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Five Things You Need to Know: Challenger to the Economy, Deflation: It's Finally Over, Deflation: It's Just Beginning, Fund Managers Reeling From Meta Loss!, Decision-Making Under Uncertainty: Wealth vs. Loss


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. Challenger to the Economy

The monthly Challenger Job-cut report on corporate layoffs showed increased signs of weakness this morning, topping 100,000 for the first time since January.

  • The monthly job-cut report is published by the outplacement consultancy group Challenger, Gray & Christmas.
  • According to the report, planned job cuts reached 100,315 last month, up 54 percent from August and up 40 percent from the same period last year.
  • Although planned cuts surged, layoffs are still down 18% so far this year compared to the first 9 months of last year.
  • Automakers are expected to soon take care of the year-to-date year-over-year dip in layoffs.
  • Ford (F), GM (GM), DaimlerChrysler (DCX) and their various suppliers should take care of that dip in coming months with more than 33,000 job cuts expected.
  • Oh yeah, and remember the housing sector? The Challenger report showed the "cooling" housing market has prompted job cuts at Home Depot (HD) and Pulte Homes (PHM).
  • According to Challenger, September is seasonally one of the heaviest job-cutting times of the year and perhaps as much as another 30,000 cuts may be announced into year-end.

2. Deflation: It's Finally Over

Japan's Finance Minister Koji Omi says Japan can finally declare its long-running battle with deflation officially dead.

  • Yesterday the Bank of Japan's quarterly Tankan business survey showed that businesses plan to increase spending at the fastest pace in 16 years while confidence climbed to a two-year high.
  • Core consumer prices rose 0.3 percent in August from a year earlier (though excluding energy - global inflation's best friend - were actually down 0.4%).
  • Back in July the Bank of Japan raised interest rates for the first time in nearly six years from near zero percent to 0.25%.
  • The BoJ has faced government pressure not to raise rates too quickly, however, for fear of quashing the "nascent" recovery.
  • Expectations of an interest rate rise were scaled back in August after changes to the consumer price index in Japan showed downward revisions to past estimates of consumer prices.
  • Meanwhile, Omi said at a news conference in Tokyo. "Judging from the current state of the economy, we can declare Japan's deflation is over."
  • "I think it's a bit unnatural not to do so now," he added.
  • And if there's one thing we can say about central bankers and finance ministers everywhere, they love them some "all natural" economic data.

    "By using seasonally adjusted data, economic analysts and the media find it easier to see the underlying trend in short-term price changes. It is often difficult to tell from raw (unadjusted) statistics whether developments between any 2 months reflect changing economic conditions or only normal seasonal patterns. Therefore, many economic series, including the CPI, are adjusted to remove the effect of seasonal influences--those which occur at the same time and in about the same magnitude every year."

  • Yes, central bankers tend to prefer their numerical material fully organic and free of pesticides and manipulation.

    "The CPI will need revisions, as long as there are significant changes in consumer buying habits or shifts in population distribution or demographics. By developing annual Consumer Expenditure Surveys and Point-of-Purchase Surveys, the Bureau has the flexibility to monitor changing buying habits in a timely and cost-efficient manner. In addition, the census conducted every 10 years by the Department of Commerce provide information that enables the Bureau to reselect a new geographic sample that accurately reflects the current population distribution and other demographic factors."

  • It would be unthinkable for a central banker to consider adopting an "UNnatural" course of action based on "UNnatural" data that might be the product of a genetically modified structure.

    "The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand."

3. Deflation: It's Just Beginning

Bloomberg Fed-watcher John M. Berry says Federal Reserve officials focus primarily on core inflation in setting monetary policy rather than so-called headline inflation, and despite pointed criticism from some analysts and European central bankers, that's exactly what they should be doing.

