Even bellwhether Wal-Mart Stores Inc. (WMT), which had managed to dodge the cold winds of recession over the past year, was clobbered by the economic meltdown.

The discount retailer missed big on its December same-store sales numbers.  And across the board, a chorus of large retailers chimed in with similar, disappointing news.

Altogether, it may add up to the worst holiday-shopping season in four decades, as rising unemployment and tightening credit forced consumers to the sidelines during the all-important fourth quarter.

Citing the impact of slower than expected sales at its Sam’s Club warehouse stores and international units, the WalMart posted a 1.7% increase in same-store sales. The world’s largest retailer also cut its fourth quarter earnings forecast.

“The current economy remains challenging for all businesses, and retailers have already seen customers pull back on discretionary spending,” Tom Schoewe, Wal-Mart’s finance chief told the Financial Times. “Consumers are very focused on value and necessities.”

At first, consumers had crowded discount stores seeking lower-priced goods, but surprised investors must now cope with a retail environment where even Wal-Mart seems vulnerable.

“I am shocked and disappointed,” retail analyst Britt Beemer, chairman of America’s Research Group, told CNNMoney.com.  Because of its low prices and aggressive discounts, Beemer had pegged Wal-Mart as the clear winner of the holiday shopping season and was expecting the retailer to post a 3% sales gain in December.

Overall, same-store retail sales dropped 1.7% in December, the International Council of Shopping Centers reported. Same-store sales measure sales at stores open for more than a year, and are considered to be an important indicator.  Sales declined 2.2% in the last two months of the year – the biggest such drop since the group started tracking the data in 1970.

Damage was widespread and deep, pummeling not only discounters but high-end marketers. Same-store sales at luxury retailer Neiman Marcus Group Inc. sank 28% in December. Saks Inc. (SKS) posted a 20% sales decline, twice as large as analysts estimated, even after markdowns of as much as 70% on designer goods.

Macy’s (M) said same-store sales fell 4% and it will close 11 underperforming stores in nine states, affecting 960 employees. The department store chain expects to earn between 90 cents and $1 per share for the quarter ending Jan. 31, below the consensus estimate of $1.12.

“This has been the most challenging economic environment in memory,” Macy’s CEO Terry Lundgren said in a statement.

Any sales rebound in the coming year will have to weather strong headwinds from surging unemployment.  Although initial unemployment claims fell last week, they are still up 42% over 2007, the Labor Department reported.  Continuing claims rose by 101,000 to 4.61 million in the week ending Dec. 27, the highest level since November 1982.

The Labor Department is set to release the December jobs report today (Friday). Economists had expected a loss of 500,000 jobs last month, but many are revising forecasts upwards.  A report from payroll processor ADP projected job losses of 693,000 as reported by Money Morning on Thursday, capping what could be the worst year of job losses since the end of World War II.

And in more bad news on the unemployment front, Walgreen Co. (WAG) the nation’s No.2 drugstore chain said it is eliminating about 1,000 jobs, or about 9% or its work force.

“That does not bode well going into January-February, where we go into a lull period and there’s really no reason to buy until spring,” Adrienne Tennant, an analyst at Friedman, Billings, Ramsey & Co. (FBR) in Arlington, Virginia, told Bloomberg Television.

Even the good news was bad. J.C. Penney Co. (JCP) same-store sales fell 8.1%, better than it and analysts had estimated. Kohl’s Corp.’s (KSS) dropped 1.4%, helped by last- minute shopping and “strong post-Christmas business.” Analysts had anticipated a 5.9% decline.

But the lackluster results at most discounters were a huge, negative surprise.  Costco Wholesale (COST) reported a 4% drop in same-store sales for December, a bigger decline than the 3.7% analysts had expected.

Target’s (TGT) December same-store sales fell by 4.1%. The retailer said this was in line with their expectations but that it had to slash prices to clear inventory.

“These markdowns, combined with additions to our accounts receivable allowance, will put additional pressure on our profitability in the fourth quarter,” the company said.

“This kind of discounting is a big concern,” Retail Metrics President Ken Perkins told Bloomberg TV. “January will be a heavy clearance month, with further downward margins pressure, and we might see more forecasts cut.”

