AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 25, 2008

Market Matters…         

With the immediate threat of a Freddie/Fannie failure looking less and less likely (thanks for that bailout plan, Congress), 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, saw its profits decline by over 40%, much to the delight (that’s right…delight) of investors who feared much worse.  Wachovia followed up with a trifecta of bad news: a greater than expected loss, a dividend cut, and some employee pink slips.  And yet, it’s stock price was up for the week as investors began to believe the worst of the news may be behind us (until the next surprise hits). 

Outside of the financial world, investors had plenty of reasons to grin. Heavy equipment-maker Caterpillar, oil giant ConocoPhillips, communications staple AT&T, and the world’s biggest drugmaker Pfizer each announced strong earnings.  Even Internet retailer Amazon.com shrugged off prospects for weak consumer activity and raised its year-end forecast.  Southwest Airlines 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 Airlines, UAL, and JetBlue suffered along with the rest of their airline brethren; Costco showed that even discounters can struggle during dire times (apparently consumers can’t afford bulk purchases); and Ford posted its worst quarter EVER.  UPS had trouble dealing with the higher gasoline costs, while Texas Instruments lowered its outlook for the year.  Some reports required a tad bit more (over-)analysis.  While Apple 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.  Hasbro benefited from strong demand for “Iron Man” products, though management worried about the holidays as it is forced to pass along higher gas prices to consumers.  Merger talks resurfaced (another sign of business optimism) as druggie Roche Holdings will acquire the remaining shares in Genentech.  Meanwhile, Sirius and XM Satellite made strides to settle outstanding regulatory violations and proceed with its $3.9 billion merger.  Finally, Carl Icahn will have more say in future Yahoo 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 freefall (maybe that’s pushing it) and crude even touched below $123 for the first time in several weeks.  Likewise, gas prices declined to just above $4/gallon nationally (a 10 cent drop) as the higher weekly inventory report revealed a continued slide in demand, and service stations owners looked to regain those gas-guzzling customers.  While investors tried to make heads or tails over the recent earnings reports, some found 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 number (see below) put a damper on the newfound optimism from the oil decline and prompted some late-week selling that moved the Dow Jones into the red for the week.  Still, the general mood seems to be changing as investors are more willing to “stick their toes” back into the equity pools (hopefully without stubbing them in the process). 

Economically Speaking…        

Weekly Economic Calendar

With the dreaded “I” word monopolizing much of the water cooler discussion these days, 2 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 this 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 (what do they know?) and over 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 Fed’s Beige Book showed that policymakers continued to grapple with how best to handle the dual crises (slow growth vs. inflation), though Dr. Bernanke seemed confident that the country can avoid the stagflation of the 70’s.  For now, most economists expect the Fed to leave rates unchanged at the August 5 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. 

On the Horizon…A hectic week on the economic calendar is highlighted by the initial look at 2nd quarter GDP.  Remember, a recession is defined as two consecutive quarters of negative growth so doomsayers have targeted this release as confirmation of their pessimism.  Fortunately, a consensus of analysts believe the economy expanded at a faster pace than the 1% increase of the 1st quarter and safely out of recessionary 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 heals on this week’s strong durable good data.  Finally, Exxon-Mobil and Chevron headline the earnings reports 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 execs.  (Even at $123/barrel, these guys are not crying.) 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

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