Message of Hope

By Markos N. Kaminis - Economy & Markets:

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The tone of the news wire has been universally negative for a very long time now. Economic data flow has continuously broken historical records and investors' hearts. Meanwhile, talking heads, most notably the new President, have only further soured things with honest and sobering commentary. We've argued here about the counter-productivity of such brutal honesty.

A while back, in our article, "We Need a Hero," we begged America's Grandpa, a.k.a. Warren Buffet, to come to the aid of the markets with some sort of a supportive statement. Not a week later, Warren obliged by making a strong statement about the long-term viability of America and its stocks. Sometimes we wonder if folks are reading us, or if we just have a tap on the collective subconscious. Needless to say, Warren and every long investor lost some more money since that statement, but we thank him for his noble leadership just the same.

Our recent criticism of "Bad News Obama" seems to have also found root with the President, who appears to be singing a hopeful tune now. But today the unimaginable happened! Someone who the market really needed to hear from offered solid reason for hope. Vikram Pandit, the CEO of Citigroup (NYSE: C), said his company, whose shares were sub-$1 recently, was having its best quarter since 2007. We cautiously remind you that Citi was trading for over $30 a share back then. Citi's assets and business hopes are much smaller now, but even so, it sure was nice to hear a financial sector player say something (ANYTHING!) positive about his business.

Special Note:
Dr. Charles Calomiris will discuss "Hope, Prayer and the Economic Crisis" this evening at the Harvard Club in Manhattan. Meet Professor Calomiris and "The Greek" by joining us for the event and the after-gathering at Kellari Taverna next door.

Economic Analysis

Bernanke's Speech

Topic: Financial Reform to Address Systemic Risk

Federal Reserve Chairman Ben Bernanke addressed the Council on Foreign Relations this morning, though he kept his comments focused to domestic issues. As Bloomberg Radio's Tom Keene noted (Tom is my favorite radio show host of all-time, and yes this is brown-nosing but still true), the Council's meetings are no longer limited to "foreign relations" matters, though speakers try to connect issues to global interests.

As the billing suggests, the Chairman focused his discussion on several ideas he views preeminent for financial reform. These ideas have been born from his first hand dealings with the flawed system. They represent a step toward replacing the band aid he was forced to apply in the economic emergency room with a long-term solution toward financial system health.

The Chairman anchored his plan to four pillars. In his own words, "Today, I would like to talk about four key elements of such a strategy. First, we must address the problem of financial institutions that are deemed too big--or perhaps too interconnected--to fail. Second, we must strengthen what I will call the financial infrastructure--the systems, rules, and conventions that govern trading, payment, clearing, and settlement in financial markets--to ensure that it will perform well under stress. Third, we should review regulatory policies and accounting rules to ensure that they do not induce excessive procyclicality--that is, do not overly magnify the ups and downs in the financial system and the economy. Finally, we should consider whether the creation of an authority specifically charged with monitoring and addressing systemic risks would help protect the system from financial crises like the one we are currently experiencing." I view all these aspects of reform appropriate for consideration, and I even agree with the idea of creating a small team to assess inherent systemic risks.

It's interesting that the Chair notes "accounting rules" that could induce procyclicality, as the House Financial Services Committee will hold a hearing on the topic of mark-to-market accounting on Thursday. Chairman Bernanke's second point seems generated from his/our experiences with Bear Stearns and Lehman Brothers, where rumors and outright peer sabotage may have sped the demise of both firms.

One thing is certain, Chairman Bernanke has served as resident genius and consultant of desperate policy makers during this crisis, and has gone over and beyond his call of duty to help them manage the nation through it. He's become a better leader due to the endeavor, and he may have the perfect President now to guide, in that Obama is a man who trusts in Bernanke and his abilities enough to give him the reigns (or half of them with Larry Summers). We must take these things into account when assessing the record of this Federal Reserve Chief's term. He's been asked much, and has been a reliable source of hope and tangible solution. I think we are much better off with Bernanke, then we would be if Ron Paul had his way and the Federal Reserve were abolished! Don't you? I hope I do not regret these kind words in three years when inflation is worse than it was in the '70s. This is the future risk Bernanke should be dedicating a good portion of his time towards now. Click here to see Ben's prepared statements.

ICSC Weekly Same-Store Sales

Weekly same-store sales have been less bad of late, and this week's data showed some week-over-week improvement even. Weekly sales rose 0.2% over the immediately preceding period, though sales still fell 0.9% versus the prior year. Sentiment was much better last year though. Recall, at this time last year the market even enjoyed a short bear market rally, which by the way I predicted. Unfortunately, many folks who read through my work too quickly (or only looked at the headline) misinterpreted my call of "a" near-term market bottom for a call of "the" market bottom.

