Despite a rocky ride last week, stocks ended up pretty much where they started the period. The activity was symbolic of the overriding confusion that pervades the market today. Investors are faced with a conundrum. While they attempt to gauge the economic condition, forecast its future and anticipate stock market action, they also have to contend with a rare phenomenon. You see, in times of economic deterioration, price pressure typically eases as a natural consequence. However, while the broad indices including the Dow Jones Industrials, S&P 500 and Nasdaq are well off their October 2007 highs, commodity prices are breaking records. That’s unheard of!
Actually, it’s not, but it’s rare. Stagflation is the term for it, and it reared its ugly head from the murky depths last week. The Philadelphia Federal Reserve Index, which measures Philly area manufacturing, posted a negative 24.0 reading. This matched the weak figure seen in the New York manufacturing sector not long before. The news was not so troubling in isolation, or at least not surprising, but it became disconcerting when the Philly Fed reported its manufacturers continue to see input price increases and also continue to raise their own prices, despite product demand softness.
Investors have a choice between two devils though. If manufacturers do not pass through price increase, their margins get squeezed and they must consider more significant cost consolidation in the form of plant closures and layoffs. Perhaps signifying that they have borne all they could, prices are now rising on the consumer level. Manufacturers are already right alongside housing in terms of the rate they have been shedding jobs. Price increases are manifesting in the food industry and across manufacturing now. Last week’s reporting of the Consumer Price Index only confirmed what we have seen anecdotally, as prices increased more than expected in January.So what’s so scary about this Greek?
Well, the Federal Reserve is in the process of cutting interest rates with a goal to inspire economic expansion. By lowering rates, the cost of borrowing decreases and things are supposed to get easier for everyone. Of course, after the subprime debacle, lenders have otherwise tightened lending standards. Still, rate cuts lower the cost of capital for corporations and are a positive for their share values, usually.
What’s different this time, or what’s thought to be different, is globalization has reached a critical threshold, and economic decoupling has set forth. Now, developed markets are still tightly tied to America, and that’s why the U.K. and Europe are seeing similar slowdowns to ours. However, in the large emerging markets of India, China and others, domestic market demand has gained traction. Even as the United States slows, these important consuming populations, driven by an emerging middle class, continue draining global commodity resources.Capital Finds Profit
While The Greek believes this unique change is playing a role, we also expect capital flows are exacerbating that impact. Capital finds profits you see, and with the availability of new exchange traded funds (ETFs), more investors can now participate in commodity investment. As a requirement, many of these funds must own the underlying commodity, and investor demand in ETFs drives substantially higher and synthetic demand for the commodities. The Greek believes an important cure for this potential driver of stagflation or hyperinflation will have to be increased regulation of ETFs. Otherwise, the return of high interest rates driven by inflation could stymie the global economy and even eventually lead to wars over basic resource supplies.The Week Ahead
The coming week will offer key housing, consumer and producer data to swallow.Monday
Existing home sales are set for Monday report and new home sales for Wednesday. Recent market reaction to housing data has been one indicative of overriding bearish sentiment. Investors have come to expect poor results, and do not generally penalize home builders or the broader market for weak information any longer. This sets the stage for upside surprise eventually, but it’s still early for that in our view. Bloomberg's survey of economists pegs existing home sales for January at an annual pace of 4.84 million, compared to 4.89 million in December.
The Fed goes on parade this week, and Governors Mishkin and Kroszner will serve as Co-Grand Marshals. The two will take separate podiums on Monday. The day's most noteworthy earnings reports include Healthcare Realty Trust (NYSE: HR), LDK Solar (NYSE: LDK), Lowe’s (NYSE: LOW), Nordstrom (NYSE: JWN) and Sotheby’s (NYSE: BID).
The remainder of the earnings schedule includes FirstEnergy (NYSE: FE), Henry Schein (Nasdaq: HSIC), Human Genome Sciences (Nasdaq: HGSI), ONEOK Inc. (NYSE: OKE), Shiloh Industries (Nasdaq: SHLO), Silver Wheaton (NYSE: SLW), Zebra Technologies (Nasdaq: ZBRA) and more.Tuesday
The Fed parade continues on Tuesday, when Fed Vice Chairman Donald Kohn grabs a microphone. Remember it was Kohn who set the pace when Bernanke seemed lost in neutrality.
