Replies to post #322107 on Zeev's Turnips Patch-No Politics (ZEEV)

[basserdan]

The King Report

M. Ramsey King Securities, Inc.
Wednesday Nov. 17, 2004 –
Issue 3040 "Independent View of the News"

We had the expected Turnaround Tuesday to the downside, which was abetted by a worse than expected PPI and more disappointing economic news.

Fannie Mae warned that it will have to post a $9B after-tax loss of $9 billion as of Q3 if the SEC finds that they have been accounting improperly for derivatives.

Copper had its biggest decline in two weeks due to reported Chinese selling.

PPI soared 1.7% (0.6% exp) in October, the largest increase since January 1990. Energy prices increased 6.8%, the biggest increase since February 2003. Gasoline prices in October surged by 17.3%, the largest increase since June 2000. Home heating oil soared 17.9%, the largest advance since February 2003. Liquified petroleum gas, such as propane, jumped 14.7%.

Many pundits and TV ‘experts’ said the market will discount the PPI because energy prices have been falling recently – the October PPI is old news. Not so fast, the problem is the market has yet to fully realize the full inflation damage. The surging energy, healthcare and other costs that were regularly cited during earnings reporting season are not fully reflected in PPI and CPI. But they soon could be in profits.

Please recall that BLS has energy prices DOWN 9.6% for Q3 in the CPI. Ergo, BLS data still has energy prices lower than June levels. Oil traded mostly between 36.50 and 38.25 in June. Gasoline this month has traded between 1.42 and 1.31. It traded mostly between 106.35 and 100 in June. The Goldman Sachs Industrial Metal Index is still about 15% above its June trading range.

Yesterday’s worse than expected PPI induces serious analysts to lower real GDP, retail sales and earnings forecasts due to higher inflation. By not fully accounting for inflation, economic data is stronger than warranted. Retail sales are an example of the insidiousness of under-reported inflation. Unit volume is often ignored at the sake inflated dollar volume sales. In recent retail sales data, gasoline service stations provide a big boost to the sales numbers.

Other notable prices increases in the October PPI: food prices 1.6% (hurricane influence – veggies +34.3%, fruit +11.3%), construction machinery and equipment 2.7% (biggest jump since 1/80), and light motor truck 2/7%. Intermediate prices were up 0.9% and 0.3% core, but crude prices rose 4.3% and 5.4% core. This implies inflation other than energy. Core crude prices are +28.3% for the past twelve months

Notable declines in the PPI: passenger cars 1.3% and heavy motor trucks 0.7%.

As we have warned for months, market activity, both economically and financially, is characteristic of late cycle action; and is this case it’s an abjectly over-extended cycle.

Recent dollar downside pressure is due to reports that Japan & China will allow the $ to fall. As we mention regularly, Japan normally desires a weaker than warranted yen to facilitate its exports. However, when inflation becomes a problem, they will allow the yen to appreciate versus the dollar.

The US is now exporting inflation via the declining dollar. The remedy for countries importing inflation is a strong currency; however that will crimp economic activity in the current environment.

-END-

[basserdan]

The King Report

M. Ramsey King Securities, Inc.
Thursday Nov. 18, 2004 –
Issue 3041 "Independent View of the News"

Contrary to the Bubblevision ‘expert’ that just parrots his sources; Wednesday’s market did not get jiggy early because of the hurricane-generated industrial production number. The hurricane influence is in the 1.6% jump in the production of wood products. Home electronics soared 4.9%. Petroleum & coal production increased 1.8%. The other big jump is the 2.3% hike in motor vehicles & parts. Construction supplies increased 1%...Manufacturing employment continues to fall and aggregate hours worked are unchanged to down a tad…Production of defense and space equipment is +5.2% y/y.

Total products increased to $2.8911 trillion in October from September’s $2.8671 trillion or 0.8%. PPI increased double that amount in October. There is an inflation component involved in the increase in industrial production. $10.6B of the $23.4 increase is in automotive products. But auto unit volume fell to 4.06m (annualized) from September’s 4.32m. Auto products by dollar amount increased $10.6B or 3.38%, but unit volume vehicle production increased only 2.3%. The difference is knows as inflation…Trucks increased 500k, with light trucks increasing 510k. We warned in yesterday’s missive that any serious analyst or investor must differentiate unit volume and dollar volume growth is these inflationary, and understated at that, times… Much of the industrial production increase is in light trucks, inflationary plays like coal, metals, wood and petroleum.

Of course the increase in capacity utilization is mostly in the inflation and hurricane beneficiaries.

Wednesday’s action was a currency play, specifically a reaction to the declining dollar and US Treasury Sec Snow’s implicit assent to a falling dollar. US Treasury Sec Snow, in Europe, told the Old World that they have to change the way they do business. Snow said the US favors a strong dollar, which everyone knows is BS, and said the US would not join with others to intervene in the dollar - "The history of efforts to impose non-market valuations on currencies is at best unrewarding and checkered." Naturally the dollar tanked to new lows.

Reuters: "U.S. manufacturers brushed off European complaints on Wednesday about the weak U.S. dollar and argued that the greenback actually was still too strong."

Presently, the market believes the US benefits by a cascading dollar. That’s precisely what drove that big summer rally in 1987. Eventually, the consequences of ‘beggar thy neighbor’ competitive currency devaluations will be manifest in economic & financial disturbances. And if someone does a Jim Baker III, screaming fire in the cascading dollar and dollar market, (Snow’s comments yesterday are a start.) matters and markets will worsen far more than people can imagine…Everything is on course.

You know that housing starts ‘boom’ in October (+6.4% to a 2.027m annualized) that the fin media crowed about yesterday? Single family units FELL 0.1% m/m; multi-family home starts soared 20.3%. Single-family home permits are DOWN 11.6% y/y; starts are -0.2%; under construction is +12.3% y/y. This is not the sign of economic strength or builder confidence. This is a boom stalling out on inventory, including houses (probably most spec) under construction…Even multi-family homes statistics are turning south – permits are down 5.4% y/y. Northeast multi-family starts are up 18.6% y/y; under construction is up 14.1% y/y. Northeast single-family home permits are DOWN 20.8%.

Right from the lips of the BLS: "During the first ten months of 2004, the CPI-U rose at a 3.9 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 1.9 percent for all of 2003." http://www.bls.gov/news.release/cpi.nr0.htm Energy and healthcare costs are still grossly understated.

Last week Fed officials stated that their fed funds policy is nearing ‘neutral’. Well, the BLS CPI shows that the Fed needs to double fed funds to get to neutral.
And that’s still below real CPI…Fed policy is in concert with the administration’s policy of a softer dollar.

What we have here, is stagflation. Current market psychology, fueled by easy money and bullish seasonality, dictates the buying of anything, except the dollar.

The markets are back to ‘buy everything, except sell the dollar’ mode…Stocks and bonds are rallying now, because both respective investor groups are bullish.

Of course when the psychology changes, both bond and stock investors will each see negatives germane to their group.