Wall Street Greek: Stock Market's Wall of Worry

(Stocks in Article: AMEX: SPY, AMEX: DIA, Nasdaq: QQQQ, AMEX: SDS, AMEX: DOG, AMEX: QLD, NYSE: HNZ, Nasdaq: FWLT, NYSE: CBS, NYSE: SI, NYSE: LM, NYSE: C, NYSE: FNM, NYSE: FRE, NYSE: LDK, NYSE: MBI, NYSE: ABK, NYSE: M, NYSE: TGT, NYSE: HD)

Inflation and stagflation concerns have officially taken over from worries about bond insurers. They say bull markets climb a wall of worry, but the size of this wall is still becoming clear to us, and this market might need to take a break, catch its breath and work up some confidence before giving it a go.

Economic Data & Analysis

Producer Price Index - January 2008

PPI rose 1.0% on a monthly basis, and 0.4% when excluding food and energy. Both figures exceeded consensus expectations for increases of 0.3% and 0.2%, respectively. Prices for finished goods jumped 7.4% over the year ago period. However, this included energy price increase measuring 22.6% during that span. Food prices rose 8.3% on the producer level during the same period. Excluding food and energy, prices rose 2.3% on a year-to-year basis, still somewhat worrisome.

This news has reinforced inflation concerns today. Recent inflationary headlines have brought into vogue a topic we first discussed early last year. The secular drivers of current price increase are of significant difference than random seasonal drivers of the past. These are stickier increases in the core economic factors of energy and food. This is why stagflation risk is a real issue worthy of consideration now.

Gauging Consumers

Two bits of data reached the market today to help us keep a close read on consumers. The Conference Board offered its monthly Consumer Confidence Index, and it slipped sharply to 75.0 from a level of 87.3 in January. The consensus was looking for 81.3, according to Bloomberg. This important decline greatly reflects stock market ills despite the slight bounce off January lows, and it likely also reflects the onset of recession and concern about bond insurers, in our view.

The Weekly Same-Store Sales Report from the International Council of Shopping Centers - UBS offered a more timely and also more positive viewpoint. Reportedly, same-store sales increased 2.3% year-to-year, continuing an ongoing trend showing a rising rate of growth through recent weeks. The population is still largely employed, and perhaps already spending tax refunds. It's also possible discounted pricing is driving the slight change in sales patterns.

Target (NYSE: TGT) reported quarterly earnings results today, showing Q4 same-store sales growth of 0.2%. Still, Target offered a forecast for 2-3% same-store sales growth for FY 09 (Jan.). The company based this bold prediction on its view that it could surmount weak second half 2007 results. That's a gutsy prediction that assumes deterioration will cease by mid-year. TGT has likely already talked down analysts' EPS estimates in private discussions, but we believe there is a certain degree of hope applied here anyway, and that creates downside risk tied to earnings misses.

The fiscal stimulus package should offer a boost for consumer sensitive results and shares through fiscal Q2, but after that, the future really depends on the ability of the economy to recover in a burdensome rate environment. Despite Bernanke's cuts, inflation concern has long-term rates on the rise. The yield curve is looking steeper than it has in years.