From
TheStreet.com
After breaking through important technical barriers Wednesday and Thursday and sliding early Friday, the major averages attempted a minor rally late Friday, but still ended near their June 13 lows. The worst performer of the week was the Nasdaq Composite, which sunk to its lowest level since October. The Comp closed down 0.82% on the day, and 4.3% on the week to 2037.35, which is 1.6% below its June low of 2072.47.
The Dow Jones Industrial Average finished down 1% Friday and 3.1% on the week to close at 10.739.35, just 0.3% above its June 13 low of 10,706.14. The S&P 500 declined 0.5% Friday and 2.3% on the week, closing at 1236.19 or 1% over of its June 13 low of 1223.69.
The NASDAQ is in a terrible technical position. The average is at its lowest point in a year. Going back about two years, the main market movers have been energy and industrial companies. As a result, tech has languished. The S&P and Dow are in better technical position, but that's a relative term right now. Both averages are near the lows for the year.
Meanwhile, oil spiked last week, and analysts are predicting further price increases:
Crude oil surged to reach new highs this week, closing at $77.03 Friday to bring its four-day climb to 4.6%. The price of oil and the political turmoil sparked a flight-to quality rally in assets like gold, which closed up 5.4% for the week after gaining $13.60 to $669 per ounce Friday.
Analysts predict that front-month, crude-oil futures will reach $80 a barrel as early as next week, following a four-session gain of more than $3 and a record close Friday.
Violence between Israel and Lebanon and the West's quarrels with Iran and North Korea fueled traders' anxiety over the state of oil supplies, as countries begin to take sides on the various conflicts around the world.
That oil spiked should come as no surprise considering the instability in the Middle East. Violence in the Middle Easy always spikes oil prices. The longer the conflict continues, the worse for oil prices - and the US economy.
So - what does this all mean? The S&P and Dow were rallying from mid-June lows until early July. They traded sideways for the next week, in what traders call a consolidation pattern. In essence the markets were trading in a narrow range waiting for the next big event to move the markets higher or lower. As the markets entered earnings season (when a majority of companies announce quarterly earnings) the reports were a bit mixed, but not catastrophic. There was also plenty of time and earnings announcements left to possibly drive the markets higher. However, now the S&P and Dow are in a very poor technical position. In short, the conflict may have killed off the possibility of a summer rally.
The spike in oil prices is very bad news. As mentioned below, import prices for oil dropped last month lowering the import price index. Then there is the overburdened US consumer who hasn't had a pay-raise after inflation for this expansion, yet has higher energy prices to pay. If these price increases continue, expect a bump in inflation which does not bode well for the Fed pausing its interest rate hikes.
Just as important is the drop in retail sales
U.S. consumers cut back in June, sending retail sales down 0.1% for the month, the Commerce Department reported Friday.
It was the second straight month of tepid retail sales. Sales rose 0.1% in May.
"Sales are clearly being hurt by the combination of high energy prices, weakening housing markets and record debt burdens," said Scott Hoyt, an economist for Moody's Economy.com.
Consumer spending is already down because of high energy prices. $80/oil simply crimps consumer budgets further, slowing spending at an increased pace. Considering consumer spending accounts for 70% of GDP growth, this indicates consumers will probably decrease spending even further, hampering economic growth in the second half of 2006. Also remember that over the last5 years, consumer debt as a percentage of GDP from 70& in 2001 to 90% in 2005. At some point, consumers will have too much debt. The question now becomes, "at what level are consumers saturated with debt, unable to take on anymore?" While there is no firm number for that, 90% consumer debt/GDP is more than likely pretty close to it.
And consumers are feeling a bit glummer:
Confidence among U.S. consumers unexpectedly weakened this month as gasoline prices rose, reinforcing concern about a cooling economy.
The University of Michigan's preliminary index of consumer sentiment declined to 83.0 from 84.9 in June. The measure has averaged 88.1 since monthly data were first compiled in 1978.
Higher borrowing costs and a slowing housing market are adding to the woes of Americans stung by prices at filling stations. Businesses such as Williams-Sonoma Inc. are bracing for a slowdown in consumer spending that's forecast to curb the pace of economic growth.
``Some of the factors that pushed confidence higher are beginning to diminish,'' said Eric Green, chief market economist at Countrywide Securities Corp. in Calabasas, California. ``Equities are starting to perform less impressively, housing prices are flattening out, and employment growth continues to slow.''
And as if that wasn't enough:
The U.S. Import Price Index rose 0.1 percent in June, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The increase was led by a 0.4 percent advance in nonpetroleum prices which more than offset a 1.4 percent downturn in petroleum prices. Export prices increased 0.8 percent in June after rising 0.6 percent the previous month.
Import prices rose for the third consecutive month, although the 0.1
percent advance in June was modest compared to the 2.0 percent and 1.7
percent increases in April and May, respectively. The June rise was dampened by a 1.4 percent decrease in petroleum prices, which had risen 17.8 percent over the previous two months. Despite the June downturn, petroleum prices rose 32.6 percent over the past year. In contrast, the price index for nonpetroleum import prices advanced 0.4 percent in June following increases of 0.1 percent in April and 0.7 percent in May. For the year ended in June, nonpetroleum import prices rose 2.2 percent while overall import prices increased 7.2 percent.
What's important about this particular statistic is oil prices dropped, lowering the overall number. That probably won't be the case next month with the Middle East currently engaged in open combat. Combine that with a Federal Reserve that is very inflation sensitive, an the possibility of further rate hikes increases.
Then there was the trade deficit news this week:
The Nation's international deficit in goods and services increased to $63.8 billion in May from $63.3 billion (revised) in April, as imports increased more than exports.
Exports increased to $118.7 billion in May from $115.9 billion in April. Goods were $84.2 billion in May, up from $81.8 billion in April, and services were $34.4 billion in May, up from $34.1 billion in April.
Imports increased to $182.5 billion in May from $179.3 billion in April. Goods were $154.3 billion in May, up from $151.4 billion in April, and services were $28.2 billion in May, up from $27.9 billion in April.
For goods, the deficit was $70.1 billion in May, up from $69.6 billion in April. For services, the surplus was virtually unchanged at $6.2 billion.
So, the US' gluttonous ways continue. We consumer more than we produce. Yes, exports are increasing. But imports are increasing at a faster pace. And the trade deficit shows little signs of moderating at this point.
In short, this was a terrible week for the economy and financial markets. The markets tanked, oil prices spiked and we had a rash of bad economic numbers. At least we don't have 24 hour trading.