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DOW TAKES A BREATHER - By WSS Research Desk

|Includes:United Parcel Service, Inc. (UPS)

By Carlos Guillen

Equity markets are taking a breather, if you will, after making strong gains yesterday on positive comments from Fed Chairman Ben Bernanke. In fact, the Dow Jones Industrial Average ended yesterday's trading session at a record high closing price, but at this moment that euphoria has simmered down as the Dow is now down over 20 points after not so favorable economic data concerning producers' prices and consumer sentiment.

Perhaps a bit concerning today was that consumer sentiment landed lower than expected and ticked lower for a second consecutive month. The University of Michigan's Consumer Sentiment July result landed at 83.9, lower than the Street's expectation of 85.0, decreasing from the 84.1 reached in June. Consumer confidence has been slowly diminishing as it is becoming apparent that the recent increases in mortgage rates and prices at the gas pump are starting to frighten consumers that were previously looking forward to better things to come. In fact, and also discouraging, the index of expectations six-months from now, which more closely projects the direction of consumer spending, declined to 73.8 in June from 77.8 the month before.

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Also not so encouraging for those that are expecting no tapering in the short run was news of increasing prices from a producer's perspective. According to the Department of Labor, the Producers Price Index (PPI) in June increased month-over-month by 0.8 percent; this compares with the Street's consensus estimate calling for a 0.3 percent rise. Because retailers try to pass costs on to consumers as soon as possible, the PPI can provide hints on future trends for the CPI, which has also been creeping higher. Excluding food and energy contributions to the price index, core PPI increased month-over-month by 0.2 percent, while economists' average forecast called for a 0.1 percent rise. These recent increases in prices are also likely to begin raising some concerns at the Fed, taking away some of the inclination to remain "accommodative" as Ben Bernanke mentioned this past Wednesday.

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UPS Warns
By David Urani

UPS lowered its EPS guidance this morning to $1.13 versus the $1.20 consensus, and its full year guidance to $4.65-4.85 versus an expectation of $4.97. Certainly UPS is somewhat of a bellwether for global activity so it's worth noting when a company like this gives such a warning and its stock drops 6%.

The company cited three main issues, including overcapacity in the airfreight market, a customer down-shift to lower-priced services, and slowing US industrial activity. To be honest, these are three factors that are not necessarily new information. The airfreight overcapacity has been affecting the industry already this year, and seems to have stemmed from an oversupply of planes to service Asia, whose activity hasn't quite been keeping up with plan. That's led to a lot of planes being grounded and taking write downs, and lower prices.

With respect to the trade-down to lower priced services it's not a surprise to see it happening. While UPS does not break out all the details, I suspect much of this may be happening in Europe and perhaps Asia. It is normal for this effect to occur, and happened in a big way during the recession when people clearly didn't want to pay up for premium next-day air services.

Finally, the US industrial slowdown is not necessarily a surprise either. The latest manufacturing numbers have been tepid at best, including last Friday's employment report showing a 6k drop in manufacturing jobs.

Nevertheless, it goes to show that despite the record high markets, there are some headwinds still out there that are enough to anchor a big business like UPS. That's why it's important to keep up with the macro-trends and pick your spots.

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https://www.wstreet.com/user/register.asp?source=3

Stocks: UPS