The Overnight Report: Shoppers Yet To Drop

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By Greg Peel

The US December retail sales figure had been a bad one, suggesting Americans had backed off from their usual spending spree at Christmas. As consumers account for 70% of the US economy, this was one piece of data that prompted an acceleration in recession talk. January is a time for post-Christmas sales, and usually another big month for retailers. But when individual retailers began reporting same-store sales for January last week, the mood was sombre. On average sales were flat, but the rhetoric suggested worse results to come in the months ahead.

So it was that economists were expecting another fall in the January sales number, by 0.3%. So when the result came out at +0.3% it was very much a surprise. Wall Street jumped from the gate, stumbled slightly, and then started steadily building towards the close. The rally came mostly from the retail sector, which included a good performance from tech. Healthcare also received some interest, but troubled financials remained pretty flat.

The Dow closed up 178 points, or 1.5%. The S&P added 1.4% and the favoured Nasdaq jumped 2.3%.

While traders were heartened by the third up-day in a row – the first time this has happened in 2008 – there was still general disappointment about trading volumes. As one trader put it, “Volumes are only about a billion [on the NYSE]. They should be more like 1.5 billion on such a move”. Thus indications are the rallies are still not attracting the investor masses, only short-coverers and the bold.

The retail sales figure only adds to the general recession-or-slowdown confusion. Until such matters are demonstrably clearer it is reasonable to believe a lot of punters will remain on the sidelines, watching the game unfold from a position of safety. In this case, safety would be elevated levels of cash in the portfolio. The retail sales figure was somewhat undermined by the release of December business inventories, which rose more than expected. Retailers may yet be stuck with a lot of stock on the shelves.

Dow component Coca-Cola reported a 79% increase in profit in the fourth quarter and added positive guidance for 2008, but the shares still suffered a 0.5% fall. A lot of funds have shifted into consumer staples, and in the US they don’t come much more staple than sugar-based carbonated and flavoured water.

Late in the session a Wall Street Journal report put News Corp ((NWS)) into the frame as a potential buyer of Yahoo! to supplement its successful MySpace business. Microsoft currently has a hostile US$31 offer on the table. But Yahoo! shares only rose mildly on the news.

Another fillip to last night’s rally was a comment from US Treasury secretary Hank Paulson, made as President Bush signed the US$170bn stimulus package into law, that more stimulus would be provided by the government down the track if necessary.

Energy stocks posted good gains again last night, as the pan-continental oil war continues. The story so far is: Venezuela’s nationalist leader Hugo Chavez had seized Exxon interests in the country’s oil wells, and in retaliation Exxon had frozen Venezuelan assets in the US. Chavez then threatened to halt all exports to the US, which is telling as the US needs Venezuelan oil to supplement its own supplies. Last night, however, Chavez backed off his position to only ceasing supply to Exxon in particular, which is more symbolic than effective.

Chavez does have one small problem – one that comes up every time Iran threatens to cut off supply to the US. Venezuela has plenty of oil but few refineries, so the country is an importer of petrol and other distillates. If the US retaliates by halting exports back the other way, Venezuela is in trouble.

The oil price fell initially last night, on the Chavez news and news that domestic inventories had risen. It turned around to post a US49c gain to US$93.27/bbl later in the session however.

The US dollar was slightly higher last night, sending gold slightly lower. It fell US60c to US$903.90/oz. The Aussie slipped back over 24 hours to a more familiar US$0.8964, having flirted with US90c following more hawkish rhetoric from the RBA on Monday.

Last night saw the return of Chinese New Year revellers into the base metal market, and traders had set themselves for fresh Chinese buying. But the action was lukewarm, triggering a disappointed sell-off. Later in the session the bargain hunters moved back in however, so metal prices ended mixed, with zinc the only real failure down over 2%.

The SPI Overnight added 57 points.

Today is jobs day in Australia, with economists expecting continuation of the tight labour market and thus RBA vindication.

Happy Valentine’s Day to all florists and restrateurs (and to readers too, of course).

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