It’s almost like Pavlov’s dog,” said Craig Johnson, president of retail-consulting firm Customer Growth Partners LLC in New Canaan, Connecticut.  “Consumers have become so accustomed to markdowns that nobody wants to pay full retail anymore.”

Source:Blue Christmas for Retailers as Slumping Economy Hammers Sales

But a historic drop in retail gasoline prices and auto sales may have exaggerated the decline.  Filling-station sales mirrored the recent drop in prices from $4 a gallon in July to less than $2 a gallon recently. Auto sales fell 2.8%, confirming automakers’ assertions that business had sunk to the lowest levels in decades.

Excluding gasoline, which fell by almost 15%, retail sales fell just 0.2%.

In fact, without sales of autos, gasoline and building materials, sales actually rose 0.5%, the most since May.

“The financial markets were braced for a horrific retail sales report for November, but the numbers were actually not so bad,” Mark Vitner, a senior economist for Wachovia Corp. (WB), told MarketWatch.com.

Retail fell a projected 2%, according to the median estimate of 73 economists in a Bloomberg News survey. Economists consider retail sales to be a bellwether for the overall economy since it accounts for about 50% of all consumer spending.

There were some promising stats, however. Aside from the automotive sectors, sales surged in almost every other important category.  General merchandise store sales rose 1.3%, the biggest gain in three years. Electronic stores had a 2.8% jump in receipts.

Purchases at department stores rose by the most in three years as Americans took advantage of discounts by retailers from Macy’s Inc. (M) to Best Buy Co. Inc. (BBY) to start shopping for the holidays.

But while it appears retailers have been successful in getting consumers to loosen the spending reins with aggressive discounts, the devil may be in the details.  Retailers have been consistently warning that their profits will suffer from the heavy discounting they’re using to entice shoppers.

Neiman Marcus, the luxury retailer owned by ) and TPG Inc., which recently used heavy discounts to reduce inventories, said this week that profits dropped in the quarter ended Nov. 1.  Purchases of expensive goods are also falling because of tight credit restrictions imposed by banks.

Retail analysts have been increasingly concerned about “cherry-picking,” where consumers storm the aisles for heavily advertised items, but leave the store without making other purchases.

That has led some to question the validity of the numbers themselves.

“We are somewhat suspicious of the November results and believe that a seasonal adjustment quirk may have influenced the results,” wrote David Greenlaw, an economist for Morgan Stanley (MS), MarketWatch reported.

Same-store sales in the U.S. fell 2.7% in November from a year earlier, the biggest drop since records began in 1969, the International Council of Shopping Centers said last week.

And aworsening labor market is unlikely to sustain any rebound.  The employment outlook is likely to drag down holiday shopping, a time when many stores expect to reap up to half of their annual revenue.

The unemployment rate climbed to 6.7% percent in November, the highest level since 1993. Employers have cut 1.9 million workers from payrolls so far this year.  Surging unemployment usually leads to a plunge in consumer confidence and spending cutbacks.

A dismal holiday shopping season also bodes ill for retail sales throughout 2009.  That could likely lead to a consolidation in the sector with many retailers closing their doors for good.

In fact, bankruptcies of stores such as Sharper Image Corp. (OTC: SHRPQ) and Circuit City Stores Inc. (OTC: CCTYQ) are already having a negative effect on the sale of gift cards, with consumers afraid to bet on long-term survival of some retail franchises.

Counting on the survivors being the heavy discounters such Costco Wholesale Corp. (COST) and the world’s largest retailer, Wal-Mart Stores Inc. (WMT).

“This is Wal-Mart time,” Chief Executive Officer H. Lee Scott Jr. told Wall Street analysts during an Oct. 27 presentation at company headquarters in Bentonville, Ark., BusinessWeek reported. “This is the kind of environment that Sam Walton built this company for.”

Plunging Auto & Gas Sales Hurt Retail Sales in November

The situation is dire. GM is burning through cash at a pace that could mean bankruptcy, and all three players are struggling with high costs, weak vehicle sales, frozen credit lines and dwindling cash reserves calling into question whether they can survive much longer without government help. The answer, of course, is that they probably can’t.

