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Five Things You Need to Know: Producer Prices: Crying on the Outside, Laughing on the Inside; Frosted Shredded Wheat; If Inflation is So Contained, Then Why Does it Feel So Bad?; Disappointing... But Contained... For Now; Wal-Mart: Always Low Security!


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. Producer Prices: Crying on the Outside, Laughing on the Inside

Ok, so here's where we are: Producer Prices this morning showed up with tears streaming down her face, the headline number up 0.9%, while on the inside she was quietly laughing to herself as the "core" - like everything else these days - "was largely contained."

  • Prices paid to U.S. producers rose more than forecast in May, the Labor Department reported.
  • The 0.9% increase in the headline was higher than the 0.6% increase most economists expected.
  • The "core" however, which excludes food and energy (more on this in Number Two and Three), showed a more modest 0.2% increase, in-line with expectations.
  • That's good, we were told, because it shows that the "more stable" measure of producer price inflation is "largely contained."
  • Digging deeper into the details we see that the cost of intermediate goods - those used in the earlier stages of production- surged 1.1%, the most in a year, and are running at a 3.7% annual pace.
  • Core intermediate goods are rising at a 2.9% annual pace.
  • Prices for crude goods (basically, raw materials) rose 2% for the month.
  • The largest pressure on prices was from energy, of course.
  • And there was some good news on the food inflation front - at least looking backwards (more on this in Number Two) as finished consumer food prices actually fell 0.2%, the first monthly decline in seven months.
  • Wait a minute! Didn't Campbell's (CPB) and General Mills (GIS) both recently raise prices for consumer foods?
  • Finally, one more detail: As we have grown accustomed to seeing, the ability for producers to pass through these costs to customers remains largely absent.
  • Below is the chart showing intermediate goods prices versus finished goods prices. It's been in near free-fall since early 2002. If you are looking for pass-through costs, this is a very disappointing chart.

2. Frosted Shredded Wheat

While the PPI showed apparent good news on the food inflation front with finished consumer food prices actually falling 0.2%, the first decline in seven months, Wheat futures aren't having it... spiking limit up on demand... sorry, not demand, on "technical buying."

  • "CHICAGO (Dow Jones)--U.S. wheat futures Wednesday rallied to new contract highs and fresh 11-year highs for front-month contracts on technical buying and worries about crop damage, analysts said."
  • Apart from technical buying, drought is also playing a role.
  • Drought is affecting production in a number of important wheat producing regions, including Ukraine, Argentina, Central China and western Australia.
  • In the U.S. wheat production is facing the opposite - overly wet conditions impacting harvest in the southern Plains.
  • Global wheat supplies are already historically tight, according to USDA figures.

3. If Inflation is So Contained, Then Why Does it Feel So Bad?

Wonder why inflation feels worse on your wallet than the Fed says? There's an interesting article in the USA Today this morning looking at a wide array of inflation gauges and how they, ahem, measure up against the Fed's preferred measure.

  • The article notes the major discrepancy in how consumers think of inflation versus how economists think of inflation.
  • For consumers, inflation is most important (and visible) in the things they buy most often - gasoline, food, all the things that have been rising so significantly this year.
  • Economists and the Federal Reserve, however, focus on "core" measures of inflation that exclude food and energy.
  • Why? Those items tend to fluctuate most wildly since they are closer to the end user than other items such as raw materials and goods that producers "turn into" something.
  • All it takes is a few months of rising gas and food prices to call the whole ball of wax into question, though... that and a looming major election of course.
  • We find it interesting that other, so-called "alternative measures" of inflation are suddenly making their way into more mainstream and widely read newspapers and media outlets.
  • The USA Today even mentioned today the Dallas Fed's Trimmed Mean PCE (which we look at in Five Things periodically) as well as the Cleveland Fed's Trimmed Mean CPI, both of which are running hotter than the Fed's preferred gauge, the Core PCE.
  • Core PCE year-over-year: 2.0%
  • Dalls Fed's Trimmed Mean PCE year-over-year: 2.3%
  • Cleveland Fed's Trimmed Mean CPI year-over-year: 2.8%

4. Disappointing... But Contained... for Now

Goldman Sachs (GS) and Bear Stearns (BSC) each reported results today with all the focus on the impact subprime loans are having on their results.

  • As we noted in Five Things on Tuesday, Lehman Brothers (LEH) raised the bar for the brokers by reporting disappointing fixed-income results, but making up for that with an increase in trading revenues and percentage of revenues from overseas.
  • For Goldman, however, the decline in fixed-income trading hurt more than even pessimists expected.
  • Fixed-income trading fell 24% as rising defaults on subprime loans had a serious impact.
  • Bear Stearns, meanwhile, reported a 21% slump in fixed income revenue, due to subprime issues.
  • Lehman, by comparison, reported just a 14% decline in fixed-income revenue.
  • Goldman Sachs CFO David Viniar said the subprime market remains weak and hasn't hit bottom, but that so far hasn't spread to other credit markets.
  • Bear said "challenging market conditions in the subprime and Alt-A mortgage sectors'' contributed to the drop in fixed-income revenue.

    U.S. mortgages entering foreclosure rise to a record... let by subprime loans...

5. Wal-Mart: Always Low Security!

Shoppers at Wal-Mart (WMT) stores across America are loading up carts with merchandise and strolling right out without paying, the Associated Press hyperbolized this morning, causing us to ask someone, anyone, to tie us to an anthill and smear our ears with jam.

  • Lord love a duck and good heavens to Murgatroid what is this world coming to that people are just walking right into Wal-Mart stores all across the country, loading up their shopping carts with flat-screen TVs, DVDs and such and then walking right back out without paying, the Associated Press said.
  • Retail consultant Burt Flickinger III told the Associated Press the thefts are likely to rise to more than $3 billion this year.
  • Wal-Mart noted in a June 1 SEC filing that gross profit margin in the stores segment fell 0.1% in the first quarter due to "higher inventory shrinkage" (read: theft), but the company's shrinkage as a percentage of sales is still better than its peers company spokesman John Smiley told the AP.
  • Last year Wal-Mart decided to no longer prosecute minor cases of shoplifting in order to focus on more organized and damaging large scale shoplifting rings.
  • Theft cost retailers overall $41.6 billion last year, according to a joint study released Tuesday by the National Retail Federation and the University of Florida, the AP reported.
  • The study found that the nationwide retail theft rate as a percentage of sales ticked upward slightly last year to 1.61 percent of sales compared to 1.60 percent in 2005.

    Minyanville Five Things Bonus: In another Wal-Mart-related story, the company recently announced it intends to open as many as 400 health clinics in its stores over the next few years. Below is Hoofy & Boo's take on the Wal-Mart health clinics:

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