The Producer Price Index for the month of January will hit the wires on Tuesday, but this news should reflect what we have already seen from regional Fed districts. Also, last week’s CPI report was more important, in our opinion, as it showed the prices borne at the consumer level. Still, January's PPI is expected to show an increase of 0.3%, and to post a rise of 0.2% when excluding food and energy price change.
The International Council of Shopping Centers will post its weekly same-store sales figure on Tuesday morning. Growth accelerated a bit in the prior week's report, up to 1.9% year-over-year.
Consumer confidence will be measured on Tuesday through the Conference Board’s survey of February. The consensus is looking for a measure of 81.3 this time around, versus 87.9 in January. As confidence and consumer spending ease, we've been expecting tough times to befall retailers, and they have. Sharper Image (Nasdaq: SHRP) has filed for bankruptcy, following up store closures and layoffs at Macy's (NYSE: M) and Talbots (NYSE: TLB). A slew of retailers are set to report this week, including Macy's on Tuesday.
Some of the other earnings reports you will want to prepare for include DISH Network (Nasdaq: DISH), Domino’s (NYSE: DPZ), Foster Wheeler (Nasdaq: FWLT), H.J. Heinz (NYSE: HNZ), Home Depot (NYSE: HD), Papa John’s (Nasdaq: PZZA), RadioShack (NYSE: RSH), Target (NYSE: TGT), American Dental Partners (Nasdaq: ADPI), Asset Acceptance Capital (Nasdaq: AACC), Astec Industries (Nasdaq: ASTE), Autodesk (Nasdaq: ADSK), AutoZone (NYSE: AZO), CV Therapeutics (Nasdaq: CVTX), Dycom (NYSE: DY), El Paso (NYSE: EP), Frontier Oil (NYSE: FTO), Health Care REIT (NYSE: HCN), Helios & Matheson (Nasdaq: HMNA), Herbalife (NYSE: HLF), K-Swiss (Nasdaq: KSWS), Lionbridge Tech (Nasdaq: LIOX), Masimo (Nasdaq: MASI), Medarex (Nasdaq: MEDX), Office Depot (NYSE: ODP), Overseas Shipholding (NYSE: OSG), Reliant Energy (NYSE: RRI), Sanderson Farms (Nasdaq: SAFM), Sempra Energy (NYSE: SRE), Sonic Solutions (Nasdaq: SNIC), Star Bulk Carriers (Nasdaq: SBLK), Superior Energy (NYSE: SPN), Tenet Healthcare (NYSE: THC), TETRA Technologies (NYSE: TTI) and more.Wednesday
The Fed parade climaxes Wednesday and Thursday when Chairman Bernanke addresses the House Financial Services Committee and the Senate Banking Committee in successive order. Durable Goods Orders for January are set for Wednesday release, and are expected to show a significant drop-off of ordering activity. Bloomberg's consensus is looking for a 3.5% decrease in orders month-to-month. New home sales for January are seen setting a slightly lower mark, to an annual pace of 600K. This compares to 604K in December.
Wednesday also of course brings the regular reports on mortgage activity and petroleum inventory. Both matter this time around. With long rates rising and spreads widening, recently decent mortgage activity could now find a brick
wall. Oil prices have risen despite large inventory building. Rumblings out of OPEC about a possible March production cut may be aiding that a bit, and certainly the Turkish incursion into Northern Iraq and refinery explosion in the U.S. helped support prices last week. As this past news gets older, we have to wonder how oil prices can hold up. T. Boone Pickens, for one, also sees oil prices softening from here. Or, is inflation the key catalyst now, and if Iran continues to defy the U.N., perhaps the floor is not too far a trip.
Wednesday's earnings slate includes Aqua America (NYSE: WTR), Boyd Gaming (NYSE: BYD), Dollar Tree (Nasdaq: DLTR), Eagle Bulk Shipping (Nasdaq: EGLE), General Maritime (NYSE: GMR), Limited (NYSE: LTD), Noble Energy (NYSE: NBL), Salesforce.com (NYSE: CRM), Toll Brothers (NYSE: TOL), Charter Communications (Nasdaq: CHTR), Checkpoint Systems (NYSE: CKP), Cogent Communications (Nasdaq: CCOI), Dress Barn (Nasdaq: DBRN), Edison Int'l (NYSE: EIX), Flowserve (NYSE: FLS), IHOP (NYSE: IHP), LifeCell (Nasdaq: LIFC), MasTec (NYSE: MTZ), McDermott Int'l (NYSE: MDR), Millennium Cell (Nasdaq: MCEL), Mylan Labs (NYSE: MYL), Nortel (NYSE: NT), Owens Corning (NYSE: OC), Public Storage (NYSE: PSA), RR Donnelley (NYSE: RRD), Southwest Gas (NYSE: SWX), Synovis Life Technologies (Nasdaq: SYNO), Teekay Corp. (NYSE: TK) and others.Thursday
GDP for the fourth quarter will be re-reported, adjusted after the advance report showed just 0.6% growth. A significant revision higher or lower would be important to the stock market.
