FOMC Policy Statement June 28, 2007

Before we offer up our take on it, we thought we would share the official policy statement from the Federal Reserve with our readers. Please find the statement from the Fed below:

Release Date: June 28, 2007



For immediate release

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Cathy E. Minehan; Frederic S. Mishkin; Michael H. Moskow; William Poole; and Kevin M. Warsh.

Today's Morning Coffee - A Complex Rate Outlook

The market is tentatively awaiting the conclusion of the Federal Open Market Committee meeting today, but the result is widely expected to be no change in rates. However, the official statement could hold some dangerous term changes or indicate the direction of future action. Wall Street Greek believes an indication of some Fed governor minority wishes to raise interest rates could surface, and this would continue the summer swoon in stocks. However, we view a rather complex rate future in the medium term, and one which would soon include increasing expectation for rate cut, depending on the insight of the Fed.

Economic Data & Analysis

GDP Revision

First quarter GDP growth was revised higher to 0.7% from the 0.6% first estimated. However, the final reported rate of growth was slightly short of expectations for a 0.8% rise. Wall Street Greek believes our forecast is spot on regarding GDP this year. We were out in front with our view that Q2's pending pick up in growth would be followed by weakness in Q3 and Q4. We received the first confirmation of this view from an investment bank economist or strategist on June 22, when Goldman Sachs' Chief U.S. Economist, Jan Hatzius said, "Economic growth in the first half of 2007 is shaping up to look much stronger than seemed likely a couple of months ago. The caveat is that final domestic demand is softening, a development that could foreshadow a renewed slowdown later in the year.'' Sound familiar? Now think about when you first read that from the Wall Street Greek, and when the Street started reflecting that view. For the most part, the Street is still not anticipating a later slowdown driven by consumer softness, like we are. Think about the value add you gain from having that information significantly sooner.

Within the GDP revision, there was a more significant change. The inflation metric was revised higher to a 2.4% annual rate, up from the 2.2% initially estimated. Depending on the foresight of the Fed, this could significantly shake things up in the financial markets.

What to Expect from the Fed

With GDP growth expected to recover in the second quarter, depending on the Fed's outlook for consumer spending, they could look to make an impact on inflation in the short term. The argument against this is based on the recent rise of yields, effectively doing the Fed's job for them. However, Wall Street Greek believes the Fed would like to see long term rates edge even higher, once the housing market is stabilized. That's why I expect we will later find out that the Fed vote included some interest in raising interest rates.

Clearly, my view for an economic downturn later this year and next would advise a Fed cut, not a hike, but I wonder how evident this is to the Fed, since most economists still seem blind to it. The Fed itself has harped on the need to tame inflation over the past year. I've argued that the Fed may eventually find itself handcuffed with a weakening economy and rising inflation, otherwise known as stagflation, an ugly term and state of existence. Basically, the Fed would want to raise interest rates, but face the risk of driving significant recession by doing so. There may be no resolution in fact, and Bernanke's days as Fed Chief would be shortly ended.

So, this guides our view that the Fed will indicate interest in taming inflation, with votes. This would be a negative catalyst for stocks this summer. However, soon enough, we think consumer softness will make itself evident, and hope will intensify for Fed expansionary action. When/if this occurs, it might add some short term lift to the market, if the economy escapes recession or if it looks like it could be short-lived. We have to balance the reality of economic health, as well as expectations induced by Fed action, in anticipating market movement. It's a tough game to call, I think you can see.

Weekly Initial Jobless Claims

Weekly initial jobless claims at 313,000, came in below expectations for 318,000, while dropping from last week's total of 326,000 (revised). This is good news, but not significant enough to really matter. We continue to anticipate an increase in jobless claims will follow a drop in new hiring, so it's too early to look for signs of economic weakness here.

However, it's worth noting that Capital One Financial (COF) announced it would layoff 2,000 people as part of a cost restructuring initiative. Yes, this is that same Capital One that was willing to lend to everybody and their mother about a year ago. I'm not sure who could not see this one coming, but I think they should probably be taken out and shot to help improve the IQ of society.

Capital One announced a comprehensive plan to save $700 million pretax annually starting in 2009. The idea is to improve the cost structure of the company. It figures that if you run such a risky lending operation, you must do it bare bones in order to do it effectively. If I was managing that company, it would be the lowest cost operation in the business, outside of debt recovery mitigation operations, which would be top of the line. Still, that's no guarantee of survival, depending on how bad the consumer and employment environment gets.

We hope to provide an earnings roundup piece for you later today.

Receive Wall Street Greek via email by subscribing here. If you change your mind, it's easy to unsubscribe. We respect your privacy and will not share your information with any third party. (disclosure)

Today's Morning Coffee - Not So Durable Durables

Broad equity indices have started lower, outside of the NASDAQ, which is modestly higher. We have a burdensome couple of data days ahead of us, with the FOMC decision and revised GDP tomorrow, and personal income and spending, and consumer confidence to finish off the week. The market is unlikely to show too much enthusiasm before this news comes to pass, and the news could be disenchanting as well. Bulls can forward to the second quarter earnings season, which may again surpass analysts' low-ball estimates, and we think the market will begin to anticipate this in a week or so. The GDP revision is expected to be higher, and it will surface plenty of talk about a better Q2. Depending on the inflation data from the Friday report published by the Commerce Department, and the consumer sentiment report, we could swing widely in either direction Friday. Of course, the FOMC Statement Thursday could render Friday's data mute as well. Are you thoroughly enough confused yet? I think you see why stocks are mired in muck this week.

ECONOMIC DATA & ANALYSIS

Durable Goods Orders
May durable goods orders fell 2.8%, well short of the 1.5% slide expected (some sources showed consensus view for 1.0% decline). The number was significantly impacted by transportation equipment. Excluding transportation, orders were down only 1.0%. Still, the decreasing trend, if you can call it that yet, was impacted by housing and, surprisingly, business investment. This is what has the experts worried this morning. Business investment fell some 3%.

I agree with Steve Leisman, resident economist at CNBC, when he says the worst case scenario is that businesses are possibly sensing consumer softness, and investing less. I believe this is at least playing a minor role in the number. I also expect the housing reality has finally started home builders significantly reducing investment, and soon significantly consolidating. Home builders were living under illusion to start the year. When the builders really start consolidation, you may find your crescendo bottom buying opportunity in housing stocks, but I would focus on the best of the best when the time comes. I'm not talking about the best quality construction, but the best run companies, and that's likely Toll Brothers. Not yet though, but I'll tell you when. See, the Greek is not a perma-bear after all. I told you it was too early to look to housing in January, and I think it's still too early now, but I can sense bottom coming. Clearly though, some concerning things can happen to severely lengthen the time to true bottom, and I'm talking about Iran.

Conference Board's Consumer Confidence
The Conference Board's take on confidence was expected to fall to 105 in June, and we told you that number probably was not low enough in our article "The Greek's Week Ahead - Taxing Times." The figure came in at 103.9 and is a clear indicator, along with the Michigan survey, that the consumer is stressed. We should take this information seriously, as it has the potential to shake up most economists' forecasts for Q3 and Q4. We continue to expect downward revisions to these figures, despite a solid Q2 GDP report, which is widely expected.

FOMC
The FOMC begins its two-day meeting today, and the consensus expects it to result in no change to the benchmark interest rate. We expect some surprise though, as we anticipate there could be more than one dissenting vote. We anticipate the voting results, released later, will show a growing interest to raise interest rates in the future.

Thank you for your interest in our articles. (disclosure)

The Greek's Week Ahead - Taxing Times

The Greek's Week Ahead has been engineered to prepare you for events that could impact your portfolio this week. Better late than never....

Taxing times ahead for hedge and private equity funds, and the market on the whole...

Just when it looked like we had accounted for every factor working to dry up liquidity, a new potentially most hazardous source surfaced. Nothing can kill market enthusiasm like raising taxes, and a group of lawmakers are looking to do just that. Those jolly Democrats in the House of Representatives came up with a new tax idea that in our view looks destined to shake the financial market to its core, while removing a good deal of liquidity.

A few weeks ago, in "The Greek's Week Ahead - When Liquidity Dries," we avidly discussed the many factors that could do us in. How could we have overlooked Uncle Sam though... We spoke of the market pendulum of action and reaction, and how toward the end of the market bubble of the last decade, capital was flowing into every new idea spawned by every wild dream. As a result of those excesses, we saw companies follow it up with a period balance sheet building, and now we've seen private equity firms exploit that excess as well. So, it's time for private equity and hedge funds to give back now too and take us back to normalcy. By the way, that normalcy will only pass us by like some unknown train stop on our express route to the next excess.

The plan by the jolly group of Dems is to tax the 20% incentive fee that has drawn so many young entrepreneurs into the hedge fund and private equity space. I was almost one of them, before foreseeing the troubles that lay ahead. I still may create a few funds some day, whether hedge or mutual, but not now, not in front of this speeding locomotive. In its present shape and form, the bill seems to target private equity like Blackstone Group (BX), but I'm sure it will find a way to spoil the hedge fund party as well. When you take away the incentive, or threaten to, I think you alter the dynamics of the market once again. Remember when I said the Fortress Investment Group (FIG) move to go public would not start a trend. That's all out the window now.

