Companies may cry 'uncle' on oil
Monday, 26 May 2008

Reuters, New York- Oil prices will likely take on more importance for the stock market next week as the summer driving season officially kicks off and as more companies are seen feeling the pinch of higher energy prices on their profit margins.

For the week, the Dow fell 3.9 percent, the S&P 500 shed 3.5 percent and the Nasdaq dropped 3.3 percent. For all three indexes, it was their worst weekly percentage drop in three months.

Pressure from higher energy costs is already being felt, with Kimberly-Clark announcing it intends to hike prices on its consumer goods products by 6 to 8 percent in the third quarter. The maker of Kleenex tissues and Huggies diapers said higher energy and raw materials costs were to blame for the price hikes.

Earlier in the week, Ford Motor Co said it no longer expected to return to profitability in 2009, with analysts saying the automaker's recent gains have been overrun by a weak U.S. economy and spiraling oil prices.

With the earnings agenda nearly empty, investors will pay close attention for any other intermittent announcements about energy prices and their impact on profitability.

The industries most likely to downgrade their earnings outlooks are those "which have less elasticity of demand, such as the consumer discretionary sector, restaurants in particular," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama. "All they can do it make portions smaller or raise their prices, neither which are popular."

The Dow Jones U.S. Restaurants & Bars index .DJUSRU fell 4.5 percent this week, its worst five-day percentage decline since the first trading week of the year.

More price hikes are likely to come from staples producers, which could help the individual shares, but may stoke overall inflation fears, said Brandon Thomas, chief investment officer with Portfolio Management Consultants in Chicago, a unit of Envestnet Asset Management.

"Consumers are cutting back on discretionary spending, like appliances, but they need toothpaste, milk and everything else," Thomas said. "I think consumer staples companies realize they have the pricing power."

The market will get a reading of price increases on Friday when the Commerce Department reports the personal income and spending data for April.

Included in the data set is the core PCE price index, which is the Federal Reserve's preferred measure of inflation. That gauge is forecast to have risen 0.1 percent, slower than the 0.2 percent rate of the previous month.

"At this point the big question is how much are the energy prices being passed along through in consumer products and hitting the store shelves. That's the key here," said Fred Dickson, market strategist at D.A. Davidson & Co. Lake Oswego, Oregon.

"The real questions is are consumers going to take and ratchet back spending, and do it significantly. So there's earnings risk, to put it simply," he added.

Elsewhere on the economic calendar are Thursday's reports on weekly jobless claims and the second reading of first-quarter gross domestic product. The first GDP reading showed the economy grew at a slightly stronger pace than forecast.

"The GDP will probably be the key number," Thomas said. "When the GDP was first reported it came as some surprise that it was positive. It will be interesting to see whether the revision shows it remaining positive."

Of the small number of S&P 500 companies reporting earnings next week, most are retailers and may shed more light on the health of the U.S. consumer across the income spectrum.

Apparel maker Polo Ralph Lauren Corp reports earnings on Tuesday, followed on Wednesday by close-out retailer Big Lots Inc, warehouse club Costco Wholesale Corp and department store chain Sears Holdings Corp and upscale jeweler Tiffany & Co on Friday.

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