Market Talk

Stocks finish lower in a dull, light-volume session. Dow Industrials stay cooped up in a tight range for most of the day, and then falter in the final minutes in action that looked more like buyer fatigue rather than any fresh offensive by sellers.

Consumer discretionary stocks stand out for their weakness following a report showing consumer spending increased but mainly due to higher prices, and real disposable income fell in Feb vs Jan. Oil retreats, which weighs on DJIA component Chevron; IBM, Home Depot also among the average’s leading dollar decliners. All three major indexes end at session lows. DJIA falls 22.71 to 12197.88, and Nasdaq slips 12.38 to 2730.68. S&P 500 ends 3.61 lower at 1310.19.

Trading volume again was weak, which isn’t a great sign for bulls. Via Newswires’ Tomi Kilgore, Miller Tabak technical analyst Phil Roth noted this morning that volume during the recent rally has fallen “from moderately low levels to very low levels…suggesting the rally was mainly a function of traders reversing bearish positions, with little evidence of investment buying by traditional institutions or by the public.” Without increased upside volume, Roth said “the short-term rally is likely to become a top-broadening affair.”

Tomi also noted that while the DJIA today failed to break resistance in 12250-12280 range, “bulls can take some comfort knowing the Dow Jones Transportation Average is still up, and firmly above a similar resistance area.”

More from Tomi:

DJIA closes down 22 at 12198. The intraday high of 12273 was within the 12250-12280 resistance range where there were several intraday highs during the early-March consolidation range. Failing at that resistance preceded the DJIA’s 600-point drop in five sessions to a fresh 2011 low on March 16. But DJTA gains 22 to 5229, off a high of 5254, above its early-March resistance range at 5165-5195.

No evidence that the run-up in commodities prices is soon to abate. Crude oil higher today, rice futures limit up, corn up, soy products rally and wheat up big, too.

Expect to hear more comments down the road like this one yesterday from Safeway’s (SWY) CEO Steve Burd during the company’s quarterly conference call. Responding to a question about passing on rising costs to consumers, Burd said, “we are not the only one passing along cost increases and it is not confined to the supermarket industry. And it’s called preservation.”

Catch that? It’s called preservation, he says. After at least a year of walking on eggshells over raising prices, scared that customers will just run for lower prices at the competition, businesses are collectively (“…not confined to the supermarket industry,” as Burd says) raising prices. Out of (self) preservation. Continue reading…

I’ve been holding to the notion that the only real signs you can trust that will signal a lasting, sustainable recovery are rising employment and rising wages (and not just nominal wages, but inflation-adjusted wages.) I’m inclined to add a third to that: the savings rate.

Much was made of the higher retail sales this past holiday season. Jeff Harding over at Minyanville notes that the higher spending is coming at a time when savings are falling, and that’s a problem to him. (Another problem is that the spending spree, he holds, is just part of our ingrained habits, a bad habit.) Because the higher spending isn’t coming from where it should, rising wages.

These are the differences between a real, sustainable, lasting recovery, and a cheap, debt-fueled, government-ginned one. We have the latter now, which is why I remain downbeat on the economy, despite the loud, very loud, drumbeat of a bright, cheery recovery.

From Harding:

More significant is the fact that the personal savings rate has been declining since June, from 6.2% to 5.3% in November. In light of most Americans’ personal indebtedness and the lack of retirement funds, I find this rather disturbing. They are supporting their spending habit from savings.

Second, unlike other economists, I don’t believe the economy will revive if consumers just start spending. If spending were all it took to lead us to riches and prosperity, then Zimbabweans would be rich. But that’s not how the economy works. Yet almost all government-stimulus policies are geared to assist the average household to part with its money on the false belief that it will stimulate the economy.

To determine if such increased spending means economic recovery, we have to ask the question: Where is the spending coming from? It is one thing if it is a result of rising wages; it is another if it comes from savings. If wages were rising, unemployment were going down, housing were stabilized, savings had grown, and deleveraging were further along, then one could say that increased consumer activity was justified and economically viable. But, if as I suspect, consumers are spending mostly out of savings, then such growth is not sustainable.

