Press Your Luck! Big Bucks--BANG! Triple Whammy!

A triple-whammy from Yahoo News

I found these three headlines off the business heading of Yahoo News to be interesting. We have three stories here with the Dow down 60, oil prices jumping up due to Mideast fears, and consumer spending down. Not very good for economic news.

So let's start looking into these triple-whammy stories--starting with the Dow ends down 60 on inflation jitters. Here is the Yahoo Whammy One:

NEW YORK - Heightened fears of inflation sent stocks sliding for a second straight session Tuesday as a key price index climbed to an 11-year high and an improving manufacturing sector raised the likelihood of another interest rate hike by the Federal Reserve. Tech shares and small-caps were hardest hit.

While inflation-adjusted consumer spending rose 0.2 percent in June, the
Commerce Department also reported that consumer prices are up 2.4 percent year over year, the highest rate of inflation since April 1995.

A big increase in the Institute for Supply Management's manufacturing index deepened investors' interest rate worries, as a strong economy would make it easier for the Fed to raise rates without cutting off growth. The index rose to 54.7 in July, far better than the 53 reading economists had expected.

The Fed meets next Tuesday to gauge whether more interest rate hikes are needed to clamp down on inflation. The Commerce and ISM reports could push policy makers toward another quarter percentage point increase, which would put the benchmark rate at 5.5 percent. That would make capital more expensive for corporations — and hurt corporate earnings and share prices.

"The market is trying to read every tea leaf to gauge where the Fed is going to go, and we have a lot of data out this week," said Bryan Piskorowski, market analyst at Wachovia Securities. "You're going to see these kind of movements, up and down, before you get to the Fed meeting."

The Nasdaq composite index dropped 29.48, or 1.41 percent, to 2,061.99 as investors abandoned tech shares and small-cap issues, perceived to be risker in a rising rate environment.

Other stock indexes also fell. The Dow Jones industrial average fell 59.95, or 0.54 percent, to 11,125.73, and the Standard & Poor's 500 index lost 5.74, or 0.45 percent, to 1,270.92.

Rising crude oil and natural gas futures added to Wall Street's worries, since the Fed has signaled that high energy prices could further feed inflation. Crude prices rose 51 cents to $74.91 per barrel due to multiple crises in the Middle East, while natural gas futures built on Monday's 14 percent surge based on higher U.S. electrical demand in a nationwide heat wave.

Traders work on the floor of the New York Stock Exchange, Tuesday Aug. 1, 2006. Heightened fears of inflation prompted investors to sell off stocks Tuesday as a key price index climbed to an 11-year high and an improving manufacturing sector raised the likelihood of another interest rate hike by the Federal Reserve. (AP Photo/Richard Drew)

So we've got heightened inflation fears, high energy prices, and the Feds signaling that they may raise interest rates again next week that has forced investors to sell stocks. Throw in the weak consumer spending report, and you've got a somewhat crappy day on the stock market. Of course, investors are also hoping that the Feds will also put an end to these interest rate hikes, fearing that these continued interest rate hikes would grind the economy to a halt. It is no wonder that investors are jittery--even when confronted with the Institute for Supply Management's index increase.

So let's now look at the second Yahoo Whammy, titled Oil prices jump as traders eye Mideast:

WASHINGTON - Oil prices climbed Tuesday as energy traders kept an eye on supply threats ranging from a tropical storm in the Caribbean to fighting in the Middle East.

Natural gas futures gave up more than half of the gains from a Monday rally fueled by a heat-induced surge in electricity demand. Still, natural gas prices are roughly 25 percent higher than they were a month ago, in part reflecting the market's nervousness about the Gulf of Mexico hurricane season.

The U.S. National Hurricane Center said Tropical Storm Chris has formed near the Leeward Islands in the Caribbean, raising traders' fears that it could strengthen and damage oil platforms and refineries along the Gulf Coast.

So we've first have some new worries for energy traders to focus on. The big worry here is that hurricane season in the Gulf of Mexico could drive up natural gas prices. In fact, I'd say that Katrina's destruction is still in the back of the energy trader's minds as this new season approaches.

But wait--there's more! How about the worry of the heat wave that's gripping the U.S., or the continued Mideast wars in Iraq and Lebanon? Continuing on with the Yahoo story:

Light sweet crude for September delivery rose 51 cents to settle at $74.91 a barrel on the New York Mercantile Exchange, where gasoline futures jumped by more than 6 cents to settle at $2.2762 a gallon. Heating oil futures rose 4.28 cents to $2.0804 per gallon.

In London, September Brent crude rose 32 cents on the ICE Futures exchange, to $75.47 a barrel.

The heat wave gripping the eastern half of the country was expected to keep electricity demand near record levels, prompting utilities and grid operators in the Midwest, mid-Atlantic and Northeast to encourage homeowners to conserve power.

Gary Rasp, a spokesman for the Midwest Independent System Operator, said he was unaware of any significant outages or voltage reductions. He added that the region, which consumed a record 136,520 megawatts on Monday, had 7,622 megawatts of power-generating capacity in reserve, or more than twice the amount required.

