Wake Up Call - Gauging Consumer Health

The three most widely reported upon indices, the Dow, S&P 500 and NASDAQ are all up modestly this morning as the bullish overtone persists with investors. We had mixed data and news this morning, with Home Depot (HD) and WalMart (WMT) reporting poor guidance for the second quarter and not so hot earnings, especially for HD. However, the widely followed inflation guide, the CPI Index indicated prices higher about in line with expectations. The Empire State Manufacturing Index posted reassuring improvement and the ICSC-UBS weekly retail same-store report indicated some bounce this week, and maybe month. So, the market is thus far pleased with the data, but we get key housing and consumer sentiment data later this week that could shake investor enthusiasm. Right now, the market is trying to gauge how tough the consumer is, and if she will survive through the pressures of a rising cost of living and tightening credit. Also, geopolitical fires are burning across the world, though they are little noticed. Civil war is alive in Palestine, civil unrest threatening in Pakistan and the IAEA just announced that it found Iran to be enriching uranium on industrial scale. Please find significantly more detail below.

Asia:
Hang Seng Index -0.53%; Shanghai/Shenzhen CSI 300 -3.48%; NIKKEI 225 -0.93%; S&P/ASX 200 -0.85%; Taiwan TAIEX -0.69%; BSE SENSEX 30 -0.26%; KRX 100 -0.8%; Ho Chi Minh -1.06%

U.K., Europe & Middle East:
DJ STOXX 50 Index -0.14%; FTSE 100 -0.09%; CAC 40 -0.03%; DAX +0.07%; Russian RTS Index -1.05%; ASE General +0.98%; Tel Aviv 25 -0.13%; Tadawul All Share +0.01%; DFM General +1.08%

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

• *** WalMart (WMT) reported first quarter EPS in line with estimates, but provided a forward quarter guidance range that just slightly reached the consensus forecast, implying there's a good chance the consensus is too high. Same-store sales were reported up only 0.6% in fiscal Q1, and WalMart is now looking overseas for growth. This key American retailer is regarded as an important barometer for consumer health, and its weakness should be well noted.
• *** Home Depot (HD) deeply missed consensus estimates for its fiscal first quarter. EPS were down 24% from the prior year, and same-store sales fell 7.6%. Logic says housing related retailers should mirror weakness in new home demand and a stressed consumer, and HD did not defy logic.
• *** The April consumer price index showed a headline figure rise of 0.4%, versus expectations for a 0.5% increase, and a core CPI rise of 0.2%, versus the same expected. Despite persistent inflation, the rate of increase on the headline figure was lower than the 0.6% increase in March. The market was relieved not to see an upside surprise, and likely views this data as supportive for more of the same. However, note that the rate of core CPI increase actually rose from 0.1% in March to 0.2% in April. It's possible that increasing food and energy costs are finding their way into other prices, as we believe they will. In our view, the market should find the CPI data, combined with the reports from HD and WMT negative overall. There was some contradiction, however, from the weekly ICSC report on weekly same-store sales.
• *** The ICSC-UBS report showed a 0.8% sequential rise, week to week, in same-store sales, and a 2.6% increase in the week versus the same period from a year ago. This data is reassuring, but a week does not a trend make, and WalMart and Home Depot's quarters and guidance do raise concern.
• *** Earnings season rolls on, so catch Yahoo!'s calendar here.
• *** The Empire State Manufacturing Index increased to 8.0 from 3.8 in April. Results were in line with expectations, and in line with my view that a disconnect exists for now between a weakening domestic consumer and the sales of American firms that have diluted that impact with foreign sales into developing markets. As we stated in "The Greek's Week Ahead," we expect domestic weakness, still the most important driver of sales of most U.S. multinationals, will catch up to the strong performers of the quarter. Not only will the domestic economy weaken, in our view, but global markets should catch the disease. We direct you to our weekly article for further insight.

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