The Economy Guy

Issue: 9/14/07 Friday

The market rested today.  The only movement was in Oil that went higher, but ended down about $1.  Basically, the market while being very volatile is waiting for the upcoming Fed meeting.  Also, the market didn’t foresee anything negative happening over the weekend; so it just lolly gagged along.

Retail sales posted a modest gain in August, helped by the biggest jump in auto sales in more than a year. But there are concerns that spending could falter as the steep slump in housing and financial market turbulence weigh on consumer confidence.  The Commerce Department reported Friday that retail sales increased 0.3 percent in August, compared to July, when sales had been up by 0.5 percent. The strength last month was led by a 2.8 percent jump in auto sales, the biggest increase since July 2006.  The increase in retail sales was just about half what had been expected.   

 

Okay, let’s interpret this measure.  Total retail sales were much lower than expected, and the total sales were boosted by auto sales.  That means that without the auto boost, retail sales were very low (in fact it would have been NEGATIVE 0.4%).  

 

The majority of the US economic engine (2/3’s of the economy) runs on Consumer Spending, and retail sales is its best measure.  One month doesn’t prove anything, and retails sales are a “lagging” indicator – something that happened in the past.  The trend is down (and the trend is your friend).  This might be one more sign of a slowing economy, and could be leading to a recession.

In another sign of weakness, industrial production in August edged up by just 0.2 percent. It was the poorest performance in three months and reflected a 0.3 percent drop in output at U.S. factories, the first decline in manufacturing after five straight increases.

The government said that the current account, the broadest measure of trade, totaled $190.8 billion in the second quarter, down 3.1 percent from a $197.1 billion in the first three months of the year.  The trade improvement supported the view of economists that America’s trade deficit, after setting records for five consecutive years, should show finally begin to decline in 2007, helped by stronger overseas growth and a weaker dollar, which boosts the competitiveness of American products.

Let’s explain this important point too.  The US Government is going to take credit for an improvement in exports.  Exports have improved over the past few years because the US Dollar has declined against all major trading partners (except the Chinese).  So exports naturally would improve as buyers look for the cheapest products.  US products are sophisticated, like Boeing airplanes or computer systems, and are easily chosen on a price/performance basis over foreign competitors.  

 

Well, the Fed inflates our currency, causing it to drop against other currencies, and this results in improved exports.  When the US Government claims a victory in exports, it is just hiding the fact that it is stealing the wealth of all US citizens at the same time.  Last, but not least, can you imagine how much US exports would have to improve to balance all the imports?  The number is reported as $190B each 3 months.  So, we won’t get back in a balanced trade position in your lifetime.

The global credit crisis struck a leading British mortgage lender Friday as the Bank of England said it had approved emergency funding to help the bank overcome a liquidity crisis.  Northern Rock PLC issued a profit warning saying that market turmoil sparked by defaults in U.S. Sub-prime loans meant its profits would fall to between 500 and 540 million pounds ($1 billion and $1.1 billion).  The bank, which relies heavily on the wholesale money markets for cash, has been unable to raise money since the money markets choked up earlier this summer.  Experts said there was little risk that the bank, which holds 113 billion pounds ($226 billion) in assets, would collapse.  

 

This was the first time the Bank of England issued its emergency credit facility since it gained independence from the British government.  (Sounds like the British set up an independent Central Bank similar to the FED, doesn’t it?)  In Britain, the key three-month interbank lending rate, or LIBOR, now sits at 6.82 percent — more than a full percentage point above the 5.75 percent base rate and just above the Bank of England’s emergency lending rate of 6.75 percent.  Here is the point.  Some US loans use the LIBOR rate, and you can see that LIBOR is at an abnormally high point.  International finances can have a direct effect on US loans.

Meanwhile, China is having its own problems. China raised interest rates Friday for the fifth time this year amid signs that repeated attempts to cool the sizzling economy so far have had little effect.  The interest rate on a one-year loan will rise by 0.27 percent, to 7.29 percent, as of Saturday, the Central Bank said. Rates paid on bank deposits also will rise by a similar margin, to 3.87 percent. A rate hike was widely expected after the government said this week that inflation rose to an 11-year high of 6.5 percent in August, driven by a surge in politically sensitive food prices.

Chinese leaders want to maintain high growth to reduce poverty but worry that the current boom, fueled by exports and investment, could push inflation to dangerous levels or ignite a financial crisis.  The economy has powered ahead despite repeated rate hikes, investment curbs and measures to shrink credit, as well as global worries about the U.S. economy.  The economy grew by 11.9 percent in the last quarter, and the World Bank this week raised its forecast for the full year’s expansion by almost a full percentage point to 11.3 percent.  The reserve rate rises are more than offset by the torrent of new deposits pouring into banks as booming exports send cash flooding through the economy.  The country’s swollen trade surplus jumped nearly 33 percent in August to $24.97 billion, its second-highest monthly level on record, according to the government.

Treasury Secretary Henry Paulson said on Friday that it will take time to work through the problems contributing to current financial market turmoil but expressed confidence U.S. growth will not be derailed.  ”I feel very confident that this economy is going to continue to grow,” Paulson said in an interview with CNBC television. “Inflation is contained and that is obviously the key to extending an economic expansion.”  The U.S. Treasury secretary was spending a day in Chicago speaking to business people before heading for France and Britain to meet finance ministers there in Monday.  Well, that should both you a lot.  It represents the official party line of the government.

OPEC chief Abdalla Salem El-Badri said Friday the current oil price of 80 dollars did not reflect fundamentals and was unlikely to last long.  ”I don’t think 80 dollars (per barrel) will last,” El-Badri told journalists here. “The fundamentals do not support the price.”  El-Badri said that the current price of oil was “too high.”  But OPEC did not have a target for the oil price, he said.  ”We’re not in favor a high price or in favor of a low price,” the cartel chief said.  OPEC is not our friend.  How could he possibly say, without laughing, that he’s not in favor of a high price.

And, here is something to tell you how the other half live.  The art boom, the wealth explosion, and Baby Einstein-style parenting have conspired to create a new breed of art collector — kids with art allowances big enough to buy works by Andy Warhol, or even Rembrandt. New York developer Bil Ehrlich said he pays for his 13-year-old son, Ace, to buy brand-name artists to teach him to love art and spend money on things that last. Dakota King, 9, had another reason for buying an Andy Warhol panda from the artist’s series on endangered species. “Panda is darling and chubby and cute,” she said, “and at night he protects me.”

Here are Today’s closing details:

DJ30 – 13,442 (up 18)

10 year US Treasury Bond – 4.46%  (Down .02)

US Dollar - $1.3874/Euro.

Gold closed at $718 per ounce.  No change

Oil Closed at $79.10 (Down 0.99)  I wonder if Oil has hit its high for this time around?

Gasoline is $2.04