Mother’s Day Linkfest, Part Deux

Barrons_econ_calendar Yesterday, we looked at the week that was. Today, lets preview the week that will be.

With Q1 earnings season all but over, the focus will be on a number of economic releases. Given the market’s reaction to the PPI data Friday, Consumer Price Index on Tuesday will be especially important.

Although food prices (7.7% y/y) and energy (3.4%) were both up big, the core rate was unexpectedly flat, mostly due to an unexpected drop in prescription drug prices, and a not unexpected
drop in both car and truck prices. Inflation in the pipeline remains robust as intermediate goods
(that is ex food and fuel) rose .8% — the biggest gain since last year.

All this means that Tuesday’s CPI takes on extra importance, as we find out the extent that inflation is being
passed along to consumers. Concensus is for CPI to rise 0.5%. Core CPI (aka inflation ex-inflation) is expected to climb ~0.2%.

ICSC/UBS Same store sales are also on Tuesday, but given last week’s retail data, expectations are rather muted.

Housing_starts Wednesday we get Housing Starts (1.475M) and MBA Mortgage Apps. Note that the day before, we get the National Association of Home Builders’ monthly Housing Market Index. Its hovering near 15-year lows. Wednesday is also the release of Industrial Production (0.2%). Improving factory activity is Q2’s best hope for bettering the anemic Q1 GDP. Thursday brings Jobless Claims, which have been very pretty good, but full of odd quirks keeping the data low. Friday reveals Consumer Sentiment.

Also on the upcoming agenda: Changes by FASB to the rules for reporting profit. Expect to hear more about this in the coming weeks.

Plenty of speeches this week too, with Fed Chair Bernanke discussing derivatives (Tuesday) and sub-prime lending (Thursday). Neither is expected to move markets — but ya never know.

Meanwhile, here’s a few tidbits to help get you prepped for the coming week:


Positive Surprises Leading to Upward Estimate Revisions:
We are more than three-quarters done with earnings season and earnings
continue to surprise to the upside. As things stand now, it’s about an
even money bet that the median S&P firm will post double-digit
year-over-year earnings growth. That would make it the 19th straight
quarter. While the 9.8% growth is still lower than previous quarters it
is much better than expected. The surprise ratio now stands at 3.5:1,
down from 3.8:1 a week ago, and 5:1 two weeks ago but still very
strong. Positive surprises have been widespread, with every sector
showing more positive surprises than disappointments with the exception
of Utilities  (Zachs)


How cheap debt overinflates stocks: Since 2003, IBM has purchased 203 million of its own shares at a total
cost of $30.7 billion. That’s a huge percentage — about 52% — of the
company’s total operating cash flow of $59.5 billion during the period.
It looms even larger if you add in the $17 billion IBM spent during
this period on capital expenditures, the $8.8 billion it spent
acquiring businesses and the $5.3 billion it spent paying dividends to
investors. All that — added to the spending on buying its own shares
— comes to 104% of operating revenue. (MSN Money)

Forget Murdoch: Yahoo! Should Buy Dow Jones: Its market cap is more than $41 billion, so the
company could easily absorb Dow Jones in an all-stock deal, matching
Murdoch’s $5 billion offer. They would also be a white knight much more
acceptable to the major and minor family shareholder groups.

Smart ways to play the M&A boom With so many deals in the news, it’s only natural for investors to
wonder which company will be bought next – and which stock will be next
to see a pop. Before you start chasing rumors, though, bear in mind
that you may already be profiting from the action. That’s because the
M&A wave has buoyed stock prices across the board, a number of
market watchers say, by adding another source of demand for shares. (Fortune)

Tech Investors Cull Start-Ups for Pentagon: The nation’s military, in its search for the next surveillance
system, bioterror vaccine or robot warrior, has decided to take a peek
into the garage. Through a program that recently emerged
from an experimental phase, the Defense Department is using some of the
nation’s top technology investors to help it find innovations from tiny
start-up companies, which have not traditionally been a part of the
military’s vast supply chain. The program provides a regular
exchange of ideas and periodic meetings between a select group of
venture capitalists and dozens of strategists and buyers from the major
military and intelligence branches. (New York Times)

