Morning Call: Washington and Consumer Spending

0 CommentsTuesday • August 31, 2010 • by alwaters

“My strength lies solely in my tenacity.”

Louis Pasteur

Morning Call

August 31, 2010

Off the cuff: How is it that a consumer that is burdened with debt will have trouble getting more credit and will pay more for it, but the government is rewarding for the same with low rates and an ample supply of lenders?

Pick of the Day

Buy CPB: Campbell Soup Company

Despite the name, Campbell Soup Company is actually rather diverse in its offerings. The company is active in sauces, beverages and various snack products. It also completed an acquisition of artisan bread-maker Ecce Panis, which it rolled into its Pepperidge Farms Bakery Division.

Shares carry a 3% yield and have seen a recent pullback, which creates a buying opportunity. The company also reports earnings on Friday. Call options on the stock have soared in the past few days, suggesting a strong belief in the options pits that this stock is heading higher.

Market Update

It was a slow and steady decline for the Dow yesterday, which finished lower by 140 points with banks and energy shares among the worst performers. Yesterday’s data showed personal income growth failed to keep pace with the biggest increase in consumer spending in about four months. Spending increased 0.4% in July, while personal income was only up 0.2%. The combination of the two, of course, means that the savings rate for U.S. households fell in July to the lowest level in three months. The savings rate fell to 5.9% from 6.2% in June, which had been the highest level in a year. The savings rate had averaged only 2.1% in 2007, before the recession. Today we get to see where consumer confidence stands, which will give some insight into how spending will develop in the near term.

Stocks in Asia followed Wall Street’s lead with a sharp selloff, led by a 3.55% drop for the Nikkei; it’s biggest decline in three months. Concerns have grown over a stumbling US economy and investors also doubt whether stimulus measures announced by Prime Minister Naoto Kan and the Bank of Japan will slow appreciation on the yen and foster economic growth.

On a more positive note, India’s economy grew 8.8% in the second quarter from the prior year, after an 8.6% increase in the previous quarter. This is the fastest pace in the past 2 ½ years and may prompt the central bank to step up tightening measures to cool down inflation. This, while the US and other developed economies scramble to avoid dipping back into recession.

Stocks in Europe opened sharply lower, and have since fluctuated slightly, with the major indexes now lower by about 1%. The financial sector is underperforming considerably, while a few technology shares are actually in positive territory. As examples, Allied Irish Banks plummeted 6.4% in Dublin and Barclays fell 2.9% in London. Greek lender Alpha Bank showed a 62% decline in profit as losses on bad loans continued to increase; shares are down 2.2%. A combination of economic worries and a few less than stellar earnings reports have investors increasingly pessimistic.

Business and consumer confidence, however, continued to rise in the 16-nation Eurozone in August, although at a slower level than in July. According to the latest data, the UK recorded the biggest gain of 1.5 on the Economic Sentiment Indicator, which calculates the morale of member countries when it comes to future economic performance. Germany posted the second largest increase of 1.1 but still leads on the confidence scale.

Commodities and Currencies

Commodities are sliding to the downside today as confidence in global demand erodes. Crude oil has turned sharply lower, giving up more than $1 to level off in the mid-$73 range. If anything, oil should be even lower based on demand and inventory levels, but oil traders have been essentially following the lead of the stock market to gauge the economic outlook.

Across the board, distillates fell by most of 1%. Natural Gas is the exception with a sudden jump of nearly 1.5% in the early hours. This may be more of a technical bounce than anything else as prices are very close to their 52 week low; set just last week. Inventories remain too high and analysts forecast very little upside for natural gas for a year or more.

Gasoline prices have been doing something unusual for this time of the year — dropping or remaining stable across the country. The decline likely will mean continued lower prices at the pump leading up to Labor Day weekend, a time when prices usually climb.

Agricultural commodities are all modestly lower, while industrial metals, including copper, have fallen by nearly 2%.

The Dollar is mostly lower this morning with gains only on the Pound. Meanwhile, the Yen and Euro continue to strengthen.

Precious Metals and Gemstones

Gold is basically stuck in a tight range once again, showing a loss of more than $2 this morning at $1234.  Bullion holding funds have been accumulating the precious metal, which has helped support the price level. Such funds are reportedly holding more than 2,075 metric tons, within 0.1% of the all-time high. This is as a whole, however, as it is worth noting that some of the largest holders in the gold trusts, including Soros Fund Management and Astor Asset Management, have recently reduced their positions in gold.

Silver is just slightly lower at $18.90 while platinum has tumbled $14 to $1509.

In the world of diamonds, BHP’s diamond division reported revenues increased 42% to $1.3 Billion and earnings soared 234% to $485 Million.

Diamonds also played a major role in a turnaround for the economy in Botswana which shrank 3.7% last year but, according to the IMF, grew 8.4% this year due to higher diamond demand.

Economy and Earnings

The Chicago Purchasing Manager Index, the Case Shiller Home Price Index, and Consumer Confidence are on the calendar today.

Economists expect home prices climbed 3.5% in June from the same month last year, down from a 4.6% gain in the previous month. Record foreclosures and a drop in sales after the expration of the homebuyer tax credit could put a bigger than expected damper on home prices in the coming months.

Consumer Confidence is expected to remain flat.

Earnings news will be coming from ABM Industries, DSW, Isle of Capri Casinos, and a few others.

Washington and Public Finance

A long battle in Congress over the federal budget could hinder the SEC’s efforts to carry out the duties required by the financial-reform legislation. As part of the Dodd-Frank reform law, the Securities and Exchange Commission is charged with addressing 95 rules and proposals, and conducting 17 studies. Much of that work must be completed over the next 12 months or so. Meanwhile, the chances of the commission getting significant new resources are slim. The Senate Appropriations Committee did approve a $1.3 Billion budget for fiscal 2011, an 18% increase from the regulator’s previous fiscal-year budget, but it may be far short of what will be necessary. Estimates are that the SEC will be bringing in 800 new employees in order to accomplish their goals.

In Summary

The “S” word has been thrown out there a lot lately. The idea of possibly seeing more stimulus spending seems to be gathering a certain level of acceptance even before it has been spoken in Washington.

With the US economy  staring to backfire and blow smoke, it appears increasingly likely that something new will be pulled out of the Washington Medicine Chest and further spending is very possible.

The fact is that the the timing is fortunate for policymakers as the marketplace has driven borrowing costs to record lows. This certainly does leave the door open for Washington to borrow on the cheap and and spend like a drunken sailor.

The assembled information disseminated in the Morning Call is for information purposes only, and is neither a solicitation to buy nor an offer to sell securities. All assembled information within the Morning Call is subject to change without notice. The assembled information within Morning Call is based on information believed to be reliable as of the date of the report but no representation, expressed or implied, is made as to its accuracy, completeness or correctness.

Forward Looking Statements:

Information in the Morning Call will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. All readers are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance or portfolio performance is no guarantee of future price appreciation or performance.

Posted in: Morning Call: Daily Analysis of the Global Markets and Economy

Tagged with: banks, bonds, commodities, economics, economy, energy, finance, gold, investing, money management, oil, stocks, wall street