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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.

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Thursday, May 31, 2007

Today's Coffee - Market Moving News Abounds

First Quarter GDP Revision:

First quarter GDP growth was revised to 0.6% from 1.3%, initially estimated. The growth rate fell short of economists' consensus expectation for 0.8% growth. This is not good news folks, but most economists forecast a pickup in growth in the second quarter. Also, talking heads are noting revised higher consumer spending for Q1. Surely, Q2 GDP should benefit from the rising equity markets, but we believe a pickup in GDP will be followed by future quarter declines and recession.

A couple things that we found noteworthy in recent data were that expectations are that future consumer spending will soften. Today's gasoline storage build points towards the possibility that expensive gasoline prices are indeed eating into the consumer's pocket, possibly limiting his travel and accompanying expenditures to restaurants, retail and other establishments. Next week's gasoline inventory data should be rather telling, considering the Memorial Day holiday. If people didn't travel during Memorial Day weekend, we should be able to build conviction in the theory that rising prices, tighter credit and home equity losses are playing a role. Then we can look forward to retail surprises, margin pressures and increasing unemployment. Layoff reports from Motorola (MOT) and Pulte Homes (PHM) also portend further strain on consumers to come.


The Monster Employment Index rose to 189 in May from 186 in March. Clearly, online employment search continues to benefit from a secular trend, as job seekers increasingly migrate from help-wanted type searches to online effort. Still, this figure shows the job market continues strong.

Weekly initial jobless claims fell 4,000 to 310,0000, but were in line with expectations. The ADP report earlier this week revealed the private sector added about 97,000 jobs last month, and looks to be supporting Wall Street Greek's thesis that new hiring will first tail off before unemployment rises. Tomorrow's Employment Status Report from the Labor Department is likely to reveal similar results to the ADP figure. ADP has proven a better predictor of the Labor Department figure since changes to its generation earlier this year.

NAPM - Chicago

The National Association of Purchasing Managers - Chicago reported manufacturing health for May. The reading of 61.7 compared with April's 52.9. Please recall that I theorize manufacturing will lag service sector weakness. Manufacturing continues to benefit from global demand for American product in a depreciating dollar environment. Eventually, we believe weak domestic demand weakness will impact manufacturing.


U.S. construction spending rose 0.1%, exceeding expectations for no change. Commercial and municipal activity continued to offset residential weakness. However, we anticipate that retail weakness could expose a saturated retail environment leading to consolidation and a decrease in commercial activity.

Yesterday's FOMC Meeting Minutes:

We reviewed the minutes and they seem to support our thesis. The committee expressed some of the same concerns we do, but did not foresee retail spending dropping off as much as we do. We believe the Board of Governors has been lulled to sleep by consistent consumer strength in times past, and may be missing the degree of impact the many factors working together against the consumer could hold.

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Tuesday, May 29, 2007

The Greek's The Week Ahead - Putting Together the Economic Puzzle

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

This piece of sky goes here and this jagged piece of ocean goes here... Putting together the puzzle that is our economic future is complicated these days by dynamic and unique changes to the global environment we are operating within. When the economy should be slowing, it shows signs of life. While unemployment should be rising, it holds up enough to inspire debate as to the accuracy of data. When inflation is suppose to be giving way, its stubborn persistence draws a line between economists debating its future trend.

What the heck is going on here! Why are so many experts seemingly confused, taking positions at odds with one another and pointing to various factors as the key to their views.? How can so many equity analysts miscalculate first quarter results by so much?. What is behind the mania driving emerging markets? These are questions with many answers, but one thing holds true within the fabric of each. The global environment is dynamic, and historical norms cannot be relied upon to hold true in the future to the same degree as they have in the past.

This week, many new puzzle pieces will become available, and could make sense of the jumbled mess before us. Wall Street Greek expects that as we work toward the first quarter GDP revision, which is widely anticipated to be revised lower, the high flying Dow and S&P 500 indices, which now lack the support of earnings season, should give back some profits. Even if GDP does not shake things up, the Labor Department's reporting of nonfarm payrolls and the PCE inflation indicator portend to.

Following the Memorial Day holiday, Tuesday kicked off the work week with the Conference Board's Consumer Confidence Report. The report showed an increase in confidence in May to 108, from 106.3 in April (revised higher). The measure also exceeded economists forecasts for a reading of 105 this month, as compiled by Bloomberg. Does this mean the consumer is okay? Sure, but it does not mean she will stay that way. May's confidence was probably born from the stock market's strength this month, adding to the wealth of many Americans. So, despite higher gasoline prices and other expenditures, consumers have a brighter view of the future.

A factor that can change that is the continuing of creeping prices and persistent inflation in food, energy and other costs of living. A change in the employment picture would also pressure the consumer's outlook and spending habits. Tighter lending standards are sure to play a role as well. I think the impact of the latter will be analogous to the impact that taking candy from a baby has on the child. Losing your home or automobile can be rather disheartening, and losing the ability to borrow is bound to have impact as well. The aggregate impact of higher costs of living should lead to a decrease in restaurant outings and shopping binges. The result of this should be tightening margins of consumer discretionary businesses, which in turn should drive reduction of workforce. And there you have the downward spiral of consumer spending.

On Tuesday, S&P Case-Shiller released their combined work on the depressed state of housing. The first quarter of 2007 represented the first quarter of home price decrease since it last happened in 1991. Nationwide home values fell 1.4%. I'm sure none of us were surprised, after all, we just discovered that new home prices fell 11% in April. Another thing likely to keep people from spending as much as they use to is the loss of home equity as values continue to decline. Nothing hurts more than taking a loss, and the memory can affect our spending for quite some time to follow, in my opinion. I'm just going by my understanding of human nature here. When a guy blows ten grand in the stock market, it could send him away for years. I for one, had an early experience in the casino the day after I turned 21 that kept me from Atlantic City for more than five years. Most of us hate that losing feeling, so I don't buy the views of the experts who say that decreases in home values do not affect consumer confidence readings as much as other issues. Ten grand is ten grand, and 11% is not a pittance.

Just as Peter Lynch took from personal experience to select some of the greatest stocks of his time, I look into my everyday life for signs of economic change, and stock picks as well. This holiday weekend, as this autoless New Yorker (a phenomenon not atypical for the city) visited family, I had to borrow a car to get around. It seems the rest of you still do not enjoy the effective transit system we rely on here in New York, though it be stinky. Anyway, I noticed that after I reminiscently borrowed my father's car to visit a friend and play tennis over the weekend, his response upon my return was, "you used all my gas." This was a strange comment from my father, one I had never heard before, not even in my teens. I view this as supporting evidence that, yes, gas prices really do matter to regular folk.

It seems Chinese regulators have taken Wall Street Greek's advice and have acted in a more direct manner to stem equity investment. Recall our article last week, when we suggested Chinese regulators consider limiting equity investment to a specific level of liquid wealth. Last night, after the market close, China announced an increase in its cut of trade commissions. The government raised the stamp duty on shares to 0.3%, from 0.1% previously. This move could impact trade, but is not likely to slow the inflow of domestic capital investment into Chinese equity markets. Also, I still have not received my consulting fee from the People's Republic. In other international news, the Bank of Canada decided to keep rates steady at 4.25%.

On Wednesday, the latest Federal Open Market Committee meeting minutes will be released and threaten to contain hawkish language or express concern about the housing market. The weekly purchase index will be provided by the Mortgage Banker's Association, but we continue to advise that weekly data should be impacted by rate change, while the general trend should continue weak.

Weekly retail data will again avail itself with the releases of the ICSC-UBS Store Sales report and the Redbook report. We continue to closely monitor these trends, seeking indication of consumer softness.

In a prelude to Friday's Employment Status Report, the recently prescient ADP Employment Report is due Wednesday morning. The May 2nd report for April accurately predicted weakness in the Conference Board's report that followed. ADP measures private sector employment trends.

