A Reuters/University of Michigan survey showed consumer confidence fell to its lowest in four months in August on worries over high unemployment and dismal personal finances, though the mood improved from earlier this month.

The Nasdaq was buoyed after Intel Corp raised its outlook for third-quarter revenue and Dell Inc , the world’s No. 2 personal computer maker behind Hewlett-Packard Co , posted a strong quarterly performance and several brokerages raised their price target on the stock.

The PHLX semiconductor index <.SOXX> rose 2.2 percent, while Dell shot up 4 percent to $16.29, and Intel increased 4.6 percent to $20.36.

“You would think after the Intel blowout numbers the market would have really picked up a lot of steam,” said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

“It’s just telling you that this market has about as much good news baked into as it can take. We’re at that point now where there is no more good news that could come out that can really juice this market.”

The Dow Jones industrial average <.DJI> dropped 30.39 points, or 0.32 percent, to 9,550.24. The Standard & Poor’s 500 Index <.SPX> shed 0.77 points, or 0.07 percent, to 1,030.21. The Nasdaq Composite Index <.IXIC> gained 6.39 points, or 0.32 percent, to 2,034.12.

The Dow industrials were weighed down by declines in consumer companies like McDonald’s Corp , off 1.2 percent to $56.

Shares of Apple Inc rose 0.5 percent to $170.26 after China Unicom <0762.HK>, China’s No. 2 mobile carrier, agreed to sell the iPhone in China, giving Apple access to the world’s largest mobile market. China Unicom’s U.S.-listed shares gained 4.1 percent to $14.66.

Earlier Friday, the government said U.S. consumer spending rose as expected in July, lifted by the “cash-for-clunkers” program that fueled demand for autos.

After the market open, the S&P 500 rose to 1,039.47, its highest intraday reading since Oct. 14, 2008.

Aug 28 (Reuters)

Video rental king Netflix Inc. (Nasdaq: NFLX) years ago usurped Blockbuster Inc. (NYSE: BBI)’s throne as the No. 1 video rental outlet, but now it’s focused on cementing its status as the market leader as other video rental companies struggle to play catch-up.

Blockbuster, still king of brick-and-mortar rental stores, learned first hand the threat an innovative upstart can pose when it ran up against Netflix’s DVD-by-mail business model.

With movie theater tickets costing upwards of $10 (and that’s not including the popcorn or sodas), Netflix’s $8.99 1-DVD plan with unlimited exchanges and streaming video access represents a decidedly better deal for consumers that are tightening their spending amid rising unemployment and waning confidence.

Netflix celebrated its 10 millionth subscriber in February, noting that it added more than 600,000 net subscribers since the beginning of the year. In its second quarter ended June 30, Netflix said it had a total of 10.6 million subscribers, with paid subscribers representing 98% of the membership. The company expects its total membership to rise to between 11.6 million to 12 million by the end of the year, upping its previous quarter’s guidance of 11.2 million and 11.8 million.

Churn, a measurement of customer cancellations, rose to 4.5% in the second quarter from 4.2% a year ago, Netflix said.

“It could be the economy,” Netflix Chief Executive Officer Reed Hastings said of increasing churn in an interview with The Motley Fool. “It could also be that we make it very easy for subscribers to put their accounts on hold if they go on vacation or don’t have enough money for a month or two. When a subscriber goes on hold, we count that as a cancellation. What you can look at – as a good stable indicator – are net additions. And net additions continue to grow.”

Netflix’s top and bottom lines continue to grow as well. Revenue grew to $408.5 million in the second quarter, up from $337.6 million in the same period a year ago. Profit grew to $32.4 million in the second quarter, up from last year’s $26.5 million.

As subscribers, sales and profit rise, so too does Netflix’s stock. Shares of Netflix have jumped more than 45% since the start of the year, and managed to sidestep the doldrums experienced by the markets in March.

Still, it’s no time for Netflix to rest on its laurels, lest it suffer the same fate as Blockbuster. That’s why CEO Hastings is quietly preparing for the death of DVDs themselves. Ultimately, consumers will one day dump the plastic discs in favor of movies delivered straight over the Internet, Hastings told The Wall Street Journal.

So Hastings, who is a self-proclaimed student of companies that stumble by failing to adapt to technology shifts, is quickly trying to shift Netflix’s business so that more videos are available online.

