Five Things You Need to Know: PPI, Housing, What me worry? We (heart) Libya, Surf City
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. Producer Price Index
The Producer Price Index came in with a headline number of 0.9% compared to 0.8% expected.
- The higher-than-expected headline number was largely due to energy.
- Excluding energy (which is silly to do, but here you go) the PPI came in at 0.1%.
- Gasoline prices jumped by 12.3%.
- Energy prices overall were 4% higher.
- Processed foods and feeds prices fell by 0.4%.
- What does all this mean? For that answer, we turn to... housing data.
2. Housing Data
Housing starts came in below the 2 million level for a second month in a row, falling to 1.849 million compared to expectations of 1.96 million.
- The 7.4% decline was more than expected and follows yesterday's NAHB (National Association of Home Builders) Index data falling to its lowest level since mid-1995.
- Interesting. Housing starts continuing to fall, down 20% since January - the largest decline in a decade - builder confidence collapsing to 1995 levels?
- In a situation like this, we find it helpful to AWWAGD (Ask What Would Alan Greenspan Do?).
- Simple. You Cut. You Cut rates, and you cut rates hard. You take rates down 75 basis points in the span of 10 months between March 1995 and January 1996 after ratcheting rates up 300 basis points for 30 months.
- Wow!!!, you say. 300 basis points in 30 months?! I'll bet that will never happen again.
- If by "never happen again" you mean "won't happen again until June 2003 when the Fed hikes a total of 300 basis points over the 32 months between then and May 2006, well, yes, we suppose it will "never happen again."
- Bottom Line: Weak housing trumps energy-induced PPI boost, stocks enjoy a temporary reprieve... at least until tomorrow's CPI.
3. What, me worry?
Corporate Bonds, the New Treasuries
by Alfred E. Neuman, Manager, Magnus Alpha Delta (MAD) Fund
Good news! Our proprietary corporate bond price models suggest corporate bonds have reached a permanently high plateau, bolstered by super-duper management at virtually every company whose bonds we buy, and low-low every day interest rates! The economy is, in a word, totally excellent, and we expect this secular trend of super-duper awesome management and low-low every day interest rates and totally excellent economic performance to continue forever.
To illustrate our expectations, below is a chart of the spread between investment grade corporate debt versus Treasuries. Remember 2002? Just after Enron collapsed? The spread between investment-grade corporate bonds and Treasuries was 2.46%! Today, that spread is 0.87%.
Spread, investment-grade bonds/US Treasuries (Expected)
At the MAD Fund we are savvy risk managers. We are aware (and you should be too) that there are risks to our projected displacement of US Treasuries for investment-grade corporate bonds. Such risks include, but are not limited to:
- Hell freezing over.
- Although we are confident that global warming predictions are based on junk science, we recognize that should the atmospheric conditions change more than expected, it is possible that global warming could result in, ironically, hell freezing over, thereby putting our investment thesis at risk.
- Corporate Pensions.
- Somebody said something about pension risks. What was it? We forget. Oh wait, something about companies being behind in their pension obligations and that 47% of investment-grade companies have a deficit of 20% or more in their defined benefit plans. Our analysis concludes: "Whatever!"
- This FASB thing is about requiring companies to include pension liabilities on their balance sheets. If passed, the new rules would erase $537 billion in shareholder equity. Yeah, right. Like that's going to happen. Last time we checked, Senators and Congressmen buy investment grade bonds too!
In conclusion, we believe the biggest risk to our thesis is that we are too conservative in our bullish corporate bond thesis!
Alfred E. Neuman
4. We Libya!!!
Moammar Gadhafi loads up the truck and he moves to Beverly! Hills that is! Movie Stars! Swimming Pools!
- Come and listen to a story 'bout a man named Gadhafi, poor dictator, barely kept his country fed.
- Then one day he was shooting at some food, when up from the ground come a bubblin' crude!
- Oil that is. 1.6 million barrels per day. In the OPEC top 10. 40 billion barrels in proved reserves, but possibly the second largest undiscovered oil in the world.
- Well, the first thing you know Moammar's a billionaire, the U.S. says, "Dictator? Who cares?"
- "You got oil and that's what we really need," so they moved to Tripoli and opened up an embassy.
- Set a spell. Take your shoes off. Ya'll come back now, y'hear?
5. Surf City, USA
"Surf City USA" is officially in Southern California, according to a federal agency that granted this town exclusive trademark rights despite challenges from northern rival Santa Cruz, according to the Associated Press.
- The U.S. Patent and Trademark Office has awarded Huntington Beach three official registration numbers that permit it to use the designation "Surf City USA" in ads and on beachwear.
- Huntington Beach has battled Santa Cruz for years over the right to use the designation, "Surf City."
- Surf City was taken as a name after the 1963 hit song by Jan and Dean that boasts "two girls for every boy."
- Dean Torrence, who co-wrote the song, lives in Huntington Beach and has said he backs his hometown's claim.
- "Surf City" - minus the "USA" - is not trademarked, according to the AP, and is the actual name of cities in New Jersey and North Carolina.
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