More employment data starts the day off on Thursday, with the Monster Employment Index release at 6:00 a.m. EDT. With a significant and increasing degree of job seeking done now through the Internet, this has become a more important report than the Help-Wanted Index provided by the Conference Board. April's reading measured 186. The weekly reading of Initial Jobless Claims is also due Thursday, and expectations stand for a level of 310,000. Something higher would raise eyebrows and concern for Friday's Labor Department report.

The corporate profits component of GDP will be reported for the first quarter. However, the big data bit that should significantly impact equities and sentiment on Thursday is the revision of first quarter GDP. The initial reading showed GDP growth had slowed to just 1.3%, but expectations have worsened for the revision. The consensus of economists surveyed by Bloomberg sees Q1 growth at just 0.8%. Thus, a reading in line is concerning to equities this week, and the reason why Wall Street Greek expects equity action to the downside leading into the report. Obviously, a moderate upside surprise should be met with welcome. A reading sharply above expectations could ironically raise concern about a future Fed rate hike, while a surprise to the downside would likely concern the market about pending recession. The value added service we provide is sure of one thing, the global economy and equity markets are likely due for a shock if conflict is initiated with Iran. We have outlined our view on this several times before and recommend survey of our various articles on the topic. Our time horizon is within a year and our view of the probability of its occurrence is "highly likely".

The National Association for Purchasing Managers will report on Chicagoland conditions in manufacturing, but we continue to view manufacturing as a laggard to economic slowing this time around. We believe it will follow other events, including lighter domestic demand trickled up from a tighter consumer budget and also on global adjustment post conflict. This is a view few are bold enough to make, so I ask you remember it please.

The month to month change in construction spending is set for 10:00 a.m. release Thursday, and expectations are for no change. Commercial construction has helped to protect the overall construction industry from housing troubles, but we anticipate a saturated retail environment will be exposed with time and commercial construction will be severely impacted as a result. While we are on the topic of housing, Fitch Ratings kicks off its housing conference, while Hovnanian Enterprises (HOV) reports the results of its fiscal second quarter.

Friday holds one of the busiest economic data slates imaginable. The very important Employment Situation Report leads all with its release at 8:30 a.m. EDT. Nonfarm payrolls are expected to increase by 135,000, a decent increase considering April's rise of just 88,000. Unemployment is generally seen holding at 4.5%, and we agree. Average hourly earnings are seen rising 0.3%, month to month, not a slow pace. The market would be surprised to get another reading below 100,000 in May, but Wall Street Greek expects this indicator to be the one that should eventually take the lead (lower) from weaker retail spending. We may still be early this month, as retail has not softened significantly as yet. However, this and the consumer softening issue are key factors that we expect to eventually be proven correct on.

Personal income and consumption will also be reported on Friday's big league data slate. Income is seen rising 0.3% month the month, while consumption is expected to rise 0.4% in April. Eventually, I expect these figures to tail off, but I'm not sure if April will be the inflection point. It's more likely to happen in forward months, in my view. The University of Michigan will publish its consumer survey on Friday, and expectations are for a reading of 88. The survey recently showed a blip of short-term rise in a trend of decline. We anticipate the downtrend will continue this year, but likely come to prominence next month. This month could hold steady, considering short-term issues providing confidence now.

The ISM Manufacturing index is seen measuring 54.0, versus 54.7 a month prior. We reiterate that we anticipate manufacturing weakness will lag other drivers in this economic cycle. This is due to the support of international demand, exacerbated by a weakening dollar and developing world. The National Association of Realtors will report April's Pending Home Sales on Friday. March showed a 4.7% decrease, and we do not anticipate strength for April's data either. Finally, May motor vehicle sales are expected to measure 12.5 million, versus 12.4 million in April.

We hope you found value in this week's report and we apologize for the delay in its publishing. Development efforts and holiday travel impacted us this week. We expect to get back on track soon.

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Friday, May 25, 2007

Today's Coffee - The Geopolitical Factor

Geopolitical issues are headlining the news again, as the dry winds of summer rekindle brush fires across the world. It seems almost orchestrated how unrest has resumed in Palestine, Lebanon, Pakistan, and the never ending fire of Iraq seems set to return to a furious state again. At the same time, hardline rhetoric has supplanted discussion of negotiation between Iran and the U.S. In Nigeria, rebel assaults and kidnappings have increased. Conflict is following a trend of escalation that seems sure to continue. These issues are important to the dynamic stock market, and should not be discounted as just noise. The geopolitical factor is one that is increasing in importance as a driver of stock price and it's time to pay attention.

Iran has warned Israel that another invasion of Lebanon would be met differently than the passive reaction Iran undertook last time around. Hezbollah seems inspired to overthrow the Lebanese government. At the same time, another Iranian ally, Hamas, is engaged in a new round of civil war with the Fatah Party. This time around, Israel is actively assisting Fatah, arresting Hamas leaders and bombing Hamas targets. They should just paint a bull's-eye on the forehead of Mahmoud Abbas, as Palestinians are likely to develop a bitter for taste for a leader that is assisted by Israel. Wall Street Greek makes bold predictions of all sort, and I anticipate Mahmoud Abbas' days are numbered. That's not a good thing for Palestine.

In Pakistan, an Islamic revolution under the cover of democratic movement threatens to unseat an important American ally. Imagine an Iranian style revolution in a nuclear Pakistan. Wall Street Greek believes it is inevitable. For now, Musharraf's army is powerful enough to stave off such efforts, and his resolve has been forceful enough to put down his enemies. Still, there is likely some dissent within his ranks, and risk of a situation altering bomb or bullet finding its way to the Pakistani leader is high. Al Qaeda has targeted him before, and has had success in eliminating the leaders of other opponents in such fashion.

In Iraq, Muqtada al-Sadr has reemerged from the cover of his snake hole. With September commonly mentioned as a date to mark the beginning of a withdrawal, the summer portends to be a bloody one. One has to wonder why American troops would be pulled, unless they were considered in harms way should we undertake a mission against Iran sometime to follow.

The IAEA issued a rather ominous report yesterday, stating that Iran now had nuclear knowledge, and that the world's focus should shift to stopping the ancient civilization from proceeding to industrial scale production. The United States stepped up the rhetoric, stating that a greater intensity of pressure should be applied than the United Nations is seeking. The U.S. is now engaged in naval exercises in the Persian Gulf, while Iran continues to issue threats.

With earnings season behind us, geopolitical concerns and next week's GDP revision seem likely to start a bearish trend after Memorial Day. Its duration is very likely to find high correlation to the direction of GDP revision and the state of geopolitical affairs.

Existing home sales:

Existing home sales showed inconsistency with yesterday's new home sales rise, as I anticipated. We wrote, "Wall Street Greek believes new housing benefits from a higher propensity to offer incentives and cut prices, so existing sales should not show the kind of upside surprise seen today in new housing." Existing sales for April fell to an annual pace of 5.99 million, down from 6.12 million in March. In fact, the rate was the lowest seen in four years. Existing home sales dominate the housing market, and are therefore more important than new home sales as a barometer for overall housing health. My how the outlook can change in just one day, in the eyes of the popular press that is. We have held to our conviction here. I wish you all a great holiday weekend.

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Thursday, May 24, 2007

Today's Key News - Stubborn Bull

The broader indices are lower today, despite the recent cheer leading of Henry Paulson regarding the state of the subprime sector and major media's positive spin on a weaker than expected durable goods report. Housing news today was on the surface positive, but spurring sales by reducing prices 11% is not such a clear positive as indicated by today's popular press. Your independent equity research source here has no agenda but to provide you with a value added service. That said, a serious catalyst is not in place to start correction now. Pending existing housing data, though probably not as positive as today's new housing data, shouldn't be powerful enough to start a trend lower. A three day weekend with the U.S. Navy involved in military exercises in the Persian Gulf is enough to inspire some profit taking though. Next week's GDP report, which is widely expected to be relatively poor, and could show a revision lower from the initial report showing just 1.3% growth, that could be a catalyst for further profit taking next week. The eventual catalyst, recession or not, to drive global equities into severe correction, is the war with Iran that is clearly nearing. With geopolitical issues back in focus, we are planning a special article.