While Hastings is having success in getting Netflix instant video onto devices, the biggest challenge facing his company is convincing Hollywood executives to license their content. While 12,000 choices may seem like a lot, many are older AAA movies or TV shows, or newer movies that weren’t commercially successful. New releases of hit movies usually take months or even years to appear in Netflix’s streaming video catalog.

That’s because Netflix is competing with pay cable channels such as Time Warner Inc.’s (NYSE: TWX) HBO and Viacom Inc.’s (NYSE: VIA) Showtime, which gain exclusive rights to show movies and generally have larger audiences. To get the movies and TV shows consumers want, Netflix will have to boost its licensing spending from the roughly $100 million it spent last year, an anonymous source told The Journal.

“Netflix has yet to show that it has the resources and profitability to be in the markets where licensing is the business policy,” said Warren Lieberfarb, former head of Time Warner’s Warner Bros. home video division.

The company has had some success in the licensing department earlier this year when it inked a deal with Liberty Media Corp. (Nasdaq: LMDIA) to show movies from its Starz pay cable channel.

Netflix’s library of 100,000-plus DVD titles is made possible by the “first-sale doctrine” of U.S. copyright law, which allows buyers of DVDs to lend them out without the consent of studios.

Too Little, Too Late?

It’s difficult to say when Blockbuster’s fall from grace began, but it was somewhere between its well-publicized late fee fiasco and the proliferation of Netflix.

Blockbuster’s operating income at the end of its second quarter in 2004 was $105.3 million. That was just before Netflix entered mainstream consumer consciousness. Blockbuster’s operating income at the end of its second quarter this year was a loss of $1.5 million.

In spite-of an 8.3% industry-wide increase in rental revenue, Blockbuster’s revenue fell 13.3%.

The company blamed the drop partly on reduced inventory as it tries to generate more cash to handle its debt load, the Los Angeles Timesreported.  Although Chief Executive Officer Jim Keyes told analysts in a conference call a renegotiation of a revolving line of credit meant stores would be fully stocked and more aggressively marketed, he admitted last week that didn’t happen.

“Temporarily during the first and second quarter, we put our plans for increased availability on hold,” Keyes said on the call. “We made this change with the recognition that we were also facing new and very aggressive competition who are better capitalized and would likely take share from us as we pulled back.”

Still, Blockbuster is doing everything it can to stay afloat, from closing stores to kiosk deployment.

“We’re deploying as many as 10,000 vending machines by the middle of next year,” Keyes told Bloomberg News in a telephone interview, adding that his company is focused on increasing cash flow rather than boosting sales in a “very challenging credit market.”

Blockbuster’s $250 million revolving line of credit is due on Sept. 30, 2010, and the company has more than $350 million of long-term debt outstanding that it must pay by the end of next year, according to a research note written by Wedbush Morgan Securities Inc. analyst Michael Pachter. Blockbuster had $99 million in cash and equivalents as of July 5, down 36% from $154.9 million on January 4, Pachter said.

“[Blockbuster needs] the credit markets to loosen up and they need to refinance,” Pachter told Bloomberg. “They’re not on track to repay this debt in the time frame they need to, so they’ve got to extend the terms.”

Pachter downgraded his rating on Blockbuster stock from “outperform” to “hold” last week. Blockbuster shares have tumbled more than 44% since the start of the year.

The Little Red Box That Could

Blockbuster was effectively rendered obsolete by Netflix’s quick response to changing technology. But Coinstar Inc.’s (Nasdaq: CSTR) Redbox Automated Retail LLC, which offers consumers new release DVDs for $1 per night, is hoping to avoid a similar fate.

Kiosk vendor Redbox, initially funded by McDonald’s Corp. (NYSE: MCD) and Coinstar in 2002, saw Coinstar acquire its remaining shares in February. The company’s $1-a-night DVD rentals are found in places like McDonalds restaurants, grocery stores, and numerous locations owned by retail giant Wal-Mart Stores Inc. (NYSE: WMT) that that serve at least 15,000 customers a week.

Redbox plans on having 21,000 to 22,000 kiosks throughout the United States by January, up from 13,700 a year earlier. The company’s sales, which were $188.9 million in the second quarter, account for 57% of Coinstar’s overall sales, up from 41% in the same quarter last year. Coinstar’s stock has risen more than 62% since the beginning of the year.

