AND THAT’S THE WEEK THAT WAS…

For the Week Ended August 22, 2008

Market Matters…         

Straight from China…the land that exports much of the world’s toys and other (lead-based) products AND imports significant oil, gas, and other commodities (greatly contributing to the prior surges in related prices) come the latest in business headlines.  With Michael Phelps becoming an overnight hero at the Beijing Olympics, a new corporate bidding war may soon begin as the record medalist prepares to be transformed into the next global marketing sensation.  (What happened to the mere excitement of a Wheaties box?)  Phelps currently maintains a contract with swimwear company, Speedo, and will collect a cool $1 million bonus for his gold medal accomplishments.  Enter Nike, the sports apparel giant, with a limited swimwear presence.  Analysts project that Phelps could mean $50 million and a huge new market for Nike; the company may come calling with a blank check.  (Can you say Tiger Woods?  Michael Jordan?)  Here’s the rub as these companies prepare their bids and potentially increase their ad budgets during a period of economic uncertainty.  While Tiger and MJ participate(d) in sports that graced TV screens constantly, Phelps will drift into virtual athletic oblivion until London 2012.  Good luck Michael.  Thanks for making us forget the mortgage/credit crises (if only for a few days).

Speaking of…Just when it seemed that investors once again found it safe to hold Freddie Mac and Fannie Mae securities, a negative Barron’s article spooked shareholders that their stock prices were heading to $0 amid an imminent government bailout.  Other analysts believed that full-fledged nationalization of the two government sponsored enterprises remains unlikely and major loans from the Fed would seem the more logical path should capital infusions be needed.  Meanwhile, the respective stocks plunged to 18-year lows.  On the “lighter” side of the financial news,) Goldman Sachs, Merrill Lynch, and Deutsche Bank joined UBS, Citigroup, JP Morgan Chase, and Morgan Stanley in reaching settlements with NY Attorney General Cuomo (doing his best pre-scandal Elliot Spitzer imitation) over past sales of risky securities.  On an even more positive note, analysts at JP Morgan stated that the next two years would be more favorable for financial firms than for energy companies.  (Any one interested in a Lehman hostile takeover?)  In earnings news, retailers Home Depot, Target, Saks, and Staples all posted worse that expected quarters, revealing that consumers are steering clear of just about every type of store these days.  Techs got a boost, however, as HP reported surprisingly strong results.    

As the week began, the Dow plummeted over 300 points in two days as the Freddie/Fannie scare resurfaced.  Fortunately, the eternal optimists pointed to the light volume which often results in exaggerated price moves (either up or down).  With the summer winding down, traders and investors alike head to the Hamptons for some much-deserved R&R (at least, those who can still afford it).  Oil prices suffered through some excess volatility as traders (over)analyzed the growing tensions between Russia and the US, the weekly inventory data, and threats of storms in the Gulf that could have disrupted production.  By week’s end, the major equity indexes had bounced back, but still ended in negative territory.  Maybe a few more Olympic successes can put the fear and uncertainty on the backburner again.  (Certainly not the 4 X 100 meter relays.) 

Economically Speaking…        

Weekly Economic Calendar

So much for the decline in energy prices over the past few weeks putting a stop to the never-ending inflation fears.  In July, PPI skyrocketed at its fastest rate in over two-and-a-half decades, far exceeding most economists’ forecasts.  While some are keeping a “wait until next month” attitude (when the lower energy prices will be reflected in the numbers), others point to the core data (excludes the volatile food and energy component) as proof that inflation is here to stay regardless of the shift in energy.  Core wholesale prices suffered the largest monthly increase since November 2006 as other sectors clearly have been impacted by the rise in commodities.  At week’s end, Dr. B. seemed to be reveal that he is most concerned about the sluggish economy; he made his case for the current level of fed funds (2%) by projecting that inflationary “pressures should ease in the coming months as commodity prices fall and the economy slows.”

Meanwhile, housing continues to struggle as July construction starts plunged to the lowest pace since March 1991 (so what else is new?) and new mortgage applications also declined to levels not seen in almost eight years.  On the bright side (if any really exists), residential sales in So-Cal (Southern California) climbed to a 16-month high as home buyers and real estate investors (more likely, speculators) finally found some value in certain foreclosed properties.  The predictive index, leading economic indictors, fell far more than expected as the continued slump in building permits led the ongoing pessimism about future housing activity.  (Well, at least, So-Cal may be on the mend?  Any other regions care to follow?)

On the Horizon…Despite the recent reprieve from record energy prices (and Bernanke’s comments notwithstanding), inflation definitely should remain high on the Fed’s radar screen (and Americans will still feel the pinch in their pocketbooks).  While some analysts expect food and energy prices to lead to lower overall inflation gauges (CPI, PPI) in the months to come, the recent core numbers reveal that businesses and consumers will continue to be impacted by price pressures.  The upcoming release of last month’s Fed policy meeting will delve a bit into the mindset of the policymakers as they continue to face the dual economic threats of sluggish economy vs. inflation.  On that note, the revised 2nd quarter GDP will be released and investors are hoping for an upward revision from the 1.9% reported in July.  Most were counting on those tax rebates contributing more to the domestic economic growth.  Confidence and personal income/spending data will help dictate just how active the consumer will be in the months to come.  Retailers (discounter and luxury stores alike) will surely be watching to learn whether they can expect any positive news in time for the holidays.  Finally, two one-time industry leaders, Dell and Sears, report earnings, though such announcements do not carry the luster they once did.  Then again, maybe Michael Phelps can start “blogging” on a new Dell laptop (take that, HP), while wearing new Sears swimwear?  You guys care to expand those advertising budgets? 

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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ron@ronbrounes.com

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