The consensus is looking for a slight increase to 0.7%. Weekly initial jobless claims have been trending higher, and the four-week moving average jumped more than 10K last week. Bloomberg's consensus is looking for a small increase in the weekly figure to 350K.
The natural gas report should arrive just on time Thursday at 10:30. Natural gas, which had been lagging oil as stocks filled, has had a noticeable increase of late. At $9.32/MMBtu, a spike is forming.
Thursday's earnings include AIG (NYSE: AIG), BEA Systems (Nasdaq: BEAS), Del Monte (NYSE: DLM), Dell (Nasdaq: DELL), Freddie Mac (NYSE: FRE), Gap (NYSE: GPS), Sears (Nasdaq: SHLD), Smithfield Foods (NYSE: SFD), Sprint Nextel (NYSE: S), Viacom (NYSE: VIA), XM Satellite Radio (Nasdaq: XMSR), Avici Systems (Nasdaq: AVCI), Barr Pharmaceuticals (NYSE: BRL), Bidz.com (Nasdaq: BIDZ), Cablevision (NYSE: CVC), Cal Dive Int'l (NYSE: DVR), Cell Genesys (Nasdaq: CEGE), Cepheid (Nasdaq: CPHD), Cooper Tire (NYSE: CTB), Deckers Outdoor (Nasdaq: DECK), Deutsche Telekom (NYSE: DT), FTI Consulting (NYSE: FCN), Gmarket (Nasdaq: GMKT), Hansen Natural (Nasdaq: HANS), Hospira (NYSE: HSP), King Pharmaceuticals (NYSE: KG), Kohl's (NYSE: KSS), Leap Wireless (Nasdaq: LEAP), Live Nation (NYSE: LYV), Mentor Graphics (Nasdaq: MENT), Revlon (NYSE: REV), Rowan Cos. (NYSE: RDC), Scientific Games (Nasdaq: SGMS), Sycamore Networks (Nasdaq: SCMR), United Rentals (NYSE: URI), UTStarcom (Nasdaq: UTSI), West Marine (Nasdaq: WMAR) and others.Friday
Just when you thought the Fed was out of gun power, Atlanta Fed President Lockhart addresses subprime mortgages. Consumer confidence will be measured for the second time this week through Friday’s reporting of February confidence by the University of Michigan. Bloomberg's consensus sees confidence inching higher to 70.0, from 69.6 in January.
Perhaps the most important report of the week, Personal Income and Outlays for January will be posted on Friday morning. The market will be concerned about both figures, with income hoped to be moderate and indicating a non-threatening wage inflation scenario. Personal consumption of course will help investors gauge how well
the consumer is holding up. In January, weekly same-store sales data recorded by the International Council of Shopping Centers was relatively weak, so the same news should be found in personal outlays. Perhaps the most important piece of information from the report will arrive in the PCE Deflator, the pricing gauge viewed most important by the Federal Reserve. The Fed targets a rate between 1-2%, but will likely tolerate a higher rate if necessary in times of economic strife, according to member white papers. The market probably doesn't remember that fact though, so watch out.
After sad news from both Philly and New York area manufacturing, the National Association of Purchasing Managers - Chicago, is expected to show the Midwest teetering on the fence of contraction and expansion. Bloomberg's consensus is projecting a measure of 50.0 for February. With commodity prices rising across the spectrum, the Farm Prices Report at 3:00 p.m. Friday should not be overlooked.
Friday's earnings include Petrobras (NYSE: PZE), Service Corp. (NYSE: SCI), Coeur d'Alene Mines (NYSE: CDE), Mine Safety Appliances (NYSE: MSA), Royal Bank of Canada (NYSE: RY), Southern Union (NYSE: SUG), The Progressive Corp. (NYSE: PGR), Westar Energy (NYSE: WR) and more.
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Labels: Week Ahead