• ConocoPhillips‘ (COP) second-quarter profit climbed 13% on the back of record high oil prices. Net income rose to $5.44 billion, or $3.50 a share, for the April-June period, from $301 million, or 18 cents a share, in the year-ago quarter. Revenue increased to $71.4 billion from $47.4 billion a year ago, when the company incurred a $4.5 billion charge related to its former assets in Venezuela.

• PepsiCo Inc. (PEP) reported strong second-quarter operating results yesterday (Wednesday), with 14% net revenue and 12% operating profit growth. The company delivered earnings per share of $1.05. PepsiCo expects full-year 2008 performance of 3%-5% volume growth, low-double-digit net revenue growth and earnings per share of at least $3.72 excluding the impact of any mark- to-market gains/losses.

• Amazon.com Inc. (AMZN) says its second-quarter profit more than doubled to $158 million, or 37 cents per share, from $78 million, or 19 cents per share, last year. The company’s revenue climbed 41 percent to $4.06 billion.

• Oil prices shed nearly $4 Wednesday, tumbling below $125 a barrel for the first time since early June on growing fears that high prices and the weak economy are draining demand. Light, sweet crude for September delivery dropped $3.98 to settle at $124.44 a barrel on the New York Mercantile Exchange, crude’s lowest finish since June 4, the Associated Press reported.

• Northwest Airlines Corp. (NWA) reported a $377 million loss in the second-quarter based on a $547 million non-cash accounting charge. The airline would have posted a $170 million profit without the charge, Forbes reported. Northwest’s loss of $1.43 per share was also helped by a $250 million fuel hedge gain.

• The U.S. Federal Reserve released its Beige Book yesterday (Wednesday). The report, which comes out roughly every seven weeks and is compiled from data submitted by the Fed’s 12 regions, painted a glum picture of the U.S. economy. “Reports from the 12 Federal Reserve districts suggest that the pace of economic activity slowed somewhat since the last report,” the beige book said, The Wall Street Journal reported.

• China’s largest search engine, Baidu.com Inc. (ADR: BIDU), announced yesterday (Wednesday) that second-quarter profit increased 87% on high Internet traffic leading up to the Beijing Olympic Games. Beijing-based Baidu posted profit of $38.6 million (265 million yuan) for the three months ended June 30, compared with $20.8 million (141.9 million yuan) in the same period the year prior, Reuters reported.

• Privately held U.S. automaker Chrysler LLC announced yesterday (Wednesday) it would eliminate 1,000 office jobs in an effort to cut costs during a deep downturn in the domestic car industry. The job cuts will be achieved primarily through natural attrition, retirements and special programs, Reuters reported.

Source: Global Investing Roundups: Thursday, July 24th, 2008

• New York’s Chrysler Building, the an iconic piece of the city’s skyline and the world’s tallest building until 1931, was bought by an Abu Dhabi sovereign wealth fund Tuesday. The Abu Dhabi Investment Council paid Abu Dhabi Investment Council acquired the Chrysler Building from a fund managed by
  Prudential Financial Inc. (PRU).

• Northwest Airlines Corp. (NWA) said yesterday (Wednesday) that it will cut 2,500 jobs because of high oil prices, and start charging $15 to check a single piece of luggage and as much as $100 to redeem a frequent-flier award ticket, the Associated Press reported. The airline hopes the new fees will add $250 million to $300 million a year in revenue.

• Icici Bank Ltd. (ADR: IBN), a leading Indian lender, is considering acquisitions to expand outside its home market, the International Herald Tribune reported. The bank has about $5 billion cash on hand to spend on an international expansion. Targets could include consumer banks in Britain, Canada or Germany, Sonjoy Chatterjee, the executive director responsible for the bank’s international business unit told the Tribune.

• OPEC’s earnings from oil exports are expected to reach a record $1.251 trillion this year, about $73 billion more than previously estimated, Reuters reported. Net oil export earnings from OPEC are projected to grow by 86% this year from $671 billion in 2007, before rising 6%in 2009 to $1.322 trillion, the Energy Information Administration said.

• Clothing retailer Steve & Barry’s LLC is planning to file for bankruptcy protection, as its low-cost strategy wasn’t enough to offset a softening domestic economy, The New York Times reported. The company claimed annual sales of $1.1 billion, but was operating on an extremely thin margin due to its $10 or less pricing.

• Stocks tumbled yesterday (Wednesday) leaving the S&P 500 Index down 20% from its October peak, the definition of a bear market, Reuters reported. The S&P 500 closed down 29.02 points, a decline of over 2%, at 1,244.68.

• Anheuser-Busch Cos. Inc. (BUD) yesterday (Wednesday) urged shareholders to revoke consent of the InBev NV proposal to replace the board of directors. “We believe that the InBev consent proposals are solely designed to enable InBev to take control of your board in order to facilitate InBev’s acquisition of Anheuser-Busch pursuant to a proposal that your board has determined is inadequate and not in the best interests of the company’s stockholders,” said Anheuser in its filing, The Washington Post reported.