Guess what, even before this great day in the Citi started, I've been getting a little excited about a new bear market rally I see here, driven by valuation, exhaustion and seasonal energy. I've even been toying with the possibility of calling "the" market bottom this time around. If only there were not so many fallen economists and strategists lying around who tried to do the same thing.

Tying back to the weekly sales data, did you notice how energized folks were over the warm weekend? I took careful note of shopping activity, and even spoke with a few retailers who were recently fretting about this year's "early" Easter. A little burst of sunlight and all those bunnies came right out of their holes. They returned in the evening full of tiny pink bags from their favorite stores. Look for this particular sales metric from the ICSC to show strong weekly sales gains next week as a result.

Wholesale Trade

January's Wholesale Trade data came in lower, though not depleted enough. January's inventory levels fell 0.7%, versus the consensus outlook for a fall of 1.0%, according to Barron's (careful, as this may have been only one economist's forecast). Compared to last year, inventories were up a full percentage point. The scariest information garnered from the report is the significance of the difference between sales and inventory decline. Sales dropped 2.9% from December levels, and nose-dived by 15.4% from the prior year period.

Sales are not adjusted for price changes, and so reflect the true movement of units. As you might imagine, the sales-to-inventory ratio expanded to 1.3 in January, from 1.09 a year ago and 1.27 (r) in December. What's this all mean? It means wholesalers aren't moving stock, and therefore, will have to cut capacity, fire employees and reduce prices further (remember this data is from January though). For the layman it still means more bad news!

International News Drivers

Europe Rejects Summers' Call to Arms

The day before Bernanke says he takes global cooperation as necessary and even "self-evident," and in response to the well-planned global call to arms by Larry Summers, Europe rejected the call for more stimulus! Anybody who has traveled between the U.S. and Europe knows full well the variation in pace between the two regions. While the difference may vary from the extremes of Germany and Greece (I only use Greece because of my familiarity), Europe is generally much slower paced than the U.S., no matter what you are up to.

To the efficiency centric, timeline sensitive (often at the cost of quality) United States, Europe is just too slow. I often wonder how many American tourists suffer nervous breakdowns in Europe, as I've witnessed it myself with several traveling companions who happened to be less tolerant than I am. It's sometimes funny to watch, but can become disturbing. I can use my own adjustment as an example. I would often leave for vacation working late nights and all-nighters to prepare for the trip, even pulling back-to-back all-nighters while working from an Athens hotel. It was insane! However, by the time my return date arrived, I was ready to quit my job and remain in Greece to sell fruit from a pickup truck. Let me tell you, while I love American opportunity (esp. for small business), I do not miss the robotic corporate ignorance that often comes at the cost of quality and sanity in the cubicles of America. At the same time, I realize the flaws of European easy going as well.

So, you must be wondering what all this jabber has to do with the European rejection of new stimulus. Well, the Europeans want to wait and see how efforts already undertaken work towards economic restoration. It's a wait and see attitude, a measured pace. In the U.S., this is viewed as a flawed strategy that will cause Europe to linger in recession, but in Europe the mega-spending the U.S. has undertaken is viewed as reactionary nervous strides that might lead to dollar devaluation and runaway inflation. Who is right? Probably both actually. The truth is somewhere in the middle, as always.

Prices FALL in China

China's Consumer Price Index (CPI) showed a year-over-year price decline in February, the first such move in six years! China's CPI fell 1.6%, though some of the move may be relative to the fact that last February offered a tough "comp." Prices rose 8.7% in the 2008 period. At first glance, this looked like a media attempt to create news, since we all know oil prices are much lower now then they were a year ago. We could not locate the original report on China's National Bureau of Statistics website, but most of the rereporting makes no reference to energy prices. This is a "headline" CPI number though, and in the States that incorporates energy. Attribution is being paid to lower housing and commodity prices, especially food. The Chinese government still forecasts CPI growth of 4% this year, and there remains little concern for deflation. We have to agree, as domestic development in China is like a large ship, once begun, as it is now, it is very hard to stop. Global demand for exports will pick up soon enough as well.

Eastern European Farce?

There's been much fuss raised recently over the danger of Eastern European currency crises and economic catastrophe. There have been great outcries to broader Europe for help, and the EU has responded by promising to support its own members and by fueling the IMF and World Bank alongside other nations.

However, today, an Austrian bank drew attention like a lone tree on a hilltop draws lightning. Erste Group, which is already hampered in its argument before it begins due to its interests in Eastern Europe, sought to dispute the "erroneous" claims of recent articles in the Economist and Financial Times, not to mention recent credit rating agency downgrades and warnings. However, speaking from experience, if we are comparing the accuracy of the companies in question (rating agencies) to Erste Group, I have to give decent probability to Erste Group's claims being more accurate! Trust me on this one!