The other big contributor to the better sales numbers, I’d bet, are the government transfers and other tax-code type giveaways that were such a big part of the last stimulus bill, and are a big part, the only part really, of the new one, which is being called a tax-cut bill, but let’s not kid ourselves, it’s a stimulus bill.

Yesterday’s improvement in November retail sales numbers sent many hearts aflutter, leading some publications to strut about consumers opening their wallets, and their “biggest shopping spree since before the recession.” Nice, but a bit exaggerated.

Consider that CPI is up more than 5.5% since 2007, so November’s total retail & food services sales — $377.547 billion — is roughly $357.77 billion in 2007 dollars. That’s higher than sales in the months of January, February and September 2007, but still well below the $371 billion monthly average for the year.

Also insightful to look at per capita sales — the US population is up an estimated 6.42 million since 2007, so November sales in 2007 dollar terms, per capita, were about $1,162, below what would’ve been $1,186 spent per per capita back in 2007.

Indeed, spending is improving, but it’s still a little premature to pronounce the patient — in this case, the US consumer — cured.

In today’s Upshot column, we’re taking a sort of state-of-the-consumer look at earnings. Certainly, consumer spending has improved, I’m a pretty bearish guy but even I have to admit that. But, and here’s the rub, it’s not at a level that’s getting companies to move away from this guarded approach they’re taking these days.

From The Upshot:

Consumer spending has picked up, but not vigorously, and that has companies keeping their guard up and holding a tight lid on costs.

From third-quarter earnings released so far this month, it’s clear that corporate America is still concerned about skittish customers. Businesses continue to employ discounts and other incentives to get customers in the door, and hopefully clutching a shopping bag or two on the way out. Yet those incentives can be costly, and companies remain reluctant to spend money on inventory expansion or hiring.

This uneasy dynamic between companies and their customers will be on display this week, with Domino’s Pizza Inc., luxury-goods retailer Coach Inc. and American cultural icon Harley-Davidson Inc. reporting results.

Sure, companies are taking advantage of cheap interest rates and issuing debt, but they’re using it to buy back shares, or pay out dividends, or buy other companies, but they’re not using to do the kinds of things that lead to job creation, like expanding their operations, or starting up new divisions.

There’s something to be written about malinvestment, how government intervention into private markets is creating perverse incentives to invest in unproductive places, and the money that should be going into creating the next wave of business and jobs is being diverted into propping up favored sectors and assets. If I ever get two free minutes, I’ll work on that.

If we only had some customers.

Edmund Phelps makes the argument in a NY Times op-ed over the weekend that the economy is faltering in many aspects, but a lack of demand isn’t an issue to worry about.

The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand, the total demand for American goods and services. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall.

The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention.

Phelps argues that structural deficiencies are plaguing the economy. Short-term pessimism is running rampant, which is hindering companies from increasing capex spending. He also notes business investment relies on innovation, which isn’t happening right now, especially with unemployment remaining at a stubbornly high rate. From Phelps:

Sustained business investment, in turn, rests on innovation. Business cannot wait for discoveries in science or the rare successes in state-run labs. Without cutting-edge products and business methods, rates of return on a great many investments will sag. Furthermore, innovation creates jobs across the economy, for entrepreneurs, marketers and buyers. State-led technology projects do not.

All are decent points. But Phelps’ final line reads like a dagger that ruins his entire argument. “Rather than continuing to argue over solutions to a problem we do not have — low demand — the country needs to focus on fixing the structural problems that, unresolved, will stymie the economy over the long haul.”

It seems like wondering which is the true culprit of the economy’s problems — sustained business investment or low demand — is like arguing which came first, the chicken or the egg? Completely disregarding low demand as one of the key issues plaguing the economy is short-sighted, at best.

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- Time’s Curious Capitalist blogger John Curran offers several themes to keep an eye on about current market conditions. “First, stocks are going nowhere,” he says, as there are lots of headlines and big moves in both directions, but the market is still flat year-to-date. Corporate earnings are way up, though mostly on cost-cutting. Oil prices are inching backing up, especially as dollar weakens. Consumer spending isn’t improving, savings rate is increasing and European debt crisis isn’t over.