• Speaking in Los Angeles yesterday (Wednesday), Bank of America Corp. (BAC) Chief Executive Officer Kenneth Lewis predicted the U.S. housing crisis would begin to abate mid-2009. “Until then, depending on what sector of the economy you’re in, it will feel slow and may feel like a recession,” Lewis said, Bloomberg News reported.

Source: Global Investing Roundups Thursday, July 10th, 2008

The airline industry has been battered by the surge in oil prices. Major companies have already cut services, raised fees, and announced job losses. And share prices have collapsed since the start of the year: United Airlines (UAUA) is down a whopping 84.6%, Delta Airlines (DAL) 64.8%, Continental (CAL) 48.7% and Northwest (NWA) 58.9%.

So why invest now? Eric says a correction in crude oil prices is inevitable; and when fuel goes down, airline stocks will fly again…

Why the World’s Worst Business Is Now One of the Best Buying Opportunities on the Planet

by Eric Roseman

Skyrocketing energy prices are making the headlines almost daily since last spring. Over the last 12 months, crude oil prices have more than doubled and gas prices are heading to US$5 per gallon.

Meanwhile, out in the financial markets, investors are blindly buying energy stocks. Commodity fund managers are lunging after crude oil and natural gas futures. A full-blown mania now surrounds the energy pits.

In just about every facet of global business and consumer livelihood, high energy prices are wreaking havoc. Prices are rising, if not soaring, for most goods across the world. Oil’s ubiquitous role is forcing consumers and companies alike to boost spending, reducing discretionary income and slicing corporate profits.

Oil’s “Unstoppable” Prices Are Yesterday’s News

But surging oil is yesterday’s news. Demand destruction is underway. There will be a point when high prices finally force consumers to use less oil products, buy less gas and other distillate fuels. Granted it doesn’t seem like it, but consumers are already buying less gas since April.

What Goes Up WILL Come Down: Oil’s Path This Year

Since March 31st, crude oil prices have soared more than 35% — an astonishing rally in a short period of time. At some point, a correction looms. That’s when some sectors suffering from expensive oil will post some spectacular gains. That includes my absolute favorite contrarian play right now: Airlines.

The Worst Business in the World

Yes, I know the airline industry is arguably the worst business in the world right now.

Soaring jet fuel prices, expensive labor costs and rising airport user fees are forcing carriers worldwide to cut routes, reduce capacity, and shed labor. Many analysts forecast several big carriers, mostly in the United States, will probably collapse this year if jet fuel prices remain at these elevated levels.

In fact, you could say airline stocks have been a one-way ticket to the poorhouse lately. That’s certainly been the case over the last 18 months as input costs have surged, mainly because of a 100%-plus rally for jet fuel.

Airline stocks also earn the dubious ranking as the worst performing sector of the market over the last 12 months — even worse than the financials!

Since June 2007, the AMEX XAL Airline Index of global carriers has collapsed a formidable 62%. Over the same period, jet fuel prices have doubled. Airlines have cut capacity. Also, executives in the business are warning that we’re facing the worst economic climate for the industry since 9/11. In short, these are dark times for airline executives, employees and passengers.

Notice: It’s the Exact Opposite of Oil in the Airline Sector

How Many Airlines Do You Know that Are Raising Dividends?

Historically, I’ve avoided the airline sector like the plague. I’ve only turned bullish on this sector a handful of times in my 16-year investment career.

But at these bombed-out levels and ultra-low valuations the airlines are just too contrarian to ignore. Plus, I see a major catalyst coming for rapid price appreciation in the airlines on the heels of lower oil prices in the months to come.

I’m now buying one of the best-managed airlines in the world. This blue-chip company just raised its dividend again recently. The stock now pays an effective 8% per annum in one of the world’s strongest currencies. That yield is almost twice the rate paid by 10-year bonds in the United States and Europe.

This stock is also trading at a 52-week low, still earning profits and has most of its jet fuel hedged at about US$75 per barrel. How many airlines do you know that are still making money, yet alone raising dividend payments?

The way I see it, if oil prices suffer a 20% correction or more, which is highly likely after a nonstop blistering rally since last summer, industries leveraged to the price of oil or in this case, jet fuel, will rocket higher.

Since the advent of the sub-prime debacle in July 2007, every segment of the commodity bull market has suffered a correction — except the energy complex. The rally has literally been unstoppable so far.

Go Against the Herd for the Best Profits By Christmas

All secular bull markets face corrections — even oil. These corrections tend to be brutal. So you can expect oil prices to post a savage correction. When that happens, the industries that have been handcuffed by high oil prices will post major reversals — including the best-managed airlines.

Plus, global governments are now throwing everything they can at high oil prices, including the Saudis, so the odds of a brief respite are growing more likely by the day.

If oil prices decline, as I expect them to, then input costs for all carriers will decline markedly, if even for just several months. There is certainly enough room to juice this speculation for at least a quick 35% to 50% profit, possibly more. Plus, add some dividends into the picture, profitable earnings, and a big bear market rally and you should hit a home-run in airlines before December.

