Granted, it wasn’t by much – a scant 0.7% higher than July. But it’s inevitable that consumers will eventually get back to their spending ways as this recession subsides.

And if you’re looking for a way to play it, consider hhgregg, Inc. (NYSE: HGG). Here’s why…

hhgregg, Inc: This Retailer is Bucking the Industry Trend

Based in Indianapolis, the hhgregg operates 111 retail stores selling consumer electronics and home appliances. Yes, I know that’s the same stuff you can get at your typical Best Buy (NYSE: BBY), Home Depot (NYSE: HD), or Lowe’s (NYSE: LOW).

But this company is hardly typical.

While most retailers are focused on survival, hhgregg’s in full-on attack mode. It’s not pinching pennies to stay afloat. It’s not reducing the workforce. It’s not closing underperforming stores, or mothballing expansion plans.

Instead, it’s actually ratcheting up its expansion plans and hiring by the hundreds. In fact, in the next two years, the company plans to expand its footprint by 60%.

And there’s a good reason for it…

hhgregg’s “Extraordinary Opportunity” for Growth

hhgregg’s still a regional player, with countless metropolitan markets left to enter. Plus, the fundamentals make sense…

• The typical hhgregg store generates positive free cash flow quickly, within three months of opening.
• Not to mention, the company entered the recession in much better shape than most of its competitors.
• Most notably, it wasn’t overloaded with debt. In turn, management is exploiting the drop in commercial rental rates to secure prime locations, within miles of top competitors.

President, Dennis May, says, “We have an extraordinary opportunity to gain market share by taking advantage of the current rental rates and excess availability in the real estate market.”

At the same time, the bankruptcy of a once major retailer cracked open an $11 billion opportunity…

Two Ways That hhgregg Separates Itself From the Crowd

With Circuit City having gone bust, most investors expect Best Buy to scoop up all the business. But I’m convinced hhgregg will earn its fair share too, because it distinguishes itself from big box competitors in two notable ways.

1. All Commission… All Knowing: hhgregg employs an all-commission sales staff. So if they’re content to just show up, they go hungry. They need to make sales. Thus, hhgregg’s staff tends to be older and more informed about products than the hourly, 20-somethings over at Best Buy. And with big-ticket items, consumers put a premium on superior customer service.
2. Same-Day Delivery: hhgregg offers same-day delivery on most products. Instant gratification goes a long way in attracting new customers.

To be clear, however, hhgregg is sharing in the retail pain. Same-store sales dipped 14.7% in the most recent quarter. But analysts expected worse.

The key point to remember, though, is that we never buy a stock based on the current conditions. We buy based on the future. And I’m convinced that hhgregg will be locked-and-loaded for rapid earnings growth as the economy recovers.

And the fact that shares trade at a reasonable valuation of 14 times forward earnings only makes the opportunity more compelling.

Good investing,

Louis Basenese

Source: hhgregg, Inc.: The Only Retail Stock Worth Buying Right Now

For a bunch of financial writers, we sure do a lot of talking. There is no debating we have a lot of interesting discussions around the TFN office. Yesterday we got into an in-depth conversation about penny stock investing.

The question: what does the perfect small cap look like?

Of course, each of us had differing opinions based on our own theories and experiences, but we came to one obvious conclusion. Give us a small cap that has the books of a Blue Chip and we will show you a winning pick.

As if it was some sort of divine intervention, our conclusion was proven to be deadly accurate this morning.

When I initially recommended SpongeTech (OTC BB:SPNG) to Hot Stock Confidential subscribers on August 13, I said, “The company’s balance sheet reads more like a blue chip than a speculative penny pick.”

It’s true. SpongeTech was highly undervalued. It was buying back its shares and is growing like the national debt.

The recommendation was only made two weeks ago, but already it has paid off. I advised readers to sell half of their positions for gains of 30% today. By locking in at today’s price, we can afford to ride out any future volatility.

Room for more

Almost instantly after sending out the sell alert, another “small-cap Blue Chip” popped up on my screen.

The headline from the Associated Press reads, “Kewaunee Scientific raises dividend to 10 cents.”

My first thought… who in the world can raise their dividend in this economy?

For any investor who has ever studied signaling theory, this is the ultimate buy signal from the company’s management. It shows that Kewaunee’s (NASDAQ:KEQU) top brass is confident growth is going to exceed shareholder expectations organically.

Investors rewarded the company by increasing its share price by as much as 8% during the session.