Natural gas futures slid 63.7 cents to settle at $7.574 per 1,000 cubic feet. On Monday, natural gas futures surged 14 percent to settle at $8.211, the highest close since early February.

In the Middle East, there were few signs of a quick resolution to the escalating conflict. Israel decided Tuesday to widen its ground offensive and Israeli fighter jets struck suspected Hezbollah positions deep inside Lebanon for a second straight day.

Oil traders have been focused for nearly three weeks on the violence between Israel and Hezbollah guerrillas in Lebanon, fearful of possible supply interruptions in the region. Iran, OPEC's No. 2 supplier, is a backer of Hezbollah and is in the midst of a diplomatic standoff with the United Nations over its nuclear program. Crude futures rose to a record $78.40 a barrel July 14.

On Tuesday, Iran President Mahmoud Ahmadinejad rejected a U.N. Security Council resolution that would give his nation until Aug. 31 to suspend uranium enrichment.

In other words, we've got a lot of volatility in the energy market that is also spooking energy traders.

So now let's go to the third Yahoo Whammy, titled Consumer spending up 0.2 percent in June:

WASHINGTON - Consumer spending was sluggish in June as Americans had to divert more cash to filling up their gas tanks and a key inflation gauge rose at the fastest clip in more than a decade.

The Commerce Department reported that consumer spending, after adjusting for inflation, posted a weak 0.2 percent rise in June, marking the fourth straight month of 0.2 percent or less.

At the same time, an inflation gauge tied to spending also posted a 0.2 percent increase in June and a rise of 2.4 percent for the 12 months ending in June. That matched the rise in the 12 months ending in September 2002 and was the fastest increase since a 2.5 percent rise in the 12 months ending in April 1995.

In other economic news, a report on construction spending showed unexpected strength in July, rising by 0.3 percent to a record level, helped by big increases in spending on government, office and hotel projects.

Chart shows construction spending for the past 13 months; with BC-Economy. (AP Graphic)

And the Institute for Supply Management's gauge of manufacturing activity in July posted a stronger-than-expected increase to 54.7, above the June reading of 53.8. However, part of that acceleration reflected a rise in prices of raw materials as the costs of everything from fuel to paper increased.

The weakness in consumer demand was a major factor in the government's report last Friday that overall economic growth slowed to an annual rate of just 2.5 percent in the April-June quarter, far below the economy's 5.6 percent growth rate from January through March.

There are a number of things that strike me about this story. The first is the link between consumer spending and high energy prices. The high energy prices are certainly taking a hit on the American's pocket-book, having to divert their spending on other goods towards spending more to fill their gas tanks. But I think there is more here. Prices on all goods have certainly raised upwards due to high energy costs. Businesses can't continue to absorb these high energy costs, which are eating into their own profits. Businesses had to start passing these high energy costs towards consumers in the form of higher prices. The June 2006 Consumer Price Index was 4.3 percent higher than June 2005, although the monthly CPI was at a lower reading of 0.2 percent over that of the monthly price increases for previous five months of 2006. So inflation is still a worry--especially if the Middle East takes a bad turn with the wars in Lebanon or Iraq expanding.

The second detail I saw in this story was the slowing of construction spending. While the report showed an increase in construction spending, it was a small increase of 0.3 percent, mainly concentrating on government projects, offices, and hotels--not housing projects. Housing stats have certainly been slowing down as a result of the Fed's interest rate hikes, which also increases interest rates on consumer home mortgages. In addition, builders have been struggling with trying to sell a backlog of unsold homes in this high interest-rate market. High mortgage rates, and the construction slow down have certainly affected consumer spending, where potential first-time home buyers will not only avoid purchasing new homes, but also will cut back on purchasing big ticket home items, such as appliances.

The final detail I saw here was the Institute for Supply Management's gauge of manufacturing activity. The July 2006 number increased "to 54.7, above the June reading of 53.8." However the Yahoo story reflects this increase to high energy prices, and to an increase in prices of raw materials (of which the increase in raw material prices may also be a result of high energy prices.). The ISM increase in manufacturing activity is not due to firms' expansion projects or an increase in production capacity, but rather due to high energy prices. We're talking inflationary pressures here.

So what does all this mean? We're still seeing inflationary pressures against the U.S. economy due to increasing energy prices. The Feds are still worried about inflation, meaning they will continue their interest rate hikes for a while. While energy prices and interest rates are increasing, consumer prices are also increasing, which are forcing Americans to cut back on their own consumer spending. This is forcing a slow down of the economy. Now the Feds are hoping that this slow down will be gradual, culminating into a soft landing. I'm not so sure. There is still too much volatility in the energy markets, with the wars in Lebanon and Iraq raging on. The high government debt and budget deficit is hanging over us, with the Republican-controlled Congress and Bush White House refusing to do anything about it--except asks for more tax cuts. And finally, while the unemployment rate remains at 4.5 percent, there are signs that the job market may be cooling.

This economy is not on solid footing.