are trending toward 400,000 in weekly claims will be troubling. Last week’s jump may have resulted from the issue of seasonally adjusting for the Memorial Day holiday as it pushed the prior week’s data meaningfully lower and hence we got that boost last week – which was actually for the week of June 7. This morning’s data will give us a cleaner look as the adjusting process to that holiday will have passed.

Moving along to energy policy, CNBC had analysts and commentators on all day long yesterday talking about whether or not to open up restricted federal lands along the outer continental shelf, et al., that have proven oil and natural gas reserves. Literally, all day they went round and round as if this is a tough call. For the love of God, just drill.

Ronald Reagan, in his epic 1964 speech “A Time for Choosing” stated: “They say the world is too complex for simple answers. They are wrong. There are no easy answers, but there are simple answers.” He was of course referring to the Cold War.

In this case though, we have the best of both worlds. The answer is both easy and simple, especially with energy prices perched at these lofty levels and regimes that hold vast reserves hell-bent on the destruction of the West. As Daniel Henninger has so forthrightly put it: drill, drill, drill!

And while we’re on the subject, those opposed to increased levels of production have come out with a new claim: energy producers are sitting on 68 million acres of leased land that they are not currently drilling on and thus they should not be allowed to lease additional areas. This has become the new talking point as I heard it verbatim from three different politicians within an hour’s time last night

But let’s inject a few realities:

• First energy companies must engage in geological/seismic testing to find where the oil – if any – is on a given parcel of land (there are no proven reserves when the leasing process begins regarding many of these areas)
• Then they must move through the long process of local, state and federal permit approvals – and the lawsuits that pop up from environmental groups which delay work for years in many cases
• Lastly, this claim that government will take the land back (part of this new “use it or lose it” threat) if production or the processes necessary to get to that stage is not occurring is already law. If nothing is being done, then there is no argument; the oil companies lose that land. But why would they pay the lease if they were not going to do anything with it? Some of these parcels are “dry” and they must move on to another site

Finally, beyond the fact that more production is necessary, we shouldn’t neglect the reality that this new approach will create thousands of high paying manufacturing jobs. We often hear how productivity increases and global competition have reduced U.S. manufacturing positions. Well, this is one way to boost jobs within the sector in a big way.

Have a great day!

Brent Vondera, Senior Analyst