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?

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a  process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it “onerous and expensive” for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.

Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Economically Speaking

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Source:  Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

Xinhua, China’s state-run news agency, said yesterday that the stimulus package represents “a shift long advocated by analysts of the Chinese economy and by some within the government. It comes amid indications that economic growth, exports and various industries are slowing.”

The decision was announced yesterday by the State Council after Premier Wen Jiabao presided over an executive meeting Wednesday. China reported in late October that its economy grew at a less-than-expected rate of 9% in the third quarter – the fifth straight quarter than growth has slowed, MarketWatch.com reported.

“As the global outlook deteriorates, we expect Chinese macro policy to turn increasingly aggressive,” Merrill Lynch & Co. Inc. (MER) economists T.J. Bond and Ting Lu wrote in a research report Friday. “This is a key theme for China and indeed, the entire Asian region.”

China becomes the latest major country to announce a stimulus package. Governments have been injecting billions of dollars into their economies, as central banks around the world slash interest rates, all in the hope of avoiding a whopper global recession. Just last week, researchers at the International Monetary Fund (IMF) said that world growth would slow to a tepid 2.2% next year, down from the 3.7% growth estimated for this year. The IMF forecast for China slashed the growth rate down to 8.5% next year, down from an earlier projection of 9.3%.

Reports are circulating that the U.S. government may be considering another infusion of its own. The urgency could escalate this week after retailers take center stage and announce their third-quarter earnings. Macy’s Inc. (M), Nordstrom’s Inc. (JWN), Abercrombie & Fitch Co. (ANF) and Wal-Mart Stores Inc. (WMT) all are expected to announce quarterly results.

The retail sales data for October will be released on Friday, though the recent weak sales numbers and earnings announcements should have provided more than fair foreshadowing of the actual monthly results.

Given that consumer spending accounts for 70% of the U.S. economy’s health, don’t anticipate great numbers. And don’t assume these are the worst we’ll see.

Market Matters

With traders predicting a victory by Democrat Barack Obama, the major markets jumped by more than 3% on election day and the Dow Jones Industrial Average closed at a four-week high. International stocks also climbed in anticipation of real “change” coming to the White House.

The euphoria was short-lived, however, as the economic realities returned “the morning after.”  Domestic indexes plunged 10% over the next two sessions in volatile trading.  Cisco Systems Inc. (CSCO), Time Warner Inc. (TWX), and News Corp. (NWS) became the latest companies to disappoint on quarterly earnings.  Likewise, General Motors Corp. (GM) and Ford Motor Co. (F) announced larger than expected losses and dismal sales results for October as execs presented a dire picture of the entire industry.  Circuit City Stores Inc. (CC) started closing stores; Goldman Sachs Group (GS) began handing out pink slips; JP Morgan Chase & Co. (JPM) announced plans to modify mortgage loans for delinquent borrowers.

Weak economic releases (see below) prompted oil prices to plummet again on enhanced recession concerns; the price of gasoline pushed below $2.40 per gallon – reaching its lowest level since early 2007.  For now, inflation does not appear to be a problem.  As for the President-elect, no one ever said it would be easy.  (Then again, optimists note, many of the same fears we face now were present back in 1992 when a relatively unknown Democratic president was elected and his party also controlled Congress. The Dow soared more than 200% during the President Bill Clinton years, the strongest performance in the post-World War II era. We also ended with a budget surplus – but that, at least, may be too much to ask for).

Weekly Market Data

Economic Matters

A hectic week on the economic calendar unfortunately brought little for investors (and the President-elect) to cheer about. The manufacturing sector appears to be in far worse shape than previously thought as the ISM index plunged to its lowest level in 26 years.  Two days later, that same Institute for Supply Management reported that the services sector was weakening, as well. Retailers remained very apprehensive about the holidays and the poorest October sales results since 1969 did nothing to relieve those fears.  JC Penney Co. Inc. (JCP) and Nordstrom’s reduced their earnings projections and only discounter Wal-Mart seemed to benefit from the uncertain times.

As for the highly anticipated unemployment releases, we found that during the month of October, the country shed another 240,000 jobs, its tenth straight month of labor contraction, bringing the year-to-date total losses to 1.2 million. Even worse, the losses appear to be accelerating.

Last month’s unemployment rate skyrocketed to 6.5% (from 6.1% in September) and now stands at its highest level since March 1994. Additionally, recruiting firm Challenger Gray & Christmas reported soaring layoffs (+79%) over the past 12-months, and payroll provider Automated Data Processing (ADP) revealed that the private sector suffered its largest monthly job contraction since December 2001. The dismal labor picture all but confirms a second consecutive quarter of negative growth (GDP), which translates into full-fledged recession. When individuals worry about their jobs, they don’t spend. Retailers suffer, manufacturers suffer, and the overall economy suffers.

We’re already seeing all of this – and there’s more to come.

Overseas, the world’s Central Banks followed in the Federal Reserves’ footsteps by dropping their key lending rates in attempts to jumpstart their respective economies. As Money Morning reported, the ECB (European Central Bank) cut its key interest rate by half a percentage point to 3.25%, while the Bank of England took surprising action by reducing its rate by one-and-a-half percentage points to take it down to 3.0% – an attempt at countering the impact of its rapidly falling housing prices and the ongoing credit crisis.

Weekly Economic Calendar

Source: China Stimulus, Troublesome Retail Earnings Point to Escalating Global Economic Woes