Farrell: 'Look Under the Covers'
Chief Investment Officer, Soleil Securities
Several economic reports were released Tuesday, and the actuality is far different from the headlines. The Producer Price Index came at 8:30am and registered an alarming increase of 1.8%. But if you factor out food and energy, the increase falls to +0.5%. Read further, and that increase is entirely due to a jump in the price of cars and other light vehicles. I don't know what is going on with that, but car sales are horrible, and I figure this is some statistical oddity that will be revised or adjusted at a later date. Take all that out, and producer prices were flat.
Retail sales seemed to log in with a healthy increase of +0.6%, but that was not as good as it looks. There was a rebound, as I noted above, in both the price of cars and the sales volume. But the sales may be due to a different mix of car types normally sold, because of plant shutdowns. Retail sales of gas were up strongly due to a higher price of gas for the month. Take out car sales (which I don't think can be either real or consistent) and gas sales, and you find retail sales actually fell 0.2%.
Gas prices have fallen since the date of this report and are now down four weeks in a row. The average gas price last week was $2.53. That compares with $4.11 at the peak last year.
On the price of energy, apparently Morgan Stanley thinks crude oil will average $55 for Q3 2009, $60 for Q4, and rise to $85 in 2010. But take your pick of forecasts. BNP says oil will be at the $45 level through August. I think oil is still vulnerable and will trend towards $50. An $85 price for next year would require a fairly healthy economic recovery and to my mind is a bit optimistic.
Faced with massive deficits anyway, Congress and the Administration have to figure out how to pay for any health care legislation. The wizards in the House have came up with a 5.4% surtax on the highest wage earners. Take a look at the editorial in the Wall Street Journal of Tuesday, July 14, entitled, "The Small Business Surtax." While the Congressional tax guys want to portray a surtax as a levy on the fat cat financiers, the Journal editorial points out that 6 of every 10 taxpayers that would be effected by the surtax proposal are small-business owners. This is where the rubber of job creation meets the road of unemployment, and these class warfare Washington guys have no clue.
They also tout the Bush tax cuts that expire next year as an addition to the dollars they can count on. But that expiration has already been counted in long-range budgets, so no counting twice, guys! If the surtax were to be enacted and if the folks that labor with my pal Jason Trennert at Strategas add it up correctly, California residents would have a top marginal tax rate of around 55%, NY State folks would hit a 54% rate (this includes some propose Medicare increases), and we lucky NYC denizens get to 57%! The lowest would be Wyoming, and they would still be over 45%. Christine Romer, now at the White House, wrote when she was still apolitical that, "tax increases appear to have a very large, sustained, and highly significant negative impact on output." Amen! Would the White House only listen to its advisors or would the advisors stand up and be counted!
We are still in the very early stages of earnings season, and so far so good. Goldman blew estimates away (but the bored reaction of the stock tells us better numbers were already priced in the stock), and JNJ , CSX , and Novellus all posted good reports. We are off to a good start, but better numbers than the consensus are needed to help the market, and I still feel the market is in a corrective process that will take us a bit lower.