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Market Commentary

The news out this morning as all about inflation.


The PPI came out this morning, softer than expected.  Retail sales came out along side this number, also lighter than expected.


This goes to show that inflation WILL subside as economic activity slows.  The problem is that it will always lag.  Producer Prices will also generally lead Consumer Prices, another reason that the financial media has to pay real attention to economic numbers like leading indicators and employment  to get an idea of where inflation will go... not where it is now.  Rate cuts will be swift and large should inflation give up.  The last holdouts in the hawkish camp of the Fed will soon fall.



    Bonds are higher this morning, as they were ahead of these numbers.  Discretionary spending took the brunt of the pain in the PPI numbers this morning, which makes us even more nervous than we were before.  Retail spending is worth a large chunk of the US GDP and subsequently top down equity valuations.  To date the US consumer has kept spending remarkably well as their house values fall, but we worry that we are seeing a capitulation in that sector, which could have grave effects on the non-financial sectors of the market.  This could in turn bleed into more trouble for the financials as consumer lending could dry up more than it already has.



  The news out of Citigroup has hit all the headlines, and we are interested to see that the coupon on the preferred issue they are selling is back to earth after a couple of large financial private placements in the junk bond range.  The coupon on the issue will be 7%.  This is a far cry from the 9% Merrill Lynch is paying this morning, and the 11% Citi had to pay the Abu Dhabi sovereign wealth fund in December for a $7.5 billion issuance.  In fact, Abu Dhabi has to be feeling pretty good about themselves for getting an 11 yield only a month ago when new paper is going out at 7%.  The terms are different, of course,  as theirs has a mandatory conversion to common in four years, but in the meantime that is a nice coupon to clip.


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