The Greek's Week Ahead - The Permabull May Charge

The Greek's Week Ahead has been engineered to prepare you for events that could impact your portfolio this week.

The tone of trading this week is widely anticipated to be driven by Friday's employment situation report, which blew experts away by showing nonfarm payrolls rose by 180,000, well ahead of the consensus view for 135,000 reported by Bloomberg. We agree that the market should benefit, for the short term, but interestingly enough, CNBC showed data on Friday that Mondays following a positive Good Friday employment report are typically down days for equities. We believe this is likely due to increased concern for a Fed rate hike that would be intended to cool economic growth, but this time around, with the economy still expected to weaken, this concern may not take hold immediately.

We expect the market to buy deeper into Bernanke's view that the economy will slow this year, while avoiding recession, and that inflation might ease. Let's be clear here though, we are not necessarily agreeing with Ben, just attempting to interpret the market's sentiment, which is far more important than reality for short term traders.

The intuitive group of you may be questioning how employment is holding up so well, with unemployment reported down to 4.4% in March. How can this be possible, with so many important domestic economic indicators showing weakness? Here's how. Economists at UBS measured foreign sales of companies in the S&P 500 made up 29% of their total sales in 2005. Globalization is your friend my dear readers. Healthy and growing foreign markets are generating growing revenue streams for American companies, and helping to dilute the impact of variations in domestic demand for products and services.

And like pouring your last bottle of water out while traversing through a vast desert, the democratic majority within Congress that is seeking to make an impact, perhaps before carefully considering the complete set of dynamics in play, has picked now as the time to start a trade war with China. Protectionist behavior will only isolate America and push foreign partners toward a viable alternative in Europe. We say, let the French start the trade war, as they inevitably will, and let's reap the benefits. Or at least wait until we are in economic recovery.

We have some serious concerns regarding China again. The mainland equities markets have surpassed previous highs, despite continuing intent by governing bodies to contain expansion. Emerging markets remain in position for disappointment at the slightest catalyst. Still, a permabull mentality exists in the marketplace, and there is good reason for it. When a trend like the consistent upward rise of equities since the early 1900s exists, who can blame men for expecting it to continue. Anyone who publicly doubts such a trend can continue is labeled mentally suspect and publicly ostracised, like say Al Gore. That's why people like these, with the courage to stand behind an argument that eventually proves true should be regarded as genius and ballsy for that matter. Well, they are ballsy whether they're right or wrong, and genius if they are correct.

While equities should rise in the short-term, because the permabull majority is hungry for a reason to buy stocks, we expect a second dip before equities truly start to recover. The dip would be driven by further economic weakness we see in the near term. We qualify this longer term growth outlook, however, as only possible if war does not occur with Iran. The problem is, I am one of the ballsy few who expect war to occur with Iran, spread to Syria, Lebanon and Iraq, impact Saudi Arabia and Kuwait, and send oil prices skyrocketing. That's a big problem, but one I do not expect to develop in the second quarter. If I had to place probability on the timing of it, I guess it would be divided like this: Q2 10%; Q3 20%; Q4 20%; Q1 '08 30%; Q2 '08 20%. We have a lot of expensive military assets in place, troop levels rising, strategic oil reserve storage building and everything falls into place in the first quarter of next year. Questions remain as to how patient Israel is, how unpredictable Iran is and how clever Russia and China are. While the American military is sure to quickly severely impact Iran's ability to counter, it's likely Iran has plans of its own to react quickly and with impact. Also, the pride and determination of the Iranian people will lead to ongoing problems, as we will not occupy Iran or contain Iranians, while Iran will continue to seek revenge. If escalation of conflict and global military build continue, we think permabulls are in for an eventual shock that could threaten to turn many rich investors to paupers, at least those not holding physical gold. But, for now, gold and oil should weaken in the near term, while stocks should enjoy further strength this week.


This Week...