Of course, digging through the company’s books, it is obvious this company is a Blue Chip in a small-cap shell.

With a market value of just $33 million, many of this company’s brethren barely have revenues worth noting. Kewaunee flexed its muscle by sporting a top line of $104 million last year. Best of all, the company turned the sales into a net profit of $4.2 million.

A 4% margin is not worth shouting about, but it sure beats what Ford (NYSE:F), Boeing (NYSE:BA) or Hone Depot (NYSE:HD) did during the same period.

Now, with a market cap of $33 million and $4 million in earnings, we get a price/earnings (P/E) ratio of 8.25.

Home Depot’s ratio stands at 20. Boeing comes in at 15. And Ford, well, it may be a few years until it finds a positive figure for the ratio’s denominator.

Of course, with any small cap, liquidity is a major risk factor. With $25 million in debt, investors should certainly watch Kewaunee’s leverage. But it is nothing worth crossing this one of your buying list for.

After all, aren’t liquidity concerns an issue at almost every Blue Chip these days? The Dow was built (and crashed) on debt.

As a manufacturer of laboratory equipment (cabinets, vent hoods and work surfaces) Kewaunee is in a strong position to take advantage of Washington’s trillion-dollar spending spree. As the biotech industry continues to grow and as more and more high-tech school labs are built, Kewaunee’s phone is going to be ringing a lot.

I am not saying to buy shares of the company right this instant – prices have risen a lot of the last six months – but it is worthy of your watch list.

I know it is at the top of mine. Our subscribers may be reading more about this winner in the months ahead.

Source: A Small-Cap Blue Chip

In a report to be released this week, the Obama administration will boost its 10-year projection for the federal budget deficit to about $9 trillion – an increase of roughly $2 trillion, or 29%, from its prior projection, Fox News reported over the weekend, citing a source from the Office of Management and Budget (OMB).

The new cumulative deficit projection – for 2010-2019 – replaces the administration’s previous estimate of $7.108 trillion. Changes in budget projections – whether they result in a surplus or a deficit – are often refined as economic conditions change. This new projection was necessary because the recession has gone on for so long, causing federal tax receipts to plunge – and because the economic rebound will be prolonged and weak, resulting in lower forecasts for future federal revenue.

Although most of the news media focuses on the Obama administration’s $787 stimulus measure, the fact is that the federal government was pushing forward with nearly $12 trillion in rebound-related financing commitments, Money Morning reported this spring.

The administration earlier this year predicted that unemployment would peak at about 9% without the financial-jump-starting initiatives and 8% with them. But U.S. joblessness zoomed skyward anyway, and stood at 9.4% last month, although many economists now say that a double-digit unemployment rate – one of 10% or more – is easily possible.

The nation’s debt now stands at $11.7 trillion. In the scheme of things, that’s more important than talking about the deficit, which only looks at a one-year slice of bookkeeping and ignores previous debt that is still outstanding.

Back in June, the non-partisan Congressional Budget Office (CBO) predicted that the federal deficit would reach $1.825 trillion this year. The CBO and the Obama administration will tomorrow (Tuesday) separately release new budget-deficit predictions. Last Wednesday, a senior White House official, speaking on the condition of anonymity, told The Associated Press that the administration estimate would reach $1.58 trillion – or triple last year’s deficit.

The report for the budget year that ends Sept. 30 also will predict Washington to spend $3.653 trillion this year, although revenue will reach only $2.074 trillion, the unnamed senior official told The AP.

“Whether it’s $1.6 trillion or $1.8 trillion, it’s pretty bad,” said Robert Bixby, executive director of the bipartisan fiscal watchdog The Concord Coalition, told Fox News. “I hope no one tries to spin that as good news.”

Total U.S. debt has soared to $11.7 trillion (the budget deficit is the “shortfall” in the annual deficit, while the debt is cumulative), having balloned to that level as a result of the multiple annual deficits that have become the norm, it seems.

Market Matters

Just who is the world’s great economic superpower these days?  At times, it seems, “as China goes, so go the world equity markets.”  Early in the week, the Shanghai Composite Index (SSE) suffered its largest percentage decline since late 2008, with the index plunging more than 20% for the month on concerns about the sustainability of China’s recovery.

The global markets watched as the Japan, Europe, and the U.S. indexes followed the SSE downward.  By mid-week, however, all eyes were back on the domestic market as another sell-off in China was overshadowed by signs of growing U.S. economic strength and reports of enhanced energy demand.

