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Five Things You Need to Know: Bartender, This CPI Not So Think As You Good It Is!


While economists and market participants fight over the legitimacy of this CPI print, the credit markets continue to scream deflation.


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

1. Bartender, This CPI Not So Think As You Good It Is!

Another round, please! The futures this morning spiked hard on what conventional wisdom suggests was a truly impressive Consumer Price Index print. Consumer prices in February came in unexpectedly unchanged thanks largely to 0.5% decline in Energy prices that, seasonally adjusted, turned into a 2% decline.

Consumer prices were forecast to rise 0.3%, according to the median estimate of 81 economists by Bloomberg.

Looking inside the CPI, Medical Care costs rose 0.1%, the smallest increase since March 2007. Food, which accounts for about 20% of the CPU, continued to show gains, up 0.4% increase.

The reality, however, is that this inflation measure is a lagging indicator no matter how it is sliced and diced. But credit markets are leading indicators. And while economists and market participants fight over the legitimacy of this CPI print, the credit markets continue to scream deflation.

2. Hey, We Resemble That Remark!

The jubilation that ensued following this morning's CPI print lasted all of 40 some minutes before the Bear Stearns (BSC) news dropped on the tape. "JPMorgan, New York Fed Agree to Fund Bear Stearns," Bloomberg reported.

JPMorgan Chase (JPM) and the New York Federal Reserve agreed to provide funding to Bear Stearns as the securities firm said its cash position has "significantly deteriorated," Bloomberg said. Importantly, JPM is assuming no credit risk in this transaction.

Wait a minute. Bear's cash position has "significantly deteriorated"? Isn't that a :liquidity concern"? That sounds vaguely familiar. Where have we seen "Bear liquidity concern" before? Oh, that's right, here in Minyanville... last Monday...

Changing the Benchmark by Bennet Sedacca:

"Perhaps the most interesting part of all of this is that Lehman (LEH) recently announced a share repurchase of 100 mln of its shares for a cost of $5 bln or so. At the same time, it floated a preferred stock deal at 7.95% and issued billions of dollars of new debt for itself. This occurred just as the firm's mortgage and other debt related write-downs began that will likely run into the tens of billions of dollars. In other words, rather than de-leveraging, it's adding leverage. I guess this is why my firm is short Lehman debt. The same goes for Bear Stearns (BSC) and many others. To prove the point, what do you think would happen if Lehman and Bear were told by regulators to sell its 'hard to price' assets? I find it highly doubtful it would be able to sell them and hence, this makes them technically insolvent in my book."

3. The Return of Goldilocks!

Just after the Consumer Price Index was released this morning, there were at least two mentions of the "return of Goldilocks" on CNBC. "Sure," the logic went, "Goldilocks is a little battered and beat up, but this CPI shows she's back."

The bitter, cruel irony of a "Bear" (BSC) hitting the tape not 10 minutes after that declaration on television was, well, exactly how the original fairytale is supposed to end.

See more below...

4. Goldilocks, the Real Story

Once upon a time there was a family of three bears; a mama bear, a papa bear and a baby bear.

This family of bears lived in a quiet cottage in the woods. One day, waiting for their porridge to cool, they decided to take a leisurely walk in the woods, as bears are known to do. While they were out on their walk, a little girl named Goldilocks who happened to be playing in a field nearby, discovered their house, and also the porridge inside, which, let's be honest, is not really porridge, but a metaphor for the collective savings of the three bears which they wisely keep under their mattress for fear of an economic collapse.

Being curious, and an expert burglar, Goldilocks managed to break into the three bears' house, though she later claimed the front door was left "wide open." Once inside, she examined the first bowl of "porridge'" (a metaphor for U.S. Treasuries).

"This porridge is too cold!" she exclaimed.

So she whipped out her cell phone and ordered the Federal Reserve to take some kind of policy action to try and force this "cold porridge" out of the hands of domestic holders and into the equity markets where returns would look great, even to bears, as long as the bears didn't bother to notice that the returns were due solely to the devaluation of their paper currency.

Moving on to the second bowl of "porridge," which is clearly gold, Goldilocks noted, "This porridge is too hot!" So she dumped it onto the open market, even going so far as to sell gol... er, "porridge," that she doesn't even own and can never ever possibly physically deliver in order to try and make it unattractive to bears.

Finally, she moved to the third bowl of "porridge," which in this case is a metaphor for a stack of U.S. dollars that the baby bear kept under his mattress to use as "writing paper."

"Ahhhhh," Goldilocks said. "This porridge is just right."

Then, she abruptly fell asleep in the baby bear's bed. (Editor's note: Certain metaphorical acts committed by Goldilocks, such as raising taxes, browbeating foreign trading partners for structural deflation, etc. have been omitted for the sake of brevity.)

As Goldilocks was sleeping, the three bears returned home.

"Someone's been eating my porridge," growled the papa bear.

"Someone's been eating my porridge too," growled the mama bear.

"And someone's been messing around with my writing paper and used it all up!," cried the baby bear.

Just then, Goldilocks woke up, saw the three bears and screamed.

"Help!" she cried.

"Print more money!" she demanded.

"Buy something... anything!" she screamed.

But it was too late.

By 10:30 a.m. the corporate debt market had locked up and forced selling by overleveraged hedge funds was spilling over into commodities and equities markets. By 11 a.m. the first round of trading curbs kicked in, but this had the perversely ill effect of actually withdrawing even more liquidity and bids from the market. By noon the Federal Reserve had called a special meeting with Wall Street's money center banks to see which, if any, could remain operable through the end of the week.

Goldilocks, meanwhile, was vilified in the press for her reckless breaking and entering and total disregard for good porridge. The bears felt vindicated, but not particularly good. After all, in a real bear's market, no one wins, not even the bears.

5. NCAA Pool Operators Beware

Ran across an interesting Chicago Tribune story this morning on what for the next five weeks will become the American national pastime - NCAA office and online bracket pools.

People who host online pools and collect fees conceivably face criminal charges and jail if found guilty of operating an illegal online gambling operation, the Tribune notes. "It is fair to say this raises questions" with the FBI, agency spokesman Ross Rice told the Tribune. "There could be a violation if there's a payout and if the operators take a cut."

Good to see the Feds setting their priorities straight.

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