Mike Tyson use to speak about his old mentor and trainer, Cus D'Amato, and the encouraging words he offered Mike that served him well in the ring. Cus would say, "The hero and the coward feel the same way. They are both afraid. But the difference between the two is that the hero faces his fear." That's called "courage" folks, and the market seems to be displaying a good deal of it lately. Iron Mike Zambidis, perhaps the greatest kick boxer in history, and likely the most courageous modern day warrior in existence displays that same courage in the image here.
Despite Friday’s near 300-point decline in the Dow Industrials Index, the market has shown interesting resilience to bad news lately. Sure, Friday’s report from General Electric (NYSE: GE), indicating that it had missed forecasts sent the stock for its biggest one-day dive since the 1987 market crash. That's good enough reason for panic. Of course, consumer sentiment readings that were off the charts on the low end reminded investors of the realities of recession as well. It is logical then that investors would want to protect their capital through the weekend and sell heavily on Friday.
However, up until Friday, the market had shown a new and very interesting characteristic through the week, that being resilience. Plenty of other bad news hit the wires this week, including the confessions of the Treasury Secretary and Federal Reserve Chairman that "contraction" was in store and "sharp decline" was in process. It seemed clear to us that Paulson and Bernanke were simply covering their tails now for the onset of recession. That cover may fly on Main Street, but Wall Street will crucify the two for having denied economic strife until the midnight hour, and having targeted it, albeit aggressively, a day late and certainly a dollar short.
Still, we think the market’s new found courage (until Friday) might in fact be indication of a trough for stocks. In other words, downside risk might finally be evening out with upside potential.
The Week Ahead
The week ahead holds in store important metrics of inflation and the economy, as well as the sincere start to earnings season.
Monday offers the market opportunity to follow through on its fearful Friday closure. Retail sales threaten to be disturbingly bad when reported for the month of March before the market open. All indications point toward an ugly report. Last week, individual retailers noted mostly poor chain store sales for the same period. According to Bloomberg's survey of economists, retail sales will be unchanged in March. Anything worse than that, or in other words, a reported decline in sales would be viewed threatening to equities. Even so, much of this expectation is already priced into shares, and we would expect stocks to find support by the close.
Business inventories (for February) are set for 10:00 AM release. Last week, we saw inventories rise on the wholesale level for the same reporting period. The economists' consensus is looking for an increase of 0.6% in this report, after inventories rose 0.8% in January. Despite the just-in-time manufacturing economy, inventories are still on the rise, like in economic troughs of eras past. This may say more for the speed and "sharpness" of the decline, than for anything else.
Importers get a chance to voice complaints about the declining dollar to the man greatly to blame (for at least near-term softness), as ECB President Jean-Claude Trichet addresses a group at New York University.
Besides the Pope, Tuesday and Wednesday bring the Producer Price Index and Consumer Price Index in successive order. Within these reports we find important measures of inflation, especially within the consumer data. Bloomberg's survey shows expectations set for a 0.5% month-to-month increase in the PPI, and 0.2%, when excluding food and energy.
According to last week’s report from the ECB, European economic growth is holding up, and the ECB did not cut interest rates as a result. This is bad for Greeks or other foreign born nationals planning a summer return to the motherland, and also poor for Greek merchants who import goods from Europe for sale here. The dollar cannot firm up against the euro in the near term without consistent movement from the ECB to match the American Federal Reserve.
However, Jean-Claude Trichet, the ECB chief, pointed to still decent economic growth and hot inflation in Europe as good cause to keep rates steady. Unfortunately for us, if his forecast holds true and Europe does not follow us into recession, there’s a tough pill here to swallow. This means global demand could hold up, and thus prices as well. So, the CPI report threatens to defy Fed Chief Bernanke’s assumption that prices will ease as a consequence of recession. If China still needs steel, rice and oil, and Europe continues growing, then how can prices ease for Americans who live within the global economy?
The Empire State Manufacturing Survey, which measures the health of the important New York area manufacturing sector, is expected to post another dismal figure. After reading -22.2 in March, economists are looking for a gauge of negative 16.0 this month. Remember the importance of delta in the movement of stocks. Delta represents directional change, and what we see here is actually improvement in that regard. However, the degree of improvement is likely negligible by the market's eye.