But it’s here that the debate turns political, the Detroit Free Press reports. Congressional Democrats are pushing for some form of auto-sector bailout – even an extension of the deal U.S. banks received as part of the $700 billion rescue plan crafted by the U.S. Treasury Department. But Republican lawmakers claim their Democratic counterparts are “pandering” to their own voter base, which includes widespread support of American unions.

Expect the debate to become heated and emotional as some lawmakers and other policymakers spotlight the massive job losses that a failure of one – or all three – of the carmakers would cause. And there would be massive ramifications beyond the Big Three themselves. As Money Morning has reported, the three automakers – all told – employ more than 200,000 Americans, and support millions of additional indirect workers employed by suppliers and dealerships.

The collapse of the automakers could ultimately cost the economy more than 2 million jobs. And the pain that would cause doesn’t even factor in the additional estimated 1 million Americans who rely on the U.S. auto companies for pension and healthcare benefits – chiefly retired autoworkers and their families.

Reaching a bailout agreement probably would require automakers and their supporters depends on the automakers and their supporters convincing skittish lawmakers that such a deal is critical for the health of the overall economy and that the U.S. government won’t be throwing good money after bad, the Free Press reported.

GM spokesman Tony Cervone even tried to spin it that way: “It’s a loan, it’s a bridge loan,” he said. “The fact is we’re looking at a short-term liquidity crisis that needs a bridge loan.”

Second, Freddie Mac (FRE), seized by the government two months ago, asked the Treasury for $13.8 billion, after a record quarterly loss caused its net worth to fall below zero. More on this momentarily.

And third, the struggles also continue abroad. Foundering Asian economies came away from a weekend Group of 20 meeting in Washington on the worldwide financial crisis with the promise they’d have expanded access to financing programs from such sources as the International Monetary Fund (IMF).

Exporters throughout Asia that depend on credit to pay for raw materials and to finance shipments say business has plunged as access to needed credit has dried up, the International Herald Tribune reports. Access to IMF loans could help governments in South Korea, India, Indonesia and other economies where investor anxiety about a possible scarcity of foreign currency has driven down exchange rates, said Citigroup Inc. (C) economist Yiping Huang.

Leaders of the world’s top industrialized nations also pledged to give developing countries a bigger role in global financial bodies — a move long sought by China’s leadership. And while Beijing welcomed the step, China’s leaders gave no indication whether the country might respond by using its $2 trillion in reserves to help expand a global bailout fund. China last Sunday unveiled a $586 billion stimulus, some of which will come from that foreign-reserve fund.

Target Corp. (TGT), Home Depot Inc. (HD), and AnnTaylor Stores Corp. (ANN) (among others) report earnings, though poor results are already forgone conclusions.  A hectic economic calendar will be highlighted by the widely anticipated inflation data as falling energy prices work through the economy.  (Just a few months ago, such releases were feared…How quickly things can change.)

Market Matters

Looks like the Feds could use a mulligan (do-over).  When the $700 billion bailout plan was first announced, one of its primary goals was to resurrect the balance sheets of ailing banks by buying underwater assets.  Additionally, direct government investments were supposed to encourage bank-lending activity that would help thaw out the frozen credit markets.

Well, just a few weeks after its creation, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. announced that the government will not buy troubled assets (that no one seems to know how to value), meaning the plan will instead focus on enhancing consumer lending.  Meanwhile, as a Money Morning investigative report demonstrated, some healthy institutions have received direct investments, but used the proceeds to purchase struggling competitors and have not increased lending in a way that would stimulate economic growth.  Non-banks also have been recipients of the government’s generosity, as insurance giant American International Group Inc. (AIG) received $40 billion in new capital from this package, under the terms of its newly structured bailout. All told the deal’s worth more than $150 billion.

American Express Co. (AXP) applied for (and received) approval to become a commercial bank in order to tap into the government resources.  While certain tweaks should have been expected to ensure that the bailout effectively achieves its goals of repairing the financial system, the actions this week did little to generate any investor confidence. President-elect Barack Obama is asking a Congressional lame-duck session to approve $25 billion to $50 billion in rescue aid for Detroit’s crumbling auto industry. He also wants to appoint a czar or board to oversee the auto industry’s rescue and reconstruction, both Money Morning and Bloomberg News reported.

