Week in Review - As Bad as Expected

Over the past few weeks, Wall Street Greek has been warning that as the market digests the new reality of inflation as a serious threat, it would likely retest its March 10 lows. Ironically, on the same day the Federal Reserve released its minutes from the emergency meetings it held back in March, the market did retest the lows. The Dow Industrials closed the week down 4.2%, settling into a new low at 11,346.51. The S&P 500 also drifted 3.0% last week, to close within five points of that aforementioned March floor.

As we pointed out in our article, "Technology Stocks, Underweight Tech Now!," the Nasdaq Composite has lagged the overall market's move to the break-point. We should point out though, that it's not as if the Nasdaq has not moved lower in concert with the other indexes. It has, and it declined another 3.8% last week. It's just that the composite is still 6.7% off the bottom, while the other indexes are already there.

The reason for this divergence is likely because the higher beta, or more volatile technology stocks that dominate the Nasdaq, previously moved sharply lower in exaggerated fashion into the March 10 bottom. This occurred as part of a market capitulation process. Capitulation occurs when investors give up on stocks en masse due to a catalyst event, like the Bear Stearns unraveling. When that happens, high beta issues lead the market lower while exaggerating the broader move. Since we have not had another capitulation (read yet), the Nasdaq has lagged in revisiting its low-point.

"The Greek" believes that this quarter's earnings season will offer evidence of both consumer spending softness and corporate investment weakness, leading technology firms to reduce their forecasts. We saw two companies do this on Thursday, in Research in Motion (Nasdaq: RIMM) and Oracle (Nasdaq: ORCL). We then warned about Micron Technology (NYSE: MU), which later reported bad news on Thursday evening sending the stock down nearly 13% on Friday. We expect more of the same for the rest of the tech sector in July, and so we are recommending investors underweight technology stocks now.

Economic Results

We closed last week out with news that consumer sentiment sank to a 28-year low, and approached a 50-year trough. At the same time, we received news that Personal Income increased a strong 1.9% in May, but the gain was greatly boosted by the delivery of government stimulus checks. The also perverted Consumer Outlays figure for May rose 0.8%. The feeling is that this temporary boost will fade in July and August, and the underlying economic woes of our nation will be apparent in this monthly report as well.

First quarter GDP was revised higher a tenth of a percent last week, to 1.0%, and Q2 stands to benefit from the government handout. Corporate Profits continued to decline, portending further layoffs in American industry. The Weekly Jobless Claims data offered a figure hovering in that same range we've seen over the past three weeks; it came in at 384K for the second week in row.

The most important economic news of the week was reported as expected. The Federal Open Market Committee held rates steady and focused its policy statement on inflation risk. In our opinion, a clear signal was issued that the long string of expansionary rate cuts is over. The Fed clearly understands the importance of strengthening the dollar. But, is it too late... Will the Fed prove handcuffed, like Wall Street Greek told you they were months ago.

As the Fed tiptoes around a tough economy while threatening to battle inflation, long rates might move higher out of control and destroy loan supply for borrowers on the fringe. Housing could thus languish for quite a while longer, and deflation of home prices would likely continue to reverse the wealth effect. Meanwhile, the ECB is likely to raise rates as quickly as our Federal Reserve, so just how much of its old glory can the dollar regain anyway...

Last week's housing data was mixed, as new home sales continued to adjust to a lower rate. However, a seasonal uplift did occur in existing home sales. Still, Wall Street Greek warned investors not to get too excited about seasonal boost off of unnatural and dramatic trough.

Oil prices continued higher as market participants and regulators came under heavy scrutiny. Our government took a look at speculation and its role in driving the price spike. OPEC decided contrary to Saudi Arabia, and did not offer to boost production. Meanwhile, rumor after rumor of Israeli air-strike fed plenty of volatility. By the end of the week, OPEC's president declared oil prices might reach $170 per barrel soon. If that isn't adding insult to injury, I don't know what is...

Corporate News

On the corporate front, several analysts downgraded and made troubling forecasts on each other's coming quarter, and the extent of ongoing asset write-downs that are likely. Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) bore the brunt of the attention, with both firms sinking significantly on the week. AIG (NYSE: AIG) faced the aspect of another major hit to assets, and Royal Bank of Scotland suffered a ratings downgrade. American Express (NYSE: AXP) and Discover Financial (NYSE: DFS) indicated that charge-offs were rising among their card holders. Barclays (NYSE: BCS) came back to market for some more capital, and one has to wonder, when will buyers disappear. It was just plain ugly in the financial sector. This was the perfect illustration of how a cheap price-to-book ratio can serve as a warning, as much as it can indicate value. When book value will continue deteriorating, one must question the validity of the component to the ratio, and thus the ratio itself.

We already noted the warnings in the tech space. Home builders Lennar (NYSE: LEN) and KB Home (NYSE: KBH) reported ongoing strife in their space as well, and it seems all the doubting Thomases who had been looking for value in home building have finally gone the way of everyone else and abandoned the industry altogether. A handful of food companies reported mixed news, as illustrated by the rise in Kroger (NYSE: KR) and fall of General Mills (NYSE: GIS) last week.

Stay tuned for "The Greek's Week Ahead" coming soon.

Article also interests AMEX: DIA, AMEX: SPY, AMEX: QLD, Nasdaq: QQQQ, AMEX: DOG, AMEX: SDS. Please see our disclosure at the Wall Street Greek website.