Metals Bubble Poised to Burst on Increasing Supplies: Copper, nickel and lead, the best
performing commodities in the past four months, may be the worst
by year-end. On Wall Street, the chorus is getting louder that rising
metal supplies are outpacing demand. From Goldman Sachs Group
Inc. to JPMorgan Chase & Co. to Societe Generale, there are
warnings of a mania that is showing all the signs of a climax. (Bloomberg) Counter argument: 
Investors Mine For More Deals In Commodities (Wall Street Journal)

Weak Dollar? Currency, at 10-Year Low, May Fall More: Anyone who says the dollar is weak
after it fetched a record-low $1.3681 against the euro and the
fewest pence against the pound in 25 years is expressing a
euphemism. The currency may decline at least another 10 percent by the
end of 2008. (Bloomberg)

China’s irrational exuberance:
Since its February hiccup, the Shanghai A-share market has now moved
back up 40%, buoyed by a series of successful initial public offerings
as the ranks of investors swell at over 200,000 a day. There are now
more than 91 million accounts held at brokers or mutual funds. But some
critics argue the way the mainland IPO market is being run
systematically fans the irrational expectations of these novice
investors with the promise of easy money, storing up trouble ahead.
Chinese investors may be notoriously momentum-driven and ignorant of
valuations, but they can surely see the IPO market is serving up a
bargain. (Marketwatch)

U.S. stocks going parabolic like Nikkei of 1980s:
The respected Gartman Letter, marketed to investment institutions and
not monitored by the HFD, has a chilling explanation of what’s going
on. Editor Dennis Gartman wrote in the past week: "We stand in awe of
the sheer majesty of this rise." But Gartman’s response is to review
what he wrote about an earlier unstoppable bull: the Japanese stock
market of the late 1980s. As Gartman remembers: "Shares there were
running skyward even as the economies of the rest of the world were
tanking. The Bubble was going "parabolic," and every modest decline was
met with huge new buying, that soon took shares to incredible new highs
as the Nikkei soared toward 40,000." (Marketwatch)

• Warm up those green visors and #2 pencils! Profit as We Know It Could Be Lost With New Accounting Statements:
Pretty soon the bottom line may not be, well, the bottom line. It is
the item many investors look to as a key gauge of corporate performance
and one measure used to determine executive compensation. In its place,
investors might find a number of profit figures that correspond to
different corporate activities such as business operations, financing
and investing. (Wall Street Journal)


The Wall of worry continues to build:

Retail Sales = Hard Landing ? See also, slowflation

Borrowing Binge Fuels U.K. Economic Worries: With inflation at a 10-year high and interest rates set to rise as soon
as today from their current 5.25%, concerns about Britain’s borrowing
binge are gathering momentum. Personal insolvencies in England and
Wales last year hit a record 107,288, up almost 60% from 2005. In the
first quarter, insolvencies totaled a seasonally adjusted 30,075, up
24% from a year ago. Treasury officials announced in January that
they’re considering a nationwide financial-education program. The
consumer squeeze is particularly worrying for the British economy,
reliant as it is on consumption for nearly two-thirds of its output. (WSJ)

Recession ’07: ‘Black Swan’ or ugly duckling?
Recession 2007? Improbable? Totally unpredictable? So why are most
economists predicting it won’t happen? And can you trust anything you
read in the news about a coming recession? One trader says it’s just
"noise." (Marketwatch


Borrowers, Beware  James Grant, writing in the Washington Post,
notes "Easy credit financed the bull market in houses and the flood of
home refinancings. Americans felt richer and spent as though they were.
It stands to reason that the withdrawal of this manna will lead them to
spend less — with substantial collateral damage to the
housing-centered U.S. consumer economy, and, perhaps, well beyond. Our
captains of industry owe as much to their lenders’ leniency as does any
subprime, or high-risk, home buyer. They, too, have been able to raise
money on terms unimaginable only four years ago."    

Home-price forecast: First ever decline:  Home prices are expected to finish down for the year, the National
Association of Realtors (NAR) said Tuesday, which would mark the first
drop since the group started tracking values in 1968. NAR
projects a 1 percent decline in the median price of an existing
single-family home, to $219,800. The group, in a forecast made a month
ago, had previously been expecting a 0.7 percent decline. Prior to
that, it had expected a gain of 1.2 percent. (CNN Money)   

The ugly face of foreclosure:
Foreclosures are devastating communities across the United States,
and the impact may only worsen as more subprime adjustable mortgages
reset during the next few months. Foreclosure filings are up 35 percent
nationwide since a year ago, according to RealtyTrac. See also Foreclosure bargain-hunting (CNN Money)


