AND THAT’S THE WEEK THAT WAS…

For the Week Ended August 15, 2008

Market Matters…         

While consumers and businesses have gotten a bit of a reprieve at the pumps as of late, the past year’s escalating energy prices have lead to some changes in overall behavior (not such a bad thing).  Many drivers took those gas-guzzling SUVs to the used (pre-owned) car lots and bought more fuel efficient cars.  Companies with large distribution networks redesigned their shipping schedules to accommodate larger truckloads and more efficient routes.  Gasoline sales tumbled during the first half of the year as domestic demand fell to its lowest level in five years.  In fact, the Transportation Department reported that Americans drove almost five percent less in June than a year ago, while ridership of mass transportation (buses, subways, light rail) climbed by 3.4% in the first quarter.  Lately, gas stations have been forced to make adjustments as prices at the pumps declined below $3.80/gallon after surging to $4.00/gallon and beyond at the beginning of the summer.  Even in China, oil imports dropped substantially in July on shrinking global demand.  (But, will the Olympics have any effect on the latest numbers?)  Despite the tensions (to put it mildly) between Russia and Georgia, energy traders brushed aside concerns about major supply disruptions and the current energy trend still seems quite “friendly.”  In fact, late in the week, oil prices took cues from the newfound strength in the dollar and moved below $112/barrel, a number not even imaginable in mid-July when prices reached a record $147. 

While certain optimistic analysts claimed that the worst of the credit crisis had ended, the latest news from the financial front indicated otherwise.  Swiss banking giant UBS, fresh off $5 billion in new mortgage write-downs, will divide its investment banking and wealth management operations into two separate units and some analysts believe it may look to sell off the banking arm over the next few years.  JP Morgan Chase announced additional losses of $1.5 billion in July and then followed in Citi’s, Merrill’s, and UBS’s (among others) footsteps by agreeing to settle with regulators for billions (plus fines) over the sale of risky securities.  In non-financial news, Wal-Mart bucked the negative retail trend by reporting a 17% increase in quarterly profits as strong international sales helped overcome the domestic slowdown.  Meanwhile, Macy’s issued a warning that earnings for the year will not meet prior expectations and JC Penney and Abercrombie & Fitch missed analysts’ outlooks as well.  Despite the rising commodity prices, food services company Sysco (not to be confused with techie Cisco) posted a 10% gain in quarterly earnings.  Given the ongoing economic concerns (see below) and the “challenges” faced by financials and retailers, Dems in Congress are pushing for another stimulus package, a move with political implications during the election year.  (Candidate Obama approved this message.)   

Looking at fixed income (for a change), bonds moved higher late in the week on a strong dollar and the yield on the benchmark 10-year fell below the 3.90% level.  While pressures on financials (Citi, JP Morgan, Bank of America) propelled the Dow lower mid-week, other equity indexes held up quite nicely.  As energy prices keep falling, some investors believe that corporations will enjoy better cost structures in the months to come and certain share prices reacted accordingly.  Many companies already have begun making helpful adjustments (as every little bit helps).

Economically Speaking…        

Weekly Economic Calendar

While talks of the dreaded “R” word come far less frequently these days, economists remain pessimistic about the rest of the year (and beyond).  Some previously believed the country would experience a nice rebound by the second half of 2008, though the latest economic projections call for 1.2% growth in the third quarter and a feeble 0.3% increase in the fourth.  A recent CEO survey showed that 90% of top execs polled considered domestic conditions to be “fair” or “poor.”  The Fed beige book warned that the overseas demand for “Made in America” goods was beginning to soften, and manufacturers were growing more concerned that the recent strong international activity would no longer help cushion the domestic weakness.  In fact, the European Union economies actually fell by 0.2% in the second quarter and consumer confidence dropped to its lowest level in over five years.  (Maybe the European Central Bank can hold off on those rate hikes after all.)   Even Alan Greenspan (remember him?) thinks the housing sector will not show signs of a turnaround until the first half of 2009.  Greenspan also criticized the Administration over its handling of the Fannie/Freddie debacle, perhaps attempting to shift blame away from himself for his role in the “lax” regulatory oversight of housing and the mortgage industry.   

Looking inside the weekly numbers, retail sales dropped in July as cautious consumers stayed away from the malls and seemed to be waiting for the absolute last minute for any back-to-school shopping needs.  Even removing the weak auto sales data from the equation, retailers suffered their worst showing in five months.  (So much for those tax rebates.)  Meanwhile, July CPI surged by its fastest pace in 17 years and the core statistic (excludes the volatile food and energy components) increased slightly more than expected as well.  However, since average gas prices have declined by over 20 cents in the past few weeks, some analysts expect that the August (well, maybe September or October) CPI release will look far better (unless, of course, Russia/Georgia heats up or a sizable hurricane wreaks havoc on oil platforms in the Gulf of Mexico).

On the Horizon…While Greenspan undoubtedly lost some of his luster (that may have impacted his book sales), investors are eagerly awaiting the real “Maestro’s” biography as “How Warren Buffett Collected Friends, Wisdom, and Wealth” is due on the shelves in September.  (Any tips for the masses, Mr. B.?)  July inflation part 2 will be reported Tuesday with the release of the wholesale gauge (PPI).  Since energy prices have declined in recent weeks, analysts should take these numbers with a grain of salt as the July data will still reflect the higher levels.  Of greater relevance, perhaps, leading economics indicators often serve as a foreshadowing of future activity so Bernanke and friends should take note of that upcoming release.  More retailers post earnings (Limited, Gap, Ann Taylor, Home Depot), though, by now, investors realize the consumers remained cautious about the economy, and most related companies (other than discounters) have continued to struggle.  Maybe the lower gas prices will help turn things around for these and other businesses in the coming months (that is, as long as the current trend in energy remains “friendly”).

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

713-962-9986 (Direct)

ron@ronbrounes.com

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