Barron’s picks up “Core Prices versus Non Energy Earnings”



I just noticed that Barron’s picked up Thursday’s Core Prices versus Non Energy Earnings. Only they renamed it (depending on the landing page you clicked from) either Pundits of Data Analysis or Robust Inflation or Lousy Earnings?

The ubiq-cerpt: 

of data analysis is watching the way various persons (of the Least
Weasel mustela nivalis genus) manage to emphasize what they want and
ignore the rest.

Case in point: the core consumer and producer price indexes that don’t include food and energy. Apparently, we have no inflation in this country…unless you count food and energy, in which case we have a lot of inflation.

The whole concept of reporting CPI ex-food and
energy is to pull out the volatile figures to provide insight into the
underlying strength of inflation. You could also use a simple moving
average, or even better, the trend.

Instead, we see an entire group of pundits who have
chosen to ignore the energy component — not to eliminate wild swings,
but simply to create a pretty world where inflation is low (and where
all the children are above average).

Yet at the same time, these same pundits are all too
happy to report that the Standard & Poor’s 500 index’s
year-over-year earnings for the quarter are up 12%, including the
contributions of the energy sector. Without energy, the S&P 500′s
year-over-year quarterly earnings gains are a pathetic 4%.

That’s inconsistent.

Choose your poison: Either we have robust inflation,
due in large part to oil (but also due to industrial commodities), or
we have lousy earnings.

On a related note, Larrry Kudlow pointed out to me that my math is off — he cites SPX earnings ex-energy at 8%. His point is valid, but he is using a different measure than I — his analysis is based upon an ongoing cash flow basis. My data is year-over-year S&P500 earnings increases or decreases.

Why the distinction? I track SPX earnings changes for cyclical timing reasons. Long time readers may recall we have previously discussed How to Use Earnings as a Buy Signal and Earnings and Subsequent Market Gains, based upon this indicator.

As a reminder, the ideal entry point is when earning go from awful to bad. When they go from great to good, much of the upside is already baked in . . .


Pundits of Data Analysis
Robust Inflation or Lousy Earnings?

THURSDAY, AUGUST 18, 2005      

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