MarketView for August 14

Summary

Stock prices moved higher on Thursday despite relatively low trading volume that sent all three major equity indexes into positive territory for the day driven in part by a decline in the price of oil. However, the day did not start off on a particularly cheery note with prices on the major indexes falling after a report by the Labor Department indicating that the consumer price index rose at a rate we have not seen in over 17 years.

At the same time the weekly jobless data showed further deterioration in the labor market. Although there is no question that inflation remains a concern, the current thought is that the recent decline in commodity prices, particularly oil, will ease inflation strains in the long run.

An index of S&P financial stocks rebounded from its worst two-day slide in six years, in part on the view that easing inflation pressures could give the Federal Reserve more leeway to hold off on interest-rate increases. The index rose 2.6 percent. Meanwhile, Bank of America saw its share price rise sharply, making it one of the strongest contributors to the Dow’s advance. JPMorgan Chase was another standout in the financial sector, up 2.4 percent at $37.81, two days after the bank roiled investors with news that it had taken $1.5 billion of further write-downs in the current quarter due to the housing slump.

The price of domestic sweet crude settled down 99 cents per barrel at $115.01 as economic weakness in Europe underscored the threat to growth in global oil demand and on hopes that a shaky cease-fire between Russia and Georgia would hold.

Shares of Fannie and Freddie Mac also headed higher. SIFMA, an industry group, said Fannie and Freddie must limit the number of large loans in a key mortgage bond market to hold down costs for the bulk of borrowers in the struggling housing market.

Shares of biotechnology company Amgen gained a bit of ground after its stock was recommended by Goldman Sachs, which added it to its "conviction buy" list. Wal-Mart Stores also moved higher after the world's largest retailer reported a stronger-than-expected second-quarter profit but gave a cautious outlook for the current quarter.

The Economic News Is Not Good

Consumer prices rose sharply during July at the fastest pace we have seen in 17 years, thereby underscoring the pressure on consumers who are dealing with both rising gasoline and food costs, while their job prospects dim and incomes shrink.

The Labor Department said its consumer price index, the most commonly used inflation gauge, increased at rate of 0.8 percent in July and year-over-year was u p5.6 percent, the strongest yearly advance since January 1991 when the first Gulf War was under way. Core consumer prices, which exclude food and energy items, gained 0.3 percent in each of June and July and rose 2.5 percent last month on a year-over-year basis.

The rising price of both energy and food helped push July prices up. However, oil prices have begun to decline. Some analysts said July might mark the worst of inflation pressures but others noted the price increases hit a wide array of goods from clothing to airfares and cigarettes.

The Labor Department also issued figures on real earnings that showed the toll rising prices were taking on consumers. Average hourly earnings, adjusted for inflation, fell at a 2.5 percent year-over-year rate in July, the biggest drop since late 1980. There is some hope that as the economy slows that commodity prices including oil will keep declining and cause what has become a global inflation shock to ease its grip.

In a separate report, the Labor Department reported that 450,000 workers filed new claims for jobless benefits last week, down 10,000 from a week earlier but still at levels that are associated with recession. The job market is severely strained, adding to the burden on consumers who fuel two-thirds of economic activity through their purchases of goods and services.

In fact, a four-week moving average of new jobless claims that is regarded as a better gauge of underlying labor trends because it irons out week-to-week volatility, climbed to 440,500 from 421,000 the week before. That was the highest reading for the moving average in more than six years, since it hit 445,500 in April 2002.

With the housing market in the worst slump since the Great Depression, home foreclosure activity soared 55 percent in July from year-earlier levels. Foreclosure filings rose 8 percent from June and 55 percent from July 2007 to 272,171, according to RealtyTrac, which tracks property in the various stages until it is actually seized. Consumers are facing a squeeze not only on their incomes and from rising costs, but in many cases are seeing accumulated wealth in homes and stocks ebbing away.

A report from the National Association of Realtors showed the value of existing U.S. single-family homes in metro areas tumbled 7.6 percent in the second quarter from the comparable period in 2007. About a third of all home transactions now are distress sales that occur because of foreclosures or "short sales" where a mortgage holder takes a loss, the association said.

Higher Earnings At A Cautious Wal-Mart

Wal-Mart reported on Thursday that its earnings for the second-quarter profit increased 17 percent. At the same time the retail giant indicated that current quarter results that could miss Street estimates as consumers deal with tough economic times.

According to the company, the stimulus from tax rebate checks, which spurred shopping in the latest quarter, was mostly over, and sales remain volatile as consumers run out of money in between paychecks. Nonetheless, Wal-Mart still raised its full-year forecast on the strength of second-quarter results as consumers seek out low prices on everything from food to health-care products and electronics.

The thoughts on the Street were that Wal-Mart's third-quarter outlook was lower than some expected, but its recent earnings results show the retailer is well positioned to gain market share. Wal-Mart's net income rose to $3.45 billion, or 87 cents per share, in the second quarter that ended July 31, from $2.95 billion, or 72 cents per share, a year earlier. Earnings per share from continuing operations increased to 86 cents from 75 cents.

Wal-Mart forecast third-quarter earnings per share from continuing operations at between 73 cents and 76 cents, while analysts on average had expected 76 cents.

Wal-Mart's second-quarter net sales rose more than 10.4 percent to some $101.6 billion. Sales rose 8.5 percent to $64.05 billion at its namesake stores and increased to $12.28 billion from $11.38 billion at its Sam's Club warehouse unit. International sales jumped 17 percent to $25.26 billion.

Total sales at U.S. stores open at least a year, a key retail gauge known as same-store sales, rose 4.5 percent. Same-store sales at its namesake discount stores increased 4.6 percent and rose 3.7 percent at Sam's Club.

According to the company, margins rose in the quarter compared with a year ago as it trimmed its inventory and improved its merchandise selection, helping it avoid profit-crunching clearance sales. For the third quarter, Wal-Mart expects U.S. store sales to rise between 1 percent and 2 percent. The company raised its estimate for full-year earnings from continuing operations to a range of $3.43 to $3.50 per share.