Morning Coffee: Citi Letdown & Retail Free-Fall

(Stocks in Article: NYSE: SPY, NYSE: DIA, Nasdaq: QQQQ, NYSE: SDS, NYSE: C, NYSE: MER, NYSE: VMW, Nasdaq: AMAT, Nasdaq: AAPL, NYSE: MCO, NYSE: FRX, NYSE: STT, NYSE: M, NYSE: TLB, Nasdaq: PFCB, NYSE: FDX, NYSE: AVP)

The market reacted poorly today to news from Citigroup and economic data providers. News flash, there's no quick remedy. However, we expect today's weakness will be quickly forgotten when election year factors lead President Bush and Congress toward action. We disagree with Bill Gross on this subject, and think the two will work toward substantive action in order to outdo the other, rather than stop the other. Also, the supposedly independent Federal Reserve seems to get it now, and we expect significant stimulus as a result.

Citi let down market expectations this morning with no clear cut distinction between past problems and future hope. In fact, Vikram Pandit left things sort of up in the air with a statement that he is not finished yet. The market wanted it finished today, with no more uncertainty. Vik doesn't seem to get it yet. There should have been no greater priority than airing out everything today.

Does this mean Citi is not going to turn around, no. It just means the stock will not pop today. It will pop though, as the dividend cut is now history, the S&P ratings action (another late move by S&P on something everybody knew was coming) is passed, and the company has made clear much of the uncertainty regarding write-downs. The fundamental scare is that Citi still has plenty of consumer weakness and credit exposure in its credit card business. The job cuts were not enough to appease the market, and Vikram came across as not yet having his arms fully around the situation. He may prove an excellent leader, and we think this is very possible, but he didn't market himself that way today. However, we still like C and the rest of the I-Banks for a near-term pop heading into Fed and government stimulus.

Retail Sales December

Yikes! Retail is in free-fall in such scary fashion that even The Greek is afraid, and we have been predicting it for quite some time now. This is a lousy analogy nobody can relate to but as much as an exorcist expects to confront a demon, when he is confronted by one, it's still terrifying... You know what we mean! It's the terror that leads to frenzied selling, the fear you are suppose to buy into.

December retail sales fell 0.4% and the consumer has finally officially broken. Mrs. Shopper couldn't do it this year! She couldn't save Christmas as much as she hoped and tried. As credit dried up, gasoline prices stuck, and mortgage payments were adjusted higher, she finally broke. So, what's next for her? Well, she may have to tap into her 401K to pay the mortgage if she loses her job, and that's something nobody has considered yet. She is losing her job my friends, with unemployment topping 5% recently, and while we live in a consumer sensitive economy.

Macy's (NYSE: M) and Talbots (NYSE: TLB) are the notable operators to close stores so far; Citigroup (NYSE: C) and every other investment bank is firing employees away; and consumer sensitive companies like Avon (NYSE: AVP) and cyclical players like Applied Materials (Nasdaq: AMAT) have started to cut jobs as well. It's getting ugly and it's going to get uglier no doubt. Avoid retail for now, and we don't care how far these stocks have already sunk. We would not buy into recently strong news at P.F. Chang's (Nasdaq: PFCB) and others, as the market just cannot support the saturated restaurant and retail sector. There's going to be significant consolidation, and my REIT call is now playing out as smart money realizes the next sector to fall will be commercial construction and REITs specializing in the rental of commercial space.

Producer Price Index December

Headline PPI fell in December. Good news? No way! PPI is lower because gasoline prices drifted during the month, coming down from $3 seen in November. Oil prices fluctuated a bit and touched some big numbers in December, but it's clear the economic driver is now in control. Remember, we told you the most important driver of oil prices is not the ozone or Nigeria or even Mahmoud Ahmadinejad; no, it is in fact that stalwart, the economy. Economic demands are clearly going to soften further and the oil market gets it now. Steer clear of oil stocks for now. There's no near-term catalyst to rescue oil prices outside of war with Iran, and we actually expect that this year, but we're still telling you to protect your capital now.

Inflation is hot despite the headline figure. Core PPI, excluding food and energy, met expectations in rising 0.2%. Well, it depends on whose consensus figure you used between Reuters and Bloomberg, but in either event, a 0.2% month-to-month rise is not welcome. It represents hot inflation, in our view. PPI over the full 2007 rose 6.3%, 2.0% on the core figure. This falls within the Fed's preferred range.

