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Five Things You Need to Know: Inside the CPI, Bernanke Put and Stocks Won't Go Down Forever


We're still very early in what will be a 15-round bout against deflation.


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

1. Inside the CPI

The Consumer Price Index rose 0.3% in December, less than November's robust 0.8% gain, according to the Labor Department.

  • Unlike yesterday's Producer Price Index, the CPI survey was conducted during a time frame that did account for the move in energy.
  • The index for energy advanced 0.9% and accounted for about one-third of the overall CPI increase in December.
  • The core CPI, which excludes volatile food and energy prices, advanced 0.2%.
  • Overall last year, consumer prices rose 4.1%, the fastest level since 1990.
  • The core, however, was a bit more moderate, rising 2.4% year-over-year.

2. Ambac Lines up for Cash Behind MBIA

Following on the heels of MBIA's (MBI) recent decision to cut its dividend and raise capital, Ambac Financial Group (ABK) this morning revealed a similar plan, cutting its quarterly dividend by 67% and looking to raise more than $1 billion in capital.

  • Ambac is the second-largest bond insurer behind MBIA.
  • The issue is these companies are expected to report sizeable losses for the fourth quarter due to losses in their credit derivatives portfolios and underperforming home-equity loans and lines of credit.
  • This is cutting into the capital base of these companies, and threatening the credit ratings of the companies.
  • Why do we care so much about the credit ratings on these bond insurance companies?
  • Simple. The loss of a AAA credit rating for Ambac or MBIA, or any of the other insurers could negatively affect the ratings of $2.4 trillion worth of municipal bonds and structured finance debt that these companies guarantee.
  • A credit rating downgrade would also cripple the ability of these companies to continue underwriting new bonds.
  • This, in turn, would create a ripple effect by crimping the ability of states and local governments to borrow money by raising their costs... at precisely the worst time.
  • Due to declining real estate values, subsequent reductions in property taxes and the possibility of a slowing economy, many states are facing the likelihood of significant budget shortfalls.
  • Meanwhile, according to Bloomberg, prices for contracts tied to the bonds of MBIA, which protect lenders and creditors against the possibility that debt payments won't be made, are higher for one year than for five years.
  • That's inverted from normal. Typically longer-term protection is more expensive because the risk of nonpayment is greater.
  • This means the market is anticipating payment stress by MBIA.

3. Bernanke Backs Fiscal Stimulus

News from Washington this morning is that Federal Reserve Chairman Ben Bernanke is in favor of "some type fiscal stimulus" to go hand-in-hand with the Fed's monetary stimulus.

Senator Charles Schumer (D-NY) said at a hearing in Washington that he "called Chairman Bernanke personally to get his thoughts on the economy," and that he said "fiscal stimulus is certainly needed and he would be generally supportive of the Congress and the President enacting such a stimulus," according to Bloomberg.

Remember, this credit unwind is a process, not an event. Back in August in "Digging Ourselves a Deep Jackson Hole," we looked at a very important speech Bernanke delivered at the Kansas City Fed's Economic Symposium in Jackson Hole, Wyoming. Remember the so-called Greenspan Put, the belief that former Federal Reserve Chairman Alan Greenspan would manipulate monetary policy to maintain a certain level of asset prices? In the Jackson Hole speech Bernanke outlined what amounts to his version of that put, the Bernanke Put.

As part of our analysis of his speech, and a prior piece looking at "What Does "Credit Crunch" Mean?," we offered the thesis that the tools for halting a credit crunch will include not just monetary policy, but in this case fiscal policy as well. As noted in August, we were then in just the first round of what will be a 15-round bout against deflation. This has important implications for stock market investors, which leads us to today's Number Four.

4. Stocks Won't Go Down Forever

Below is where we stand with the point and figure bullish percent indicators for equities.

All bullish percents are now below the 30% risk level; reversals up from here are, historically, excellent low-risk buying opportunities.

As well, the High-Low indexes for both the Nasdaq and NYSE are now at very low-risk levels as well; the lowest level since October 2002 for the Nasdaq. This is also the most washed out for the market on a sector-by-sector basis since 2002.

What does this mean? For long-term investors the actual reversals up in these indicators will trigger a point at which stock market allocations can be increased.

One thing to keep in mind is that while October 2002 is frequently considered The Bottom for the market, it was extraordinarily difficult to buy stocks at that time. While buying at that time was the right thing to do based on the indicators, there was an eight month period between October 2002 and June 2003 where it felt like such a foolish thing to be doing, buying stocks in the middle of a deflationary meltdown, pending war with Iraq that should send oil above $50-$60 a barrel, etc. etc. etc.

5. Department of Impossible to Believe: 401k Debit Card

Whenever we reach the point where we begin to think maybe, just maybe, the easy-credit mania is behind us, something else happens to remind us that this is indeed a long-term unwinding process and not an event.

Minyan Bryan recently ran across this article on a company that administers 401k loans through debit cards. That's right. Need credit? Tap your 401k with a handy debit card.

No positions in stocks mentioned.

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