Today's Coffee - Mind the Signs of Consumer Softness
The biggest driver of stocks today is the CPI figure, and we previewed the volatile expectations in our weekly report. We said, "Remember, the market is inflation-centric right now, so this data will likely impact equity direction and degree of movement." So, the inflation-centric market has taken values up today as a result. In the article below, we cover in detail the economic issues of the day and geopolitical topics, as well as international market and domestic stock activity.
ECONOMIC DATA & ANALYSIS
Consumer Price Index
The CPI report this morning set stocks off like a rocket, but the numbers were not that far off consensus expectations, so the run is most likely a relief driven move. The Core CPI figure for May was reported up 0.1%, ahead of the consensus view for a rise of 0.2% and down from April's rise of 0.2%. This seems to have eased overall market concerns about inflation. Yields have moderated as well. Recall that the key driver of volatility this week has been inflation concern. We think there was a little more to it than that, but this core figure has temporarily relieved the pressure on stocks from inflation.
Here's why the market is wrong today, and why inflation is likely to be stubborn. Today, CNBC had a special segment on whether the Fed should focus on Core or Headline CPI. As my loyal readers know, I have been harping here for months about the importance of the headline inflation measures that include rising food and energy prices. To refresh your memory, my point is this. In the past, food and energy price fluctuations have been excluded due to the seasonal drivers and other short-term factors that drove volatility. These short-term drivers usually netted themselves out over time, and proved not to be important long-term issues. So, it made sense to exclude them when analyzing inflation risk.
Today, the drivers behind rising food and energy prices are different. They are secular factors, rather than seasonal. Food prices should continue to rise for many reasons. First of all, global population growth is burgeoning at a much greater pace than new planting, and as you know, acreage is not increasing on this planet. At the same time, the emerging and developing worlds are shifting from agricultural and basic material driven economies to industrialized nations. Farmers across China are migrating to better opportunities in the manufacturing complexes. This is something not limited to China, but clearly the shift in China has great impact to the rest of the world. China has become a net importer of grains just recently, and will likely depend more on imports at an increasing rate.
At the same time that we are reducing global agricultural production, we are finding new uses for agricultural products. The most obvious example is the increasing use of corn to produce ethanol. This is a significant change occurring within our generation, and is at the forefront of driving higher food prices.
Likewise, energy prices are rising due to increasing industrialization in the emerging markets and increasing development throughout the world, as well as population growth. We have a limited supply of found and undeveloped resources, and new energy sources, though increasing, are not yet important enough to drive energy prices lower. Also, the economics of many of the alternative sources make them relatively expensive, though competitive with today's oil prices.
The geographic location of most of the world's oil, which includes many politically unstable places that face the strong potential of digressing, compounds the pressure on prices. Regarding energy, I believe the world is headed in the right direction, and much of this is the result of improving global warming awareness. So, I expect energy prices to moderate before food prices do, but I also expect a broad Middle Eastern war in the near term that holds the potential of escalating into something more.
So, you see, the drivers of rising food and energy prices are not seasonal, like hurricanes and droughts, but secular and substantial. Therefore, we cannot ignore the impact of rising component prices that should find there way into a good deal of other costs. The Producer Price Index reported yesterday and the headline CPI reported today, tell me that inflation is likely to persist and find its way into more goods and services. If it doesn't find its way into consumer goods, this is not a positive sign. It probably means retailers are cutting price to move inventory, which means they'll report weaker results and tighter margins. And that likely translates into industry consolidation, layoffs, bankruptcy and further economic weakness. Proceeds from sales that are generated on lower prices, produce poorer margins, less efficient profits and weaker GDP. It's like squeezing the last bit of juice from an orange. You get a lot less juice for a lot more effort. I think you can see this in productivity trends.
People are pointing to lower prices in housing as a good thing, and I believe there is a healthy rebalancing going on as housing tries to find stability. However, declining home equity and rising mortgage payments are a cost to the consumer that shouldn't be ignored either.
University of Michigan Consumer Sentiment
In this week's "The Greek's Week Ahead - Phantom Catalyst, Correct Reaction," I wrote "Your independent equity research provider here expects consumer sentiment to weaken below the consensus level." The University of Michigan/Reuters Consumer Sentiment Survey reading fell to 83.7 in June from 88.3 in May. We have been pointing to the declining trend throughout the year as a red flag. I want to republish that trend for you here so that you get the picture:
2007 Monthly Michigan Consumer Sentiment:
Jan - 98.0
Feb - 93.3
Mar - 88.8
Apr - 85.3
May - 88.3
June - 83.7
We reported in May, our view that May's rise was likely just a blip due to the strong performance of the stock market. Even at that time, we warned investors to avoid over enthusiastic behavior, because the consumer is showing signs of breaking. The consumer is responsible for two-thirds of GDP, and is therefore the most important bearing pillar of this economy. He's under a lot of stress, though he's held up well. The sentiment figures and recent retail sales data, as well as other anecdotal information point toward a softening of consumer spending. I believe this will drive layoffs and consolidation in the retail sector, and impact both the service sector, which makes up 90% of our economy, and the manufacturing sector.
