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Five Things You Need to Know: Fed Got a Brand New Bag, Spillover, Retail Sales, Speaking of the "D-Word", Nothing Wrong With a Little Puffery Among Friends


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. Fed Got a Brand New Bag

The Federal Reserve Open Market Committee met yesterday and decided to keep its target for the federal funds rate unchanged at 5.25%.

  • The decision to stand pat on the fed funds target rate was widely expected, so the only drama surrounded the release of the FOMC statement.
  • Two things stand out. The first is the progression of the Fed's view of the housing market.
  • Housing first made an appearance in the FOMC statement accompanying the May 10 meeting.
    "The Committee sees growth as likely to moderate to a more sustainable pace, partly reflecting a gradual cooling of the housing market..."
  • The Fed's view that the housing market was "gradually cooling" apparently remained in place until the Sep. 20 meeting when the accompanying statement said:
    "The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market."
  • Now, the FOMC statement notes the following:
    "Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market."
  • In the course of seven months the housing market has gone from gradual cooling to cooling to substantial cooling.
  • The second thing to stand out is the addition of the word "mixed" to describe the economy.
    "Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters."
  • Looks like the Fed got a brand new bag... and it's mixed.

2. Spillover

U.S. chief executive officers see the pace of economic growth slowing slightly over the next six months, according to a quarterly survey by the Business Roundtable released on Tuesday, Reuters reported.

  • The survey by the Business Roundtable tallies the thoughts of 124 of the group's 160 members, all of which are large U.S. companies.
  • Roundtable members employ some 10 million people and have a combined $4.5 trillion in annual revenue, according to Reuters.
  • The CEO Economic Outlook Index survey came in at 81.9 in December, slightly below the 82.4 reading in September.
  • The headline print is fine. A reading higher than 50 indicates growth.
  • But notably the CEOs downgraded their predictions for GDP next year, looking for 2.8% versus the 3% they expected three months ago.
  • Also noteworthy, the CEO's top worry was health-care costs, as well as the extent to which the softening U.S. housing market will spill over into consumer spending.

3. Retail Sales

Speaking of spillover, retail sales in the U.S. rose more than forecast in November. Is that spillover? Not on the headline, but inside the numbers? Well, take a look...

  • Retail Sales rose 1%, the most since July, the Commerce Department reported.
  • Meanwhile, October's 0.4% decline was revised upward to a 0.1% decline.
  • The revisions are actually far more important than the preliminary numbers because the margin for reporting error based on the magnitude of the revisions is so high the preliminary numbers are meaningless.
  • Looking inside the numbers, only one category showed a decline, Furniture and Home Furnishings, which fell 0.1% in November.
  • But October's reading in the Furniture and Home Furnishings category was revised sharply downward to a 0.7% decline from the previously reported 0.3% decline.
  • Also revised downward were Miscellaneous Store Retailers, which previously reported a 3.1% rise in Retail Sales in October, now revised downward to 0.5%.
  • General Merchandise Stores were revised lower in October to -0.3% from -0.2%.
  • Clothing & Clothing Accessories were revised lower from -0.1% to -0.6%.
  • Sporting Goods, Hobby, Book & Music Stores were revised lower as well, from -0.4% to -0.9%.
  • There were some upward revisions. Motor Vehicle Parts & Dealers were revised sharply higher, from -0.1% to a 1% rise.
  • Electronics and Appliances Stores were revised higher from -0.3% to 0.0%.
  • And Building Material, Garden Equip. and Supplies Dealers were revised higher from -0.3% to 0.5%.
  • What is the bottom line then? The revisions are more important than the projections.
  • While this report may paint a picture of stabilizing retail sales, that stability comes at a cost, namely, lower prices and shopping incentives, which is what happens when deflation begins taking psychological root among consumers.

4. Speaking of the "D-Word"

Here are the consequences.

  • Best Buy (BBY) said yesterday that fierce competition forced it to cut prices in its fiscal third quarter more than it had planned.
  • That's why their profit fell short of Wall Street expectations, sending the stock more than 1.5% lower this morning.
  • Weeks ago Wal-Mart (WMT) began slashing prices on everything, forcing consumer electronics competitors such as Best Buy to match or beat prices.
  • "We chose to match or beat on categories like name-brand flat-panel TVs, and honestly, if we could do it all over again, we'd make exactly the same decision," said Best Buy vice chairman and chief executive Brad Anderson.
  • Remember that upward revision in Electronics & Appliance Store sales in this morning's Retail Sales?
  • Now you know the rest of the story.

5. Nothing Wrong With a Little Puffery Among Friends

As a result of a competitor's complaint and a ruling by the Better Business Bureau, Gorilla Glue has changed its claim that it makes "The toughest glue on planet Earth" to, simply, "Glue for the toughest jobs on planet Earth."

  • Gorilla Glue withdrew the advertising claim after a ruling by the BBB's National Advertising Division.
  • Acting on a complaint by the makers of Elmer's Glue, the BBB found no evidence that the glue was indeed the toughest in the world.
  • Consequently, the BBB ruled it an "unsubstantiated superiority claim" rather than acceptable puffery.
  • The ruling raises a question, what is the difference between statements of "puffery" versus "claims of superiority"?
  • According to the BBB, "puffery consists of statements for which reasonable consumers will not expect substantiation," the Cincinnati Enquirer reported.
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