Fed Will Keep 5.25% Until Definitive Data Shift:Unless there’s a definitive shift in
economic data before Federal Reserve officials meet next month,
they might just as well issue the same statement they put out
yesterday when they left the interest rate at 5.25 percent. (Bloomberg)

Inflation Risk Keeps Fed on Alert  The Federal Reserve signaled continued wariness on
inflation, leaving interest rates unchanged and giving no sign it is
inching toward an interest-rate cut. The Fed said after its policy meeting yesterday that
its "predominant policy concern remains the risk that inflation will
fail to moderate." (Wall Street Journal)


How the Wii is creaming the competition: A year ago it looked like game over for Nintendo’s storied console
business. The Kyoto-based gamemaker–whose Nintendo Entertainment
System ushered in the modern age of videogames–was bleeding market
share to newer, more powerful systems from Sony and Microsoft. (Business 2.0)   

Profit in Motion: Tiny Sensors Take Off  The Key to Wii’s Controller and New iPhone, ‘Mems’ Are a Hot Product   (free Wall Street Journal)   

The New Business Contrarians: 11 business leaders who achieved success by zigging while the rest of the world zagged. (Business 2.0)

Using YouTube for Posterity   (Wall Street Journal) 


Are CD Prices Coming Down? (Surprisingly, Yes)

• Last Week, we mentioned one of my favorite new singers, Amy Winehouse. I noticed she got lots of ink this week, including WSJ (A New British Invasion?) and NYT (Disillusioned Diva With Glimmers of Soul)    

Malcolm Gladwell on the Colbert Report   

The Gatekeeper: How Posh Hotel Sizes Up Guests: Ever wonder what the maitre d’ is taking in as you walk into a
high-end restaurant, or what the saleslady at Bergdorf’s knows about you?
Plenty. Count on it. They’re acting on information you’ve given them without
even knowing it. Ever wonder what the maitre d’ is taking in as you walk into a
high-end restaurant, or what the saleslady at Bergdorf’s knows about you?
Plenty. Count on it. They’re acting on information you’ve given them without
even knowing it. (free Wall Street Journal)


That’s all from what looks like another glorious weekend in the NorthEast. Happy Mother’s Day, Mom! See you next week.

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What's been said:

Discussions found on the web:
  1. V L commented on May 13

    There is an area of the brain (located in the ventromedial prefrontal cortex, behind the brow) responsible for communication between the emotional and cognitive parts of the brain. University of Zurich and University of Southern California have conducted studies on people who had a trauma or mini-stroke in that area of the brain (the emotion to cognition neural network was destroyed). They found that these people were completely rational. They had no emotional inhibition of their cognitive cortex — pure reason. (The researches asked them about hypothetical emotional dilemmas like would you take an innocent life of one individual to save others; to save yourself and others, would you throw someone out of a lifeboat? etc.)

    One of the components of this subconscious emotional part of the brain is greed. Greed area has a positive feedback loop with endorphins and other neurocrines (endorphins stimulate pleasure receptors [sense of pleasure and wellbeing] that cause to release even more endorphins leading to even higher stimulation of the greed area and so on – it is never too much of money). As a result, of over stimulated greed neurons firing and inhibiting the cognitive (rational) part of the brain, we get irrational market bubbles with their parabolic spikes and irrational overpaid private equity takeovers. (By the way, Ponzi schemes are also based on overstimulation of the greed area [promising excessively high returns on investment])

    It is just a matter of time before the cognitive part becomes tolerant to greed neuron inhibition (it is similar as tolerance to caffeine, it takes time but it happens). The reason that it takes about the same amount of time for the tolerance to develop is that the market participants are humans with similar physiologies. Unless the tolerance develops, any bad news will be interpreted as good news (because the news would be processed by the emotional part of the brain, not cogniyive). When the cognitive cortex starts producing rational decisions the selling begins and the bubble pops. (Then we hear about what was I thinking type of comments.)

    Anyhow, I hope, I have figured it out when the bubble should pop based on the historical data, the slope of the current S&P curve and human brain physiology (timeframe that it takes for an average human brain to develop this tolerance). Based on my experimental model it should happen in April-May of 2008. It will be interesting to see if it happens in 2008 as the model predicted.

