Did you feel a little twinge last week? Sure you did. Think about it. It probably felt like a noose tightening around your neck, or a fire burning the wallet in your back pocket. "The Greek" believes we finally crossed the critical oil price threshold last week, and nobody noticed. We are of course talking about the price point where energy really starts to impact economic demand.
It developed sort of like how a caged dog, one within an invisible electronic fence, feels a shock as he approaches or crosses it. Americans likely felt a similar threshold surpassed last week. It certainly was a hard one to cross, after all, it took months of price rise past the points most economists thought would do it. It seems we finally reached the critical point for oil and gasoline pricing, where individual consumers will begin to seriously consider conservation and alternative energy resources. More on that in a minute...
Last WeekStocks moved lower throughout last week, as rising oil prices raised broader economic concern. The Dow Jones Industrials moved 3.9% lower, while the S&P 500 fell 3.5% and the Nasdaq Composite slipped 3.3%. The decline was broad reaching, as seen by the similar moves across the diverse indices.
The blame for the tough week clearly fell upon oil. Crude oil futures for July delivery started the week just under $127, and ended it at $130.51, touching a high of $135 on Thursday. Meanwhile, just ahead of the big Memorial Day weekend, one that is well known for motor vehicle traffic, gasoline prices skyrocketed as well.
June futures for gasoline started last Monday morning at $3.23 a gallon on the Mercantile Exchange, and closed Friday at $3.32. The good news is that oil and gasoline prices backed off Thursday’s highs to close the week a step lower. However, stocks found no solace in that news, since the slide likely came on profit-taking, not fundamental reasoning. However, the highs probably likewise benefited from trading momentum, so the slip was good news just the same.
Wednesday helped to fuel the most recent energy spike, as the Energy Information Administration reported a weekly draw of 5.4 million barrels of oil from storage. Meanwhile, the media had much to feed the frightened with as well. Oil executives were grilled on Capitol Hill last week by a Senate panel. The Senators highlighted the contrast of oil company profits and excessive executive compensation with the inflation burdened American public and an economy that teeters on recession. At the same time, Congress passed an insanely dangerous measure that might lead to legal suit against OPEC. Seems Congress never heard the saying about not biting the hand that feeds you.
The Good NewsHowever, as the stock market worried about the impact of high gas and other prices, it likely also foreshadowed a price-induced conservation of energy that should decrease demand for it. In other words, a threshold looks to have been passed, where people will actually now seriously consider travel distance and other fuel expenditures in their plans. This seems to indicate that petroleum might trade in a range in the near term. You’ll want to check into the Wall Street Greek website this week, as we are preparing an in-depth petroleum market report.
The Week Ahead
The abbreviated trading week still holds a powerful concentration of economic data on the schedule.
TuesdayConsumer Confidence for the month of May was reported Tuesday morning, falling to 57.2, versus consensus expectations for a reading of 60.0. That compares with a reading of 62.3 in April.
Also reported on Tuesday, New Home Sales for April follow Friday’s Existing Home Sales data, which while down, still beat expectations. We expected that seasonal impact and dramatically low recent levels to compare against might offer a positive surprise in this report. Sales ran at an annual pace of 522K in March, missing that month’s consensus expectation by a mile.
When reported this morning, April sales ran at a pace of 526K, up slightly. The S&P Case Shiller Index built upon the weak sales data, showing that home prices continued to moderate in March and of course in the first quarter (-14.1% from last year's period).
Tuesday kicks off the shortened week's earnings schedule, including reports from Borders Group (
NYSE: BGP), Donaldson (
NYSE: DCI), Jamba Juice (
Nasdaq: JMBA), Vodafone Group PLC (
NYSE: VOD), Bank of Montreal (
NYSE: BMO), Bank of Nova Scotia (
NYSE: BNS), Cogent (
Nasdaq: COGT), Modine Manufacturing (
NYSE: MOD), On Track Innovations (
Nasdaq: OTIV), Shanda Interactive (
Nasdaq: SNDA), SourceForge (
Nasdaq: LNUX), StealthGas (
Nasdaq: GASS), Versant (
Nasdaq: VSNT) and WuXi PharmaTech (
NYSE: WX).