Sometimes, it pays to look the other way behind the trail of a blazing bull market in energy prices. In this case, some airlines will reward investors with big profits over the next 6-12 months. I’m betting on it.

Source: Why the World’s Worst Business Is Now One of the Best Buying Opportunities on the Planet

Byron, on his Energy and Oil blog, has a great piece on the future of aviation. He reckons big changes are coming thanks to high crude oil prices…

Mother Nature is taking her revenge in the form of high-priced oil. The cost of jet fuel is soaring. The airplanes of the world are starting to get grounded. The skies of the future will not be so crowded. Flying will cease to be an option for many tens of millions of Americans — maybe for hundreds of millions.

In the future, only the most efficient jets (like Boeing’s new 787 Dreamliner) will ever go wheels up at the end of a runway. Ticket prices will be high. How soon will these things happen? I think that we will experience our first silent spring as early as next year.

Now, Byron says, Northwest (NYSE:NWA) and Air Canada (TSE:AC.A, AC.B) are now cutting flights within the US, and grounding more aircraft…

The Airline Waiting Game

By Byron King

Thing is, most of the airline cuts announced to date have not yet taken effect. The plane groundings and service cutbacks will occur towards the end of the year and into 2009. As of now, almost all of the flights are still rolling down the runways.

For the flying public, all that passengers are seeing just now is higher ticket prices and the nickel-and-dime stuff like charging for bagage check and paying for the sodas in coach class. A lot of people who bought tickets for summer travel back in the winter are feeling no pain, really.

Wait until people go to the likes of Orbitz (NYSE:OWW) and Priceline (NASDAQ:PCLN), and want to book flights in the first quarter of 2009. Good luck.

Choices of flights, connections, timetables and fares will be causing serious heartburn.

As I’ve been saying, in six months you will not recognize the US airline industry.

More info here.

Until next time,

Byron King

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder. To receive daily insights into energy, oil, commodities and other natural resources sign up here!

Source: The Airline Waiting Game

• Continental Airlines Inc. (CAL) became the latest airline to announce reduced flight service and jobs cuts yesterday (Thursday). Continental will eliminate 3,000 jobs and 16% of its flight capacity, The New York Times reported. The cost cutting efforts follow similar moves from UAL Corp.’s (UAUA) United Airlines, Northwest Airlines Corp. (NWA) and Delta Air Lines Inc. (DAL).

• France Telecom SA (ADR: FTE) announced yesterday (Thursday) that it was pursuing a $42 billion bid for Sweden’s TeliaSonera AB (PINK: TLSNF), The Associated Press reported. TeliaSonera dismissed the initial offer as too low, but France Telecom reported it has the backing of the French government and could up its bid.

• The Mortgage Bankers Association (MBA) announced yesterday (Thursday) that both the percentage of loans in foreclosures, as well as the number of foreclosure starts, climbed to levels not seen since 1979, MarketWatch reported. For one- to four-unit properties, 2.47% of all mortgages outstanding were in foreclosure, up from 2.04% in the fourth quarter, according to the MBA’s latest National Delinquency Survey. At the end of first quarter 2007, only 1.28% of such homes were in foreclosure.

• The number of U.S. citizens filing first time unemployment claims fell last week, the Department of Labor said yesterday (Thursday). Initial jobless claims decreased by 18,000 to 357,000 in the week that ended May 31, the lowest level in more than a month, due in part to the Memorial Day holiday, Bloomberg News reported.

• Stocks in China fell to a six-week low Thursday (yesterday) on speculation that the government would tighten prices to curb inflation. The move that would shave profits from the country’s commodity titans. The CSI 300 Index, which tracks 300 stocks traded in Shanghai and Shenzhen, fell 1 percent to close at 3,512.14, the lowest since April 23, Bloomberg reported.

• The U.S. government announced yesterday (Thursday), via the Department of Justice, that it is suing Honeywell International Inc. (HON) for selling material used in bulletproof vests that it alleges was defective, The Associated Press reported. According to the DOJ, Honeywell had scientific data that showed the ballistic material, known as Zylon, “degraded quickly over time, especially in hot and humid conditions,” leaving the vests unfit for use. The department also alleges that Honeywell failed to notify the government or the vest manufacturer, Armor Holdings Inc., of the defect.

• E.I. Du Pont De Nemours & Co. (DD), commonly known as DuPont, said yesterday (Thursday) that it is targeting a 40% increase in soybean and corn yields over the next 10 years through its Pioneer Hi-Bred unit, according to Thomson Financial. The company expects DuPont Agriculture & Nutrition segment sales to grow by 6% to 8% and earnings by more than 15% on average between 2007 and 2010.

• Swiss pharmaceutical maker Novartis AG (ADR: NVS) spent nearly $1.3 million lobbying the U.S. government in the first quarter on drug and health care issues, according to a recent disclosure form, The Associated Press reported. Novartis lobbied on bills designed to ensure the government has a sufficient stockpile of influenza vaccine in case of an outbreak.

