The Week Ahead: Stormy Weather

I expect the markets to be very upset as we get news about inflation, retail sales, and a slate of bad earnings releases.

This is the bedtime story the Fed is telling the markets: inflation will soften as the economy cools, but the economy will only cool slightly. Nice fairy tale, but it isn't true.

For this to be true, we have to see tame inflation (less than 0.2%), inflation is running high for food and energy, but it isn’t clear about the rest. The trend is inflationary (the cost of imports has shot up), but companies may not be passing it on to the consumer. So PPI could be up but CPI flat. CPI is the big dog here because anything >0.3% means that (1) the Fed is wrong and (2) inflation is high and further interest rate cuts may not be happening.

retail sales may look strong because of dramatically higher prices of food and gas. But the underlying message will be a reduction in spending. Industrial production may be higher due to exports and a slowdown in imports that will drive more domestic sales.

Monday: Retail Sales. Analysts expect an increase 0.2% excluding autos & parts
Tuesday: PPI, Home builders Index
Wednesday: Housing starts, Industrial Production, CPI. Analysts expect CPI to grow just 0.3% for all and 0% less energy and food. They also expect no change in industrial production.

Meanwhile, we have a slew of financial earnings releases, as well as a smattering of consumer and IT releases.
* Financial – Until last Friday's GE report, the market imagined that the bad news was out. Now the fear is that the bad news will continue. WAMU on Tuesday will set the tone.
* IT – There are two types of IT: the consumer (Sandisk, Intel, Seagate) and the Corporate (IBM, Infosys, Seagate, etc). Both are forms of discretionary spending and I think we’re going to see the first strong indicators that companies are slowing their IT spend.
IT spending is usually a lagging indicator because companies have long-term contracts and they can't turn of the spending spigot quite as fast as consumers. I suspect that business has been slowing for 5 months, so it’s time for that slowdown in IT spending to emerge. Nevermind that layoffs hit PC sales or that the squeeze on financial companies means they will push out IT projects to preserve capital. I am talking about a more widespread trend that will confirm slowdown.

Thursday brings 2 companies of consequence to us: E Trade and Harley Davidson (HOG).
E Trade: a lot of recent weakness thanks to GE. There could be further softness, but we can always write more calls.
HOG: should get hit hard from sales slowdowns and delinquency rates (GE showed that delinquency rates are surging – and if folks are getting behind on dishwashers, those $20K bikes must be straining resources even harder). Plus I've heard used Harleys are starting to show up.
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Tuesday: Infosys (gauge of IT services both US and EU), Intel (IT gauge), Linear Tech (IT), J&J (consumer and health), Seagate (IT), WAMU (Financial), US Bancorp (Financial)

Wednesday: Illinois Tool Works (Manufacturing), IBM (IT), JP Morgan (Financial), Wells Fargo (Financial)

Thursday: AMD (IT), Bank of NY (Financial), Capital One (Financial), ETrade (Financial), Harley Davidson (Auto & Consumer), KeyCorp (Financial), Marriot (Travel), Merril Lynch (Financial), MGIC (Financial), Nucor (Steel), Sandisk (IT), Zions Bancorp (Financial)

Friday: caterpillar (construction), Citigroup (Financial), Schlumberger (energy infrastructure), Wachovia (Financial)