Wednesday
Wednesday’s Durable Goods report and Thursday’s Corporate Profits seem poised to stab economic hopes in the back. Most of the preceding data on the subject of corporate profits has indicated that they've been sickly this past quarter. Let's not mince words.
Regarding durables, Bloomberg's consensus expects a monthly decrease of 1.1% for April orders. That would compare with a 0.3% decline in March. We like to remind readers that just-in-time production-to-delivery processes, supportive technology and fluid distribution channels have helped companies to manage inventories at an increasingly efficient rate. So, inventory levels might fluctuate in a volatile fashion from month to month as a result. Four consecutive months of decline, however, clearly reflect the softening domestic demand, capacity consolidation and economic weakness we've seen this year.
Minneapolis Fed-Man Gary Stern and Dallas Fed President Richard Fisher are both scheduled to address audiences on Wednesday. Barron's correctly reports that Fisher's comments might offer some interesting perspective, as he has dissented against rate cuts three times in recent history. What he has to say about inflation might prove enlightening, if he speaks openly.
The weekly same store sales data reported by the International Council of Shopping Centers - UBS, gets pushed back a day this week due to the holiday. So, you can look for that very important and under followed metric on Wednesday morning this week. In case you missed it, last week's report showed a sales spike of 1.6% year-over-year. The Mortgage Bankers' Association reports on mortgage activity Wednesday morning as usual, however, we find little insight from the report still. Later, it will be interesting to follow how mortgage rates might rise with inflation, thus curtailing housing market recovery.
The EIA usually reports Petroleum Status on Wednesday, but this report is often pushed back a day during shortened weeks, and this week will be no exception. Look for oil market news on Thursday.
Wednesday's earnings schedule includes American Eagle Outfitters (
NYSE: AEO), Chico's FAS (
NYSE: CHS), Coldwater Creek (
Nasdaq: CWTR), Dollar Tree Stores (
Nasdaq: DLTR), Dress Barn (
Nasdaq: DBRN), Jo-Ann Stores (
NYSE: JAS), Men's Wearhouse (
NYSE: MW), National Bank of Greece (
NYSE: NBG), Polo Ralph Lauren (
NYSE: RL), AFC Enterprises (
Nasdaq: AFCE), Apollo Investment (
Nasdaq: AINV), Applied Signal (
Nasdaq: APSG), CBRL Group (
Nasdaq: CBRL), China Nepstar Chain Drugstore (
NYSE: NPD), Daktronics (
Nasdaq: DAKT), Finlay Enterprises (
Nasdaq: FNLY), Jinpan Int'l (
AMEX: JST), RBC Bearings (
Nasdaq: ROLL), Shamir Optical (
Nasdaq: SHMR), Synovis Life (
Nasdaq: SYNO), TIVO Inc. (
Nasdaq: TIVO), Toronto Dominion Bank (
NYSE: TD) and more.
ThursdayThe top story on CNBC Thursday morning should be the first revision of Q1 GDP. We could see the number reported in contraction territory or close to it, from its first reporting at +0.6%. This report looks to be highly influential to market direction and even medium term market movement, as it addresses one of two key market concerns very directly. Those two key concerns are of course economic growth and inflation. Economists well-informed by other since revised and late reported economic data are actually forecasting an upward revision for GDP, to 1.0% growth for Q1.
As indicated earlier, Corporate Profits will also be reported on Thursday morning, and most data have offered indication of a dramatic decline in corporate earnings.
Profits are finding pressure from both directions. The soft economic environment is impacting the top line and rising costs are squeezing margins at the same time. For this reason, economic recovery seems limited in opportunity, and stocks upward potential likewise capped.Weekly jobless claims are due on schedule, and Bloomberg's consensus expects 370K or so new benefits filers. Last week's report showed 365K. The Help-Wanted Index is also due, but its significance has been reduced by the advent of online job search tools. We suspect there will be a second wave of job market decline in the months ahead as pressure mounts on corporate executives to preserve shareholder value.
The Energy Information Administration will report on Petroleum Status on Thursday this week. The data will of course prove an important news bit, and especially so after a draw from inventory of 5.4 million barrels last week. Natural gas will be reported upon on its regular schedule, meaning the two reports reach market simultaneously this week, offering a powerful concentration of energy data all at once. At the start of the week, energy prices were already backing off recent highs, as it becomes plainly apparent that the demand sensitive threshold has been reached.