At a time when consumers are strapped, Redbox is perfectly positioned for those looking to save money. But now Hollywood is looking to stunt Redbox’s growth.

Tinseltown accuses Redbox of depressing DVD prices and depriving studios of the same revenue-sharing opportunities they now enjoy with traditional DVD rental houses such as Blockbuster, Reuters reported.

Three studios – News Corp.’s (Nasdaq: NWS) 20th Century Fox Home Entertainment, Warner Bros. and General Electric Co.’s (NYSE: GE) NBC Universal – are vowing to withhold their DVD distribution to kiosks like Redbox until 28 days after they are released.

To counter, Redbox has filed a lawsuit against at least one of the studios, 20th Century Fox.

“At the expense of consumers, 20th Century Fox is attempting to prohibit timely consumer access to its new release DVDs at Redbox retail locations nationwide,” said President Mitch Lowe. “Despite this attempt, Redbox will continue to provide our consumers access to all major new releases including 20th Century Fox titles at our more than 15,000Redbox DVD rental locations.”

Speaking to the LA Times, Lowe said Redbox isn’t a threat to Hollywood, but instead an additional source of income. However, Papi Capital analyst Richard Greenfield disagrees, writing that Redbox’s pricing is a “substantial risk” to the movie industry.

“It sets an ultra-low price point for movie content that will impact consumers’ decision-making process about all forms of movie-related commerce – theater-going, DVD purchase, video-on-demand,” Greenfield wrote.

Of course, distribution withholding and lawsuits aside, if Netflix’s Hastings is right and DVDs do walk the path of oblivion like CDs are now, Redbox will need to adapt and find a way to enter the already-crowded Internet video market.

Source: Hot Stocks: Netflix Finds Success in Innovation, While Other Video Rental Companies Fight For Survival ]]> http://www.contrarianprofits.com/articles/hot-stocks-netflix-finds-success-in-innovation-while-other-video-rental-companies-fight-for-survival/19974/feed 1 http://www.contrarianprofits.com/articles/will-this-week%e2%80%99s-earnings-reports-reflect-a-recovery-or-a-relapse-for-the-us-economy/19961 http://www.contrarianprofits.com/articles/will-this-week%e2%80%99s-earnings-reports-reflect-a-recovery-or-a-relapse-for-the-us-economy/19961#comments Mon, 17 Aug 2009 21:00:21 +0000 Jason Simpkins http://www.contrarianprofits.com/?p=19961 Several key second-quarter earnings reports could either validate or undercut assertions that the U.S. economy is poised for recovery.

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…

• Investors yesterday (Monday) cashed in on profits from Friday’s market rally, which followed better-than-expected unemployment news. The Standard & Poor’s 500 Index fell 0.33% to 1,007.10, the Dow Jones Industrial Average dropped to 9,337.95, down 0.34%, and the Nasdaq Composite Index closed at 1,992.24, a decline of 0.40%.

• Southwest Airlines Co. (NYSE: LUV) offered more than $170 million for bankrupt Fontier Airlines Holdings (OTC: FRNTQ). That’s up more than 50% from its first offer of $113.6 million. The move is intended to head off a bidding war with rival Republic Airways Holdings (Nasdaq: RJET). The winning bidder will get a stronger foothold in the Rocky Mountain region.

• General Motors Co. (OTC: MTLQQ) is partnering with eBay Inc.(Nasdaq: EBAY) to sell cars and trucks on a new portal sitestarting today (Tuesday). The joint venture will involve roughly 225 California dealerships and will run through September 8. If the program is successful, it could expand nationally as soon as next month, The New York Times reported.

• Shares of Dish Network Corp. (Nasdaq: DISH) rose more than 4% yesterday (Monday) to close at $19.30, as the satellite television provider reported its first increase in subscribers in more than a year, adding 26,000 new customers. Still, high expenses from increased marketing and patent dispute litigation with TiVo Inc.(Nasdaq: TIVO) caused Dish’s profit to fall to $63.4 million, or 14 cents a share, in the quarter ended June 30. That compares to a net income of $335.9 million, or 73 cents a share, a year ago. Revenue was flat at $2.9 billion.