Source: Global Investing Roundups: Friday, June 6th, 2008

• The Conference Board’s consumer confidence index fell to 62.3 in April, a five year low, Bloomberg News reported. The Conference Board’s index dropped from a revised 65.9 reading in March that was higher than previously estimated.

• Citigroup Inc. (C) said it would sell about $3 billion of its common stock in a public offering yesterday (Tuesday). Citigroup Inc. says it is has already received “strong interest” in the issuance, the Associated Press reported.

• Denny’s Corp. (DENN) reported first-quarter net earnings of $5 million (5 cents a share), up from 1.16 million (1 cent per share) a year ago. The increase came despite a $40.8 million drop-off in revenue. The stock closed up 1 cent at $3.17, Thomson Financial reported.

• IBM Corp. (IBM) increased its dividend payout 25% yesterday (Tuesday), reflecting the technology company’s confidence that it can thrive even with an uncertain economy, according to the Associated Press. At IBM’s annual shareholder meeting, the board of directors upped the quarterly dividend to 50 cents per share. For the past four quarters it had been 40 cents per share.

• Shares of pharmaceutical firm Merck & Co. Inc. (MRK) shed 10% yesterday (Tuesday) with a decline of $4.30 to close at $37.14. On Monday, the Food and Drug Administration rejected Merck’s cholesterol drug, Cordaptive, and analysts warned it could have an inverse impact on Merck’s bottom line.

• Airline shares soared yesterday (Tuesday) as crude oil dropped below $116 a barrel after reaching a record high on Monday of almost $120 a barrel, Reuters reported. Northwest Airlines Corp. (NWA) had the biggest gain with an increase of almost 23%, adding $1.74 per share to close at $9.36.

• MasterCard Inc. (MA) shares gained 12% yesterday (Tuesday) after the world’s second-largest credit card processing company announced first quarter earnings. First-quarter net income increased to $446.9 million, or $3.38 a share, from $214.9 million, or $1.57, a year earlier, Bloomberg News reported. The stock gained $31.48 to close at $273.98.

• Shares of Canada-based sportswear maker Gildan Activewear Inc. (GIL) plunged yesterday (Tuesday) after management lowered its outlook. The stock dropped $10.99, a decline of over 30%, to close at $24.93, after the company lowered both second-quarter and full-year estimates due to production shortfalls and slow sales, Forbes reported.

Continental’s management ended months of speculation by announcing that a merger with troubled United would do more harm than good, even with the intense pressure airlines are under due to record high oil prices and the competitive threat posed by the recent deal between Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA).

“The risks of a merger at this time outweigh the potential rewards,” Chief Executive Officer Larry Kellner said in a letter. “While some would prefer to see Continental pursue a merger, we strongly believe we have made the right decision.”

As for the niche carrier Eos, in grounding itself it joins Skybus Airlines, Aloha Airgroup Inc.’s Aloha Airlines and ATA Airlines Inc., which have already ceased operations, as well as U.S. charter operator Champion Airlines, which announced plans to stop flying at the end of May.

Frontier Airlines Holdings Inc. (FRNT) also has filed for bankruptcy protection, but at this time plans to keep flying.

The Eos downfall was “no surprise,” Calyon Securities airline analyst Ray Neidl told The Associated Press. “We saw it happen with other smaller, undercapitalized airlines. Basically, there are too many airlines. We’re in a period of consolidation. The weaker guys, [facing] $120-a-barrel oil, are finally succumbing.”

With jet fuel the single largest expense for carriers, merging to capitalize on economies of scale makes sense. And as the world’s new largest carrier, the Delta/Northwest merger now has the competitive advantage.

But while Continental still might be able to go it alone – even against a stronger potential rival – United is in a much weaker financial position and needs a partner. The carrier wasted no time in turning its attentions to U.S. Airways Group Inc. (LCC).

“Consolidation is under way – ensuring you have the right partner is everything,” United Airlines Chief Executive Glenn Tilton said in a statement. “We will pursue all options to ensure a strong, sustainable future for our airline.”

While talks with U.S. Airways are not yet at the advanced stage United had reached with Continental, management is doing its best to accelerate discussions, hoping to finalize any deal before the end of the year – and before there’s a possible change in the political party in the White House.

When it comes to mega-mergers – and industry consolidations in which there might be a perceived decline in competition – the Bush administration is seen as being more of a proponent for deals that require Justice Department approval in order to proceed.

Analysts say that U.S. Airways and United could mesh well due to similar pay structures and complementary fleets. In addition, United and U.S. Airways are both members of the Star global marketing alliance.

Bigger is Better

Atlanta-based Delta announced it would buy the Eagan, Minn.-based Northwest for $3.63 billion, all in stock, creating a single carrier with a combined enterprise value of $17.7 billion.

Delta Chief Executive Richard Anderson will be chief executive officer of the combined company. Delta Chairman Daniel A. Carp will become chairman of the new Board of Directors.