Ben Bernanke will perhaps yodel his speech on liquidity in Switzerland on Thursday, while Tim Geithner addresses a group in New York. With food shortage and inflation in focus, the OECD and the United Nation's Food and Agriculture Organization will issue their 2008 outlook on agriculture.
Thursday's earnings schedule includes Costco (
Nasdaq: COST), Dell (
Nasdaq: DELL), H. J. Heinz (
NYSE: HNZ), Hellenic Telecommunications (
NYSE: OTE), J. Crew Group (
NYSE: JCG), Joy Global (
Nasdaq: JOYG), Sears Holdings (
Nasdaq: SHLD), Ansoft (
Nasdaq: ANST), Big Lots (
NYSE: BIG), Canadian Imperial Bank (
NYSE: CM), Caraco Pharmaceutical (
AMEX: CPD), dELiA's (
Nasdaq: DLIA), DSW Inc. (
NYSE: DSW), DynCorp (
NYSE: DCP), eLong (
Nasdaq: LONG), Esterline Technologies (
NYSE: ESL), Fred's (
Nasdaq: FRED), Genesco (
NYSE: GCO), Golar LNG (
Nasdaq: GLNG), Gottschalks (
NYSE: GOT), HEICO Corp. (
NYSE: HEI), Iteris (
AMEX: ITI), Man Group plc (
Nasdaq: MNGPF.PK), Marvell Technology (
Nasdaq: MRVL), Monro Muffler (
Nasdaq: MNRO), Movado (
NYSE: MOV), Netezza (
NYSE: NZ), Omnivision (
Nasdaq: OVTI), QAD Inc. (
Nasdaq: QADI), Royal Bank of Canada (
NYSE: RY), SeaChange Int'l (
Nasdaq: SEAC), Shoe Carnival (
Nasdaq: SCVL), Sigma Designs (
Nasdaq: SIGM), Sycamore Networks (
Nasdaq: SCMR), The Descartes Systems (
Nasdaq: DSGX), Wind River Systems (
Nasdaq: WIND) and XETA Technologies (
Nasdaq: XETA).
FridayGet ready to get busy on Friday, with a grand slam of reports due, including Personal Income & Outlays, the Chicago area manufacturing report, University of Michigan Consumer Sentiment and Farm Prices to close it out.
The closely followed and very important Personal Income & Outlays Report will be released at 8:30 a.m. Bloomberg's consensus forecasts personal income growth of 0.2% for April. Income growth is unfortunately indirectly pressured by international competition for goods and services that leads American firms to seek cost consolidation. American Axle, which settled with the UAW last week, suffered through a long strike for the sake of cost reduction, achieving a significant savings in wage rates and in pension benefit liability. The length that American Axle was willing to go is a testament to the significance of market force pressures.
The big headline on Friday will of course be personal consumption expenditures, as the market seeks to understand just how much the American consumer is actually tightening his belt. Bloomberg's surveyed economists see an increase of 0.2% for April. Lehman Brothers (
NYSE: LEH) was quoted in Barron's seeing a 0.3% increase. Do not neglect the very important impact of price rise on the spending increase. The real spending change is what matters here, or that excluding inflation.
The University of Michigan/Reuters weighs in on Consumer Sentiment on Friday, and the consensus sees the May measure reaching 59.5 (same as the earlier check), compared to 62.6 in April.
Chicago area manufacturing gets a check up on Friday as well, and economists see the regional index at 48.5 in May, versus 48.3 in April. Farm prices are also on tap, marking the second chew on food inflation this week.
Treasury Secretary Paulson is scheduled to visit the Middle East to appease foreign investor concern, as Congress discusses the issue of sovereign investment. It's likely the issue came up during President Bush's visit, and so he's now sending Paulson to further quell concern.
Friday's short list of earnings reports includes China Finance Online (
Nasdaq: JRJC), Graham Corp. (
AMEX: GHM), Kirkland's (
Nasdaq: KIRK), Lion's Gate Entertainment (
NYSE: LGF), Medical Action Industries (
Nasdaq: MDCI) and Tiffany & Co. (
NYSE: TIF).
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