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Sunday, April 15, 2012

Market correction a cleansing process

Tony Paradiso

The markets are rolling and the media investment shills are laser-focused on a continuing upward ramp. On days when the financial markets do decline, the talk inevitably migrates to the much anticipated “correction.”

But what exactly is a correction? Doesn’t it imply that the markets are currently incorrect? And if so, what caused this incorrectness and why haven’t the talking heads informed us of it?

A correction is invariably the explanation for any decline in the markets whether it’s for one day – or as we witnessed last week – for five straight days. The beauty of said correction is that it’s a “cleansing” process and by its very definition not negative, but positive. The net result: it’s good when the markets go up and it’s good when they go down because they are merely “correcting.” It’s a wonder that everyone isn’t invested in stocks. You just can’t lose.

Corrections are necessary because as we all know markets can’t go up in a straight line. Any other upwardly pointing line is fine but not a straight line. So when markets misbehave by rising in an inappropriate fashion, they must decline to correct the misconduct. And what boys and girls, do these momentary positive declines present? Right: a buying opportunity.

What confuses me is that after the correction is consummated, the expectation is that the markets will resume their rise. In fact, the markets are expected to rise above the point at which the correction occurred. It’s almost as if the correction never happened because we really aren’t correcting the value of the markets, but how they arrive at that value. Straight line bad, upward saw tooth curve good.

It all seemed moot after last Thursday’s rally. Perhaps this time all that was required was a little kink in the line. Notwithstanding the correction, the primary reason for the market dip was renewed concern over Europe.

Personally I don’t understand why investors are worried that Spain can’t handle its debt load. Massive unemployment, massive debt, a declining economy, and an over-dependence on government employment all seem solvable problems to me. Sure, the medicine that the EU wishes to prescribe will, in the short term, make matters worse. But didn’t the Central Bank wave its magic money wand and virtually solve the problem?

As for China, they still enjoy an enviable growth rate but growth in China is measured on a different scale. The 8.1 percent in the first quarter represented a decline from the 8.9 percent rate in Q4 of 2011. It also marked the slowest rate since the first quarter of 2009. Growth is expected to rise as the year progresses but keep an eye on the Q2 number.

Two key inflation gauges were released last week: the producer price index (PPI) and the consumer price index (CPI). Normally these numbers elicit a yawn from the markets but something more important than rising prices is at stake. Face it: Wall Street doesn’t care about higher prices. That’s a Middle America problem. What Wall Street does care about is cheap money.

Since the financial crisis the Federal Reserve has been administering sugar rushes to the equity markets. But like all sugar rushes the euphoria is fleeting and the markets nervously await more sugar. However, the only chance of the Fed accommodating the markets is if the inflation data is tepid.

The PPI was unchanged in March. Economists had expected a 0.3 percent rise. Ironically, a drop in wholesale gas prices caused the core number to rise 0.3 percent, slightly above estimates. In the last 12 months wholesale prices have increased by the smallest amount since June 2010.

The CPI was up 0.3 percent and the core number was up 0.2 percent. Both were in line with expectations. The Fed remains unlikely to administer another sugar fix but with both the PPI and CPI within the Fed’s comfort zone at least the markets have some hope.

As I’ve previously chronicled, the Fed focuses on core inflation which conveniently excludes food and energy. Regardless, I wonder if the wunderkinds at the Fed have taken into account the game of shrink the package that producers have been playing for years. For that matter I wonder how many consumers have noticed.

If you didn’t notice it’s understandable because the changes in package size are designed to go unnoticed. I sell many of these shrunken products in my store and I didn’t notice. For example, the popular 99 cent Arizona Ice Teas went from 24 to 23.5 ounces. It’s an imperceptible change that is the equivalent of a 2 percent price increase.

In 2008 Kellogg skimmed roughly 15 percent from the size of their cereals. Mars melted away a miniscule .41 ounces from their candy bars but that equaled an 11 percent price increase. Tropicana squeezed 5 ounces or 8 percent from their “half gallon” juice cartons. Chicken of the Sea tuna was watered down from 6 to 5 ounces, a full 17 percent reduction. And Frito-Lays chipped away a quarter ounce from their 99 cent snack products. Even Bounty rolled back its towels 7 percent from 138 to 128 sheets. But lucky for us inflation remains in check.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso can be reached at tparadiso@tds.net.