The carriers decided to go ahead with a merger despite being their respective pilot’s unions being unable to come to agreement. Delta’s 7,000 pilots endorsed the deal by supporting a new labor agreement that includes an equity stake.

While Northwest’s 5,000 pilots will be asked to join a contract before the deal closes, the union is expected to oppose deal after the unions could not agree on how to assign pilot seniority – a key determinant of shifts, pay scale and what airplanes they fly – in the new organization.

It is expected that the Delta/Northwest merger will be approved later this year.

But if the central bank does pare short-term interest rates, it’s likely to be the last such move in awhile; the Fed will take a break and give its rate cuts a chance to work their way through the U.S. economic system.

Despite an active-economic-calendar schedule this week – which includes a report on first-quarter gross-domestic product, and several other statistics that could confirm that the U.S. economy is entrenched in a recession – the Fed’s machinations should dominate this week’s headlines, given that the central bank’s interest-rate-setting arm is set to meet Tuesday and Wednesday.

Any announcements about interest rates will be made at 2:15 p.m. Wednesday. Experts also say that whatever the Fed says about its expectations will be just as important as what it actually does to the benchmark Federal Funds rate.

“I don’t think there’s any question that they’ll cut [a quarter-percentage point] off the rate,” David Rosenberg, chief economist for Merrill Lynch & Co. Inc. (MER), told The International Herald Tribune. “The real question is what they say about the future. It won’t be an ‘all clear’ signal. But they’ll find a way to tell the markets that they’ve done enough for now, simply put.”
Not everyone agrees.

“There is no reason why the Fed should be cutting rates right now,” Richard Yamarone, director of economic research at Argus Research Corp., told MarketWatch.com.

Yamarone may be thinking back to some of the public comments certain of the central bankers themselves have been making.

Back on April 18, Fed officials hinted that they would be reluctant to cut the benchmark Federal Funds rate yet again, given that the slumping U.S. economy also faced a major inflationary threat. Indeed, Philadelphia Fed President Charles Plosser warned against believing that interest-rate cuts were “the solution to most, if not all, economic ills.”

Plosser is one of the Fed’s major anti-inflation hawks At the time, Plosser was merely the latest in a string of policy-makers to warn about the rising risks of inflation, essentially suggesting that another rate cut would probably be a very tough sell.

In a speech at Drexel University’s LeBow College of Business in Philadelphia, Plosser said real interest rates were now at “an accommodative level, meaning borrowing costs were low enough to start boosting the U.S. economy’s growth rate back toward its normal historical norm, Reuters reported.

The futures market is projecting a Fed Funds rate of 1.75% by the end of this year. Here’s a look at the futures market’s month-by-month expectations for short-term borrowing costs for the remainder of 2008:

• April: 2.17%.
• May: 1.89%.
• June: 1.85%
• July 1.79%.
• August 2008: 1.76%.
• September 2008: 1.76%.
• October 2008: 1.77%.
• December 2008: 1.73%.

The worries about inflation that Plosser and other inflation hawks have are very real. And those concerns don’t exist solely on our side of the Atlantic. The low U.S. rates are contributing to a weakness in the greenback that’s sent the American currency to record lows against most other key world currencies. That’s fueling a massive run-up in the cost of energy and food-related imports – and that’s inflationary for U.S. buyers.

But it’s made U.S. exports very competitive abroad, acting almost as a big discount for foreign buyers of such wares as Boeing Co. (BA) jetliners. In fact, just last week Boeing surprised Wall Street with record earnings and announced a record order backlog. And pan-European arch-rival Airbus SAS., was forced to announce a price increase on several  of its commercial airliners – because of rising steel prices and because of the falling dollar.

French Economy Minister Christine Lagarde yesterday (Sunday) that the gap between the U.S. and Eurozone interest rates was way too large, and called for a change in rate policies on one side of the Atlantic, or the other.

“We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates,” Lagarde told LCI Television and RTL Radio, the global wire service Reuters reported. “The differential in interest between the two, it seems to me, is a little too big at the moment.”

Paris has long been a vocal critic of what French President Nicolas Sarkozy has termed the ECB’s overly narrow focus on fighting inflation – and has previously been criticized by Germany for meddling in the business of the “independent” central bank.

With Eurozone inflation running at about 3.6% – its highest rate since the measure for that portion of the European market began in 1997, the European Central Bank (ECB) has left its key refinancing interest rate unchanged at 4.0%, despite some very definite signs that Eurozone growth is slowing.

By comparison, the key U.S. interest rate is at 2.25%, though it may be heading lower this week, and inflation is “officially” said to be at right about 4% – though such experts as Money Morning Contributing Editor Martin Hutchinson believe the actual U.S. inflation rate is actually much higher.

Although the FOMC meeting is likely to top the economic the economic news of the week this week, the GDP report will come in a fairly close second and will be nearly as closely watched by some experts. The reason: Many eternal pessimists are expecting the report to show negative growth during that three-month period.

