Morning Watch, August 19
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August 19, 2008
Economic data puts downward pressure on stocks as inflation concerns increase. On Monday, the major market indices suffered losses with financial stocks leading the way. Stocks are continuing their slide Tuesday following discouraging data on producer prices and housing starts. In earnings news, Home Depot (HD) reported better than expected results and traders are awaiting results from Hewlett-Packard (HPQ) after the bell.
Last week, data on consumer prices showed much larger gains then expected at 0.8 percent growth overall and 0.3 percent growth at the core. Unfortunately, the producer price index [PPI] did little to ease pricing pressure concerns rising 1.2 percent overall and 0.7 percent at the core. Expectations were for growth of 0.5 percent and 0.2 percent respectively. This puts the headline PPI up 9.8 percent this past year with the core up 3.6 percent. Unfortunately, this is the fastest pace for wholesale inflation in the past 27 years.
As if this news wasn’t bad enough, housing starts also were disappointing. Starts in July fell 11.0 percent, more than erasing the gain of 10.4 percent in June. The annualized rate came in at 0.965 million units, putting the year on year rate down 29.6 percent. Another negative in the report was the 17.7 percent drop in building permits, which is used as a gauge for future housing activity.
In earnings news, Home Depot reported that profits fell nearly eight percent in the quarter, but this was much better than anticipated. Unlike competitor Lowe’s (LOW), HD reaffirmed its outlook for the second quarter. Nonetheless, with the market falling Tuesday, shares of HD are struggling to find strength, trading near $27. There are two points of view on home-improvement retailers. One view is that a tough housing market could keep sales at these stores weak. The other is that since houses are not selling, consumers will choose to fix up their current residences, which could benefit LOW and HD.
In related economic news, weekly same-store sales continued to weaken with the ICSC-UBS report showing a year on year gain of 2.4 percent, down from 2.6 percent in the prior week. The Redbook report was even weaker, showing growth of 1.3 percent for the week ending August 16, down 2-tenths from the prior week.
After the bell today, reports from Hewlett-Packard (HPQ) and Analog Devices (ADI) are on tap. Last week, the Philly Semiconductor Index ($SOX) outperformed the broader market, gaining 11.50 percent. ADI shares are down three quarters of a percent Tuesday to a price under $32. HPQ shares are also lower, down about 1.5 percent just below $44.
Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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