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Five Things You Need to Know: Economic Release Highlights Need for Better Understanding of Economics (Also:Know your Fed Heads, The TIC, Sensex, Dead Comfort)


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


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

1. Economic Release Highlights Need for Better Understanding of Economics

The Labor Department reported that producer prices fell by a much larger than expected 1.3 percent last month. Wait, isn't that good? Why did stock futures decline and bonds rip higher following the release?

  • On the surface the PPI headline reads like a good thing.
  • "Wholesale Prices Drop 1.3%" the Wall Street Journal reported.
  • After all, one would think that wholesale prices coming in less than expected would help mend the inflation divide (See Number Two of Five Things) that is beginning to appear on the Federal Reserve Open Market Committee.
  • Inflationists on the Fed will point to the surge in the Core Producer Price Index, which showed the largest increase since January 2005, 0.6%.
  • Expectations had been for a gain of just 0.2%.
  • But look inside the numbers. Included in the core fig is a 2.8% surge in passenger cars - the largest gain in 16 years, and a 3.5% in light trucks - the largest increase since 1985.
  • Does that make sense? Of course not. Both gains in cars and light trucks reflect the final days of automotive incentives and promotions.
  • Here is a typical case of a headline that misses the essence of today's PPI:

  • Are stocks down because of inflation concerns? If the core data is not as inflationary as the headlines suggest, shouldn't stocks appreciate the benign inflation data?
  • What about bonds? shouldn't bonds be down on the news that inflation is making a comeback? Exactly.
  • While the Fed continues to try and bang the inflation drum, stocks and bonds are worried about the lack of inflation.
  • A truly inflationary PPI is a necessary component of the goldilocks scenario, the soft landing, or whatever it's called, that stocks (and the Fed) are banking on these days.
  • This news is just a plain, old fashioned, deterioration in wholesale prices from front (crude materials) to back (finished goods).

2. Know Your Fed Heads

David Rosenberg, Merrill's North American Economist, has been able to divide the Fed into three inflation-fighting forces - the Hawks (aggressive inflation-fighters), the Doves (which we in Minyanville sometimes refer to as the pedal to the metal money-pumpers) and Centrists (who defer to the Fed Chairman Bernanke) - by using Fed-head statements over the past four weeks.

  • Doves: Bernanke, Yellen, Poole (new voter in 2007), Hoenig (new voter in 2007) and Mishkin.
  • Hawks: Moskow (new voter 2007), Plosser, Lacker and Kohn.
  • Centrists: Kroszner, Warsh, Minehan (new voter 2007) Bies, Geithner Pianalto and Fisher.
  • Today's PPI leaves a little less "inflation" to aid in the imagination of certain Fed Hawks.
  • After all, through August we were looking at a 12-month headline rate of 3.7% year-on-year.
  • Now we're at 0.9%.

3. The TIC

International investment in U.S. securities jumped to a record $116.8 billion in August, according to Bloomberg.

  • International investment in U.S. securities jumped to a record $116.8 billion in August as foreigners stepped up their buying of Treasury notes, Bloomberg reported.
  • By comparison, in July we saw a relatively penny-pinching purchase of $32.9 billion, the lowest since May 2005.
  • As Minyanville Professor Bennet Sedacca noted earlier this morning on the Buzz and Banter following the data release, we now know why we saw such strong moves in Treasuries recently.
  • International purchases of U.S. securities previously peaked at $102.6 billion in October 2005, and averaged $71.6 billion over the 12 months through July.
  • The average over the previous five years was $57.8 billion.

4. Stop Making Sensex!

  • India's Sensex Index has quadrupled since 2003 and is now approaching its own Dow 12,000-esque milestone of Sensex 13,000.
  • How do they do it? Simple. By following the U.S. model of fomenting a credit boom, running a government deficit of almost 10% GDP and a current account deficit of 3% of GDP.
  • Private sector credit has been growing at an annual rate of more than 20% over the past year-and-a-half.
  • Bank lending has been growing at an annual rate of more than 35%.
  • But here's a problem with India trying on the U.S. economic model for size.
  • India is not the U.S. Their currency is the Rupee, not the dollar.
  • Review the Treasury data above in Number Three of Five Things and recall the old saying: If you owe the bank $100,000 more than you can afford, it's tough to sleep at night; if you owe the bank $100,000,000,000 more than you can afford, the banker can't sleep at night.

Impressive, but it's still not the Dow Jones Industrial Average... yet.

5. Dead Comfort

  • Remember the bean bag chair? So 70s! So retro! But so square!
  • Today's kids would love to kick back in the cozy comfort of a bean bag chair but who wants to risk looking like a doofus in front of their friends?
  • What we need is a hip, 2k version of a bean bag chair.
  • To the rescue: the Body Bag Bean Bag.
  • "The Dead Comfy - Body Bag Bean Bag is quite simply the most evil twisted bean bag chair ever invented," raves the Web site the Green Head.
  • Available from, the Body Bag Bean Bag comes in three sizes: dead large, dead medium, and dead small.

Relax. But not too much.

Dead Comfy - Body Bag Bean Bags

No positions in stocks mentioned.

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