by Larry Levin
Some say the world is suffering from deflation, others throw around terms of disinflation, stagflation and of course, inflation. Whatever it really is, we got a whole lot of "flation" goin' round.
Today brings us more news on the "flation' front." In fact, there was a great deal of new news today, most of it very bullish. Or was it? Today’s news comes from an inflation report, the US dollar, consumer confidence, oil, Google, FDIC, home heating oil, home prices, and various earnings reports. Continue reading...and you be the judge.
Before today's opening bell, the Labor Department reported EXPLODING prices in the PPI that fueled a 1.0% jump in January. Using economist's "annualization" gimmick to make the GDP look impressive we now have super-heated inflation, at the producer level, scorching a 12.0%-annual pace. Holy smokes!
That couldn't be right, could it? Ok, don’t take my word for it. Would you rather believe Milton Friedman and the BOE? Mervyn King, now governor at the Bank of England, says that, "Few empirical regularities in economics are so well documented as the co-movement of money [supply] and inflation." Hmmm, money supply increases then inflation increases? What say you Milton? Mr. Friedman has been famously quoted as saying, "Inflation is always and everywhere a monetary phenomenon." Ok, so we have a consensus here. Good.
Question: What is the result of the FOMC's one-trick pony act of cutting interest rates whenever Wall Street whines? That is always and everywhere an increase in the money supply folks. And what did EZ-Al Greenspan do for years? He cut rates to ridiculously low levels and held them there for too long. And now Bernanke is repeating his mistakes.
Mr. King quoted the statistics that, "Over the 30 year horizon 1968-98, the correlation coefficient between the growth rates of both narrow and broad money, on the one hand, and inflation, on the other, was 0.99, and 0.99 is as near perfect as you’ll find in any pair of data. An absolute 1.00 only ever exists for the very same thing measured against itself - say, the cost of living mapped onto the cost of living, or gold prices correlated with gold prices, for example." So it's safe to say the correlation of increasing money supply and following inflation is as tight as night follows day.
Mervyn King goes on to say, "But ignoring the flood of money - first created as credit and now stacked up in Treasury bonds across the emerging economies - would mean ignoring the connection between growth in the money supply and inflation in prices like China registering an 18% plus growth in money, India 22.4%, Singapore 14%, Britain up 12.3%, Western Europe 11.5%, Australia 16%, Canada 13%, and Saudi Arabia 22%." What about ole' glory? He saved us for last by saying, "The U.S. money supply - if the Fed still reported M3 – is now guesstimated to be showing 15% annual expansion." So I ask again, could we really be about to experience 12.0% inflation?
Frankly, the money creation counted above is just government debt. Wall Street banks have created, without direct governmental approval, trillions of new dollars. Bill Gross of Pimco calls this the Shadow Banking System. How many trillions of dollars did Wall Street conjure up out of thin air before the CDO disaster? And lest you didn't know, these Collateralized Debt Obligations were used as collateral time and again for multiple loans, which created money from nothing many times over.
And you thought the Treasury and Fed were the only creators of money. HA! How can that be legal you may be wondering? Well, as long as the good times are a rollin'...WHO CARES! Yeeeee-haw, let the money flow.
Following are the rest of today's reports/news...
Inflation debases a nation's currency. The US dollar reached a milestone today: it traded lower than it ever had before. "Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless." – Milton Freidman.
More housing data was reported today: prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in at least 20 years.
Today the Conference Board said its Consumer Confidence Index fell to 75.0 this month from a revised 87.3 in January. The reading was the lowest since the index registered 64.8 in February 2003.
Oil reached a milestone today: it traded higher than it ever had before. I once heard this was inflationary, but that was surely during REM-sleep.
Home heating oil reached a milestone today: it traded higher than it ever had before. I once heard this was inflationary, but that was surely during REM-sleep.
Wheat reached a milestone today: it traded higher than it ever had before. I once heard this was inflationary, but that was surely during REM-sleep.
Google shares were crushed 7% today after a downgrade.
