Today's Coffee - Consumer Concern

Major U.S. equity indices were relatively unchanged while the Dow bounced higher today, as positive data from the ISM was negated by poor March pending home sales and increasing concern about consumer health. The effects of slowing GDP growth were compounded by this week's poor personal consumption data and today's auto sales information. It's clear to us that tightening credit in America, combined with rising prices for food and energy are beginning to restrain the consumer. As the consumer is the key pillar supporting our economy, Wall Street Greek has sounded the warning sirens for recession in recent issues. Despite taking a lot of criticism, I am going to tell it like I see it, not paint a rosy picture so your breakfast digests well while your portfolio sinks. When the economy is ready to recover, I'll tell you that also. Being risk oriented allows me to avoid pitfalls, but it does not keep me uninvested. We recommended large caps a while back, and some specific stocks like Yamana Gold (AUY) and others in old copy, and have looked to short ideas in recent times as well. Most importantly, we remain committed to providing you with specific stock ideas in the near future.

OVERSEAS MARKETS
Chinese mainland markets have been on fire since the late February correction. The CSI 300 has soared 41% since February 27, the day of the 9% correction. April's report of first quarter GDP growth, showing a rise of 11.1%, inspired discussion from Chinese central bankers for further action to reign in growth and speculation. Then, Monday, Chinese regulators raised the reserve requirement for lenders to 11%, continuing a trend meant to limit speculative use of capital.

However, in recent moves, the bank has become more and more aggressive, and in raising the requirement by 50 basis points, sent a message of just how serious it was. As the reserve rate rises, it places lenders who may be fully extended into a position where they may need to call back loans. This is something we'll have to keep an eye on, and need to conduct further research to find where a break-point may exist, though we suspect this is not an imminent danger. We viewed the aggressive move indicative of the bank's frustration in its inability to tame economic growth and inflation. Based on the regulators' own words, we expect a combination of actions, including benchmark rate increase in the near future. There may be risk of self-fulfilled prophecy here as well, because if the bank becomes too aggressive it may in fact bust the bubble that it fears is building toward a bust. Wall Street Greek's greatest concern regarding China is the catalyst provided by western conflict with Iran. China's dependency on Iranian oil portends to light an emerging market and global market collapse should war break out.

ECONOMIC DATA & ANALYSIS
At 10:00 a.m., the Institute for Supply Management issued its report for U.S. manufacturing activity in the month of April. The index measured 54.7, above Bloomberg's consensus view for 51 and an improvement from 50.9 in March. The media generally projected the news as a positive sign for the economy. As you know, I continue to view manufacturing data less significant than that of the larger service sector. Besides this, I believe the data also reflects the health of U.S. sales overseas, as the export component of the index increased to 57, from 55.5 in March. However, I found the reduction of inventory at manufacturers and strength in orders positive news for the sector.

Also on Tuesday, the National Association of Realtors presented its index for pending sales of existing homes in March. The index fell to its lowest level in four years, measuring 104.3, down 4.9% from February. We have been proposing for some time now that tightening lending standards, limiting credit, would impact home sales this year and be an important factor driving the double dip in housing we are experiencing now. As credit tightens in other sectors, this situation should only get worse. The effects to a broader group of lenders have thus far been mitigated through "short sales" of homes and other flexibility within loan restructuring work. Still, this is the kind of situation that can build upon itself, and it could grow to a level overwhelming for lenders.

This morning on CNBC, Mark Haines asked a couple experts why currency impact matters to earnings now-a-days when "we were taught it didn't matter." The two individuals, while on the spot, provided relatively poor responses and didn't really answer the question. One guy said something close, mentioning that globalization was more important.

The reason currency matters now, and was not an important representative of operational value add before, is because in the past, currency fluctuations were mostly driven by short term factors that seemed to average out over the long run. It was something that added value one quarter and took away from it the next, so analysts like me were taught to remove it from our models in order to better forecast future operational trends. The reason it matters now is because it reflects globalization, and a secular trend driving competitive advantage. As the dollar weakens on the development of emerging markets, a trend that should continue, American firms selling products overseas benefit by gaining market share as their products become cheaper to foreigners. That market share gain is an economic value add and should not be discounted as a fluctuating inconsequential circumstance.

Today's news from Detroit was not as bad as anticipated, but still portends something worse for consumers. Ford (F) and General Motors (GM) saw declines in sales, but not as steep as forecast. DaimlerChrysler (DCX) experienced an increase that may have partly resulted from Ford and GM's decisions to decrease fleet sales to rental car companies and others.

Tomorrow, we plan to combine "Wake Up Call" and "Today's Morning Coffee" into one value added article. We hope this will allow for reduced clutter of your inbox, while still providing significant value add to your trading day. 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)