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS AG (NYSE: UBS) by selling off its investment for a $1.13 billion profit, or a 30% annualized return.  While the U.S. government has yet to reap similar benefits, several major banks have paid off their Troubled Asset Relief Program (TARP) loans and the CEO for one of the poster children for financial distress, American International Group Inc. (NYSE: AIG), announced that his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”

While many auto dealers complained about the rebate process on the “Cash for Clunkers” program, General Motors Corp. (NYSE:GRM) stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.

The healthcare debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public-health-plan option sent related health-care stocks soaring early in the week, though the jury remains out as to how this will really play after U.S. President Barack Obama guaranteed approval of an overhaul and then bashed congressional Republicans for their efforts in blocking any plan whatsoever.

On the earnings front, the housing sector received mixed signals as Home Depot Inc. (NYSE: HD) bested expectations, while rival Lowe Companies Inc. (NYSE: LOW) fell short and reduced its outlook. Cost-cutting was widespread among retailers as The TJX Cos. Inc. (NYSE: TJX), The Gap Inc. (NYSE: GPS), and even Target Corp. (NYSE: TGT) benefited from increased margins, though sales remained lackluster at best.

Hewlett-Packard Co. (NYSE: HPQ) struggled in its PC and printer-business segments, though management expects a healthy rebound in its fiscal fourth quarter.

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for U.S. Treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports.

Likewise, oil prices shook off some early week negativity and surged to 2009 highs, as a surprising plunge in inventory levels revealed growing demand – perhaps to coincide with the beginning of a global economic rebound?  On that note, U.S. Federal Reserve Chairman Ben S. Bernanke’s comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the U.S. markets assumed the leadership role once again.  The major domestic indexes shrugged off the weak start and pushed to new highs for the year.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (08/14/09)	Current Week (08/21/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	9,321.40	9,505.96	+8.31%
NASDAQ	1,577.03	1,835.04	1,985.52	2,020.90	+28.15%
S&P 500	903.25	919.32	1,004.09	1,026.13	+13.60%
Russell 2000	499.45	508.28	563.90	581.51	+16.43%
Global Dow	1526.21	1,629.31	1,803.83	1,819.50	+19.22%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.56%	3.56%	+132 bps

Economically Speaking

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.

However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime mortgages are no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well.

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by more than 7% as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.

In non-housing news, separate regional reports from the New York and Philadelphia Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as the producer price index (PPI) fell by a wider-than-expected 0.9% in July and prices have plummeted over the past 12 months by the largest percentage (6.8%) since records have been kept, dating back to 1947.

Be forewarned: Oil just hit a 2009-high.

U.S. Federal Reserve policymakers met for their annual conference and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course, Bernanke tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound would likely be slow, with unemployment remaining a concern.

Bernanke also spoke of the need for financial regulatory reform in order to ensure the current financial debacle isn’t repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities.

Weekly Economic Calendar

Source: In the Race for a U.S. Economic Rebound, Growing Debt and Budget Deficits Remain the Biggest Possible Roadblock

It has been a tough week if you have anything to do with the world of retail. Just about every company that opened its books to the Street this week got punished for the act.

The list of “disappointing” reports is getting longer by the day.

Lowes (NYSE:LOW) kicked off the week with scary-low figures. Home Depot (NYSE:HD) beat the Street but still got punished after a slew of less-than-stellar economic reports.

Outside of the home-centric sector, shares of Liz Claiborne (NYSE:LIZ) plummeted on Monday after the Standard and Poor’s cut its rating on the unprofitable retailer to B, a two-notch downgrade. The company’s rating now stands five levels below investment grade.

High-end retailer Abercrombie & Fitch (NYSE:ANF) is also deep in negative territory for the week after succumbing to industry pressure and a downgrade from Susquehanna.

Obviously, the market believes a business model that focuses on trendy, expensive clothing is not a place to be during a deep, protracted recession.

And of course, there is Eddie Lampert and his Sears Holding (NYSE:SHLD). While the store may be the hideout of choice for any enslaved husband while his wife shops for new bed linens, fewer of us our purchasing the store’s products.

Shares of the company are down by double-digit proportions today after Sears announced it lost $94 million over the past three months. It is tough to make a profit when revenues are plunging by 10% (12.5 for comparable-store sales).

Essentials only investing

If consumers are not spending their money at the high-end stores or paying to fix up their house, where are they spending it? After all, there is no choice but to spend money on the essentials at the very least.