With foreclosures soaring by a full 25% in October from last year’s level, Fannie Mae (FNM) and Freddie Mac (FRE) [now literally part of “the government” – somewhat ironic given that it was the pressure from foreign-government bondholders that forced the federal government to put the two mortgage giants into conservatorship, a Money Morning investigative story demonstrated] announced plans to modify hundreds of thousand of loans by reducing mortgage rates or even forgiving a portion of the outstanding principal.

Freddie, the mortgage-finance giant that had a negative net worth of $13.7 billion at the end of the third quarter, asked the Treasury Department for $13.8 billion and says it expects to receive the money by Nov. 29. The net loss widened to $25.3 billion after the company wrote down tax assets and providing for bad mortgages and securities, Bloomberg News reported Friday.

As the government tries to avert a financial-market collapse spurred by the worst housing slump since the Great Depression, Freddie’s demand adds to the government’s growing burden as it tries to avert a collapse in financial markets, Bloomberg said. The U.S. pledged $100 billion each to Freddie and larger rival Fannie Mae when it placed them into conservatorship in September. Fannie said this week it may need more money at the end of the year.

“You could very well get losses north of $100 billion on both of these companies,” Paul Miller, an analyst at FBR Capital Markets (FBR) in Arlington, Va.

Freddie Chief Executive Officer David M. Moffett, 56, named in September when the government seized control of the company, increased write-downs for bad mortgages and securities and took a charge against most of Freddie’s so-called deferred tax credits. Fannie CEO Herbert M. Allison Jr., 65, took similar steps earlier this week, causing the Washington-based company to record a $29 billion loss.

Like Fannie and Freddie, Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), and Bank of America Corp. (BAC) have increased their efforts to stem foreclosures by aiding struggling borrowers by streamlining and modifying its loans.  Speaking of Citi, its CEO announced plans to slash total compensation expenses by 25%, or up to 60,000 jobs. And rumors have its chairman among those to be given his walking papers (A Reuters report Saturday stated that Citi would cut 10% of its 352,000-person work force).  Not to be outdone, Morgan Stanley (MS) will be cutting close to 10% of its institutional securities and asset management units.  In non-financial news, Sun Microsystems Inc. (JAVA) plans to reduce its workforce more than 5,000 jobs; Intel Corp. (INTC) and Best Buy Co. Inc. (BBY) offered pessimistic outlooks; Circuit City Stores Inc. (CC) filed for bankruptcy protection (just in time for the holidays), and retailers J.C. Penney Co. Inc. (JCP) and Macy’s Inc. (M) issued weak earnings reports.

In fact, after posting a $44 million loss for the third quarter, Macy’s may be looking to consolidate down to two divisions from its current four, Womens Wear Daily reported Friday. Sources told the trade journal that plans were calling for Macy’s Florida in Miami and Macy’s Central in Atlanta into the New York-based Macy’s East and San Francisco-based Macy’s West division, the industry trade journal reported.

Wal-Mart Stores Inc. (WMT) fared better than many competitors, the company also warned of a challenging quarter ahead.

Early last week, as was reported in this column a week ago today (Monday), China announced a $586 billion economic stimulus package that served to give a jumpstart to the global markets.  Unfortunately, the euphoria was short-lived (so what else is new?) as investors focused on the weak earnings reports, the uncertainty about the domestic automakers, and the restructured bailout plan.  Three days of intense selling meant $1 trillion of lost shareholder wealth.  With the Dow Jones Industrial Average plunging below the 8,000 level, bottom-fishers re-emerged late Thursday, propelling the index to a 900-point swing and its third-largest point gain ever. Volatility continued Friday as investors worried about the weak retail numbers (see below) and sold positions heading into the weekend (especially late in the session).  Oil prices fell below $60 a barrel to a 20-month low; gasoline pushed closer to a national average of $2 a gallon with consumers in Des Moines, Iowa (of all places) paying as low as $1.75.  At least, that’s good news for those “gloom-and-doom” retailers.   (Maybe they should tap into the bailout fund as well?)

