The Stock Market Pulse

($49.95/month value)

Week of February 16th, 2009

 

Weekly review of the markets

 

Last week, The week before last the graphs were not bad with the Nasdaq breaking higher but all hope lied on the financial and economic rescue plans being accepted and fulfilling investors expectations. The week ended on hopes the plans would be concluded and accepted over the weekend.

Monday, we learned we wouldn't know what the results of the rescue plans would be before the next day and no important economic news were on tap so the market didn't go anywhere all day forming a candle called a doji which usually is a break before the next move up, or down.

Tuesday, no significant economic news at the open so all we had left to do is wait for the announcement in the afternoon. The financial rescue plan came out but it seems investors didn't like it because there were not enough details as to how it would work... The devil is in the details... In fact the impression was that the treasury still had no idea what to do! The doji finally had its effect and since the markets moved up recently on hopes of a better plan, the doji preceded a sharp decline...

Wednesday, the day started the same way it ended the day before drifting lower until the Obama recovery plan was announced. Although there were no surprises it was still a colossal announcement with a little less than $800B dollars destined to stimulate the economy, so people with short positions decided to cover which helped the market close higher on the day.

Thursday retail sales increased by 1% when the expectation was a 0.2% decline. This represented the first rise since July 2008; but it didn't impress the market one bit as it still opened lower and remained lower until another government announcement turned the trend up to finish higher again. This news was the one about the help finance troubled mortgage loans.

Friday the consumer sentiment index continued to drop (56.2 vs 61.5) but this obviously didn't surprise anybody since the market remained unchanged most of the day. This emotionless attitude continued through the announcement that the house of representatives approved the Obama plan. Now we need to wait for the Senat. In the end the week remain pretty much unchanged even though it seems all the plans will be accepted...

This Week

It is now clear that investors are far from being convinced the extraordinary measures taken to rescue the economy will be sufficient. That being said everybody expects the market to bounce hard, soon, but the question is when and what will it take? It's like a group of 100m dash runners waiting for the signal while the starter is fumbling with the gun: They know it's coming and they're impatient but they still can't go until the real signal is given. Some are trying to anticipate the signal but they are simply causing false starts... Anyways, you get the drift! :-)

 

Next week is a shortened week and some interesting economic data is underway so check it out further down in this report.

Technically, only the Nasdaq seems to be holding up and giving us hopes that we might be close to a rebound but the overall trend is still negative.

Nasdaq:

 

The Dow clearly broke out of its triangle and the post recue plans activity occurred outside of it.

 

 

And finally, the S&P500 still didn;t break out but it's really close to it...

 

 

*if you want more information on technical indicators and Technical analysis in general I strongly recommend you click here

 

Economic Calendar Data Source: Bloomberghttp://www.bloomberg.com/markets/ecalendar/index.html

(Reports I consider will impact the market the most with definitions and expectations)

 (Soon to be a section for Investor Rules members only ) Not a member yet? Just go to

 

http://www.InvestorRules.com/membership.html

 

 

Monday February 16th  

 

US Holiday Presidents Day

Tuesday February 17th  

Empire State Mfg Survey
08:30 ET
Consensus -22.0

Definition
The New York Fed conducts this monthly survey of manufacturers in New York State. Participants from across the state represent a variety of industries. On the first of each month, the same pool of roughly 175 manufacturing executives (usually the CEO or the president) is sent a questionnaire to report the change in an assortment of indicators from the previous month. Respondents also give their views about the likely direction of these same indicators six months ahead. This index is seasonally adjusted using the Philadelphia Fed's seasonal factors because its own history is not long enough with data only going back a couple of years. (Federal Reserve Bank of New York)

Why Do Investors Care?
Investors track economic data like the Empire State Manufacturing Survey to understand the economic backdrop for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers a moderate growth environment that won't generate inflationary pressures.

The Empire Manufacturing Survey gives a detailed look at New York state's manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on the markets. Some of the Empire State Survey sub-indexes also provide insight on commodity prices and other clues on inflation. The Federal Reserve closely watches this report because when inflation signals are flashing, policymakers can reset the direction of interest rates. As a consequence, the bond market can be highly sensitive to this report. The equity market is also sensitive to this report because it is the first clue on the nation's manufacturing sector, reported in advance of the Philadelphia Fed's business outlooks survey, the NAPM-Chicago index and the ISM manufacturing index.