The key is understanding which retailers are stocked up on the essentials. Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are the first to come to mind.

And guess what… shares of Target are up on the week and Wal-Mart is just slightly in negative territory.

One of the most appealing sectors of the retail market is the ultra-cheap (in price and quality) “dollar store” segment. As the market breaks out its magnifying glass in an attempt to find any signs of so-called green shoots, shares of company’s like Family Dollar (NYSE:FDO) and 99 Cents Only (NYSE:NDN) have dropped from their recent highs.

The discounting is a mistake. Today’s unexpected surge in first-time jobless claims (a jump of 15,000 claims) proves tens of thousands of American consumers are still at risk of losing their jobs. That means they won’t be shelling out their reserves any time soon.

Instead, they will continue their spendthrift shopping.

While there are sectors much more likely to hand you sizeable profits in the near future, no portfolio is healthy unless it is properly diversified.

If you need exposure to the nation’s retail market, look at the big guys like Wal-Mart and Target or the small discount retailers where a buck will buy you just about anything… but a share of the company.

Finally, if you have been playing this sector or have your eye on any big movers, your fellow readers would love to hear about it. Drop us a line and let us know your thoughts.

Source: Dangerous Retail: The Sector That Refuses to Recover

• Japan’s economy is once again growing, with its gross domestic product (GDP) rising 3.7% in the second quarter. A rebound in exports to China and a large stimulus program helped Japan bounce back from contraction that, at an annualized rate of 11.7%, was more than double that of the United States’ in the first quarter. Officials at Japanese companies think the nation’s worst recession since World War II is nearly over, according to a survey released last weekend.

• The National Association of Home Builders/Wells Fargo confidence index rose to 18 this month, a one-year high, Bloomberg Newsreported. Still, a reading below 50 means most respondents view conditions as poor. “Inventory is being cleared and that is starting to benefit the new-home market,” Julia Coronado, a senior economist at BNP Paribas SA in New York told Bloomberg. “With a few months’ lag, that will lead to a turnaround in construction activity.”

• The Federal Reserve Bank of New York’s general economic indexrose to 12.1, higher than forecast and the first increase since April 2008. Any reading above zero indicates that manufacturing is growing. “Inventories were drawn down to such amazingly low levels that companies need to start bringing them back,” said Tom Porcelli, a senior economist at RBC Capital Markets Corp. in aBloomberg News interview. “We are coming out of the recession.It’s probably over at this point.“

• Credit card default rates showed signs of stabilization in July,Reuters reported, citing regulatory filings by multiple large U.S. banks. Bank of America Corp. (NYSE: BAC), the bank with the highest default and delinquency rates saw its charge-off rate shrink slightly to 13.81% in July from 13.86%. “It just seems to bear out what we heard in the second-quarter calls, that things seem to be getting marginally better — and I would stress marginally — on the consumer side,” Nancy Bush, founder of NAB Research, said of Bank of America.

• Microsoft Corp. (Nasdaq: MSFT) and General Electric Co. (NYSE: GE) joint venture MSNBC.com has acquired “hyperlocal” news and information Web site EveryBlock. Terms were not disclosed, but in June Time Warner Inc.’s (NYSE: TWX) AOL acquired a similar Web site, Patch for $7 million, The Washington Post reported. EveryBlock offers news in 15 cities. “Joining with MSNBC.com gives us the resources to turn EveryBlock from a cool, useful service into something much bigger,” said Adrian Holovaty, founder of EveryBlock. Holovaty and the company’s staff of five will remain based in Chicago.

• Reader’s Digest Association Inc., whose namesake magazine says it is the bestselling magazine in the world, has filed for Chapter 11 bankruptcy protection as a part of a prearranged plan with lenders to cut debt by 75%. If the court approves the deal, Reader’s Digest’s debt would be reduced to $550 million from its current $2.2 billion. “Our deal has already been negotiated and hammered out with a majority of our creditors,” said Chief Executive Officer Mary Berner in an interview with Reuters. The announcement “doesn’t affect our employees, it doesn’t affect the vast majority of vendors, it doesn’t mean we’ll do mass layoffs, it doesn’t mean we’re going to be selling off assets. It’s business as usual.”

• Continuing weak demand, bad weather and charges related to the halting of its expansion contributed to a 19% drop in Lowe’s Cos.’(NYSE: LOW) second quarter earnings. The world’s second-largest home improvement retailer after Home Depot Inc. (NYSE: HD) saw its profit fall to $759 million, or 51 cents a share for the quarter ended July 31. That compares to a net income of $938 million, or 63 cents a share in the same period last year. Sales fell 4.6% to $13.84 billion and same-store sales dropped 9.5%.

Source: Investment News Briefs Tuesday, August 18, 2009

After the Commerce Department reported last week that retail sales fell 0.1% in July from June, and 8.3% year-over-year, retailers will stay in the limelight this week as several high-profile companies report second-quarter earnings. Target Corp. (NYSE: TGT), Limited Brands Inc. (NYSE: LTD), and Gap Stores (NYSE: GPS) are among the big-name retailers set to report.

Meanwhile, the Hewlett-Packard Co’s (NYSE: HPQ) report will provide a further glimpse into the world of technology, and The Home Depot Co.’s (NYSE: HD) results will confirm or counter claims that the recent housing rebound is for real.  On that note, the upcoming economic releases include July housing starts and existing home sales, while the wholesale inflation gauge may show that price pressures are not yet creeping into the producers’ side of the equation either.

Market Matters

While many more bearish analysts continue to proclaim “gloom and doom” and a drop back to the March-lows in equities, at least one noted naysayer may have shifted to the other team.  Hedge fund manager John Paulson purchased over $165 million shares of Bank of America Corp. (NYSE: BAC) to become the banking giant’s fourth largest shareholder.  Paulson was among the select few who predicted the subprime debacle, so his allocation into financials may be interpreted as a nice vote of confidence from an unexpected source.

Meanwhile, the U.S. Federal Reserve made a few bold moves to promote its case for recovery as well.  Following the policy meeting, Federal Reserve Chairman Ben S. Bernanke announced his intent to cease the program of buying up to $300 billion of Treasuries in October, as a major economic lifeline may have served its purpose well.  Additionally, banks have scaled back borrowing from the Fed’s emergency short-term lending facility, a sign that the frozen credit markets have thawed considerably.

Finally, the Car Allowance Rebate System (CARS), popularly known as “Cash for Clunkers,” was expanded, allowing car buyers to receive vouchers for future purchases as automakers report dwindling inventories.

Retailers took center stage in the earnings game as Wal-Mart Stores Inc. (NYSE: WMT) and Kohl’s Corp. (KSS) beat expectations, but still offered cautious projections for the months ahead (including the upcoming holiday season).  Macy’s Inc. (NYSE: M) posted a declining profit, but gave an optimistic outlook, as it benefits from cost-cutting measures.  Liz Claiborne Inc. (NYSE: LIZ), on the other hand, reported a wider loss and new streamlining plans and J.C. Penney Co. (NYSE: JCP) issued some pessimistic comments about the state of the consumer.

Seemingly recession-proof McDonalds Corp. (NYSE: MCD) announced strong July same-store sales as its coffee drinks competed effectively with the “big boys.”  On the transactional front, China continued its expansion into the global commodities markets as China National Petroleum Corp. and CNOOC Ltd. (NYSE ADR: CEO) have eyes on the Argentinean unit of Repsol YPF SA’s (NYSE: REP) to the tune of $17 billion. Microsoft Corp. (NYSE: MSFT) and Nokia Corp. (NYSE ADR: NOK) are teaming up to take on PDA leader Research in Motion Ltd. (Nasdaq: RIMM) in an alliance that brings the popular software together with a solid cellular player.

Fixed income investors got a boost from a successful 30-year bond auction, as $75 billion in new Treasury securities were well-received during the week.  The Treasury also announced a plan to issue more TIPS (inflation-adjusted bonds), a move aimed at alleviating concerns in China (the largest foreign holder of U.S. debt) that the government would allow a surge in inflation as it tries to finance the stimulus plans.

Higher inflation would increase the yields on TIPS and result in greater costs for the government.  Bond prices fell mid-week after the Fed announced its intent to end its Treasury purchase program, though the auction news was a welcome relief and a late-week flight-to-quality also ensued.

Investors focused on the lackluster consumer activity – illustrated by both earnings and economic releases – and worried that economic growth will be stunted as long as shoppers remain in hibernation.

Despite favorable reviews by the Fed, major equity indexes gave up slight ground during the week with the Standard & Poor’s 500 Index and Nasdaq Composite Index still flirting with 1,000 and 2,000 respectively.