Empire State Manufacturing Survey
The New York region's manufacturing report showed a reading of 25.8, versus expectations for 12.5. It was a positive report, but not one that contradicts Wall Street Greek's view. We are on record stating that manufacturing will be the last leg to fall, as U.S. multinationals benefit from demand for U.S. products overseas. The decline of the dollar has made U.S. produced goods more competitive, and firms are also able to chase market share with better success now. However, we think it will fall for this reason. In the end, American consumers butter the bread of American manufacturers. If consumer spending declines, the impact should be felt across the service and manufacturing sectors globally, and certainly in America.
Current Account Deficit
The current account deficit widened by 2.5% in the first quarter, versus the fourth. The current account deficit is the broadest measure of trade, as it includes investment flows as well as trade. It's not a good sign that it has widened sequentially at a strong rate. There is some debate whether a stealth trade war is beginning between China and the U.S. Some question whether China is selling out of U.S. treasuries or just buying less. Big Red has already stated it would do so as a matter of diversification, but experts and enthusiasts I trade emails with wonder if there is more to the dramatic move of interest rates of late than just inflation fear. Yesterday, I also noted that as war draws near with Iran, a trend of capital flow out of the U.S. should increase. One place you can be sure it will not be flowing into though, is Iran.
GEOPOLITICAL ISSUES
Hamas and the Palestinian Issue
Hamas has captured the important government and military installations in Gaza. And now we await the Israeli Army to retake Gaza. It's only a matter of time, because Israel is not going to allow friends of Iran to control the territory. Hamas is not good for Palestinians, and that is going to be reinforced soon by Israeli tanks I'm sure.
Palestinian President, and Fatah Party Chief, Mahmoud Abbas dissolved his government and replaced Hamas' Haniya with one of his own guys. While this is probably cool with Israel, it's not the way to unite your people. Abbas should have found and placed on trial the people involved with the attack on Haniya's home. This may sound naive, but it's the only way to unite Palestine. Someone needs to stand up and burn the flags of Fatah and Hamas and call for a unification of Palestinians. It's the best resolution for the Palestinians and the Israelis alike. Certainly, more reasons to divide people are not necessary. Hamas should be dissolved as should Fatah.
International Markets
The Bank of Japan kept rates steady today, a good move for investors in Japan. Recent economic growth has been favorable for investment, so we would like to see a central bank willing to let growth gain some traction. The NIKKEI 225 improved 0.72% today, and the Hang Seng rose the same amount. China's mainland markets also had another up day, as the CSI 300 appreciated 0.58%. China reported strong factory expansion today, and significant inflation risk remains, but I cannot see mainland shares really correcting until war with Iran scares people about energy supplies. Defense Secretary Gates today accused China of supplying weapons to our enemies in Iraq and Afghanistan, through Iran. It's clear that the Chinese government is no friend to America, and is actively working to prepare itself to perhaps challenge the United States' influence in many regions of the world. Wall Street Greek would not be surprised to see China advance its position regarding Iran, to a more threatening stance. There are important energy resources and supply lines and plans at stake.
International Market Activity:
Asia:
Hang Seng Index +0.72%; Shanghai/Shenzhen CSI 300 +0.58%; NIKKEI 225 +0.72%; S&P/ASX 200 +0.52%; Taiwan TAIEX +1.45%; BSE SENSEX 30 -0.29%; KRX 100 -0.01%; Ho Chi Minh +0.52%
U.K., Europe & Middle East:
DJ STOXX 50 Index +1.25%; FTSE 100 +1.24%; CAC 40 +0.96%; DAX +2.31%; Russian RTS Index +0.70%; ASE General +0.85%; Tel Aviv 25 NA; Tadawul All Share NA; DFM General NA
Stock Specific News
Today's Earnings Calendar Includes:
Business Systems Group Holdings PLC (BSG.L)
Time Not Supplied
Competitive Technologies (CTT)
Time Not Supplied
Plasmon PLC (PLM.L)
02:00 am ET
Triad Group PLC (TRD.L)
Time Not Supplied
Winnebago (WGO)
Consensus: 0.49
Before Market Open
Thank you for your interest in our articles. (disclosure)
ECONOMIC DATA & ANALYSIS
Consumer Price Index
The CPI report this morning set stocks off like a rocket, but the numbers were not that far off consensus expectations, so the run is most likely a relief driven move. The Core CPI figure for May was reported up 0.1%, ahead of the consensus view for a rise of 0.2% and down from April's rise of 0.2%. This seems to have eased overall market concerns about inflation. Yields have moderated as well. Recall that the key driver of volatility this week has been inflation concern. We think there was a little more to it than that, but this core figure has temporarily relieved the pressure on stocks from inflation.