Economic Matters

How quickly things can change. In June, the Organization for Economic Cooperation and Development (OECD) projected global economic growth to increase by 1.7% in 2009, as the agency believed the financial crisis had all but ended.  Remember, last summer, most U.S. Federal Reserve watchers also expected the next rate move to be higher as Federal Reserve Chairman Ben S. Bernanke and friends seemed more concerned about threats of inflation (with oil at a record of $145 a barrel) than any domestic (or global) recession.  Fast-forward to the present, the OECD now claims the developed nations of the world have slipped into a collective recession, and 2009 will bring a consolidated decline of 0.3% in GDP for its 30-member countries (with the U.S. suffering a 0.9% contraction).

By contrast, in a recent Wall Street Journal survey, the 54 participating economists believe that the domestic economy will begin to rebound by mid-2009 and slight growth will emerge by the fourth quarter.  (No shortage of contradictory predictions from “experts” these days.)  These same economists overwhelmingly believe that President Obama should reappoint Bernanke as the central bank chairman in 2010.  Late in the week, Bernanke stated that the world’s central bankers have pledged to work together to resolve the global financial crisis and even opened the door to another rate cut (below the current 1.0% target level for the benchmark Federal Funds rate).  U.S. President George W. Bush welcomed world leaders to the G20 economic summit by praising the benefits of capitalism (that some may be doubting these days) and warned against excessive government regulations (despite the ever-expanding global bailout plans).

[Editor’s Note: For Money Morning’s take on the U.S. economy, U.S. stock market and such other key 2009 topics as the state of economies in China, Latin America and Japan, and the outlooks for the prices of gold, oil and food, check out our “Money Morning Outlook 2009” series, which is just under way. We’ll also be looking at sovereign wealth funds, retail sales, alternative energy, IPOs, mergers and acquisitions, and more.]

A light week in the economic calendar brought little stress relief to investors (not to mention retailers).  Friday’s retail sales release was reported as a 2.8% decrease in October, the largest percentage decline on record.  While U.S. auto lots have been transformed into veritable ghost towns these days, the complete and utter lack of consumer confidence these days also resulted in lower sales of furniture, clothing, and virtually everything else.

However, a few eternal optimists remain who point out the reduced prices at the pumps should serve as an economic stimulus package of its own over the next few months.  Further, the plans to renegotiate mortgage terms will help many borrowers get a better handle of their cash-flow positions (without suffering foreclosure).

Weekly Economic Calendar

Source:U.S. Automakers, Freddie Mac and Foreign Exporters Next in Line for Bailout Handouts

This week is very busy with 14 reports in four days, and things really get going this morning with the release of the July Retail Sales figures. The market expects a rather large jump this month. In June, the growth was an anemic 0.10 percent, but the market expects a growth of 0.50 percent in July. I guess only in this current economic state can a half-percentage point growth be big news, but it is a gain none the less.

The Core CPI and CPI figures come out simultaneously on Thursday morning. While both are likely to continue showing increases, the increases are slowing down. Core CPI, which excludes food and energy costs, is expected to increase 0.20 percent in July, versus 0.30 percent in June. CPI, which takes food and energy into consideration, is expected to increase by 0.40 percent. This marks a considerable drop from June, when the increase in CPI was 1.1 percent. This could be attributed to a drop in fuel costs, which declined from the middle of July until the end of the month.

The preliminary Michigan Sentiment Index figures for August come out Friday and indications are for a higher confidence reading than July. This index could indicate that the economy is gaining some momentum. If consumers start feeling better about the economy and think things are beginning to turn around, they will likely start spending more money. And if the retail sales figures for July increase, this could indicate just such a thing. Add to that only a slight increase in CPI, and things could begin to offer a glimmer of hope at a turnaround. Only time will tell, but we could be seeing a light at the end of the tunnel.

