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Five Things You Need to Know: More Fed; Eh, What's That Got to Do With the Price of Milk in Hershey, PA?; And Still More Fed; Why Haven't Home Construction Jobs Disappeared?; Embrace the Weimar Aesthetic!

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What you need to know (and what it means)!

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

1. More Fed

Today right off the bat we get day the second half of Federal Reserve Chairman Ben Bernanke's Humphrey Hawkins testimony. Yesterday's Fed hot seat was positioned in front of the House Financial Services Committee, while the only difference today is that the Senate gets its turn to do some political grandstanding and posturing.

  • As we noted yesterday, there's really nothing substantively different in the testimony from what Bernanke and other Fed officials have been saying all along:
    "Growth is fine, but housing is sluggish, and inflation will moderate, and this is all exactly as we have anticipated all along."
  • There was really only one other thing worth noting, if only for novelty's sake - the acknowledgment that headline inflation - meaning, inflation readings that includes stuff normal people have noticed are going up in price lately (read: food, gas) - is running a bit "hot" compared to core inflation.
  • "Sizable increases in food and energy prices have boosted overall inflation and eroded real incomes in recent months–both unwelcome developments," Bernanke acknowledged.
  • But "food and energy prices tend to be quite volatile, so that, looking forward, core inflation - which excludes food and energy prices - may be a better gauge than overall inflation of underlying inflation trends."
  • Especially if we are intent on creating inflation... without acknowledging its existence, he didn't add.


2. Eh, What's That Got to Do With the Price of Milk in Hershey, PA?

As long as we're not focused on food and energy as accurate inflation gauges, Hershey (HSY) this morning reported that profit plunged 96%... largely related to higher dairy costs.

  • Hershey lowered its annual forecast for the second time in two months due to the transfer of some operations to Mexico and higher dairy prices.
  • The company said it now expects annual per-share profit of $2.25, down from an earlier estimate of $2.46 to $2.51.
  • "Higher dairy prices and a slower than expected improvement in the U.S. business adversely impacted results,'' Chief Executive Officer Richard Lenny said.
  • For those of us wondering if the company has the ability to pass through increased costs, this past April Hershey increased prices for the first time in two years by 4 to 5% for its famous chocolate bars as well as Reese's products.
  • According to Bloomberg, Dean Foods (DF) last month cut its profit forecast for the second time this year due to higher milk costs.


3. And Still More Fed

And then this afternoon at 2 p.m. EST is the release of the minutes of the June 27-28 Federal Reserve Open Market Committee meeting. This is the public's opportunity to see what the Fed wants us to think takes place behind closed doors.

  • What are the Fed Minutes?
  • The FOMC, the committee of the Federal Reserve that meets to discuss and set monetary policy, first began publishing the minutes of their meetings in 2005 on a three week delayed basis - you know, to clean up the transcript and perhaps edit out all the profanity and off-color jokes - just kidding!
  • Previously, the Fed would release the "Statement" accompanying their monetary policy decisions and that would be that; anything markets need to know is contained int he statement.
  • So the minutes purportedly throw open a window on FOMC meetings and reveal some of the "mechanics" of Fed policy-making and discussions. Right.
  • The purpose is probably to provide more clarity to financial markets about the Fed's intentions, but the reality is that more information doesn't necessarily improve decision-making under conditions of uncertainty - which is what financial market participants are engaged in - it often makes it worse!
  • But wait, here's the truly hilarious (sad?) part.
  • The FOMC minutes will be released at 2:00 p.m. EST.
  • At approximately 2:00:03 EST bullet point headlines will begin scrolling on news services summarizing the ~4,000 word minutes release.
  • At approximately 2:01 EST entire news articles will begin appearing on news services "analyzing" the ~4,000 word document.
  • Financial markets will then make a movement that is directly attributed by someone afterward to something that was contained in or, worse, not contained in the minutes.
  • Finally, tomorrow financial markets will do something else and all of this will have been forgotten, so enjoy!


4. Why Haven't Home Construction Jobs Disappeared?

There has been a lot of questioning of the Bureau of Labor Statistics monthly employment data lately, even by the Fed itself. San Francisco Fed President Janet Yellen last month noted that, "Most of the recent slowdown in labor productivity growth can be accounted for by such lags in just one sector -- residential construction. Although this sector has experienced huge drops in spending, employment has been remarkably well sustained." How is that possible?

  • Minyan Tom helped us out by downloading the BLS data and comparing it to the more comprehensive Business Employment Dynamics report, also published by the BLS.
  • Take a look at the following chart (data seasonally adjusted, private sector only):
    CLICK TO ENLARGE
  • What the chart shows is the variance between the data - the monthly BLS report probably massively overstated Q3 2006 figures.
  • Note the Q3 2001 - another huge overstatement - during massive job losses as a result of the recession.
  • The mean of the variance is +23.1k and standard deviation is 198 since 1992, so this miss is quite unusual.
  • Granted, the numbers are compiled by different methodologies, so perhaps the it is not an easy comparison, but this is still way off, Tom notes.
  • Check out Chart 2, below, which shows the cumulative divergence since Q3 2001
    CLICK TO ENLARGE
  • Chart 3 shows what is happening to construction companies based on the BED report.
    CLICK TO ENLARGE


5. Embrace the Weimar Aesthetic!

We ran across an article this week in the Arts section of the New York Times about an emerging downtown trend in New York... the Weimar Aesthetic. Weimar? Really? Are we positive we're ready to embrace the "Weimar Aesthetic"?

  • Smudged eyeliner and torn fishnets, bared flesh and innuendo, a vaguely antique setting and a winking - or smirking - nod to the politics of today. It's all part of an emerging trend in the performance art and theater scene below 14th St. says the Times.
  • "The Weimar aesthetic has taken over," gushed Justin Bond, a torch singer who performs as the female half of group called Kiki & Herb.
  • "Weimar New York" is a cabaret revue that opened this week at a temporary venue in New York's South Street Seaport called the Spiegeltent.
  • The comparison to interwar Berlin "runs the risk of sounding hyperbolic," said Earl Dax, the creator of "Weimar New York."
  • Hyperbolic? You think?
  • The Weimar period in Germany ran roughly from 1919 to 1933, much of that time marked by hyperinflation.
  • During that period, money in Germany was virtually destroyed. Hyperbolic indeed.
  • According to Adam Fergusson, who documents the "nightmare of the Weimar collapse" in his book, "When Money Dies," just before the first World War, the German, mark, the British shilling and French franc were each worth about the same.
  • Any four or five of each were worth about one dollar.
  • At the end of 1923, it would have been possible to exchange a shilling, a franc or a lira for up to 1,000,000,000,000 marks.
  • Although, Fergusson writes, "in practice by then no one was willing to take marks in return for anything. The mark was dead, one million-millionth of its former self. It had taken almost ten years to die."
  • So today, in honor of the Federal Reserve Chairman's Humphrey Hawkins testimony, the Fed's release of the FOMC minutes, the rising cost of everything except those things included in core inflation, the $2 trillion worth of dollars put in circulation between 1776 and 1990, the $2 trillion more dollars that were added between 1991 and 2000, the $2 trillion more dollars added between 2001 and 2003, the $2 trillion more dollars added in 2004 and 2005 and the $2.8 trillion more dollars added from 2006 through the first half of this year, then yes, let us by all means embrace the Weimar Aesthetic!

    The Weimar Wheelbarrow Wallet
No positions in stocks mentioned.

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