BARRON'S ONLINE: A Sampling of
Cutting Into Crude
We believe it is early to assess...impact. However, if the recovery process resembles that of Hurricane Ivan, we believe refined-product prices could trend lower.
-- Nicole Decker
A Still-Strong Balance Sheet
-- Henry Dickson, Charles Reinhard
Decelerating Productivity: A Natural Outcome
Unit labor costs, which are compensation gains less productivity gains, increased at a revised 2.5% q/q annual rate in Q2, [versus] a preliminarily reported 1.3% rise...Measured on a year-over-year basis, which smoothes out considerable quarterly volatility, productivity grew at a 2.2% rate in Q2 after increases of 2.9% in Q1...Compensation per hour increased by a y/y 6.5% in Q2 after a 6.3% gain in Q1....
Recent results on the productivity front are indicative of a situation where the harshest cost-cutting by the corporate sector has run its course and productivity growth is thus reverting to trend from earlier unsustainable rates of increase. With compensation gains sizeable on a y/y basis, this means that unit labor costs are beginning to move up in significant fashion -- a big difference from the outright declines or very small increases posted until the latter part of last year. Therefore, the boost to corporate profits from margin expansion on the back of rapid productivity growth and lower unit labor costs has likely run its course.
The big question now is how much companies will be able to raise prices for finished products to offset the hit to profits from higher unit-labor costs. If pricing power remains limited, owing to abundant spare capacity (which we believe to still be the case in most industries), the main effect of slower productivity growth will be to weigh on corporate profits. Therefore, our expectation is that the corporate sector will grow profits much more in line with nominal gross-domestic-product growth than has been the case in the recent past.
-- Joshua Shapiro
Jobs: Another Whirlwind Ahead?
-- Charles Lieberman
Gold Not Shining
-- Dave Skarica
Supply-Side Trouble Spots
Oil has already soared nearly 550% over the past six years and it's up 65% so far this year. Normally, when any market rises this far, so fast, it eventually exhausts itself and turns down. But oil is in a different category...demand keeps growing, and could soon outpace production supplies.
So let's review the supply side first. OPEC produces most of the world's oil, which primarily comes from the Middle East, and the three largest oil countries have nearly half of the world's proven oil reserves. These are Saudi Arabia, by far the biggest, followed by Iran and Iraq. If you add Venezuela, No. 5 on the list, then four out of the top-five oil countries, or 80%, are currently or potentially trouble spots.
-- Mary Anne and Pamela Aden
A quick look at household debt-service payments as a percent of disposable personal income reveals that consumers are feeling a much harder pinch in the budget than they have during past recoveries.
While rising housing-price valuations may offset some of the uneasy feeling about these debt burdens, there is widespread uncertainty about the exuberance in the real-estate market limits.
Mortgage-debt payments as a percent of disposable personal income also have risen sharply over the last two years. The last time such a ratio of mortgage-debt payments occurred was in the second quarter of 1991. [the economy remains in a growth cycle]
-- Dawn McLaren
Eating Away at the Expansion
The U.S. economic expansion was based on affordable oil and dependent on consumer spending. It was enhanced further by borrowing against the No. 1 soaring asset -- home value...[With] interest rates raised for the tenth time to 3.5%, a four-year high and the longest tightening cycle ever...the economy has been on course for another shameful Fed-induced recession, confirmed by the flattening yield-curve, about to invert.
....Thanks to the Bush supply-side tax cuts, this economy has absorbed one blow after another. Now, the devastating...blow by Katrina has exposed our vulnerability to energy-supply disruption. The gasoline-price spike is critical, and, if continued, will dramatically slow the economy.
-- Konrad Kuhn
Critically, all of these factors are now in play. Credit is easy, debt is booming, and lending standards are near rock-bottom, investor are reaching for higher yield regardless of quality and risk, and interest rates are clearly rising in North America. Given all that, it is not untimely to at least think about underweighting financial stocks.
-- William Hahn
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