Market Talk

[The_Technician]

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A spell of hot weather late in the month sparked an apparent fury of pent-up summer shopping during June as the nation's chain stores recovered from weakness in May to report one of their best months in memory.

Discount chains popped up after several months of depressed results tied to the effects of high gas prices on lower income consumers. Once again Target was among the best performers in the discount group, posting a same-store sales rise of 9.0% vs. 7.0% in May. Department stores also did very well with JC Penney posting a 7.4% same-store rise vs. 3.5% in May. Like several other big chains, JC Penney raised guidance following the results.

Today's results are certain to raise expectations sharply for next week's retail sales report, which along with the dramatic spike in GM truck sales, is likely to prove unusually strong. But the results may have only limited effect on the economic outlook given uncertainty whether the June spike is a one-time weather-related event and uncertainty over the future of auto incentives and the health of auto makers. Share prices of retailers were mixed Thursday morning as the bombings in London are depressing stocks.

 

[The_Technician]

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The chart above depicts the federal funds rate target relative to the PCE deflator since January 2000. Whenever the year-over-year change in the PCE deflator is higher than the federal funds rate, it means that the real (inflation-adjusted) fed funds rate is negative and policy is very accommodative. The PCE deflator is not yet available for June, but given the stability in the inflation rate over this period, it would be safe to say that the June inflation rate is likely to remain in the same 2 to 2 1/2 percent range of the past several months. This would mean that the real fed funds rate is finally positive.

[align=justify]The debate continues over the proper "neutral rate", a rate consistent with a Fed that is neither accommodative nor restrictive in its policy. When asked about the neutral rate, Fed Chairman Alan Greenspan continues to give his stock answer that we'll know it when we see it. Given that the neutral rate is not a fixed rate across time, but dependent on the overall economic environment, the answer may not be as flip as it sounds. Many economists are concluding that the Fed is indeed approaching, if not a neutral rate, at least a pausing point. Laurence Meyer, former Fed governor and currently associated with Macroeconomic Advisors, believes that the Fed will raise the funds rate two more times to reach 3.75 percent and then take a break to see where the economy stands. Meyer left the Fed Board in 2002, so this is not so much insider knowledge as his view of the economy and of Fed policy as a "regular" economist. But Meyer is thoughtful and has won awards for his forecasting ability. So his views certainly carry weight in my book. [/align]
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[align=justify]Here comes a few more interesting info...[/align]

 

[The_Technician]

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STOCKS
The first six months of the year simply don't look good. Most of the indexes depicted below fell three or four times over this six-month period - the Nasdaq composite only managed to rise in one of the past six months. Some analysts have blamed the less than stellar stock market performance on the Fed's rate hikes. But long-term interest rates have not moved in tandem with short-term rates and housing is still booming.
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[align=justify]Crude oil prices have played a role in keeping equity prices depressed relative to the end of 2004. Investors are in part worried that higher oil prices will create a potential inflationary environment. But even if higher crude oil prices don't permeate every aspect of the consumer price index, sharply higher oil prices have the potential to derail the economy. Granted, oil prices have hurt specific industries - any of those that rely strongly on oil. But the overall economy grew at a pretty good pace early in the year. The Commerce Department's final estimate revealed that real GDP grew at a 3.8 percent rate in the first quarter. [/align]

 

[The_Technician]

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Many analysts have pointed out that crude oil prices may have reached their highest level ever on a current dollar basis, but in real terms, prices were higher in the 1980s. While true, that is not the correct point to consider. I'm not convinced that looking at the real level of oil prices is altogether relevant, rather it is more important to consider changes in prices over the past 18 months. In January 2004, crude oil prices were less than $35 per barrel. Lately, prices have been hovering between $55 and $60 per barrel. This may not be a high number in real terms - but then neither was the $35 a high number in real terms 18 months ago. The point is that when prices of crude nearly double over a short period of time, they are likely to have a real impact on the economy even if oil prices, after adjusting for inflation, were higher in the 1980s.
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[align=justify]Bottom line? It is difficult to believe that such high crude oil prices won't have any impact on the economy at all. It is true that consumers have almost adjusted themselves to paying more than $2 per gallon of gas these days. But as we approach $3 a gallon, the adjustment may become more difficult. While consumers can certainly adjust their driving habits a bit in order to conserve on fuel costs, some gas expenditures are absolutely required (driving to work if there is no public transportation available). Consumers may indeed find themselves having to make alterations to their household budgets, and it could mean less spending on other goods and services. [/align]

 

[The_Technician]