Why is that important? Simple: According to the National Bureau of Economic Research (NBER), two consecutive quarters of negative growth constitutes a recession.

Most folks “feel” like the U.S. economy is already in a recession. An official designation by the NBER – which usually comes well after the fact – would simply make it official.

In the meantime, some of these other reports this week could help serve as an interim and unofficial “confirmation” of that dour diagnosis of the U.S. economy:

• The health of the manufacturing sector will get a solid assessment via Thursday’s release of the much-watched ISM survey and Friday’s report on factory orders.
• The all-important U.S. labor markets will get significant scrutiny via Thursday’s report on initial jobless claims and Friday’s reports on the U.S. unemployment rate and on non-farm payroll data.
• We’ll get a bit more insight into the psyche of the American consumer with Tuesday’s report on consumer confidence for the month of April and Thursday’s report on personal income and spending for the month of March.
• And we’ll get an overview of Corporate America’s health, as U.S. energy giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) reveal how their profit reports have been boosted by record energy prices [likely also prompting new calls for Congressional investigations into allegations of price gouging].  Starbucks Corp. (SBUX) will follow up recent warning with an actual announcement, while Office Depot Inc. (ODP) and Radio Shack Corp. (RSH) will give investors a look inside the world of retail.

Market Matters

Two weeks ago, investors disregarded any semblance of bad news (and lately, there has been plenty) and instead took the stock indices to their highest levels in months. Last week, investors allowed the earnings releases to guide their trading activities while awaiting the Fed’s interest-rate decision and commentary.

So just what did the recent earnings reports say about the current state of Corporate America?

Financialscontinue to stoke the negativity (no surprise there) with Bank of America Corp. (BAC), investment banker Credit Suisse Group (CS), and bond insurer Ambac Financial Group Inc. (ABK) reporting more disappointing results.  Drugmakers, on the other hand, enjoyed a nice quarter with Merck & Co. Inc. (MRK) and Novartis AG (NVS) beating expectations.  While a sluggish economy can’t keep folks out of McDonald’s Corp. (MCD) (as least in its international markets), it does seem to be impacting coffee intake as Starbucks warned that this week’s results (and those for all of 2008) will miss earlier projections.  Of course, dire times lead to more nervous smoking (and higher cigarette sales) as happy Philip Morris International Inc. (PM) shareholders found out this quarter.  While cost-conscious folks stayed home and watched more DVDs, Netflix Inc. (NFLX) warned that future subscriber growth may be limited.

Both Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) posted sizable losses on skyrocketing fuel costs, leading some analysts to question the wisdom behind the proposed merger. While the world’s largest shipper, United Parcel Service Inc. (UPS), experienced a jump in profits, management expressed concern about the quarters to follow, since consumers just don’t seem quite as interested in finding out “what Brown can do for you.”  Even techs, which previously had been a savings grace for the market, turned pessimistic this week.  Apple Inc. (AAPL) and Texas Instruments Inc. (TXN) reported decent earnings, but warned about their respective outlooks.

Likewise, high-tech bellwether Microsoft Corp. (MSFT) disappointed with its profit numbers, while investors wait with trepidation to see what becomes of Microsoft’s bid for Yahoo! Inc., (YHOO). Meanwhile, Yahoo beat “The Street’s” expectations. However, the three-week deadline that Microsoft gave Yahoo to come to an agreement on its unsolicited bid passed Saturday without any announcement from either side, leading to the possibility that the battle for Yahoo is about to turn hostile, MarketWatch.com reported.

ConocoPhillips (COP) showed that record energy prices are not hurting everyone, as the No. 3 U.S. oil company reported a 17% increase in profits.

Transactions typically imply growing confidence in corporate boardrooms as management finds the value in certain acquisition targets.  Last week, News Corp. (NWS.A) moved closer to buying Newsday and giving Rupert Murdock greater control over the New York press.

Insurance giant Liberty Mutual Holding Co. Inc. agreed to buy SAFECO Corp. (SAF) in a $6.2 billion deal that will create the 5th-largest property and casualty firm.  Triarc Cos. Inc. (TRY) soon may be adding those terrific “hot-and-juicy” square burgers and addictive Frosty drinks to its Arby’s roast-beef-sandwich menus as it looks to acquire Wendy’s International (WEN) in a deal valued at $2.34 billion. And, of course, there’s still the Microsoft-Yahoo proposal.

With a mixed week on the earnings front, stocks traded relatively flat as investors took some profits from last week’s newfound bullish sentiment, while still searching for a bargain or two.

Economically Speaking

For many Fed-watchers, the prospect for another rate cut has been a foregone conclusion.  After all, central bank Chairman Ben S. Bernanke and clan have let their creative juices flow [not to be confused with the creative juices of those Wendy’s hamburgers] over the past few months; the Fed has tried everything from the aggressive rate-cutting campaign to liquidity injections to arranging the buyout of The Bear Stearns Cos. Inc. (BSC) by JPMorgan Chase & Co. Inc. (JPM).