- AOL’s struggling so much that it couldn’t even meet the Street’s diminished 2Q expectations. MediaMemo blogger Peter Kafka notes two important themes to watch: AOL’s ad business and rate of decline at its subscription business.

- Investors and consumers have been so conditioned to look out for inflation that the threat of deflation, particularly in housing and wages, isn’t being taken as seriously as it should be, Yves Smith writes at naked capitalism. “It is hard to prove in a tidy way, but I see more signs of discounting in the economy, even in goods and services aimed at upper income consumers supposedly unaffected by the downturn.”

- “Inflation expectations are falling and there is currently no end in sight,” notes David Beckworth, assistant professor of economics at Texas State University. “Let me be very clear what all of this implies: by failing to stabilize inflation expectations the Fed is effectively tightening monetary policy at a most inopportune time. I hope this is not how the Fed wants to be remembered.”

- Hackers have released their latest set of instructions to help iPhone 4 owners run their devices on multiple carriers.

- Bearish sentiment among advisers fell for a second-straight week, according to Investors Intelligence. Now, only 33% of the survey’s respondents say they are in the bearish camp. “While a decline in bearish sentiment is typical when equities rise, one could make the case that it should be lower,” Bespoke Investment Group says. “After all, the current level of bearish sentiment is the same now as it was when the S&P 500 was trading at it correction lows in early July.”

- “Maybe, just maybe, the thing to do is let the deleveraging/saving/expense cutting process take place,” Credit Writedowns says. “Just as forest fires are a part of the natural life cycle of forests, so is the cleansing and seeding process of an economic downturn.”

- Research In Motion’s (RIMM) Torch may be the best BlackBerry to date, but it’s not as good as Apple’s (AAPL) iPhone or the plethora of phones using Google’s (GOOG) Android software, Dan Frommer writes at Silicon Alley Insider. “The biggest problem is that RIM has not been able to build a mobile operating system that feels nearly as modern and elegant as Android or Apple’s iOS,” Frommer says. “As a result, even RIM’s newest phone feels old next to a new iPhone or Android device.”

- Oracle’s Larry Ellison joins other billionaires in following a call by Warren Buffett and Bill and Melinda Gates to pledge the majority of their wealth to charity.

- Mosque near Ground Zero gains approval, but opponents are expected to fight it in court.

- National savings rate in June inched up to 6.4% from 6.3% a month earlier and is approaching the 50-year average of 6.9%. “On the one hand, higher savings will put a crimp on consumer spending which of course makes up a majority of US GDP,” says Miller Tabak’s Peter Boockvar.. “But on the other, higher savings is the fuel for investment which helps to finance businesses everywhere that are getting crowded out in their borrowing by the enormous needs of the US government and some European ones.”

- The Wells Fargo/Gallup Small Business Index hit its lowest level since the index’s inception in 2003. Most of the poll’s decline came from the “Future Expectations” category of the survey, which follows business owners’ expectations for cash flows, new jobs, access to credit and capital spending. “In other words, as dour as the subjects are about the present sitch, they are even more so about the near future,” Josh Brown writes at The Reformed Broker.

- By next year, Apple (AAPL) will likely become the second-largest semiconductor buyer in the world, thanks to the iPhone, which prompts TechCrunch’s Steve Cheney to ponder: “Should Apple own its own wireless chip development?” Rumors are swirling Intel (INTC) may be close to acquiring Infineon’s (IFX.XE) wireless chip business, but “based on Apple’s deep relationship with Infineon, and its famed secrecy around M&A, it is a pretty safe bet that Steve Jobs is analyzing the implications of a deal.”

- Consumer spending and personal income were both flat last month, slightly below economists’ expectations. “That’s not terribly surprising these days, but it’s hardly encouraging. Perhaps the best we can say is that it’s more of the same,” James Picerno writes at The Capital Spectator.

