The Week Ahead: Why We Still Worry

by: Markos Kaminis

This past week will forever be remembered for its historical significance. On the same day of Martin Luther King’s “I Have a Dream” speech some 25 years ago, Barack Obama became the first American of African descent to accept a major party nomination for the office of President of the United States of America. Then, on the following day, John McCain made Alaska Governor Sarah Palin the first female Republican nominee for Vice President ever.  

What will be forgotten is the heavy flow of positive economic data that stood in stark contrast to most economists’ economic outlook. Housing reports started the week’s positive data flow. While not offering any sign of improvement, deterioration was also not in evidence. As the week progressed, economic data only proved stronger.  

Durable Goods Orders increased 1.3% in July, against expectations for just 0.1%. This marked only the second month this year in which orders increased, the first being June. Then on Thursday, the best news of all arrived, as interpreted by the stock market’s favorable reaction. Second quarter GDP (Preliminary Report) was noted at a solid 3.3%, exceeding expectations for 2.7% and above its earlier reporting of 1.9%.  

Even the financial crises of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) seemed to settle a bit, as both companies were able to raise capital last week. FNM rose 37%, and FRE soared 60.5% last week, but both declined sharply on Friday. We wouldn’t recommend buying either of them actually. Friday showed you the market’s concern, which is that over the weekend your good old government might decide to take the firms private, leaving shareholders left with nothing. I believe this is more likely than not at this point, so I would leave the shares alone, or favor a short position. 

The good news didn’t end there. On Friday, the Reuters/University of Michigan Consumer Sentiment Index was reported at its highest point in five months. Sentiment measured 63.0, up from July’s 61.2 and ahead of the expected 62.0. Personal Spending came in as was forecast, at +0.2%, but income declined more than expected, falling 0.7%.

Why We Still Worry

Despite all the good news, there remains plenty of reason for concern. For instance, income levels decreased partly due to the end of fiscal stimulus distribution and partly because of decreased worker hours at companies across the country. That’s not a good thing. Also, GDP benefited because of the widening difference between the change in exports and imports. Imports, for that matter, are not growing like they had in the past thanks to the weak dollar and decreased overall spending here at home. Consumers are strapped for cash, and you don’t need me to tell you that. Meanwhile, exports continued to do well overseas, since suffering consumers in Europe are flocking to cheaper American goods. 

Despite the still solid GDP data, economists see tough times ahead as gas remains relatively high, unemployment continues to rise and fiscal stimulus funds are exhausted. The government might consider a second round shortly though, especially because of the election year driver pushing each party to do the most they can to help Americans.

The Week Ahead

This week is shortened due to the Labor Day holiday. Investors will return to face more stress than just that brought on by their return to school schedule. The week contains all the important monthly employment reports, and these are not likely to present the positive surprises we saw this week. On top of that, we expect to hear economic concerns voiced by the ECB on Thursday, which will likely worry the market more about global economic decline. India already reported softer than expected Q2 GDP last week. You’ll also want to look for Chain Store Sales data on Thursday. 

The earnings schedule is light, but includes: Monday – China Petroleum and Chemical (NYSE: SNP); Tuesday – DHT Maritime (NYSE: DHT), Donaldson (NYSE: DCI); Wednesday – Hovnanian Enterprises (NYSE: HOV), Joy Global (Nasdaq: JOYG); Thursday – Take-Two Interactive (Nasdaq: TTWO), Toll Brothers (NYSE: TOL); Friday – National Semiconductor (NYSE: NSM) and Sycamore Networks (Nasdaq: SCMR).

Disclosure: none