Here's why the market is wrong today, and why inflation is likely to be stubborn. Today, CNBC had a special segment on whether the Fed should focus on Core or Headline CPI. As my loyal readers know, I have been harping here for months about the importance of the headline inflation measures that include rising food and energy prices. To refresh your memory, my point is this. In the past, food and energy price fluctuations have been excluded due to the seasonal drivers and other short-term factors that drove volatility. These short-term drivers usually netted themselves out over time, and proved not to be important long-term issues. So, it made sense to exclude them when analyzing inflation risk.
Today, the drivers behind rising food and energy prices are different. They are secular factors, rather than seasonal. Food prices should continue to rise for many reasons. First of all, global population growth is burgeoning at a much greater pace than new planting, and as you know, acreage is not increasing on this planet. At the same time, the emerging and developing worlds are shifting from agricultural and basic material driven economies to industrialized nations. Farmers across China are migrating to better opportunities in the manufacturing complexes. This is something not limited to China, but clearly the shift in China has great impact to the rest of the world. China has become a net importer of grains just recently, and will likely depend more on imports at an increasing rate.
At the same time that we are reducing global agricultural production, we are finding new uses for agricultural products. The most obvious example is the increasing use of corn to produce ethanol. This is a significant change occurring within our generation, and is at the forefront of driving higher food prices.
Likewise, energy prices are rising due to increasing industrialization in the emerging markets and increasing development throughout the world, as well as population growth. We have a limited supply of found and undeveloped resources, and new energy sources, though increasing, are not yet important enough to drive energy prices lower. Also, the economics of many of the alternative sources make them relatively expensive, though competitive with today's oil prices.
The geographic location of most of the world's oil, which includes many politically unstable places that face the strong potential of digressing, compounds the pressure on prices. Regarding energy, I believe the world is headed in the right direction, and much of this is the result of improving global warming awareness. So, I expect energy prices to moderate before food prices do, but I also expect a broad Middle Eastern war in the near term that holds the potential of escalating into something more.
So, you see, the drivers of rising food and energy prices are not seasonal, like hurricanes and droughts, but secular and substantial. Therefore, we cannot ignore the impact of rising component prices that should find there way into a good deal of other costs. The Producer Price Index reported yesterday and the headline CPI reported today, tell me that inflation is likely to persist and find its way into more goods and services. If it doesn't find its way into consumer goods, this is not a positive sign. It probably means retailers are cutting price to move inventory, which means they'll report weaker results and tighter margins. And that likely translates into industry consolidation, layoffs, bankruptcy and further economic weakness. Proceeds from sales that are generated on lower prices, produce poorer margins, less efficient profits and weaker GDP. It's like squeezing the last bit of juice from an orange. You get a lot less juice for a lot more effort. I think you can see this in productivity trends.
People are pointing to lower prices in housing as a good thing, and I believe there is a healthy rebalancing going on as housing tries to find stability. However, declining home equity and rising mortgage payments are a cost to the consumer that shouldn't be ignored either.
University of Michigan Consumer Sentiment
In this week's "The Greek's Week Ahead - Phantom Catalyst, Correct Reaction," I wrote "Your independent equity research provider here expects consumer sentiment to weaken below the consensus level." The University of Michigan/Reuters Consumer Sentiment Survey reading fell to 83.7 in June from 88.3 in May. We have been pointing to the declining trend throughout the year as a red flag. I want to republish that trend for you here so that you get the picture:
2007 Monthly Michigan Consumer Sentiment:
Jan - 98.0
Feb - 93.3
Mar - 88.8
Apr - 85.3
May - 88.3
June - 83.7
We reported in May, our view that May's rise was likely just a blip due to the strong performance of the stock market. Even at that time, we warned investors to avoid over enthusiastic behavior, because the consumer is showing signs of breaking. The consumer is responsible for two-thirds of GDP, and is therefore the most important bearing pillar of this economy. He's under a lot of stress, though he's held up well. The sentiment figures and recent retail sales data, as well as other anecdotal information point toward a softening of consumer spending. I believe this will drive layoffs and consolidation in the retail sector, and impact both the service sector, which makes up 90% of our economy, and the manufacturing sector.