Suddenly, some great prognosticators believe the Fed may be “seven and done” as they drop the Federal Funds rate again (by a minimal quarter of a percentage point this time around) – before going on a “summer hiatus” to give their earlier work the time to take effect.

With oil prices hovering around the (once unheard of) $120/barrel level, some policymakers are sure to claim that inflation should be considered as critical a concern as the sluggish housing market to the U.S. economy’s health. Indeed, comments such as those of Philly Fed President Plosser make it clear that inflation is already becoming an increasingly important consideration.

Additionally, the European Central Bank seems content to keep its lending rate at 4%, so further Fed actions will continue to have devastating impact on the value of the dollar.

The economic calendar was relatively light last week as analysts rested up for this week’s vast array of important data. After a surprising climb (better known now as an aberration) in February, existing home sales plunged again in March, while new homes sales fell to their lowest level in more than 16 years.

Furthermore, the median price of a new home dropped by more than 13% last month, the largest such decline in almost four decades.

Durable goods orders fell in March, as well, although once the volatile transportation sector was removed from the equation, the results did not look half bad.

We hope that investors and analysts got plenty of rest over the weekend to get ready for the bustle of economic reports due throughout this week. Talk of recession should resume with the release of the first-quarter GDP, which many eternal pessimists believe will show negative growth during that three-month stretch.

Weekly Economic Calendar

Recent high-profile bankruptcies of mainstay American retailers, such as Sharper Image Corp. (SHRPQ) and Linens Holding Co.’s Linens ‘n Things, as well as the proposed mergers between Blockbuster Inc. (BBI)/Circuit City Stores Inc. (CC) and Delta Air Lines Inc. (DAL)/Northwest Airlines Corp. (NWA), and the admissions from the nation’s leading student lenders that their business models are no longer viable, mark the beginning of a long overdue overhaul of the American economy.  In short, the economy will be getting smaller and more expensive.

The success of all of these seemingly disparate sectors depends, to a large extent, on the ability of Americans to continue to borrow cheaply and easily.  Now that home equity extractions and zero-interest credit card rollovers can no longer be used to fund electronics purchases, vacations or tuition, those corresponding sectors are suffering.  The foundation of our bloated service-sector economy, supported by overseas savings and production, is now giving way.

This diminished capacity will result in a wave of bankruptcies and consolidations to restore profitability in what will become a much smaller service sector.  The days of cheap consumer goods from Wal-Mart Stores Inc. (WMT) and cheap airfares from JetBlue Airways Corp. (JBLU) are coming to an end.  It is all part of the process of an unprecedented decline in America’s standard of living, which is the inevitable result of years of living beyond our means.

For retailers, the business model of selling cheap foreign imported goods to over- leveraged Americans was doomed from the start.  It is fitting that just prior to the collapse, Wall Street private equity firms decided to jump aboard a sinking ship (Linens ‘n Things was purchased by Apollo Management LP for $1.3 billion back in 2006).  No doubt the added debt subsequently piled on to the firm by the profit-squeezing buyout boys hastened the company’s demise.  As revenue declines and debt-servicing costs rise for many retailers (who have been similarly hog-tied by private equity firms), look for additional blow-ups down the road.

As the dollar continues its historic decline, imported goods will become too costly for many Americans.  In addition, more of those products still made (or more likely grown) domestically will be exported to wealthier foreign consumers whose appreciated currencies increase their purchasing power.  As a result, fewer products will be available to fill our shelves and those that remain will carry much higher price tags.

In addition, as defaults on both credit cards and store-charge cards continue to increase, the market for such debt soon will disappear. As a result, the credit crunch will spread from subprime mortgages to all forms of consumer credit. 

The bottom line: Not only will Americans be staring at higher prices; they will have to pay in cash. 

Similarly, the looming airline consolidation will usher in a harsher era for the American airline industry.  In truth, given the rising costs of building, flying and servicing aircraft, U.S. carriers currently supply more planes and passenger miles than American consumers can afford to utilize.  While this may seem illogical in a time when domestic flights are usually fully booked, it is important to realize that these crowded planes do not translate into profits at current ticket prices.  While mergers may help the airlines hold down costs for a bit, the only lasting pathway to profit is fewer flights and significantly higher ticket prices.  Of course, this will mean that Americans of modest means will travel less by air. Unfortunately, that fact is simply an inevitable consequence of a sagging currency and diminishing national wealth.

Although many Americans have come to regard affordable air travel as a birthright, from a global perspective it remains the province of the wealthy.  The massive borrowing that has financed the American economy for generations – combined with an evaporating industrial base and a lack of domestic savings – have all combined to reduce America’s wealth in comparison to the rest of the world.  Consequently, as more materials, technicians and jet fuel go to service the burgeoning Asian air travel industry, the higher the costs will become for American travelers.  As with other hallmarks of a diminished standard of living, Americans now have to confront the reality of staying closer to home.

