"It's all because of doing things by halves," he would often say to me, and "saying things by halves, that the world is in the mess is in today. Do things properly by God! One good knock for each nail and you'll win through! God hates a halfdevil ten times more than an archdevil!" Nikos Kazantzakis' Alexis Zorbas
Wall Street Greek proudly borrows these words from Kazantzakis, and we thank his family and Simon and Schuster, who published the book, "Zorba the Greek", in 1953. We also hope the film producers of the 1964 masterpiece, Michael Cacoyannis and the late Anthony Quinn approve. We recently discovered that Mr. Quinn, one of our personal favorite actors, was our neighbor as well here in New York.
We know surely that Zorbas would enjoy our reference. In fact, he would very likely declare,
"My words are like a gift to the world. From the second they leave my lips, they are free to go and wander, to find and inspire ears that need a good tug and minds that need inspiration." We have always found Zorbas' words inspiring.
Over the weekend, as we contemplated the significance of the Federal Reserve action of last week, and the many interpretations of it from the scores of talking heads who are paid to respond as quickly and conclusively as possible, we grasped desperately for some conclusion of our own. Is the Federal Reserve body genius or fool we pondered... In the end, we decided that it was likely somewhere in between, in the gray area almost always overlooked in today's society. We believe that our own confusion is representative of how the market will feel and act during the weeks that follow. Also, we are sure that any doubt that exists is the fault of the Fed, and it's half action.
But, let's take a scientific approach, and try to weigh both sides of the argument, one of which we buy into more than the other. The weaker argument, in the Greek's view, is that the Fed action will have no impact. We think it's weaker, but its basis has merit. A fifty basis point cut to the discount rate will help move capital within the commercial paper market, and at least unclog one pipe. However, if the CP market were one clog, then there's an entire plumbing system here that is in need of repair.
The Fed is taking a targeted approach to things, when we believe a major overhaul is necessary. When Bear Stearns (
NYSE: BSC) and BNP Paribas (
Paris: BNP.PA), or similar firms in like places, went to their respective central banks with pleas for assistance out of fear for imminent doom, the Fed and its peers overseas bought up what the market had considered poisonous financial instruments, also known as mortgage-backed securities. And when the commercial paper market was freezing to a point that threatened the very essence of corporate financial facilitation, the Fed added some warmth, or incentive for banks to lend.
The Fed is plugging up leaks in a dam with its fingers. Eventually, it's going to have to fix the damned dam, or it's going to run out of fingers. The
real problem here is that mortgage borrowers are defaulting on their loans, and it doesn't really matter whose fault it is. You can blame borrowers for signing contracts they couldn't fulfill, or the mortgage brokers for pushing bad loans in bad ways; or you can blame the middlemen for packaging them up into securities; or you can blame the institutional investors who bought them and allowed the market for fool's gold to grow.
When it's all said and done, with economic recession threatening, the pending default of too many homeowners is the root of both the problem before us and its cure. We must address
that issue to secure the dam.
Those who argue that a drastic Fed target rate cut is the wrong choice in a moral dilemma are missing the point entirely. The moral dilemma has already been broken, and it happened when all those parties made all those decisions unchecked by federal regulators. It's not up to the Fed now to play regulator OR judge. It's up to the Fed to help seven million mortgage borrowers renegotiate out of their loans into something more manageable. Because, if we do not, we will allow a process to continue that will drive softer consumer spending, retail and other consumer service consolidation, rising unemployment and broader economic distress.
The other side of the argument is that the Fed has somehow signaled that it will give up its crusade against inflation if necessary to preserve economic growth. We believe that's always been the case, despite the stubborn, if not ignorant commentary from William Poole. The problem is that it will likely take "financial calamity" to spur that action.
Still, in the near term, the market will likely interpret this latest move as an indication that the Fed has our backs. From this, the market should strengthen, but only until it becomes clear that the Fed has not solved the problem yet. Then, once again, the market will question whether the Fed is willing to fix the real problem and drop the target rate sharply and decisively. We expect William Poole and his friends to help drive market participants to raise the query we refer to. Still, the market will likely be more confident of Fed action on that day than it was before the market opened last Friday, when futures were indicating imminent crash.
Now, let's take a look at the week ahead...
During an especially light week for economic data, July Leading Indicators will be reported by The Conference Board on
Monday morning at 10:00 EDT. Ironically, the report will be greatly influenced by stale data. It's expected to show a rise of 0.4%, thanks to July's stock market gains and improved consumer confidence, both of which are expected to have waned in August. Leading Indicators fell 0.3% in June.
President Bush is expected to meet with the leaders of Mexico and Canada to discuss regional issues. Topics of discussion are likely to include Arctic territorial disputes, where Russia recently started a land claim race. The believed to be resource rich region has since drawn counter claims from the United States, Canada and Denmark. For those of you unaware, Greenland is a territory of Denmark, thus providing the otherwise tiny nation with good cause to pursue the case.
The earnings week will be kicked off with reports from Lowe's (
NYSE: LOW), Blue Square Israel (
NYSE: BSI), Gold Reserve (
AMEX: GRZ), Hastings Entertainment (
NASDAQ: HAST), Kensey Nash (
NASDAQ: KNSY), Kongzhong (
NASDAQ: KONG), Linktone (
NASDAQ: LTON), Oplink Communications (
NASDAQ: OPLK), Perry Ellis (
NASDAQ: PERY) and others.
On
Tuesday, the International Council of Shopping Centers-UBS report their weekly same-store sales data. Last week's report showed a 0.9% decrease week-to-week and 2.3% increase over the prior year result. The consumer is clearly softening in our view, as evidenced by the slower growth of retail spending. This should be concerning to the Federal Reserve, as consumer spending is the key underpinning of the American economy.
At 10:00 a.m., the State Street Investor Confidence Index will be reported for August. The index is based on the levels of risk in investment portfolios through the previous Wednesday. In light of the period under consideration and the fact that retail investors withdrew some $2 billion from stock funds last week, we expect the index to fall below last month's reading of 87.0.
Though William Poole may be locked in a sound proof room, Richmond Fed President Jeffrey Lacker is scheduled to address the Risk Management Association in Charlotte, N.C. He'll be discussing the economic outlook. Recall, Lacker has been very hawkish in months past, so this could make for a few interesting quotes.
Shareholders of Tribune (
NYSE: TRB) are scheduled to vote on the $34 takeover offer from Sam Zell. Barron's reported that the company has commented that its deal financing is fully committed. Tuesday's earnings schedule includes Adams Respiratory Therapeutics (
NASDAQ: ARXT), Affiliated Computer Services (
NYSE: ACS), American Eagle Outfitters (
NYSE: AEO), Analog Devices (
NYSE: ADI), Biopure (
NASDAQ: BPUR), BJ's Wholesale Club (
NYSE: BJ), CallWave (
NASDAQ: CALL), Candela (
NASDAQ: CLZR), Dick's Sporting Goods (
NYSE: DKS), DryShips (
NASDAQ: DRYS), Genpact (
NYSE: G), Hanover Capital Mortgage (
AMEX: HCM), Hugoton Royalty Trust (
NYSE: HGT), Hutchison Telecommunications (
NYSE: HTX), Jack Henry (
NASDAQ: JKHY), Key Tronic (
NASDAQ: KTCC), Medtronic (
NYSE: MDT), Met-Pro (
NYSE: MPR), Myriad Genetics (
NASDAQ: MYGN), Pep Boys (
NYSE: PBY), Retalix (
NASDAQ: RTLX), Saks (
NYSE: SKS), Staples (
NASDAQ: SPLS), Target (
NYSE: TGT), Vestas Wind Systems (Copenhagen: VWS.CO), Weir Group (
LSE: WEIR.L), Wilsons The Leather Experts (
NASDAQ: WLSN) and more.
At 7:00 a.m. on
Wednesday, the Mortgage Bankers Association reports its weekly Purchase Applications. While the general trend is influenced by housing demand, weekly data often reflects short-term changes in interest rates. At 10:30 a.m., the Energy Information Administration will offer its weekly Petroleum Status Report. Uncertainty surrounding the path of Hurricane Dean deterred weakness in oil commodity pricing last week. Now that it appears very likely Dean will keep on a southerly route, oil prices would be expected to soften. Only, the Fed's recent action, and a growing view that the Fed will act to cut the Fed Funds Target Rate on or before their September meeting, could help to build a new floor under oil now.
Wednesday's earnings schedule includes Abercrombie & Fitch (
NYSE: ANF), American Woodmark (
NASDAQ: AMWD), Astro-Med (
NASDAQ: ALOT), BHP Billiton (
NYSE: BHP), Blue Coat Systems (
NASDAQ: BCSI), Broadridge Financial (
NYSE: BR), Charming Shoppes (
NASDAQ: CHRS), China Netcom (
NYSE: CN), Eaton Vance (
NYSE: EV), Foot Locker (
NYSE: FL), Frontline (
NYSE: FRO), Gander Mountain (
NASDAQ: GMTN), Gymboree (
NASDAQ: GYMB), Hot Topic (
NASDAQ: HOTT), Intuit (
NASDAQ: INTU), JDS Uniphase (
NASDAQ: JDSU), Limited Brands (
NYSE: LTD), Magnetek (
NYSE: MAG), Men's Wearhouse (
NYSE: MW), Phillips-Van Heusen (
NYSE: PVH), Regis (
NYSE: RGS), Ross Stores (
NASDAQ: ROST), Ship Finance Int'l (
NYSE: SFL), Synopsys (
NASDAQ: SNPS), Talbots (
NYSE: TLB), Tech Data (
NASDAQ: TECD), Toll Brothers (
NYSE: TOL), Trintech (
NASDAQ: TTPA), Tween Brands (
NYSE: TWB), Urologix (
NASDAQ: ULGX), Value Vision (
NASDAQ: VVTV), Verigy (
NASDAQ: VRGY), WCI Communities (
NYSE: WCI), Zumiez (
NASDAQ: ZUMZ) and others.