Highlights

The recession is widening to involve more firms and is deepening in its intensity, at least for manufacturing firms in the New York region. The Empire State's general business conditions index, offering an early indication of economic conditions in February, dropped more than 12 full points to -34.7. The new orders index fell nearly 8 points to -30.5. Both these readings are record lows. Employment readings are contracting further, down nearly 13 points to -39.0 for the number of employees index and down more than 7 points to -31.0 for the employee workweek. These readings indicate that factory layoffs and shutdowns in the region have accelerated this month.

This report, like the Philadelphia Fed's regional manufacturing survey, includes readings on six-month expectations. These have broken lower but are no worse in February. Respondents rate general business conditions six months ahead at -6.6, down 2-1/2 points from January. New orders are also seen lower, at -4.3, but still a 4 point improvement in the month.

Other readings show that price pressures are still in reverse with sharp contractions underway in both input prices and output prices. But price changes in the manufacturing sector, reflecting price changes for fuel and basic materials, move quickly and do not necessarily point to deflation for finished consumer goods. Today's report isn't giving any lift to the stock market which is set to open sharply lower.

Market Consensus Before Announcement

The Empire State manufacturing index showed modest improvement (less negative) in current readings for January but -- more importantly -- showed a deep breakdown in the 6-month outlook, a breakdown that underscores a deep pessimism among the region's manufacturers. First, the general business conditions index backed up to minus 22.2 from December's minus 27.9. But order readings barely show any improvement, at minus 22.8 for new orders and minus 26.1 for unfilled orders. The really bad news in the Empire State report was the 6-month outlook where readings suddenly lurched into the negative column with the overall index plummeting to minus 4.0 from plus 18.1 in December.

Empire State Manufacturing Survey Consensus Forecast for February 17: -22.0
Range: -36.5 to -17.5  

The Empire State Manufacturing Survey has a much shorter history than the Philadelphia Fed's business outlook survey. The two series tend to move in tandem much of the time, although not each and every month. They are both considered leading indicators for the ISM manufacturing survey.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/15 2/17 3/16 4/15 5/15 6/15 7/15 8/17 9/15 10/15 11/16 12/15 Released For: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

 

 Treasury International Capital
9:00ET

consensus 34.8B

Definition
These Treasury data track the flows of financial instruments into and out of the United States. Instruments tracked include Treasury securities, agency securities, corporate bonds, and corporate equities.

Why Do Investors Care?
TIC data have been issued for the past 30 years, but only recently, due to an enormous rise in foreign participation in our markets, have they grabbed the attention of the international financial markets. Although methodologically limited, TIC offers a measure of foreign demand for our debt and assets. Bonds and the dollar are most sensitive to the data, therefore bond and foreign exchange markets are more likely to react to this report than the equity market.

Strong inflows (demand for U.S. securities) are needed to keep downward pressure on interest rates. Strong inflows also underpin the value of the dollar since foreigners must purchase dollars in order to buy our securities. A strong dollar helps to maintain stability in all U.S. financial markets. Since foreign ownership of U.S. equities is comparatively small, the equity market is less concerned about this report.

 

State Street Investor Confidence Index
10:00ET

Definition
The State Street Investor Confidence Index measures confidence by looking at actual levels of risk in investment portfolios. This is not an attitude survey. This index is current since it uses data collected at the close of the previous Wednesday and is reported on the second to last Tuesday of each month

Why Do Investors Care?
Conventional wisdom suggests investors are confident when stocks are rising and pessimistic when falling. But in fact, the State Street group notes prices tend to be higher when economic fundamentals are strong; i.e., when economic indicators are growing at a healthy clip. But a good investor confidence measure "should indicate whether, for a given set of fundamentals, investors are bullish or bearish on risky assets."

State Street believes direct measurement, rather than a survey of portfolio managers who often don't have time to fill out monthly questionnaires, is a more reliable approach to consumer confidence. The investor confidence index is compiled with techniques based on modern portfolio theory. According to State Street, "the more of their portfolios that professional investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence." So when investors choose to increase their holdings of risky assets, this confirms their confidence has increased. Incidentally, State Street believes investor confidence can exist in a bear market as well as a bull market.

Since market players have become so enamored with consumer attitude surveys, it probably would be useful for both professional portfolio managers and amateur investors to consider investor attitudes.