Our take on today's key news:

  • *** Oh Magoo, you've done it again! Alan Greenspan correctly, in my opinion, warned that Chinese investors are in store for a dramatic correction. Sounds similar to Wall Street Greek's recent article pointing toward a 1929 style market crash and resulting Chinese depression.
  • *** In true communist fashion, the party ran pickup trucks through the streets with megaphones warning citizens to stop buying so much stock, and also to turn in their first born daughters. Well, something like that. Rather, the government warned investors to study a little bit more about the risks of speculation.
  • *** Chinese shares continued to weather the storm, as the capital flow provided by the opening of some 250,000 new brokerage accounts a day is unstoppable for now. Chinese equities barely flinched today.
  • *** Durable goods orders rose 0.6% in April, short of consensus forecasts for a 1.0% increase, but you wouldn't know it by watching popular media. Instead, I see a lot of cherry picking of good bits of data from within the overall miss. The focus is on the prior month's revision higher and the growth of 1.5% if you exclude transportation. Your independent equity research provider here has pointed out that durable goods orders should continue to benefit from global demand for cheaper American goods overseas. We remind you now that an expense pressured, capital dry consumer should lead to decreased service sector profits, which should precede slower growth of new hiring and a later increased unemployment. Feeding upon itself, weakening corporate profits driven by further consumer weakness could send GDP into recessionary territory. Remember, multinational or not, it's the American consumer that butters the bread of American companies. So, the catalyst that should slap the market in the face is surprisingly slower retail, restaurant and other service sector earnings in coming quarters. I may be too early here again, or underestimating the consumers' spending capability, but we need to keep a close eye on the consumer to root out weakness or strength in the near future. We have to figure out if the consumer can really survive rising food, energy and soon other prices, in my view. I doubt it, and continue to believe recession is a serious possibility. Still, as long as there is a disconnect between much of the data and this likelihood, stocks should remain unpressured.
  • *** Initial weekly jobless claims rose above forecast levels, to 311,000. Remember, nonfarm payrolls should provide the first sign of a deteriorating employment situation, not jobless claims.
  • *** New home sales were surprisingly stronger than expected in April, but if we take a closer look, we see why. Prices have adjusted significantly further lower. Prices declined 11%, on a median basis and compared to prior year levels. The inventory of homes for sale, though improved, still "sucks," to use the words of several home builder CEOs. At the current pace, it would take 6.5 months to sell through all the inventory. Still, there are buyers, and that's a good thing. Who cares about those folks taking losses on their investments and slipping into negative equity, or the banks that are forgiving that difference in order to avoid costly foreclosure sales. Who cares about that? How about banking sector investors next quarter...
  • *** Toll Brothers (TOL) reported earnings for its fiscal second quarter, and showed a profit decline that missed consensus expectations. TOL continues to cut back on production and lots, but showed an improving cancellation rate. Still, that could be partly benefiting from the fact that less people are entering into contracts they would later cancel, as a byproduct of the weak housing environment. Contracts signed into continues to track lower than prior year results, but sequential data is more important now. Wall Street Greek believes new housing benefits from a higher propensity to offer incentives and cut prices, so existing sales should not show the kind of upside surprise seen today in new housing.

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

Financial Times: In Communist Fashion, Chinese Government Warns Investors
Forbes: The Greenspan Effect
Bloomberg: Durable Goods Orders Miss Mark
CNBC: Initial Weekly Jobless Claims Decline
CNN Money: China Trade Talks Result In Not Much
BBC: U.N. Warns of Iran's Nuclear Schedule
CNN: Israel's Worst Mistake
Yahoo! Earnings Calendar
AP: Toll Brothers' Earnings Ugh
Iran Daily: Tales from the Dark Side

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Wednesday, May 23, 2007

Today's Coffee - China's Shady Tactics

China trade talks are the most important topic again today, despite the market's hope to find another driver. It appears the only tangible result of the meeting between the delegations will be the opening of Chinese destinations to American airlines and the sharing of environmental technology. America benefits from both of these initiatives, as does the world, from a reduced pollutant contribution emanating from China's coal-fueled plants.

It looks as if the Democratically controlled Congress will not be satisfied by these minor achievements and recent Chinese fiscal policy decisions. I expect Congress will move to penalize China for copyright infringement and its impeding of a free trading currency. While China's yuan has appreciated against the dollar, most experts agree it remains significantly artificially restrained, leading to an unnatural contribution to trade imbalance.

Wall Street Greek agrees that China needs to play by the rules, but I would avoid a trade war. I think a better solution might be providing further incentive for American firms to do business in India and Eastern Europe, rather than China, to force China to play fairly. Nobody likes a cheater. Actually, Chinese investors do, as the CSI 300 Index climbed another 1.77% today. I do not see a catalyst strong enough to impact the heavy flow of capital from domestic sources in China, until Iran. I'm talking about the kind of catalyst that is capable of doing the damage Alan Greenspan spoke of today regarding Chinese equities.

Somebody gave Jeffrey Lacker a microphone yesterday, and that's a sign that the guy has finally been recategorized from the insane inflation hawk box, to the concerned economic maven file. Lacker is the lone wolf from the Richmond Fed who has been aggressively pushing for interest rate hikes, while his colleagues have argued otherwise. The tone in which the mainstream media use to refer to him made him seem like gunslinging idiot out to make a name for himself. In the interview on CNBC yesterday, he didn't look so tough. He also spoke yesterday to a group at New York University and said he is comfortable for now with interest rate levels, but sees opportunity for Fed action in the not too distant future. At least that's how I interpretted it. Read for yourself.

Thanks for nothing nuclear man...
The International Atomic Energy Agency reported to the U.N. Security Council today that Iran has stepped up nuclear enrichment efforts and that it had blocked IAEA access to secret facilities. It's clear that the longer the world pursues a diplomatic solution, the closer Iran gets to making nuclear weapons. ElBaradei said that Iran already had the knowledge of enrichment, and the world should now focus on preventing Iran from moving to industrial scale production. It's anticipated that Iran could have 3,000 centrifuges in operation by June's end.

Meanwhile, the U.S. Navy sent nine vessels, which we believe include two carriers westward through the Strait of Hormuz and deeper into the Persian Gulf. The vessels are set to run exercises, but it seems the U.S. is making a show of force, and possibly even trying to entice Iran into a mistake. No advanced notice was issued to the Iranians of the activities, so some itchy trigger fingers are likely shaking. Brent crude broke $70 today, while WTI crude is up a half of a percentage point, to just above $65.

Today's Petroleum Status Report showed a 2 million barrel build of inventory stocks, while gasoline built by 1.5 million barrels. RBOB gas futures are down fractionally today as a result. Capacity utilization at refineries, the bottleneck that has driven gasoline prices so high, improved to 91.1%, up 1.6% percentage points. This should allow gas prices to moderate some, in my view, despite capacity utilization still slightly below normal for the season. However, I can't retain my short-term bearish view on oil with a face-off apparently in store now with Iran. I am neutral near term and still bullish long term, as I continue to expect war to occur sometime later this year or early next year. Please review my recent weekly article, in which I discuss in detail the catalysts I view capable of collapsing Chinese and global equities. My discussion includes the catalyst of war with Iran.

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

CNN: China Seeks Patience in Trade Talks
CNBC: Day 1 for Chest Beating, Day 2 Deal?
Bloomberg: Yuan Flexibility, Catalyst for Collapse?
Bloomberg: Fed's Lacker Says Slowing Economy Not Enough to Stem Inflation
DOE: Petroleum Status Report
BBC: Security Council Gets Its IAEA Report on Iran
CNN: Carriers Exercising in Persian Gulf
Yahoo! Earnings Calendar
CNN Money: The Speed of Subprime Bust Shocks
CNBC: Weekly Mortgage Applications Rise
Bloomberg: Bank of England Raises Rates
Forbes: Alcan Had Other Plans
CNN Money: Target Bettering WalMart
CNBC: Iran, Inventory in Oil's Focus
CNN: Turks Attribute Ankara Bomb to Kurds
Yahoo!: White House Declassifies 2005 Bin Laden Order to Attack
Iran Daily: Tales from the Dark Side

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Tuesday, May 22, 2007

Today's Coffee - China and the Democrats

I noticed the more I mention China, the more publicity my site receives, so China China China... The day's hottest topic is by far China and the trade/economic discussions just getting underway today. Well actually, today was mostly about greet and meet, and tonight's cordial dinner should swiftly give way to hardcore bargaining tomorrow.