So, what does that mean? Well, even if it was hotter, it would not preclude the Fed from acting to stave off economic recession. In past white papers, Bernanke has outlined his view regarding flexibility and in following an inflation targeting framework, though not by rule. He even offers the option of an "escape clause," where inflation targets could be raised temporarily in order to protect the economy from shocks and keep the financial system from freezing up.

The headline figure on PPI is much more concerning than the core figure, despite what the numbers say on the surface. This is because as the impact of higher food and energy prices feed through the system, they are passed on to retail sellers of goods. Retailers then have to either bear margin contraction or pass through price increases. This should lead to employment reductions at struggling firms and/or price increase. In either event, the economy suffers.

Eventually, sticky high costs should lead price increase to find its way to consumers, and it has. Just go buy a gallon of milk or a dozen eggs. You're paying for the increase in farmers' feed costs. Milk has not all of a sudden become more popular than Coca Cola! Those extensive "Got Milk" commercial campaigns have not all of a sudden struck a cord with the American public! Nah, cattle ranchers and dairy producers are just feeling the heat and passing it on to you.

The same goes for energy prices, but rising costs for transporting goods to store shelves or keeping the lights on in the service office reach a much broader portion of the economy. Businesses from FedEx (NYSE: FDX) to H&R Block (NYSE: HRB) feel that heat. So, yes Virginia, the headline figure does matter, and we're sorry Santa Claus couldn't make it this year. Oh, sorry to Michigan too!

Michigan Primary

Voters hit the polls, and The Greek expects today will mark the point of Mitt Romney's turn and rise to the presidency. Despite late polls showing McCain putting up a good fight, we expect Romney to win the state's Republican contest. Romney was significantly impacted by the perverted election in New Hampshire. Yes, perverted, dirty independent and even Democratic voters showed up to support the 71 year old McCain in the state. That will not happen in Michigan, though he will benefit from the momentum.

On a personal aside, The Greek, a man with an uncle who served as a ranger in Korea, lost some respect for McCain after his personal attack on Romney at the NH debate. Ronald Reagan would have sent McCain packing for that statement, veteran or not. The statement was not representative of the character the well-heralded veteran represents to Americans, and it's a shame he traded some of his personal honor to get some votes. They say silence is the best form of protest, but Reagan would have made him pay for that show of personal weakness. While I agree with McCain that the subject of the Middle East is critical to this generation's future, I'm not sure we should give up hope for a more human solution than war.

We need a man who can bring people together, even people who currently hate us. I view Romney and Huckabee as the guys who have the best chance at that, if it is possible at all. Abandonment is not the answer, and Edwards is too combative. We need strength driven by a righteous pious spirit. The world needs this leadership now, not just America. That's just my opinion though. Let's not let the lessons of the past die off with the greatest generation.

Market-Moving News

• Bloomberg: Retail Sales Drop 0.4% in December


• ICSC-UBS Weekly Same-Store Sales Inch Up Weak 1.1% Wk Ended Jan 12


• MarketWatch: Core PPI Up a Hot 0.2% in December


• AP/Yahoo!: More on December's PPI


• AP/Yahoo!: Citigroup (NYSE: C) Loses Most $ in its History, Cuts Div 41%


• CNBC: Steve Jobs' Mac World Speech Leaked or Hoax? (Nasdaq: AAPL)


• Forbes: Channeling Jobs, What's Next for Apple


• CNN: Gentlemen Start Your Engines! Michigan Race Begins


• ECONOMIC REPORT 10:00: Business Inventories Nov (Consensus +0.4%)


• Platts: Oil Lower on Weak Economy


• AP/Yahoo!: Saudi Minister Says Market Dictates Oil Production


• FT: Moody's (NYSE: MCO) Looks to Play Hardball on Deals


• Yahoo! Earnings Calendar


• CNBC: Merrill (NYSE: MER) Gets $6.6 Bln. Infusion


• AP/Yahoo!: Forest Labs (NYSE: FRX) Raises '08 Outlook


• Bloomberg: State Street (NYSE: STT) Earnings Drop 28%


• AP/Yahoo!: S&P Slashes Citi's Rating (NYSE: C)


• SA: VMWare's (NYSE: VMW) Pipeline Looks Strong


• AP/Yahoo!: Applied Materials (Nasdaq: AMAT) Cutting 1,000 Jobs


• BBC: Arms Offer to Saudis?


• The Greek's Week Ahead - Gauging "Substantive Action"


• Greek: Buy Investment Banks


• Greek: Sunset for Solar Stocks


• Economist: The Geopolitical Week Ahead


• Iran Daily: Tales from the Dark Side

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