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Bond investors are not paying much attention to economists these days. Most economists have been predicting that the Fed will continue to raise rates for a while longer, but most bond investors have been ignoring the economists and fighting the Fed instead. They have hoped to read a statement in which the FOMC gives a sign that they will soon stop raising rates. Bond investors were disappointed again this week because there was no such signal.
The Fed has now increased the fed funds rate target nine times since last June. Since the beginning of the year, the funds rate target is 100 basis points higher. It stood at 2.25 percent at the start of the year. The more the Fed has raised rates, the more the yield curve has flattened as short term rates have risen while long term rates have dropped. We have commented on this every week lately. But the flattening appears more striking when one compares it with six months ago!
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Markets at a Glance

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[align=justify]Weekly percent change column reflects percent changes for all components except interest rates. Interest rate changes are reflected in simple differences. [/align]

 

[The_Technician]

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The Economy

June manufacturing survey improves but will the reversal be sustained?
The ISM manufacturing index increased two points in June to 53.8, reversing the May drop and surpassing April's low of 53.3 as well. But notice the sharp downward trend in this index since it peaked in early 2004. The latest month's reversal is almost inconsequential. But perhaps not. The new orders component of the index jumped several points to reach 57.2 and the production index increased marginally to 55.6. Even the employment index rose, although it fell just short of the 50 required to indicated expansion rather than contraction at 49.9. Further increases in manufacturing would bode well for the economy. Not surprisingly, it appears that the ISM manufacturing index peaked over a year ago when crude oil prices were closer to $35 per barrel than $60 per barrel. As oil prices have risen, manufacturing activity has swiftly moderated over the past year. There is no question that a healthy drop in oil prices would help boost manufacturing activity.
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[The_Technician]

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Confidence on the mend
The Conference Board's consumer confidence index as well as the University of Michigan's consumer sentiment index both increased in June. The Conference Board's index, focused on job questions, stood at 105.8 for the month, its highest level in three years. In contrast, the Michigan survey did manage to rise in June from its April and May lows, but is still below the December 2004 level. The Michigan survey is more broadly focused on consumer finances. The Conference Board's sample size is larger than the Michigan survey. In any case, the minor discrepancies in the confidence surveys have been interesting, but we still aren't convinced that they are telling us anything about current retail sales.
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The Bottom Line
The Fed raised the federal funds rate target by 25 basis points to 3.25 percent. This will increase consumer loan rates that are tied to the banks' prime rate, such as home equity loans or credit card rates. Conventional mortgage rates won't be affected because they follow Treasury yields.
Stock price performance was less than stellar in the first half of the year. Some analysts are hoping that 2005 will follow the 2004 pattern - because the bulk of the gain in equity prices that occurred in 2004 happened after the election. Acceleration in economic growth and a sustained drop in crude oil prices would surely cause stock prices to rise, but then few economists are forecasting this rosy scenario.
[align=justify]Now that the FOMC meeting is over, investors are looking forward to next Friday's employment report (and of course Greenspan's semiannual testimony on July 20th). [/align]
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[align=justify]I guess that will do.......for now.....but I think the crude price is hurting the manufacturing directly......given the Europeans not lowering their interest rates and the Dollar increasing in value........I would guess that it maybe a chance that we are setting ourselves up to save our economy......but it still will take time....:^[/align]

 

[mlk_man]

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Wow Tech, I think I need reading glasses now....:shock:

As of right now, futures are up as well as Japan and Australia.

Here's another perspective:

http://money.cnn.com/2005/07/07/markets/london_funds/index.htm

 

[Birchtree]

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The Technician,

Thankyou so very kindly for posting all that encompassing data - you saved me valuable time this evening from having to hunt data myself - I certainly appreciate your endeavor.

 

[Mike]

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The US market held up well.

Looks like the payroll report will matter, after all.

 

[The_Technician]

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Sure, you're welcome.....glasses can be bought overnight......

Actually, I've been wanting to do that for a while.....couldn't find the data that would paste.......I finally did....there will be more.....



:dude:

 

[The_Technician]

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Consumer installment credit expanded only $1.3 billion in April, the smallest gain since last November. Don't expect a strong showing in May - auto sales were down for the month and retail sales were anemic too.

Consumer credit Consensus Forecast for May 05: $3.9 billion
Range: $1.0 to $6.0 billion


class=econo-sectiontitleTrends

class=econo-chartcaptionThe debt-to-income ratio shows how indebted consumers are relative to income. A rising ratio indicates that consumers are taking on greater debt burdens with respect to income growth. In a growing economy, this may not be dangerous. However, indebtedness could quickly become a problem if income and employment conditions turn around. The yearly change in debt outstanding shows yearly trends in debt growth and tends to be less volatile than the monthly change.