Earnings:
Tuesday: AMAT, NVDA, UBS
Wednesday: M (Macy’s)
Thursday: WMT

Source: A Critical Week For The Market To Build Momentum

On the other hand, threats of hurricanes in the Gulf of Mexico and geopolitical turmoil in Iraq, Turkey, Nigeria – and now the fireworks between Russia and Georgia – could spark a dramatic reversal in sentiment and renew fears of supply disruptions.

However, this week’s economic calendar contains the types of reports that will factor into the musings of Federal Reserve policymakers with regards to interest rates.

The report on the Consumer Price Index (CPI) for July – due out Thursday – gives economists another look into domestic price pressures, although the recent drop in energy prices will not yet be reflected in this data.  Then again, economists tend to focus only on so-called “core” inflation (which “excludes volatile food-and-energy prices,” anyway).

The July retail sales report gives us some additional insight into the consumer mindset, demonstrating that those tax rebates are virtually all gone. With gas prices on the decline, consumers should have a bit more available disposable income in the months ahead (though, again, the July numbers may not show any enhanced activity just yet).

Additional confirmation of the recent consumer cautiousness should come from the next round of earnings reports, which will feature reports from such retailers as Macy’s Inc. (M), J.C. Penney Co. Inc. (JCP), Nordstrom Inc. (JWN), and Wal-Mart Stores Inc. (WMT).  Should the gas trend continue, consumers could emerge from hibernation just in time for the holiday shopping season… wishful thinking?

Market Matters

Let the games begin. As host of the 2008 Summer Olympic Games, Mainland China takes center stage and gets the chance to show the rest of the world that it has arrived as a global player and an economic superpower. Of course, no event should be more apolitical than the Olympics.  That is, until China banned some participants for their support of Darfur.  And before U.S. President George W. Bush criticized China’s poor record of human rights on the eve of the games. And before China deported a few activists who were demonstrating against certain national policies. (Probably nothing that a few gold medals won’t cure.)

Speaking of having politics cross over into the economy: Last week, Democratic presidential candidate Barack Obama publicly lobbied for the sale of 70 million barrels of oil from the U.S. strategic reserve and also claimed to now support new offshore drilling (if his tire gauge idea fails to prove an effective policy).  As the presidential-election campaigns accelerate into the home stretch, investors can expect plenty of promises (and flip-flopping) from both sides of the aisle.  (How do you feel about those Bush tax cuts this week, Senator McCain?)

So just where are investors to turn these days?  Freddie Mac (FRE) and Fannie Mae (FNM) returned to the headlines last week, as both reported significant losses – far in excess of Wall Street expectations.  (Weren’t those analysts following the news?)  Likewise, insurance giant American International Group Inc. (AIG) reported its third consecutive quarterly loss as its mortgage portfolio remained deeply under water.  Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and UBS AG (UBS) each reached multi-billion settlements with the New York state attorney general over certain high-risk securities that the firms will buy back from affected investors. Outside of financials, Cisco Systems Inc. (CSCO) – the subject of a recent “Buy, Sell or Hold” feature in Money Morning – provided a boost to techs by announcing better-than-expected profits; likewise, The Procter & Gamble Co. (PG) proved that consumer companies could still thrive, despite surging commodity prices.

Institutional funds have garnered additional interest as of late as investors seek out non-traditional asset classes to help compensate for the challenges of the markets.  In July, Hedge Fund Research Inc. reported that the return on a basket of 60 funds designed to reflect the industry as a whole declined by about 3%, the worst monthly showing in six years.  Tutor Investment Corp. will be spinning off its Raptor fund at year-end after bad calls on the energy sector caused ongoing losses for the past two years.  Private equity firm, Fortress Investment Group LLC (FIG), reported a larger-than-expected quarterly loss and has seen its share price drop about 40% since its IPO in early 2007.  Bear in mind, not all hedge funds and non-traditional assets are created equal; plenty of “winners” have emerged lately.

Anyone remember when oil touched $147 a barrel on July 11?  Has the bubble officially burst?  Energy continued its downward spiral as oil fell below $117 barrel, its lowest level since early May.  Rising inventories eased supply/demand concerns and renewed strength in the dollar also helped support domestic securities (thanks to the European Central Bank – see below).  Equity market volatility remained as investors tried to weigh the negative Freddie/Fannie reports against the positive energy trend (and the inactivity of Federal Reserve policymakers with regards to interest rates – also see below). Stocks alternatively soared, plunged, and soared again as the major indexes moved considerably higher by end of last week.