 

Housing Market Index
 13:00 ET 

Definition

The National Association of Home Builders produces a housing market index based on a survey in which respondents from this organization are asked to rate the general economy and housing market conditions. The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. (National Association of Home Builders/Wells Fargo)

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but the economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the housing market index, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Whether the housing market index reflects new home sales or home resales, once a home is sold, it generates revenues for the realtor and the builder. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, home sales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the existing home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

 

 

 

Wednesday February 18th    

 

 

MBA Purchase Applications
07:00ET

Definition

The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a leading indicator for single-family home sales and housing construction.

Why Do Investors Care?

This provides a gauge of not only the demand for housing, but economic momentum. People have to be feeling pretty comfortable and confident in their own financial position to buy a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as the Mortgage Bankers Association purchase applications, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Each time the construction of a new home begins, it translates to more construction jobs, and income which will be pumped back into the economy. Once a home is sold, it generates revenues for the home builder and the realtor. It brings a myriad of consumption opportunities for the buyer. Refrigerators, washers, dryers and furniture are just a few items new home buyers might purchase. The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing construction has a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the MBA purchase applications index carries valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

 

ICSC-Goldman Store Sales

7:45ET

Definition
This weekly measure of comparable store sales at major retail chains, published by the International Council of Shopping Centers, is related to the general merchandise portion of retail sales. It accounts for roughly 10 percent of total retail sales.

Why Do Investors Care?
Consumer spending accounts for more than two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

The ICSC-Goldman index is one of the most timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005. The ICSC-Goldman Sachs store sales series previously was known as ICSC-UBS before Goldman Sach's involvement with ICSC. The name change took place with the September 30, 2008 release.

Housing Starts
8:30 ET
Consensus 0.530M

Definition
Housing starts measure initial construction of residential units (single-family and multi-family) each month. A rising (falling) trend points to gains (declines) in demand for furniture, home furnishings and appliances.

Why Do Investors Care?
Two words...Ripple Effect. This narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments. By tracking economic data such as housing starts, investors can gain specific investment ideas as well as broad guidance for managing a portfolio.

Home builders usually don't start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. Furthermore, each time a new home is started, construction employment rises, and income will be pumped back into the economy. Once the home is sold, it generates revenues for the home builder and a myriad of consumption opportunities for the buyer. Refrigerators, washers and dryers, furniture, and landscaping are just a few things new home buyers might spend money on, so the economic "ripple effect" can be substantial especially when you think of it in terms of more than a hundred thousand new households around the country doing this every month.

Since the economic backdrop is the most pervasive influence on financial markets, housing starts have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the housing starts data carry valuable clues for the stocks of home builders, mortgage lenders, and home furnishings companies. Commodity prices such as lumber are also very sensitive to housing industry trends.
Market Consensus Before Announcement
Housing starts in December continued to be pushed down by oversupply of unsold homes on the market. Starts fell another 15.5 percent, following a 15.1 percent plunge in November. The December pace of 550 thousand units annualized was down 45.0 percent year-on-year. December's pace of new construction was the lowest since the starts series began in 1959. For the latest month, the fall in starts was led by the multifamily component which dropped 20.4 percent while the single-family component fell 13.5 percent. Starts are expected to remain weak due to still heavy supply on the market and lower demand from higher unemployment.

Housing starts Consensus Forecast for January 09: 0.530 million-unit rate
Range: 0.480 million to 0.570 million-unit rate
 

Monthly figures are often volatile; housing starts fluctuate more than many indicators. According to the Commerce Department, it takes five months for total housing starts to establish a trend. Consequently, we have depicted total starts relative to a five month moving average.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/22 2/18 3/17 4/16 5/19 6/16 7/17 8/18 9/17 10/20 11/18 12/16 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

 Import and Export Prices
Import Prices Consensus : -1.4%
Export Prices Consensus : N/A

Definition
Indexes are compiled for the prices of goods that are bought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. These prices indicate inflationary trends in internationally traded products.

