The Bulls May Take A Break

Based on comments from the Federal Reserve earlier this week and their actions in the previous weeks, it appears rates are headed considerably higher.  They say they believe higher short term rates and the possibility of an inverted yield curve will not create a recession.  We and other investors are not so sure.  While much remains to be seen in the coming months, we see little to move the broad markets ahead.  But if the broad markets will be sideways to down there remain some select opportunities that still look promising.  In light of a weakening economy we have taken and will continue to take some profits among our more economically sensitive issues. 

We are busy with some portfolio changes this morning, so the today’s Brief consists of various excerpts from Bloomberg News releases this week.

Crude oil rose to a fifth consecutive daily record, touching $66.16 a barrel in New York, on speculation that increased fuel demand may outpace production capacity.  A number of unplanned closures of U.S .refinery units have increased concern that supplies will be insufficient to meet demand in coming weeks.  The U.S. consumes 25% of the world’s oil.

Oil may rise further next week as demand for gasoline and other fuels increases, a Bloomberg survey of 69 analysts and strategists yesterday showed.  The peak U.S. gasoline consumption period runs through the Labor Day holiday on Sept. 5, a period when Americans take to the highways for summer vacations.

Average gasoline prices reached an unprecedented $2.41 a gallon this month, threatening to siphon spending from other goods and services.  While an improved job market and income gains have helped Americans cope with the higher prices, economists said the higher fuel prices may be starting to take a toll.  “The economy is fundamentally quite strong, but there is no question that surging energy prices have the capacity to push spending off track temporarily,” said Ian Shepherdson, chiefU.S.economist at High Frequency Economics, a Valhalla,New York, forecasting firm.

U.S. consumer confidence fell in August from the highest level of the year as Americans confronted record prices at the gasoline pump.  The University of Michigan’s preliminary consumer sentiment index declined to 92.7 from July’s 96.5, the first drop in three months and the lowest since May’s 86.9.

The gap in goods and services trade swelled 6.1% from $55.4 billion in May, the Commerce Department said today inWashington.  Imports rose 2.1 percent to an all-time high $165.7 billion. Exports were up 0.1 percent.  Record energy costs this month and an accelerating economy suggest little prospect for improvement in the trade gap for the rest of the year, economists said.  Crude oil prices increased 13% on average in June, and retail sales rose as consumers bought more foreign-made apparel and appliances. Companies also imported more equipment to replenish inventories.  “We’re still in a situation where the deficit is going to widen again,” said Michael Moran, chief economist at Daiwa Securities America Inc., who forecast a $58.3 billion June trade gap.  “We need to see stronger growth in foreign countries and a softer dollar, and we haven’t seen enough on either front to see sustained improvement in the deficit.”

The productivity of U.S.workers grew from April through June at the slowest pace in nine months and labor costs accelerated from a year earlier, a government report showed.  Productivity, a measure of how much an employee produces for every hour of work, rose at a 2.2% annual rate compared with a 3.2% increase the previous three months, the Labor Department said today in Washington. Labor costs rose 4.3% from a year earlier, the biggest increase in almost five years.  Companies that have previously relied on gains in efficiency now have to hire more workers to help meet demand, as businesses added 584,000 employees and increased the number of hours worked last quarter.  Rising labor costs that threaten to boost inflation support forecasts that Federal Reserve policy makers will extend their series of interest-rate increases through the first half of next year.

“Companies can’t cover all the growth in output with productivity gains,” said Ethan Harris, chief U.S. economist at Lehman Brothers Inc. in New York, before the report. “Lower productivity translates into higher wages and inflation, and if that were to persist it would worry the Fed.”

We remain hopeful the Fed will not quash the economy, but we cannot afford to bet on it.  Presently, we are at 10% cash in the portfolios and expect to go to 20% in the coming months as we both sell our more cyclical issues and the few remaining interest rate sensitive issues.