AND THAT’S THE WEEK THAT WAS…

For the Week Ended August 1, 2008

Market Matters…         

As earnings season plugs along, just as many questions and concerns about the strength of corporate America remain unanswered as when Alcoa was first on the clock a few weeks back.  At mid-week, just over half of the S&P 500 companies had reported and the results actually looked half-way decent (relatively speaking, that is).  About two-thirds of those companies announced earnings that exceeded expectations, while only 20% or so missed on analysts’ targets.  Financials dominated the “good” news as four of the five leading banks bested Street estimates (though, that often meant lower losses instead of better profits).  However, when the dust finally settles, the second quarter will represent the fourth straight period of declining earnings as S&P companies are headed for a double-digit drop from last year.  Of course, the massive plunge among financials greatly contributed to the negative results.  Looking forward, the eternal optimists remain confident that positive earnings will return for the second half of the year and financials may even lead the way as they move beyond the “never-ending” periods of huge write-downs.  However, if such optimism does not come to fruition and annual earnings decline for the second full year in a row, corporate America will have accomplished something not experienced in quite a while, not even during the bear market (and recession) of the early 2000s. 

So, let’s turn to this week’s numbers.  Energy companies benefited from the surge in oil and gas prices as Exxon-Mobil posted the best quarter ever by a domestic company (though still fell short of Street expectations).  Likewise, Royal Dutch Shell and Chevron reaped some strong results as well.  US Steel took advantage of the rise in commodity prices and Verizon and Motorola both recognized better than expected profits.  On the downside, General Motors experienced its third worst quarter in the company’s history.  Tyson Foods struggled as increased grain prices hindered chicken sales.  Sony was victimized by a decline in consumer spending.  And one-time darling Alcatel-Lucent reported another terrible quarter and said goodbye (and good riddance) to its CEO at the same time.  Shifting to the financial world (no rest for the weary), Merrill Lynch plans to write-down another $5.7 billion as it sells off much of its underwater mortgage portfolio and looks to raise another $8.5 billion through a common stock issuance.  (Some analysts believe Citigroup has another $8 billion in write-downs in them as well.)  First National Bank of Nevada and First Heritage Bank joined IndyMac as they were taken over by the FDIC. 

Volatility emerged in the energy market as oil prices fell to their lowest level in two months and even declined in July by almost $16/barrel from previous record highs.  A late week rally pushed prices higher, though the general trend may have shifted.  Some untimely comments from OPEC and turmoil in Nigeria (not to mention Iran) threaten to change that mood back to negativism.  Gasoline fell below $3.90/gallon after hitting a high of $4.11 at mid-month.  Stocks experienced quite a bit of volatility as daily triple-digit price movements (up or down) seem to have become the norm.  Weaker economic data (see below) helped end the week on a sour note, while bonds benefited from a flight-to-quality that sent the yield on the 10-year below four percent again.  All in all, another ho-hum summer week (if +/- 200 daily price moves can be considered ho-hum). 

Economically Speaking…        

Weekly Economic Calendar

Economists got their first look at the overall growth numbers for the second quarter as GDP climbed by 1.9% during the three month period.  While the data seemed to put the economy safely out of recessionary territory (for now), analysts were hoping for a 2.4% growth rate on the heels of the tax rebates that arrived in May.  The eternal pessimists remain fearful that subsequent quarters will prove far weaker without any additional economic stimulus plan.  (Anything you’d like to propose before leaving office, Prez W?)  Consumer confidence rebounded (ever so slightly) from a 16-year low as declining energy prices eased the prior inflationary fears.  Activity within manufacturing was reported right at the “boom/bust line” of 50 as the ISM Index indicated neither expansion nor contraction during July.  Construction spending fell again (11th month out of 13), proving that the country will not be experiencing a housing rebound anytime soon.    

All eyes were on the labor picture as economists hoped that the domestic layoffs were starting to subside and college grads would be joining the summer workforce just in time to stimulate growth.  Early in the week, the ADP survey indicated that private sector employment was on the rise and 9,000 new jobs actually had been added to the economy.  Unfortunately, the euphoria was short-lived; on Friday, the unemployment rate was reported at 5.7%, its highest level in four years.  Meanwhile, 51,000 jobs were lost from the labor force, the seventh straight month of a shirking non-farm payroll picture.  While the July cuts were slightly below expectations, analysts could not help but focus on the fact that over 460,000 jobs have been eliminated so far this year. 

On the Horizon… After a pretty hectic Friday, investors departed for the weekend, relatively certain that the Fed’s hands will be tied for the immediate future.  Bernanke and friends return to the limelight as the governors hold their Open Market Committee meeting to set monetary policy.  They are sure to have plenty of spirited debate: price pressures vs. slow growth, strong energy vs. weak housing, extending the emergency borrowing program, expansive powers over financial firms, etc., etc., etc.  Most expect little more than some heated dialogues as any action could bring negative ramifications.  If they cut rates to stimulate growth, inflation could escalate.  If they raise rates to reign in prices, the economy could slow further.  The data of the week focuses on the consumer as personal income/spending and consumer credit reveal just how active folks have been during these uncertain times.  As the summer (of discontent) winds down, travelers may be able to get in a last minute trip or two as gas prices have declined over the past few weeks.  And retailers are hoping to benefit from the “back to school” shopping crowd.  Ah yes…the second quarter earnings reports continue as consumer giant Procter & Gamble and insurer AIG headline the list of reporting companies.  Any new surprises as the season comes to a close?   

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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