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Market Insider/Thursday Look Ahead

Wednesday, 9 Apr 2008 | 10:51 PM ET

Like an early warning system, retailers Thursday could reveal how much pain the consumer has been feeling from rising energy costs and the slowing economy.

Chain stores report their monthly same store sales, starting before the bell. The March reports are expected to be fairly dreary, but retailers should also provide some comment on how April is shaping up so far.

Of course, there will be winners, but it would not be hard to imagine a few more comments like the ones made by Bed Bath and Beyond Wednesday when it released its quarterly earnings. The company said its fiscal year '08 sales will be flat to slightly negative and earnings will face a double digit decline. Circuit City surprised when it reported a slight quarterly profit Wednesday, but it also said it sees the "toughest macroeconomic environment in years."

According to Thomson Financial, analysts see March sales declines of 6.3 percent at department stores, 4.5 percent at general retailers and three percent at the teen chain stores. The government's monthly retail sales number is reported Monday, and economists expect that to be an important factor in the Fed's thinking as it heads into its next FOMC meeting at the end of the month.

Boiling Oil

These retailers' reports come as energy prices head higher, breaking records and showing no signs of abating. Oil rose 2.2 percent Wednesday on a surprising drop in inventories. Crude oil on the NYMEX soared, setting a new intraday high of $112.21, topping the March high of $111.80. Oil closed at a record $110.33 per barrel. Heating oil also set a record, closing at $3.2345 per gallon, up 4 percent, and gasoline rose 0.9 percent to $2.7742 per gallon. Natural gas was on a tear, finishing up 3.7 percent at $10.056 per million BTUs. Inventory data on nat gas is released at 10:30 a.m. Thursday.

Not surprising, as oil and other commodities rose, the dollar fell. It was down 0.71 percent against the euro and 0.77 percent against the yen.

Miller Tabak's Tony Crescenzi said until recently the consumer has been taking rising oil prices in stride because of rising incomes. "With U.S. consumption of crude oil at around 21 million barrels per day.. the tab to consumers of this latest price rise amounts to $18.17 billion on an annualized basis. With oil up about $10 per barrel over the past month, the energy tab has increased close to $80 billion."

"... In light of the contracting U.S. job market, consumers will have a difficult time with this latest price run-up, as income gains currently are not sufficient to keep up with recent price gains. This of course means that consumers are facing new headwinds," he wrote.

Crescenzi noted that from 2004 until the end of 2007 income growth averaged 6.3% per year, about a percentage point more than normal. That gave households about $100 billion of extra income per year over, allowing them to pay rising energy costs.

Econorama

There are a few economic headlines to watch Thursday, including the weekly jobless claims number, released at 8:30 a.m. International trade data for February is also reported at 8:30 a.m..

Also worth keeping an eye on will be comments from Fed Chairman Ben Bernanke, who speaks at 1 p.m. on the President's Working Group and financial stability at the World Affairs Council of Greater Richmond's Global Ambassador awards luncheon. He will take questions form the audience.

Before the bell, traders will be watching for news from the European Central Bank and the Bank of England after their rate meetings. CNBC Europe News Editor Patrick Allen tells us that the Bank of England is expected to cut rates by 25 basis points, due to the faltering U.K. economy. "House prices fell last month by 2.5 percent according to data yesterday from Halifax which is the biggest mortgage lender. Banks reliant on the money markets have pulled back from huge amounts of mortgages and 100 percent deals are now things of the past," he wrote to us. "Some want a 50 basis point cut but inflation is still a concern." Sounds familiar.

The ECB, meanwhile, is likely to stay on hold, and ECB Bank President Jean Claude Trichet is likely to say that price pressures remain a concern. Allen points out that all the comments from ECB members since their last meeting indicate inflation concerns dominate fears over growth.

Wobbly Market

Stocks were weaker out of the gate Wednesday, weighed down in part by that disappointing report from UPS late Tuesday. But also weighing on sentiment was a fresh wave of fear around the financial group. Brokers Morgan Stanley and Goldman Sachs both disclosed in SEC filings that level three assets rose in the last quarter.

Those assets, including certain corporate loans and mortgage securities, are difficult to value because of no dependable market for them.

The brokerage group tumbled, with Lehman the hardest hit. Reports that Citigroup could unload $12 billion in leveraged loans to private equity firms kept that stock from sinking with the rest of the group.

Goldman Sachs holds its annual meeting Thursday morning, and it certainly will be closely monitored for any comments on the firm's outlook.

Benjamin Halliburton, chief investment officer with Tradition Capital Management, was on "Power Lunch" Thursday and he said he believes it's still too early to rush into the financial group even though he says they've probably bottomed.

He told me he is a buyer of a few "safe" names, and one of them is Goldman. He also likes Chubb, U.S. Bancorp and Prudential. "We would not be wading into the financials in a major way. We're still underweight. We've done some detailed work on several institutions and the problem is when you start doing the detailed work you see a lot of real land mines buried in the balance sheets ... That said, I do think the financials have probably bottomed and the risk to the rest of the market has lessened," he said.

Halliburton says the industry still faces loan issues and the impact of troubled credit card and auto loans are just beginning to show up. He said the industry will be reshaped as firms increase their capital levels. "Return on equity is moving to a much more normalized level," he said.

Yoo Hoo, Microsoft!

The MicroHoo saga takes a new twist ... the New York Times reports that Rupert Murdoch's News Corp is in talks with Microsoft about joining in its contested bid for Yahoo. The combination, which would join Yahoo , Microsoft’s MSN and News Corporation’s MySpace, would create a behemoth that would upend the Internet landscape.

This news breaks right after the Wall Street Journal quoted sources saying Yahoo had a three fold plan to give its shareholders an alternative to Microsoft's unwanted takeover offer. First it would strike deals with Time Warner's AOL and Google. Yahoo would also repurchase billions of dollars of its own stock. The deal with Google would be an advertising tie up. The deal with AOL would be to combine internet operations, the Journal says. Time Warner would fold its AOL unit into Yahoo and make a cash investment in return for about 20 percent of the combined entity.

Feeling the Heat

It's hard to be an airline these days, but AMR is facing a public relations nightmare of massive proportion. Its American Airlines said late Wednesday it expects its flights to be back to normal by Saturday, but NBC News reports another 900 flights are cancelled for Thursday as the carrier inspects MD 80 aircraft. Check out its stock, off more than 11 percent.

Questions? Comments? marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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