Empire State Manufacturing Survey
The New York region's manufacturing report showed a reading of 25.8, versus expectations for 12.5. It was a positive report, but not one that contradicts Wall Street Greek's view. We are on record stating that manufacturing will be the last leg to fall, as U.S. multinationals benefit from demand for U.S. products overseas. The decline of the dollar has made U.S. produced goods more competitive, and firms are also able to chase market share with better success now. However, we think it will fall for this reason. In the end, American consumers butter the bread of American manufacturers. If consumer spending declines, the impact should be felt across the service and manufacturing sectors globally, and certainly in America.
Current Account Deficit
The current account deficit widened by 2.5% in the first quarter, versus the fourth. The current account deficit is the broadest measure of trade, as it includes investment flows as well as trade. It's not a good sign that it has widened sequentially at a strong rate. There is some debate whether a stealth trade war is beginning between China and the U.S. Some question whether China is selling out of U.S. treasuries or just buying less. Big Red has already stated it would do so as a matter of diversification, but experts and enthusiasts I trade emails with wonder if there is more to the dramatic move of interest rates of late than just inflation fear. Yesterday, I also noted that as war draws near with Iran, a trend of capital flow out of the U.S. should increase. One place you can be sure it will not be flowing into though, is Iran.
GEOPOLITICAL ISSUES
Hamas and the Palestinian Issue
Hamas has captured the important government and military installations in Gaza. And now we await the Israeli Army to retake Gaza. It's only a matter of time, because Israel is not going to allow friends of Iran to control the territory. Hamas is not good for Palestinians, and that is going to be reinforced soon by Israeli tanks I'm sure.
Palestinian President, and Fatah Party Chief, Mahmoud Abbas dissolved his government and replaced Hamas' Haniya with one of his own guys. While this is probably cool with Israel, it's not the way to unite your people. Abbas should have found and placed on trial the people involved with the attack on Haniya's home. This may sound naive, but it's the only way to unite Palestine. Someone needs to stand up and burn the flags of Fatah and Hamas and call for a unification of Palestinians. It's the best resolution for the Palestinians and the Israelis alike. Certainly, more reasons to divide people are not necessary. Hamas should be dissolved as should Fatah.
International Markets
The Bank of Japan kept rates steady today, a good move for investors in Japan. Recent economic growth has been favorable for investment, so we would like to see a central bank willing to let growth gain some traction. The NIKKEI 225 improved 0.72% today, and the Hang Seng rose the same amount. China's mainland markets also had another up day, as the CSI 300 appreciated 0.58%. China reported strong factory expansion today, and significant inflation risk remains, but I cannot see mainland shares really correcting until war with Iran scares people about energy supplies. Defense Secretary Gates today accused China of supplying weapons to our enemies in Iraq and Afghanistan, through Iran. It's clear that the Chinese government is no friend to America, and is actively working to prepare itself to perhaps challenge the United States' influence in many regions of the world. Wall Street Greek would not be surprised to see China advance its position regarding Iran, to a more threatening stance. There are important energy resources and supply lines and plans at stake.
International Market Activity:
Asia:
Hang Seng Index +0.72%; Shanghai/Shenzhen CSI 300 +0.58%; NIKKEI 225 +0.72%; S&P/ASX 200 +0.52%; Taiwan TAIEX +1.45%; BSE SENSEX 30 -0.29%; KRX 100 -0.01%; Ho Chi Minh +0.52%
U.K., Europe & Middle East:
DJ STOXX 50 Index +1.25%; FTSE 100 +1.24%; CAC 40 +0.96%; DAX +2.31%; Russian RTS Index +0.70%; ASE General +0.85%; Tel Aviv 25 NA; Tadawul All Share NA; DFM General NA
Stock Specific News
Today's Earnings Calendar Includes:
Business Systems Group Holdings PLC (BSG.L)
Time Not Supplied
Competitive Technologies (CTT)
Time Not Supplied
Plasmon PLC (PLM.L)
02:00 am ET
Triad Group PLC (TRD.L)
Time Not Supplied
Winnebago (WGO)
Consensus: 0.49
Before Market Open
Thank you for your interest in our articles. (disclosure)
posted by The Greek | 10:08 AM
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