  2. Winston Munn commented on May 13

    V L

    Interesting hypothesis but it seems to depend on the timing of the start of endorphin overproduction, i.e., at what point did greed overcome fear, which I assume would be norepinephrine release from the adrenal medulla.

    However, this is an interesting physiological hypothesis as substituting fear with norepinephine would explanin the sudden, violent spikes downwards while considering greed as endorphin production would explain the longer and steadier upward move.

    The one variable in the hypothesis seems to be a sudden, high threat of loss which would override the endorphins with a rush of fight or flight norepinephrine – the shock that sobers up the drunk, so to speak.

  3. Winston Munn commented on May 13

    “The Fed said after its policy meeting yesterday that its ‘predominant policy concern remains the risk that inflation will fail to moderate.'”

    According to my Fedspeak-to-English dictionary, this translates to, “If foreign central banks don’t keep buying our worthless treasury paper we are SO totally screwed you wouldn’t believe it.”

  4. V L commented on May 13

    Winston Munn,

    Yes, the model is far from perfect. Any major event (like a terrorist attack) will activate the “fight or flight response” and destroy the entire process in a second. Therefore, the model is only valid if there are no violent and unpredictable events.

    In addition, you are correct about the difficulty in selecting the starting point (the most important variable). I used August 25th, 2006 as the starting point.

  5. Philippe commented on May 13

    The starting point?
    When the assistance will start seeing the illusionists more often than the illusions they try to produce.

    PS Banks still need to down load on private individuals all these “papers” that they purchased during the recent distribution days.

  6. Winston Munn commented on May 13

    V L.

    For a starting point it might be worthwhile to compare the VIX – if the hypothesis holds, it seems that endorphins, acting somewhat like an opiate, would reduce apprehension and thus might be reflected in decreased volatility?
    This opiate-like stupor would certainly explain how any news could be ignored – and a central nervous system depression would slow reactions, hence slowing the urge to sell.

    I think you may want to look well before 2006 as a starting point, as the May-July drop from last year could be explained by a norepinephrine release based on the Fed rate hike fear, and thus only a temporary intrusion into the endorpin high – in other words, only a temporary override of an otherwise intact event. The Aug. date may simply reflect at point when the original bias reaffirmed its strength.

    I might suggest a sustained period of low volatility and rising market as a starting point.

  7. V L commented on May 13

    Winston Munn,

    I like the idea of considering the period of low volatility!

    The emotional brain (greed) is subconscious. They are not aware of the process. They think that their decisions are completely rational.

  8. noname commented on May 13

    V L (and WM)

    oh puhlease tell me your joking — what a bunch of psychobabble draped in scientific jargon.

  9. Winston Munn commented on May 13

    “V L (and WM)

    oh puhlease tell me your joking — what a bunch of psychobabble draped in scientific jargon”

    Noname – it’s only a hypothesis. I find it somewhat unique as it is based on actual physiological responses – but that doesn’t mean it is right or will work.

    At the same time, contempt prior to investigation would have kept the Wright Brothers grounded.

  10. toddZ commented on May 14

    anyone read Ben Stein’s piece in the Sunday NYT? “Assorted Mysteries of Economic Life.” For a mostly bullish guy, the article had a very bearish tone relating to the US Dollar.

  11. V L commented on May 14


    Could you kindly be more specific as to what you consider psychobabble?

    Some ignorant, arrogant, and clueless journalists (with only college Psychology 101 background) like Richard Rosen used to label Freudian psychoanalysis and psychotherapy as psychobabble.

    Is your definition the same as that of Dick Rosen?

    It appears that not only you have no name, but also you are not familiar with the subject. (Confusing psychoanalysis with neuroscience/neurophysiology)

  12. Greg0658 commented on May 14

    Psychology basecourse for economy side of WWIII or Armageddon?

    Disease, earthquake, famine, flood, hurricane, shortages, tornado, war, wildfire (alphabetical order).

    I like to believe in the half-full glass filling with insight to repair all ills … not the tale of end.

    On the flip-side … I see history.

  13. S commented on May 14


    There seems to be an increasing risk that nuclear armed Pakistan may fall into extremist hands. Scary to think about a nuclear armed Taliban.

    Warren Buffett has long said the biggest risk to America, and civilization in general, is nuclear war. You might as well add the potential for nuclear annihilation to your cheery list.

  14. Greg0658 commented on May 14

    Biggest risk is the lack of diplomacy skills & willingness to use them and all them horrendous weapons.

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