The weekly ICSC-UBS same-store sales results get us all excited over here at The Greek, while the report draws virtually no attention from the rest of the media world. That's their fault folks, because this report has offered us important insight into the state of retail. Last week's growth rate softness to 0.3%, marked slippage from 0.5% the week before and 1.0% the week before that. We are finally realizing The Greek's long standing expectation for severe impact to the retail sector arising from a decreasing consumer propensity to spend. Remember, we're looking for the retail and restaurant industry to suddenly look too fat for demand, and weaker players to start dropping like flies as a result. And, that spells trouble for commercial real estate, and lending.
The Treasury International Capital Report, which measures foreign demand for long-term U.S. securities, is due at 9:00 on Tuesday. Foreign interest in securities had backed off sharply in December and January, and for good reason, but Barron's reports Lehman Brothers (NYSE: LEH) expectation for demand to have picked up in February, to $75 billion. Finally, the Housing Market Index for April could show a firm-point has been discovered, after the measure read 20.0 in the past two consecutive monthly reports.
The Consumer Price Index will garner all early media attention on Wednesday, and the gauge of inflation is expected to show prices rose 0.3% month-to-month in March, or 0.2% when pretending that energy and food price change do not matter. The delusional government still likes to tell us that. Please refer to our past piece on the subject of the dynamics of secular change in food and energy prices.
March Housing Starts are also due for early morning release, and Bloomberg's consensus is looking for an annual pace of 1.018 million starts as of March. The market will prove more concerned with the pace of permits for new homes, but we unfortunately do not have a gauge on those expectations. Regarding housing, Wednesday brings the weekly reporting of mortgage activity, recently greatly driven by FHA loans and improved government incentives and opportunities for such aid.
March Industrial Production is expected to have declined 0.1%, but we would not be surprised to see a greater drop, considering the weak reads from regional indexes lately. Capacity utilization is seen declining to 80.3% from 80.9%. The auto industry seems to have no light at the end of its tunnel, but Barron's wrote an interesting piece making a case to buy Ford (NYSE: F). We could not help but agree with the case made by one of our favorite scribes, Mike Santoli. We know a couple writers over there at Barron's personally, but Michael is not one of them, so we hope he does not mind our calling him Mike...
Speaking of regional indicators, the Fed's Beige Book, which takes a close look at each region's independent view of local economies, is due for release at 2:00 p.m. It gets attention these days, so keep your afternoon eye out after that post lunch cup of coffee. San Francisco Fed Head Janet Yellen will address a group on Wednesday as well, and she's been real good lately at stating the obvious. So, if you have amnesia, you won't want to miss her discussion.
Finally, the EIA Petroleum Status Report is now like a weekly superbowl for energy traders. Last week's nat gas and oil reports both offered up surprising draws from inventory. That's not suppose to happen when you are in recession folks, so oil found good reason to break old records last week. Still, oil pricing seems to hang precipitously, waiting for large builds that seem all but an eventuality. Like general price trends though, a lot depends on growth in Europe and Asia, and if that sticks, get use to $100 plus oil.
Another regional manufacturing index, the Philly Fed measure, is due out on Thursday and gives us a monthly reason to refer to the NL East Champion Philadelphia Phillies. We expect plenty of feedback from NYC traders more likely in line with the Mets. Bring it on! Bloomberg's consensus sees a Philly Fed measure of negative 15 in April, sort of similar to the number of games the Mets lost in September to choke to division away. Oh! Did he really just say that?! I might have to borrow some of the Pope's security detail this week...
Weekly Initial Jobless Claims backed off of the prior week frightful figure of plus 400K, and this week's consensus forecast is for 375K new claims filers. It's as if economists the world over read our column last week, as for once, the forecast does not match the prior week's result (357K this time). But, wait a second, maybe it's just a typo since the "5" and "7" seem switched! I would bet on a typo here, considering the constistency of past estimates.
Leading Indicators is set for report, and remember, we're talking about a leading indicator that measures a past month while we're halfway through this month. March Leading Indicators are seen rising 0.2%, in case you cared. We would bet on a decline. The regular EIA Natural Gas Report is due for release at 10:30. Also, Sam Zell has scheduled a press conference, and all of Chicago is sure to be attuned.
There's some risk of market-moving news arising from the meetings of two technical analyst groups in San Francisco on Friday. Also, South Korea's chief of state meets with President Bush. The Pope addresses a packed house at Yankee Stadium on Sunday, and The Greek will try his best to get in. For those of you hoping to see the religious leader, you do not need a ticket to station yourself along 5th avenue (up to 72nd Street) on Saturday around 1 p.m., as his caravan passes by on its way to another destination. And say hi if you see me there! God bless.
Advertising on "Wall Street Greek" offers indirect benefit you would be well-served to allow us to explain. Please see our disclosure at the Wall Street Greek home page.