The plan in Congress that threatens to raise the taxing of "carried interest" compensation paid to private equity partners from the 15% capital gains rate to the 35% ordinary income rate is scary indeed. It threatens the very core of the ponzy scheme that widens the eyes of young MBA's hoping to one day make the contacts and build the reputation to begin a fund of their own.

You know, it really is the MBA graduate who foretells the future. He migrated to the dot-com space, then to hedge funds and private equity. We should keep an eye on him to help guide us to the next arbitrage opportunity. Or should we? Maybe the MBA consensus arrives late, and can only prepare us for the trend's demise. I'll charge you with figuring this out, and move on.

I'm worried that this Democratic assassin is reactionary in his own sense, and due to the evils of the latter Bush, perhaps necessary ones, this new age Democratic majority is ready to start trade war, tax the rich and drown us into depression. If the tax man kills the hedge fund, the money will run fast and furiously. Lucky for the lock up provision it can't all run at once, but it will run. The problem is where the heck can it go? Real estate? No way. Emerging markets? Yes, but it's there already, and maybe that would just add to another bubble shortly to pop in its own right. Treasuries? No, because there is too much concern that the world is about to reconsider the risk of the American investment. Gold. Yes, I think it has to go to gold. Eventually, where else could it go? Get ready for those dreaded words, "flight to safety." I'm not going to go into my war chant now; I've done enough of that.

Let's instead take a look at the week ahead...

On Monday, the National Association of Realtors reported its existing home sales data for May. The pace of sales was in line with views and matched the sales level of April at a 5.99 million annual pace. The view we've laid forward from early this year, which is now the consensus view, is that housing will soften further in 2007, as it has. The confidence of industry insiders, or lack of it, reinforces that view, and this data confirms it. The factors we have outlined have come to play, including tightening lending standards and the increasing cost of living burden on Americans.

On Tuesday, our favorite weekly measure of consumer health is reported. The ICSC-UBS Same-Store Sales report showed a weekly decrease of 0.7%, the second weekly decrease in a row. Year-to-year, sales rose 1.7%, a decreased rate of growth when compared to the prior week level. This measure is providing us with insight into consumer discretionary weakness, where we have recommended seeking short opportunities. The Conference Board will post its consumer confidence measure later Tuesday morning, and the consensus view is for a measure of 105.0. It was 108 in May, which we remind you was a month when the Dow soared. Wall Street Greek correctly foresaw a softer Michigan sentiment number than the consensus and we see one here again.

May new home sales will be reported at 10:00 a.m. Tuesday morning, with a consensus view for a 920,000 annual pace. That's down from 981,000 in April. The Federal Reserve Bank of Richmond will report its regional manufacturing index for June, and we would expect a solid report considering the state of manufacturing strength in New York and Philadelphia.

Reporting earnings, look for reports from Apogee Enterprises (APOG), CHC Helicopter (FLI), GeoPharma Inc. (GORX), Lennar Corp. (LEN), Nike (NKE), Steelcase (SCS), Stride Rite (SRR), Kroger (KR) and a few others.

Despite the start of the FOMC meeting, the big news Wednesday should be provided by the May Durable Goods Orders Report at 8:30 a.m. EDT. Orders are seen decreasing 1.5% month to month, after having risen 0.6% in April. Also in the a.m. hours, the Mortgage Bankers Association reports its regular data on Purchase Applications. This could surprise some sleeping traders with market-moving news, due to the interest rate volatility of the past couple weeks. Finally, Wednesday also brings the usual EIA Petroleum Status Report. Last week's build of inventory shocked prices for a day, until Nigerian strike pressure sent oil higher. With the strike over now, another strong build could send oil started back to the lower $60s. Issues that could help keep oil inflated include the ongoing tensions with Iran, a pending new set of sanctions and rumors that Israel and its neighbors are quietly preparing for war... maybe not so quietly in parts of Palestine and Lebanon!

Cheerleader Henry Paulson should again have some nice but useless things to say about the economy at a Wall Street Journal conference in New York. Reporting earnings, look for Bed Bath & Beyond (BBBY), CKE Restaurants (CKR), ConAgra Foods (CAG), Herman Miller (MLHR), Paychex (PAYX), Red Hat (RHT) and a few others.

On Thursday, we'll get the final Q1 GDP revision, with Bloomberg showing consensus expectations for a rise of 0.8%, up from 0.6%. With Q2 nearly complete, the focus in popular media will likely look toward the expected increase seen. I believe June has tempered enthusiasm somewhat, despite manufacturing strength, and the consensus will begin to focus on Q3 and Q4, which we believe could slip into recession. In any event, we anticipate the next 12 months will be a period of drastic change, partly as a result of a surprisingly widespread conflict originating with Iran. Helping us gain a better view of Q2 GDP, the revision to the corporate profits component of the barometer will also be reported Thursday. We expect it to be revised higher, thanks to the low bar set by analysts prior to the reporting season.

Weekly initial jobless claims are set for report Thursday as well. Over the past few weeks, we've seen a modest rise in claims. The expectation for this past week is for new claims of 319,000. We reiterate our view that we'll notice the signs of weakness first in new hirings data. Early indications point toward a significant softening, and we'll get that news a week from Friday. The Help-Wanted Index might provide some insight into this point, but it focuses on hard print job advertisements. Online job search has just become too important ignore. Still, we might find signs here, so it's worth at least looking at on Thursday. April's measure showed the index at 29, down from 30 in March. We do not have a consensus number for this metric.

The EIA reports its weekly natural gas inventory status Thursday at 10:30. The most important news Thursday will clearly emanate from the Federal Reserve, as the FOMC announcement and official statement is released. Rates are expected to be kept steady, but we anticipate a surprise in the voting. We think some votes for rate hike will show up this quarter, and raise concern that a rate hike is imminent. This could severely hurt stocks to close the week, so we advise preparedness.

The Kansas Fed will report its regional manufacturing index, and expect earnings news from 3Com (COMS), Apollo Group (APOL), Arrow International (ARRO), Black Box Network Services (BBOX), Christopher & Banks (CBK), Constellation Brands (STZ), Electroglas (EGLS), Family Dollar (FDO), General Mills (GIS), Gerber Scientific (GRB), KB Home (KBH), Monsanto (MON), Palm (PALM), Research in Motion (RIMM), Rite Aid (RAD) and a few others.

On Friday, a good deal of data is set for release, but Thursday's news may render it all mute. The information is important though, and it may actually neutralize Thursday's news. Personal income and consumption is due for release for the month of May. If it was June, we would advise the data could be weak and offset rate concerns, however, May was not too poor of a month and the data is not expected to surprise. Personal income is seen increasing 0.6%, while consumption is seen rising 0.7%.

The strength recently seen in the National Association of Purchasing Managers - Chicago should continue, as economists see a measure of 57.5 likely. It was 61.7 in May. You know our view that manufacturing will lag the service sector lower, as manufacturing's international sales benefit from a softer dollar. Eventually, a softening American consumer should impact manufacturing globally in our view, and certainly within the U.S.

May construction spending is due for report at 10:00 a.m. Friday, and the consensus view is for a 0.2% increase. We can't tell you what this measure will show, but we can say that future trends should reflect a softening consumer and exposed saturated retail environment. Our view that commercial real estate is set for collapse is one held for some time, and not commonly shared. This kind of forecasting continues to set us apart from the herd.

Michigan Consumer Sentiment is seen at 84.0 in this June's report. We have time and again highlighted the year's trend in this measure, and it's one of clear decline. We advise not getting lost in the monthly variations, but taking note of the broader trend. We anticipate this measure will fall below consensus and raise more concern about the consumer. Earnings reports for Friday include 99 CENTS Only (NDN), A. Schulman (SHLM), Berkley Group plc (BKG.L) and Investors Capital Holdings (ICH).

Thank you for your interest in our articles. (disclosure)

Dow Jones Will Sell, But Not to Potter!

Events last week have likely brought Dow Jones closer to sale, but Wall Street Greek does not think closer to Murdoch. Last week, Dow Jones & Co. (DJ) reported that it would place bargaining power in the hands of its Board of Directors. In other words, to avoid complications and miscommunication, the Board will represent the one voice of the company. According to DJ, this move does not signify a company plan to sell. The Bancrofts are represented on the Board, and beneficial owners have probably well communicated their hopes to the Board. Also, at the end of the day, it’s going to take the Bancroft family shares to consummate the sale.

Meanwhile, last Wednesday evening, after the close of trading, MySpace Founder Brad Greenspan announced that a group led by him was offering Dow Jones & Co. an opportunity to liquidate a minority 25% stake in exchange for approximately $60 a share, through Dutch Auction. Mr. Greenspan's group believes it can create significant value for DJ with the cash infusion, as it would put it to use in expanding DJ's online presence and in implementing new digital strategies. The group would also require two seats on DJ's Board in order to better insure it could implement its plan.

