smile, “It’s your turn, honey!” At that moment, he walked straightup to me and said, “You look just like that guy from Chicago that reportson the business channels.” Cautiously, I responded with a pleasant “thankyou” and hoped he would continue on his way. Before resuming his questfor company, he turned to me and said, “You know, you and Santelli are theonly ones on TV who explain the numbers so I can understand them. I likeyou guys!” I looked at my wife, who was trying very hard not to laugh outloud. She said, “There you go, Jack. There’s your audience!”
As amusing as that story might sound it proved to me that I had beenable to properly communicate the potential market impact of the economicreleases. As drunk as that investor might have been, he was able to identifyme and knew I had taught him something.
Instant analysis is perhaps the most difﬁcult thing to do on live TV. Ithink the only reason that people like Rick Santelli and others are able todo it so effortlessly is that they take the instant analysis that you need whenyou are a market participant and transfer it to the TV screen.
I asked Rick to do an interview for this book because I know of veryfew individuals like him who understand the market condition and conveyit properly to the investing public. In fact, I ﬁnd myself listening to hiscommentary more than any other on business television because of histalent for breaking down the daily activity into a clear and concise form.
INTERVIEW WITH RICK SANTELLI
Bouroudjian: Rick, you’ve been in the public eye for a few years; tell us alittle bit about your background. How you actually got into the market, andhow you ended up getting on TV.
Santelli: Well, in terms of getting into the market, I went to the Universityof Illinois, and since a very young age, I thought I was going to be a lawyer.It’s what I always wanted to do. After graduating from Champaign, I cameto visit a friend at the Chicago Mercantile Exchange, the CME. His fatherwas a pork belly broker and before that, going back to the ’50s, prior tothe existence of the present CME Exchange building [he] began his careerwhen the CME was in the Franklin Building.
I was so fascinated with what was going on down there. He tried toexplain to me . . . some of the intricacies of the meat market, and that’s allit took! I guess I fell in love with it from day one, and never proceededto go to law school. I took a job with Lehman Brothers—back then it wascalled Shearson—and then took a job with Shearson when they acquiredLehman. I believe I was making $68 a week and my train pass, which wason a monthly basis, cost about $35 per month, so there wasn’t much to live
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on at the end of the month, but I think it was probably the best move I evermade.
Bouroudjian: How’d you get on TV? Was it an accident or is it somethingyou wanted to do?
Santelli: Well, TV is another crazy story altogether. You talk about howlife throws curve balls. I started trading around ’79 and caught the greatgold market at the CME when prices shot up close to a thousand dollarsan ounce. The Iran/Iraq conﬂict started in January of ’81 and that was thepeak. Gold, instead of going up, started to come down. The Hunt broth-ers got stuck trying to corner the silver market, which helped drive priceslower. But I traded at the CME until about ’84, then went to the CBOTaround 1993 or 1994. It was during this time that the exchanges all prettymuch unilaterally started to look at the media in a more affectionate fash-ion. Instead of keeping the media out of the turnstiles, they decided, “Hey,let’s let the media on the trading ﬂoor.” But since that was really never al-lowed, there wasn’t a big pool of experienced traders that had dealt with themedia.
I had a friend who was working for media-relations for CBOT at thetime, and it was one of the local channels, channel 26, which grabbed meand threw me on the air for the ﬁrst time. I wasn’t very good at it in thebeginning. I look at some of those old videotapes and think, oh my god, Iwas so rough around the edges. And we were on this little catwalk on theold CBOT ﬂoor, which was originally the 1930s grain room. When the grainsmoved into the addition in 1981, all the ﬁnancials moved into the old grainroom. I remember doing an interview on that two-foot catwalk, and it wasan experience! It was me, a cameraman, a young lady holding a mike. It waskind of dangerous now that I think about it. Looking back on the shot, weall looked green, because the green light from the boards cast a shadow; itwas kind of eerie. It was like Halloween TV. But I liked doing it, and I startedbecoming a guest for Reuters TV, which is no longer in existence.