Then there are the ongoing Beijing Summer Olympic Games (which opened Friday), a reminder that every investor should have a China investment strategy.

[Editor’s Note: Please click here to read the first part of our two-part research report -"Why Every Investor Should Have a China Investment Strategy." The second part of that report will appear later this week.]

Perhaps that jubilant Olympic spirit is contagious?  So let the games continue: “USA…USA…USA…!”

Economically Speaking

They came, they debated, they analyzed, and they left – with no action taken. The “they” we refer to here are the members of the Federal Open Market Committee (FOMC), the Federal Reserve policymakers responsible for setting interest rates.

With dueling economic dilemmas impacting the country (slow growth vs. inflation), Federal Reserve Chairman Ben S. Bernanke and his band of central bank policymakers chose to leave the benchmark Federal Funds rate unchanged at 2.00% at their policymaking meeting last week.

While most Fed-watchers still expect the next interest-rate move to be to the upside, some believe such an action is unlikely before the end of this year as reduced consumer activity continues to spark talks of recession.  The recent decline in commodity prices helped the Fed stay on the sidelines, given that inflationary pressures are slightly less than before (at least, for the time being).  The European Central Bank (ECB) and Bank of England both left their key rates unchanged as they also weigh ongoing economic concerns in their countries against continued price pressures.  They prompted a surge in the dollar and took additional pressure off of the Fed, as well.

On the retail front, same store sales in July were lackluster at best as consumer held off on back-to-school purchases and focused on necessities such as food and household goods. (Apparently, last year’s No. 2 pencils and lunchboxes still will work fine.

Even the afore-mentioned Wal-Mart’s sales came in slightly below expectations while mall chains – the Limited Brands Inc. (LTD) and The Gap Inc. (GPS) – and luxury retailers such as Saks Inc. (SKS) all struggled as consumers no longer had those tax rebates to spend.  Moving to housing, the Federal Deposit Insurance Corp. (FDIC) reported that just under 1% of all prime (not subprime) loans originated in early 2007 were at least 90 days delinquent, meaning that the mortgage crisis still has a ways to go before being resolved (and additional write-downs may be on the way).  The weekly jobless claims data showed that more unemployed folks are seeking government benefits than at any time since March 2002.

Weekly Economic Calendar

Source: Federal Reserve Policymakers Will Hold the Line on Interest Rates – At Least for Now

The PPI report will undoubtedly rekindle the inflation-versus-recession debate (with more than a few comments about stagflation thrown in for good measure).

While the wholesale inflation gauge (PPI) provides another look into how escalating food and energy prices are impacting the economy, the most recent moves in oil and gas may not be factored in for another month or two.

On an optimistic note, gasoline prices historically peak around Memorial Day and then fall throughout the remainder of the summer. As we’ve said here a number of times before, don’t expect that pattern to repeat itself this year [Indeed, please click here to check out a related story in this issue of Money Morning that details our expectation that oil-and-gasoline prices are headed even higher].

In this column four weeks ago, we told you to ignore a U.S. Energy Department forecast that gasoline prices at the pump would reach $3.73 a gallon before falling. In fact, I said flat out that the Energy Department was wrong. And Money Morning Investment Director Keith Fitz-Gerald shortly thereafter reiterated that belief that the Energy Department’s prediction was way off the beam. And how right we were – that price already has been surpassed and consumers in some parts of California and Hawaii are paying in excess of $4.00 a gallon.

Less than two weeks ago we actually boosted our target price for oil to $225 a barrel (remember that Keith Fitz-Gerald, now Money Morning’s investment director, was probably the first investment guru to predict triple-digit oil prices).

As noted, however, much of this won’t be reflected for a couple of weeks.

