Market Insider/Wednesday Look Ahead

Oil prices are finally at the level where stock investors are taking note, but some traders think they still aren't paying enough attention.

"I'm befuddled by the whole tape. I thought with oil moving higher, the market should have suffered. It didn't and it hasn't," said John O'Donoghue, head of equities at Cowen and Co. "The market has to go down significantly because of oil, or oil has to crack. It's a game of chicken, and a lot of guys think that oil is going to crack."

You might not think that if you were looking at the oil pits Tuesday, where traders bid crude to $119.37, a 1.6 percent gain. Stocks, meanwhile, are finally beginning to react to rising oil, ending the day lower on inflation fears. The Dow fell 104 or 0.8 percent and the S&P 500 fell 12 to 1375. The dollar floundered, breaking down through a key psychological level of $1.60 per euro.

"I'm very concerned there's something that's just not right here. The market shouldn't be at this level vis a vis the dollar, and oil," said O'Donoghue.

Ironic too that oil pumped to a new high on Earth Day, as many news organizations (including this one) focused on alternative energy and stocks that are green.

Wednesday's market will continue to fret about rising inflation, and there's another stream of major corporate earnings reports. There is no economic data.


Dow component Boeing reports earnings ahead of the bell. Philip Morris and UPS also report, as does Delta, Northwest, Ambac, General Dynamics, Schering-Plough, and EMC. Companies reporting after the bell include and Apple.

Yahoo's earnings late Tuesday were slightly ahead of expectations, but the stock had little reaction.

Annual meetings are being held by General Electric and Bank of America Tuesday.

You can be sure the outcome of the Pennsylvania primarywill also get a lot of attention.

Inflation Nation

"Input costs" - that's a phrase getting a lot of mileage right now as companies and analysts chew over how much rising materials and energy costs could hit earnings. Look at what Kimberly Clark's CEO said in his company's earnings press release Tuesday. "We're off to a good start in 2008, with results on plan in the first quarter in the face of unrelenting inflationary pressures." Yikes.

That comment was not lost on Goldman Sachs analysts, who have a sell on the stock. "Risks skew to the downside as higher pulp and oil prices have limited the margin for error with the company now needing to absorb $100 to $200 million more in cost inflation than planned," they wrote.

William Stone, chief investment strategist at PNC, says the rising cost of commodities do not appear to be setting up an inflation spiral as they did in the early 1970s and early 1980s because wage growth is tame. He points back to the early 1980s when the peak in wage growth versus commodities inflation peaked, with year over year average hourly earnings increasing 9.4 percent.

Stone said without wage inflation, consumers will pare back spending in other areas, breaking the cycle of rising prices. "If you don't have that rising average hourly earnings, it doesn't feed the beast," he said. He also noted there are still some deflationary pressures.

For instance, aside from food and energy, there are many things are not going up in price. In the last CPI report, Stone points out that personal computers and equipment were down 12 percent year over year, and information technology and hardware was down 5.7 percent. Apparel fell 1.4 percent and new vehicle prices were 1.1 percent lower.

"A lot of us think that eventually you see some break in the energy price, and obviously a lot of us are still waiting," he said. "It (oil) really can't continue to go up at this rate. Let's just say this is where it's going to be. Even then CPI is likely to cool off," he said.

Yet, I wonder if we have even begun to see the pass along affect of higher energy prices.

It's Not Gasoline

Stocks (definitely consumer discretionary stocks) gave up gains Tuesday as investors worried rising oil would hurt an already weakened consumer.

Coach CEO Lew Frankfort was at CNBC today for an interview on "Closing Bell." As he was leaving, I spent a few minutes with him to get his thoughts on the rising price of energy and consumer attitudes. Coach stores attract a broad group of consumers, reaching different demographics in its regular stores and lower end outlet stores.

Frankfort said he doesn't see sales of Coach's purses and accessories being affected by gasoline or the consumer malaise. Sales were up double digit in the quarter and he says he expects them to be up 20 percent in the current quarter. "We're not seeing any drop off in discount traffic," he said, commenting on the consumer group you might think would be most sensitive to rising gasoline prices.

Frankfort said he thinks consumers in general are feeling poorer, and gasoline is just one part of that. "I think there's an overall feeling of discouragement," he said.

"I think it is a feeling of wealth deflation," he said, noting sentiment has taken a big hit from falling home prices. Then, consumers are also unable to tap the credit sources they once had. On top of that, there's rising food, and then rising gasoline prices adding to the gloom.

Questions? Comments?