In any event, Erste says the level of debt burden and financing needs based on BIS data have been greatly overstated, because they include debt issued by the local subsidiaries of foreign owned banks issued in local markets. It seems to me the truth is again somewhere in the middle. It would be hard to fathom by simple logic that the rapidly expanding and questionably regulated nations of Eastern and Central Europe were not at great risk now due to excess investment, considering what has happened in the most developed nations of the world. We expect the IMF has done its homework before issuing aid to the Ukraine, Belarus, Hungary, Latvia and Serbia! Otherwise, we may have here the latest in a series of scandals that should be equally expected by now.

Corporate News Drivers

Citigroup's Message of Hope

There you go Vik! I think every corporation should have a Chief Market Psychologist. Seems like Vikram Pandit understands the need, but his stock's offering price might have created the necessary impetus a little late. An intimate internal memo authored by Citigroup's (NYSE: C) boss man somehow leaked.......... It conveniently stated that Citi was profitable through the first two months of this year, and was having its best quarter since Q3 2007. Given C's pace of price decline, there may not have been shares to trade by the time the first quarter's good news was to be formally reported. Therefore, this news leak was well-appreciated by Citi shareholders. C shares are up 34% at this hour, and the Financial Select Sector SPDR (NYSE: XLF) is up 12%. The broader market is up about 5% (AMEX: DIA, Nasdaq: QQQQ, AMEX: SPY), so everybody is happy. Thanks Vik.

EPS Schedule

Tuesday's EPS reports include news from A.M. Castle & Co. (NYSE: CAS), Advocat (Nasdaq: AVCA), Air Methods (Nasdaq: AIRM), Alexza Pharmaceuticals (Nasdaq: ALXA), Alpha Pro Tech (AMEX: APT), American Public Education (Nasdaq: APEI), Approach Resources (Nasdaq: AREX), AVI BioPharma (Nasdaq: AVII), Baytex EnergyTrust (NYSE: BTE), Blackrock Kelso Capital (Nasdaq: BKCC), Boots & Coots Int'l Well Control (AMEX: WEL), Boston Beer (NYSE: SAM), CAI Int'l (NYSE: CAP), Capital Senior Living (NYSE: CSU), Capital Trust (NYSE: CT), China Digital TV (NYSE: STV), Clayton Williams Energy (Nasdaq: CWEI), Collective Brands (NYSE: PSS), Comverge (Nasdaq: COMV), Dick's Sporting Goods (NYSE: DKS), DXP Enterprises (Nasdaq: DXPE), Eagle Rock Energy (Nasdaq: EROC), Emisphere Tech (Nasdaq: EMIS), Evans and Sutherland (Nasdaq: ESCC), Evolving Systems (Nasdaq: EVOL), Ferrellgas Partners (NYSE: FGP), FuelCell Energy (Nasdaq: FCEL), Gaiam (Nasdaq: GAIA), General Steel Holdings (NYSE: GSI), Global Options (Nasdaq: GLOI), Gulfport Energy (Nasdaq: GPOR), Hawk (AMEX: HWK), Hovnanian (NYSE: HOV), Hypercom (NYSE: HYC), Information Services (Nasdaq: III), IRIDEX (Nasdaq: IRIX), J. Crew (NYSE: JCG), JA Solar (Nasdaq: JASO), KMG Chemicals (Nasdaq: KMGB), LHC Group (Nasdaq: LHCG), Lime Energy (Nasdaq: LIME), MAKO Surgical (Nasdaq: MAKO), Marlin Business Services (Nasdaq: MRLN), MEMSIC (Nasdaq: MEMS), ModusLink Global (Nasdaq: MLNK), Nautilus (NYSE: NLS), NCI Building (NYSE: NCS), NN Inc. (Nasdaq: NNBR), Oil-Dri Corp. (NYSE: ODC), Quadramed (Nasdaq: QDHC), Reddy Ice (NYSE: FRZ), Salix Pharmaceuticals (Nasdaq: SLXP), Silver Standard Resources (Nasdaq: SSRI), Stage Stores (NYSE: SSI), Take-Two Interactive (Nasdaq: TTWO), The Exploration Co. (Nasdaq: TXCO), The Kroger Co. (NYSE: KR), Thermadyne Holdings (Nasdaq: THMD), Thomson (NYSE: TMS), Transact Technologies (Nasdaq: TACT), TriMas Corp. (NYSE: TRS), Trinity Biotech (Nasdaq: TRIB), Uranium Resources (Nasdaq: URRE), Vicor (Nasdaq: VICR) and Western Gas Partners (NYSE: WES).


Please see our disclosures at the Wall Street Greek website and author bio pages found there. (Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK).