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Five Things You Need to Know: Waiting for Wednesday's Child, Full of Woe; CPI Gameplan; The Politics of Doing Nothing; Decision Time: Energy or Materials?; Housing: A Little Bit Worse


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. Waiting for Wednesday's Child, Full of Woe

They say that Monday's child is fair of face, and having had the entire day off thanks to a federal holiday, we're inclined to agree.

  • And is it Tuesday's child they say is full of grace?
  • Given a relatively light economic payload, we'll give her the benefit of the doubt as well.
  • Rather, it's Wednesday's child we fear the most; as they say, Wednesday's child is full of woe.
  • And why shouldn't she be?
  • After all, Wednesday holds the following keys:
    - Consumer Price Index (See CPI Preview in Number Two)
    - Bank of Japan decision on interest rates (See BoJ Preview in Number Three)
    - FOMC Minutes

Wednesday's Child, full of woe

2. CPI Gameplan

Tomorrow we will see the Consumer Price Index, with expectations of a core reading of 0.2%.

  • So, what's the game plan, and where do the risks lie?
  • First let's go back to this past Friday's Producer Price Index.
  • In Friday's Five Things we noted that the core PPI for Intermediate Goods was flat for the second consecutive month, and flat despite the third consecutive monthly gain for the core PPI for Crude Goods.
  • The core PPI for Intermediate Goods is a pretty good leading indicator core CPI.
  • Below is the matchup between the core PPI for Intermediate Goods and the core CPI, since the core PPI for Intermediate Goods (IG) peaked in May.

    core PPI (IG) core CPI
    May 1.1 0.3
    June 0.6 0.3
    July 0.5 0.2
    Aug 0.4 0.2
    Sep 0 0.2
    Oct 0.1 0.1
    Nov -0.4 0
    Dec 0 0.2
    Jan 0 ?

  • Another 0.2% print, in-line with most expectations is the clear (non-market moving) front-runner.
  • Ask yourselves what the market fears most right here - not what we fear most, mind you (deflation) but what the market fears most - and you can see that an upside surprise in core CPI (0.3% or higher) looks (for what it's worth) likely bond bearish (along with seasonals) and equities bullish, while a downside surprise in core CPI (< 0.2%, which we view as holding the lowest probabilities) looks bond bullish and equities bearish.

3. The Politics of Doing Nothing

The Bank of Japan has already begun its two-day monetary policy meeting, and by this time tomorrow we will know the outcome. What lies ahead?

  • Two things foreshadowing the decision:
    (1) The government announced over the weekend that it is leaving its economic assessment unchanged for this month, saying the economic recovery continues despite weak consumer spending. This monthly economic report - seen as a key policy-moving report - has been unchanged since November 2006.
    (2) According to XFN-Asia, a Cabinet Office official noted that a rebound in private consumption in the fourth quarter "was due to a downward revision of the previous quarter's figures. It requires further watch(ing) to assess the consumption situation through data from January."
  • This is similar to statements ahead of the last meeting, when officials voted 6-3 to leave rates unchanged, pressured by government officials to see growth and consumption both pick up.
  • So far, growth has picked up, but consumption remains stagnant.
  • Meanwhile, Japanese surveys of economists there are nearly evenly divided over whether the BoJ will act to move rates tomorrow.
  • Our best guess is no action tomorrow by the BoJ, and we would note some short covering overnight in the dollar as well as Yen weakness against all of the major currencies ahead of the announcement.

Dollar Index (blue)/Yen (red)

4. Decision Time: Energy or Materials?

Remember back in the day, when the decision wasn't Energy or Materials, but Energy and Materials? That was back in the day.

  • Pulling out our trusty rear-view mirror, we can see that Energy and Materials have been handy outperformers versus the S&P500 over much of the past five years.
  • Using the iShares ETFs as proxies, the IYE (Energy ETF) was up 113% and the IYM (Materials ETF) was up nearly 54%, compared to roughly 23% for the SPX between 2002 and 2007.
  • Frequently, this trade has been expressed as one: the Energy and Materials over the SPX trade.
  • Now, however, we are seeing signs that Materials (the lesser performing side of the trade) have overtaken Energy.
  • Since January 1, the IYM is up more than 9%, the IYE is down a little more than 1% and the SPX is up 2.6%.
  • Technically, there are signs Energy (at least for now) may be best dropped from the equation altogether.
  • Below is a point and figure relative strength chart (courtesy of showing the IYE vs. IYM. Note the triple bottom sell signal.

  • Now, take a look at this chart showing the IYE vs. the S&P500.
  • The ratio - already on a sell signal that was given in January, recently reversed back down indicating accelerating underperformance vs. the SPX.

  • Finally, here is the IYM vs. the S&P 500. All systems go... for now.

5. Housing: A Little Bit Worse

While we're all sitting around waiting for the housing bottom to materialize, consider the following nuggets that trickled out over the weekend.

  • First, a news story on Bloomberg notes that, for the first time in 30 years, farmland from Iowa to Argentina is rising faster in price than apartments in Manhattan and London.
  • Average U.S. farm prices increased 15 percent in 2006, Agriculture Department data showed.
  • Meanwhile, Minyan Marc Faber told Bloomberg that he believes farmland is "very inexpensive in a world of inflated asset prices."
  • As for housing itself, a story out over the weekend, also from Bloomberg, noted that
    "US Company Chiefs Wary on Outlook."
  • Eh, big deal, you say. So, they're wary. They're paid to be wary.
  • That's what we thought too, until we saw the comments in the article from Caterpillar (CAT) CEO James Owens.
  • "For the first time in many moons, the fourth quarter was a time for slowing sales in the US and booming sales everywhere else in the world," Owens said.
  • Well, we're not exactly sure about the many moons definition, but this next comment related to the housing market (CAT sells construction equipment) was decidedly clearer: "My guess is it is going to get a little bit worse," Owens said.
No positions in stocks mentioned.

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