Office Depot reported a 85% profit decline...yes 85%! Target's 4th-Q earnings fell and pointed to a weaker economy. Home Depot reported a 27.5% profit decline, while rival Lowes unveiled a 33% profit plunge. Of course, all of these mega profit shortfalls were released today.
The (FDIC) Federal Deposit Insurance Corp. announced today that it's taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen. The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.
Oh, but there was one other announcement today: IBM announced it will buy back $15-billion of its stock. And if the prior information is the setup, here is the punch line: Because of this one data point, the Dow roared 114-points higher.
What's interesting, but apparently not important, is that IBM has made huge share repurchases multiple times over the last 9-10 years. Well then, if it's so sure-fire positive for global equities today, then let's examine IBM's share price over that time period - shall we? After all, if it is good for unrelated equities, it must be fantastic for IBM shareholders.
Well...not so much! Nine years ago IBM traded as high as $139.18-share and since then has repurchased massive amounts of stock as mentioned above. And yet, IBM’s share price is still lower than where it was before all of the excessive-share-liquidity was sopped up. Thank goodness nobody bothers to think past the here & now when these reports are released.
And what does a repurchase of shares say about any corporation? It says the corporation sees no other firm to acquire with said cash. It has no new technology to invest in. It sees no need to build new manufacturing plants or expand sales territory. It is nothing more than a temporary gimmick...a way to goose the current share price.
"All this bad news should be adding up to a triple-digit loss for the Dow, but there is already a lot of bad news priced into the market, and you get to the point where you price in enough bad news and you get to have an opposite day," said Art Hogan, chief market strategist at Jefferies & Co. Said another way, "I have no real idea why it's going up, but I learned this cool phrase a long time ago: 'It's priced in.'"
I guess there is some truth to that phrase, but it would be more appropriate if the news today concerned banking losses from CDO's. All of the other news is new - much of it NEVER happened before in human history - so how could it possibly have been "priced in?"
I end every e-mail by recommending following the trend and will again today. So what is the current trend? The answer is somewhat divided; the short term is certainly up, while the long term trend is still bearish (imho). That being said, I believe it's still possible for the S&P to trade to 1397.00 - 1407.00 while ignoring this avalanche of very...very bad news. If it gets up there and more terribly bearish news hits the tape, as they say - "the fit will hit the shan."
Real Time Trading Signals*for
Trade Date: 2/26/07
E-Mini S&P Trades*
(before fees and commissions):
1) V-A sell @ 9:05am at 1366.25 = -1.75 & -1.75
2) V-A buy @ 9:25am at 1366.50 = -1.50 & -1.50
3) IDVA buy @ 10:05am at 1370.75 = +3.00 (1 lot)
4) OTF buy @ 12:35pm at 1382.25 = +.75 & -1.25
5) Engf sell @ 1:10pm at 1382.50 = -1.25 (1 lot)
6) OTF sell @ 1:30pm at 1385.00 = -1.50 & -1.50
7) TP sell @ 2:05pm at 1385.75 = +4.75 (1 lot)
8) Engf sell @ 2:45pm at 1379.75 = -1.25 (1 lot) ...-4.75 points
E-Mini Russell Trades*
(before fees and commissions):
1) Sell @ 9:33am at 711.9 = +.3 & +2.7
2) Sell @ 9:44am at 710.8 = +.5 & -.6
3) Sell @ 9:49am at 712.3 = +.5 & -1.3
4) Buy @ 10:26am at 716.0 = +.5 & +2.7
5) Buy @ 11:32am at 721.3 = +1.0 (1 lot)
6) Buy @ 12:11pm at 722.6 = b/e (1 lot)
7) Buy @ 12:24pm at 721.4 = -.2 (1 lot)
8) Buy @ 12:56pm at 721.5 = -1.2 & -1.2
9) Sell @ 1:10pm at 720.8 = b/e (1 lot)
10) Buy @ 1:45pm at 721.9 = +.5 & +.9
11) Sell @ 2:02pm at 722.2 = +1.4 (1 lot)
12) Sell @ 2:55pm at 719.8 = +1.4 (1 lot)...+$790.00
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