Economically Speaking

No rest for the weary (especially when auditioning to keep a job).  Fed Chief Bernanke guided the latest Fed policy meeting that saw strong signs (and language) pointing to the recession nearing an end.  The Fed claimed the economy is “leveling out” and felt the Treasury purchase program could go away with no material detriment to the nation’s financial system.

The accompanying statement also indicated that the funds rate would remain just above zero for “an extended period” as many anticipate the recovery will be slow to take hold.  Noted economists apparently have Bernanke’s back as a recent survey revealed that most prefer he remain on as Fed Chair for another four-year term and President Barack Obama should reappoint him based on his strong performance in righting the ship during the worst economic downturn since the Great Depression

Treasury Secretary Timothy F. Geithner shared some tough talk as he objected to certain concerns that major financial companies have not learned their lessons and the recent profits are indications of pre-crisis-like risk-taking.

The economic data of the week offered mixed signals as retail sales surprisingly declined in July despite the popularity of the “clunker” program, though continuous claims for unemployment benefits fell to the lowest level since April.

The anticipated rebirth of the consumer may be on hold for now as the Reuters/U. of Michigan sentiment index fell again and individuals continue to worry about the state of the job market.

While the trade deficit increased in June, exports climbed for the second consecutive month and manufacturers experienced increased demand for products like semiconductors and telecommunication devises.  Likewise, industrial production rose in July as the “new and improved” domestic automakers attempt to get back on track.

On another favorable note, inflation remains a non-issue as the consumer price index (CPI) was unchanged from June and prices have fallen by 2.1% over the past year.  On the global stage, the French and German economies posted surprising growth in the second quarter and, though the broader Eurozone countries continue to contract, the recovery is already taking hold in that region of the world.

Weekly Economic Calendar

Source: Will This Week’s Earnings Reports Reflect a Recovery or a Relapse for the U.S. Economy?

• The U.S. economic downturn may be slowing, but conditions remained weak in almost half of its regions, the Federal Reserve reported in its Beige Book business survey. “Contacts from several districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year,” the central bank said in the report. But the words “stable” or “stabilize” appeared in some form more than 60 times in yesterday’s (Wednesday’s) report,according toBloomberg. Many district banks reported that homebuilding “appeared to have stabilized at very low levels,” and some regions said “manufacturing employment levels may soon stabilize.” The Fed report reflects information collected through June 1 and summarized by staffers at the Cleveland Fed bank. It is published two weeks before the next Federal Open Market Committee meeting.

• Home Depot Inc. (NYSE: HD) yesterday (Wednesday) raised its 2009 profit forecast and said economic indicators signal the worst of the U.S. housing correction has passed. The company, which has been upgrading services and products in its stores to win back market share from rival Lowe’s Co.’s Inc (NYSE: LOW), said earnings could be flat this year, rather than falling as it previously forecast.  Admitting its sales were hit hard by the housing market slump and recession, the nation’s biggest home-improvement chain said it sees better margins this year through improved efficiencies,Reuters reported.

• Total home loan applications were driven down by spiking U.S. mortgage rates last week as demand for refinancing shriveled to the lowest level since November, the Mortgage Bankers Association said yesterday (Wednesday).  Borrowing costs have soared as bond yields have risen, even as the Federal Reserve has purchased hundreds of billions of dollars in bonds to keep rates low and stimulate the housing market, Reuters reported. The average 30-year fixed mortgage rate jumped 0.32 percentage points in the week ended June 5 to 5.57%. That’s nearly a full point, about 100 basis points, above the record low rate of 4.61% in March, the trade group said.

• Legislation introduced in the Senate yesterday would almost double an $8,000 tax credit for first-time homebuyers and expand the program to all borrowers, Bloomberg reported. Senator Johnny Isakson (R-Georgia) is co-sponsoring a bill that increases the tax credit to $15,000 and removes income and other restrictions on who can qualify for the credit, according to his spokesman, Sheridan Watson.  It would eliminate income caps of $75,000 and $150,000 on individuals and couples seeking to claim the credit and extend it to owner-occupied, multi-family units.  “The housing market continues to be a drag on the economy,” said John Castellani, president of the Washington-based Business Roundtable, which represents the interests of more than 100 large-company CEOs. “We believe that if we don’t stabilize this vital sector, we can’t turn the tide on the recession.”

• Citigroup, Inc. (NYSE: C) yesterday (Wednesday) began a $58 billion recapitalization process that will make the U.S. government the company’s largest shareholder, MarketWatchreported. The Treasury will exchange up to $25 billion of the bank’s preferred securities for interim securities and warrants. The recapitalization would create roughly $58 billion in new common Citi shares.

