Your Economic Captain For Choppy Seas

by: Markos Kaminis

Across the country, investment managers are asking the same question today: What is the economic direction? Stock pickers at T. Rowe Price, State Street, Fidelity and Janus Capital Group and fixed income investors at Federated Investors, PIMCO and Vanguard are seeking economic direction. Today we received two more data points in plotting that path and we've taken good survey of the choppy seas ahead. So never fear, because your economic captain is on duty.

The Producer Price Index reported this morning, showing finished goods prices rose 0.1% month-to-month in June. The price increase was influenced by a 0.5% increase in foods, partly offset by a 0.9% decline in energy prices. That trend is likely to continue through July. Core PPI, excluding food and energy price change, increased 0.2%, which was in line with economists' expectations.

Moving down the ladder, the price of intermediate goods fell by 0.5%, while the price of crude goods declined by 3.6%. That supports our argument to sell the shares of Basic Materials stocks, including the likes of Alcoa (NYSE:AA), Freeport McMoRan (NYSE:FCX) and Rio Tinto (NYSE:RIO). However, that view does not extend to precious metals, which I favor due to dollar et al currency dilution, plus global economic strife. So we continue to make the case for gold and the SPDR Gold Trust (NYSEARCA:GLD).

At the start of the week, I questioned whether economists were right in their expectation for an increase in the consumer sentiment measure scheduled for Friday. Well, I'm sorry to say, I was correct in my questioning. The Reuters/University of Michigan Consumer Sentiment Index was reported this morning, with sentiment at its lowest levels since December 2011. It followed yesterday's Bloomberg Consumer Comfort measure, which deteriorated modestly, and other consumer measures of late, which have us recommending tough traders like Wal-Mart (NYSE:WMT), Dollar Tree (NASDAQ:DLTR), Cash America (NYSE:CSH), (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) for when consumers check out.

This latest consumer measure slipped again in July, dropping to a reading of 72.0, from 73.2 in June. Economists somehow saw the index rising to 73.5, based on Bloomberg's data, and are busy burying the memory from associates' minds Friday. Confidence, as seen by this measure, is now lower than at any other time this year. Consumer expectations, the more volatile and intangible component of the survey, fell three points to a mark of 64.8 on its component index. It was of course impacted by the latest jobs report, which hid an ugly underlying trend in labor. Consumers are also reportedly concerned about their future, in the hands now of a bickering political complex that seems intent to push each major issue to its boiling point before resolving to a less than perfect pressured solution.

The surveyed group of consumers still didn't seem to be feeling the bite of nascent economic softness, while aware of its shadow. Their expectations for the economy actually improved a bit and purchasing plans rose as well. So for now, it looks as though consumers are just worried. Next week, when retail sales are reported, perhaps we'll see if they held true to their word.

So, all ye money managers up there in Beantown and down in sunny Southern California, I offer this advice. Legg Mason, PNC Financial, Morgan Stanley, all ye at BlackRock, Bank of New York Mellon, Goldman Sachs, and the rest, take heed. The economy has just begun to feel the effects of Europe, and the latest data out of China may well be a bit tailored for the global audience to bear. So shore up your portfolios with some gold and agricultural beneficiaries of shortage, add some consumer staples like Procter & Gamble (NYSE:PG) and Johnson & Johnson (NYSE:JNJ), and keep away from your profit choking food producers like Dean Foods (NYSE:DF) and Smithfield (NYSE:SFD).

Watch for Iran, but don't count on a prolonged oil spike. Shore up your ships, and keep attuned to your captain, because a storm is brewing overhead. I promise you, I'll hold the wheel for as long as I can.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.