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The Wall Street Greek blog is the sexy & syndicated financial securities markets publication of former Senior Equity Analyst Markos N. Kaminis. Our stock market blog reaches reputable publishers & private networks and is an unbiased, independent Wall Street research resource on the economy, stocks, gold & currency, energy & oil, real estate and more. Wall Street & Greece should be as honest, dependable and passionate as The Greek.


Seeking Alpha

Tuesday, June 26, 2007

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)

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