Headlines Don't Tell the Real Story

Related Quotes

Symbol	Price	Change
ACLS	1.27	+0.01
AMAT	13.84	+0.22
CSX	49.17	+0.70
GS	165.45	+2.26
JNJ	64.33	-0.04

{"s" : "acls,amat,csx,gs,jnj,mtsn,nvls","k" : "c10,l10,p20,t10","o" : "","j" : ""}

Several economic reports were released Tuesday and the actuality is far different from the headlines. The Producer Price index registered an alarming increase of 1.8%. But if you factor out food and energy, the increase is only 0.5%. Read further and that increase is entirely because of a jump in the price of cars and other light vehicles. I don't know what's going on with that, but car sales are horrible and I figure this is some statistical oddity that will be revised or adjusted at a later date. Take all that out and producer prices were flat.

Retail sales seemed to log in with a healthy increase of 0.6%, but that increase wasn't as good as it looked. There was a rebound, as I noted, in both the price of cars and the sales volume. But the sales may be due to a different mix of car types normally sold because of plant shutdowns. Retail sales of gas rose strongly because of higher gas prices for June. Take out car sales -- which I don't think can be either real or consistent-- and gas sales and you find retail sales actually fell 0.2%. Gas prices have fallen since the date of the report and are now down four weeks in a row. The average price last week for a gallon of gas was $2.53. That compares with $4.11 at the peak last year.

On the price of energy, apparently Morgan Stanley thinks crude oil will average $55 for the third quarter of 2009, $60 for the fourth quarter, and will rise to $85 in 2010. But take your pick of forecasts. BNP says oil will be at the $45 level through August. I think oil is still vulnerable and will trend towards $50. A price of $85 for next year would require a fairly healthy economic recovery and to my mind is a bit optimistic.

Faced with massive deficits, Congress and the Obama administration have to figure out how to pay for any health care legislation. The wizards in the House have come up with a 5.4% surtax on the highest wage earners. Take a look at an editorial, "The Small Business Surtax," in the Wall Street Journal on Tuesday. While the congressional tax guys want to portray a surtax as a levy on the fat cat financiers, the Journal editorial points out that six of every 10 taxpayers that would be affected by the surtax proposal are small-business owners. This is where the rubber of job creation meets the road of unemployment, and these class warfare Washington guys have no clue.

They also tout the Bush tax cuts that expire next year as an addition to the dollars they can count on. But that expiration already has been counted in long-range budgets -- so no counting twice, guys. If the surtax were to be enacted and if the folks that labor with my pal Jason Trennert at Strategas add it up correctly California residents would have a top marginal tax rate of around 55%, New York state folks would get a 54% rate, which includes some propose Medicare increases, and we lucky New York City denizens get a 57% rate. The lowest would be Wyoming, and residents there would still be over 45%.

Christine Romer, now at the White House, wrote when she was still apolitical that "tax increases appear to have a very large, sustained, and highly significant negative impact on output." Amen! Would the White House only listen to its advisors or would the advisors stand up and be counted!

We are still in the very early stages of earnings season, and so far so good. Goldman Sachs blew estimates away (the bored reaction of the stock tells us better numbers were already priced in the stock), and Johnson & Johnson, CSX, and Novellus all posted good reports.

We are off to a good start, but better numbers than the consensus are needed to help the market. I still feel the market is in a corrective process that will take us a bit lower.

Know What You Own: Farrell mentioned chip company Novellus. Related companies are Applied Materials, Axcelis and Mattson.