In my musings of Friday and in "The Greek's Week Ahead," I failed to note one important catalyst that could impact Chinese stocks, and relations with the communist behemoth at the same time. THE DEMOCRATS! Yes, you remember that mean ugly bunch that tear each other apart so badly during their primary disputes that the resulting winner is usually too battered and bruised to have a chance in the general election. Yes, those guys, and girls these days, are set to meet on their own with the Chinese behind closed doors. I'm not sure that's such a good idea. I mean, they may not come out alive. That Pelosi is one tough cookie. The DEMOCRATS are out for blood! They want trade war, well, they want tougher penalties for property rights stealing Chinese companies and they want the Chinese to let the yuan float freely to allow for a more competitive trade environment. Fair deal, you must admit. I'm just worried for the safety of the Chinese delegation.

In past articles, I discussed my view that now is not the time to start a trade war with China. I suggested that we needed to bite our lip a bit longer, at least until we exit this critical stage of the economic cycle. But those Dems are hell bent on showing America that they mean business ahead of 2008. I'm really worried. I even heard Ted Kennedy has offered to drive the group to dinner... Okay, that's going too far. I am a fan of the patriotism JFK personified, so its hard for me to even make a joke there, and I'm no judge nor jury. God bless America and the impact of JFK.

Let's get back to topic before I lose my day job and my democratic readers, and hopefully I will not lose any republicans because of that sentence. As you all know, I embrace an open-minded philosophy, and am not afraid to cross party lines on issues if my views differ. I have to admit that some of you who embrace specific parties with a sort of insane fury scare me sometimes. I think that nothing is so black and white that we should relegate ourselves to specific box within which to live. How many of you are Republicans and how many Democrats? Feel free to reply via the comment box at the end of the article. I'm just curious. I bet it's something near 50/50.

China China China. The Democratic push of Congress portends to pressure China enough to hurt Chinese equities, if not for the Republican president and his veto hammer. I believe that after the primaries, if a Democrat emerges as the favorite to be president, Chinese equities could start to notice. It's a catalyst I left out in my last report, and I think you should follow the issue if you are benefiting from emerging market growth or considering investment in the Far East. For your information, the mainland China CSI 300 Index broke even higher today, rising 1.0%.

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

Yahoo!/AP: U.S. and China Talking Trade and Economics Today
Forbes: Chinese Market Breaks Record
CNN Money: The Pervasive Gasoline Tax
Financial Times: China Buys Into Blackstone
AP/Yahoo!: NYC Cabs Go Green
Yahoo! Earnings Calendar
DesMoines Register: Romney Rising in Iowa
BBC: Iran/Al-Qaeda Influencing Uprisings in Palestine, Lebanon, Pakistan?
BBC: Israeli Meddling a Bad Thing for Fatah, Abbas
Bloomberg: German Investor Confidence is Strong
Financial Times: WSG Wonders How Long It Will Take BP to Regret Russian Ventures
Bloomberg: Fremont General Sells Commercial Lending Unit
Iran Daily: Tales from the Dark Side

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Sunday, May 20, 2007

The Greek's Week Ahead - China Syndrome

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

China's on my mind, with the topic discussed in so many major financial publications recently, including the Greek's Friday copy. Also, Chinese regulators took three key actions Friday evening, ahead of Tuesday's planned strategic economic dialogue in Washington. Chinese representatives are scheduled to meet with the Treasury Secretary and Fed Chairman. So, China is in focus.

I wrote on Friday that while China's central bank's actions are well-intended and the direction correct, the magnitude of change is inconsequential. It seems Chinese regulators are taking the lead from the U.S. Fed in using small steps to achieve an ultimate goal, and avoid shocking the marketplace. By taking the medicine in smaller doses, you give it a chance to work before overdosing and rendering your economy unconscious. Still, the 18 basis point rate hike the Chinese central bank undertook Friday seems a bit too precise and even ridiculous considering the double digit rate of China's economic growth last quarter. I really think the government needs to specifically target it's equity markets with its restrictive efforts. For instance, it should place restrictions on profiteering brokerage houses. Something more than 300,000 brokerage accounts were opened per day last week, and I read the average is humming along at about 250,000 a day. Now, as a percentage of population, maybe that's not so staggering, but it still seems to be driving a speculative fervor in China's equities. On Friday, I suggested, and I admit I may be uninformed here, that China should limit individual investment as a percentage of liquid wealth. That way it could limit gambling, though I'm sure those inspired enough would just open accounts for grandma and grandpa to get around the rule. Still, the harder you make it for your populous to place their life savings at risk, the better you slow a runaway market. Now, normally I would scream "communism!" but we're talking about communist China here so it's all cool.

I've been thinking a lot lately about the potential catalysts that could bring the tightrope walking Chinese equity market to a thunderous crash. There are arguments to be made about valuation, and whether it really is too high or not, after all, growth is stellar as well. It's just that when you come so far so fast, you have to ask, what's changed to make this new P/E threshold so suddenly okay. Not enough, in my view. This is the same China that is building its military faster than any nation worldwide. It's still the same country pointing missile after missile toward Taiwan and barking at every whisper of its independence. It's the same China that seems to take position opposite America on just about every major international issue. It's the same China that is okay with a nuclear Iran. And yet, it's the same China that helped broker a deal with North Korea.

I've nailed the catalysts that can tank the Chinese, and likely global markets, to the two I view most important. The first is clear. If Chinese regulators take significant enough action to cool market speculation or economic growth, it could be interpreted as too aggressive and start an avalanche of capital retreat. The pace of new account growth and flow of capital has thus far overcome restrictive moves, including the big one in late February. Investors have become use to the government's efforts at this point, and it would take something new to shake them. Natural disaster could do the trick. Something like a massive earth quake in Hong Kong for instance. But, that's just not predictable.

The very predictable catalyst that I see as a serious threat to global equities and especially Chinese equities, due to valuation sensitivity, is Iran. China and Russia have taken up position against the United States on the nuclear issue. Russia likely does so in order to win allies, but China has a much more logical reason. Let's talk about Russia a bit here, and explain why I think Russia's opposition to the United States regarding Iran is superficial.

Russia stands to benefit most from a Middle East enveloped in war, and it's actively positioning itself to better benefit. When, yes when, Iran is bombed, it will retaliate. Iran has likely learned well from studying its neighbor's pummeling at the hands of the United States and allies. It must know that every minute lost in such a war is a minute it becomes further powerless in defending itself and impotent at injuring others. The U.S. likes to take out command and control and air defense systems initially, and then move on to high priority targets and offensive threats. So, I don't think Iran is going to sit on its missiles and wait for a sunny day to fire away. I think the minute the bombings begin, you can expect missiles to fly toward energy facilities in Saudi Arabia, Kuwait, nuclear facilities in Israel and wherever American interests lie that Iran's arm can reach. I think civil war is likely to really begin in Iraq, and the Shiite majority is likely to overrun the country, possibly aided by an influx of Iranian troops... if they can get through U.S. air strength. As chaos takes over and oil prices skyrocket, Russia's intact production becomes ever more profitable and critical to European and Chinese energy needs. Now, don't get me wrong, I am not saying Iran has any chance at defeating us, but it does have opportunity to injure us and impact the global economy. Heck, that's why we haven't done anything yet.

Iran is a key supplier of energy to China and the east. This is the reason India sides with China against conflict with Iran. But China really bothers me. China is loading up its strategic oil reserves, just as the United States is. The Chinese realize the Iranian and Middle Eastern spigot is at risk, and I suspect China is more than a little concerned about that. Imagine what happens when the lights go out and the production lines fizzle to a halt in China. What chaos will befall Chinese equities.?. If you can only make money in equities when stocks rise, as in China, a mass exodus seems likely to burst through the bottleneck when downside catalyst arrives. A combination of Eastern emerging market free-fall and surging energy prices should be enough to create possibly one of the worst one day collapses of equities in, well ever. Somebody just reminded me about a biblical mention of a 200 million man eastern based army moving into the Middle East during the "end of days." Domestic coal runs much of China's plants, but that Middle Eastern resource could inspire troop movement if it was cut off long enough. Hey, I'm not Nostradamus here, I'm just saying...

The announced rate of oil flow to the U.S. strategic reserve would fill it by about March of 2008, but I doubt we are in the business of accurately telling our enemies when we'll be ready to attack them. After all, we've filled the reserve twice just before attacking Iraq, and Iran knows it. So, you can expect oil flow to the reserve to be just an undetectable tick above the reported amount, but over the course of a year, that tick of a difference could shave a couple months off the attack date. I seriously doubt I have an Iranian government following, so hopefully that intuitive secret is safe with you guys... The reason I believe the bombing of Iran is a matter of when versus if, is because I can't imagine any scenario where Israel accepts living with a nuclear Iran. I expect that all negotiations now are meaningless in light of that fact, and are basically serving as lip service to the Chinese.

So, basically, I'm saying the party is clear to roll on in China for a while. Sure, we could get a correction here or there, but I think the big hit is coming when Iran is bombed. There's also serious risk that a paranoid and tense Iran could preempt action by the U.S. or Israel or a global coalition. Global coalition is not likely in my view, as it would just allow China, Russia or someone else to tip off Iran. Still, with no site of a bombing through the summer, unless Israel or someone else is thinking one step ahead of the strategic mind of the Greek, I can't see this kind of capital flow stoppable for a while. So, party on Garth.

Now that we've outlined the next nine months for you, let's take a look at the week ahead...

The week ahead is light on economic data, before the month end GDP revision, and light on earnings reports, with the season mostly behind us. However, there will be some key reports from the retail sector and important housing and durable goods order data.

As earnings season comes to an end, conference season starts up. JP Morgan's technology conference in Boston kicks off the schedule on Monday. And, who could forget the "Investing in Water Infrastructure" conference in New York.

Limited Brands will hold its shareholder meeting, and the day's earnings schedule includes a key report from Lowe's Co. (LOW), which follows a poor quarter at rival Home Depot (HD). Also reporting on Monday, look for American Science & Engineering (ASEI) the homeland security play, Campbell Soup (CPB), Apollo Group (APOL), NetEase.com (NTES), Pacific Sunwear (PSUN), Perry Ellis (PERY), Saks Inc. (SKS), TRINA SOLAR (TSL) and others.

Tuesday looks like the highlight of the week with a slew of regular consumer reports. Last week's ICSC-UBS Store Sales report showed decent weekly growth, and retail data has not been too dire yet. Well, that's outside of WalMart and Home Depot's poor news. Wall Street Greek has been sounding the alarm, as we expect rising cost pressures on the consumer and tightening lending standards to soon crack into spending.

The less reliable Redbook Survey is out on Tuesday morning as well as the State Street Consumer Confidence Index. While there is no consensus estimate available to me, the index has trended like this: Jan 85.0; Feb 90.4; Mar 100.6; April 91.7. The State-Street Index measures levels of risk within investment portfolios, not participant attitudes. Clearly the amount of consumer metrics available Tuesday will be useful in painting a clearer picture.

In Washington, Treasury Secretary Paulson and Fed Chairman Bernanke will meet with the Chinese in the second U.S.-China Strategic Economic Dialogue. Not far away, the Federal Reserve Bank of Richmond will release its manufacturing survey. New York and Philadelphia reported solid numbers last week, but we attributed much of that to the importance of the port in New York. While Richmond reports, its Fed Chief will be in New York addressing inflation at NYU.

On the conference circuit, Morgan Keegan will kick off its home-land security technology conference and Citigroup launches its health care event in New York. Anheusher-Busch (BUD) and Morningstar have shareholder meetings scheduled for Tuesday. The earnings calendar includes American Eagle Outfitters (AEO), Analog Devices (ADI), BJ's Wholesale Club (BJ), Computer Sciences (CSC), Dycom Industries (DY), GigaMedia (GIGM), Medtronic (MDT), Men's Wearhouse (MW), Staples Inc. (SPLS), The Children's Place (PLCE), Tsakos Energy Navigation (TNP), United Natural Foods (UNFI) and others.

Wednesday brings the weekly Mortgage Bankers Association Purchase Applications report measuring weekly trends in new mortgage and refinance activity. We continue to expect weekly refinance fluctuation due to rate change, but an overall static to downward trend to persist. The weekly Petroleum Status Report should show continued build in oil and gasoline, and we think this should help to ease oil prices after last week's rise on Nigerian rebel interference and other refinery disruption.

Short master Jim Chanos and Bill Miller key the 12th annual Ira Sohn Investment Research Conference in New York. Boeing is scheduled to hold its investor conference, while earnings news is due from Abercrombie & Fitch (ANF), Ansoft (ANST) Dick's Sporting Goods (DKS), Eaton Vance (EV), Foot Locker (FL), Gamestop (GME), Gymboree (GYMB), Limited Brands (LTD), Pep Boys (PBY), Ross Stores (ROST), Synopsis (SNPS), Target (TGT), Tween Brands (TWB) and others.

The week's key economic news is scheduled for Thursday. April durable goods orders are seen rising only 0.9%, after climbing 4.3% in March. April new home sales are scheduled for 10:00 a.m. release. Bloomberg's consensus sees the annual pace at 860,000, compared to 858,000 in March. March was disappointing, as the consensus was looking for 890,000. Logic and the data lead us to believe the consensus may be close this time around. Initial jobless claims will also be announced early Thursday, and the data has been very positive of late. Wall Street Greek anticipates we'll see decreased hiring trends before layoffs begin. New claims are expected to measure 310,000, according to Bloomberg. That would be up from last week's report of 293,000, but the level still reflects a healthy labor market. Thursday's natural gas report will be important in deciding if nat gas prices can hold up after last week's warm summer weather forecast helped them higher.

Clorox and Home Depot (HD) will host an analyst day and a shareholder meeting, respectively, while the earnings schedule will be headlined by home builder Toll Brothers (TOL). Other notable earnings reports include Aeropostale (ARO), AnnTaylor Stores (ANN), Barnes&Noble (BKS), Charming Shoppes (CHRS), Deb Shops (DEBS), Gap Inc. (GPS), Hormel Foods (HRL), Mentor Graphics (MENT), Mylan Laboratories (MYL), Sanderson Farms (SAFM), The Buckle (BKE) and others.

Existing home sales are due for release Friday at 10:00. Existing homes dominate the market, so this data is more important than new home sales as a barometer of housing health. Expectations are for a 6.2 million annual pace of sales in April, versus a pace of 6.12 million in March. I expect a weaker figure in light of April weather conditions, but those conditions may also be reflected partially in May sales. The logic here is that some time passes between when a house is seen and inspected and when it is bid upon and sold. If the weather kept them away in April, maybe the sales impact will be partially seen in May. I read a separate report placing expectations at 6.1 million, versus 6.2 seen by Bloomberg's consensus.

Friday's earnings scene includes Agilysys (AGYS), Gulf Oil, Royal Bank of Canada (RY) and a handful of others. We hope you found value in this week's edition and wish you a good week trading.