• Oil prices have eclipsed $70 a barrel for the first time in seven months, and now analysts say escalating energy costs could inhibit global recovery, MarketWatchreported. “As if the U.S. consumer didn’t have enough to worry about,” said Peter Boockvar, equity strategist at Miller Tabak, referring to gas prices, which are rising to their highest levels since last fall. The U.S. government reported an unexpected decline in supplies last week. “If gasoline prices stay elevated, it will dramatically dilute the tax-cut portion of the Obama stimulus plan,” said Boockvar, adding that for every dollar the price of gasoline rises, “it’s an extra $140 billion more in consumer spending at the pump.”

• Euro Pacific Captial, Inc. President and Chief Global strategistPeter D. Schiff is considering a run for the U.S. Senate on the Republican ticket, Reuters reported, citing his Tuesday appearance on Comedy Central’s “The Daily Show.” He would challenge Connecticut Sen. Christopher Dodd. Supporters have launched schiff2010.com to encourage Schiff to run. Schiff is an occasional guest columnist for Money Morning.

Source: Investment News Briefs Thursday June 11, 2009

No matter which path GM chooses – conventional restructuring or bankruptcy – the U.S. Big Three of GM, Ford Motor Co. (NYSE: F) and Chrysler LLC will have to adjust to the U.S. auto market’s post-financial-crisis “new reality.” Automakers will sell only 10 million cars and trucks in the U.S. market this year, the worst in at least 3 decades – and roughly 38% less than the 16 million vehicles that were sold in the United States annually in recent years before the financial collapse caused an accompanying collapse in auto sales.

Part of the reason for the slump in new vehicle sales is that consumers are increasingly turning to used cars. Pre-owned car sales are up 10% this year over last, as credit availability increases, but buyers focus on affordability. In fact, according to the most-recent report, used-car sales jumped in April, and the trend is expected to continue at least until the middle of the year as pent-up demand for affordable, pre-owned vehicles jacked up the used-vehicle segment of the auto marketplace.

Market Matters

U.S. Treasury Secretary Timothy F. Geithner put his most optimistic face forward in assessing the progress with the bank bailout plan. Geithner pointed out that the 19 stressed-tested banks have already raised $56 billion in capital [including Bank of America Corp.’s (NYSE: BAC) $13.5 billion stock offering] and several could begin to pay back Trouble Asset Relief Program (TARP) money shortly.  He also indicated that the public-private partnership to remove “toxic” assets from banks’ books should be up and running in the next month-and-a-half, a move that may instill greater confidence in the financial markets.

However, an analysis by The Wall Street Journal rained on Geithner’s parade by estimating that small and mid-sized banks could face losses on bad commercial real estate loans of $100 billion by year-end 2010. A Money Morning investigation of the looming commercial real estate crisis predicted that this sector of the real-estate market would pose major problems for the U.S. economic recovery.

Meanwhile, GMAC LLC may be close to receiving a fresh $7 billion in new (bailout) money as the government continues to seek ways to rescue the auto industry.  GM reached an agreement with its main union (UAW) that would reduce retiree benefits and overall labor costs to make them comparable to those of their foreign rivals.

As another negative earnings season comes to a close, investors searched long and hard for a bright spot – any bright spot.  With most Standard & Poor’s 500 Index companies reporting, earnings plunged more than 30% in the first quarter and are on track to fall 13% for the full year, the worst annual performance in six years.

Still, Thomson Reuters PLC (Nasdaq ADR: TRIN) says that a consensus of sell-side analysts projects a 29% increase in earnings in 2010 as cost-cutting measures pay off and relative results begin to look more attractive.

The Lowes Cos. Inc. (NYSE: LOW) reported better-than-expected quarterly profits and raised its outlook for the year, but The Home Depot Inc. (NYSE: HD) saw its numbers disappoint investors who were looking for stronger signs from the home improvement giant.  Likewise, Hewlett-Packard Co. (NYSE: HPQ) reported weaker earnings, and that spawned renewed pessimism for the high-tech sector.

