Wake Up Call - Advance GDP Could Derail Dow Express

All major U.S. indices have opened lower, and international markets are broadly lower, after the Advance GDP report for the first quarter showed U.S. economic growth well below expectations, at a weak 1.3% level. At the same time, the Core PCE, a Fed barometer on inflation that measures consumer prices ex- food and energy, increased 2.2%, versus 1.8% in the fourth quarter. The title of the most used word in business America will likely change hands today, from "subprime" to "stagflation." It's a scary scenario that portends to keep the Fed handcuffed as the economy weakens. Wall Street Greek sees serious potential for the economy to slip into recession this year, despite the success of America's multinational corporations. While we view large-cap multinationals as the preferred place for equity investment, the "Dow Express" could be derailed today.

Asia:
Hang Seng Index -0.68%; Shanghai/Shenzhen CSI 300 %; NIKKEI 225 -0.17%; S&P/ASX 200 -0.98%; Taiwan TAIEX -0.63%; BSE SENSEX 30 -2.25%; KRX 100 -0.77%; Ho Chi Minh NA

U.K., Europe & Middle East:
DJ STOXX 50 Index -0.89%; FTSE 100 -0.77%; CAC 40 -0.46%; DAX -0.52%; Russian RTS Index -1.7%; ASE General -1.22%; Tel Aviv 25 NA; Tadawul All Share NA; DFM General NA

Our value-added take on today's key news:

• *** The first quarter Advance GDP report showed the economy likely grew 1.3% in the first quarter of 2007, a sharp drop from Q4's growth of 2.5% and well off the 1.8% consensus view of economists. The result was in fact grazing the bottom of the range of views that extended to 1.2%. In our weekly article appropriately entitled "The Dow Express' Week of Reckoning", we said "a poor measure (would be viewed) as a red flag for stagflation." Weak GDP growth, combined with a high reading on the Core PCE, which showed a 2.2% annual consumer price rise, will raise red flags across the country. The Fed and economists alike will grow very concerned that the second and/or third quarter could slip into recession. Housing once again impacted GDP significantly in a negative way, while consumer spending held up. However, consumer spending is likely going to weaken in coming quarters as capital becomes harder to come by to fund automobile, home and other purchases. Wall Street Greek believes there is a high probability that the economy will slip into recession this year. Also, we think prospering American multinationals will come under Congressional pressure to pay more taxes to make up for the decreased impact of their sales on the economic health of Americans in general. Wall Street Greek expects the "Dow Express" will be derailed temporarily here. Still, in our asset allocation, we would shift capital out of mid-cap and small-cap shares, into large cap multinationals on weakness, if you have not done so already.
• *** At 10:00 a.m., the University of Michigan's consumer sentiment reading is expected to match March's 85.3 figure. This news could compound or ease the market's reaction to the GDP and inflation data.
• *** Fed officials Yellen and Fisher expressed continued concern about inflation in speeches yesterday. The Fed is effectively handcuffed regarding its ability to rescue the economy, due to the combination of housing weakness, economic growth slowdown and inflationary persistence. We see troubled times ahead as inflation is impacted by secular trends in food and energy that cannot be discounted as seasonal effects.
• *** Earnings season has produced an illusory sense of well-being as low ball estimates set by safe-playing, weak-willed analysts have for the most part been exceeded. But, we knew they would. There is real economic health reflected in the move of the Dow, however, as they benefit from the weaker dollar. We continue to favor the shares of large-cap multinationals, or any American firm selling overseas and advantaging competitively. Microsoft (MSFT) reported earnings ahead of estimates; Waste Management (WMI) topped analysts estimates; Burger King (BKC) beat estimates.

To receive our reports via email, click here and provide us with your email address. We respect your privacy and will never share your information with any third party. (disclosure)