Contradictory Economic Reports Whipsaw Investor Expectations

By: Money_Morning

William Patalon III writes: No wonder this economy is so hard to figure out: The economic reports are as volatile as the economy itself.

Just when the dreaded "R" word seemed to be creeping back into the daily office chatter, a few economic reports last week seemed to reaffirm that the enhanced pessimism may be a tad bit early.

In the second quarter, gross domestic product (GDP) grew at a 3.3% pace, a significant upward revision from the 1.9% growth rate reported last month. While analysts were hoping that the summer tax rebates would provide more of a boost than initially posted, most were surprised by the strength exhibited in this new release.

But that begs the question: Does that mean that a lower GDP revision is in the cards for next month?

Meanwhile, consumer confidence in August rebounded to its best showing since May and durable good orders revealed a renewed surge in manufacturing activity. At the week's end, some disappointing news on the consumer front (personal spending and income) put a damper on what, up until then, had been a promising few days of days of data.

Turning to the U.S. Federal Reserve, the minutes from the most recent policy meeting suggested that the governors still seemed quite concerned about continued economic sluggishness (recent data notwithstanding); some expect the threats of inflation to taper off in the coming months because of the recent decline in energy prices.

Said Fed policymakers: "Some viewed the upside risks to inflation as having diminished modestly … mainly as a result of the drop in the prices of oil and some other commodities as well as the greater likelihood of persistent economic slack."

Though the GDP release put an end to some of the most pessimistic dialogue, the Fed is clearly concerned that the upcoming quarters will not show nearly as favorably. While the tax rebates may have provided a nice boost, such stimulus is fast becoming a distant memory.  Further, growing weakness in the economies abroad (and recent renewed strength in the U.S. dollar) may lead to a reduced level of exports. The National Retail Foundation predicts weak consumer activity continuing well into 2009; however, the trade group expects some isolated strength as shoppers use the last of those rebates on late back-to-school items. 

The days ahead give economists another glance into manufacturing (ISM, factory orders) and labor (unemployment, payroll additions), while viewers tune in to see how Republicans will deal with the nation's "challenges" if given four more years .  Any lessons learned from small-town Alaska, Governor Sarah Palin?

The minutes implied that the Fed Funds rate should hold steady (at 2.00%) for the remainder of the year - barring unforeseen events - though the next rate movement is still expected to be higher.  

Market Matters

Show me the money!!!  That's what Democrats said to Corporate America last week as they gathered in Denver for the political pep rally known as the Democratic National Convention . While Republicans traditionally have been the primary beneficiaries of those corporate dollars in prior election cycles, this year looks very different. According to the Campaign Finance Institute, roughly 150 countries spent more than $160 million in Denver, while 80 corporate donors are expected to contribute about $100 million at the Republican convention in Minnesota (although that was before Alaska Gov. Sarah Palin had an opportunity to exhibit her fundraising skills).

AT&T Inc. ( T ) , Merrill Lynch & Co . ( MER ) and Burlington Northern Sante Fe Corp. ( BNI ) were among those sponsors letting the dollars fly for party faithful. Perhaps they believe that a President Barack Obama will "fix the broken politics of Washington" and his $115 billion stimulus package with tax rebates for the middle class would help pad their earnings down the road?  Or maybe these companies just support a federally funded universal health care plan?  Or did they simply respect the "grace" and "passion" of the Clintons who (begrudgingly) passed along the torch of the Party with an inspiring "No way…no how…no McCain" message?   In any case, the spotlight is clearly now on John McCain as he touts the experience of his running mate who earned her political creds as the mayor of a 5,000-person Alaskan town.

As earnings season winds down, the recent data shows that Standard & Poor's 500 Index companies struggled through their fourth consecutive quarter of lower profits. While early consolidated figures show that the related earnings of the S&P 500 companies declined by almost 30% in the second quarter, banks plunged by more than 80% - dramatically skewing those numbers.  In fact, by removing financials from the equation, these companies actually reported higher profits by more than 3%.

Dell Inc. ( DELL ) put a damper on some previous technology optimism by announcing a 17% earnings decline, while retailers Sears Holdings Corp. ( SHLD ) and Dillards Inc. ( DDS ) posted disappointing results as well.  Fannie Mae ( FNM ) and Freddie Mac ( FRE ) both got a reprieve, as a short-term debt offering (Freddie) was general well-received and their respective stocks prices received a boost from some positive analysts' reports from Citigroup Inc. ( C ) and Lehman Brothers Holdings Inc. ( LEH ) .  Speaking of Lehman Brothers, Kohlberg Kravis Roberts & Co. expressed interest in Lehman's asset management group, Neuberger & Berman Inc . , though others think the $10 billion valuation seems a bit steep. 

With Tropical Storm Gustav brewing in the Gulf, energy companies took some precautionary measures to prepare for the worst.  Royal Dutch Shell (ADR: RDS.A , RDS.B ) , BP PLC (ADR: BP ) , and Transocean Inc. ( RIG ) among others began removing certain personnel, and traders pushed oil prices higher in anticipation of a disruption in production.  Gas prices climbed on Friday for the first time in 43 days (and just in time for the long holiday weekend).

Stock prices experienced another whipsaw week as light volume led to some exaggerated price movements (both up and down). While a few solid economic releases (see below) brought renewed optimism to the markets - albeit only briefly - the threats of the powerful storm impacting the energy sector as well as some negative earnings reports countered that positive sentiment.  As the trading session (and the week) came to a close, some folks headed out of town for the last time this summer, while others over-analyzed the political speeches of the past week and looked forward to another pep rally in the days ahead (where more corporate donors will be " showing the money "). 

Economically Speaking

Weekly Economic Calendar

News and Related Story Links :

• MiamiHerald.com : New Orleans is abandoned as Hurricane Gustav takes aim .
• Money Morning Election Coverage : Election 2008: Dawning of Democratic Convention Illuminates a Few Bright Spots For Investors .
• Corporate Web Site : Kohlberg Kravis Roberts & Co .

By William Patalon III
Executive Editor

Money Morning/The Money Map Report

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