• Bankruptcies among U.S. consumers grew by more than 126,000 in July, representing a 34% increase over July 2008, Bloomberg News reported, citing the American Bankruptcy Institute (ABI). “Rising unemployment on top of high pre-existing debt burdens is a formula for higher bankruptcies through the end of this year,” ABI Executive Director Samuel Gerdano said. The increase came after bankruptcies in the first six months of 2009 grew 36.5%.

• U.S. Federal Reserve Chairman Ben Bernanke deserves another term based on his success in battling the financial crisis, Nobel Prize winner and Princeton University economist Paul Krugman toldBloomberg News in an interview. “He turned the Fed into the financial intermediary of last resort,” Krugman said. “When the banking system failed to deliver capital where it was needed, he put the Fed into the markets.” In 2000, Krugman was recruited by Bernanke to join Princeton. Bernanke’s term ends on January 31 2010.

• Fast-food giant McDonald’s Corp. (NYSE: MCD) reported its same-store sales for July rose 4.3%. Sales in the United States grew 2.6%, Europe sales were up 7.2%, and sales in the Asia/Pacific, Middle Eastern and African markets rose 2.1%. The company attributed the growth to a strong reception of its McCafe espresso-based coffees, a tiered-menu approach and longer operating hours. “With July’s improved trends, we are encouraged by (McDonald’s) ability to gain or maintain share in a still challenging environment,” Oppenheimer analyst Matthew DiFrisco said in a note to clients.

• Bank of America Corp. (NYSE: BAC) will pay $55 million to employees of its Countrywide Financial Corp. to settle a class-action lawsuit in which the employees accused Countrywide of misleading them about its financial health and causing the value of their retirement plan to drop, Bloomberg News reported. Lawyers for the employees called the settlement “fair, reasonable and adequate.” BofA acquired Countrywide in January 2008.

Source: Investment News Briefs Tuesday, August 11, 2009

• Senate Democratic leaders late yesterday (Thursday) abandoned plans for an overhaul of the nation’s $2.4 trillion healthcare system before Congress recesses in August – dealing U.S. President Barack Obama a major political blow. The decision was delivered by U.S. Senate Majority Leader Harry Reid, D-Nev., who said that “it’s better to have a product based on quality and thoughtfulness rather than try to jam something through.” The decision to reject President Obama’s ambitious timetable – he wanted a vote on the plan before Congress adjourned – had been anticipated for weeks. Sen. Reid’s comments mirrored those of Republicans, who feared the implications of a quick vote on such a politically charged issue.

• Sagging worldwide PC and server sales resulted in a 17% revenue decline and a 29% drop in Microsoft Corp.’s (Nasdaq: MSFT)fourth quarter ended June 30. The company reported a net income of $3.05 billion, or 34 cents per share on revenue of $13.1 billion, compared to a net income of $4.29 billion, or 46 cents per share on revenue of $15.83 in the same quarter last year. For the year, the software giant posted a net income of $14.56 billion, or $1.63 a share on revenue of $58.43 billion, compared to a net income of $17.68 billion, or $1.90 per share on revenue of $60.42 billion in the same quarter last year.

• Initial unemployment benefit claims in the United States grew by 30,000 to 554,000 for the week ended July 18, according to the Department of Labor. However, the less volatile four-week moving average shrank, falling by 19,000 to 566,000. “The numbers have come down but they still have a ways to go down before the bleeding of jobs is over,” said Andrew Gretzinger, a senior economist at MFC Global Investment Management in a Bloomberg News interview. “The labor market is still weak and is going to remain that for some time to come.”

• Deutsche Bank AG (NYSE: DB) has raised its target for Apple Inc. (Nasdaq: AAPL) from $150 to $225 following its strong second quarter showing and impressive iPhone sales. Apple moved 5.2 million units of its lucrative iPhone, exceeding Deutsche’s projection of 5 million. Deutsche estimates iPhone margins to be roughly 60%. Another reason for Deutsche’s optimism regarding Apple is it expects the iPhone’s international reach to expand from 18 to 80 countries by the end of the September quarter, with a possible partnership with China Unicom Limited (NYSE ADR:CHU) as early as this fall, representing the iPhone’s debut in the emerging market.

