Farrell: Why Can't we Enjoy the Good News?


Sometimes it's the forward looking announcements that accompany earnings reports that are the more important item.

Last week we got a nice cross section of companies that allowed some insight into the recovering economy.

Maybe the most important was Federal Express . While earnings are down a lot versus last year, the company offered that business, especially international business was looking better. Campbell Soup , the type of company that usually offers consistent and visible earnings, also offered the view that business was ok. To cover the spectrum completely, National Semiconductor also said business was doing ok. This trifecta of different companies in different industries and subject to different economic winds offers hope that we are turning a bit.

But we seem unable to enjoy good news.

The Administration has chosen to start a fight with China over trade protectionism(or respond to China's outrageous violations, take your pick). We'll tax your tires and, gosh, we are surprised that you come back and tax our autos and poultry products. This could get ugly fast, but let's hope not. It was the Smoot Hawley tariff passed in 1930 that cemented the Great Depression in place. To pick a fight with the largest foreign owner of our debt when we are the largest debtor nation in the world — and seemingly intent on staying that way — is a dangerous path to take. I know that labor would generally love a move to protect American industry and the Administration needs organized labor support for any health reform initiative, but this type of brinksmanship is fraught with risk. Is this really the time and place for a fight like this?

And we are not getting help from some allies overseas. The President of France is apparently threatening to walk out of the G-20 meeting in Pittsburgh this month if his proposal on limiting bankers pay is not heeded. Sort of like I'll take my ball and go home. How about letting bankers get paid all they want but not in cash. Rather pay them in the stuff they create to sell us. The argument that if you don't pay bankers they will go elsewhere argues effectively for not paying them. The problems we have experienced didn't come from unregulated hedge funds, but rather from the regulated side of the aisle. Maybe we should let them go elsewhere. I don't know where they would land but for those skilled enough to get into the unregulated side of the business, they would soon find that putting your own money on the line makes for a very different investment mind set.

I read that Mark Zandy of MoodysEconomy.com feels that the $8,000 first time home buyers credit helped account for some 400,000 home sales. If so this argues that it's a program that should be extended. The noise out of Washington is that some are balking because they want to show fiscal restraint. That's rich. A program that works must scare them or something.

There will be a raft of fairly important economic announcements on Tuesday. The Producer Price Indexis expected to show a healthy headline gain of 1.4% or so since oil was up in price last month. Take out food and energy to get to the "core" PPI and the guess is for a gain of .1%. That is awfully close to zero and if we were to slip to a loss of .1%, as some are forecasting, it would be the first decline in the core in some 25 years. The threat of deflation has not been completely taken off the table.

Retail sales should show a nice headline gain of +1.4%, but take out autos (lingering afterglow of the cash for clunkers program) and gasoline (a $.10 rise in the average price of gas last month) and sales will show a much more modest gain of .2% or so. Retail sales can't do well in my opinion with the consumer facing the many headwinds that exist (rising unemployment, depressed home prices, stagnant wages to name a few).

The recently released somewhat more optimistic Beige Book offers hope the NY Empire Manufacturing Index will continue its recent trend of modest sequential gains. If it registers the expected 15 (versus 12.1 last month and .6 in July) it will be the second consecutive monthly gain and the highest reading since November, 2007. The NY district is weighted towards technology and this arena has shown improvement.

We also get business inventories on Tuesday and they are expected to be down -1%, similar to last weeks wholesale inventories. Businesses continue to work through existing stocks and this will be the 11th consecutive monthly decline. Sooner or later we'll get a halt to inventory liquidation and the result will be a nice pop in GDP. _______________________________________