On a brighter note, retailers Sears Holdings Corp. (Nasdaq: SHLD) and Aeropostale Inc. (NYSE: ARO) reported better-than-expected quarterly profits.  Ratings upgrades brought early promise as Citigroup Inc. (NYSE: C) boosted its forecast on homebuilder Lennar Corp. (NYSE: LEN); Deutsche Bank AG (NYSE: DB) raised its views on McDonalds Corp. (NYSE: MCD); and Goldman Sachs Group Inc. (NYSE: GS) made Bank of America a “Buy.”  However, S&P warned it may downgrade the United Kingdom’s debt below AAA due to ongoing economic obstacles, a development that prompted others to wonder if U.S. securities could face similar dire possibilities.

Crude oil surged past $62 a barrel on lower inventory data and gasoline climbed above $2.36 a gallon heading into the Memorial Day holiday weekend, a far cry from the $3.80 of this time last year – although it was 30 cents higher than late April levels.

Economically Speaking

While Geithner was “spinning” the bailout progress in the most favorable light possible, the U.S. Federal Reserve meeting minutes painted a picture of a more sluggish economy than most had predicted just three months ago.  In fact, the policymakers negatively revised their projections for economic contraction and warned that the unemployment rate could push toward 10% by the end of the year.  Still, central bank Chairman Ben S. Bernanke believes improvements are on the way as the impact of the Obama administration stimulus package aids in the recovery over the year’s second half. Furthermore, the Fed stands prepared to buy more U.S. Treasury and mortgage-related securities should such moves be deemed beneficial.

In the “it could be worse” category, Mexico (-21.5%), Japan (-15.2%), and Germany (-14.4%) each reported severe economic declines (as measured by gross domestic product, or GDP), as these three primary U.S. trading partners suffered the ill effects of the lower domestic demand for foreign-made goods and services.

Though the economic calendar was rather light during the week, some positive signs did emerge from deep within the numbers.  While analysts were surprised by a decline in April housing starts, the losses stemmed from a reduction in apartment activity, and single-family construction actually jumped by almost 3%, its second consecutive positive monthly showing.

Additionally, a private survey of the nation’s construction professionals depicted that homebuilder sentiment soared to its highest level in eight months, another sign that the prolonged housing slump may finally be nearing an end.

Finally, leading economic indicators, a predictive index that forecasts activity for the ensuing six months, turned positive after six straight down months.  Unfortunately, labor continued to struggle as the number of folks who have been receiving unemployment benefits for over a week hit a new record high.  While the economy definitely seems to be moving past the dreaded recession, any recovery will be limited as long as the labor picture remains weak and employees hold off on purchases until their job situations become more stable.  And the risk of a “double-dip” downturn remains somewhat high.

Weekly Economic Calendar

Source: As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Smaller Market

Starts for privately owned homes clocked in at a 458,000 annual rate, a 12.8% decline from March’s revised rate of 525,000 and a 54.2% dive from April 2008’s annual rate of 1,001,000 starts, according to a report from the U.S. Department of Commerce.

Meanwhile, building permits for privately owned housing units were applied for at a seasonally adjusted annual rate of 494,000, 3.3% below March’s revised rate of 511,000 and a 50.2% plummet from April 2008’s revised rate of 991,000.

The Commerce Department report also sheds light on the complexity of the housing market’s fallout and path to recovery.

Most strikingly, while starts in the West have dropped 52.9% from last year, they actually rose 42.5% from March 2009. The Northeast, Midwest and South all posted double-digit monthly declines and steeper annual losses.

Also, the drop in building permits isn’t necessarily a bad thing, says Peter Kenny, managing director at Knight Equity Markets. Like the retail sector’s recovery, the first step for the ailing housing market is getting rid of all the houses already on the market, he said.

“There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we’ll be,” Kenny told Reuters.

Affect on Stock Market

For the short term, April’s housing figures won’t help the country’s top home-repair retailers, The Home Depot Inc. (NYSE: HD) and Lowe’s Cos. Inc. (NYSE: LOW).

Each company posted quarterly earnings that beat analysts’ forecasts, but not because they’ve been blessed by a return of consumer demand.

Rather, the retailers discounted items and cut costs across the board.

Earlier this year, Home Depot announced plans to cut 7,000 jobs, freeze officers’ salaries and close some specialty outlets – moves that shed 16.4% from operating costs, Reuters reported.

In April alone, building-material and garden-supply stores, shed 7,500 jobs, according to the U.S. Department of Labor.

The moves have clearly been effective, but also entwined with a bitter irony.

And as long as unemployment continues climbing, there won’t be a consumer base for every element for the housing market, including the merchandise on their shelves.

Source: U.S. Housing Starts and Permits Revisit Record Lows in April