Don’s Outlook 8/20/08
Stocks slumped for the second straight day on Tuesday as investors digested the latest data on inflation and oil rebounded off a three-month low. The Dow Jones Industrial Average fell 131 points, or 1.1 percent, to 11,349. Financials once again led the blue-chip index lower. American International Group lost 5.9 percent in the wake of an analyst report that suggested the insurance giant’s top management may not fully understand the extent of the company’s vulnerability in the current tight credit environment. The S&P 500 declined 12 points, or 0.9 percent, to 1,267, and the technology-focused Nasdaq Composite Index slipped 33 points, or 1.4 percent, to close out the session at 2,384.
According to the Labor Department, wholesale inflation increased 1.2 percent in July and is currently running at an annual rate of 9.8 percent. The core PPI, which strips out food and energy costs, grew by 0.7 percent. The Labor Department’s report also revealed that the cost of “crude goods,” the raw materials producers use to manufacture their products, jumped 4.2 percent, a sign that further increases in the PPI could be in store.
Along with the consumer price index, the Labor Department’s gauge of consumer prices, the latest PPI data paints a picture of soaring inflation and sluggish economic growth—the main ingredients of “stagflation.” Ebbing energy prices, however, may provide some relief to consumers in the third quarter, and analysts who follow the Federal Reserve closely believe the central bank is still on track to leave interest rates unchanged at its next scheduled meeting on September 16. The consensus is that the Fed would need to see a sharp increase in wages before bringing the federal funds rate back up from its current level of 2.0 percent.
Most energy analysts credited a weaker dollar—it slipped against a basket of foreign currencies yesterday—with oil’s rebound. The front-month contract had declined to just under $113 a barrel on Monday, and oil’s month-long slide has sparked a mini-rally in the stock market. The Energy Information Administration reports today, however, that domestic stockpiles of crude jumped to 9.4 million barrels last week, a sign that demand for petroleum-based products continues to ebb. Analysts had been expecting a build of just 1.7 million barrels. Oil traded lower on the news.
Kenneth Rogoff, the former chief economist for the International Monetary Fund, made waves yesterday when he told Reuters that a large U.S. bank will likely fail in the coming months, and investor concern over the state of the financial system has been driving most of the big market moves in recent weeks. Shares of Lehman Brothers, the fourth-largest Wall Street firm, won’t announce its third-quarter earnings in mid-September, but investors are already preparing for another dismal profit report. Since last Friday, shares of Lehman have plunged 17 percent, and some prominent analysts are speculating that the firm will need to raise more capital in order to stay afloat.
On the earnings front, Hewlett-Packard, the world’s largest manufacturer of personal computers, reported better-than-expected second-quarter results. It looks like consumers in Asia were behind H-P’s stellar quarter. The company reported that sales of laptops were up 26 percent on a year-over-year basis, while growth in sales of desktop machines grew by just 6 percent. H-P noted, however, that business customers—a key segment for most of the tech sector—are delaying their purchases of new equipment but are spending more heavily on tech services to keep their existing machines running.
