I am surprised that the market is indicating higher this morning. Throughout the day yesterday, and on into the afterhours, there continued to be a convergence of mixed signals. By mixed signals I mean talk of deflation, talk of inflation, talk of less Fed spoon feeding of stimulus, and of course concern over the administration's new regulatory overhaul. To boot, overnight some leaders in the U.K. and Japan expressed the need to hatch proper exit strategies in terms of stimulus measures, and hatch them rather soon. Hold your horses I say; I also suspect the Federal Reserve to say this next week in its policy statement. While the stock market has rebounded from the abyss that was the March low, markets remain constrained and consumer psyche fragile. Where is the benefit in aggressively signaling reduced commitments to low interest rates and quant easing? Why waste the efforts put forth thus far? As we saw this week in the PPI and CPI readings inflation is a threat more in the long-term not so much lurking around the bend next month.

Spotlight: Retailers

The retail rally has stalled, which I see as highly justified. From the March low point I believe the rally has fueled by the "less bad" phenomena playing out in the economic numbers. With retailers ready to enter prime time selling seasons, back to school and the holidays, and concerns over whether the consumer will reemerge I expect a give back of the sector gains. Despite efforts to reduce inventories and expenses since the holiday quarter of 2008, it's becoming apparent at least in our work that retailers will need to do more (still too much tied up in working capital) to meet the rising consensus earnings estimates for 2H09 and 2010.



Morning Notes from WSS Research Desk

David Silver

The "cash for clunkers" legislation now moves to the president's desk for approval. It passed through the senate (by a 91-5 vote) attached to a bill for military spending in Afghanistan and Iraq. Maybe that is just the way business is done in Congress, but it seems shady to attach anything to that spending bill. Better yet, I want to know the five senators that voted against the bill and see their reasons for not supporting the troops (seems pretty unpatriotic to me). Anyway, back to the cash for clunkers. Germany initiated a similar program a few months back and the results were mindboggling right off the bat, and while the excitement waned in May, the success of the program goes without question. However, my problem with the bill is that it doesn't have that large of a target market.
The average age of a vehicle on the road today is over 9 years old (9.2 years as of 2007, the last year the Bureau of Transportation Statistics released data), and the majority of the people that are going to be able to use this incentive will already be driving light trucks and SUVs. I guess that is the point, to get more people to get rid of those lower fuel efficient vehicles, but what happens when Mr. John Doe from Anytown, USA trades in his 1991 Ford F-150 getting a whopping 14 miles per gallon for a brand new F-150 getting slightly more than 20 mpg? Americans that are driving smaller, more fuel efficient vehicles again get nothing.
Do I think this will be a successful program? Yes, I think that dealerships will be the biggest winners as the inventory out there will be worked through and it will allow automakers to finally start matching supply with demand levels. However, I do feel that the benefits will be short-lived. The first two months will see a big jump as those fence sitters finally step into a showroom, but the effect will not be long lasting.

Carlos Guillen

Last night, BlackBerry maker Research in Motion Ltd. (RIMM) reported a better than expected 33.0% jump in first quarter profit as the company continued to boost market share among non-corporate customers. The company reported revenue of $3.42 billion and earnings per share of $0.98, compared to Street estimates calling for revenue of $3.40 billion and earnings per share of $0.92. RIMM's second quarter outlook, however, was rather disappointing. In the second quarter, RIMM forecast earnings per share of $0.94 to $1.03 on revenue of $3.45 billion to $3.7 billion. The Street expected profit of $0.97 per share and $3.61 billion in revenue.
RIMM also said it expects to sell between 8.1 million and 8.7 million new units, less than the Street's range of 8.5 million to 8.9 million. The market was certainly hoping for more out of RIMM, and that is why the stock is currently bidding lower. However, the stock has been performing very well, more than doubling since early March.