Today's Key News - Food and Energy Matter

U.S. equities have opened trading modestly higher, after reading the CPI report as mild. The market focuses on the core CPI reading, which came in somewhat favorable, but we provide reasoning below why the headline CPI figure is becoming more important than core CPI, which excludes food and energy. Consumer sentiment, as measured by the University of Michigan was near expectations but slightly lower. We anticipate equities will decline today, based on the general signs of economic weakening and persistent inflation.


Asia:
Hang Seng Index -0.08%; Shanghai/Shenzhen 300 -1.56%; NIKKEI 225 -0.69%; Taiwan TAIEX +0.31%; BSE SENSEX 30 -0.9%; KRX 100 -0.03%; Ho Chi Minh +4.15%


U.K., Europe & Middle East:
DJ STOXX 50 Index +0.25%; FTSE 100 +0.03%; CAC 40 +0.21%; DAX +0.3%; Russian RTS Index +0.66%


Key Headline News:

• *** Today's CPI report showed a rise of 0.4% in February, versus expectations for an increase of 0.3%. Now pay attention, today you will hear expert after expert tell you that CPI does not really matter, and that you should focus on Core CPI, which excludes volatile food and energy. Wall Street Greek is telling you they are wrong. An important new factor is taking position in this dynamic marketplace that often misses changes. People just go on relying on the past to keep them safe from prediction error. The best forecasters are focused on risk, and notice changes in the dynamic marketplace. Food and energy have been considered less important than other factors within inflation measures because they are seasonal and often impacted by factors such as the weather. Droughts, floods and harsh storms can drastically change food prices from year to year, this is true. However, there is a new secular factor that makes changes in food prices critical to your forecasting. Improving health care globally is leading to longer life spans. In other words, people are living longer and thus consuming more food. Food resources are finding new uses. For instance, sugarcane and corn are now used for ethanol production. This leads to less food for eating, and drives prices higher. Developing nations are shifting from agricultural and commodity production to industrial production, and in turn altering from net exporters of foods to net importers in some instances. Again, less agricultural production means less food. More people, less food, means a secular supply/demand dynamic is taking its place in the market, and should be measured as a true driver of inflation, and not a seasonal or weather related problem. I see a similar situation within energy, though perhaps less true that the driver of food inflation. As we predicted in the past, Tyson Foods recently announced that rising feed costs would be passed on to consumers, driving the prices of proteins like poultry and beef higher. This all amounts to more sustainable pressure on the consumer, and is a reason why the Fed may soon face a dilemma between staving off recession and trimming inflation. In any event, it does not portend well for equity markets.
• *** We continue to anticipate crude prices face risk in the near term. Economic data is not going to prove positive in the next few months, in our view, and the economy is the most important driver of energy prices. Iran remains a threat, but barring a surprise bombing run by Israel, which remains possible, we do not expect Iran to be a lasting factor on oil prices in the near term. When the war starts, possibly by early 2008, well that's another story.
• *** Factors are in place to keep the shares of subprime lenders rising in the near term, but medium term threats remain likely to pressure the shares of many of them again. The investment banks and private equity look to be coming to the rescue, but keep in mind that bail out prices do not equal buy out prices. Still, this may help diversified firms stay solvent, while those with a continuing subprime business focus remain threatened. News of new funding sources for some troubled players today is supporting those shares.
• *** The University of Michigan reported its consumer sentiment index for March with a result of 88.8, down from February's 91.3 reading. The measure fell slightly short of consensus views. Still, overall, this keeps the pressure on equities, as consumer spending is critical for the American economy.

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