PowerTrend Brief: Contracting Consumers Confirm Economic Concerns

Chris Versace

Chris Versace is a financial columnist and equity analyst with more than 20 years of experience in the investment industry.

Through the end of last week, roughly 288 of the companies that comprise the S&P 500 index reported their latest quarterly results. Tallying the results, we find that roughly 72% beat earnings expectations, but far fewer — only 41% — beat on revenues. Generally speaking, their guidance for the upcoming quarters has fallen short. It has been pretty painful for those companies that have missed earnings expectations altogether, for they have seen their shares collapse between 11%-40% within 24 hours.

Needless to say, traders are edgy. However, given the worsening situation in Europe and slowing domestic economy it is not necessarily unwarranted. Sifting through the commentaries from a number of companies, including Starbucks (SBUX), I found warnings that the consumer slowdown in June continued in July. Couple this reality with the July reading for the University of Michigan’s Consumer Sentiment Index — 72.3 for sentiment and 65.6 for the Outlook component — and it appears that the slowdown is poised to continue, near-term.

Potentially making matters worse is the heat, which has been taking its toll this summer on the Midwest. It’s shaping up to look like the worst drought in the United States in nearly 50 years, and that means lower-than-expected yield in corn, soybeans and several other commodity crops. According to the U.S. Department of Agriculture (USDA), close to 88% of the corn crop and 77% of the soybean crop has been affected by the drought. Lower-yielding crops mean there is less to go around, and that means prices for corn, soybeans and other commodities have been on a tear.

Corn now sells around $8 a bushel, up significantly from just a month ago. Soybeans are at a near-record price of $17 per bushel, compared to $13 just eight weeks ago. This rise prompted the USDA to revise its food price forecast, with poultry and beef prices being hit the most. The USDA’s revised figures show that the consumer price indexes for chicken and turkey would rise 3.5% to 4.5% later this year, with beef prices expected to climb 4% to 5% over the coming year.

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The National Oceanic and Atmospheric Administration’s outlook for August through October, which predicts continuing dry conditions in the Midwest, even as more than two-thirds of the United States now are enduring drought conditions. That forecast is not good for corn and soybean crops.

The potential corn supply problem is compounded by two things. First, the USDA reported that corn stockpiles as of June 1 fell 48% from March 1 to 3.15 billion bushels, the lowest level since 2004. Second, the demand for corn continues to grow due to a combination of exports, livestock feed and ethanol production, according to the National Corn Growers Association.

While those are three key drivers of corn, the reality is that corn is a key ingredient in cereal, peanut butter, snack foods and soft drinks. In total, there are more than 4,200 uses of corn. That situation means higher input costs for those products that count corn as a key ingredient. An example of this occurred when PepsiCo Inc. (PEP) recently reported its second-quarter earnings results, which showed its margins and profits are getting squeezed by higher costs for corn and other ingredients that are used to manufacture, package and ship the company’s products.

PepsiCo and other companies facing these rising input costs have sought to pass along these costs to consumers by raising prices. Last October, PepsiCo announced it would raise prices on some Gatorade sports drinks and Frito-Lay snacks in the coming weeks to help offset higher commodity costs. That price hike was in addition to price increases PepsiCo put in place during the third quarter of last year. It sounds like we can expect more of the same in the coming months from food and beverage companies.

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With consumers facing higher food prices in the coming months – yes, that means that inflation is alive and well, Mr. Bernanke, thank you very much — as the economic slowdown takes hold, it looks like yet another round of belt tightening for consumers is on the horizon.

Sincerely,

Chris Versace
Editor, PowerTrend Brief

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, by going to ChrisVersace.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027877.

This Week Ahead

Even though the 2012 Summer Olympics in London will take this week and gain extensive media coverage, there still are a good number of companies that will be reporting their earnings in the days ahead without nearly as much fanfare. As we exit July, we will get the latest snapshot on job creation later this week via the July Employment Report, as well as a number of third party perspectives (ADP, CBiz and Intuit) on job creation, not to mention job cuts (Challenger, Gray & Christmas). Given the number of indicators, surveys and sentiment readings that point to a weaker economy, many will be looking to see if July added more nonfarm jobs than the 75,000 per month average in 2Q 2012.

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Fasten your seat belts, as last week’s bumpy ride is poised to continue this week.

Monday, July 30
Dallas Fed Manufacturing Survey (July)
Anadarko Petroleum (APC)
Cal-Maine Foods (CALM)
Cirrus-Logic Inc. (CRUS)
Diebold Inc. (DBLD)
Flowserve Inc. (FLS)
Hologic Inc. (HOLX)
Loews Corp. (L)
Masco Corp. (MAS)
Vector Group (VGR)

Tuesday, July 31
Personal Income & Spending (June)
Employment Cost Index (2Q 2012)
Case-Shiller 20 City Housing Index (May)
Chicago Purchasing Managers’ Index (July)
Consumer Confidence (July)
Archer Daniels Midland Co. (ADM)
Big 5 Sporting Goods Corp. (BGFV)
Cabot Corp. (CBT)
CEVA Inc. (CEVA)
Cummins Engine (CMI)
Denny’s Corp. (DENN)
Hanesbrands Inc. (HBI)
Mueller Water Products (MWA)

Wednesday, Aug. 1
MBA Mortgage Index (Weekly)
ISM Manufacturing Index
Construction Spending (June)
Auto & Truck Sales (July)
FOMC Rate Decision (July)
Amdocs Ltd. (DOX)
Avon Products (AVP)
Burger King Worldwide (BKW)
Carmike Cinemas Inc. (CKEC)
Cavium Inc. (CAVM)
Comscore Inc. (SCOR)
Garmin Inc. (GRMN)
MasterCard Inc. (MA)
Speedway Motors Inc. (SPW)
The Boston Beer Company (SAM)
Weight Watchers International (WTW)

Wednesday, Aug. 2
Weekly Initial & Continuing Jobless Claims (Weekly)
Challenger Job Cuts (July)
Factory Orders (June)
Air Methods Corp. (AIRM)
Apache Corp. (APA)
DIRECTV (DTV)
Dolby Laboratories (DLBY)
Granite Construction (GVA)
Harris Teeter Supermarkets Inc. (HTSI)
Henry Schein Inc. (HSIC)
hhgregg Inc (HGG)
II-VI Inc. (IIVI)
Kellogg co. (K)
Kraft Foods (KFT)
Molycorp Inc. (MCP)
Parker Hannifin (PH)
Rovi Corp. (ROVI)

Wednesday, Aug. 3
Employment Report (July)
ISM Services Index (July)
Agrium Inc. (AGR)
Cubic Corp. (CUB)
ITT Corp. (ITT)
NYSE Euronext (NYX)
Proctor & Gamble Co. (PG)

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