The same mathematics will come into play for our ridiculously expensive higher education system, which cannot exist without a well-lubricated loan infrastructure.  Limit the ability of students to take on heavy loans, and college education becomes untouchable for anyone but the wealthiest Americans.  If loans dry up, universities will be forced to slash their bureaucracies and substantially reduce tuitions.  Ironically, the silver lining here is that with low tuitions students will no longer need the loans that kept tuitions so high in the first place.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and dollar-denominated investments, read Peter Schiff’s new book “Crash Proof: How to Profit from the Coming Economic Collapse.”  Click here to order a copy today.

By watching the trading “tape,” you almost could “hear” what investors were thinking:

• JPMorgan Chase & Co. (JPM) announces a 50% decline in first-quarter profits, and says markets will remain weak through the rest of this year and perhaps into next: No problem. As bad as the results were, they were actually better than Wall Street expected.
• Citigroup Inc. (C) says it lost $5.1 billion on a 48% decline in revenue and will slash 9,000 jobs – that’s great!
• Merrill Lynch & Co. Inc. (MER) posts its third straight quarterly loss, and says it is going to have to slash 3,000 jobs. Again, the investors seemed to be saying: No sweat.

And those were just the financials. Intel Corp. (INTC) posted lower quarterly earnings, even after issuing a warning a few weeks earlier. Even so, the results were better than anticipated. The Coca Cola Co. (KO) experienced lackluster domestic results.

On their face, these earnings just didn’t look so hot overall.

So how did the U.S. stock markets respond: With great strength.

In fact, U.S. stocks reached their highest levels in nearly three months – and energy stocks in the Standard & Poor’s 500 Index had their biggest gains this decade – on a mix of better-than-expected earnings, soaring oil prices and new record highs in key commodities.

The Dow Jones Industrial Average soared 4.25% for the week. The Standard & Poor’s 500 Index jumped 4.31%. And the Nasdaq Composite Index rocketed a stunning 4.96% for the week.

The Russell 2000 Index of small-cap stocks increased 4.8%.

Energy stocks in the Standard & Poor’s 500 Index had the biggest gain this decade after crude oil surpassed $116 a barrel in New York. The profit report for Google Inc. (GOOG) sent shares of the Internet search-engine giant up 20% Friday, its biggest single-day climb since it went public in 2004. Intel’s report pushed tech stocks to their largest single-week gain since August 2006.

Profit exceeded analysts’ estimates at 58 of 101 companies in the S&P 500 that have released first-quarter results so far, even as earnings fell an average 37% from a year earlier, according to Bloomberg data. Overall, earnings are forecast to decline 13.7% in the first quarter, marking the third straight decrease.

JPMorgan Chief Executive Officer Jamie Dimon said the credit crisis is nearing an end.

“It’s been quite an exciting market,” John Carey, who helps oversee $13 billion at Pioneer Investment Management USA Inc., in Boston, told Bloomberg News. “Earnings are the big story, and you have some companies surprising and being rewarded in the market.”

Stocks tend to be a leading market indicator, in effect, anticipating future events.

As part of that, markets tend to rally during the depths of a recession, anticipating an economic recovery even at a time when the outlook still seems to be as dire as can be.

The question to ask right now is this: Is last week’s rally – coming amid a bevy of disappointing earnings or outright corporate losses – merely an aberration, as in a pent-up burst of buying that’s following after weeks of bearish selling?

Or was last week’s rally a signal – perhaps telling investors that the recession many experts believe the U.S. economy is already well into is on its way out?

Only time will tell.

Market Matters

It was another tough week for the airlines: Given that, it’s clear the $17 billion Delta Air Lines (DAL)/Northwest Airlines Corp. (NWA) merger deal may have been the first of many similar transactions that will change the landscape of an industry struggling through the twin challenges of mountainous fuel costs and a weak economy. With oil surging past the $116 a barrel level and gasoline moving ever closer to the $4 a gallon level on supply concerns, Republican presidential hopeful John McCain proposed a “gas-tax holiday” that would suspend the federal gas tax of 18-plus cents a gallon for the summer-driving months.

Did anyone even notice?

Meanwhile, Blockbuster Inc. (BBI) expressed confidence that consumers ultimately will move out of their doldrums and back to the malls as the company proceeded with its potential $1.35 billion bid for ailing consumer-electronics retailer Circuit City Stores Inc. (CC).

Equity investors digested the earnings data, disregarded the surging energy prices, put away their tax records for another year, and went bargain hunting for undervalued stocks. When the dust had settled, each of the major indices climbed more than 1.75% on Friday alone, rose over 4% for the week, and hit levels not seen in two months.

Even so, the Dow is down 3.13% year to date. The S&P has skidded 5.31%. And the Nasdaq is down 9.4%.

Of course, fixed income felt the brunt of the shift in asset allocation as the yield on the 10-year Treasury bond climbed to around 3.75%.

With positive stock-price momentum, the potential for a new round of corporate deal making that could further stoke bullish sentiment, tax refunds on the way for some, and gas-price relief in time for the all-important summer driving season, there seems to be a lot to be optimistic about as the arm weather months return to us here on the East Coast.