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Wake Me After PPI…Or Don’t


After the equity futures market closed the morning session fairly close to unchanged, the cash market launched higher at the open, maintained those gains throughout the day, and moved to new yearly highs on the close. What was the cause of the sudden move?

…Could it be because Citigroup reported a $7.6 billion loss? Analysts tried to spin this positively: most of the loss was the cost of paying back TARP money. But even after that, the bank managed a 6-cent-per-share loss in a period of record earnings for other banks. Oh, and the loss was only that small because Citi had lower loan-loss provisions…even though delinquencies and bankruptcies, by all indications, are still rising. In any event, I don’t know that we ought to take that much pleasure in the performance of a company that paid back cheap funds with expensive funds so that they can pay executives more. And the market didn’t, when all was said and done, with C basically reversing Friday’s loss.

…So maybe the broader market rallied because it is Tuesday, following a nice weekend with pleasant weather; moreover, the market had already declined for one consecutive day, so the correction must be over. Possible, but it turns out that the answer is probably that…

…Unbelievably, the market is reacting violently to the very possibility that a Republican might win Ted Kennedy’s seat in the Senate. This would have a big effect, some believe, on the probability that the health care bill passes (that is, making it less likely). And sure enough, with the S&P up 1.25%, the NYSE Healthcare Index was +1.99%. This idea has some legs, but it still doesn’t understand why non-healthcare stocks rallied unless…

…Unless the market is growing disenchanted with the movement towards bigger and more expensive government. This is big news, if true – in my mind, much bigger than the news that Republicans are winning on a generic ballot by 9% according to Rasmussen. Polls change, and can easily be moved by near-term events. Republicans would be courting disaster to treat the current mood of the nation as something that can be milked until November. However, a movement in the market is something else entirely. If the stock market starts to decline every time the Democrats gain, and rallies every time the Republicans gain, then the Dems will have to beat two opponents – because they sure don’t have much of a chance if stocks are plunging. They’d have to gain an edge in the polls while mollifying the investing public (and these are very different groups!).

This is something to watch over the next nine months!

There wasn’t much else to watch today, though. Tomorrow, the economic data includes Housing Starts (Consensus: 575k vs 574k last month) and PPI (Consensus: unch/+0.1 ex-food-and-energy versus +1.8%/+0.5% last month). I don’t really pay attention to PPI, and there are many reasons for this. One reason, though, I am not sure I have ever mentioned before and it’s this: producer heterogeneity.

That’s a nice little phrase, no? But here is what I mean. Consumers are fairly homogeneous, meaning that we all consume generally the same things. We consume shelter, medical care, education, transportation, apparel, and so on. We consume them in different proportions, but the difference between the “10th percentile” and the “90th percentile” in consumption patterns isn’t as great as you might think. One way or the other, almost everybody consumes shelter, after all.

On the other hand, there are huge differences in what “producers” consume. A producer of farm equipment has a basket of input goods, and therefore Producer Prices, that is extremely different from the producer of tax returns, which is different from the inputs used by a producer of donuts, and so on. Therefore, while an accelerating CPI has a very clear implication for each and every one of us, an accelerating PPI means very different things depending on what stuff you as a producer are using. The only thing I care about in PPI, and usually not enough to actually go figure it out, is the uniformity of advance. If all inputs are advancing in price, that probably means something for the likely pass-through (but even then, causality is difficult to determine). Accordingly…I don’t usually care about PPI.

Gosh, I hope something else interesting happens tomorrow!

This just in: as I prepare to hit ‘Publish’ on this post, I see that the Senatorial seat was won by the Republican, by around 5%. In this age of recounts, that barely even counts as being close. A truly shocking result! And it will be interesting to see how the market, and political theater, unfolds from here. So maybe things will be interesting after all.

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