• Existing home sales in June rose by 3.6% to a 4.89 million annual rate from a revised 4.72 million in May, when the number rose by 2.4% according to the National Association of Realtors. “Housing may no longer be the weakest link,” said Joel Naroff, president and chief economist at Naroff Economic Advisors Inc. “Demand has clawed itself back to where it was a year ago, a very nice signal that the market has not only hit bottom but is making its way back.” In another sign the housing market may be on the upswing, rates on fixed-rate mortgages increased this week to 5.20%, up from 5.14% last week, Freddie Mac (NYSE: FRE) Vice President and Chief Economist Frank Nothaft said in a prepared statement.

• Increasing landline cancellations and heavy iPhone subsidies contributed to a 15% drop in profit for AT&T Inc. (NYSE: T). The company reported a net income of $3.2 billion, or 54 cents a share on revenue of $30.73 billion for the quarter ended June 30. That compares to a net income of $3.8 billion, or 64 cents a share on revenue of $30.86 in the same quarter last year. The company did benefit from the new iPhone model released last month, activating 2.4 million accounts for the smartphone in the United States.

• Rising customer traffic and operating income could not helpMcDonald’s Corp.’s (NYSE: MCD) profit, which fell 8.1% in the second quarter due to currency fluctuations, the company said. The fast-food chain posted a net income of $1.09 billion, or 98 cents a share on revenue of $5.65 billion for the quarter ended June 30. That compares to a net income of $1.19 billion, or $1.04 a share on revenue of $6.08 billion in the same period last year.

• 3M Co. (NYSE: MMM) suffered an 18% drop in its profit, but beat expectations due to stronger demand for electronic healthcare products in its second quarter ended June 30.  The conglomerate posted a profit of $783 million, or $1.12 a share on revenue of $5.7 billion, compared to a net income of $945 million, or $1.33 a share on revenue of $6.7 billion in the same quarter last year.

Source: Investment News Briefs Friday, July 24, 2009

With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.

Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

While CIT is not nearly the household name of Citigroup Inc. (NYSE: C)or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”

Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.

An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO),McDonalds Corp. (NYSE: MCD), and Amazon.com Inc. (Nasdaq:AMZN) join the mix.

U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await.  As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days.  Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.

Market Matters

The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street.  Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.

Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.

Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations.  After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out.  CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others.  But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.

Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations.  A CIT failure could prove devastating for those firms considered the lifeblood of American business.

In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters.  Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq:DELL) warned that lower margins are impacting its operations andGoogle Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.

The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE:MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.

Market/ Index	Year Close (2008)	Qtr Close (06/30/09)	Previous Week (07/10/09)	Current Week (07/17/09)	YTD Change
Dow Jones Industrial	8,776.39	8,447.00	8,146.52	8,743.94	-0.37%
NASDAQ	1,577.03	1,835.04	1,756.03	1,886.61	+19.63%
S&P 500	903.25	919.32	879.13	940.38	+4.11%
Russell 2000	499.45	508.28	480.98	519.22	+3.96%
Global Dow	1526.21	1,629.31	1,561.11	1,664.23	+9.04%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	3.52%	3.30%	3.65%	+141 bps

Economically Speaking

The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul.  Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.

Investors shrugged off the CIT developments and focused on positive earnings and economic data.  Stocks surged early on the Goldman news and soared right through the technology reports.  Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts.  Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades.  Oil rebounded on the favorable market and economic signs.

While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending.   Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.

But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges.  Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.

Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.

On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.

Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength.  Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.

The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year.  Most Fed watchers do not see any change in the funds rate for the foreseeable future.

On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal).  The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.

Weekly Economic Calendar

Source: Market Recoils as CIT Edges Toward Bankruptcy

Source: Investment News Briefs Tuesday, June 9, 2009

Yesterday was a holiday in the US. Little news from that quarter.

But while Americans were enjoying their backyard barbecues, the rest of the world turned.

“Obama plans ‘leaner’ car industry,” says the BBC.

While most readers will focus on the last three words of that sentence, we direct your attention to the first two. The subject is the important part… not the predicate.

That the car industry may or may not get ‘leaner’ is of little interest to us. It will do what it needs to do. But that the president of the United States of America is now creating the business plan for an automobile company is surely a sign of something big. The world has already turned… perhaps more than we realize.

