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Five Things You Need to Know: More PPI, Investment Standards? We Don't Need No Stinking Investment Standards!, Thai Me Up, Thai Me Down, Relationships, One Has a Theory About This...


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. More PPI

Yesterday we looked at the Core Intermediate Price Index in the PPI, which fell 0.3% last month, continuing its deterioration from May's 2006 peak at 1.1%. But wait, there's more...

  • There are basically three PPI's.
    - Finished Goods PPI
    - Intermediate Goods PPI
    - Crude Goods PPI
  • As you might guess, they correspond to pricing for various stages of production; crude being an earlier production stage than intermediate, which is earlier than finished goods.
  • Now, all three of these PPI's also have what are called "core" readings which exclude food and energy.
  • The "core" that typically appears in the headlines is the core PPI for Finished Goods.
  • For example, yesterday the headlines mostly read: "November's core PPI surged 1.3%."
  • The 1.3% level comes from the core PPI for Finished Goods.
  • We looked at the core for Intermediate Goods, however.
  • Merrill's Richard Bernstein has another view of PPI using the core PPI for Crude Goods, which tracks raw commodities prices excluding food and energy.
  • Bernstein notes that the Core Crude Goods PPI has a very tight correlation to the profits cycle that dates back more than 30 years.
  • The swing factor in the profits cycle always has been, and continues to be, commodities, Bernstein pointed out.
  • The year-over-year change in the Core Crude PPI has been halved in less than six months, he noted, which suggests overall profits growth will continue to slow.
  • And bad news for profit growth is usually good news for multiple expansion. Just make sure your stocks' multiple expansion is a result of the "P" going up and not the "E" going down, he advised.

2. Investment Standards? We Don't Need No Stinking Investment Standards!

The California Public Employees' Retirement System said yesterday that it would allow its investment managers in emerging-market stocks to buy shares in China and six other countries that previously were off-limits, the LA Times reported.

  • CalPERS, which has a $136 billion stock portfolio, had previously banned stock investments in China, Colombia, Egypt, Morocco, Pakistan, Russia and Venezuela because they failed to qualify under a scoring system that includes factors such as political stability and labor practices.
  • The fund currently has a 3.5% allocation to emerging markets, making $4.8 billion now eligible for investment in those seven countries.
  • If you are familiar with "Logic", you are probably thinking, "Ah, so CalPERS is scrapping its scoring system." Hmmm, no.
  • CalPERS says it will keep the scoring system, but its investment managers can buy shares of individual firms in those countries anyway.
  • CalPERS says it will only invest in companies in those countries if the stocks "meet certain standards," though it is unclear what, exactly, those standards are, apart from being companies whose stocks are going higher.
  • It took us a bit longer, but the LA Times figured this out in less than seven paragraphs: "The decision also could allow CalPERS to cash in on hot stocks in the seven countries," The LA times observed.
  • Here's the best part of the scheme: According to CalPERS' board president Rob Feckner, "By allowing investment in selected public companies that meet our standards, we could encourage others to also qualify by raising their standards to meet our investment criteria."
  • Or, on the other hand, CalPERS, by allowing investment in selected public companies that meet their standards, can encourage other pension funds to lower their standards to the CalPERS level which will allow them to catch the hot emerging markets stocks too!

3. Thai Me Up, Thai Me Down

Thai stock investors now only down 5% in two days, instead of 15%. Annualize that, buddy.

  • The Thailand SET Index rebounded following yesterday's 15% decline, jumping 10% after rules that would have locked up 305 of new foreign-currency deposits were revoked.
  • The rule was designed to halt the 15% rise in the Thai Baht this year.
  • Whew, glad that's over with.
  • Oh, sorry to interrupt, I know you want to move on to Number 4, but there's just one more thing.
  • Let's see, how to explain this.
  • Ok, here goes. That 30% lockup rule on foreign currency deposits was revoked for equities, which stock investors view as a good thing.
  • But curbs on foreign investments in bonds and other debt instruments will remain, the government (quietly) said.
  • Eh, so what.
  • Them is bonds. These is stocks.
  • It's not like they're related or anything. Are they?
  • Wait, are they?
  • Seriously, dude, are they?

4. Relationships

As we near the end of 2006 it's time to begin thinking about 2007. At least that's what the editorial desk here says. My theme for 2007? Relationships.

  • Yesterday on Minyanville's Buzz and Banter we noted the relationship between General Electric (GE) and the S&P 500.
  • The chart below shows the long-term (monthly) divergence between GE (in blue) and SPX (in red).
    1).jpg" width="418" />
  • More recently, as the daily chart below shows, this relationship has begun to converge.
  • Meanwhile, here are some other interesting relationships.
    IBM vs. SPX (monthly)

    INTC vs. SPX (monthly)

    MSFT vs. SPX (monthly)

    And then here's this one.
    XOM vs. SPX (monthly)

5. One Has a Theory About This...

How soon before Dow Theorists are out in force calling for a market top?

  • Our admittedly rudimentary understanding of Dow Theory suggests that the chart below may soon put Dow Theorists back in the headlines.
  • At least one source says a close below 12,000 on the Dow and 4,600 for the Transports will confirm a Dow Theory market top.
  • Until then, carry on.

Dow Theory? Dow in Blue, Transports in Green

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No positions in stocks mentioned.

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