Retail Fallout

The Dow, S&P 500 and NASDAQ indices are all down significantly today on weak April retail sales figures, and also on fallout from the FOMC policy statement. They're not down enough. The problem is that most experts are pinning the retail miss on the weather and Easter, and choosing to avoid the possibility that the consumer may in fact be cash strapped. Therefore, we think it is possible that the market could again miss the importance of April's Retail Sales report due out tomorrow. Eventually though, Wall Street Greek expects further data to confirm that the pillar of strength that has been the consumer, is feeling the heat of higher costs across food, energy and housing expenses and from a tightening credit environment as well. Please find further detail below.

Asia:
Hang Seng Index -0.47%; Shanghai/Shenzhen CSI 300 +0.63%; NIKKEI 225 -0.06%; S&P/ASX 200 +0.23%; Taiwan TAIEX +0.55%; BSE SENSEX 30 -0.07%; KRX 100 +0.25%; Ho Chi Minh +0.01%

U.K., Europe & Middle East:
DJ STOXX 50 Index -0.29%; FTSE 100 +0.19%; CAC 40 -0.18%; DAX +0.04%; Russian RTS Index -1.12%; ASE General +0.49%; Tel Aviv 25 +1.16%; Tadawul All Share NA; DFM General -0.38%

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

• *** After leaving rates unchanged yesterday, the Federal Reserve issued a policy statement that was not significantly altered. The Fed continues to focus on inflation, and considering its own forecasts do not show desired inflation reduction until 2008, we can imply that for now, there will be no rate cuts. We could assume that if the economy were growing at a faster pace, further rate hikes might be occurring. However, if Wall Street Greek's predictions play out and the economy falls into recession, a rate cut seems likely before the end of 2007. Before getting too excited about that, let's recall that the economy would slip into recession on weakening consumer spending. That kind of catalyst would probably have repercussions to high flying Asian markets, to whom we represent a key export market. The kind of collapse that could happen in Asia, considering the rate of rise to current levels, would likely have dire results for global equity markets. So, when getting jolly on the prospect of rate cuts, consider the cause. The market seems drunk to me, and depending on the quality of the booze, or driver, that could lead to a bad hangover in the future. That said, large multinationals continue to deserve greater asset allocation in your portfolio, in our view. This is a point we have made for some time, so the light criticism I've received from a one or two individuals about missing the rise is baseless. It should be noted that my economic view should not have precluded investment in the Dow or S&P 500, where a great deal of income is generated from the overseas activity of large multinationals.
• *** Weekly initial jobless claims came in strikingly low again this week. Claims decreased by 9,000 to 297,000, versus expectations for a reading of 315,000. Consistent strength in employment is the greatest argument against my thesis for softening consumer spending. However, it also heightens concerns for inflation, as labor pressure mounts. I view the rising cost burden on the consumer as the important catalyst here, as it is the one that is changing. Employment has been strong for a while now and is a stagnant factor. Meanwhile, consumers face rising food, energy and housing costs, while capital availability in decreasing. Things are getting tight, and Americans are a credit comfortable people. Living week to week works for as long as liquidity is available, employment consistent and costs stagnant. Two of those factors are changing, and I believe employment will lag but follow.
• *** The trade deficit widened greater than expected, to $63.9 billion. One of the experts quoted in this article suggests that imports will decrease this year on "consumer weakness" and that the subsequent narrowing of the trade deficit will benefit economic growth. What?!!! Hello #@$%$!!!, okay, so a narrowing trade deficit does benefit GDP, but a weakening consumer has much broader implications for domestic growth. Changes in many other factors that feed into GDP should produce a net negative impact to the economy. It's another case of missing the forest for the trees.
• *** Earnings season rolls on, so catch Yahoo!'s calendar here. Disney (DIS) beat estimates, but has a lot of risk in future results tied to two movies, which to us, seem like sure hits.
• *** The ECB kept rates steady while the Bank of England raised its benchmark a quarter of a point in order to tame inflation in the U.K.
• *** Retailers are posting same-store sales results for April today in mass, and it's as ugly as we expected. The market, for now, is tying this poor performance to the date of Easter and the weather. We included both these factors in our thesis, but we believe the market is missing the most important catalyst today, and it looks like it may not get it tomorrow either when it reads the April Retail Sales report. Individual retailers' shares are seeing impact though today, as we warned they might in our article at Seeking Alpha. Individual retailers are posting poor results and the shares of WalMart (WMT) and Federated (FD) are not benefiting today from them, though WMT is holding up well against the numbers.

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