Two-for-two!

Markets rallied today for the second day in a row, with very broad and large price gains. But what do these two days mean? Today's volume was higher than yesterday's on both the NYSE and NASDAQ, but they're both near their average volumes during the past few weeks of selling. In short, volume wasn't terribly impressive.

Looking at the table below, we see that market internals are not particularly strong.

	11/27/2007			11/28/2007
	NYSE	AMEX	NASDAQ	NYSE	AMEX	NASDAQ
% Adv Issues	66.0	43.1	54.1	84.8	67.0	76.0
% Dec Issues	31.9	49.7	42.1	13.6	27.5	20.8
% Adv Volume	71.8	72.6	79.0	94.8	87.0	88.1
% Dec Volume	27.2	26.6	20.1	5.0	12.5	11.7
New Highs/Lows	0.08	0.20	0.15	0.45	0.33	0.41

Advancing issues and volume were strong today, but advancing issues were weak yesterday. Probably the most troublesome is the ratio of new highs to new lows. Both yesterday and today new lows outnumbered new highs by at least a 2-to-1 margin! For what it's worth, today saw half as many new lows as yesterday. I expect some selling into this 'rally' later this week.

Freddie Mac : 2007Q3

Freddie Mac reported much worse than expected results this morning. Here are the highlights from the press release:

• Third quarter loss of $2.0 billion reflects a higher provision for credit losses and losses on mark-to-market items.
• Provision for credit losses of $1.2 billion reflects the significant deterioration of mortgage credit as a result of continued weakness in the housing market.
• Total GAAP mark-to-market losses of $3.6 billion primarily include $1.5 billion in interest-rate related items and $2.3 billion in credit-related items.
• Fair value, before capital transactions, decreased by approximately $8.1 billion primarily due to widening of net mortgage-to-debt option-adjusted spreads and valuation losses on credit-related items.
• Increase in management and guarantee income reflects continued guarantee portfolio growth.

When this 'liquidity crunch' started in July/August, investors would only buy pools securitized by Fannie and Freddie. Prior to that, it was questioned if those two GSEs were needed. Will investors be as willing to buy from Freddie now that their pools are worse than expected?

UPDATE: Some excellent answers to the above questions in Calculated Risk's comments (excerpts are below; follow the links for entire comment).

Tanta said,
The whole idea of having the GSEs continue to buy loans in this market is that they will actually bid when no one else does. That is, they are supposed to be out there saying that there is, actually, a difference between 51 bps and 450 bps and they will bid accordingly.

gse doom said,
...their [Fannie Mae and Freddie Mac] securities are "understandable" and the payment of both principal and interest is guaranteed. The loans in their securities are underwritten to more conservative and standardized guidelines, and the securities themselves are more easily analyzed and modeled. Fannie Mae and Freddie Mac guarantee to the bond holder the timely payment of both principal and interest.

October Inflation Reports

Both PPI and CPI inflation reports were released last week. PPI came in below expectations, while CPI was in line with the consensus estimate.

The chart below shows both headline and core PPI near the top of their range since 2000. Further, PPI inflation has been increasing since mid-2006. This doesn't bode well for moderating CPI inflation, if PPI leads CPI.


As expected, there was a sharp increase in YOY headline CPI inflation in October, while CPI inflation ex food and energy remained near 2.5%. In this week's Thoughts From the Frontline, John Mauldin shows YOY headline CPI inflation will remain high for the rest of 2007, due to last year's low index levels. He also describes the changes made to the CPI index in the early 1990's (substitution and hedonics).

The chart below shows two lesser-known 'core' measures of CPI inflation created by the Cleveland Fed. Both the median and trimmed-mean CPI show an increase in October. Further, Mauldin's analysis suggests we should expect these two core measure to increase in the next two months.


While the Fed doesn't have explicit inflation targets, it's believed 1-2.5% is in their comfort range for core PCE inflation. All three measures of core CPI inflation shown above are at or near 2.5%. As many have noted, this doesn't leave the Fed much room to cut thier target rate if the economy begins to slow substantially.

Dunkin' Donuts Coffee

I have an affinity for Dunkin' Donuts hazelnut coffee. But the closest Dunkin' Donuts to me, by geography, is in Champagne-Urbana IL; the closest by time is Chicago O'Hare airport.

I was excited when they announced that they would start selling their coffee in grocery stores. However, it costs $7.99 per 12 oz bag ($10.67/lb.)! I decided to see how much it cost on their website. Here's the breakdown:

Pounds	Price	S&H	Total Price/lb.
1	$5.49	$7.00	$12.49
10	$54.90	$11.55	$6.65
20	$109.80	$19.02	$6.44
50	$274.50	$40.81	$6.31
500	$2,745.00	$352.35	$6.20
1000	$5,490.00	$700.89	$6.19

Clearly, buying 1000lbs at a time is the best deal. Seriously, why can you even do this on their website? Anyone feel like ordering even 50 pounds to see what happens?

Big Rally, Small Volume

Today's rally was staggering - with the Dow, S&P, and NASDAQ up 2.5%, 2.9%, and 3.5% respectively. But how much participation was in the move? Is this simply a relief rally from the past four sessions of selling, or the beginnings of a new advance?

100 million fewer shares traded on the NASDAQ compared to yesterday, but volume was close to its average over the past few weeks. Today was also a 9-to-1 up day on the NYSE and NASDAQ, where 90+ percent of the total volume traded was attributed to advancing issues. However, the number of issues making new 52-week lows outnumbered those making new highs by a wide margin on both exchanges.

The 9-to-1 up day is encouraging but hasn't been a reliable indicator of a new uptrend by itself. However, the lack of total volume and the number of issues making new lows is cause for concern. Time will tell, but this appears to be a relief rally...

CRB Core Inflation? Hardly.

Barry Ritholtz uses the CRB "excluding food and energy" in a post today to show how high 'core' inflation is. I found the data in the post's chart at www.economagic.com. A bit of investigation into the data revealed the "ex food & energy" series to be the CRB Raw Industrials Index.

The Raw Industrials Index is composed of hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, and rubber. All but hides, tallow, rosin, and rubber are contained in two other sub-groups:

1. The "metals" sub-index (40% of the 'core' index) contains copper scrap, lead scrap, steel scrap, tin, and zinc.
2. The "textiles and fibers" sub-index (30% of the 'core' index) is comprised of burlap, cotton, print cloth, and wool tops.

Therefore, this 'core' index is mainly composed of 5 metals and 4 textiles. Further, if you decompose the rise in the raw industrials index into its two main components - metals and textiles - you can see that the recent rise in metals prices is the main cause of the rise in its parent index (see chart - click to enlarge).

Barry has presented some good arguments against the use of core inflation in monetary policy. This is not one of them, however.

UPDATE: I should have guessed, Barry intended to be a bit over-the-top in his post...


For those interested, the R code used to create the chart is below.

require(fImport)

rawInd <- economagicImport("crb/crb12", freq="monthly")@data[-(1:7),]
rawInd$DATE <- as.Date(rawInd$DATE)
textiles <- economagicImport("crb/crb13", freq="monthly")@data[-(1:7),]
textiles$DATE <- as.Date(textiles$DATE)
metals <- economagicImport("crb/crb14", freq="monthly")@data[-(1:7),]
metals$DATE <- as.Date(metals$DATE)

plot( rawInd$DATE, rawInd$VALUE, type="l",
ylim = range( c( rawInd$VALUE, textiles$VALUE, metals$VALUE ) ),
main = "Selected CRB Indicies",
xlab = "Date", ylab = "Index Value",
lwd = 2 )
lines( textiles$DATE, textiles$VALUE, col="red" , lwd = 2 )
lines( metals$DATE, metals$VALUE, col="blue", lwd = 2 )
legend( "topleft",
legend = c("Raw Industrials","Textiles Sub Index","Metals Sub Index"),
col = c( "black", "red", "blue" ),
lty = c( 1, 1, 1 ),
lwd = c( 2, 2, 2 ),
bty = "n", inset = 0.05 )

savePlot( "Select_CRB_Indicies", type="png" )