On more than one occasion, I have leveraged the tune "In the Air Tonight" by Phil Collins to describe market sentiment. I believe playing off that Miami Vice theme song is appropriate at this particular moment as the market action suggests further consolidation of gains achieved from the March lows.

What's in the Air Tonight Checklist

Overhaul of the financial regulatory structure

Thoughts: Hang onto your Ray Bans ladies and gents as at 12:50 PM EST the Big O will put his stamp on the future of the financial services industry. I sense very mixed reactions to the construction of the oversight plan, most of which has been leaked to the media in recent weeks. As I wrote in a column for our website yesterday, what President Obama has laid out falls short of the plan put forth by former Treasury Secretary Henry Paulson. It's great that the derivatives market will be regulated to a certain extent, but employing rigid capital requirements for banks and non-banks will stifle the potential of our economy. Per comments made by President Obama yesterday evening, we need that potential to be "robust" in order to avert higher taxes on the middle class.

Realization that the market has priced in "green shoots"

Thoughts: In order to get from the disaster scenario to one of prosperity there must be someplace in between, a starting point if you will. On March 9, no doubt the market was oversold. On March 9, no doubt that given the abyss we were coming from and government intervention that economic data would be "less bad" in the months ahead. So, the market rallied, pricing in that "less bad" economic outlook into valuations. Now, however, mixed economic data suggests the next step in reaching prosperous times may be a bit further off than previously expected. Accordingly, the market is undergoing an adjustment period, trying to determine when we could actually return to sustainable, positive growth (this is different than one quarter of positive growth and then a fallback into negative numbers).

Federal Reserve meeting next week

Thoughts: The Fed needs to send strong signals on the following subjects (1) interest rates remaining at current low levels for the rest of 2009, and (2) continued commitment to quantitative easing. No pussyfooting will suffice as this is the most important Fed gathering in some time given the rise in yields and the modest turn in the economy. Investors should pay close attention to possible dissentions by FOMC members; you do not want to see dissention considering Bernanke's term is almost up.

Sidebar

I will be breaking down the financial impact for Abercrombie & Fitch (ANF) of closing the Ruehl concept, with a plan for a detailed note out by week's end. At first blush, I must say, what took so long to close Ruehl? Early last year I suggested parting with a concept that despite having high quality merchandise was nothing more than an Abercrombie & Fitch concept attempting to peddle goods at inflated AUR (average unit retail prices). If there is one lesson to be learned from the tragic ending to Ruehl, it's that retailers should not chase every age demographic. The lines are blurred when it comes to consumer preferences in the teen apparel sector; by this I mean just because someone has 35 candles on the birthday cake doesn't mean a trip to Abercrombie & Fitch is no longer possible (note Ruehl was the company's attempt to capture the business of those who supposedly outgrew Abercrombie & Fitch).

I commend management for finally exiting the business prior to what was shaping up to be a very disappointing holiday season for the brand (our tours of Ruehl have confirmed two things: foot traffic is non-existent and the store smells nice). Now that Ruehl is out of the equation, I am wondering where it leaves the accessories concept Gilly Hicks. At what point does the team throw in the towel their and focus its efforts on maximizing productivity at Hollister and Abercrombie & Fitch?

Afternoon Notes from WSS Research Desk

David Urani

Commodity prices have been the name of the game today following the tamer than expected Consumer Price Index (CPI) increase. Contrarily, it was higher fuel prices that really skewered FedEx's (FDX) guidance for its next quarter. However, the latest news on commodities may offset some of those fears, which is allowing the market to edge higher. Adding to the commodities hoopla today was the EIA's oil inventory report for last week Although crude oil inventory decreased more than expected, gas stole the show, with inventories building by 3.4 million barrels versus the 500,000 build consensus. It's no wonder either, because pump prices have been creeping higher. In fact, in some parts of the country $3.00 per gallon gas is already here. The huge inventory build last week suggests consumers aren't going to stand for it, and that means we can look for prices to come down again (hopefully). Federal Reserve members will be breathing a sigh of relief today, as too much more inflation and it will have had to begin to consider raising rates. Crude oil fell back below $70.00 per barrel immediately following the oil report.



David Silver

The rollercoaster of a ride today shows the market's shakiness. FedEx reported strong (relatively) earnings results earlier this morning, but the crux of the issue was the guidance that management offered. CEO of FedEx, Fred Smith, did not paint a pretty picture for the first quarter of fiscal year 2010. Fuel costs continue to be the largest impediment to future earnings, and with crude oil above $7000 per barrel again, it doesn't bode well for any transport company, ranging from FedEx and UPS (UPS) to the railroads to the truckers.

We saw this morning (and yesterday) that inflation pressures aren't quite rearing their ugly heads just yet. However, the hope for tomorrow (economy) seems to finally be waning and is being replaced with the realities of today. I am the transportation analyst and there have been rumors about a "large less-than-truckload carrier" going bankrupt which would actually benefit the rest of the industry. A large portion of the industry would be split up to the smaller regional truckers essentially. It seems that the Street is expecting a bankruptcy filing from YRC Worldwide (YRCW).

Since the beginning of March, the transport stocks have been on a roll as shown by the Dow Jones Transportation Index chart below. However, it seems that the economic "green shoots" just aren't enough to sustain the current rally. We mentioned it in the market commentary last week that we are just not seeing the early signs of an economic recovery just yet. We expect to see the railroads rebound before the truckers in terms of fundamentals, and as of right now, we expect a little pullback in the transport stocks because the economy hasn't quite caught up with market expectations. We see 3,400.0 being the resistance level that the index has now tested twice; 3,200.0 and then 3,0000 are the next support levels.

Carlos Guillen

So far during today's trading session, the market as measured by the Dow Jones Industrial Average has been jumping in and out of green territory. Investors appear to be feeling rather ambivalent in light of today's news; on one hand, investors believe the economic backdrop is getting "less bad," as noted by my colleague Brian Sozzi above. But, on the other hand, they are worried that the recovery will be lethargic and extended. So far, the Dow Jones Industrial Average is lightly in the green, up barely 0.25% from yesterday's close, awaiting the president's speech.

Some of the negative events so far in today's trading session include the following items:

* Rating agency Standard & Poor's downgraded its debt rating on 22 banks, citing that it expected a more difficult operating environment as a result of increasing volatility in the financial markets and tighter regulation.
* Economic bellwether FedEx appears to have popped investor's bubble that the economy was bottoming. According to management, the company expects operating conditions to be extremely difficult during the next two quarters.

On the other side of the spectrum, some of the more positive events included these:

* Earlier today, the Bureau of Labor Statistics reported that inflation remained suppressed in May, rising at 0.1%, less than the 0.3% increase the Street expected.
* Shares of Qualcomm Inc. (QCOM) were upgraded by Goldman Sachs (GS), citing that the company's royalty business is substantially undervalued and that average selling prices should increase from smart phone sales strength.
* Shares of Texas Instruments (TXN) were upgraded by Merrill Lynch, citing that gross margin should come in above the Street's estimates.

Afternoon Action

We are holding off on a new Hotline idea this afternoon as the market looks rather indecisive.