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Reality Check

Friday, December 15, 2006 | 08:50 AM

in Inflation | Markets | Psychology/Sentiment | Technical Analysis

My pal Cody wrote a column yesterday titled Reality Check. He wrote: "Nothing drives me crazier than when people point to the current state of the economy and lament it as anything less than a boom." He further laments the parsing of "the macro and microeconomic data for any little validation of their wrong views."

One thing Cody is definitely right about: If you have been anything but long and strong you've been wrong (investing wise). From a trader's perspective, fighting the tape is always a losing battle. The trend remains up, momentum is positive, seasonal strength is upon us, and the bears and shorts have been vanquished.

But is that a Reality Check? Is accepting the Wall Street and Mutual Fund Buy & Hold sales pitch all that real? Do we really take Government Statistics at face -- and call that a true gauge of reality? Has our reality simply become the 200 day moving average of the markets?

Take today's benign CPI data. Futures exploded on the release, and given this is the 2006's last quadruple witch, the bias will be strongly to the upside (although we should expect a lot of volatility in individuial names). The best short term advice remains "Don't Fight the Tape."

But the official data continues to be at odds with reality (not that Traders care a whit about that). The CPI release claims there is almost no inflation, with core CPI up 2.6% (consensus 2.7%). But consider what the BLS told us today:

• Food prices fell, as orange juice went to record highs, and corn is up 70% since August, while wheat is near 10 yr highs.

• Medical care rose only 0.2% -- apparently, the recent 20% annual increase has been halted.

• Education prices went down 0.2% -- despite widely reported tuition increases -- primarily caused by a decline in long distance phone service prices (WTF?)

• Commodities ex-food and energy fell 0.4%, just as the CRB industrial metals index went to a record high.

(Thanks to Peter Boockvar of Miller Tabak + Co for much of the data here)

Bottom line remains that the headline numbers look great -- expect markets to respond positively -- but the reality check is this: These Government BLS numbers simply do not square with reality.

While Investors can recognize this, Traders have no choice but to "ignore reality" and go for the ride. A turret-bound buddy wrote me:

"I don't care about the numbers, the economic data, whether Iraq is in a Civil war, if the President gets impeached, who controls congress, what a company does, whether we fall into a recession or if China buys Europe and turns it into a Disney theme park. My world is defined by what I see on my four 20 inch monitors in front of me. Everything else is noise."

That's what is driving the markets. And that's your reality check for the day.

Source:
CPI Is Flat; Core Inflation
Is Lowest Since June 2005
JEFF BATER
WSJ, December 15, 2006 9:23 a.m.
http://online.wsj.com/article/SB116618889905651461.html