Back then, getting to be an occasional guest on CNBC was about ascool as it ever could get. I started doing a few spots on CNBC, and lo andbehold, I became the guy for Unemployment Fridays. Every ﬁrst Fridayof the month, I was the guy who broke down the numbers. They didn’thave individual shows back then; it was one giant show all day long. JimmyRogers used to always be on the ﬁrst Friday along with me. I think Cramerbecame the regular when Jimmy stopped doing it before Kudlow took hisplace. So I appeared on TV for the better part of ﬁve years. Now it’s 1999and we found ourselves on a new trading ﬂoor. The CBOT opened up thatbig monster ﬂoor in ’97. I remember I was having issues with one of mybigger customers at the time, and at that time in my life, I was with SanwaBank.
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Unemployment
reports still had really big movement
in themarketplace—it’s been a lot more tame of late. One customer was driv-ing me crazy! I executed the orders, ran up and did my spot on CNBC witha lot of issues on my mind. Mumbling half-heartedly, I said into the micro-phone, “God, I should just do this for a living!” You got to be careful whatyou wish for—all of a sudden the wheels started turning. The next thing Iknew I was ﬂying out to CNBC headquarters; at that time they were in FortLee, New Jersey.
About seven months after that, we worked out a deal. I stopped trad-ing, gave up my memberships, and went to work for GE/CNBC full-time. Iremember my wife and parents looking at me as if I were crazy: “Are youout of your mind?” This all happened when I was having a great year. 1999was a great year for brokerage—the clients were trading, it was proﬁtableand still, for me, fun! I left it all, and thought to myself, there are so manychanges taking place in the industry!
Whether it’s brokerage rates coming down, or even the disappearanceof the edge, things were changing. Traders like me looked at the marketsand thought the edges weren’t as big as they used to be. My god, if you lookwhat the edges are now, it makes the edge in ’99 look rather gigantic. I madethe move and now I’m going on eight years with CNBC, almost thirteenif you include the time I was a guest. I think it’s probably the best careerdecision I ever made. I think I do a couple of things in life well. I can ﬁx anold Lincoln with my eyes closed, and I love talking about the market. Whenyou get paid to talk about something you love, it’s an added bonus!
Bouroudjian: You’ve been a successful trader and you’ve been a success-ful broker. How do you get your information, and better yet, is there anythingyou do differently now than you did before?
I guess the ﬁrst part is, when I really started to get into theSantelli:ﬁxed-income markets, it started in the Treasury bill and Eurodollar futurescontracts in the early ’80s. I met a gentleman named Richard Sandor. Andanybody who understands the history of this business we’re in, namelyfutures, knows that there’re two names that always crop up—Leo Melamedand Richard Sandor. And I think, until the end of time, those two gentlemen,will always ﬁght over who is the father of ﬁnancial futures. Personally, Ithink they both should get the title. Anyway, I met Richard, and I ended upworking for him. And back then, I was a market technician.
I was an avid technician from my ﬁrst moments on the ﬂoor in ’79.Richard Sandor was an economist drumming the praises of a menu of newﬁnancial futures products to conservative bankers and institutional endusers. Richard told me, “Listen, if you’re going to work with me, we’re goingto deal with servicing institutions. You must learn about hedging, you’regoing to have to learn the language of bankers.” You can look at a chart, and
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get an idea of what you think is going to happen, but when you make yourpresentation to your client—whether it’s on the phone, it’s an order, or inperson—when you travel, you have to convert your market predictions andobservations into their dialect. So I started to learn about the ﬁxed-incomemarket. I guess what I tried to do at that point was to embrace, understand,and follow the fundamentals. The charts would tell me the direction of themarket.
I tried to marry the two concepts together. And I think, as time pro-gressed, I found the economic side of it really fascinating. You know, backthen, if the Fed changed interest rates, the information didn’t reach thetraders quickly. There wasn’t transparency. CNBC didn’t have a show de-voted entirely to the statement or the announcement. There wasn’t even astatement issued on the air. If you wanted to know what the Fed did, backin the ’80s, you had to look at your Quotron screen and you had to watchwhere Fed funds actually traded, and ﬁgure out if they moved or not. Atthis time the trading activity in the 30-year bond was huge. The contractstarted in ’77, but it didn’t really get legs, and really start to get aggressive,’til around ’84, ’85. I just thought that this is an area that not only would en-hance technicals, but in many ways become a common metric for such newcontracts, especially after coming off of double-digit inﬂation and interestrates in the early part of the decade. So I tried to marry these two marketmethods together. I guess what’s changed today, versus back then, is thatthis very metamorphosis is now the cornerstone of computer trading. Sonow we have a proliferation of large players coupled with a huge amount ofliquidity and a global stage that has altered all aspects of trading. The forceof the GDP powerhouse from the likes of China, India, or different partsof the Paciﬁc Rim and Asia with their inexpensive labor costs and pocketsfull of export bounty in the form of lots and lots of U.S. dollars is changingdecades of economic rules on the ﬂy. Many economists will debate me onthis issue, asking, “Is it really different this time?” Yet I stick to my opinionsthat comparing major data points like inﬂation, jobs, or trade imbalancesis a dicey proposition. To assume these types of comparisons are “applesto apples,” considering such dramatic and profound global change, will bedebated for years to come.
I think when it comes to the global explosion of economies and capitalmarkets, it truly is different this time. We’re never going to put China backin the box. You’re never going to change the global forces that have beenunleashed. I think Mr. Greenspan ﬁgured it out at a very early time, that allof a sudden, in the ’90’s, you have this productivity miracle going on, butin many ways, the ability of the U.S. economy to power through levels ofemployment, and GDP, that normally, in the past, would bring on horribleinﬂation and a raft of other negative consequences, is amazing. And now,years later, we have Ben Bernanke, talking about productivity in the same
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fashion, that it will help the U.S. economy increase its capacity. I think ourproductivity, like so many new and improved economic theories, is morethan partially due to what’s going on in China and the other new large globalplayers.
If you have a factory that makes widgets, and you can outsource thefactory, and have lower labor costs, and make a proﬁt without ﬁghting theglobal labor market realities, everybody seems to walk away a winner. Sowhat have I done differently? I now question how you interpret all of thedata today, and all of the issues that move the market in the context ofhistory, because I think we’re writing a new set of rules. I think in 10 or20 years, when you go to the biggest business schools in the country, theywill look at the period from about 2001 on as deﬁned by a couple of differentmajor issues.
Terrorism—September 11th. Changed the markets, really cemented thenotion that we all learned in ’87, that when things get nasty, the credit marketpicks up the slack. You know, it’s the old-fashioned “ﬂight to quality.” Theother big notion is that the global economy is probably in its infancy now,and I think for many years to come it’s going to change every measurementof how we trade the market, and if I could leave readers with one notion,the question I now ask myself, before I ever use an economic statistic orpattern on a chart, is “What’s the money doing? Follow the money.” BecauseI think, with the push of a button, all the electronic platforms, the speedand efﬁciency in money, capital, trading . . . it’s now instantaneous, you canmove everything quickly.
I also think one must realize that there are so many things that havechanged—it’s very dynamic! Maybe one of the biggest things to havechanged is the role of central bankers. In this global setting, any givencountry’s central bank has a much shorter reach with much less efﬁcacyto imprint their will. Central bankers now are starting to have summits onglobalization, and behind closed doors, I’m sure they’re discussing the veryissues that we all are.
Bouroudjian:I’m going to switch gears on you a little bit. You do anamazing job, breaking down economic releases. I do it once in a while, butyou do it all the time. Is there anything special that you do, to be able tobreak down these numbers, so that the average investor can understandthem?
Santelli: Being prepared is the biggest factor. I’ll always be cognizant ofwhat data is coming out, where it has been and where expectations placeit currently. For argument’s sake, let’s say it’s CPI [Consumer Price Index].I will look at the way the market has behaved the last several releases,and see what parts of the report the market moved on. What was the year-over-year core inﬂation, and what was the headline number? What part of
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the overall data did the market concentrate on? And then I will try to putdown on paper all the extremes of that series; in other words, let’s say we’retalking about core inﬂation CPI. What’s been the lowest or highest read?So that as the data’s released, I can put the important component in sometype of structure to see whether it’s in the top part of the range, or a newhigh, or is it in the bottom part of the range, or a new role for the series,or is it in the middle? Then I get to what I commented on earlier, followthe money. What I will do is keep one ear tuned to the noise level on thetrading ﬂoor and both eyes glued to the news boards as the information isreleased. I’ll see what the number is, and I will try to scan all the sectors,span the interest rates, the equities, and the foreign exchange as each ofthese important sectors relates price to the data that is unfolding in realtime. Is the trading on the ﬂoor getting louder and more aggressive, or isdimming down? Is the market moving up or down aggressively, is it movingup or down with big volume or with small volume?
I guess I’ve gotten this to the point where I tease some of the guysin the pits; I will sometimes not look at all the data, as I’m on TV, but Ican tell you what it is. Because you get to the point where you know themarkets and the reactions so well, that you can just get a sense of the datapurely from the activity, or lack of, on the trading ﬂoor. Although sometimesthere’s a delayed response. Many times as of late we ﬁnd traders diggingdeeper into the subtext of the numbers. It seems as if we’re all turning intoeconomists . . . trying desperately to get to the market-moving aspects ofthe report. As important as the data is, the price movement of the market isstudied more than the actual numbers. This is why I feel that the technicalstudy of the market can be viewed as all-inclusive, with data points just asubset of the charted activity.
So, I guess, my motto in that regard is “Prepare, and know exactly whatthe data has been.” Because you’ve got to know where you’ve been to knowwhere you’re going. The most important thing is to make the market the star.Whatever the market does is always right. I learned an important life lessonearly in my career. You can change CPI data. You can revise unemploymentdata. You can pretty much revise everything in life, even election returns, aswe learned in 2000. But there’s one thing you can never change and neverrevise, and that’s yesterday’s prices in the market. It can never be changed.Once they’re on that chart, once the Dow Jones Industrial Average closesfor the day—that’s the price. And that will be the price forever. For themarkets are the star. Everything else is relative, and the only constant is theprice structure.
Bouroudjian: One more question. If you had a new trader come to youand say they wanted to start trading or investing, what one or two points,aside from “Follow the money,” which is an excellent point, would you give
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them? Would you like to share a secret that maybe the ﬂoor has, or maybethe professional community has, that the average investor doesn’t know?
Santelli: Oh, I think that’s the easiest question of all. The market is theaggregate vote of all the players. So at any given moment, the price thatyou see on the board, or on your screen, represents a consensus. People—in this case, investors—are biological organisms, which makes them verypredictable on a number of levels in terms of their behavior. To that end,I love playing little games; I do this with my kids. I’ll say, “Okay, get onthe other side of that door. And I want you to come and see if I’m home,so knock on the door.” They always knock three times. It’s a Fibonaccinumber. Certain behavioral traits, like how many times we knock or ringa phone, are comfortable to us as humans. One ﬁnds Fibonacci numbers asomewhat magical metric in nature, astronomy, art, and even in the originsof the present-day calendar. How many times, Jack, have you talked aboutretracements in the markets? Much of the methodology is based on theFibonacci numbers and the golden mean. The intermingling effects of timeand price on our decision making process are some of the cornerstones oftechnical analysis.