Earnings season kicks off this week with the traditional report from Alcoa Incorporated (AA) on Tuesday. Still, the week's earnings schedule and economic calendar are relatively light. On Monday, in international news, the Bank of Japan will begin a two-day monetary policy meeting. The meeting is not expected to result in any significant policy decision or action. Delta is holding its shareholders meeting Monday, while Delta & Pine Land Co. (DLP) is scheduled to report its fiscal second quarter earnings.

The first quarter earnings season officially kicks off on Tuesday with the report from Alcoa Inc. (AA). The consensus is looking for EPS of $0.75, versus $0.70 from a year ago. Also reporting earnings on Tuesday, expect fiscal third quarter news from Electro Scientific Industries (ESIO). The Bank of New York (BK) and Morgan Stanley (MS) are holding shareholder meetings Tuesday as well. Meanwhile, Suntrust Robinson Humphrey's 36th annual institutional investment conference kicks off in Atlanta. The week's Fed tour begins with Frederic Mishkin's monetary policy address at Bridgewater College in Virginia.

Wednesday brings the Fed into focus, with the release of the March 21 FOMC meeting minutes. This text will be minutely explored, as the Fed's initial statement sent equities soaring, before Ben Bernanke's followup a week later brought them back to earth, as he reinforced the need for an inflationary bias. Ben will be on hand to answer questions that may arise, as he addresses market discipline and regulation before a public forum. Chicago Fed Chief Michael Moskow will speak to the economic outlook later that evening.

The Treasury is scheduled to release the federal budget balance for March on Wednesday. The consensus of experts surveyed by Bloomberg expects the deficit to measure $89 billion, compared to $85 billion a year ago. The weekly petroleum status report from the Energy Information Administration will be closely followed by commodity and equities traders alike, after last week's report showed a draw of gasoline that placed inventories in the lower half of historic levels for this time of year. This kept oil prices relatively high, despite the end of the Iranian/U.K. sailor situation.

CIBC World Markets' annual biotechnology and specialty pharmaceuticals conference kicks off in New York on Wednesday. Reporting earnings, look for reports from Bed Bath & Beyond (BBBY), Ruby Tuesday (RI), Christopher & Banks (CBK), Apogee Enterprises (APOG), and Angelica Corporation (AGL).

Thursday brings key data from the retail industry, as the sector reports their March sales. While sentiment has shown weakness of late due to the subprime mess and poor economic readings, March sales may still prove solid as retailers benefit from weather and seasonal bonus spending.

The day also brings the first opportunity for contradictory data about employment, as weekly jobless claims are reported. Bloomberg's consensus sees jobless claims rising to 320,000, still not enough to debate for weakness. March import prices are scheduled for release at 8:30 a.m. EDT, with the consensus estimate seeing a 0.7% increase, compared to a 0.2% rise last month. The figure excluding fuel prices will get greater scrutiny, as monthly changes to the headline figure are sensitive to changes in oil and fuels.

Standard & Poor's Emerging Markets Seminar is scheduled for Thursday, while the earnings report calendar includes LAM Research (LRCX), MGIC Investment (MTG), Polaris Industries (PII), Pier 1 Imports (PIR), and Cost Plus Inc.(CPWM).

Two 8:30 a.m. economic reports will likely guide the day's trading on Friday. The producer price index for March is expected to show a rise of 0.7% on the headline figure and an increase of 0.2% on the reading less food and energy prices. As we've discussed in the past, we continue to argue that quarterly growth including food and energy should be considered in critical Fed decision-making, as we see secular drivers taking food and energy prices higher, despite seasonal influences. February international trade is expected to show a widening deficit, to $60.3 billion, from $59.1 billion in January, according to Bloomberg. Finally, the revision to the University of Michigan's consumer sentiment index for April is expected to measure 87.5, down from the preliminary reading of 88.4.

In Washington, the G7 Finance Ministers are scheduled to discuss the reformation of the International Monetary Fund, as well as other issues. The only key earnings report scheduled is General Electric's (GE) first quarter report. GE is seen earning $0.44, versus $0.39 last year.

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