The Greenspan offer is not completely unattractive to Dow, since the company is already somewhat levered. In other words, taking on too much more debt may not be a great option for a publishing, despite its still cash flow positive status. So, if DJ wanted to implement a new intensive digital strategy, it would be easier to do so with Greenspan’s capital. Still, if you’re an owner, $60 is probably going to be less than you can get somewhere else at the end of the day.

The Bancrofts are not unattached owners, in our view. The family has already expressed concerns about losing the integrity of the publications if it were to sell to the wrong buyer (Read Murdoch). That’s a clear indicator of an owner that has a greater interest than getting the best dollar offer. In other words, in the eyes of the Bancrofts, selling to Murdoch would be analogous to George Bailey selling out to Potter in "It’s a Wonderful Life." We think the recent effort by DJ in providing a plan to insure the editorial integrity of The Wall Street Journal and Barron’s does a lot in creating bargaining leverage, and maybe not as much to insure sale to Murdoch as it appears on the surface.

If the public views a Murdoch deal as unlikely, than DJ may be limited in what it can fetch for the firm. It is in the Bancroft's interests to keep the door open to Murdoch on the face of things. This plan essentially says, the potential for dealing with Murdoch is still viable, so offer us $60 bucks or more. I think you see my point...

Here’s where human nature comes to play...
When you compete against someone, whether in media or in total wealth, like for instance Rupert Murdoch, then selling to that competitor can leave a bitter taste. I’m totally guessing here, since that kind of wealth is just something I pass on my way to Central Park. Still, this is where art impacts the science of the deal. So, while Greenspan’s first offer may not quite seal the deal, he may have the winning cards in his hand. However, I continue to believe a new suitor is very likely to come to fore, which is a good thing for valuation.

This is a staple American asset for sale, and if the crème of society is willing to pay up for art and antiques, then they’re willing to pay up for Dow Jones. News Corps.’ (NWS) best offer on the table at $60 is probably not even competitive with the Greenspan offer, since the Bancrofts would not have to give up control. Still, on a what seems like daily basis, new suitors are coming to the table, despite the withdrawal of interest from General Electric (NYSE: GE) and Pearson Plc. Wall Street Greek believes General Electric offers a nice fit for DJ, with its CNBC brand, and GE is probably not out of the running quite yet. Also, LA billionaire Ron Burkle is rumored to be assembling a group to buy the company, which may include an employee-based interest. In the wings, the Philadelphia Inquirer’s owner, Philadelphia Media Holdings along with its partners may still emerge with a deal. It seems clear to us that Murdoch or someone is going to have to raise the stakes if they really want Dow Jones.

In times like these, valuation takes on a different flavor. Investors look at the asset and the brand, and in Greenspan’s view, the value that can be created through better online leveraging of the DJ brands. Just because Internet is replacing hard copy reading, does not mean the Wall Street Journal is worth the same as my blog for instance, Wall Street Greek. Though it certainly improves my distribution competitiveness. You see what I mean, there are respected brands there in Barron’s and the Journal for instance, that are always going to be viewed as legitimate sources of financial news and opinion. You don’t lose that kind of value overnight to the “Wall Street Greeks” of the world, however excellent my content may be (cheap plug).

In our view, Dow Jones is going to sell, but to a buyer the firm views sensitive to its editorial integrity, and the Bancrofts don’t seem to view Murdoch in that light. Still, they have Murdoch to thank for the opportunity before them, which includes either the intensification of online effort and creation of value while retaining ownership control or cashing out.

Receive Wall Street Greek via email by subscribing here. If you change your mind, it's easy to unsubscribe. We respect your privacy and will not share your information with any third party. (disclosure)

Subscribe to Our Free Newsletter

Our weekly market-moving event planner is on its way. You can receive it and our daily market warm up and value added articles via email for free. Please enter your email address below to begin receiving our postings. If you change your mind, it's easy to cancel. You may also email us directly if you have any questions, at WallStreetGreek @gmail.com. Your satisfaction and privacy is important to us and we will never share your information with any third party.

	Subscribe to Wall Street Greek Free Material
	Email:

If you would like to advertise in the space below our articles, we are now offering tailored plans, including assistance in ad design. Contact us at WallStreetGreek @gmail.com to find out more.

Today's Coffee - Ironically Late Leading Indicators

The market interpreted Thursday's Leading Indicator data as a positive sign for the economy, and despite a slight uptick in yields, stocks of the major U.S. indices rose Thursday. Wall Street Greek believes the components of the leading indicator data are ironically late, and newer data exists that should have economists and strategists looking beyond Q2. Within this article, we discuss in depth how consumer softness is manifesting in the reports of consumer discretionary shares including restaurants and retailers.

ECONOMIC DATA & ANALYSIS

Late Leading Indicators
May Leading Economic Indicators were reported up 0.3%, in line with expectations as compiled by Bloomberg. The measure is being reported as a positive sign for the economy, and Q2 GDP forecasts that exceed Q1 are finding the limelight. In this week's copy of "The Greek's Week Ahead - The Father of the Next Recession," regarding leading indicators, we said, "April showed a decline of 0.5%, but we also expect an increase in the May data. May was not a relatively poor month on the whole, and the indicators should reflect a positive forward outlook as a result, however false we expect this to prove out."

Some of the component indicators that were reported as providing positive contribution to May, but have weakened in impact for June include the contribution of the stock market, consumer sentiment and decreased jobless claims. Jobless claims have actually held up relatively well in June until this week, which we will get into later. Still, as you can see, leading indicators is missing some new information, quite ironically.

Weekly Initial Jobless Claims
Claims climbed to 324,000 last week, from 314,000 a week prior, and marked their highest level in two months. Leading the charge, California, the same state where foreclosures are greatest in number. Looks like the Governator has a challenge ahead of him.

The level of claims is not as concerning to me as the potential realization of a trend I've been expecting. If claims rate higher than the four-week average of 314,500 again next week, economists and strategists will begin to take notice. Remember, I said consumer softness would show its hand first, and then hiring would slow, which would be followed by increased layoffs and further weak spending. Finally, the anticipation is that manufacturing will also slow and the economy could slip into recession. Later in this article, I discuss the newest signs of consumer softness showing up in the restaurant sector.

Philly Fed
In the weekly article, I alluded that the strength in the New York region provided a guide into Philly's manufacturing sector report released today. Too bad you couldn't bet on it, because Philly blew out the number. The Philly Fed General Economic Index measured 18, versus 4.2 last month. Wall Street Greek's argument regarding the strength in manufacturing is that it will lag the service sector lower, as the sector benefits from dollar weakness in its international sales. Eventually, American demand softness should impact even manufacturers here though.

COMPANY SPECIFIC NEWS

Consumer Softness Signs in the Restaurant Sector
Months ago we wrote that softer consumer spending would eventually expose the oversaturated retail and restaurant industries. We posited that a weakening retail environment would send the Gap's (GPS) of the world into bankruptcy, and even some modest performers into consolidation mode. We also stated that the commercial real estate market had peaked, and would soon join residential real estate in the doldrums. Were you listening? We hope you will remember this six months from now when it is apparent to everyone. Hey, these are just more ballsy views from your favorite independent resource who has no corporate bullcrap to fight through to get his opinion across. Oh, and we are still recommending under-weighting the consumer discretionary sector (read, look for short opportunities here).

This week, Darden Restaurants (DRI), a major player in the casual dining space, displayed one of the early signals we mentioned. Darden reported a fourth quarter loss on charges it took to shut down its newer concepts. Relying on mainstays The Olive Garden and Red Lobster, the cash cow hopes to survive what is described by industry analysts as a challenging environment for the casual dining sector. Like we said, the cost of driving to a restaurant, and increased food expenditures and mortgage payments are pressuring the consumer out of eating out. And when she does, she faces hiked menu prices as restaurants, perhaps less than perfectly hedged against rising food prices, must either bear the margin pressure or transfer the burden to a consumer less inclined to pay it. The industry consolidation we spoke of manifested itself quickly in the well-managed Darden, but other chains will try to overcome the environment and go bankrupt, in my view.

Sonic Corp. (SONC) also reported earnings on Wednesday, and yet another disappointment. Sonic also discussed rising margin pressures, and provided forward guidance for its fiscal fourth quarter below consensus estimates. Not good.

And what about poor Best Buy (BBY) and Circuit City (CC), companies that couldn't receive the Apple IPhone soon enough. Consumer softness is manifesting its ugly head in electronics as well. Circuit City reported a loss and withdrew FY 08 guidance, never a good sign. Electronics retailers may prove worth purchasing on weakness though, as the IPhone draws some consumers into the shop. Still, I think I would rather wait until the criticism of the IPhone hits after its release, and instead buy AAPL on the weakness that likely ensues.

In any event, our view is negative on consumer discretionary as a whole and commercial real estate, where the weakness has likely yet to manifest itself in the shares, or those of other industry related participants.

If you like our work, please tell your friends. Receive Wall Street Greek via email by subscribing here. If you change your mind, it's easy to unsubscribe. We respect your privacy and will never share your information with any third party. (disclosure)

Oil Sliding or Just Slipping? Fact or Fiction, Could China or Russia Wage War for Iran?

With no economic news on Wednesday, oil price movement and company specific news led the headlines. The Petroleum Status Report held a surprise for commodity traders, and had most oil shares giving back some recent gains. Shares of Occidental Petroleum (OXY) fell 3.4%, Nabors Industries (NBR) dropped 1.9%, Exxon Mobil (XOM) sank 3.5% and Halliburton (HAL) fell 2.8%. However, Nigeria is on strike and geopolitical concerns are as hot as ever, more specifically within Gaza where refugees are moving into Israel and Israeli rockets are moving into Gaza. So, Wall Street Greek believes this move will prove to be a short term slip rather than a longer slide.

Commodity Markets & Geopolitical Topics

Petroleum Status Report
Wednesday's report showed a greater than anticipated build in oil inventory, and the largest in quite some time. Some 6.9 million barrels were added to the stockpile. This surprise, in light of the very recent run up to $70, had oil backtracking on the day. Gasoline stocks also rose more than expected, despite capacity utilization that is still trailing historical seasonal levels. Apparently the build had a lot to do with increased imports, not usage.

You know, everybody points out that new refineries have not been added to the system in quite some time, but Barry Ritholtz noted Tuesday on Larry Kudlow's show that refineries have expanded operations. Here's where I would normally say, "barring an early hurricane to the Gulf, things should be fine," but Nigeria is on strike and is the driver behind the rise to $70. WTI crude fell about a 1% Wednesday, while brent crude sank some 2%. Gasoline RBOB futures fell about a quarter of a percentage point. Still, I think this was just a slide, because Nigeria is overhanging.

Everything near term depends on Nigeria and how the strike impacts production. If the strike is settled quickly, oil prices should deflate substantially. I cannot foresee Iran getting involved with the Israeli effort underway now in Gaza. It's just not worthwhile for Iran, unless it's planning a massive surprise attack of Iraq as well.

Let's play devil's advocate, shall we? You know, I believe that outside of agreeing to global demands regarding the fuel for its nuclear facilities, Iran's best option is to launch a massive surprise attack on Iraq and Kuwait. Sitting back and waiting to be bombed seems futile, because Iran's traditional military capabilities should be wiped out in a short swipe, this barring third party submarine intervention. In other words, if China or Russia were to intervene in Iran's favor, clearly a world balance altering move, we could lose an important battle. This would mark a drastic change in global politics, begin world war, and is not out of the realm of possibility. However, it is extremely unlikely. Time is taking us in that direction though, and words from Iran in months past make that clear. Evidence surfaced months ago, when Mahmoud Ahmadinejad made a statement that revealed a major world power was communicating to it something different than it was communicating to the world community. In other words, China or Russia is telling Iran, "don't worry, we won't let them bomb you," or, "we'll stand by you." I can't see Russia backing up those kinds of statements, but China? Or, what if it was a fleet of Iranian submarines, supplied and manned by Russians? Let's hope this is just good fiction. I have concern though, and you would have to be blind to believe Putin or China are your friends.

(disclosure)

Today's Coffee - Hamas, Housing and Yahoo!

In this issue, I cover the day's economic data & analysis, geopolitical concerns in Palestine and Iran, and stock specific issues at Apple (AAPL), Yahoo! (YHOO) and Microsoft (MSFT).

Economic Data & Analysis

May Housing Starts

May housing starts were reported at an annual pace of 1.474 million, compared to 1.502 million in April, but starts came in about in line with the low bar set by economists. New building permits were reported running at an annual pace of 1.501 million, up from April. Yesterday's housing index also confirmed that home builders agree on an outlook that is not rosy. I expect some more builders to go bankrupt before all is said and done. I read some 50 subprime lenders have gone under so far.

In reading the economist's statement in today's Bloomberg article, the one concerning the housing numbers, I noticed his current view compares well to some of the things I wrote way back in January. YES, tighter credit standards that resulted from the subprime debacle are impacting lending, and YES, rising interest rates are affecting the trend of increasing foreclosures. I am going to create a mechanism for readers to better search my records, and also highlight some of the prescient forecasts made over past months. It's a little difficult to do now, especially considering the way I labeled articles early on. The site is littered with articles from December through April discussing the double dip that I expected in housing, which has since proved true.

But, what you need to know today is how things are going to look in the future. My view is that after a modest recovery in GDP is reported for Q2, we should see consumer softness bring GDP down again later this year, possibly into recession. So, I see this current rise of interest rates as short lived, since I would anticipate rates will once again price in an increased probability of a Fed move to inspire investment. However, I do expect continued pressure on rates from Chinese divestiture of treasuries or reduced purchases of them, and from persistent inflation. The investment issue should become a real problem if we enter combat with Iran as well. I spoke of stagflation late last year, and I still believe there is a decent chance we could see it. In any event, I expect a severe correction to global equity markets directly related to the confrontation of Iran that is approaching.

International Council of Shopping Centers - UBS Same-Store Sales Report

I don't see this data reported anywhere else, but it's important for future retail sales reports. So, by following it, you are getting ahead of the game. It looks like consumer spending could be softening. Last week's report showed a week-over-week rise of 1.0% and year-to-year change of 2.1%. This week, the data showed a week-to-week decrease of 0.1% and smaller year-over-year rise of 1.9%. This was the week before Father's Day, so you would have expected growth in the weekly comparison, unless Americans our honoring their father's less than usual. Judging by the amount of people on the train this weekend, I don't think that's the case. So, maybe pop only got a bottle opener this year instead of the surf 'n turf he's become accustomed to. We'll monitor this report for you every Tuesday. Incidentally, the less reliable Redbook Report showed an increase of 2.0% year-over-year.

State Street Investor Confidence Index

We told you over the weekend, in "The Greek's Week Ahead - The Father of the Next Recession," that the State Street Index, which takes a look at the amount of risk within portfolios, was not likely to show as meager a confidence view as the Michigan Survey. June's report measured 97.2, versus 91.2 in May.

Geopolitical Issues

Palestine

As we anticipated, Israeli tanks are on their way to the border with Gaza. Israel is not going to allow a militant rival, and illegitimate government to rule the region. Hamas should have foreseen this, and Iran is not going to come to their aid either. Now, Hamas, and thousands of innocent Palestinians are caught in the trap with the sea to their backs.

I believe Mahmoud Abbas has once again made a significantly flawed decision. After Prime Minister Haniya's home was attacked by grenade launcher, he should have denounced the illegal action and sought to prosecute the Fatah members who perpetrated it. I don't give a damn about what violenced preceded it, after all, he was a government official. The only way Abbas can defeat the popularly elected Hamas, is by uniting Palestinians. I repeat, he should burn the Fatah Party flag and the Hamas flag, and call on Palestinians to unite. He should restore his government through new elections and beg Israel to remain across the border.

What actually is going to happen is that he is using Hamas' rebellion as a tool to remove the group. However, the casualties of this effort will be the Palestinians in Gaza who are about to be run over by Israeli tanks. In the end, the cornered Hamas will bite, and I anticipate the bitten will include Mr. Abbas. I think he is targeted as I write this article, and I expect he will have moved on from this world before the end of the summer. However, he has made his own bed. By siding with America and Israel, and against a good portion of his own people, including those who voted Hamas into power, he's like a bleeding old shark among a frenzy of his kin. The best thing he could do now to preserve his survival is to resign, but if he has vision, he will unite his people and not divide them. I can say one thing with certainty, I will not be at the funeral.

Iran and the Oil Card

Today, Iran's OPEC representative confirmed that, in fact, Iran will use the oil card if necessary. The guy actually smartly included the U.S. in his statement, saying that if America could keep the "use of force option" on the table, Iran could keep its oil card as well. By doing this, he places the blame for Iran's future action that will impact the entire world square on the U.S. Some of the discussion seemed to indicate that Iran might not lash out at its neighbor in Saudi Arabia, as we anticipate here. However, I still expect that a desperate Iran will first strike Kuwait and Iraq, and eventually attempt to damage Saudi Arabia's oil infrastructure.

Remember that when following Iran, Mahmoud Amadinejad is the President, but the head of state is Iran's Supreme Leader. Clearly, Amadinejad has bigger dreams and may some day become the Supreme Leader, but today, Ayatollah Khameini makes the final decisions.

Company Specific News

I think I have to address Yahoo! (YHOO) and Apple (AAPL) today, as both shares are active on news. Yahoo! replaced its CEO with one of its founders, and I think this will be good for the company in terms of vision. However, I do not think it increases the chances of a Yahoo!/Microsoft (MSFT) merger. The reason I believe this, is not scientific. This business is an imprecise mix of science and art. My intuition tells me that the founder of a company, who cares so much about the performance of the company he founded that he returns to run it after already getting rich from the effort, is a guy who is not going to succumb to his competition or merge with it.

Apple's IPhone will soon be available at a store near you, possibly even at the ailing Best Buy (BBY), which reported softer than expected profits today. AAPL stock has run up ahead of the release, as the product is viewed as a blockbuster. But is it? Recent surveys raise concern about the price point, but Wall Street Greek anticipates wireless telecommunications providers will pick up a good portion of that cost to win market share. It's the kind of product that could inspire you to switch service providers. Net net, though, I think the stock will soften on the news, just as it ran up ahead of it, but will prove a winner in the end. Yes, I am eating crow. The SEC looks to be letting Jobs slide on the options issue, and it's unfortunate, because from my perspective, it doesn't seem quite fair. Still, any investor in AAPL must be aware that a bomb could drop any day, should the SEC want to pursue the issue. Otherwise, I think quarterly results will be lifted by this product. It seems to me like a real winner. Hey, what do I know, I'm just going on perception here, but it's that same perception that told you Mitt Romney would be president. He now leads the GOP candidates in the important early states... I am going to cover commodities in tomorrow's issue, with the Petroleum Status Report. Thanks for your interest.

Receive Wall Street Greek via email by subscribing here. If you change your mind, it's easy to unsubscribe. We respect your privacy and will not share your information with any third party. (disclosure)

Wake Up Call - Geopolitical Fires Drive Concern

"Today's Coffee" is on its way. Today's early market catalysts include confirmation from Iran that it would use oil as a weapon, justifying it with the U.S. statement that it would not rule out force. May housing starts were about in line (read poor), and permits were just slightly better. All the market-moving headlines, which are dominated today by geopolitical and company specific news, follow below. You can find the top news catalysts daily in our sidebar section, "Headline News."

Reuters: Iran Confirms It Will Use Oil As Weapon
Bloomberg: May Housing Starts In Line Weak, Permits Stronger
MarketWatch: Yahoo!, Back to the Future
CNBC: Best Buy Profit Falls
Financial Times: Euro Slips on German Confidence Fall
MarketWatch: The Gold Trade
Yahoo! Earnings Calendar
Economist: After the Showdown, Dust Settles in Palestine
BBC: Israel, U.S. Discuss Palestine
CNN: U.S. Launches Iraqi Offensive
BBC: Pakistan Protests Rushdie's Knighthood
ABC News: Suicide Bombers Are On Their Way
Iran Daily: Tales from the Dark Side

The Greek's Week Ahead - The Father of the Next Recession

The Greek's Week Ahead has been engineered to prepare you for events that could impact your portfolio this week.

Happy Father's Day Mr. Consumer. Enjoy your surf 'n turf because next year's version will likely join Toyota in passing GM, in relation to the price of a Lincoln that is! I think there's a good chance the consumer could guide us into recession, but it's not his fault. He's done his best to spend all that he can and with all that he can borrow. He's just tapped out, plain and simple. Yes, you heard me correctly... during the same time span the stock market supposedly decided that there would not be a need for a Fed rate cut to stimulate economic growth, and that, in fact, the economy was ready to recover, Wall Street Greek is telling you the market got it wrong again. Yes, during the same seven-day period that included a better than expected May retail sales report, this crazy blog man is telling you the consumer is actually weakening and that the economy is on its way as well. But, there's a good chance I'm not insane, after all, I did get the housing double dip correct, and the subprime fallout. And, there was February 25th and 26th, when I warned about the domestic Chinese equity market, just a day before that memorable adjustment. And remember the day I correctly said oil had reached bottom; it was in the upper 40's and hasn't looked back. More recently, my theory on inflation, especially regarding food and energy seems to be gaining fans as well. So, give me the benefit of the doubt on this one.

Here's why I believe the May retail sales figure provided a false sense of security. April offered a very weak retail period, which was attributed to the timing of Easter and a relatively cold month. It only makes sense that May should make up for the weak spring/summer sales in April. May offered a beautiful period to go shopping, outside of rising gasoline prices. The fact is, the stock market climbed and consumer sentiment even blipped higher in May. Anecdotal evidence, including commentary from some of the reporting retailers this past period, pointed toward a weak June and next few months. A good deal of them recently missed same-store sales expectations as well. New hiring plans also indicated that the summer season would likely be one of tempered enthusiasm, especially within retail.

The signs are there, everywhere in fact, except in the May retail sales figure. Last week, in my article, "Mind the Signs of Consumer Softness," I offered up 2007's monthly down trend of the Michigan Consumer Sentiment Survey in full color. It basically shows that May was an anomaly, where I believe consumer sentiment, and spending, benefited from the rising stock market and maybe even the weather. However, if you look at the picture on the whole, it seems clear the consumer is getting wary of things.

And why shouldn't he? His gasoline, food, mortgage payments all cost more these days. I get tired of saying it, but the pressure is mounting on the consumer, and last week's rise of rates only added to the weight on that courageous Atlas. As enormous numbers of mortgage loans reset each month, the aggregate cost of home ownership rises, and meanwhile, home equity declines. Imagine the poor souls who bought in at the peak and now sit on loans that are larger than the value of their homes... They are still better off though, than the other souls down the street who joined the ranks of the foreclosed upon in May, some 90% more than a year ago. Foreclosures are now eating up some 0.58% of all home loans outstanding, a record total. It seems clear to me that this trend is only going to get worse as rates rise.

Forgive me for not adding further color on my inflation theory, which insists that the headline figures including food and energy should be the focus of our attention these days. Basically, my view is that the dynamic drivers behind rising prices now-a-days are secular factors, whereas in the past they were seasonal, and therefore less meaningful. I went into this topic in detail in my article, "Mind the Signs of Consumer Softness."

In surveying Barron's "Mid-Year Roundtable"I was pleased to see that Pimco's famous bond guru, Bill Gross, agrees with many of my views. One that I strongly believe in is that risk is going to be revalued. Currently, the spread between the typical high-yield index and 10-year treasuries is just about 180 basis points. The fact is, I anticipate geopolitical fires and a flailing economy will eventually drive consideration of risk back into securities and dry the excess liquidity within the market. I talked about this extensively in my weekly article two weeks ago, "When the Liquidity Dries," and I covered the rise of country risk in America in "Country Risk, is America Safe?" I plan on a new geopolitical article this coming week, so stay tuned.

Now, let's get a look at the week ahead shall we...

Monday looks like a rather light news day. At 1:00 p.m., the National Association of Home Builders reports its Housing Market Index, a sample of the consensus view on the current and future housing market. Needless to say, the reading has been pretty pathetic of late and is expected to stay so on Monday.

European Central Bank President Jean-Claude Trichet is scheduled to give the keynote address at a conference on "Succeeding Through Uncertainty." There are a handful of companies reporting earnings on Monday, including Ashworth (ASHW), Benihana Inc. (BNHNA), Casella Waste Systems, Inc. (CWST), China Medical Technologies, Inc. (CMED), Gerber Scientific (GRB), OMNOVA Solutions (OMN), Sharper Image Corp. (SHRP) and Zila (ZILA).

On Tuesday, the usual report from the International Council of Shopping Centers will provide insight into the weekly same-store sales of major retail chains. The Redbook Survey adds to the puzzle of consumer spending activity. We have already outlined our expectation that consumer spending will soon show significant weakness, a predecessor to new hiring weakness and layoffs within the space. Thus, we will be attentive to Tuesday's data.

At 8:30 EDT, the Commerce Department is scheduled to report May Housing Starts, and after a very weak new permits report last month, the consensus view for starts is just 1.47 million, versus 1.528 million in April. Logic points to a weak number, but other housing data such as mortgage application activity for new home purchases has not been too bad. The expectation for sales stands above the 1.429 permit figure reported in April as a result. With not much data available this week, this should catch plenty of attention and drive equities with conviction.

The State Street Investor Confidence Index will be posted at 10:00 a.m. State Street measures actual risk within investment portfolios, so we would not expect a negative measure on this one yet. The reading was 91.2 in May. Reporting earnings on Tuesday, look for Actuant Corp. (ATU), Best Buy Co. Inc. (BBY), Carnival Corp. and Carnival plc (CCL), CLARCOR (CLC), Darden Restaurants (DRI), FactSet Research Systems (FDS), FSI International (FSII), La-Z-Boy Inc. (LZB), Progress Software (PRGS) and a couple others. Darden's report could be interesting, since it recently announced plans to divest some of its less well-known chains. We wonder how investment company success is impacting data provider FactSet.

Bright and early on Wednesday morning, the Mortgage Bankers Association reports its regular assessment of Purchase Applications. The usual EIA Petroleum Status Report is due at 10:30, and eyes continue to monitor capacity utilization at refineries. There remains some concern about the ability of gasoline reserves to sustain any shock to the system, like perhaps a hurricane in the Gulf of Mexico or oil supply disruption, perhaps say within the Straight of Hormuz.

A ton of Fed representatives are scheduled to speak on Wednesday, including Timothy Geithner, Janet Yellen and Richard Fisher. Wednesday's earnings reports include CarMax, Inc. (KMX), Circuit City (CC), Commercial Metals (CMC), Comverse Technology (CMVT.PK), FedEx (FDX), Morgan Stanley (MS), Sonic Corp. (SONC) and a few others.

Weekly Initial Jobless Claims starts the day on Thursday with consensus expectations for a reporting of 311,000 newly unemployed, according to Bloomberg. We have noted recent expectations hovering near prior week results, but the reported data has also been reported very close to expectations, so there may be accuracy involved and not the guesswork we had implied previously. Eventually, we expect this metric to show an increasing trend, but it's probably still a bit early, in our view. At 10:00 a.m., The Conference Board reports the highly anticipated Leading Indicators data. Bloomberg's consensus is looking for a rise of 0.3% for May. April showed a decline of 0.5%, but we also expect an increase in the May data. May was not a relatively poor month on the whole, and the indicators should reflect a positive forward outlook as a result, however false we expect this to prove out. Finally, the Philly Fed is scheduled to report on manufacturing in the Philadelphia region. After a stellar Empire State report, Philly is expected to post a reading of 7.5 for June. May's figure was 4.2.

Internationally, the European Union begins a two-day meeting in Brussels. Also, the ECB Governing Council is meeting, but no interest rate announcements are scheduled. The longest day of the year and first day of summer includes earnings reports from American Greetings (AM), Cognos (COGN), H&R Block (HRB), J.M. Smucker Co. (SJM), Jabil Circuit (JBL), Pier 1 Imports (PIR), Tektronix (TEK) and a few others. It will be interesting to see how HRB's advertising campaign and intensification of competition with self-service foes panned out. Also, Pier 1 could provide an interesting report, considering the state of housing.

Friday ends the week with a light schedule that could lead to many spontaneous three-day weekends and light trading as a result. ECB President Jean-Claude Trichet is set to give a speech at Swiss National Bank's centennial celebration. There are no earnings reports scheduled. We hope you found value in our market-moving event planner, and look forward to providing you with our regular daily reports all week.

Thank you for your interest in our articles. (disclosure)

Today's Coffee - Mind the Signs of Consumer Softness

The biggest driver of stocks today is the CPI figure, and we previewed the volatile expectations in our weekly report. We said, "Remember, the market is inflation-centric right now, so this data will likely impact equity direction and degree of movement." So, the inflation-centric market has taken values up today as a result. In the article below, we cover in detail the economic issues of the day and geopolitical topics, as well as international market and domestic stock activity.

ECONOMIC DATA & ANALYSIS

Consumer Price Index
The CPI report this morning set stocks off like a rocket, but the numbers were not that far off consensus expectations, so the run is most likely a relief driven move. The Core CPI figure for May was reported up 0.1%, ahead of the consensus view for a rise of 0.2% and down from April's rise of 0.2%. This seems to have eased overall market concerns about inflation. Yields have moderated as well. Recall that the key driver of volatility this week has been inflation concern. We think there was a little more to it than that, but this core figure has temporarily relieved the pressure on stocks from inflation.

Here's why the market is wrong today, and why inflation is likely to be stubborn. Today, CNBC had a special segment on whether the Fed should focus on Core or Headline CPI. As my loyal readers know, I have been harping here for months about the importance of the headline inflation measures that include rising food and energy prices. To refresh your memory, my point is this. In the past, food and energy price fluctuations have been excluded due to the seasonal drivers and other short-term factors that drove volatility. These short-term drivers usually netted themselves out over time, and proved not to be important long-term issues. So, it made sense to exclude them when analyzing inflation risk.

Today, the drivers behind rising food and energy prices are different. They are secular factors, rather than seasonal. Food prices should continue to rise for many reasons. First of all, global population growth is burgeoning at a much greater pace than new planting, and as you know, acreage is not increasing on this planet. At the same time, the emerging and developing worlds are shifting from agricultural and basic material driven economies to industrialized nations. Farmers across China are migrating to better opportunities in the manufacturing complexes. This is something not limited to China, but clearly the shift in China has great impact to the rest of the world. China has become a net importer of grains just recently, and will likely depend more on imports at an increasing rate.

At the same time that we are reducing global agricultural production, we are finding new uses for agricultural products. The most obvious example is the increasing use of corn to produce ethanol. This is a significant change occurring within our generation, and is at the forefront of driving higher food prices.

Likewise, energy prices are rising due to increasing industrialization in the emerging markets and increasing development throughout the world, as well as population growth. We have a limited supply of found and undeveloped resources, and new energy sources, though increasing, are not yet important enough to drive energy prices lower. Also, the economics of many of the alternative sources make them relatively expensive, though competitive with today's oil prices.

The geographic location of most of the world's oil, which includes many politically unstable places that face the strong potential of digressing, compounds the pressure on prices. Regarding energy, I believe the world is headed in the right direction, and much of this is the result of improving global warming awareness. So, I expect energy prices to moderate before food prices do, but I also expect a broad Middle Eastern war in the near term that holds the potential of escalating into something more.

So, you see, the drivers of rising food and energy prices are not seasonal, like hurricanes and droughts, but secular and substantial. Therefore, we cannot ignore the impact of rising component prices that should find there way into a good deal of other costs. The Producer Price Index reported yesterday and the headline CPI reported today, tell me that inflation is likely to persist and find its way into more goods and services. If it doesn't find its way into consumer goods, this is not a positive sign. It probably means retailers are cutting price to move inventory, which means they'll report weaker results and tighter margins. And that likely translates into industry consolidation, layoffs, bankruptcy and further economic weakness. Proceeds from sales that are generated on lower prices, produce poorer margins, less efficient profits and weaker GDP. It's like squeezing the last bit of juice from an orange. You get a lot less juice for a lot more effort. I think you can see this in productivity trends.

People are pointing to lower prices in housing as a good thing, and I believe there is a healthy rebalancing going on as housing tries to find stability. However, declining home equity and rising mortgage payments are a cost to the consumer that shouldn't be ignored either.

University of Michigan Consumer Sentiment
In this week's "The Greek's Week Ahead - Phantom Catalyst, Correct Reaction," I wrote "Your independent equity research provider here expects consumer sentiment to weaken below the consensus level." The University of Michigan/Reuters Consumer Sentiment Survey reading fell to 83.7 in June from 88.3 in May. We have been pointing to the declining trend throughout the year as a red flag. I want to republish that trend for you here so that you get the picture:


2007 Monthly Michigan Consumer Sentiment:

Jan - 98.0
Feb - 93.3
Mar - 88.8
Apr - 85.3
May - 88.3
June - 83.7


We reported in May, our view that May's rise was likely just a blip due to the strong performance of the stock market. Even at that time, we warned investors to avoid over enthusiastic behavior, because the consumer is showing signs of breaking. The consumer is responsible for two-thirds of GDP, and is therefore the most important bearing pillar of this economy. He's under a lot of stress, though he's held up well. The sentiment figures and recent retail sales data, as well as other anecdotal information point toward a softening of consumer spending. I believe this will drive layoffs and consolidation in the retail sector, and impact both the service sector, which makes up 90% of our economy, and the manufacturing sector.

Empire State Manufacturing Survey
The New York region's manufacturing report showed a reading of 25.8, versus expectations for 12.5. It was a positive report, but not one that contradicts Wall Street Greek's view. We are on record stating that manufacturing will be the last leg to fall, as U.S. multinationals benefit from demand for U.S. products overseas. The decline of the dollar has made U.S. produced goods more competitive, and firms are also able to chase market share with better success now. However, we think it will fall for this reason. In the end, American consumers butter the bread of American manufacturers. If consumer spending declines, the impact should be felt across the service and manufacturing sectors globally, and certainly in America.

Current Account Deficit
The current account deficit widened by 2.5% in the first quarter, versus the fourth. The current account deficit is the broadest measure of trade, as it includes investment flows as well as trade. It's not a good sign that it has widened sequentially at a strong rate. There is some debate whether a stealth trade war is beginning between China and the U.S. Some question whether China is selling out of U.S. treasuries or just buying less. Big Red has already stated it would do so as a matter of diversification, but experts and enthusiasts I trade emails with wonder if there is more to the dramatic move of interest rates of late than just inflation fear. Yesterday, I also noted that as war draws near with Iran, a trend of capital flow out of the U.S. should increase. One place you can be sure it will not be flowing into though, is Iran.

GEOPOLITICAL ISSUES

Hamas and the Palestinian Issue
Hamas has captured the important government and military installations in Gaza. And now we await the Israeli Army to retake Gaza. It's only a matter of time, because Israel is not going to allow friends of Iran to control the territory. Hamas is not good for Palestinians, and that is going to be reinforced soon by Israeli tanks I'm sure.

Palestinian President, and Fatah Party Chief, Mahmoud Abbas dissolved his government and replaced Hamas' Haniya with one of his own guys. While this is probably cool with Israel, it's not the way to unite your people. Abbas should have found and placed on trial the people involved with the attack on Haniya's home. This may sound naive, but it's the only way to unite Palestine. Someone needs to stand up and burn the flags of Fatah and Hamas and call for a unification of Palestinians. It's the best resolution for the Palestinians and the Israelis alike. Certainly, more reasons to divide people are not necessary. Hamas should be dissolved as should Fatah.

International Markets
The Bank of Japan kept rates steady today, a good move for investors in Japan. Recent economic growth has been favorable for investment, so we would like to see a central bank willing to let growth gain some traction. The NIKKEI 225 improved 0.72% today, and the Hang Seng rose the same amount. China's mainland markets also had another up day, as the CSI 300 appreciated 0.58%. China reported strong factory expansion today, and significant inflation risk remains, but I cannot see mainland shares really correcting until war with Iran scares people about energy supplies. Defense Secretary Gates today accused China of supplying weapons to our enemies in Iraq and Afghanistan, through Iran. It's clear that the Chinese government is no friend to America, and is actively working to prepare itself to perhaps challenge the United States' influence in many regions of the world. Wall Street Greek would not be surprised to see China advance its position regarding Iran, to a more threatening stance. There are important energy resources and supply lines and plans at stake.

International Market Activity:

Asia:
Hang Seng Index +0.72%; Shanghai/Shenzhen CSI 300 +0.58%; NIKKEI 225 +0.72%; S&P/ASX 200 +0.52%; Taiwan TAIEX +1.45%; BSE SENSEX 30 -0.29%; KRX 100 -0.01%; Ho Chi Minh +0.52%

U.K., Europe & Middle East:
DJ STOXX 50 Index +1.25%; FTSE 100 +1.24%; CAC 40 +0.96%; DAX +2.31%; Russian RTS Index +0.70%; ASE General +0.85%; Tel Aviv 25 NA; Tadawul All Share NA; DFM General NA

Stock Specific News
Today's Earnings Calendar Includes:

Business Systems Group Holdings PLC (BSG.L)
Time Not Supplied

Competitive Technologies (CTT)
Time Not Supplied

Plasmon PLC (PLM.L)
02:00 am ET

Triad Group PLC (TRD.L)
Time Not Supplied

Winnebago (WGO)
Consensus: 0.49
Before Market Open


Thank you for your interest in our articles. (disclosure)

Today's Coffee - Country Risk, Is America Safe?

From thirty thousand feet, the view below is much clearer than the chaos that appears to be at hand on ground level. When markets get volatile, talking heads speak quickly, sometimes perhaps without adequate forethought. You see, these guys get paid to know what's going on, to put you at ease and to clarify things for you, so if they don't get it, they had better well sound like they do right? I'll never forget the time a very senior guy once told me that if you don't remember something, it's better to just fake it than to come across as unsure on air. You know me, and you know I would never do that, so I always prepared very well for television appearances so as to avoid that situation.

It's hard to remember all the details of a group of stocks, especially when you follow forty companies as a sell-side analyst and you are asked specifics during a live television interview. So, I came to rely on the big picture view. I tried to answer the question, "why do you like this stock?" rather than get lost in the details, and if I forgot one, I would just fall back on "why I like this stock." I still have to refocus people today who are so lost in the details that they miss the big picture. We can argue and argue about some minor issue, but if revenues are growing 20%, the company has a viable offering and the stock is undervalued, who cares?

ECONOMIC DATA & ANALYSIS

May Producer Price Index

It's really unbelievable. Every economist, strategist and their mother are now saying what I've been bouncing off walls about for months. People are starting to back off the idea that faster growth expectations are the driver behind rising interest rates, or the so labeled "Phantom Catalyst," we entitled this week's "Greek's Week Ahead" after. No, now they are pointing to the persistent inflation Wall Street Greek has been pounding into the table here so often that our fists are bloodied and bones exposed. The view is that the 0.9% rise in prices, including food and energy, which was above the expected 0.6% view, could finally push consumer prices higher as well. Gee that sounds familiar, but was it a dream or did I first note this would happen sometime this past winter? Maybe if you stick with a viewpoint long enough, the market is eventually going to make you stylish?

Let's stick to the issue Greek! Yes, rising producer prices, including the impact of rising food and energy costs are going to seep their way into consumer prices. Yes, food and energy matter!!! I'm starting to bore myself though, saying it over and over again. Food and energy prices impact consumers more than any other expenditure, except maybe the cost of maintaining his domicile. Oh yeah, that cost, his monthly mortgage payment, is rising as well, evidenced by the steep increase of foreclosures reported in the first quarter. Every trip to the supermarket, restaurant and mall is impacted by those rising costs. Driving there alone is more expensive, as you are well aware of. It's simple logic, often missed by the giant minds of Wall Street, because it's so basic a concept.

The other new theory being tossed around, and I love having new topics to discuss, is that China may be selling or not buying U.S. Treasury securities as much as in the past, driving bond prices down and yield's higher. This is the "mechanics" issue mentioned today on CNBC by my favorite on air reporter, Rick Santelli. Rick discussed how significant off-hours trading has been during this volatile period, and it was implied that the trading was being driven by significant parties.

We all know about the inverse relationship of bond prices and yields. It's a basic relationship taught in schools across the country. The thing is, it's usually yields that drive price. I've never really considered that it could work the other way around, but it can. It's the basic supply demand, capital flow driver that moves the prices of all market offered goods and services. Why would China do this though?

Well, they have already announced that they want to diversify their reserves. Anybody with some vision can see the U.S. is pushing toward war with Iran. Maybe more institutions are laying off treasuries, and maybe they are doing so because of the existence of the greatest degree of country risk seen in America since perhaps World War II. American government securities have always been safe. It's where you supposedly face no risk of default, and very little risk of inflation. Things are changing in both respects. Well, things appear to be changing anyway.

There are risks to war. Many unknowns exist, however likely victory may be. There are suitcase nukes floating around from the cold war, and there is this thing called an electromagnetic pulse that could be created by an Iranian or Korean freighter that fires and explodes a nuclear missile over the United States. Such an explosion could bring back the abacus and that dreadfully inefficient thing called manual accounting. Just imagine the mess caused by fried computers, databases, servers and systems nationwide. That's serious risk. And, it could be something much less complex that threatens America. What if a Russian born genetically altered version of marburg is set loose. Alright, that's pretty complex. How about an Iranian born small pox strain.

Iran's intelligence agency is much better organized than say, al-Qaeda, which we've spent billions to defend against. I'm sure our intelligence has stopped some serious dangers, but the ones publicized recently have not been all to scary to me. We've arrested a bunch of idiots who were planning to attack a military base; yeah, that's pure evil genius there. Let's attack a bunch of armed, trained men. That's brilliant. I expect Iran's intelligence is better prepared to cause some havoc then these unemployed bozos posing as heroes to their cause. That's a real driver of risk to American securities and the dollar. So, maybe the Saudi's are getting the heck out also. Maybe even the Europeans are looking to other investments. Maybe foreign policy is impacting our financial stability. Seems like a good place to plug the stable, logical mind of Mitt Romney, your next president. Vote Mitt!

The point is, geopolitical fires and new problems with Iran have paralleled recent market flows. I believe country risk is increasing, and if I'm wrong, then the perception of country risk is increasing, and that's just as bad. America needs stable leadership now more than ever. We do not need another George Bush, and we do not need the polar opposite, and that's most of the democrats. We need a closer here. We need to elect an intelligent, logical mind, and a good person who views humanity above all. Democrats are going to scream that that sounds like Al Gore... I think I have this one right, and I'm standing behind Mitt Romney. Consider this my official endorsement. American country risk is rising, and that's what's pushing rates and stocks this week, besides the persistent inflation we've been harping on for months.

Receive Wall Street Greek via email by subscribing here. (disclosure)

Today's Morning Coffee - The Pawns of War

Today's issue of "Morning Coffee" is abbreviated, as I have an especially busy schedule in store. However, I hope I have provided the usual value added viewpoints to today's key news below. Equities are rebounding at this hour, as interest rate yields have moderated. Today's data was not especially convincing to drive a new inflection point. Thursday and Friday will provide some very important data regarding inflation and consumer sentiment that have that potential, so stay tuned. The most important news of the day is within the geopolitical sector, as important recent events portend to fan the flames of broader war.

Economic Data & Analysis:

May Retail Sales
Retail sales were reported 1.4% higher in May, versus expectations for an increase of 0.6%. Recall, the ICSC reported same-store sales rose 2.5% in May, so this should not be an extreme surprise. I have stated in the past that the numbers have not yet provided adequate evidence of a softening consumer, but it is something I expect in the future. Yesterday, news broke that summer hiring was expected to be lower than normal, including within the retail sector. This ties into my theory that hiring weakness should coincide with softer sales, and lead to rising unemployment and further reduced spending and GDP.