  • While core inflation measures in the U.S. exclude food and energy items, most of the difference between the core and headline numbers has been due to whether energy prices are going up or down, Berry notes.
  • why shouldn't the Fed focus on the entire CPI, Berry asks.
  • After all, consumers have to pay for the gasoline, heating oil, natural gas and electricity they buy just like clothing, rent, medical care and everything else.
  • Fed officials pay greater attention to core inflation because they believe it is a better guide to the underlying level of inflationary pressures in the economy, he says.
  • In the 12 months ended in August, the consumer price index rose 3.8 percent and the core only 2.8 percent.
  • The difference is energy related.
  • Since the June 29 interest rate decision, the last time the Fed raised rates, crude oil is down 17.27%, unleaded gas is off 34.25% and natural gas is off 17.08%.
  • Is the Fed still worried about inflation?
  • Not according to Fed Funds futures. Fed funds futures are now pricing in about a 33% chance of a rate cu at the January 31 meeting, and a 66% chance of a cut by the March 21 meeting.

4. Fund Managers Reeling From Meta Loss!

According to Bloomberg: "New Star Asset Management Group Plc fund managers Stephen Whittaker and James Ridgewell lost a combined 10 million pounds ($19 million) on investments in online gambling companies after their shares sunk yesterday."

  • Let's start with an idea: Individuals collectively enjoy speculation; decision-making under conditions of uncertainty. This is the meta-group.
  • Meanwhile, a macro-group is itself already engaged in speculation and decision-making under conditions of uncertainty related to wagering on the success of certain sub-groups which are in turn engaged in speculation and sector-specific decision-making under conditions of uncertainty.
  • So a sub-group decides that it can provide a money-making platform utilized by the collection of individuals, the meta-group, who enjoy wagering on their decision-making prowess under conditions of uncertainty related to sporting events, thereby providing investors in the platform the possibility of a return on their capital, which is itself a form of decision-making under conditions of uncertainty since no one can be absolutely positive that the platform and its cost structure can successfully translate into a profitable use of the original investment capital.
  • The macro-group wagers that the sub-group's wager on the overall wagers of the meta-group will be successful; a perfect chain of dependency from macro to meta.
  • Unfortunately, a variable force, present but heretofore inactive (the U.S. Congress), intrudes upon the sub-group and disrupts their wager, which quashes the meta-group's very ability to wager, and which in turn crushes the macro-group's wager on the sub-group.
  • In the shareholder letter, this lost wager by the macro group should be referred to as a meta-loss, and stripped from the overall consciousness of material losses.

5. Decision-Making Under Uncertainty: Wealth vs. Loss

Daniel Kahneman won the Nobel Prize in economics in 2002 for "demonstrating how human decisions may systematically depart from those predicted by standard economic theory."

  • The reality, Kahneman found, is that people often behave irrationally.
  • They focus too much on the short-term, or are overconfident and believe they know more than they really do, or they place too much emphasis on their own beliefs.
  • The reason we bring this up today, other than to provide additional context to the meta-losses suffered by New Star Asset Management (above in Number 4) is that markets continue to shift toward a risk averse from a risk-seeking mode.
  • This is evident in the continuing shift from high-risk areas (Russell 2000, small and mid-cap stocks, and Biotech) to areas with perceived lower risk (bonds, large cap stocks, large cap pharmaceutical companies).
  • The way Kahneman described this thought-process (and indeed, that is what we are talking about, a process) is thinking in terms of major losses versus wealth.
  • In a 2002 interview with Forbes, he described it this way:
    "If you think in terms of major losses, because losses loom much larger than gains--that's a very well-established finding--you tend to be very risk-averse. When you think in terms of wealth, you tend to be much less risk-averse. I'll give you an example: Suppose someone offered you a gamble on the toss of a coin. If you guess right, you win $15,000; if you guess wrong, you lose $10,000. Practically no one wants it. Then I ask people to think of their wealth, and now think of two states of the world. In one you own [your current assets] minus $10,000 and in the other you own [your current assets] plus $15,000. Which state of the world do you like better? Everybody likes the second one. So when you think in terms of wealth--the final state--you tend to be much closer to risk-neutral than when you think of gains and losses."
  • "When you think in terms of states of wealth, you are thinking long term," Kahneman said. "So to the extent it is more rational and reasonable to think long term, then that's the calculation that people should make."
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