Daily Insight

U.S. stocks were all over the map yesterday as the dynamic duo (Fedhead Bernanke and Treasury Sec. Paulson) were on the Hill – which almost always results in market volatility – and a big drop in oil prices helped stocks erase much of a 2.3% early-session decline.

Also we had a slew of economic data out yesterday, and while the inflation data was disturbing – and Bernanke’s dithering, non-committal behavior only causes inflation expectations to erode -- the retail and business sales data were market positives.

Nevertheless, those two economic gauges were not enough to keep stocks positive by session’s close as the S&P 500 closed at its lowest level since late 2005. I’ll repeat though, even if stocks are laggards right now – much of this due to the fact the Fed has created additional uncertainties, in my view – the economy continues to show an awesome level of resilience and I’m not sure our call for a 2.5% second-quarter GDP reading won’t be a bit shy of reality; we may very well get a reading that is closer to 3.0% (in real terms) as core retail sales have risen at a 7.5% annual rate over the past three months – a figure that flows right into GDP.

Market Activity for July 15, 2008

In addition to the Capitol Hill appearance by the dynamic duo, SEC Chairman Chris Cox was also testifying. Of his statements, his comment that naked short-selling would be outlawed regarding financial-sector shares probably garnered the most attention. Naked short-selling is supposedly when someone borrowers the same stock from the same brokerage firm multiple times. What this means is that the person selling short has no intention, or ability, to deliver the shares. I’ve got to be honest, not even sure how this works in reality, but I was under the assumption it was already illegal; it certainly sounds illegal. Maybe what Chairman Cox was saying is now it is really really illegal. Or maybe he found it appropriate to voice the term “naked shorts” in front of members of Congress based on their indecorous behavior.

Moving on…

Crude-oil futures plunged $6.44 per barrel, or 4.44%, yesterday. When this drop occurred at 9:15CT it perfectly coincided with the rally in stocks that brought them back from what looked to be shaping up as an ugly day. President Bush was on the mark yesterday. He was awesome – without tripping himself up even once – on the economy, spelling out a number of positives while acknowledging there are some major challenges that must be dealt with. He was clear, straightforward and on message. Same was true for his statements on the necessity of removing restrictions on domestic energy production.

Naturally, according to the press, it was not Bush’s comments on domestic production that caused crude prices to decline, but the rumor that a bank was failing and had to liquidate their oil positions. So typical. There are a lot of people saying we can’t drill our way out of this situation. I don’t agree. Yes, even if we removed all restrictions on domestic production it would not result in one additional drop of oil, or cubic foot of natural gas, today. But, if the statements are followed with action, it sends a signal and futures prices will respond. Besides, if these restrictions has been removed a decade ago, the energy market would likely not be so uptight.

All of that said, we’ll point out that the crude contract for August delivery expires this week, so this likely has something to do with the precipice drop as well. Crude is down another 1.25% this morning.

On the economic front, the Commerce Department reported that June retail sales rose 0.1%, but excluding autos the figure jumped 0.8%. Core retail sales, which takes out gas station receipts, autos and building materials, rose 0.3%.

We’ve seen consumer activity bounce back very nicely over the past four months, and the rise since April will help to boost Q2 GDP.

In a separate report, Commerce also released business inventories and sales data for May. Inventories rose 0.3% and sales jumped 0.8%, which sent the inventory/sales ratio back to the record low of 1.24 months’ worth of supply.

As the chart below illustrates, business sales remain on a respectable trajectory, up at a 6.3% annualized pace over the past six months – this is not something one sees in an overall weak economy, underlying strength is there. I’ll caution, this sales figure will likely decline when the June figure is released but this will be a very natural occurrence following three months of big gains. Since March, business sales have increased at a 14% annual rate.

Finally, we had the Labor Department’s report on wholesale inflation via the producer price index for June. I’ll let the chart speak for itself.

Despite the troublesome pick up in producer and import prices – import prices are up 20.5% over the past year due to the weak dollar – Bernanke offered nothing that would lead one to believe he is focused on price stability. But reality will continue to ask ol’ Ben how many lumps he wants as it continues to beat him over his Keynesian skull.

In his defense, the consumer-level inflation gauges have remained somewhat tame, although we’ve seen CPI hit 4.2% and this morning’s data is expected to show CPI rose 4.5% year-over-year for June. I find it hard to believe that at least half of the rise in producer prices will not flow to the consumer readings. Inflation works with a lag and I believe the Fed is going to find the inflation gauges hit 5% before they know it. At that point, they’ll be forced to say their Phillips Curve models are flawed – well no, they won’t explicitly admit it – and begin to raise rates. This will actually be a positive event if it occurs, because the sooner they get to it the less aggressively they’ll have to hike.

For now the Fed Chairman is dreamin’ as he continues to state “longer-term inflation expectations remain well anchored.”

On earnings news, Intel reported last night that that operating earnings jumped 45% in the latest quarter as the chip-giant posted record unit shipments of chips for laptops, record shipments for wireless communications and gross margins rose to 55.4% from 53.8%. So that’s good news and provides additional evidence tech-sector profits will record another strong quarter. Recall, Oracle’s 25% rise in operating profit a couple of weeks back that showed the U.S. segment rebounded by 18%.

On a lighter note…

We’ve heard a lot about the “staycation” over the past couple of months. For those not familiar with the term, as it suggests, this is when you can’t afford to actually travel anywhere so you just stay home – as if no one ever stays home when they take time off from work. Anyway, there’s an article in the WSJ touching on how some are pretending to travel – they stay home, but create itineraries for themselves that make it feel like they have gone somewhere. One example was this woman in New York who could not afford a trip to Japan. Instead, she is going to Japanese restaurants, the Bonsai Garden and speaking Japanese for a week. Articles of this type prove there are too many journalists in this country, when you’re struggling to write something and this is what one comes up with it’s pretty clear evidence. We’ve known for some time America has too many lawyers; now it’s clear there are too many journalists too.

Have a great day!


Brent Vondera, Senior Analyst