Poor Ben. Even in the week that contained what will likely be noted as his defining moment, Federal Reserve Chairman Ben Bernanke
was once again overshadowed by his predecessor, Alan Greenspan. Alan,
as it seems, finally finished his memoirs after 15 months of effort,
and rolled out his new book, "The Age of Turbulence: Adventures in a
New World" - the same week as Big Ben's ballsy ballyhoo.
Ben, the poor guy, goes out on a limb against his better judgment, and gives the Bush administration what it was looking for, the big rate cut to save the day. And this old geezer, considered genius by some and intellectually clumsy by others, shows up at Barnes & Noble with what will most likely jump right to the top of the best seller's list. Oh Magoo! You've done it again! Seriously though, and mind you that I was a fan of Greenspan's, shouldn't the old guy be put out to stud or sent to Harvard or Wharton to train the next generation of Triple Crown winners? Instead, he keeps wandering onto the course getting in the way of today's thoroughbreds!
In last week's copy, we warned that Ben would be damned if he did and done if he didn't. He did, and now the dollar is suffering. Almost immediately after the Fed's big move and last triumphant spurt of the market, concern shifted from the economy and the credit crisis to the dollar and inflation. Remember that bad dream called inflation that Bernanke kept warning us about? Remember how we wouldn't buy into it? From Larry Kudlow down to George Bush, who was quoted as saying, "I'm told, blah blah blah...," nobody really believed inflation was anything more than myth. George's words pretty much implied, "it's their heads on the block, not mine."
And now the dollar seems certain to tank as other major central bank authorities threaten to stick to their restrictive monetary stance of recent times, despite the Fed's move. While CIA agent double oh-Jacques, Nicholas Sarkozy, pleads with the ECB's Jean-Claude Trichet (in French), the ECB chief speaks proudly of the independence of his organization, and it's greater than political cause. And don't expect anything different from the Japanese either. Everybody has bought into this idea that the international economies of the world have detached from the American market. Now that's a myth!
Still, there now remains serious risk that foreign investment capital could look to Europe for direction, or to Japan or elsewhere. Even our good old friends the Saudis appear ready to follow Iran's lead in denominating oil proceeds in something other than the greenback. A few months ago, we told you gold looked like a good place for capital. We received a ton of critical letters in the days that followed. "What say ye now?!" proclaimed Midas.
Our reasoning for gold, however, was more tied to the safe haven bet than to inflation, though we accounted for that demon as well. Here's the answer to all your woes, and we're talking directly to President Bush. Arrest this crazy Iranian while he's here in New York pretending to be a nice guy, ship him off to Guantanamo, and start your war. The currency reset and global risk reallocation that follows will bring things right back to normal. Europe and Japan will cut rates in minutes. The Chinese will be desperate for oil. No capital will flow to emerging markets, but instead find its way to the good old (buffered by two oceans) USA.
The week ahead...
Monday starts the inflation-centric week off quietly, with no major economic data set for release. Markets will not even open in Japan, South Africa, South Korea and Taiwan, due to Autumn Equinox Day. Boy could some countries use a few less holidays, or maybe we should be donning aluminum foil caps and celebrating as well. Reporting earnings on September 24th, look for Analogic (Nasdaq: ALOG), Financial Federal (NYSE: FIF), Learning Tree International (Nasdaq: LTRE), Navisite (Nasdaq: NAVI), SYNNEX Corporation (NYSE: SNX), Wolseley plc (NYSE: WOS), YM BioSciences (AMEX: YMI) and a few foreign firms.
Tuesday looks to provide two key economic data bits that the market will be well-tuned in for. At 10:00 AM EDT, the Conference Board is scheduled to report September's consumer confidence level. The consensus of economists measured by Bloomberg anticipates a reading of 104.0, versus the 105.0 figure posted a month prior. Based on recent trends and the market environment, you might expect the actual result to fall short of the 104 anticipation. The metric read 104 in April and 103.9 in June, so expecting a little worse seems well-founded. We expect such a measure to be a difficult one for the market to digest as it desperately seeks signs of economic growth and inflation moderation. However, because the market anticipated a Fed cut, stocks rose into the cut, and that also implies that confidence may have been restored some before the reporting period closed. In other words, this one is tough to call.
