Economic & Market Update: August 17, 2009

“Disappointing Economic Data Weighs on Markets”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Trade Balance:                    -$27.0B – imports and exports both on the rise

Retail Sales:                             -0.1% – weak report despite ‘cash for clunkers’ support

CPI:                                           0.0% – no surprise as trends in inflation are weakening

Capacity Utilization:            68.5% – stabilization evident with auto plants back online

Industrial Production:      0.5% – factory output increases for first time since Dec ‘06

Michigan Sentiment:            63.2 – confidence dwindles as people struggle to find jobs

Stocks:                                  1004 – corrective week following four weekly increases

10-year Note:                    3.57% – big rally on weak economic data        

Oil:                                           $67 – poor economic news cast doubt on crude

Dollar/Euro:                        $1.42 – mostly subdued week for the dollar

Economics This Week:

Date      Item                                                Est.                     Comment

8/18      Building Permits:    576K                   Single family homes slightly improve

8/18      PPI:                              -0.2%                   Decline in gas prices will slow PPI

8/18      Housing Starts:        598K                   Homebuilding remains depressed

8/20      Leading Indicators:  0.6%                Expected to show 4th increase in a row

8/21      Existing Home Sales: 5.0M              Home sales scrapping along bottom

Markets Succumb to Pullback

Investors were lacking conviction this past week as the S&P 500 index faltered for the first time following four consecutive weeks of gains.  Poor news on the economy led to the selling although the 0.6% decline was relatively modest, considering the strength of the recent rally. 

There was a significant amount of speculation as to what the Fed would announce at its most recent meeting but it turned out to be largely in line with expectations.  The Federal Open Market Committee kept the fed funds range at 0-0.25% and announced that they would continue purchasing agency debt and mortgage-backed securities, although the purchase of Treasury securities will now end in October, rather than the previously scheduled September.  The FOMC also acknowledged that the economic picture is “leveling out” but that inflation will remain subdued given the amount of slack in the economy. 

One of the more troubling announcements of the week was that Colonial BankGroup Inc., Alabama’s third-largest state-chartered bank, was sent into receivership by the State of Alabama Banking Department.  BB&T will take over Colonial’s $20 billion in deposits with an FDIC guarantee on $15 billion of those assets.  The bank was doomed after a deal to secure $300 million of outside capital fell through and an additional $550 from the Treasury Asset Relief Program was contingent on that deal being finalized.

Through last Friday, regulators have shut down 77 US banks this year, with another 300 banks on an undisclosed watch list for possible action.  The FDIC’s insurance fund is coming under increasing pressure as the Colonial failure alone will cost the agency an estimated $2.8 billion.  Who’s next?  The Financial Times is reporting that banking regulators are seeking bids for Guaranty Financial Group, the second-largest publicly traded bank in Texas, with an estimated $16 billion in assets. 

Wherefore Art Thou Inflation? 

Market strategists are spending a lot of time trumpeting the inflation horn these days but CPI in the US was unchanged in the month of July, following a 0.7% gain in June.  Recent volatility in energy prices, especially crude oil, has been a driving force behind the headline inflation figures, but even excluding food and energy, core CPI only rose 0.1% for the month. 

Source: NY Times

On a year-over-year basis the 2.1% decline in CPI represents the biggest drop since 1949, but again, distortions are evident as a barrel of oil was trading well above $125 at that point and retail gas was at $4 a gallon, as we all painfully remember.  Lower food and energy prices are a benefit for cash-strapped consumers who are struggling to maintain control of their personal finances.    

Inflation is likely to remain subdued for the time being as higher unemployment and excess global capacity will temper price increases.  July’s inflation data also makes it unlikely that the Fed will seek to increase the fed funds rate for the foreseeable future. 

The Week Ahead

Second quarter earnings season is coming to a close with 88% of companies having already reported.  There are a few noteworthy stragglers that will announce this week – Hewlett-Packard, Home Depot, Lowe’s and Target being the primary ones.

The Fed’s Senior Loan Officer Survey will be published Monday and should provide an indication as to whether consumers are having an easier time accessing credit.  Other important economic data this week will provide a snapshot of the housing market and the Leading Indicators will hopefully show further guidance for an impending recovery. 

Top economists, including leading Federal Reserve officials and foreign central bankers, will converge on Wyoming for the annual Jackson Hole Economic Symposium from Wednesday through Friday.  This year’s conference will focus on “Financial Stability and Macroeconomic Policy.”  Ben Bernanke is scheduled to speak on Friday in a speech entitled “Lessons from a Year of Crisis.” 

Lastly, Beijing is hosting a conference entitled “International Scientific Symposium on Influenza Pandemic Response and Preparedness” from Friday through Sunday.  Given the concerns over a potential reemergence of the swine flu this fall, it could prove to be a very timely conference. 

Quotable:         “The American people will never knowingly adopt socialism.  But, under the name of ‘liberalism,’ they will adopt every fragment of the socialist program, until one day America will be a socialist nation, without knowing how it happened.”  Norman Matoon Thomas (1884-1968), six-time presidential candidate for the Socialist Party of America

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