Despite recent real estate softness, there remain pockets of strength. Some real estate markets continue to thrive near growing beach communities, like for instance Panama City Beach, Florida, which is scheduled to gain a new international airport soon. An affiliate of mine has a condominium project (684 units - zoned for up to 1,342) in Panama City Beach, next to a championship golf course and within a mile of the beach, that he is considering selling. If you have interest in such a property/project, I can put you in touch with him. Simply email me at wallstreetgreek@gmail.com. (disclosure)
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Friday, May 18, 2007

Retail Bravado Reminds of January's Home Builders

The University of Michigan released its consumer sentiment index reading for the month of May, and the measure beat estimates. The reading of 88.7 exceeded economists' consensus view for 86.2 (compiled by Bloomberg) and was above April's 87.1 measure. The result, higher than expectations has enthused trading today. However, and you know I will look deeper than the surface, consider the trend in sentiment this year: Jan-98.0; Feb-93.3; Mar-88.8; April-86.2; May-88.7. Also, the reading, though stronger than anticipated is not much higher than the average reading of 88.1 since the U. of Michigan began its work in 1978. There is a positive here that the result exceeded economists views, but let's not get overly enthusiastic, as trends, like stocks, are not likely to present perfectly straight lines.

The National Retail Association indicated that rising gasoline prices are a growing worry for consumers and retailers. Gasoline prices are rising on an almost daily basis, and consumers expect the price to reach $3.32 by Father's Day, according to the association's report released today. The report indicates that consumers are driving less frequently to dine and shop. WalMart's (WMT) earnings report supports this information, but three retailers that just reported earnings differ with this view.

In fact, the view expressed by retailers Kohl's (KSS), J.C. Penney (JCP) and Nordstrom Inc. (JWN), after their respective earnings reports, sounded to me an awful lot like the home builders did this past January. Recall, many were loudly proclaiming confidence in their businesses, and one in particular even suggested estimates could be exceeded. Just a couple months later, guidance has been pulled and the market has been described as "it sucks" by two separate CEOs, including the one who anticipated strong results.

The biased views of corporate managers make me chuckle sometimes. You'll almost never see a less than stellar corporate outlook at the many conferences and events where corporate management teams present their story. Often times, young or naive analysts, and occasionally even seasoned ones, get sucked in. It helps to play the devil's advocate, anticipate risks, question forecasts. I remember once, early in my career, I questioned a CEO at an analysts' day about his use of capital in chasing ancillary business opportunities. I questioned his small management team's ability to handle the various efforts outside of their core strength and experience, and how it might take focus away from the primary reinsurance business. Though he treated me like a fool at the conference, he ended up playing the fool in the year that followed.

Then there are the managers I would follow into the most dismal of companies. I watched James Wright, now CEO of Tractor Supply (TSCO), come in as COO and turn an underachieving management team and unreliable operation into a model for success. Over the years, I admired Manuel Perez de la Mesa, CEO of SCP Pool Corp. (POOL), and his skill in growing the less than sexy swimming pool supply and equipment distribution business he runs. Those are two of the best managers I may ever encounter, and I may never uncover a better stock than POOL was for me and my clients as a "strong buy" recommendation. However, I note, when I left my firm in mid-2005, I had already downgraded the shares based on concerns for valuation, interest rates and housing. The tide impacts all ships...

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

Bloomberg: May Michigan Consumer Sentiment
CNN Money: Gas Pressures Consumers
AP/Yahoo!: Retailers Sounding Like Home Builders Did in January
Bloomberg: China Economic Restraints Fall Short of Mark
Schwab Insights: Liz Ann Echoes Yesterday's Greek View of Estimates
Yahoo! Earnings Calendar
AP/Yahoo!: Microsoft Pays Big for AQuantive
CNBC: Oil Steady Today
CNN: Immigration Compromise Reached
BBC: Democracy is Doorway for Islamic Revolution in Pakistan
BBC: EU Holds Russia Accountable for its Pressure Tactics
Iran Daily: Tales from the Dark Side

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Walking the Chinese Tightrope

In its usual Friday night fashion, as the Chinese government walks on eggshells in its attempt to tame its fiery economy without crashing its speculative stock market, China took three key steps today. However well-intended the actions were, and how effective they might have been, Wall Street Greek views them inadequate. China raised interest rates, instituted currency trade change and raised bank reserve requirements. "That's crazy talk!" I can almost hear the factory worker who just placed his life's hard-earned wealth into one high flying Chinese stock anxiously utter those words a thousand times on his bike ride home. I would advise him, rest easy my friend, as the actions are frightening, but the magnitude of them inconsequential.

The central bank raised its one-year benchmark rate by 18 basis points, not even a quarter point. I'm undecided as to how the bank arrived at the precise figure. It was either generated by a towering, windowless building packed full of supercomputers or the idea of an upward mobile government economist attempting to look smart. I see him there speaking with his financial bosses, "Yes, this 18 basis point change is the exact necessary move to curb inflation, control economic growth, but avoid sending our equity market to a destructive finish and our economy into depression. It's just perfect." "What about 25 points," his boss would suggest. "No! my study at Wharton tells me 25 points is too much too soon! We will find financial doom!"

Take a breath and get back on your chair... Okay, so the bank also allowed the yuan to fluctuate, sort of. Well, not really. In a rule the government would be sure to change if it was effective, the yuan will be allowed to fluctuate 0.5% of A DAILY FIXING RATE. Just wanted to be sure you didn't miss that. In other words, no change. Finally, China is also raising the reserve requirement on bank deposits to 11.5% starting June 5, from 11% previously. The bank has raised this requirement almost weekly. I have flirted with the idea that eventually a threshold or break-point should be reached, where some banks may be forced to call back loans.

I have serious concern that China may be headed for a 1929 style market crash, run on the banks and depression. 11.5% is not going to be enough when that happens folks. I have suggested more direct restrictions on brokerage assets as a direct solution to the local speculation. Allow investors to only invest a small portion of liquid wealth. I mean, it is a communist country isn't it? At least put your evil to proper use. Consulting services for Chinese government decision makers is available for fee. Just contact WallStreetGreek@gmail.com for a price quote. I'll be here all week...

Seriously though, there is no telling how the lofty, tightrope walking Chinese equity market will digest any change these days, so despite the expected meek impact of the regulatory decisions, Chinese investors might still be in for a rude awakening on Monday. When valuations get lofty, price sensitivity intensifies.

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Thursday, May 17, 2007

Wholly Divergence Batman!

Wholly divergence Batman! The Dow and S&P 500 are rising deep into the trading day, as the NASDAQ and broader market shows signs of weakness. It's all about capital flows my friends, and the money is going where growth is, and that's the large multinationals within the Dow and S&P 500. Economic data was mixed this morning, as we had positive employment news and manufacturing data staving off poor leading indicators and surging energy prices. Also, Ben Bernanke had some reassuring things to say about the mortgage market. You know where I stand. I think a stealth bear is creeping and he'll get to those multinationals eventually. I'm officially out of the closet today, though I don't think I hid my bearishness well anyway. Please find significantly more detail below.

Hang Seng Index +0.27%; Shanghai/Shenzhen CSI 300 +2.12%; NIKKEI 225 -0.17%; S&P/ASX 200 +1.13%; Taiwan TAIEX +0.62%; BSE SENSEX 30 +1.22%; KRX 100 +0.75%; Ho Chi Minh +1.81%

U.K., Europe & Middle East:
DJ STOXX 50 Index +0.2%; FTSE 100 +0.3%; CAC 40 +0.15%; DAX +0.24%; Russian RTS Index -0.72%; Greek ASE General -3.59%; Tel Aviv 25 -0.89%; Tadawul All Share +0.18%; DFM General -0.9%

