Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly With Liz Peek (Week of 5/04)

EDITOR’S NOTE: Liz Peek is a financial columnist.

Americans celebrated spring this year by … shopping, of course – what else?

April retail sales were better than expected for a number of stores, well ahead of the much-awaited rebate checks. What does it mean? It’s hard to say. Easter came very early this year, which may have distorted comparisons, and in the Northeast, at least, good weather came late, dampening the urge to spruce up the spring wardrobe. Not surprisingly, given the tenor of the times, companies like WalMart and Costco continued to outperform higher-priced stores like J.C. Penney. Wholesale clubs racked up a 9% gain in same-store sales, while retailers overall enjoyed a moderate 3.6%. There is no doubt that people are trading down.

It worries me that some of the bounce in club sales could represent people trying to buy and horde food. We have seen in the past that just hinting about a shortage tends to create one. News accounts about soaring grain prices may have led homemakers to pile up cereals and other products before prices rise. I haven’t seen this mentioned anywhere, but it is a possibility.

A more positive take on the retail numbers might be that people aren’t feeling quite so dismal. According to the barbershop quartet of Street CEOs I mentioned last week, the worst of the credit crunch is behind us. The atmosphere on the Street is definitely calmer, and the stock market has bounced 9% off its March lows.

Also, the retail numbers aren’t the only economic reports that have been better than expected. Unemployment claims have remained consistent with a slowly growing economy, and another relative bright spot was the 2.2% productivity gain reported for April. Productivity growth is usually tough to come by this far into an economic expansion, but remains essential to corporate profitability.

Here’s my last word on the consumer: I heard one of the country’s most successful hedge fund managers speak off the record yesterday. He echoed the concern that spending will remain constrained by the amount of debt on consumers’ balance sheets. As he said, over the past decade Americans borrowed against the equity in their homes; this huge monetization of home equity is viewed as a one-time event. Seeming to rebut that notion were the April gains in both home equity borrowings and consumer installment credit. Together, according to Wall Street’s favorite ISI economists, debt in these two categories amounts to $3.1 trillion, up almost $200 billion year over year. As ISI points out, the jump could represent a slowdown in payments. This would not be good news.

Also occupying the pundits on Wall Street this week was the death of Microsoft’s takeover of Yahoo. I found this nearly comical – probably because I’m not a Yahoo shareholder. So here’s Microsoft making a bold preemptive $31 bid for Yahoo at a (huge) 62% premium, and telling the world how crucial the combination is to its future growth. Jerry Yang, CEO and co-founder of Yahoo, balks at the price, demands $37 — and Microsoft ups their bid, orally, to $33. Yahoo still balks, so Microsoft walks away. Have these guys never bought a house, for heavens’ sake? Don’t they understand give and take?

Afterwards, both parties tried to blame the other for the collapse of negotiations. I blame too much testosterone. I mean really – if the deal was so great at $33, wasn’t it almost as great at $34? Some folks think it was a ridiculous bid in the first place and that Microsoft came to its senses. I doubt it. The next target of the company’s affections may turn out to be Facebook, for which they would have to pay a completely-crazy-dotcom-era price. At the end, the collapse of the deal disappointed investors, who are hoping a renewed stream of takeovers will boost stock prices.

The other gorilla in the room continues to be the endless rise in oil prices, which are around $125 per barrel this morning. I keep thinking (wrongly) that we’ll get a break here soon, but supply concerns for the moment are uppermost. The bad news this week was that in spite of weakening economies, the Bank of England and the European Central Bank held interest rates firm. They are concerned about inflation, but might consider that a cut in Eurozone rates would work wonders for the dollar, and might put a lid on oil prices.

Americans are responding to the rise in gas prices by changing driving habits and buying more fuel-efficient cars. The real question is where they will go for their summer vacations. Europe is outrageously expensive, airline ticket prices have followed jet fuel higher and they can’t afford to drive. What’s the last stop on the subway? Or, for the non-city dwellers, do you still have that old bicycle in the garage?