Why Do Investors Care?
Changes in import and export prices are a valuable gauge of inflation here and abroad. Furthermore, the data can directly impact the financial markets such as bonds and the dollar. The bond market is especially sensitive to the risk of importing inflation because it erodes the value of the principal (the original investment) which is paid back when the bond matures. It also decreases the value of the steady stream of interest rate payments on this type of security.
Inflation leads to higher interest rates and that's bad news for stocks, as well. By monitoring inflation gauges such as import prices, investors can keep an eye on this menace to their portfolios.
Market Consensus Before Announcement
Import prices were extremely weak in December but downward pressure came mainly from falling prices for oil and other commodities. Import prices fell 4.2 percent in December after plunging 7.0 percent the month before. In the latest month, petroleum import prices fell a whopping 21.4 percent. But excluding petroleum, import prices fell a more moderate 1.1 percent after a 1.8 percent decline in November.

Import prices Consensus Forecast for January 09: -1.4 percent
Range: -2.5 to -0.5 percent
Definition
Indexes are compiled for the prices of goods that are bought in the United States but produced abroad and the prices of goods sold abroad but produced domestically. These prices indicate inflationary trends in internationally traded products.  Why Investors Care  

Yearly changes in import and export prices reveal long term trends in inflation for tradable goods.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/14 2/18 3/13 4/9 5/13 6/12 7/10 8/13 9/11 10/14 11/13 12/11 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Redbook
08:55 ET

Definition

A weekly measure of sales at chain stores, discounters, and department stores. It is a less consistent indicator of retail sales than the weekly ICSC index. It is also calculated differently than other indicators. For instance, figures for the first week of the month are compared with the average for the entire previous month. When two weeks are available, then these are compared with the average for the previous month, and so on. It might be more useful to compare year-over-year figures since these are indeed compared to the comparable week a year ago. This index is correlated with the general merchandise portion of retail sales covering only about 10 percent of total retail sales.

Why Do Investors Care?

Consumer spending accounts for two-thirds of the economy, so if you know what consumers are up to, you'll have a pretty good handle on where the economy is headed. Needless to say, that's a big advantage for investors.

The pattern in consumer spending is often the foremost influence on stock and bond markets. For stocks, strong economic growth translates to healthy corporate profits and higher stock prices. For bonds, the focus is whether economic growth goes overboard and leads to inflation. Ideally, the economy walks that fine line between strong growth and excessive (inflationary) growth. This balance was achieved through much of the nineties. For this reason alone, investors in the stock and bond markets enjoyed huge gains during the bull market of the 1990s. Retail sales growth did slow down in tandem with the equity market in 2000 and 2001, but then rebounded at a healthy pace between 2003 and 2005.

The Redbook is one of the more timely indicators of consumer spending, since it is reported every week. It gets extra attention around the holiday season when retailers make most of their profits. It is also a useful indicator when special factors can cause economic activity to momentarily slide. For instance, once again,  it was widely watched in the aftermath of Hurricanes Katrina and Rita which hit New Orleans and the Gulf Coast in 2005.

Industrial Production
 9:15 ET 
Consensus is -1.5%
Capacity Utilization Rate 72.5%

Definition

The index of industrial production measures the physical output of the nation's factories, mines and utilities. The industrial sector accounts for less than one-fifth of the economy but for most of its cyclical variation. The capacity utilization rate reflects the usage of available resources among factories, utilities and mines. A high and rising operating rate may signal that resources are being utilized to their fullest capacity -- a warning sign of inflationary pressures.

Why Do Investors Care?

Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.

The index of industrial production shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.

The capacity utilization rate provides an estimate of how much factory capacity is in use. If the utilization rate gets too high (above 85 percent) it can lead to inflationary bottlenecks in production. The Federal Reserve watches this report closely and sets interest rate policy on the basis of whether production constraints are threatening to cause inflationary pressures. As such, the bond market can be highly sensitive to changes in the capacity utilization rate. In this global environment, though, global capacity constraints may matter as much as domestic capacity constraints.

Market Consensus Before Announcement
Industrial production in December plummeted on lower auto assemblies plus broad-based weakness. Overall industrial production in December dropped 2.0 percent, following a 1.3 percent decline the month before. The all-important manufacturing component fell 2.3 percent after a 2.2 percent decline in November. For the other major components in December, utilities slipped 0.1 percent while mining output decreased 1.6 percent. A key part of manufacturing weakness was in motor vehicle assemblies which dropped to an annualized pace of 6.64 million units in December from 7.60 million in November - a 12.6 percent fall. But weakness nonetheless was widespread. Overall capacity utilization in December fell to 73.6 percent from 75.2 percent in November.

