Daily Insight

U.S. stocks rallied, sending financial shares to their best one-day performance ever – up 12.3% -- after Wells Fargo posted operating earnings that beat expectations and posted overall stunning results – the firm even raised their dividend. In an environment in which everyone has been expecting the worse out of this sector, the Wells news was more than enough to rally stocks.

Adding to the rally was another significant drop in crude-futures. Oil prices have declined nearly $11 in two days and this helped to ease concerns regarding the consumer; the index that tracks consumer discretionary shares jumped 4.38%.

Industrial and technology shares also enjoyed a nice day, up gained 3.18% and 2.30%, respectively.

Market Activity for July 16, 2008

Oil prices are a bit lower this morning, after falling 7.42% over the previous two sessions, as crude for August delivery stands at $134.06. Yesterday’s weekly energy report showed crude supplies rose 2.95 million barrels; a decline of 2.2 million was expected.

We saw a similar decline during last week’s first two trading session when oil prices fell $9, or 6.5% only to see a rebound back to $145. Hopefully, we have a sustained dropped occurring that gets us close to $125 for now. This would help stock prices out big time and cool the inflation gauges over the next month.

I see many in Congress continue to vilify speculators, citing their behavior as the main reason oil prices have shot up so dramatically. Certainly no one likes it when the market pushes commodity prices higher, but one can’t wish away realities by regulating vital commodity trading markets. I wonder if anyone in Congress happens to ask exactly why market participants have speculated oil prices will go higher. Of course they haven’t – most at least – because they never blame themselves for their own ridiculous policies.

Maybe if there were a sensible energy policy in place, traders wouldn’t bet prices would go meaningfully higher. I doubt anyone would be complaining if speculators were betting prices will fall.

And on the Fed, maybe if the FOMC wouldn’t have implemented such a reckless monetary policy stance, the dollar would be a bit stronger and oil, which is priced in dollars, would be closer to $90 instead of $135. The Fed has thrown the dollar under a bus. But we are trading lower for now, and if Congress removes all restrictions on drilling, we can get a trend started here. I’m not holding my breath, but stranger things have happened.

On the economic front, the Labor Department reported that the consumer price index (CPI) jumped 1.1% in June – that’s on a month-over-month basis – and 5.0% over the past 12 months. We’ve been warning that the consumer-level inflation gauges will rise to 5% before the Fed knows it and here we are. Consumer prices jumped at a seasonally adjusted annual rate of 7.9% in the second quarter and all Benflation Bernanke could say yesterday was that inflation is too high – as if he has zero control over this situation.

Energy accounted for two-thirds of June’s large 1.1% increase, but this didn’t have to be the case if the Fed hadn’t jacked fed funds lower in such an aggressive way. The CPI’s index of energy soared 29.1% at an annual rate in the first-half of 2008. The food component rose 0.8% in June and that specific index within the CPI has risen 6.8% annualized in the first half.

To be fair, the regular CPI does overstate inflation a bit as the index is not capable of quickly adjusting to consumer preferences and the substitution effect – the tendency of consumers to buy more of those goods with which prices are rising more slowing and curtailing consumption of those goods that have prices rising more quickly. Further, the owner’s equivalent rent (OER) segment boosts the housing component as it factors in the cost of renting one’s home instead of owning it. Thus, when the housing market is hurting and more people rent, that results in higher rental prices and pushed the CPI’s housing component higher even when we know home prices are falling. However, there are legitimate segments of this housing component that are pushing CPI higher, such as utility and insurance costs.

Personally, I prefer the chained CPI figure, which we do mention each month, even as the financial press totaling ignored the figure. The chained reading had inflation up 0.8% in June and 4.2% on a year-over-year basis. Certainly higher than we’d like but better at least than the regular CPI reading. Still, if the Fed continues to ignore price stability we will see all of the inflation gauges hitting 5%.

In a separate report, the Commerce Department reported that industrial production rose 0.5% in June after two months of decline. Some of this increase was due the American Axle strike coming to a close, and the negativists obviously suggested that this was a one-time thing and therefore the gains in production will not last. One could also say that the strike, which went on for several months, kept industrial production lower than it otherwise would have been over previous periods.

Other segments boosting industrial production last month were utility output, high-tech production, consumer goods, business equipment and mining activity.

Stock-index futures have done a 180 and are up strong right now after some very good earnings results from Coca-Cola, Untied Technologies and better-than-expected earnings from JP Morgan.

In economic news, we’ll get housing starts for June, the weekly jobless claims figure and manufacturing activity out of the Philadelphia region.

Have a great day!


Brent Vondera, Senior Analyst