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Five Things You Need to Know: Inside the PPI, Citigroup and Mozilo's Win-Win


If Bank of America completes its acquisition of the company Mozilo's failure will be rewarded with $115 million in severance compensation.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Inside the PPI

The Producer Price Index declined 0.1% in December according to the Labor Department. Economists were expecting an increase of 0.2%.

  • Last month's unexpected decline in the headline number followed a 3.2% increase in November; the largest increase in 34 years.
  • Core prices, which exclude food and energy, rose 0.2%, in-line with forecasts.
  • Meanwhile, year-over-year the PPI was up 6.3%, the largest yearly jump since 1981's 7.1% increase.
  • But back to the decline in the headline PPI for a moment.
  • The decline in the headline figure was largely due to 1.9% decline in Energy.

2. Welcome to the Real World

Wait, the PPI decline was led by Energy prices? How could Energy have possibly declined in December?

  • A look at commodities prices shows Crude Oil up more than 8% in December, Natural Gas up more than 2.5%, Heating Oil up more than 4% and Gasoline up more than 10%.
  • Is this some kind of conspiracy? What gives?
  • A couple of things:
    1) Most of these gains occurred towad the end of the month after the survey was finished.
    2) There is also the seasonal adjustment issue. The BLS (like most economists) prefer seasonally adjusted data to analyze "general price trends." As the BLS readily admits in the notes that accompany each month's Producer Price release, anyone who operates in the real world (meaning non-economists such as purchasing managers, budget managers and commodity traders) really needs to follow unadjusted data.
  • Why doesn't the BLS analyze both the seasonally adjusted data nad the raw data? Because it's redundant.
  • Presumably, real world operators, including consumers, by virtue of the fact they are operating in the real world, already are familiar with the raw prices.
  • They pay them every day.
  • Bottom line: It's not a conspiracy. The media has inadvertantly perpetuated the misunderstanding of inflation data by reporting it as significant to real world operators.
  • The significance is merely to economists and, by extension, the influence traditional economics has in determining monetary policy on the Federal Reserve Open Market Committee.

3. Retail Sales Disappointment Doesn't Disappoint

Retail sales fell 0.4% in December, more than economists forecast, and the first decline since June according to data from the Commerce Department.

  • As well, there were downward revisions to the October and November data.
  • The weakest category remains Building Materials & Garden Equipment and Supplies Dealers, showing negative month-over-month sales in eight of the past 12 months, and year-over-year declines for five consecutive months, a trend that even accelerated in December, down 1.68% year-over-year.
  • On the bright side, bulls will point to the fact that retail sales overall were still up 4% year-over-year.
  • Ok, fair enough, but we'll take the bear bait.
  • Looking at it year-over-year, retail sales have trended negatively for 17 of the last 19 months.
  • You can see what this negative retail sales momentum looks like a bit easier on a long-term chart.
    Retail Sales, year-over-year percentage change, courtesy of

4. Citigroup Slashes Dividend and Creates a Housheold Name

After slashing its "untouchable" dividend by 40% this morning, Citigoup (C) effectively made Oppenheimer analyst Meredith Whitney a household name. The promotion was well-earned. Whitney was one of the few among the Wall Street herd of analysts willing to take on sacred cow Citigroup's financials.

In early November last year Whitney sparked a firestorm by having the audacity to suggest Citigroup may need to cut its dividend or sell assets to fight what could be as much as a $30 billion shortfall in capital.

Fast forward. Today, in addition to the dividend cut, Citigroup announced it lost nearly $10 billion last quarter, will cut 4.200 jobs and has obtained $14.5 billion in capital from outside investors.

After her initial research note Whitney actually received death threats. "People are scared to be negative, especially when a company has such a wide holding," Whitney told the Times (UK) back in November. "Clients are not pleased with my call and I have had several death threats. But it was the most straightforward call I've made in my career and I am surprised my peer analysts have been resistant. It's so straightforward, it's indisputable."

5. Heads I Win, Tails I Win...

...even if the quarter disappears down a storm drain I win. At least that's how the game is played for Countrywide (CFC) CEO Angelo Mozilo. LA Times columnist David Lazarus gives a full run down of the insanity of this arrangement. Although Countrywide shareholders lost nearly 80% of their investment last year, and even though the company Mozilo runs was forced to draw on all of its $11.5 billion credit line back in August, and although Countrywide under Mozlio's watch has now laid off a full 20% of its workforce, some 12,000 workers, if Bank of America (BAC) completes its acquisition of the company Mozilo's failure will be rewarded with $115 million in severance compensation. With an exit package like that it's a wonder he bothered to even try to run the company successfully.
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