Wednesday’s release of the minutes from the last Fed meeting should provide investors with a bit more insight into the mindsets of central bank policymakers and just how likely they will be to stand pat on interest rates: In one of the most aggressive rate-cutting campaigns in the central bank’s history, policymakers have pared the benchmark Federal Funds rate seven times since mid-September. Investors expect the Fed to sit tight (and hold off on further rate activity) at least through the summer months.

More retailers will report this week [Target Corp. (TGT), The Home Depot Inc. (HD) but few surprise are expected at this point in an earnings cycle that – except for the discounters – has been full of disappointing retail-sales reports.

The Money Morning Story SNAFU

When they received their daily e-letter last Monday, sharp-eyed Money Morning readers noticed something peculiar about this column.

It seemed familiar.

There’s a very good reason they felt that way. They were right.

Due to a technical problem, and some human error, the column we’d put together for Monday’s newsletter was inadvertently replaced by the afore-mentioned April 14 story in which we’d told you that the Energy Department’s optimism about summer gasoline prices was wrong.

We replaced that story on the Web site with the correct piece – a warning about the week’s upcoming retail-sales reports, but we heard about the mistake. As we deserved to.

As bad as we felt about the mistake, we still found several positives. First and foremost, we were reminded yet again that we have a loyal following that reads our work closely and carefully – and for the most part enjoys and benefits from what we do.

And if you all had to read one of our “old” stories a second time, I’m happy to say that it was a strongly worded prediction piece that proved us correct.

Market Matters

Over that past year-plus, the subprime debacle and related credit crisis have prompted discussions about “disaster,” “devastation,” “tragedy,” and “catastrophe.” Homeowners were unable to afford their houses, institutions faced significant asset write-downs, hard-working folks lost jobs, and investors watched portfolio values decline. While these financial consequences undoubtedly have been traumatic for many, the events of the past two weeks can serve to lend some perspective. The death toll in Myanmar has reached about 80,000 with another 50,000 people still missing. Likewise, in China, where the earthquake eventually may take over 50,000 lives as well. Somehow, missing quarterly earnings by a few cents simply does not seem quite as significant.

Speaking of…earnings season plugged along and the results to date have given some analysts (the slightest) reason for optimism. As the week began, about 90% of Standard & Poor’s 500 Index companies had reported and 62% actually beat expectations. While average quarterly earnings have plummeted by over 17% on a consolidated basis, the results looked far stronger once the financial firms were removed from the equation.

Without that struggling sector, first-quarter profits actually increased by more than 7%. Retailers took center stage this week as Wal-Mart Stores Inc. (WMT) proved again that discounters are benefiting from the current consumer nervousness. However, while Macy’s Inc. (M) and JC Penney Co. Inc. (JCP) suffered from weak sales, their results (and guidance) bested Street projections. Sony Corp. (ADR: SNE) rebounded as TVs and cameras moved back onto consumer shopping lists. Bond insurers MBIA Inc. (MBI) and Freddie Mac (FRE) reported wider losses, while UK-based HBSC Holdings PLC (ADR: HBC) realized higher profits.

Board directors and corporate execs again played “Let’s Make a Deal” as CBS Corp. (CBS) announced its intent to buy CNET Networks Inc. (CNET); Hewlett-Packard Co. (HPQ) made overtures toward Electronic Data Systems Corp. (EDS); General Electric Co. (GE) is reportedly putting its long-time appliance biz up for auction; and billionaire stakeholder Carl Icahn pushed for Yahoo! Inc. (YHOO) management to reopen talks with Microsoft Corp. (MSFT). Analysts often welcome merger news and consider it a positive sign of a rebounding business climate. Research in Motion Ltd. (RIMM) shares soared this week on news that its newest Blackberry creation will soon hit the market; and Merck & Co. Inc. (MRK) received a major victory when a Texas appeals court overturned a Vioxx verdict that, initially, awarded $32 million in damages.

Goldman Sachs Group Inc. (GS) apparently enjoyed the limelight (and the stir its analysts caused) two weeks ago. Last week, the investment bank was at it again, forecasting that crude prices will rise to $141 a barrel during the second half of 2008. Oil surged to about $128 a barrel late last week as gasoline prices soared to over $3.75 a gallon – just a week before the widely-traveled Memorial Day weekend.