Cooling Economies
Market Commentary
By WSS Research Team

Cooling Economies
By Carlos Guillen

Equity investors appear to continue to be affected by Friday's poor jobs result, as this will have a significant effect on confidence and consumption in the short run. But also rather discouraging is that we can't even look to China to provide worldwide growth as data today continued to demonstrate that it too has an economy that is cooling, with inflation reaching a 29-month low.

Earlier today, data from the National Bureau of Statistics revealed that China's consumer and producer prices eased more than expected in June, providing more evidence that demand for goods from the world's second largest economy is dwindling away. China's consumer price index (annualized), a measure of price changes, cooled to a 29-month low of 2.2 percent in June versus the 3.0 percent reached in May. On a month-to-month basis prices fell by 0.6 percent, while economists expected only a 0.3 percent decline. Even more concerning was that producer prices (PPI) fell even faster, declining 0.7 percent month-to-month and 2.1 percent on the year, marking the fourth straight month of outright deflation in factory prices and pushing the PPI to a 31-month trough. So China continues to cool as demand slows from within and from abroad. Perhaps we can find a bright side to the Chinese story, and that is that Chinese economic officials will now be forced to put forth some form of stimulus without fear of generating excess inflation. So far forecasts for economic growth in China are at 7.6 percent for the second quarter. While this would certainly be enviable by any standard, on a relative basis it represents the slowest quarter of expansion since the three months to March 2009, at the depths of the global financial crisis.

So with the Jobs situation here at home showing no type of improvement after such a sharp drop during the most recently experienced recession, it is difficult to see the consumer ramping up demand in the near term. With the U.S. government continuing to reduce expenditures and with private enterprise remaining on the sidelines in terms of capital expenditures, the only leg left to fuel growth is consumer spending; however, with consumers losing confidence in the prospects for jobs and increasing income, the odds are increasing that economic growth this year will be well below many current estimates at the moment.

Amerigroup Takeover a Big Nod to Obama by WellPoint
By David Urani

One of the big stories today is the takeover announcement by WellPoint (WLP) to buy Amerigroup (AGP) for $4.5 billion (more than a 40% premium). This of course is shortly after the upholding of Obamacare, and it's easy to see that this is a show of confidence by WellPoint that increased business is coming in the area of government programs, particularly Medicaid.

Naturally, big takeovers boost industry peers and in this case the response is enormously positive. Take a look at the gains on WellCare (WCG), Centene (CNC) and Molina (MOH), each of which is up in the teens-percentages at the time of this article. Each of these companies does Medicaid-related business. Not only are they now being seen as viable takeover candidates, but as I said before WellPoint is signaling that the Obamacare ruling gives this market the green light.

Corn Traders All Ears on Record Heat

While you swelter in the record summer heat, remember that the crops are too. Just when you thought it couldn't get much worse the heat continues to beat down on the nation's farmland. They're saying now that the Midwest drought is the worst since 1988. Corn is "limit up" once again in futures trading rising more than 5% as it continues to spike to its highest levels since September, and you'd suspect it will rise further as trade keeps being limited to the upside.

Naturally, anybody who uses corn as an input cost risks margin pressure. That means caution for the likes of Tyson (TSN), Sanderson Farms (SAFM) and Smithfield (SFD); one of my favorite short candidates when corn rises is Pilgrim's Pride (PPC) which is off almost 7% today.

Ethanol makers are feeling the heat too, and it's now starting to become more costly to make ethanol than the selling price at some plants. Valero (VLO) for instance is halting 2 of its 10 ethanol plants. If it really becomes an emergency, the EPA could even decide to temporarily ease the national ethanol requirements to cool corn prices. All of this could mean rough business for VLO and other ethanol businesses like Pacific Ethanol (PEIX), BioFuel Energy (BIOF) and REX American (REX).

A USDA report on Wednesday ought to tell us just how bad the damage is.

Corn - 6 month

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