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

  • *** Initial weekly jobless claims were reported lower for the fifth week in a row, to 293,000 for the week ended May12. We continue to expect nonfarm payrolls to show the first signs of employment softening. Our logic here is that firms simply stop hiring before they start firing. The current state of employment is strong and indisputably so. However, if tightening credit accessibility and costly gasoline and food prices start to eat into consumer spending, we anticipate corporate profits will be further pressured in our services geared economy. The natural course from there is for workforce reduction on a broader scale. At that point the Fed will have to move to cut rates, but a further reduced consumer propensity to spend, due to higher unemployment will make the road back a steeper one to climb. Short investor Doug Kass stated last week that true unemployment may already be higher than the reported figures, after logical add backs are made into the number. Included in his estimate were people unemployed who are no longer tracked by the Labor Department.
  • *** April's Leading Economic Indicators Index declined 0.5%. Expectations were for the reading to be unchanged at the beginning of the week, so the decline caught some permabulls by surprise. And yes, I think it portends trouble ahead. Now, I know those of you who have made a bundle in Dow and S&P 500 leaders are laughing in the face of this data, and I don't blame you. Still, eventually I expect a softening economy on consumer weakness to even seep its way into your market leading shares. I keep saying it, the American consumer is more important to American multinationals than foreign demand. Your safer than many, but not safe. I'm usually late for appointments (Greek time), but early for economic predictions, so beware. Seven of the ten factors that feed into the leading indicators figure had negative impact. That's a strong majority and not all housing. Stock market performance was one of the three positive factors, and sure seems to be based on a flawed driver to me. Earnings estimates were grossly understated by analysts expecting a fall off of a cliff type quarter. Analysts play this game you see. They don't want to be the catalyst to drive the stocks they are recommending for purchase lower; it's a good thing to beat estimates, and so they purposely set the bar low. Management typically does the same, and in the case of this quarter, the analysts were scared silly that recession might kill their names. So, when the majority of companies beat estimates, they beat by a lot, in aggregate anyway. It made it seem like things weren't so bad didn't it.? On top of that, a clear driver presented itself. The global economy!!! We are saved, you proclaimed! I'm sorry folks, but please don't shoot the messenger. The American economy is slipping.
  • *** The Philly Fed Survey showed expansion, and bolstered the view expressed in the Empire State reading a few days earlier. However, remember the Greek's point. The port of New York is key for foreign sales, and product from the Philly and New York area must benefit significantly from exports. Okay, so the Northeast is also a huge market. I hear you. Still, this data just ties into our new divergence theory. I think the Dow & S&P are heading down the wrong road, and will eventually have to do some backtracking to catch up to where reality tells us the economy is going, and where stocks are heading, with the Fed's hands partially tied by inflation.
  • *** If there was any doubt, it's official. I've become a scary bear, as frightening as the grizzlies I've been having recurring nightmares about since childhood. Oil prices are surging today, and natural gas is higher as well. That's not good folks. It means more pressure on gasoline prices. It's actually gasoline refinery issues driving oil again today. The summer season is just about upon us and gasoline storage is not up to par, and capacity utilization is not there yet either. God forbid we get an early Gulf hurricane. Remember $4 gas? Now that's a frightening thought. Still, I expect oil prices to soften as economic deceleration presents itself.

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Wednesday, May 16, 2007

Today's Coffee - Gouging the Consumer

Our daily "Wake Up Call" report will resume publishing tomorrow. "Today's Morning Coffee" has been engineered to provide a value-added guide to international trade, economic data, commodity market, geopolitical activity and stock specific news. The copy that follows includes economic, commodity and geopolitical news sections only.


The problem with most of the economic views I've seen expressed today and generally, is that they often consider data in isolation or aggregate them all together, and ignore the impacts of some on others and lags and leads. For instance, I read today how manufacturing strength should offset housing weakness and consumer spending softness. This is seriously flawed. The consumer is a key pillar that holds so much in place. Neither occurs in isolation, and to say that manufacturing will offset the consumer is just irresponsible and without thought.

You see, first the consumer cracks, and then later, manufacturing starts to show the impact of less consumer spending. They do not both have to occur at the same time. Manufacturing strength is certainly benefiting partly from sales globally, but as the American consumer lightens spending, it's a contagious disease that has global repercussions. Even if it was not, U.S. manufacturers rely more on American consumers than rest of world buyers, for the most part. So, what the views should express is that current GDP should reflect both consumer softness and manufacturing strength, but consumer weakness threatens future GDP and manufacturing health.

New housing permits were horrible, but must have been somewhat impacted by April weather conditions. So, why weren't starts impacted, I would ask. Well, the experience I have from working with my father in my youth tells me that if you are a struggling home builder, you're working through weather now-a-days.


The weekly Petroleum Status Report showed a greater build than was expected for both oil and gasoline, as we stated it would in our weekly copy, "The Greek's Week Ahead." Oil prices are declining, with WTI Crude futures down approximately 1.36%, also as we anticipated for the short term. However, gasoline RBOB futures are up about 1.0%, going against our wishes! Natural gas has also been on a tear of late, and we suspect it has a lot to do with expectations for an extending summer season. It's already 84 degrees Fahrenheit here in New York City in the middle of May. Heat will likely start summer activities early and extend them for a longer period. This means Americans are likely to drive more, as much of the nation makes regular trips to local beaches and recreation facilities.

An extended summer season, due to warming trends, is likely to intensify the draw of gasoline and natural gas (for electricity/air conditioner usage). This is a topic we have discussed before and represents another secular trend portending to pressure energy prices over the long-term. I doubt the market sees this yet, but it may explain the strength in natural gas and some of the strength in gasoline of late.


Is it just me or are the Nigerian rebels become quite the nuisance.? I wonder how long these interferences have to continue before the Nigerian government or even our own government move to strengthen the defenses of oil facilities in the area, and/or even initiate offensive against the rebels. It certainly seems like an issue worth tackling. How much of an effort is necessary to stop a paramilitary organization that operates in speedboats.? Considering the supply/demand tightness of the energy markets, it makes sense to pressure Nigeria into taking real action.

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Today's Key News - Publishing Delay

"Wake Up Call" will resume its normal publishing schedule tomorrow. Stay tuned for today's special copy of "Today's Coffee."


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Tuesday, May 15, 2007

Wake Up Call - Gauging Consumer Health

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

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

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

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

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

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Monday, May 14, 2007

The Greek's Week Ahead - Mainstream Armageddon

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

Two weeks ago, when the automobile industry reported a drastic falloff in April sales, I theorized that this may portend a greater problem. Last weekend, I shed light on consumer spending pressures that I suggested could come to the fore. Wall Street Greek presciently forecast that April retail sales were likely overestimated. We were proven correct in this view, as Friday's reporting of retail sales evidenced a change in consumer spending patterns, though major market media attributed a great deal of the softness to the weather and the unfavorable date of Easter. We agree that some of the weakness can be explained by those factors, but we would not ignore the impact of a rising cost of living and tightening of lending standards on American consumers.

This weekend, while perusing Barron's, I was enthused to see Alan Abelson has embraced my views. Now that the consumer is in question, it seems likely to me that market sentiment will begin to change. Abelson's article, entitled "Running on Vapors," highlighted the stretched consumer and the importance of rising food and gasoline prices, two themes you have heard here often. Finally, people are talking about the importance of food and energy, though they haven't picked up the baton regarding the secular trends that make food and energy prices important now, versus less meaningful fluctuations of the past. It's only a matter of time though before you start to hear that too from every other talking head on the street.

I believe my counterparts who argue that labor strength and industrial demand prove me wrong, have lost their way in the forest. They're like hikers staring at trees, looking for the yellow ribbon they left, and missing the sound of the roaring river that can guide their way just as well. I believe employment and industrial health are anomalies that will lag other economic factors lower. I believe both have benefited from foreign demand for American products and services, but that the American consumer is more important of a driver for American firms, even multinationals. I expect that as banks refuse loans to previously acceptable applicants, purchases of homes, autos and even credit card born expenditures will decrease in frequency, and we've already begun to see this.

As I read 100 times this past week, the home equity ATM is gone, and lenders are getting burnt from their excesses of the past. The credit comfortable American economy is losing its financing. Trips to the mall will likely decline, restaurant outings will become less frequent and less enthusiastic. You can only burden the consumer with so much debt, and then it's time to pay the piper. An article in Businessweek this week highlighted how businesses of all sorts, while making everything from big screen TVs to homes accessible to those with even the weakest credit, have in fact created a situation where the working poor are now buried in it. I think commercial real estate is next to falter, after employment, as it becomes clear the retail environment is saturated with too many weak players to survive in a less fruitful environment.

