Fed in Focus, Consumer Crashing

The purpose of "Wake Up Call" is to provide you with the market-moving news of the day, hand chosen, with value-added original commentary.

The Dow is inching higher at this hour, while the S&P 500 and NASDAQ proceed cautiously. The pending 2:15 p.m. release of the Fed policy statement has markets a little edgy today, and we believe rightly so. We anticipate the renewal of hawkish language regarding inflation will prove concerning to equity investors. Also, news from Cisco Systems (CSCO), Toll Brothers (TOL) and Toyota Motors (TM) provided a broad basis for concern last evening and this morning in their respective reports. Besides this, economists across the nation are jumping aboard the Wall Street Greek ship today, revising economic and retail expectations lower. Please find all the details below.

Asia:
Hang Seng Index +0.67%; Shanghai/Shenzhen CSI 300 +0.41%; NIKKEI 225 +0.52%; S&P/ASX 200 +0.58%; Taiwan TAIEX -0.53%; BSE SENSEX 30 +0.12%; KRX 100 +0.57%; Ho Chi Minh +0.45%

U.K., Europe & Middle East:
DJ STOXX 50 Index +0.33%; FTSE 100 -0.03%; CAC 40 +0.29%; DAX +0.48%; Russian RTS Index -0.73%; ASE General +0.05%; Tel Aviv 25 +0.86%; Tadawul All Share +0.07%; DFM General +2.37%

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

• *** All eyes are on the Fed today ahead of the all important FOMC meeting and official policy statement that follows. Seems like every economists from here to Timbuktu expects the Fed to keep rates steady this time around, and we agree. However, we do expect the Fed's policy statement will be detrimental to equity direction this afternoon. Fluffy valuations after a wild run higher put equities at technical risk, but the catalyst to drive a landslide should be found in the statement, or in Friday's retail data. Recall that last time around the Fed left out hawkish language specific to inflation. The market perceived the silence as a change in Fed view, that it was possibly less concerned that inflation could become problematic. It raised the probability of a Fed cut over a hike in the market's eye. However, this was not the Fed's intent, and a few days later, Ben Bernanke clarified on the topic and equities gave back gains momentarily. We expect the inclusion of similar inflation language this time around will have the opposite effect, raising market hysteria and hurting share prices.
• *** Yesterday, the ICSC-UBS highlighted consumer concerns with its view that April retail sales could have suffered from poor weather and the unfavorable date of the Easter holiday this year, as it relates to April sales. Today, as we predicted yesterday, economists are jumping aboard our boat, revising April retail sales expectations lower and raising the red flag for economic trouble. I pounded the table yesterday and Monday, and I'm back at it today. Reduce your consumer discretionary weightings. Wall Street Greek is now recommending the under-weighting of consumer discretionary shares. Your restaurants and retail establishment stocks could report a decent first quarter, but there is risk of forward guidance reduction. Besides that, general market concerns should start to weigh on the P/E ratios of these shares, contracting them. The Bloomberg article does a good job of summing up our previously outlined thesis. See "The Greek's Week Ahead" and older articles on the topic from us as well.
• *** Weekly mortgage applications increased 3.6% in the week ended May 4, benefiting from rate decrease as refinancings rose 4.9%. It's likely that starving mortgage brokers are aggressively pushing refinancing to fixed rates now as a sales tactic. Meanwhile, foreclosures more than doubled in April, and today, premium home seller, Toll Brothers (TOL), pulled its guidance. This quote from Robert Toll is telling, and sounds a lot like what we have been telling you, "We believe that fewer than 2% of our buyers use subprime loans," Robert Toll said. However, the impact of stricter lending standards arising from problems in the sub-prime market is negatively affecting affordability at lower price points." It's officially getting ugly folks, and I have advised my own friends who want to sell their homes to do so before things get worse. The supertanker that is the housing sector takes long to turn, and it is going to get worse in my opinion.
• *** Earnings season rolls on, so catch Yahoo!'s calendar here.
• *** Cisco Systems (CSCO) reported results, and raised a red flag with sudden weakness in its domestic business segment. We quote directly from the AP Newswire, "While sales in most segments are growing in the double digits, a sudden slowdown in orders from U.S. businesses has spooked investors. Cisco's U.S. enterprise segment grew 20 percent in the first three months of the fiscal year but has since contracted to mid-single-digit growth." I thank a loyal reader at Team Maren, Mike, for making sure I saw this. It reinforces what I have been laying out, that American firms have benefited from ventures overseas, but eventually, domestic weakness would prove important. Toyota Motors (TM) reported results, and also warned that its fiscal 2008 (Mar) would be impacted by a slowdown in the U.S.

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