 

[The_Technician]

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And some employment info........


[align=left]Consensus
195,000

Consensus Range
95,000 to 300,000

Unemployment Rate, Level

Consensus
5.1%

Consensus Range
5.0% to 5.2%








Average Hourly Earnings, M/M change

Consensus
0.2%

Consensus Range
0.1% to 0.3%

Average Workweek, Level

Consensus
33.8hrs

Consensus Range
33.8hrs to 33.9hrs

Consensus Notes
Nonfarm payroll employment increased by an anemic 78,000 in May after a stronger showing in April. Slow growth was posted across the board. The civilian unemployment rate edged down to 5.1 percent in May, after remaining at 5.2 percent in the two previous months.

Nonfarm payrolls Consensus Forecast for June 05: 195,000
Range: 95,000 to 300,000

Unemployment rate Consensus Forecast for June 05: 5.1 percent
Range: 5.0 to 5.2 percent

Average workweek Consensus Forecast for June 05: 33.8 hours
Range: 33.8 to 33.9 hours

Average hourly earnings Consensus Forecast for June 05: 0.2 percent
Range: 0.1 to 0.3 percent


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class=econo-chartcaptionDuring the mature phase of an economic expansion, monthly payrolls gains of 150,000 or so are considered relatively healthy. In the early stages of recovery though, gains are expected to surpass 250,000 per month. [/align]
That should do it until I can get some M3 data.....which we know has inflated 250% in the last 5 years........doesn't that makeeverythingworth 2.5 times as much.....wonder why homes and cars ...gas........some stocks........costs so much more.......but your labor isn't being raised to match it.....rather course way to lower your wages ehhhhh.......

:dude:

 

[Mike]

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The payroll report showed the overall unemployment rate dropping to 5%. New jobs created for June was about 50k less than the expectation... May numbers were revised upward to a little over 100k.

Hopefully, the bond market will rally a bit today in response to this since I have 50% in there now.

 

[mlk_man]

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Just as a follow-up to the low wholesale inventory numbers:

Wholesale sales and inventory data give investors a chance to look below the surface of the visible consumer economy. Activity at the wholesale level can be a precursor for consumer trends. In particular, by looking at the ratio of inventories to sales, investors can see how fast production will grow in coming months. For example, if inventory growth lags sales growth, then manufacturers will need to boost production lest product shortages occur. On the other hand, if unintended inventory accumulation occurs (i.e. sales did not meet expectations), then production will probably have to slow while those inventories are worked down. In this manner, the inventory data provide a valuable forward-looking tool for tracking the economy.

Sounds like a good thing to me! Maybe the rally still has legs...........

M_M

 

[The_Technician]

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still looking for that F fund to bottom.....

The manufacturing data is a real eye opener....a true supply and demand gauge....

The gas price is starting to annoy me....wish those futures didn't go that high....but I guess we have to have a reason to drop this economy .......it can't go this way forever.....only thing about gas prices, it hits really close to home......

:^

 

[Mike]

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Equities up big thus far... wow, I sure know how to call them.

Last year, I was in and it kept going down. This year, I'm out, and it keeps going up. I'm the ultimate contrary indicator. :l

 

[vectorman]

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Just a small reminder for days like this:

Regarding Investment Advice:

We want to make this clear:

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Let us repeat: We are NOT your investment advisor. Do NOT take any action based upon what you read at this site without seeking independent confirmation as well as competent professional advice.

In other words, your decisions are your own. If you don't have a signed contractual agreement with US, then what you read here is NOT investment advice to you, no matter what you think it looks like.

http://www.tsptalk.com/mb/forum36/1073.html

 

[Wheels]

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Mike wrote:

This year, I'm out, and it keeps going up. I'm the ultimate contrary indicator. :l

You and me both. I propose we charge a fee, say $100 a head, to let everyone know when we are going to jump back into stocks so they can get out.

Dave

 

[mlk_man]

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Wheels wrote:

Mike wrote:

This year, I'm out, and it keeps going up. I'm the ultimate contrary indicator. :l

You and me both. I propose we charge a fee, say $100 a head, to let everyone know when we are going to jump back into stocks so they can get out.

Dave

Well hopefully you weren't in that "I" fund yesterday like I was.......:shock: If I was out of stocks everytime I played the "I" fund, I might be up 100% this year!

Okay, that was slight exaggeration...............