The labor situation is logical to me. I think the slowdown in hiring will become a trend now, and I expect it is foreshadowing rising unemployment. If you are running a company, before you fire people, you stop hiring new folks. Also, productivity growth is down, and likely due to a fat labor count within companies. I do not think we have reached the limit of technological advance as some have posited. It's just a matter of bloated work force, in my view.

All these factors point toward a Fed that will have to become expansionary in nature in the future. However, with inflation holding, the Fed portends likely to wait out economic slippage, perhaps until too much damage is done. The market reacts well to rate cuts, as my friend Sam Stovall will tell you, but I think the timing of the cut and the rate of economic downturn could play a greater role in an overriding market move. Also, I have to highlight for you that emerging markets have run hard and fast, and when it becomes clear American demand may wane, we will have catalyst for equity correction in China, India and other emerging markets that have tagged along for the ride, and those that have not as well.

But wait, there's more. I hope this doesn't classify me as one of these Armageddon forecasters Erin Burnett spoke of last week, but we cannot ignore geopolitical factors that are positioning in a threatening manner. Russia just signed an agreement that will bypass western efforts to bring natural gas from the Caspian to Europe. You can now expect to see sabotage within the Republic of Georgia that will likely be blamed on breakaway factions, but driven by Russian interests. Russia's moves and Putin's language cannot be ignored, as this past week he likened America's foreign policy to that of the Third Reich. Russia is positioning itself at odds with America, as is China, too often.

While China is clearly already critical, Iran and China are set to play critical roles in our economic future. Though it may be inevitable, if we bomb Iran, or allow Israel to, Iran is likely to lash out in many unforeseen, unexpected ways, possibly including gorilla style efforts to drive oil prices higher through attacks upon its neighbors. Iran's boisterous president, and its supreme leader, may be just the right personalities to unite peoples across boarders. And when China's important oil supplier is cut off against its wishes, how should we expect it to react. I believe that a planned meeting between the U.S. and Iran, which is being labeled as an effort to improve the situation in Iraq, offers an opportunity for the U.S. to save face and negotiate with Iran directly. This is no time or place for bravado. We know what damage we can do to Iran, but we also know we will not infuriate the world by doing so. So, a deal works best, but a nuclear Iran remains an impossibility. The clock is ticking, and the strategic oil reserve is filling.

Anywho, let's hope geopolitical tensions are contained and calmer heads prevail both here and there, but don't lose sight of an important factor that could severely damage your financial well-being. The prospect of greater war is no longer interesting fictional material, but real life risk to you and your portfolio. I just hope that my view on this is never adopted by the mainstream, as the likely cause of such adoption would surely be troubling.

This week, I anticipate the concerning consumer will be lifted even higher for the viewing of all. Very important inflation, consumer sentiment and housing data is set for report, along with more individual retail earnings reports.

The week ahead...

Monday started the news week hot with the announced sale of Chrysler to Cerberus, but the heat was tepid in equities. Perhaps the market is proceeding with caution after last week's poor retail data. Dallas Fed President Richard Fisher is scheduled to speak to the importance of the U.S. service sector on the first day of the week. Reporting earnings Monday, Nordic American Tanker (NAT), PetMed Express (PETS), Yamana Gold (AUY), Agilent Technologies (A), Valspar Corp. (VAL) and others.

The first key economic data of the week hits the wire at 8:30 a.m. on Tuesday. The April consumer price index is expected to show an increase of 0.5%, versus a rise of 0.6% in March. Consensus expectations are sourced from Bloomberg. Excluding food and energy prices, the core CPI is seen rising 0.2%. Reiterating, we view changes in food and energy important, as the driver behind these changes are secular, not seasonal as in past fluctuations. Restating an argument we've made throughout the year, increasing demand and tightening supply for food and energy, due to population growth, industrial development of emerging markets, new uses of food products and the potential for war in the Middle East should keep a floor under prices while pressuring them even higher from time to time. In our view, only global economic recession poses to soften pricing, but that's not out of the question either considering the viable risks we have outlined.

The National Association of Home Builders is scheduled to report on market conditions Tuesday at 1 p.m., and recent signs from home builders do not portend strength. An especially horrid report could raise market concern for recession significantly. The reading measured 36 in March and 33 in April. The index surveys current economic and new housing conditions, sales expectations for six months forward and home buyer traffic.

After last week's retail data, the Redbook retail sales index will likely be closely watched on an ongoing basis, however, it is a less reliable resource than the weekly ICSC Index, which is reported Tuesday as well. In any event, these usually lightly followed (by the general investment community) reports are likely to gain more media attention in the future. The New York Fed will release its Empire State Manufacturing Survey. The consensus is looking for a reading of 8.0, compared to 3.8 last month. Wall Street Greek believes a strong reading continues possible for now, as New York's important port continues to serve the state's manufacturers' overseas selling efforts.

Tuesday's earnings report schedule includes Applied Materials (AMAT), Compuware Corp. (CPWR), Eddie Bauer Holdings (EBHI), Fortress Investment Group (FIG), Fossil (FOSL), Home Depot (HD), Koor Industries (KOR), The TJX Companies (TJX), Varsity Group (VSTY) and others.

Housing starts are due to be reported on Wednesday morning at 8:30 EDT and could send investors right back to bed. The consensus view is looking for an annual pace of 1.48 million starts, versus 1.52 a month prior. Again, housing data continues to pound in the reality of a weakening situation. At 9:15, April industrial production and capacity utilization will be posted. Production is expected to show a rise of 0.3%, while capacity utilization is seen inching higher to 81.5%, from 81.4% in the prior month. The mortgage banker's association will report its weekly mortgage report Wednesday, and the Energy Information Administration will report its weekly petroleum status report. We anticipate the EIA will show a second week of gasoline and oil storage build, helping oil prices to ease.

Reporting earnings, look for BEA Systems (BEAS), Deere & Company (DE), Hewlett Packard (HPQ), PetSmart (PETM), Sony (SNE) and others.

More key economic data is due Thursday. April leading indicators is seen unchanged, versus a 0.1% rise a month prior. Clearly, leading indicators will be reviewed carefully for signs of further economic weakness, or the path to recession. We will carefully note how certain media outlets, reporters and specific talking heads interpret the news, as many have thus far retained a bullish bias. Not to say they've been wrong.... Still, some people are great contrary indicators that reflect well only the current situation in equities, and the buy signal may well come when these beacons turn overwhelmingly bearish.

The May Philly Fed Survey will add further information to the New York data reported days earlier, providing further insight into manufacturing health of the Northeast. The survey is seen improving to 3.0, versus 0.2 in April. Finally, the Labor Department reports weekly initial jobless claims on Thursday and the IEA reports natural gas status. Claims are seen at 310,000. Over time, we anticipate claims will trend higher and signal that stalling hiring has spread to staff reduction. Ben Bernanke is scheduled to keynote a Chicago Fed conference on "Subprime Mortgage Markets & Regulation." This should be interesting... I guess he'll do some scolding.

Thursday's earnings reports include Advance Auto Parts (AAP), Autodesk (ADSK), Intuit (INTU), JC Penney (JCP), Kohl's (KSS), Nordstrom (JWN), Sonic Solutions (SNIC) and others. Intuit had a problem with last minute filers in April, and refunded a good deal of money. The financial impact of the issue, and a strong competitive drive by H.R. Block, may hurt INTU's fiscal third quarter ended in April.

On Friday, May Michigan sentiment may shed light on whether consumers were really feeling the heat, or just the cold weather in April. Many anticipate a retail rebound in May, and a poor reading of sentiment may raise red flags for those who previously overlooked the consumer's burden. Expectations are for a rise in sentiment to 87.0 from 85.3 in April, so there is room for downside surprise. Friday's earnings include British Airways (BAB), Dr. Reddy's Laboratories (RDY), TRC Companies (TRR) and a handful of others. We hope you found value in this latest edition of The Greek's Week Ahead.

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