The Saga Continues ...
Tuesday, November 21, 2006 | Jason JovineRating:
Before I get into what is going on in the economy and the stock market, I would like to give my condolences to the family of Milton Friedman (1912-2006.) Milton Friedman passed away last week and was, hands down, one of the greatest economists of all time. It would take far too long for me to list all of his accomplishments, so I will just say that many of the things that he has done have probably influenced every one of our lives in ways that we are probably not even aware. May God Bless his soul.
Back to business ...
I am going to break down each MAJOR piece of news that happened in the economy last week piece by piece, and then I will tell you the financial environment that we are operating in. Are you ready?
Tuesday 11/14/06:
Retail Sales
This is the first report of the month of consumer spending, and it is highly anticipated. Remember, the consumer accounts for about 70% of the economy. Do you see why Wall Street anticpates this data?
Retail Sales were down 0.2% for October but up 4.5% from October 2005. Wall Street expected them to be down 0.4% for October.
Remember, what you spend at the pump counts toward retail sales, and since gas prices have fallen recently, sales at gas stations have fallen, and therefore retail sales overall have fallen. As a matter of fact, gas station sales were down 6% for October. Americans took this savings on gas and spent it elsewhere.
The street was pleased with the retail sales number, and this helped the market on Tuesday.
PPI (Producer Price Index)
The PPI measures changes in prices that manufacturers and wholesalers pay for goods during various stages of production. This number is usually a prelude to the CPI (Consumer Price Index.) Of course, if it costs businesses more to do business, then they will usually pass these costs down to the consumer. Especially if they have a lot of pricing power (e.g. prescription drugs.)
The PPI was down 1.6% for October, and the core PPI (excluding food and fuel) was down 0.9%. This sent stocks flying higher. If prices are cheaper for businesses, then they will eventually be cheaper for consumers. Businesses will sell more goods and services, and profits will get fatter which will lead to better earnings and higher stock prices.
This sent a clear signal to the Fed that the 17 interest rate hikes were working and that although inflation should be monitored closely, it is definitely slowing down. In other words, it was good news; the market was pleased.
Thursday 11/16/06:
CPI (Consumer Price Index)
Hey, guess what? The CPI was down 0.5% (or 50 basis points) for October. The street expected it to be down just 0.3%( or 30 basis points.) Core CPI was up 0.1% when the street expected it to be up 0.2%.
Wall Street liked the CPI news, but much of it was already factored in from the PPI, so it was a half-hearted rally.
INDUSTRIAL PRODUCTION
This statistic measures changes in the volume of goods produced (e.g. manufacturing activity.) This accounts for about 20% of our economy but tells us more of a story than the service sector which is more stable.
Industrial Production was up 0.2% for October when Wall Street expected it to be up 0.3%. This is not a major deviation, so the market didn't react much.
CAPACITY UTILIZATION
Our manufacturing sector was operating at 82.2% of capacity for October. The market expected it to come in at 82% of capacity. Again, not a major deviation.
Friday 11/17/06:
HOUSING STARTS
They were down 14.6% for October. This is way below what the street expected, and naturally the market went lower.
BUILDING PERMITS
They were down 6.3% for October. This was below what the street expected as well.
WHERE DO WE GO FROM HERE?
Well, it's obvious that the real estate market is not done getting hammered and that this has helped the economy slow down. GDP has declined each quarter of this year, and economists are cutting their forecasts going forward.
The great news is that Oil fell to a 17-month low on Friday; it closed at $55.81 a barrel. Inflation, as I pointed out above, seems to be under control. Consumers have more money in their pockets to spend. There have been zero hurricanes in Florida this year. There have been much warmer temperatures in the Northeast this year, and the holiday shopping season is now upon us. Happy Thanksgiving to all of you.
The balancing act of the Federal Reserve is to keep inflation at bay and to make sure that the economy grows at the right pace; this seems to be happening. I am comfortable with where we are in the economy. I, therefore, remain cautiously bullish.
I am cautious because when things run up so fast, as they have done recently, you have to be careful. The PE ratios on stocks are increasing rapidly, and this means that you are paying more for less. I hate not buying bargains, so I don't buy in these circumstances.
The next Fed policy meeting is scheduled for December 12th. At this point, I think that they will continue to leave rates alone, and they may even cut them in the first half of next year. We will have to see, and I will keep you posted; stay tuned.
Like I said last week, when you invest, listen to your gut. You work too hard for your money to throw it away. In closing, as I have mentioned before, I am coming out with an economics report soon that I believe will help you become a better investor and business person. I hope that you will take advantage of it.
Until the next time, folks, spend your hard-earned money wisely, and don't eat too much turkey.
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Jason Jovine
Contributing Editor
The Tycoon Report
