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Coming Week: Enduring Issues

Aaron Task

In the "it's not the news that matters, it's how the market reacts that matters" department, Friday's session was telling.

Had news that the Iranian navy took 15 British seamen into custody in the Persian Gulf occurred in the midst of the market's swoon two or three weeks ago, it's likely the accompanying heightened geopolitical tensions and higher oil prices would have sent stocks reeling further.

Instead, the major averages advanced modestly Friday and, in fact, the S&P 500 got a big boost from energy stocks such as Exxon Mobil (XOM Quote) and ConocoPhillips (COP Quote).

That said, geopolitical tensions and rising oil prices are a concern for traders heading into the coming week.

"We're going to have to keep an eye on oil, obviously," veteran New York Stock Exchange floor trader Doreen Mogavero, president & CEO of Mogavero Lee & Co., said Friday in an interview for TheStreet.com TV. "The Fed debate is about whether inflation will be their target or economic growth will be the target -- oil could be a factor in keeping inflation above their comfort zone and it might not be so obvious they're going to ease vs. tighten."

After the close Friday, Iranian President Mahmoud Ahmadinejad canceled a planned address before the U.N. Security Council, which on Saturday voted to impose further sanctions against Iran for refusing to halt its uranium enrichment program.

Aside from any further drama in the Middle East and/or oil prices, the markets will likely maintain their fixation on housing.

"The housing market remains the central front in the debate over economic weakness," write Bank of America economists Peter Kretzmer and Mickey Levy. "Indeed, another significant leg down in home sales, following a tentative stabilization, would likely be sufficient to set the stage for Fed easing, as it would imply further steep declines in residential construction, extending the duration of the economy's current below-trend growth."

Monday brings new-home sales data for February, while homebuilder Lennar (LEN Quote) reports earnings on Tuesday.

New-home sales data are expected to show 6% growth, although Friday's upside surprise in existing-home sales for the month may have upped the ante for what will constitute a "strong" report. Conversely, there's little hope for anything positive out of Lennar, given forecasts for a 70% decline in year-over-year earnings and recent commentary from other homebuilders.

Tuesday also brings March consumer confidence data, from which a "moderate decline" is expected given "the downturn in the stock market [in late February-early March] and increases in initial unemployment claims and gasoline prices," according to Kretzmer and Levy. The consensus is for a drop to 109 from February's 112.5; an upside or downside surprise could move the markets, given the importance of consumer confidence (and hence spending) to the overall economy.

On the business spending front, Wednesday's durable goods report for February is projected to show a 3% rise. The growth is largely due to a rebound in aircraft orders, which plunged in January and lead to a 7.8% drop in overall orders for that month.

While forecasting an aircraft-led rebound, "the recent slowdown in industrial activity has resulted in an increase in business caution," write the BofA economists. "With below-trend growth prospects over the first half of 2007, demand for capital goods likely was restrained."

Ahead of the durable goods report, Tobias Levkovich, chief U.S. equity strategist at Citigroup, argued the decline in business investment "reflects a number of secular trends," including outsourcing by manufacturers. However, a rise in share buybacks and dividends "argues fairly convincingly that companies have not turned their collective backs on their investment needs," he writes.

Furthermore, "capital investment usually grows at a double-digit rate year-over-year once capacity utilization moves above 80%," Levkovich notes. After plunging in the aftermath of the bursting of the tech bubble, capacity utilization did not climb back above 80% until late 2005, but has remained there since.

On a related note of optimism, the strategist was "struck by the pervasiveness of capacity addition/upgrade comments" by management teams at Citigroup's recent Industrial Manufacturing Conference. An accompanying study of 240 companies showed a planned capital expenditure spending increase of more than 11%, led by telecom, semiconductor equipment, transportation, and cable/broadcasting, while homebuilders and electronic contract manufacturers had some of the weakest capital spending plans.

"Hence, while we can understand investor frustration at times about business trends, the concern over allegedly weak capex patterns seems contradicted by the facts of a dynamic spending environment schedule, in line with most companies' three-to-five year guidance," Levkovich writes.

In other words, business capital spending may actually (finally) step up to grab the proverbial baton from consumers who are (presumably) feeling the strain of the housing slowdown, adjustable-rate mortgage resets, and rising prices at the pump.

That may sound like bullish fantasy, but it's much more pleasant to contemplate than Iran's belligerence.

Notes & Notables

Other scheduled events next week include the following: