There was a good day in the stock market on Tuesday, with the S&P 500 posting a solid 1.2% gain and the Dow rising a bit less at 1%. Bonds lost some ground due to stronger than expected economic reports. Note that I didn’t write “strong” economic reports because we certainly didn’t have that. Wholesale prices nudged up a bit (easing deflation fears) and industrial production and capacity utilization both improved slightly as well. On balance though these are lazy August days when big bets are not usually made because most money movers are on vacation. Besides, there’s nothing definitive happening on the economic front, so why bother heading into the office or extending your neck with a portfolio shift. All that said, we are shaping up for a what could be a big September.
On stocks, earnings are coming in as well as anyone could hope but revenue growth (the number which tells us more about the economy) is just not keeping pace. Case in point: Walmart’s earnings news Tuesday was a pick-me-up for the stock market. But those who listened to the earnings conference call came away needing a pick me up. The company reported rising earnings but it also reported declining sales (that’s same store sales, the number that means something). The company also noted that is customers are barely using their credit cards and that the government handouts are appearing more commonly as the way customers pay their Walmart bill. This just echoes what is going on in the rest of the economy. Unemployment and related job insecurities are top of mind. Consumers remain tight fisted, willing to buy only on need or only if the bargain is so good there’s no profit margin left. That sales weakness is not affecting earnings much right now because companies have been able to keep profits growing with cost cutting and tech based productivity improvements. Those are real things, but not the the sustainable drivers of profit growth that sales can be. If this disconnect persists, the fall could be a season of reckoning in the stock market. That would be a real head spinner: The economy avoids a double dip but the stock market doesn’t.
On another front, merger news put some heat under stocks as Britain’s BHP, a mining company, extended a $39 billion bid for Potash Corp of Saskatchewan, and was rejected. Don’t think of this as the beginning of a Drexel-Burnhanesque wave of takeovers and bidding wars. This is simple resource grabbing, much as China has been doing in recent months. While the trend could develop into a string of corporate raids on other companies resources–the biggest corporate resource these days is cash–I wouldn’t expect that to happen until stock prices get cheaper. The good news in this is that those heavy cash balances in corporate coffers offer possible M&A support for stocks if the market heads south later this year due to a soft economy. The other note to take from the BHP bid is that the world food crisis is on the corporate agenda. You can find out more about this emerging crisis at Michael Schuman’s interesting Curious Capitalist post from last week.