US Consumers' Credit Scores Rising

U.S. consumers have tightened their belts to the point where they could take on a lot more debt if they wanted it- but they don't.  The average credit score rose to 704 in July, a level not seen since the first quarter of 1998, according to data that Equifax, one of the largest U.S. credit bureaus, provided exclusively to Reuters.  That means lenders consider consumers to be improved credit risks and would be happy to have more of them as customers. Yet many consumers still seem to find debt too risky, said Dann Adams, an Equifax executive.  "Traditionally, what you see is after a recession is that consumers are the engine on the locomotive for economic growth," Adams said. "Now it looks like they're the caboose." 

The data is based on Equifax' 200 million-plus files of U.S. consumers using credit. The credit risk score forecasts the likelihood a consumer will fall 90 days or more behind on debt within two years, with 850 the highest score. The higher the score, the less likely a borrower will fall behind on debt.  A decline in debt mirrored the rise in credit scores. July saw total consumer debt outstanding fall to $10.8 trillion from a peak of $11.5 trillion in October of 2008. Consumer debt includes mortgages and credit cards.  The savings rate rose to 6.4% in June from 6.3% in May to reach the highest level since June of last year. 

"The big question is whether that money moves back into the economy," Adams said.  This protracted reluctance on the part of consumers to take out debt and spend it is unmatched in recent memory. Even after the September 11, 2001 attacks on New York City's World Trade Center, spending rebounded within four months, he said.  The United States will not see a similar upward trend until unemployment abates and home values stabilize, Adams said, adding he doubts the unemployment numbers will drop in the near-term.  In the meantime, U.S. consumers are husbanding their resources instead of spending on items big or small.

Fed Official- Low Rates a 'Dangerous Gamble'

Keeping interest rates at record lows is a "dangerous gamble" that could hurt the economy later on by unleashing inflation or new speculative bubbles, a Federal Reserve official said Friday.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, made the comments just days after dissenting with the Fed's decision to take an unconventional step to strengthen the fragile recovery by buying government debt.  Hoenig did say the economy still needs the support of ultra-low rates now. Interest rates have been at record lows near zero for nearly two years.  But he worries that keeping rates too low for too long could create problems later on. For instance, low rates could spur bubbles in the prices of commodities, bonds or other asset prices. Or, they could encourage people and businesses to take on too much debt again and overly leverage themselves, he suggested.  "If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring," Hoenig said in a speech in Lincoln, Neb.

Critics like Hoenig blame the Fed for keeping rates low for too long a period after the 2001 recession. Those low rates fed a housing bubble that eventually burst, and plunged the economy into a severe recession in late 2007, they say.  "I believe that zero rates during a period of modest growth are a dangerous gamble," Hoenig said.

James Bullard, president of the Federal Reserve Bank of St. Louis, is concerned that the weak recovery could push the United States into a deflationary period, like the "lost decade" Japan suffered through in the 1990s. Low rates help combat deflation, a widespread and prolonged drop in prices of goods and services, values of stocks and homes, and in wages.  Hoenig, however, said he sees "no evidence that deflation is the most serious threat to the recovery today."

Nonetheless, the economy's growth slowed sharply in the spring, and unemployment -- now at 9.5% -- has stayed high all year.  Low interest rates cannot solve every problem faced by the United States, he argued.  "In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long," Hoenig, said. "I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut."

CPI Rises, But Consumer Still Weak

U.S. retail sales and consumer prices rose in July in a hopeful sign for the economy.  Retail sales rose, but the gains were concentrated in auto and gasoline station sales, suggesting underlying momentum in consumer spending remains tame.  Sales climbed 0.4% last month following a revised 0.3% drop in June, the Commerce Department said on Friday.  Economists polled by Reuters had been looking for a slightly firmer 0.5% gain.

Excluding vehicles, sales advanced just 0.2% compared with a median forecast of 0.3%. Gasoline station receipts, which sometimes reflect price rises rather than increased demand, jumped 2.3%. When autos and gasoline were stripped out, sales actually fell 0.1%.

After emerging from its longest slump since the Great Depression, the U.S. economy has slowed in recent months, raising fears of a "double-dip'' recession. Retail sales are a key component of growth for a country where consumer spending makes up about two-thirds of total economic activity.

US Consumer Prices Rise 0.3% in July

Higher energy costs helped lift U.S. consumer prices in July, the first rise in four months, according to a government report on Friday that could ease concerns about deflation.  The Labor Department said its seasonally adjusted Consumer Price Index rose 0.3% last month, after falling 0.1% in June.  Analysts polled by Reuters had forecast consumer prices to rise 0.2%.

In the 12 months to July, the consumer price index rose 1.2%, in line with market expectations, after rising 1.1% in June, the report showed.

Take a Look at the Fertilizer Names

Today, the US Department of Agriculture release a report that said there is a shortage of crops in the United States.  This could potential be a huge opportunity for the fertilizer names, which was a sector that turned positive this afternoon.  This is a bullish sign for the sector, and based on this report, I expect there to be much more upside for the fertilizer companies.  The three companies I like are:
          Monsanto (MON)
          Potash (POT)
          Mosaic (MOS)

A more 'close to home' name that I like is Scott's Miracle-Grow (SMG).  SMG announced earnings this week, reporting a quarterly net income of $175.9 million, or $2.65/share, from $147.8 million, or $2.27/share in the year-ago period.  Analysts expected a profit of $2.44/share.  The company also announced plans to buy back $500 million shares over the next four years and doubled its quarterly dividend to $0.25/share. "Our business and cash-flow are strong, our balance sheet is healthy and our low debt-to-EBITDA level gives us tremendous flexibility in managing our business," said Cheif Executive Jim Hagedorn in a note. Looking ahead, SMG reiterated its full-year earnings forecast of $3.25 to $3.35 cents a share.