Why are there always charts in a trading room? Well, I’ll tell you why.Because people under certain conditions have a certain amount of behaviorthat’s always consistent. So I guess what I would tell a new trader is that themarket is not the “random walk,” as some economists might have us believe.People under many different circumstances, whether it’s under pressure,or whatever, always seem to have some constants in how they assimilateinformation. And I think you have to carry that notion into the marketplace.And you have to try to understand the group dynamics, and also realize thatthere’s a lot of constants to understand, and even count on. A great exampleof this large-scale behavior is the market bubble. There have been bubblesgoing back, anecdotally to the beginning of trading. What I ﬁnd interestingis, there will always be bubbles. And it isn’t because people are stupid, it’sbecause they can’t help themselves. They’re a biological organism that is puttogether in a certain fashion, that no matter how hard we try, we can’t escapethe fact that we’re human. There’re certain things [that] affect us in certainways. Tops and bottoms in markets, for example, tend to be accompaniedby a series of recognizable patterns.
Many times you look for that capitulation trait. That’s such a humandynamic. Sometimes logic and common sense justiﬁably keep savvy tradersfrom getting involved in markets that seem to transcend wisdom in how theyare priced. Yet many times, even level-headed investors reach a point wherethey just can’t resist the temptation to get involved. Those are the trends inthe marketplace that you have to pay most attention to. Beginners or novicetraders should open to the possibilities of the markets. Even if one has
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never looked at a market, taken an economics or futures class, the learningcurve may not be as steep as professionals would have you believe. I tellfriends and others trying to learn the markets to spend a couple of monthslooking at charts of the major sectors such as interest rates and equityindices. Speciﬁcally, daily, weekly, and monthly charts. After a couple ofmonths of observation, you’ll know exactly what I mean; there are certaincharacteristics that are repetitive, over and over. It’s like an EKG of themarket. And once you get tuned into that, everything else will fall in place.You might even ﬁnd that it will hook you as it has me.
Bouroudjian:think of that you’d want somebody to either know, that you want to say?
Is there anything you might add? Anything else you can
Santelli: Well, I think that the markets are the most interesting Rubik’sCube puzzle in the world. Some people like soap operas or sporting events.But I think that the markets encapsulate everything that’s challenging andfun. It’s a great puzzle that can be peppered with a proﬁtable, monetaryaspect. It has everything to offer, and anybody who thinks markets areunexciting, or boring, ought to put a little ﬂesh in the game. They will realizethat that feeling that they get in their stomach is very addicting. And, Jack, asyou well know, whether traders are proﬁtable or not doesn’t seem to mattermuch because in either case they always seem to come back for more.
ECONOMIC RELEASES
The following are the economic releases that I believe move the market themost. It is my intention to give you a feel for what the number means totraders and investors alike. Much of the analysis is common sense, but thething to keep in mind is that there are times in the economic cycle that turngood news into bad and bad news into good. A great example is the recentmove in the short end of the yield curve in interest rates. As the economygrew stronger and stronger, the Federal Reserve decided it should act as apin in the balloon and slowly let the air out of an overheating economy. Dur-ing the cycle of Fed tightening, any good news about the economy seemedto give the Fed more reason to be aggressive in the tightening mode.
Unemployment
Unemployment—if ever there was an economic report that was the motherof all numbers, this is it! The employment release is a set of labor marketindicators. The unemployment rate measures the number of unemployedpeople as a percentage of the labor force. Nonfarm payroll employmentcounts the number of paid employees working part-time or full-time in the
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nation’s business and government establishments. The average workweekreﬂects the number of hours worked in the nonfarm sector. Average hourlyearnings disclose the basic hourly rate for major industries as indicated innonfarm payrolls.