Import Prices Exceeded Expectations
Import prices rose 0.9%, or 0.5% excluding petroleum, exceeding expectations. Prices for consumer goods were unchanged, and this is viewed as a positive by the popular press but we think there is more to it than that. Prices were expected to rise just 0.3%. This implies that inflation persists, and will continue to pressure global central banks to raise rates. Increasing global demand for limited resources should continue to drive rising prices, including those of food and energy, and further stress the American consumer.

Weekly Mortgage Applications
Mortgage applications for both purchases and refinancings rose last week, despite higher interest rates. The purchase index rose 7.2% while the refinance index increased 5.6%. Interest rates on 30-year mortgages were 26 basis points higher, but on pace with last year's level, according to the Mortgage Bankers Association. Wall Street Greek believes there is some anomaly or error here not told by the numbers. Something must have been going on last year at this time that impacted the prior year numbers, or there should be an error in this week's calculation. I would take a closer look at weather across the country at this time last year, and in the major markets for further inspection. I bet we would uncover a strange driver.

GEOPOLITICAL ISSUES

As civil war progresses full steam ahead in Palestine, that same important Shiite shrine in Samara, Iraq, which was struck in the past, was hit by terrorism again today. This reinforces my view that there is a third party playing chess here, using the Palestinians and the Iraqis as pawns. Just as the grenade that hit the home of Hamas leader, Haniya, sparked full scale war in Gaza, this terrorism threatens to spark increased sectarian conflict in Iraq.

The most likely candidates behind the trouble in the Middle East are Iran, Al-Qaeda, Russia, and the United States and Israel. Now, I do not believe we or the Israelis are behind the problems, but there are a significant enough amount of conspiracy theory enthusiasts out there who do.

Iran has the most to gain by the rising of the Shiite's in Iraq and Hamas in Palestine, not to mention Hezbollah in Lebanon, so Iran is the logical candidate. By keeping the U.S. busy, it may prolong its stalemate regarding the nuclear issue. Also, if it's friends in these regions rise to power, it is better positioned to combat the U.S. and Israel and incite a broader war.

Russia would benefit just from keeping the U.S. toiling to maintain stability in the Middle East and from a rising price of oil and natural gas. Al-Qaeda's main goal is Holy Jihad, and any fires it can incite only further its cause. Wall Street Greek's money is on Iran here, and I believe it's gremlin like behavior will not prolong its destiny with American bombs.

Receive Wall Street Greek via email by subscribing here. (disclosure)

Today's Morning Coffee - No Break for Rates

Broad U.S. indices from the Dow to the S&P 500 and NASDAQ are all down less than a percentage point in morning trading. The key catalyst likely driving the move is the news from China that inflation was higher than expected. After Japan reported strong economic growth yesterday, there is escalating concern that global central banks could continue raising interest rates. As interest rates rise in the U.S., more pressure is expected in the housing sector, and that could drive the consumer softness we are forecasting at The Wall Street Greek. However, it is the rise in rates driving equities lower, as no matter the catalyst behind that rise, an increasing cost of capital impacts all businesses and valuations. The broad market view at this point is that rising rates are due to an improved economic outlook and persistant inflation, which we only half agree with.

Today's Key News Catalysts:


ECONOMIC DATA & ANALYSIS

Weekly Same-Store Sales
The International Council of Shopping Centers reported a weekly rise in same store sales of 1.0%, and a trailing 12 month rate of growth of 2.1%. Growth in May was 2.5%, so there appears to be a clear downtrend surfacing. This reconciles to our theory that consumer spending in the United States will weaken in coming months and send the economy into recession. Remember where you first heard this, because current market weakness is being driven by a completely different view, one of renewed growth. This accentuates or highlights our value add and the clarity of our vision versus that of the broader market. Wall Street Greek remains dedicated to the independent view you find most valuable.

Hyperinflation in China
China reported that inflation rose in May at the fastest pace in over two years. This comes a day after Japan reported a higher revision to first quarter GDP growth. Central banks in Europe and the U.K. have already been hiking rates to tame inflation, and Japan seems likely to continue raising rates now as well. China will likely be no different, as it seeks to contain inflation and speculation in asset acquisition activity.

It appears your favorite Greek is on to something. A quickly developing world is demanding a greater portion of a limited supply of goods and services. Nowhere is this more obvious than within the energy sector. At the same time, industrialization is altering the construct of global contribution, reducing the amount of agricultural production. China expressed great concern that rising food costs are contributing significantly to inflation. China was a net importer of grains until recently, but with more and more farmers migrating to developing industrial centers, it has become a net importer. This is an important development, as demand for food and energy may eventually influence Chinese military activity, in my view. I anticipate the Chinese may some day seek to secure oil reserves, due to necessity, through military force. Remember where you heard that first.

Small Business Confidence
The National Federation of Independent Business reported on the confidence of small businesses today. The Small Business Optimism Index rose to 97.2 in May from 96.8 in April. Confidence also rose generally in May versus April, benefiting from stock market appreciation and better retail activity due to seasonal changes. I wouldn't read too much into this number at this point, but small businesses may be the first to notice consumer softness, as they are less likely to have a clouded view due to international sales. They also have less pricing power to help them shift the weight of inflation to consumers.

COMMODITY MARKETS:

International Energy Agency Disagrees with OPEC
The IEA raised its 2007 oil demand forecast, and again raised the warning flag that OPEC has overdone production restraints. There appears to be a real political game being played between the two organizations, and I believe the U.S. administration is influencing the IEA greatly. The IEA appears to be a pawn, positioning to temper OPEC; not that there's anything wrong with that... Or, maybe it's a case of analysts really looking ahead, as the IEA indicated that capacity increases are not keeping pace with increasing oil demand, an argument I heard often from my old colleague, Tina Vital, who I view as an excellent energy mind. In my time on Wall Street, there was just one analyst of a group of 60 who worked longer hours than I, and that was Tina.

You know my view. Energy demand is increasing globally at a rapid pace, while at the same time the U.S. adds to strategic stockpiles as it prepares for war with Iran. That war could entangle Saudi Arabia, Iraq, Syria, Lebanon, Israel and Kuwait, and that means a serious threat to global supply. I've been neutral oil in the short term, as I anticipate a weaker U.S. economy could swing prices lower before longer term issues come to play. This is a very unique view, since the broad view is for economic recovery. Though the second quarter looks like an upswing for GDP, I anticipate consumer softness will influence quarters to follow.

Brent crude and RBOB gasoline futures are down over 1% a piece today, ahead of tomorrow's Petroleum Status Report. Natural gas is a half of a percentage point higher this morning.

Geopolitical Issues
A perhaps pivotal change has developed in the civil war within the Palestinian territories. The targeting of Hamas' leader, Haniya, through the grenade attack of his home, has tripped a wire and driven him passed his limit. Hamas is now threatening to overrun Fatah Party posts, and has given a two hour warning, which is just running out now. Tune into CNN, as full scale civil war is breaking out, in my opinion.

I believe Israel made a strategic mistake by assisting the Fatah Party openly through the use of its airforce and helicopter units. This is setting up Mahmoud Abbas by presenting him as a pawn of Israel, a view that is not likely to make the somewhat moderate leader a more popular chief in the territories. Israel should have focused on behind the scenes assistance to avoid this. I believe Mahmoud Abbas has been destined for death for some time now, but it appears he may have just days left after the attacks on Haniya's home. If the Haniya attacks were Iranian or al-Qaeda driven, there was some genius in that. Recall the al-Qaeda or Iranian moves in Iraq, attacking important religious centers that were sure to incinerate fury within the two secs of Muslims in the Iraqi house. Who knows, there may even be a third party at play, and that would be Russia, but I think this is unlikely in Palestine. Iraq perhaps, as Putin certainly enjoys pointing out our tangled web there.

International Market Activity

Asia:
Hang Seng Index +0.1%; Shanghai/Shenzhen CSI 300 +2.65%; NIKKEI 225 -0.41%; S&P/ASX 200 +0.13%; Taiwan TAIEX +0.38%; BSE SENSEX 30 +0.34%; KRX 100 +0.62%; Ho Chi Minh -0.4%

U.K., Europe & Middle East:
DJ STOXX 50 Index -0.63%; FTSE 100 -0.69%; CAC 40 -0.69%; DAX -0.63%; Russian RTS Index NA; ASE General -0.52%; Tel Aviv 25 -1.64%; Tadawul All Share -1.35%; DFM General +0.54%

Stock Specific News
The first of the major investment banks reported earnings today. Lehman Brothers (LEH) reported that traditional investment banking activity and stock trading drove revenue growth of 25%. Earnings per share easily beat consensus expectations and LEH shares are now up 2% on the day. Goldman Sachs (GS) and Bear Stearns (BSC) will report their earnings on Thursday. GS is currently up 0.8%, while BSC is down 1.3%. BSC is perceived as having a greater exposure to the subprime loan sector, while Goldman is very active in the rich merger and acquisition business of today.

Thank you for your interest in our articles. (disclosure)