The other major report scheduled for Tuesday is the National Association of Realtors' Existing Home Sales report for the month of August. The consensus is looking for existing home sales to be reported running at an annual pace of 5.5 million. This would be down from July's 5.75 million. Remember, the existing home market is more than six times the size of the new home market, and is thus more useful in studying the health of the selling environment. Also, existing home sales are not as influenced by sporadic incentive offerings regularly used by home builders to push sales. Speaking of incentives, judging by Hovnanian's (NYSE: HOV) decision to reduce inventory through fire sale, we do not expect any significant positive news out of the housing sector this week. Also, the S&P/Case Shiller Home Price Index for July should be reported, and to nobody's surprise it should show further price decline. This should only get worse in August and September, given the signal from Hovnanian.
We will also be closely following the weekly ICSC-UBS Same-Store Sales report for any signs of dramatic change. Last week's figure showed year-over-year growth of 2.9%, down from last year, but holding steady compared to recent weeks' data. The week-over-week figure, which showed a decrease, was most likely impacted by the seasonal "back to school" season conclusion.
In other news, the Bank of Japan is scheduled to publish the minutes from its August meeting. On the Fed tour, Philly Fed President Charles Plosser is scheduled to speak on the topic of "Invention, Productivity and the Economy."
Lowe's (NYSE: LOW) is conducting its investor conference, providing some insight into how retail directly related to housing health might be flailing. Tuesday's earnings schedule will be headlined by home builder, Lennar Corp. (NYSE: LEN), and we expect things are turning uglier there as well. In other words, we wouldn't go looking for a buying opportunity within the home builders just yet, especially not before the release. Also on slate to report, Aehr Test Systems (Nasdaq: AEHR), CMGI Inc. (Nasdaq: CMGI), FactSet Research Systems (NYSE: FDS), H.B. Fuller Co. (NYSE: FUL), Landec Corp. (Nasdaq: LNDC), Oil-Dri Corporation of America (NYSE: ODC), PHC, Inc. (AMEX: PHC), Red Hat (NYSE: RHT), Resources Global Professionals (Nasdaq: RECN), Standard Microsystems (Nasdaq: SMSC), Spectrum Control (Nasdaq: SPEC), The Marcus Corporation (NYSE: MCS) and Worthington Industries (NYSE: WOR).
While markets are closed Wednesday in Hong Kong, South Korea and Israel, U.S. investors will be up bright and early for the 8:30 Q2 Durable Goods Orders Report. August orders are seen declining by 3.1%, according to Bloomberg. July's orders rose 5.9%, and the difference is perhaps indicative of the new economic state we are entering into. Imagine if foreclosures and defaults are rocketing higher, what happens to less important expenditures for the typical consumer. Your mortgage is the first bill you pay, we assume. However, in some instances where the mortgage has become greater than the value of the home, owners may find economic sense in walking away from the collateral rather than selling the home at a loss and short of the debt owed. Even so it may make economic sense for some, we suspect that it is still a difficult decision to make for most home owners, and rising foreclosure rates more likely reflect cash strapped consumers than a situation of economic logic leading conventional action.
The Mortgage Bankers Association will make its regular reporting of Purchase Applications on Wednesday morning as well. There are two very good reasons why the Fed's rate action of last week should play no role in application activity. First, long rates actually rose and inflation risk increased on the expansionary move. Secondly, the data should measure through the 21st of September, not allowing time to see impact since the cut.
Wednesday's scheduled earnings reports include those from Actuant Corp. (NYSE: ATU), Asure Software (Nasdaq: ASUR), Bed, Bath & Beyond (Nasdaq: BBBY), Copart (Nasdaq: CPRT), GenCorp (NYSE: GY), Intervoice (Nasdaq: INTV), Luxottica Group (NYSE: LUX), Paychex (Nasdaq: PAYX) and Xyratex (Nasdaq: XRTX).
