Libertarian's Remorse

(Stocks in this article: AMEX: SPY, AMEX: DIA, Nasdaq: QQQQ, AMEX: SDS, AMEX: DOG, AMEX: QLD, NYSE: XOM, NYSE: MTG, Nasdaq: YHOO, Nasdaq: MSFT, NYSE: LM, NYSE: KO, NYSE: NT, NYSE: DE, NYSE: DNA, NYSE: WMI)

Stocks moved generally higher today, but left the financial sector behind as a resolution to the municipal bond fire seems less likely a day after Warren Buffet's enthusing public appeal. We detail the retail sales and business inventory reports of the day below, and do not find as much to cheer about within them as the market has. That said, the mood of the market is generally a positive one for now.

Investors are hoping government action kicks in just in time to offset economic slowing. At no other time in the economic cycle does the strange mix of art and science become more apparent. Equity valuation, i.e. the science, is meaningless outside of the context of the macroeconomic situation. And in the short run, the psychology of the market in its understanding and confusion regarding where we stand, plays a great role in direction.

Economic Data & Analysis

Retail Sales (January)

Retail sales surprised the market with an increase of 0.3% in January. However, a closer investigation of the numbers reveals some concerning drivers. For instance, excluding gasoline sales, growth was limited to 0.1%. Also, growth continues to gain from rising food prices. January '08 sales at food and beverage stores increased 5.7% over January of '07, while rising 0.6% over December of '07. This most certainly is due to price increase, which is not a healthy driver of growth in a staple good. Gasoline station sales increased 2.0% from December, also not indicative of a thriving automobile environment (he says sarcastically).

Another important takeaway is that discretionary sales made at department stores and electronics retailers declined. This better matches with chain store sale results reported last week, including the ICSC report that indicated aggregate chain store sales grew 0.5% in January, the worst rate since the '70s.

Still, the result exceeded expectations for a 0.3% decline, and the resulting relief helped lift the market this morning. When evaluating the health of the economy, however, we need to consider what consumers are spending on and how price increase perverts the result. Also note the Census Bureau's estimation of error at give or take 0.5%. While considering this, consider as well the sad anecdotal evidence arriving from major retail establishments like Target (NYSE: TGT) and Macy's (NYSE: M). We do not view today's data as positive, but rather illustrative of poor economist forecasting.

Business Inventories (December)

December's Business Inventory report offered the continuation of ongoing long-term positive trend, but also showed near-term deterioration. In a recent article, we discussed the long-term trend of the declining inventory-to-sales ratio within wholesale trade. Businesses concur, illustrating the same benefit of technology, shipping efficiency and executive understanding of the importance of the just-in-time production to delivery process. That same improving trend can be seen at the business level.

However, you can also see the mild deterioration of the adjusted ratio in December. Economic deterioration often leads to inventory build. Before improvements in inventory management, this build led to delay in economic recovery. Excess inventory levels had to be worked off, or written off, before the manufacturing environment could improve. In current times, the economy is much lighter on its feet, and the economy can recover from recession faster. Swift it may be yes, but only when the drivers are there for growth. To illustrate this, imagine two pickup trucks come to a halt at a red light. One is carrying a full load, while the other is empty. Which do you expect would reach cruising speed faster given equal fuel injection...

Let's get our hands dirty, and take a closer look at the data. Sales across categories, including manufacturing, retail and merchant wholesale, increased when compared to the prior year period. However, each category showed decline when compared to November, on an adjusted basis. Inventory on the other hand, showed increase from the year ago period, which would be normal in a growing economy. Meanwhile, when compared to November, inventory also showed increased, excluding within retail. That's not good.

There may be some fault in the seasonal adjustment, or some abnormality between this year and the past to explain the retail outlier. We did experience one of the worst holiday shopping periods in recent history. The most important takeaway is that the inventory-to-sales ratios across categories deteriorated in December, portending recession.

Tired Bush Sounds Ominous

A tired looking President Bush addressed the nation this morning in ominous fashion. He led his speech off with reference to September 11th, and his expectation that terrorists were plotting worse. The Greek immediately considered that the President must be aware of something dire. He seemed to play that same card he showed at his final State of the Union Address last month.

The Senate has passed the well-worded "Protect America Act," which allows the government to access telecommunications systems and monitor terrorists and Americans across the country. Due to risk of lawsuit, many of these firms would not cooperate with the government without law, and for good reason. Congress passed temporary legislation on February 1st in order to deliberate over permanent legislation.

The President reached deep into the hearts of Congressmen during his last address, personalizing the risk, and pointing out that each member of Congress owed much to the intelligence community for something that was left implied. Seems a serious risk to Washington D.C. was exposed through this legislation and the monitoring process.

We know this topic is one of great American interest, and the kind that inspires great debate about the right to privacy. We offer you the opportunity to debate the topic here, by commenting to the article. Click the link entitled "Comment" below this piece, and argue away. Should the government be free to listen in on you? Can they monitor your communications over the Internet? There are clear benefits to this law, but are you willing to sacrifice your right to privacy? If a terrorist attack occurred, and it was later discovered that it could easily have been exposed through this process, would you not be remorseful?

Market-Moving News

• Retail Sales Unexpectedly Rise 0.3% in January, Vs. Consensus View for Decline - Census Bureau


• January Retail Sales - Bloomberg


• Venezuela Halts Oil Supplies to Exxon Mobil (NYSE: XOM) - MarketWatch


• IEA Sees Slower Growth Stalling Oil Demand - FT


• Oil Trades Choppy Ahead of Inventory - Platts


• EIA Petroleum Status Report


• Ross Says Buffet Doing Himself a Favor - CNBC


• Muni Market in Disarray - Bloomberg


• President Bush Discusses Protect America Act - White House


• Bank of England Raises Inflation Forecast - Bloomberg


• FTSE Sinks on Bank & Economic Worries - FT


• Asian Shares Shift Into Reverse Intraday - FT


• Global Confidence Falls - Bloomberg


• Summers Discusses How Bad Things Could Get - Fortune


• Business Inventories December - Census Bureau


• Mortgage Applications Decrease - MBA


• Foreclosure 2007, the Hardest Hit - CNN Money


• Yahoo! Earnings Calendar


• MGIC Investment Corp. (NYSE: MTG) Posts $1.5 Bln. Loss - AP/Yahoo!


• Yahoo! (Nasdaq: YHOO) 9% Stakeholder, Legg Mason (NYSE: LM) Endorses Microsoft (Nasdaq: MSFT) Bid - FT


• Coca-Cola (NYSE: KO) Profit Overflows - AP/Yahoo!


• Nortel (NYSE: NT) Eyes 4G - MarketWatch


• Deere & Co. (NYSE: DE) Sees 54% EPS Rise - AP/Yahoo!


• Genentech (NYSE: DNA) Breast Cancer Study Meets Goal - TheStreet


• Waste Management (NYSE: WMI) Profit Rises - AP/Yahoo!


• Greek's Week Ahead: The Market Loves Me, She Loves Me Not


• Economist: Geopolitical Week Ahead


• Currency Trades This Week - DailyFX


• Iran Daily: Tales from the Dark Side

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