Industrial production Consensus Forecast for January 09: -1.5 percent
Range: -2.5 to -0.5 percent

Capacity utilization Consensus Forecast for January 09: 72.5 percent
Range: 71.4 to 73.1 percent  

The industrial sector accounts for less than 20 percent of GDP. Yet, it creates much of the cyclical variability in the economy.

Data Source: Haver Analytics  

The capacity utilization rate reflects the limits to operating the nation's factories, mines and utilities. In the past, supply bottlenecks created inflationary pressures as the utilization rate hit 84 to 85 percent.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/16 2/18 3/16 4/15 5/15 6/16 7/15 8/14 9/16 10/16 11/17 12/15 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

EIA Petroleum Status Report (Pay attention to this one)
10:30 ET

Definition
The Energy Information Administration (EIA) provides weekly information on petroleum inventories in the U.S., whether produced here or abroad. The level of inventories helps determine prices for petroleum products.

Why Do Investors Care?
Petroleum product prices are determined by supply and demand - just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in crude oil prices - or price increases for a wide variety of petroleum products such as gasoline or heating oil. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for crude oil may not be as strong. If inventories are rising, this may push down oil prices.

Crude oil is an important commodity in the global market. Prices fluctuate depending on supply and demand conditions in the world. Since oil is such an important part of the economy, it can also help determine the direction of inflation. In the U.S. consumer prices have moderated whenever oil prices have fallen, but have accelerated when oil prices have risen.

 

FOMC minutes
 14:00 ET 

Definition

On December 14, 2004, the Federal Open Market Committee announced that they would release the minutes of each meeting with a three week lag. This is a vast improvement from the previous release of the minutes which ranged from a six to eight week lag. While the FOMC releases a statement after each meeting which describes the policy action (or inaction), the minutes generate a lot of attention in the financial markets because they reveal more details on the discussion of the most recent FOMC meeting.

Why Do Investors Care?

The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors guessing about policy changes. Historically, Fed officials did not appear on the speaking circuit as frequently as they do now.
In today's environment, where disclosure is more pronounced, reading the minutes of the previous month's meeting is not always as enlightening as it used to be. However, the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have voiced opinions at odds with the rest of the group.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement. Fed officials make numerous speeches, which freely give their views to the public at large.

The FOMC has changed dramatically in the transparency of its operations. It now discloses policy changes at the end of each meeting. Historically, the Fed used to keep investors guessing about policy changes. Historically, Fed officials did not appear on the speaking circuit as frequently as they do now.
In today's environment, where disclosure is more pronounced, reading the minutes of the previous month's meeting is not always as enlightening as it used to be. However, the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have voiced opinions at odds with the rest of the group.
Investors who want a more detailed description of Fed opinions will generally read the minutes closely. However, the Fed discloses its official view at the end of each FOMC meeting with a public statement. Fed officials make numerous speeches, which freely give their views to the public at large.

 

Thursday February 19th 

Producer Price Index
8:30 ET

Consensus
PPI - M/M change 0.2%

PPI - Y/Y change -2.1%

PPI core (less food & energy) M/M change 0.1%

PPI core (less food & energy) Y/Y change 3.8%

Definition
The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers.

Why Do Investors Care?
The PPI measures prices at the producer level before they are passed along to consumers. Since the producer price index measures prices of consumer goods and capital equipment, a portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an "inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in three versions: finished goods; intermediate supplies, materials & components; and crude materials that need further processing. The finished goods PPI is most often cited in the media. This index covers final products bought from producers by businesses to sell to consumers or to use for capital equipment.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to manufacturers increase, businesses are faced with either charging higher prices or they taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Producer prices are more volatile than consumer prices. The CPI includes services components - which are more stable than goods - and the PPI does not. Wages are a bigger share of the costs at the retail level than at the producer level. Commodity prices react more quickly to supply and demand. Volatility is higher earlier in the production chain. Food and energy prices are major sources of volatility, hence, the greater focus on the "core PPI" which excludes these two components.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

Market Consensus Before Announcement
The producer price index in December continued its streak of energy induced monthly declines. The overall PPI fell 1.9 percent, following a 2.2 percent drop in November. Meanwhile, the core PPI rate rose 0.2 percent after edging up 0.1 percent in November. As in recent months, energy led the headline PPI down. For the latest month energy dropped 9.3 percent, led by a 25.7 percent plunge in gasoline prices. Even food was weak with a 1.5 percent decline. The core rate was moderate despite a 1.2 percent rebound in passenger car prices and a 0.8 percent boost in light truck prices. Within the core, weakness was largely in capital equipment outside of light trucks.

PPI Consensus Forecast for January 09, m/m: +0.2 percent
Range: -1.1 to +2.0 percent

PPI Consensus Forecast for January 09, y/y: -2.1 percent
Range: -3.4 to -0.5 percent

PPI ex food & energy Consensus Forecast for January 09, m/m: +0.1 percent
Range: -0.4 to +0.6 percent

PPI ex food & energy Consensus Forecast for January 09, y/y: +3.8 percent
Range: +3.4 to +4.3 percent
 

It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the PPI are mainly volatile because of sharp fluctuations in food and energy prices. The core PPI eliminates the sharper fluctuations.

Data Source: Haver Analytics  

Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core PPI does not fluctuate as much as the total PPI.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/15 2/19 3/17 4/14 5/14 6/16 7/14 8/18 9/15 10/20 11/17 12/15 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

Jobless Claims
08:30ET ET
Consensus 620K

Definition
New unemployment claims are compiled weekly to show the number of individuals who filed for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating (improving) labor market. The four-week moving average of new claims smoothes out weekly volatility.

Why Do Investors Care?
Jobless claims are an easy way to gauge the strength of the job market. The fewer people filing for unemployment benefits, the more have jobs, and that tells investors a great deal about the economy. Nearly every job comes with an income that gives a household spending power. Spending greases the wheels of the economy and keeps it growing, so a stronger job market generates a healthier economy.

There's a downside to it, though. Unemployment claims, and therefore the number of job seekers, can fall to such a low level that businesses have a tough time finding new workers. They might have to pay overtime wages to current staff, use higher wages to lure people from other jobs, and in general spend more on labor costs because of a shortage of workers. This leads to wage inflation, which is bad news for the stock and bond markets. Federal Reserve officials are always on the look out for inflationary pressures.

By tracking the number of jobless claims, investors can gain a sense of how tight, or how loose, the job market is. If wage inflation threatens, it's a good bet that interest rates will rise, bond and stock prices will fall, and the only investors in a good mood will be the ones who tracked jobless claims and adjusted their portfolios to anticipate these events.

Just remember, the lower the number of unemployment claims, the stronger the job market, and vice versa.

Market Consensus Before Announcement
Initial jobless claims were relatively steady in the latest week, coming in at 623,000 in the February 7 week - down 8,000 from 631,000 in the January 31 week. The four-week average jumped over the 600,000 level, up 24,000 to 607,500. These are the worst levels since the early 1980s.

Jobless Claims Consensus Forecast for 2/14/09: 620,000
Range: 590,000 to 660,000
  

Weekly series fluctuate more dramatically than monthly series even when the series are adjusted for seasonal variation. The 4-week moving average gives a better perspective on the underlying trend.

Data Source: Haver Analytics

 

Leading Indicators
10:00 ET
Consensus 0.0%

Definition
A composite index of ten economic indicators that should lead overall economic activity. This indicator was initially compiled by the Commerce Department but is now compiled and produced by The Conference Board. It has been revised many times in the past 30 years - particularly when it has not done a good job of predicting turning points.

Why Do Investors Care?
Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the index of leading indicators, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures.

The index of leading indicators is designed to predict turning points in the economy -- such as recessions and recoveries. More specifically, it was designed to lead the index of coincident indicators, also now published by The Conference Board. Investors like to see composite indexes because they tell an easy story, although they are not always as useful as they promise.

The majority of the components of the leading indicators have been reported earlier in the month so that the composite index doesn't necessarily reveal new information about the economy. Bond investors tend to be less interested in this index than equity investors. Also, the non-financial media tends to give this index more press than it deserves.

Market Consensus Before Announcement
The Conference Board's index of leading indicators rose 0.3 percent in December - largely on a surge in the money supply. But without money supply, indications were very negative with the report warning that the results point to "intense recession" through the spring. Without the money supply contribution, the leading index would have fallen 0.7 percent.

Leading indicators Consensus Forecast for January 09: 0.0 percent (flat)
Range: -0.5 to +0.4 percent

 

Philadelphia Fed Survey
10:00 ET
Consensus -26%

Definition
The general conditions index from this business outlook survey is a diffusion index of manufacturing conditions within the Philadelphia Federal Reserve district. This survey, widely followed as an indicator of manufacturing sector trends, is correlated with the ISM manufacturing index and the index of industrial production.

Why Do Investors Care?
Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. By tracking economic data such as the Philly Fed survey, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth which won't lead to inflation.

The Philly Fed survey gives a detailed look at the manufacturing sector, how busy it is and where things are headed. Since manufacturing is a major sector of the economy, this report has a big influence on market behavior. Some of the Philly Fed sub-indexes also provide insight on commodity prices and other clues on inflation. The bond market is highly sensitive to this report because it is released early in the month and is available before other important indicators.

Market Consensus Before Announcement
The general business conditions component of the Philadelphia Fed's business outlook survey index continued to contract in January - but not as quickly as in the prior month. The Philadelphia Fed's January index for general business conditions came in at minus 24.3, up moderately from minus 36.1 in December. Both new orders and shipments contracted but at slower rates than in December.

Philadelphia Fed survey Consensus Forecast for February 09: -26.0
Range: -34.0 to -21.4  

The Philadelphia Fed's business outlook survey is a good leading indicator for the index of industrial production. It is reported in the third week of the month and thus has a lead time of nearly three weeks.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/15 2/19 3/19 4/16 5/21 6/18 7/16 8/20 9/17 10/15 11/19 12/17 Released For: Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

 

 

EIA Natural Gas Report (Pay attention to this one)

10:30 ET

Definition
The Energy Information Administration (EIA) provides weekly information on natural gas stocks in underground storage for the U.S., and three regions of the country. The level of inventories help determine prices for natural gas products.

 

Why Do Investors Care?
Natural gas product prices are determined by supply and demand - just like any other good and service. During periods of strong economic growth, one would expect demand to be robust. If inventories are low, this will lead to increases in natural gas. If inventories are high and rising in a period of strong demand, prices may not need to increase at all, or as much. During a period of sluggish economic activity, demand for natural gas may not be as strong. If inventories are rising, this may push down oil prices.

 

Friday February 20th  

Consumer Price Index
 8:30 ET 
Consensus
CPI - M/M 0.3 %
CPI - Y/Y change-0.2 %
CPI less food & energy 0.1 %
CPI less food & energy - Y/Y change 1.5 %

Definition

The Consumer Price Index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.

Why Do Investors Care?

The consumer price index is the most widely followed indicator of inflation in the United States. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets- and your investments.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 won't be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose about 4.7 percent a year in the U.S. during the first half of 2006. To recoup your purchasing power, you would have to charge 4.7 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Federal Reserve generally follows "core" inflation-inflation excluding volatile food and energy components. The Fed's preferred inflation measure is the core personal consumption deflator but core CPI data largely make up the core PCE deflator and CPI numbers come out sooner each month. In the long run, the overall CPI and core CPI track each other.

Market Consensus Before Announcement
The consumer price index continued downward in December with the headline CPI falling 0.7 percent in December, following a 1.7 percent decrease in November. Meanwhile, core CPI inflation was unchanged after no change the month before. For the latest month, energy plunged a monthly 8.3 percent, with gasoline prices falling 17.2 percent. Food posted a 0.1 percent decrease. The core was kept soft by several key components. Declines were seen in apparel, new & used vehicles, and lodging away from home. Also, owners' equivalent rent posted a very small gain.

CPI Consensus Forecast for January 09, m/m: +0.3 percent
Range: -0.5 to +0.5 percent

CPI Consensus Forecast for January 09, y/y: -0.2 percent
Range: -1.0 to +0.2 percent

CPI ex food & energy Consensus Forecast for January 09, m/m: +0.1 percent
Range: -0.1 to +0.2 percent

CPI ex food & energy Consensus Forecast for January 09, y/y: +1.5 percent
Range: +1.3 to +1.6 percent
 

It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the CPI are mainly volatile because of sharp fluctuations in food and energy prices. The core CPI eliminates the sharper fluctuations.

Data Source: Haver Analytics  

Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core CPI does not fluctuate as much as the total CPI.

Data Source: Haver Analytics  

2009 Release Schedule

Released On: 1/16 2/20 3/18 4/15 5/15 6/17 7/15 8/14 9/16 10/15 11/18 12/16 Released For: Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

 

That's it for this week,

Trade safely

 

Yours truly,

 

 

Eric LeRiche

http://www.InvestorRules.com

 

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