- Android may not be a money-maker, yet, but it’s still a success. Google’s (GOOG) strategy differs from Apple (AAPL), which sells great products while tightly controlling its hardware and software distribution. Conversely, Google “sprays its software all over the place for free, betting on owning the future of the mobile Internet and search advertising businesses the way it owns them on the web,” Dan Frommer notes. “That’s why, despite Apple’s huge financial lead, Android is already a big early success for Google.”

- About the Fed potentially plowing cash from its maturing debt back into the Treasury market: “It’s not a huge move, but letting the MBS portfolio slowly burn off is inherently tightening,” Joe Weisenthal says at The Money Game. “Rolling over that portfolio, therefore, maintains the status quo.”

- “Lately the Fed seems more interested justifying why it doesn’t need to do anything more to boost the economy rather than grappling with actual data showing that the economy needs more help from the Fed,” University of Oregon economics professor Mark Thoma writes.

- Ever since stocks bottomed out in early July, gold hasn’t been able to generate a sustainable rally. And for much of 2010 gold and the US dollar, which are usually inversely correlated, have essentially moved in lockstep. “Over the last six months the two assets have been more positively correlated than at any other time in at least ten years,” Bespoke Investment Group says.

- Research in Motion (RIMM) Co-CEO Mike Lazardis calls BlackBerry Torch launch one of most important in the company’s history, which certainly isn’t an understatement. But the question remains: Is this device a “buzzworthy breakthrough or just another BlackBerry?” asks Digital Daily blogger John Paczkowski.

- Many corporations and their shareholders are enjoying surging profits and boosted dividends, but employees are still waiting on returns of the 401(k) matches.

The band wagon's looking pretty empty.

We’ve been banging the drum on the fact that so much of the “recovery” was driven by temporary factors such as federal stimulus and inventory restocking, and that eventually their contributions would fade. Well, looks like we finally got there with the inventory part, at least.

Listen, this is a nation of 300 million plus people. Money is going to be spent. Apple can attest to that. But overall, in the aggregate as the economics boys like to say, not enough money is being spent to drive the economy to the point where companies fell compelled to start hiring, compelled to offer better wages.

Until that happens, the economy’s like a giant tow-truck that got stuck in the mud trying to pull out a smaller tow truck, which got stuck there trying to pull out an SUV, which got stuck there when its driver went on a drunken off-road joyride.

To expect the consumer to pick up their traditional role of growth donkey, just because it’s like their turn or something, just isn’t realistic. That’s the real problem. Companies aren’t spending money, the government, apparently going down the austerity path, isn’t going to be spending money, and consumers aren’t spending money. Somebody’s got to kick-start this thing, but nobody is right now.

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Nobody's doin' nuthin'. What's so uncertain about that?

“The economic outlook remains unusually uncertain,” Fed chairman Ben Bernanke said yesterday in his semi-annual address to Congress. Um, what exactly does that mean? The future, by its very nature, is uncertain. So to say you’re uncertain is merely to admit reality; nobody knows what will happen tomorrow.

But to be “unusually uncertain,” well, that’s something else now isn’t it? That’s like saying, I have absolutely no idea what’s going to happen tomorrow. Europe could implode. An asteroid could strike the Earth. Lindsey Lohan could find religion in the joint. Dennis Kneale could discover what it means to be a journalist. I just really, really just have no idea.

That’s not exactly the kind of thing you want to hear from the head of the central bank. But he’s just jumping on today’s hot buzzword: uncertain. Take a look:

- “Gasoline demand has been fairly weak for the traditionally busy summer driving season, as Americans hold on to their cash in the uncertain economy,” the AP wrote on Tuesday.

- “Quest for yield continues despite uncertain economy,” was the headline on a Dow Jones story from last week.

- “The allowance for loan losses as a percentage of total loans increased to 2.81% as of June 30, 2010, up 1 basis point since March 31, 2010, due to continued economic uncertainty,” SunTrust wrote (rather stiltedly) in a press release this morning reporting its earnings.

You ask me, “uncertain” is the new euphemism for “lousy.”

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