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The 'Details' Tell a Different Story

Thursday, 06 Sep 2007 03:21 PM

Earlier today, the major financial headlines mentioned some rather "positive" economic developments. For example, one headline I saw from several news sources mentioned that the European Central Bank's overnight deposit rate fell by 0.25 percentage points to 4.05 percent — its biggest decline in two years.

Another headline reported that U.S. productivity rose significantly during the second quarter, while labor costs fell. And, finally, a headline reported that retail sales at Wal-Mart topped analysts' estimates.

Although these "headline" news releases appeared to be quite favorable, the details behind the headlines paint a much different picture.

For example, it's true that the European Central Bank's overnight deposit rate fell significantly today, but the reason for the big decline in this key European interest rate is quite troubling - Europe's overnight deposit rate fell because the European Central Bank lent $57.5 billion in emergency cash to banks yesterday to combat Europe's overly tight credit markets that have developed in response to the fallout from the U.S. sub-prime mortgage debacle. So, the fact that certain European interest rates fell is certainly nothing to shout home about.

In regards to the supposedly big jump in productivity, here are the details: non-farm productivity, which measures the total output of goods and services produced per hour, rose at an annual rate of 2.6 percent during the second quarter of this year, while unit labor cost (costs per unit of output) rose 4.9 percent. The gap between productivity growth and unit labor costs has risen dramatically over the past year-and-a-half. This is a very negative development, because businesses are forced to make the following decision when unit labor costs rise at a higher rate than productivity - raise their prices or cut their workforce. And guess what, raising prices is inflationary, while laying off workers generally results in a slowdown in consumer spending and economic growth.

Lastly, you shouldn't think that the fact that same-store sales at Wal-Mart beat "analysts" expectations is a big deal, because Wall Street analysts are known for lowering their sales and earnings estimates during periods in which the companies they follow are experiencing slowdowns. Many of these analysts do so, because they realize the media will then report the "surprising" operating results of the companies they follow.

But, rather than getting excited by the fact that "Wal-Mart's Same-Store Sales Beat Analysts Estimate", you should be monitoring the overall trend in retail sales. So, here are the facts - same-store sales at the nation's leading retail chain stores rose, on average, by only 2.3 percent over the past six months, versus an average gain of 3.9 percent during the same six-month period a year ago.

In closing, you shouldn't think I'm overly focusing on negative economic developments, because I'm not. For example, until late June of this year, I was solidly in the bullish camp, because the majority of indicators I follow were still positive. But, when my investment models turned negative in mid-July, I became more bearish, because the facts suggested stock prices would begin trending lower.

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DavidFrazier
Earlier today, the major financial headlines mentioned some rather "positive" economic developments. For example, one headline I saw from several news sources mentioned that the European Central Bank's overnight deposit rate fell by 0.25 percentage points to 4.05 percent —...
Details,Tell,Diff,Story
504
2007-21-06
Thursday, 06 Sep 2007 03:21 PM
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