It was only a few months ago, we’re almost sure, that a private company figured out for itself how it would compete. If it was well-managed, and lucky, it would grow. If it made a serious mistake, it would go out of business… leaving the premises vacant for another entrepreneur.

Americans not only accepted this model, they applauded it. They thought the “free enterprise” system was the best in the world. They believed it was responsible for their wealth, their progress and their place in the world.

Now, they seem to have come to believe something else: that the president of the United States – an elected politician – should have a direct say in how individual private enterprises are organized and run.

But these are the same people who elected Bill Clinton and George W. Bush – twice! They’ll believe anything…

“Power Pendulum Swings Toward Washington,” says another paper.

People think capitalism has failed them. They never understood what capitalism was – and wouldn’t have wanted it at all if they had known what it was all about. Still, that doesn’t mean they won’t come up with something worse…

Capitalism is full of what Galbraith called “innocent frauds.” The capitalists try to exploit the workers. The workers try to take advantage of the capitalists. And the managers try to put one over on them both.

But now, the innocent frauds of capitalism are being replaced by the brute force of government. Now, the Obama team is calling the shots itself.

What does Barack Obama know about the car business? Ha… ha… ha…

Oh, you and your silly questions…

The role of government is commonly misunderstood. It is thought to be an impartial judge, an objective arbiter between competing interests, always asserting the common interest over the narrow interests of the competitors themselves. It is nothing of the sort. It has its own interests… its own delusions of competence… its own lusts for power and money. When the pendulum swings towards Washington, it is always bad news.

For no matter how big a mess GM’s owners, managers and workers made of the auto business, Washington is sure to make a bigger one.

More news:

Tom Bulford has been looking closely at the oil sector to find profitable opportunities for investors. He has some observations on the situation in Kurdistan.

“The Oil Ministry of Baghdad recently quit arguing with the Kurdish government and agreed to permit the export of 100,000 barrels of crude oil per day from Kurdistan. While Baghdad has been stalling, the Kurds have got on with the job of granting licenses to bold, foreign oil prospectors. And now, the latter seem to have the upper hand.

“While Baghdad may still be refusing to acknowledge the legality of these arrangements, the awkward truth is that Iraq is seeing its oil revenues fall through a combination of lower world prices and its failure to develop its own industry. In short, it needs the money.”

Editor’s note: Tom has found a small oil company, currently drilling in Kurdistan, which could hit the big time. He remembers it growing from nothing into a significant oil producer in the Gulf of Mexico. As Editor of Red Hot Penny Shares, Tom Bulford also writes a twice weekly free e-letter called Penny Sleuth. Click here to read more about the above-mentioned opportunity that he’s covered in his latest edition.

And more thoughts:

*** A hedge fund manager came by the office yesterday.

“There’s a new theory making its way around Wall Street,” he explained. “Some people think that the government will succeed in reflating the bubble. They’re putting so much money into it that they’re going to be able to create one last super-bubble… a little like the 2004-2007 period.”

Anything is possible. We were surprised the feds were able to inflate the last bubble. Back in 2002, we thought the bubble days were over – instead, the biggest bubble of all was still ahead.

The dot.com bubble had exploded. Stocks were going down. The economy was in recession. But the recession turned out to be very, very mild. Most people seemed unaware that there was a recession at all. Spending never went backwards… not an inch. In fact, all the trends already in place continued… and got much, much larger.

It is very different now.

“There’s a major change going on; most people have not noticed,” said our new friend. “People are spending money differently. First, it is obvious that they are forsaking the higher priced stores. Our fund is taking advantage of this in a very simple way. We’re short the luxury retailers and long the discount stores. Because people are changing their shopping habits. And we expect this to go on for a long, long time.

“They’re also buying different things. Everyone knows that sales of guns and ammunition are going through the roof. There are actual shortages of some items. But people are also stocking up on gardening supplies. They’re planting gardens in order to grow some of their own food. And they’re buying home entertainment systems – videos… sound systems and so forth. Instead of going out to the restaurants or the movies… they’re staying home. So, they’re making their homes more comfortable… and safer.

“Speaking of safer… sales of home safes are also taking off. They want to protect what they’ve got.

