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Five Things You Need to Know: We're Focused On Inflation, Dangit!, Junk In the Trunk?, Oh, Yeah, the Vix!, So Much for Energy Independence, Sorry, But We Have a Headache


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. We're Focused On Inflation, Dangit!

Yesterday afternoon's release of the minutes of the Dec. 12 FOMC meeting shows the Fed firmly focused on inflation, dangit. No matter what the data show!

  • The headline takeaway from yesterday's FOMC minutes was that the Fed says it is more concerned that inflation will "fail to moderate as desired."
  • However, one member did not favor language that referenced only the possibility of additional policy firming and believed that, although the risks to inflation remained the predominant concern, the statement should emphasize that policy could be adjusted in either direction depending on the evolution of the outlook for inflation and economic growth.
  • Again, the lone dissenter at the Dec. 12 meeting - presenting a view starkly different from the mild dissent noted above - was the Richmond Fed's Jeffrey Lacker.
  • Why the negativity, harshing on the Fed buzz, bro?
  • According to the minutes, Mr. Lacker dissented "because he believed that further tightening was needed to help ensure that core inflation declines to an acceptable rate in coming quarters."
  • What it comes down to is that the consensus view within the Fed is that the housing slowdown is bottoming and/or contained.

2. Junk In the Trunk?

Not anymore... it's in the front seat! The ranks of companies whose debt is rated as "junk," meaning, below investment grade, are swelling, according to the Wall Street Journal, a sign of increased borrowing and a growing appetite for risk by investors seeking high returns.

  • "Junk bonds used to be a bad word on Wall Street," Joe Bencivenga, who used to be a bond analyst at Drexel Burnham Lambert in the 1980s, told the WSJ.
  • "They have since gained a lot more respectability," he said.
  • In 1980, the debt of slightly less than a third of U.S. industrial corporations tracked by Standard & Poor's was rated junk, the newspaper said.
  • By the late 1980s that number had risen to more than half.
  • Now 71% fall into that category, which is a record according to a S&P report, the Journal said, and 70 of the companies that make up the S&P 500 have junk ratings today.
  • Meanwhile, the default rate for companies whose debt was rated as junk was 1.3% last year.
  • How does that compare to the average over the past 20 years?
  • During the past 20 years, an average of 4.5% of junk bonds have gone into default, the newspaper reported.
  • Let the good times roll!

3. Oh, Yeah, the Vix!

Aren't you, like, that thing about measuring something about stock volatility, like an index or whatever? Dude, I remember you!

  • Remember the VIX Index?
  • The VIX index is a calculated estimate of option volatility on the S&P 500.
  • Its absolute value is less important than its change and rate of change.
  • Interestingly, the VIX has quietly (very quietly) risen significantly since December 15.
  • While most of us were busy unwrapping gifts, drinking, eating and ringing in the new year, the VIX has quietly jumped nearly 20%.

4. So Much for Energy Independence

US dependence on the Organization of Petroleum Exporting Countries (OPEC) for its oil imports has risen to its highest level in 15 years following Angola's arrival this week as the 12th member of the oil producers' group, the Financial Times reported.

  • Angola's entry was agreed upon at last month's OPEC meeting Nigeria and formalized on Monday.
  • Angola is the first new member to join the oil cartel since 1975.
  • Including Angola, OPEC now supplies more than 54 percent of the oil imports of the developed countries, its highest level for five years, the FT said.
  • OPEC's share of US oil imports, 52%, is at its highest level since 1992.
  • Angola is one of the fastest-growing producers, the FT reported.
  • Reasonable projections suggested it would have provided about a quarter of the total increase in non-OPEC oil production this year.
  • According to the FT, Edward Morse, chief energy economist of Lehman Brothers, suggested Angola's entry could cause problems for the group, noting that Angola has a record of paying "lip service only" to production agreements.

5. Sorry, But We Have a Headache

The sex-related entertainment business grew by just 2.4 percent in 2006, roughly the rate of inflation. According to the New York Times, the sluggish growth rate has many in the industry wondering what they can do to... ahem... wait for it... that's right... get it up.

  • According to AVN Media Network, sales and rentals of adult videos declined by 15.4 % in 2006, though total revenue was still more than 3.5 billion dollars.
  • Dance club growth was flat in 2006, however Rick's Cabaret (RICK), the one publicly-traded company in the industry (note to wife: no positions), said same-store sales in its fiscal year ending Sep. 30 were up 25.1% over 2005.
  • The slowdown in certain areas of adult entertainment doesn't mean we're becoming less excited about this kind of content or more prudish, however.
  • Rather, it simply reflects a shift in delivery.
  • Growth in cable and pay-per-view television was 34.2%.
  • Mobile phone content grew by 11.4%, though the revenues for that segment were still relatively small at $38 million.
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