Company	Symbol	Stock Price	52 wk Range
Monsanto	MON	57.17	44.61-87.06
Potash	POT	111.9	83.75-128.42
Mosaic	MOS	51.29	37.68-68.28
Scott's Miracle-Grow	SMG	47.94	37.50-49.58

Stocks Slip on Bad Earnings

Technology companies led the stock market to its third straight loss Thursday after Cisco Systems' (CSCO) earnings report raised more questions about the economy.  The Dow Jones is down 80 points in afternoon trading.  The NASDAQ composite index had a steeper loss in percentage terms, a reflection of the drop in tech stocks.  Analysts said many traders were on vacation, and the market's resulting light volume helped skew price changes. 

Cisco Systems Inc.'s revenue from its latest quarter and its forecast for future revenue both fell short of analysts' expectations.  The company's stock fell almost 10% and other tech stocks also fell.  Investors have been focused on revenue since companies began reporting second-quarter earnings almost a month ago.  They're concerned by the connection between revenue and the economy -- if revenue is down, it's a sign that consumers' reluctance to spend is starting to affect companies' sales and profits. Investors see the revenue shortfalls as another sign of a weakening recovery.

Sara Lee Corp.'s (SLE) revenue also missed analysts' forecasts. And retailer Kohl's (KSS) disappointed the market by lowering its earnings outlook because it expects sales to slow during the second half.  That period includes the holiday season, when retailers hope to make a large part of their profits.

Stocks extended their losses from Wednesday, when the Dow fell 265 points as investors reacted to the Federal Reserve's lowering of its assessment of the recovery on Tuesday. Economic data from several countries including the U.S. contributed to the heavy selling.  Investors don't have a sense of whether the recovery will hold. The uncertainty has led to big losses, but many traders are staying out of the market and not making any moves. That has made trading volume even lighter than usual during July and August, when vacations leave trading desks thinly staffed.

Charlie Smith, chief investment officer with Fort Pitt Capital Group in Pittsburgh, predicted few major market moves for the rest of the month because so many key market players are away.  Smith said the market's drop over the past few months was due more to investors' more negative outlook rather than a fundamental change in the economy.  "We had a weak recovery back in March and April," Smith said. At that point, the market was moving toward its post-financial crisis high. Stocks began falling after the major indexes peaked in late April.

More Bad Unemployment Data

The number of people filing new claims for unemployment insurance unexpectedly rose in the latest week to its highest level in close to six months, a fresh signal of a weak jobs market.  The number of new claims for jobless benefits rose 2,000 to 484,000 in the week ended Aug. 7, the second straight increase, Labor Department data showed on Thursday.

The four-week moving average, which economists prefer because it smoothes out weekly fluctuations, rose 14,250 to 473,500, also the highest level since the week ended February 20th.  Economists polled by Reuters had expected claims in the latest week to fall to 465,000 from the previously reported 479,000.

The number of people still collecting unemployment benefits after an initial week of aid in the week ended July 31st  fell 118,000 to 4.45 million, the lowest level since late June.  Economists had expected 4.53 million. The four-week moving average of continuing claims fell 64,500 to 4.52 million, the lowest level since December 2008.

Did the Fed Mess Up?

Stocks stumbled Wednesday in an apparent rebuke of the Fed's announced plans to start using proceeds from mortgage- and agency-backed principal payments to buy U.S. Treasuries.  In recent trading, the Dow was down 269 points and the S&P was off 2.8% amid notable weakness in big-cap financials like Citigroup and JPMorgan, tech stocks like Intel and industrial names like Ford and GE.

Dan Greenhaus, chief economic strategist at Miller Tabak, and Michael Pento, senior economist at EuroPacific Capital, don't agree on much, but they do agree the Fed's announcement yesterday was a mistake.
"The Fed acknowledged that GDP growth was slowing," Pento says. "However, their symbolic move isn't really going to do much to boost economic growth."  Greenhaus agrees the Fed needs to do more if they really want to boost the economy but notes negative economic data is also weighing on the market today, including:

• A day after its trade surplus rose to an 18-month high, China reported industrial production slowed in July, as did urban fixed-asset investment.
• Japan machine tool orders rose a weaker-than-expected 1.6% last month.
• The U.S. trade deficit rose 19% in June to $49.9 billion, its highest level since October 2008.

The 3% rise in U.S. imports last month is arguably a bullish sign of a recovering consumer, as were the stronger-than-expected results from Macy's. But a higher trade deficit subtracts from GDP because "we don't measure gross domestic consumption, we measure gross domestic product," Pento says. "The fact that consumers are borrowing more to consume more is not something we should cheer about."  Pento also argues the market is weak today because the Fed "put an anchor" around the dollar by announcing its plans for a second round of quantitative easing.

Greenhaus disagrees with Pento on the impact of a weaker dollar - in the short term - setting up a broader debate about the value and utility of government stimulus, which you'll see in an upcoming segment.