“And speaking of restaurants… have you looked at what is happening? Same phenomenon as in the retail sector. The lower priced, fast-food places, such as MacDonalds’ (NYSE:MCD), are doing fine. But just look at the ‘casual’ dining places – the places where middle class people go to eat… places like Appleby’s and Friday’s. They’re losing a lot of business.

“What I think is happening is this: people are reorganizing themselves for a different, less expensive lifestyle. They’re spending less already… but they’re preparing to spend even less in the future. Instead of going out to the mall or to a restaurant… they’re going to stay home.”

Whence cometh this desire to stay home? Remember, this is not a recession… and not even a phony recession such as we had in 2001-2002. This is different. It’s a balance-sheet depression. People are cutting back in order to repair balance sheets.

How do your repair a balance sheet? It’s not as easy at taking it in to the Pep Boys… or the muffler shop. Instead, you have to pay down debt and increase equity. You have to become wealthier by saving money, rather than spending it. That’s what companies are doing. That’s what individuals are doing. And that’s what the government ought to do.

Americans were saving almost nothing a couple years ago. But in the first quarter of this year, they saved 4.2% of disposable income – or $453 billion (annualised). That’s up from just $20 billion a year before.

Saving money is the wrench you need to repair a balance sheet. After a very long time, finally, American grease monkeys are getting to work.

“Americans are making big structural changes in the way they live. These changes are going to have a big impact on the economy for many years to come,” our friend concluded.

Source: Washington Will Make a Bigger Mess of the Auto Industry

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

The identity of the bank that is alleged to have failed the bank stress test was not revealed.

The bank-stress-test findings were reported yesterday (Sunday) by CNBC.com, which said it obtained the information from a source that it did not identify. The source did not identify the company, CNBC.com reported.

“At least one firm – under the [bank] stress test assumptions – will require more capital,” the source said.

The bank-stress-test results were contained in a two-dozen-page report that the government released Friday. But the results had already been “conveyed” to the firms, meaning the bank in question is aware of the U.S. central bank’s assessment, according to the published report.

This round of bank stress tests was essentially a two-step process. The first step – outlining how the banks have been analyzed – was taken care of with the report released over the weekend.  The second step – releasing the results to the public – will be taken care of when the actual results are released May 4, which is one week from today (Monday).

Neither the U.S. Federal Reserve nor the U.S. Treasury Department would comment.

The bank stress tests have a very specific purpose. Financial institutions that are found to have inadequate capital will have six months to raise the money via the private sector. If that doesn’t work, the government has said the financial institutions will be eligible for an infusion of capital via the federal government’s so-called “Capital Access Program.”

U.S. Treasury Secretary Timothy F. Geithner said he would be open to banks repaying their Troubled Asset Relief Program (TARP) loans, as long as the availability of credit (borrowing) was not adversely affected.  As a Money Morning special report detailed last week, the credit markets don’t seem to be loosening up: Lending dropped by more than 20% from October 2008 to February 2009, despite initiatives to encourage such activity.

According to the conclusion of the report released over the weekend, “most banks currently have capital levels well in excess of the amounts needed to be well capitalized.”

However, as Money Morning has reported, the tests have become a “no-win” situation for the Obama administration.

“There are two things that are terribly wrong,” William M. Isaac, the Secura Group chairman who served as head of the Federal Deposit Insurance Corp. (FDIC) from 1981 to 1985, told CNBC.com. The first problem – and a big one – is the fact that the details were announced at all.

“I can’t imagine what Treasury was thinking when it made that move. It has been causing incredible angst in the markets,” said Isaac. “The second big problem is that the Treasury is directing the stress testing, apparently with direct involvement of the White House at the highest levels. Bank regulation by law is supposed to be carried out by the independent banking agencies without any political interference.”

Market Matters

As Money Morning reported Friday – in a Wall Street version of the old “he said/(s)he said” drama, Bank of America Corp. (BAC) Chairman and Chief Executive Officer Kenneth Lewis claimed that ex-U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and central bank Chairman Ben S. Bernanke threatened to remove him from office if he backed out of the Merrill Lynch & Co. Inc. (SQD) merger or (publicly) discussed the mounting losses.

Paulson had previously testified that Lewis must have misinterpreted their comments, but then seemed to blame Bernanke for the threat (Translation: Paulson tried to throw Bernanke “under the bus.”).