Thursday's Weekly Initial Jobless Claims Report is expected to show a measure 320,000, compared to the prior week level of 322,000. Last week's measure exceeded expectations and may already reflect the beginnings of consolidation in retail that we've been expecting, as well as job losses in housing and mortgage finance. Housing has been somewhat deceiving, we believe due to high levels of illegals within the workforce. The same goes for the restaurant sector.
The EIA will report Natural Gas Inventory at its usual 10:30 slot. 21 Bcf was added to storage last week, and if not for the hurricane, we expect natural gas related shares would not have recovered to end the week. However, the tide of renewed economic enthusiasm also lifted all ships on Friday.
In international news, the Bank of Japan is scheduled to conclude a two-day meeting on Thursday, and in light of recent market turmoil, the BOJ is expected to hold rates steady. In company specific news that the market might find greater implication in, Home Depot (
NYSE: HD) faces its extended deadline to close the sale of its supply business to a private equity group. There remains speculation that the price may be reduced due to changes in the cost of debt being employed to fund the deal.
Thursday's earnings schedule includes Aeropostale (
NYSE: ARO), Barnes & Noble (
NYSE: BKS), Bebe Stores (
NASDAQ: BEBE), Bon-Ton Stores (
NASDAQ: BONT), Brocade Communications (
NASDAQ: BRCD), C-COR Inc. (
NASDAQ: CCBL), Casual Male (
NASDAQ: CMRG), Deb Shops (
NASDAQ: DEBS), Gamestop (
NYSE: GME), Gap (
NYSE: GPS), Hibbett Sports (
NASDAQ: HIBB), Hormel Foods (
NYSE: HRL), LaBarge (
AMEX: LB), LSI Industries (
NASDAQ: LYTS), Marvell Technology (
NASDAQ: MRVL), Mentor Graphics (
NASDAQ: MENT), MoldFlow (
NASDAQ: MFLO), NETEZZA (
NYSE: NZ), New York & Co. (
NYSE: NWY), Nordson (
NASDAQ: NDSN), Pacific Sunwear (
NASDAQ: PSUN), Patterson Dental (
NASDAQ: PDCO), QAD Inc. (
NASDAQ: QADI), ScanSource (
NASDAQ: SCSC), Shiloh Industries (
NASDAQ: SHLO), Shoe Carnival (
NASDAQ: SCVL), Smithfield Foods (
NYSE: SFD), Sonic Solutions (
NASDAQ: SNIC), Stage Stores (
NYSE: SSI), Stein Mart (
NASDAQ: SMRT), The Buckle (
NYSE: BKE), The Cato Corp. (
NYSE: CTR), Children's Place (
NASDAQ: PLCE), The Wet Seal (
NASDAQ: WTSLA), Toro (
NYSE: TTC), Toronto-Dominion Bank (
NYSE: TD), Trans World Entertainment (
NASDAQ: TWMC), Trina Solar (
NYSE: TSL) and others.
Friday brings two important economic news bits. At 8:30 a.m., Bloomberg's consensus of economists expects July Durable Goods Orders to post a rise of 1.0%. June orders rose 1.4%, falling short of expectations for an increase of 2.0%. We anticipate durable goods orders for July and August will trend lower, and we continue to anticipate slowing domestic economic growth to dictate a relatively weak order flow through the second half of the year. At 10:00 a.m., July New Home Sales are expected to show an annual pace of 820,000, down 1.7% from June's 834k. We continue to anticipate that consolidation within the home building industry will impact new home construction, and with the aid of price reduction, finally allow inventory to dissipate slowly.
Friday's earnings report slate includes AnnTaylor Stores (
NYSE: ANN), Burger King (
NYSE: BKC), China Sunergy (
NASDAQ: CSUN), H.J. Heinz (
NYSE: HNZ), Harris Interactive (
NASDAQ: HPOL), Royal Bank of Canada (
NYSE: RY) and a few others. We look forward to providing you with our value-added market preview articles and equity research reports all week.
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