Business news - always new

Last Monday I read an article before the opening bell that said that the stock market was "set for a recover" from the previous, catastrophic Friday's section. Later on, after seeing the market falling another 100 points, I wanted to read the article again, to see what their rationale was. Couldn't do it: the article had disappeared.

Same with the Brazilian Invertia today. "Dollar goes up 2% facing world financial struggle", later on, the same link leads to "Dollar gains 1%...".

On CNNBusiness this morning, La Monica asks AIG and GM to be thrown out of the DOW. Sure, his logic is sound. THE DOW index should encompass US-headquartered companies that are doing well, ans the two aforementioned are not. However, the logic behind the scenes is more interesting. Take these companies out before they damage the DOW too much, as they might soon go down the same path as Lehman. This is similar to the idea of product substitution to avoid "biases" on measuring inflation.

If you are not familiar with that, let me try to explain shortly. It is not easy to measure consumer inflation. It all dependes on what is the impact of each product on the total budget of the average consumer. Say, if people spend about 40% of their budget on housing, and 20% on food, then it makes sense that housing prices should impact the inflation index more heavily than food. That is why you are seeing your grocery bill go up a round 100% while the government says the inflation is 5% or less. They are not exactly lying, but you are being fooled anyways.

But that is not all. Let's look inside what is in your recycled grocery bag now. You used to spend 15% of your budget on, say, butter. However, the price of butter skyrocketed and you can't afford to buy as much butter as before, so you buy less butter, and get some margarine to make up the total you need. So, now, if you are not buying as much butter anymore, the price of butter doesn't have such an impact on your groceries bill as before. And as a result, the skyrocketing prices of butter will not impact the inflation indexes much. So, when the regulatory agencies decide to remove butter from that "average bag", they are doing product substitution. If you think of it, the name probably sounds much better for the economist than for the consumer, that feels forced to leave the butter in the shelf. And the result of this all is that the inflation indexes do not reflect the reasons that led you to to the cheaper product, neither calls for a discussion of the consequences of it. Quite in the contrary, every time when the inflation numbers are released and they sound "under control", they are used as an excuse to "stay the course".

That is also what La Monica proposed for the DOW Jones average, but it should be called a different name: company substitution. The DOW Jones is where you look at to see how the market is doing. He is afraid that AIG and GM will collapse and impact the DOW significantly. People will look at those number and will get desperate, sell their stocks and fill up their mattresses. That would be 1930 all over again. In fact, a nightmare that is becoming more and more real for the Wall Street economics geniuses. Today Bank of America bought troubled Merril Linch for 50 billion in stocks (that is, no cash involved). Merryl Linch is also involved on the housing market, so, just more of the same, just bigger. La Monica says AIG would be trouble because it is bigger and is part of the DOW. But I think the worst fact is that they are not in the same housing business. Their failure would make it clear that the crisis is not restricted to housing. The different one is Washington Mutual, a loans and savings bank. Got the idea?

Now, back to the quality of the news. CNN reports that Lehman's bankrupcy file claims from 670 billion in debt and La Monica says that "with a current market value of $32.6 billion, [AIG] is worth nearly five times more than Lehman and WaMu combined". If you do the math, the market value of Lehman was less than 4 billion, but they still held 671 billion in debt. Something ought to be wrong... and it's either me, CNN, or the economy.