At 8:30 on Thursday morning, the final reporting of Q2 Real GDP will take place, and the consensus expects Q2 to close out showing 3.8% growth, down slightly from the last check, which had growth pegged at 4.0%. Corporate Profits will also be reported for Q2, but more attention will find the Weekly Initial Unemployment Claims Report, where the consensus is looking for a result of 320,000, up from 311,000 reported last week. Most economists agree, least of which is the Fed, that the unemployment rate will tick up in the months ahead. Furthermore, many are expecting a rate of unemployment greater than 5.0% soon enough.
New Home Sales for August are expected to show an annual run rate of 835,000, according to Bloomberg (828,000 according to Barron's). The rate was 870,000 in July, and we also expect a significant drop-off this month. After all, what else could spur Hovnanian to drop prices by so much. Finally, at 3 p.m., the Department of Agriculture will release its Farm Prices Index, showing, you guessed it, the change in prices. This data is extremely important as it will be a useful barometer for inflation within the food sector.
In a very important regulatory matter, a Senate subcommittee will study the impact of Google's (Nasdaq: GOOG) acquisition of Web advertiser, Doubleclick (Nasdaq: DCLK), on the competitive landscape of the space. Thursday's earnings news will emanate from CelebrateExpress (Nasdaq: BDAY), Chattem (Nasdaq: CHTT), Christopher & Banks (NYSE: CBK), Cintas Corporation (Nasdaq: CTAS), Cognos (Nasdaq: COGN), CRA International (Nasdaq: CRAI), Finish Line (Nasdaq: FINL), Global Payments (NYSE: GPN), Jabil Circuit (NYSE: JBL), KB Home (NYSE: KBH), McCormick & Co. (NYSE: MKC), Neogen (Nasdaq: NEOG), Rite Aid Corp. (NYSE: RAD), Saba Software (Nasdaq: SABA), Texas Industries (NYSE: TXI), TIBCO Software (Nasdaq: TIBX) and Vail Resorts (NYSE: MTN).
Friday brings a busy end to the economic week, with a slew of data set for release. The most important data of the day will be the first to hit the wires. At 8:30, Personal Income and Spending will be reported for the month of August. Bloomberg's consensus sees income rising 0.3% and spending increasing 0.4%. This compares to increases of 0.5% and 0.4%, respectively, in July. Perhaps more important that the spending data, the PCE Deflator will inform the market of just how imminent a threat inflation may or may not be. It's clear that this report will carry a ton of responsibility and play an integral role in the near-term movement of stocks.
At 9:45, Chicago PMI will measure the health of manufacturing in the Midwest, and the consensus view is for the September index to measure 52.9, reflecting continued expansion. At 10:00, September Michigan Sentiment is set for release, and the consensus expects a reading of 84.3. We expect this view will be greatly influenced by the general consensus that existed regarding the likelihood of Fed action last week, and this was the same factor that drove stocks higher ahead of the rate cut. Finally, August Construction Spending is seen decreasing 0.5%. This is our opportunity to reiterate our view that softness of consumer spending will lead to a weak retail environment, which in turn should drive retail consolidation and reduction in commercial construction. With residential building already in the tank, construction spending would look to move lower in aggregate.
On Friday, the European Commission is slated to give its quarterly report on the euro zone economy. This will be an important report, as American and apparently French leadership, will be hopeful for indication that European regulators might consider following the American lead in cutting interest rates, and thus helping to stabilize currencies (read stop the dollar dive). Also, the guy many view as the Fed's second in command, Fred Mishkin, is scheduled to speak in Chicago on Globalization and Systemic Risk."
Friday concludes with earnings news from AZZ Inc. (NYSE: AZZ), Fonar (Nasdaq: FONR), LightPath Technologies (Nasdaq: LPTH), SYS Technologies (AMEX: SYS) and several international firms.