The anticipation on Wall Street each month is clear, the reactions areusually volatile, and the information for investors helps determine investorconﬁdence. By looking past the headline unemployment rate, investors cantake a more strategic look at their portfolios and even take advantage ofunique investment opportunities that often happen in the days before andafter the release. The employment data gives the most complete report onhow many people are looking for jobs, how many have them, what they’regetting paid, and how many hours they are currently working. These num-bers are the best way to measure the current state as well as the futurecourse of the economy. Nonfarm payrolls are categorized by various sec-tors. This sector data can go a long way in helping investors determine inwhich economic sectors they intend to invest. The employment statisticsalso provide insight on wage trends, and wage inﬂation is high on the list ofenemies for the Federal Reserve. Fed ofﬁcials constantly monitor this data,watching for even the smallest signs of potential inﬂationary pressures,even when economic conditions are weak. If inﬂation is under control, itis easier for the Fed to maintain a more accommodative monetary policy.If inﬂation is a problem, the Fed is limited in providing economic stimulus.By tracking the jobs data, investors can sense the degree of tightness in thejob market. If wage inﬂation threatens, it’s a good bet that interest rates willrise; bond and stock prices will fall. No doubt, the only investors in a goodmood will be the ones who watched the employment report and adjustedtheir portfolios to anticipate these events. In contrast, when job growth isslow or becomes negative, then interest rates are likely to decline, boostingbond and stock prices in the process.
Retail Sales
Retail sales is one of the most volatile numbers month to month. It is themeasure of the total receipts at stores that sell durable and nondurablegoods. Everyone talks about consumer spending, but what they don’t knowis that consumer spending accounts for more than two-thirds of the econ-omy, so if you know what consumers are up to, you’ll have a pretty goodhandle on where the economy is headed. This is the information edge thattraders and investors are searching for. The pattern in consumer spendingis often the foremost inﬂuence on stock and bond markets.
For stocks, strong economic growth translates to strong corporate prof-its and higher equity prices. For bonds, the focal point is whether economicgrowth goes overboard and leads to inﬂation. In an ideal world, the economy
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walks that ﬁne line between strong growth and excessive growth that causesinﬂationary pressure. This balance was achieved through much of the 1990s.For this reason alone, investors in the stock and bond markets enjoyed hugegains during the bull market of the 1990s. Retail sales growth did slow downin conjunction with the equity market in 2000 and 2001, but then reboundedat a healthy pace in the last few years. Retail sales gives the investors a senseof the big picture, as well as the trends among different types of retailers,both high and low end. There are times when auto sales are especially strongor apparel sales are showing exceptional weakness. These trends from theretail sales data can help you spot precise investment opportunities, withouthaving to wait for a company’s numbers.
Producer Price Index and Consumer Price Index
The Producer Price Index (PPI) and the Consumer Price Index (CPI) arethe best indicators of inﬂation in the economy. Both numbers move themarket for obvious reasons but have much more impact when the FederalReserve is in the market. For example, when the Federal Reserve is at theend or the beginning of a cycle of tightening or easing, then the numbershave a much larger impact than at times when the Fed is out of the picture.The PPI is a measure of the average price level for a ﬁxed basket of cap-ital and consumer goods paid by producers, while the CPI is the measureof prices that have been passed along to the consumer. The PPI measuresprices at the producer level before they are passed along to consumers.Since the PPI measures prices of consumer goods and capital equipment,a portion of the inﬂation at the producer level gets passed through to theCPI. By tracking price pressures in the pipeline, investors can anticipateinﬂationary consequences in coming months. Investors need to watch in-ﬂation closely. Individual traders or investors who understand the processof inﬂation and how inﬂation inﬂuences the markets will beneﬁt over thosewho don’t understand the consequences of inﬂation. Inﬂation is an increasein the overall prices of goods and services.
The relationship between inﬂation and interest rates is the key to un-derstanding how data such as the PPI and the CPI inﬂuence the marketsand everyone’s portfolios. If someone borrows $1,000 from you today andpromises to repay it in one year with interest, how much interest should youcharge? The answer depends largely on inﬂation, because you know thatthe $1,000 won’t buy the same amount of goods and services a year fromnow as it does today. If you were in a country where prices doubled everycouple of months, you might want to charge 500 percent interest for a totalpayoff of $5,000 at the end of the year. In the United States, the PPI tellsus that prices were rising about 4 to 5 percent a year through the summerof 2005. While the CPI was rising less rapidly during this period, you would
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want to take into account the higher inﬂation rates evident at earlier stagesof processing when you were determining what interest rate