New York Attorney General Andrew M. Cuomo has been investigating the activities surrounding the merger to determine why shareholders were kept in the dark about the financial “challenges.”

Shifting to autos, Italy’s Fiat SpA (OTC ADR FIATY) emerged as a potential major global player as it attempts to forge a partnership with (soon-to-be-bankrupt?) Chrysler LLC, and also has interest in buying General Motors Corp.’s (GM) Opel unit. Meanwhile, GM will be closing 13 production plants over the summer to trim inventory and seems likely to miss a $1 billion debt payment due June 1 as it too moves closer to bankruptcy protection.

How bad is GM’s plight: GM may close its Pontiac division after 82 years of operation, The Wall Street Journal and MarketWatch.com reported over the weekend.

While the earnings news of the week found plenty of winners and losers, ultimately analysts perceived a bit of “cautious optimism.”  Bank of America and Morgan Stanley (MS) failed to live up to the favorable showings by Wells Fargo & Co. (WFC) and other financials, though techs like Texas Instruments Inc. (TXN), Apple Inc. (AAPL) and International Business Machines Corp. (IBM), beat Wall Street expectations, and brought new hope that the downturn was nearing an end. (Watch for an updated “Hot Stocks” feature on IBM here in Money Morning later this week).

Unfortunately, Microsoft Corp. (MSFT) posted the first quarterly revenue decline in its 23-year history, though investors still cheered its ability to reduce costs during these challenging times for PC sales. McDonald’s Corp. (MCD), AT&T Inc. (T), and Ford Motor Co. (F) were among the diverse group of companies reporting better-than-expected results, while United Parcel Service Inc. (UPS), Caterpillar Inc. (CAT), and Continental Airlines Inc. (CAL) issued disappointing numbers.

Amazon.com Inc. (AMZN), the subject of a recent “Buy, Sell or Hold” feature here in Money Morning, bucked the negative trend facing many retailers and posted higher quarterly earnings and revenue.

Additionally, U.S. retailers J.C. Penney Co. Inc. (JCP) and Coach Inc. (COH) each expressed positive sentiment that sales activity seems to picking up.  Oracle Corp. (ORCL) snapped up Sun Microsystems Inc. (JAVA) for $7.4 billion after IBM chose to pass, and PepsiCo Inc. (PEP) is attempting to purchase two related bottling companies as corporate execs seek favorable deals in this environment.  Such merger-and-acquisition (M&A) transactions often signal boardroom confidence and also indicate that the “worst” part of a downturn may be over.

Oil prices surged above the $51-a-barrel level late in the week as traders overlooked the higher inventory levels and instead focused on some favorable signs that the economy may be closing in on turnaround mode.

With a six-week winning streak on the line, investors offered their best “clutch hitting” late Friday, pushing all major indexes to higher levels. Early in the week, after investors digested negative news from the likes of Bank of America and GM, prognosticators said the weekly stock-market winning streak was all but over. However, some better-than-expected earnings and economic reports brought out the “bulls” for one final run.  The Nasdaq Composite Index ended the week in positive territory, and the other equity indexes were virtually flat from last week’s closing levels (with the Dow Jones Industrial Average suffering a slight decline).

Economically Speaking

According to the International Monetary Fund (IMF), the global downturn will be far worse than previously expected.  For 2009, the IMF expects the world economy to contract by 1.3%, its first such decline in 60-years, with over 10 million employees losing their jobs.  Unfortunately, its projections for the United States are even more dire (-2.8% for the year), with domestic financial institutions suffering $2.7 trillion in losses, almost twice the IMF’s prior estimates from just six months ago.

While much of the economic data of the week confirmed the IMF’s weak projection, analysts found a few positive signs that the downturn very well may have bottomed out.  While both new home sales and durable goods orders declined in March, the results beat the weaker Street expectations and came in the aftermath of some (relatively) strong February numbers.

In another promising sign of stability within the housing sector, the median price of an existing home sold in March actually rose for the second straight month.  Still, the record unemployment filings last week revealed the ongoing difficulties facing job seekers amid these tight labor conditions.  Likewise, leading economic indicators, a predictive report, dropped for the third consecutive month and many economists expect the recession to last at least until late third quarter.

Weekly Economic Calendar

Source: Controversial Stress Tests Reveal Only One Bank Needs Capital, but Worries Remain