Wednesday, April 20, 2005


The latest Chart of the Day shows how tough inflation is on the stock market. The problem is that this is the wrong topic for the time. The fact is that the PPI was exploding YOY just a couple of months ago but now the year over year comparisons are quickly moderating. The latest number of .7% was high but the core rate was only .1%.

In a similar economic environment in 1994, the PPI was driven down when the fed raised short rates several months in a row; does this sound familiar? The rise in short rates the past 8 months appear to be doing their job. The world economy (with the China numbers the big exception) has slowed. Steel prices and other material prices have fallen off their peaks. Oil dropped from $58 and is bouncing around 50-51. Chairman Greenspan's favorite measure of inflation, the PCED, is showing a 1.6% annual rate. Wage inflation, the biggest component of inflation is still very tame.

Earnings announcements have generally been very good so far. I believe Google is going to cause excitement in the market by reporting very good numbers. Stock buy back announcements are being announced daily. The stock buy backs can be read a couple of ways but the bottom line effect is that they increase operating leverage and therefore boost projected earnings for growing businesses. Another way to express the effect is that the fewer shares left divide up essentially the same earnings. The interest earnings of the cash in the corporate accounts is obviously lower than the earnings being earned by the same money invested in company shares.

There are powerful anti-inflationary forces acting on behalf of investors. Some of these factors are railed against by the media and politicians with axes to grind but they are still positive factors that reduce inflation. Things like immigration that gives us low cost labor, open trade with China, India, et. al., lower corporate tax rates, and the process of "creative destruction" that the US is going through.

American surgeons are currently using robotics to do surgeries that were impossible weeks, months and years ago. How many years pay will the head of a manufacturing plant in China give to an American hospital to save the life of a family member? There is nothing wrong with paying poor Chinese to manufacture socks and shoes for us cheaply and then charging them a fair price for a GE turbine or a heart valve repair.

The Chinese and Americans are benefiting by our trade "partnership". The whining of politicians about unfairly pegging the currencies is necessary to keep the heat of the under educated and under informed off the politicians backs. The market sets prices! If the currency is truly under-priced, it will not take jawboning to bring it up.

Should Florida decide to subsidize the price of tomatoes in order to out-sell California tomatoes, how long would it last? How long would the citizens of Florida be willing to give all tomato buying citizens in North Carolina a penny every time we buy a Florida tomato. Yes, in the very short run, California growers may have to cut back production of tomatoes or convince the citizens of California to pay North Carolina a penny or more to win back the business. The more logical stance of California would be to grow more oranges, grapes or asparagus. If Florida can indeed grow and ship to NC for the lowest price, NC citizens are likely to buy tomatoes from Florida and the citizens of the state do not need to pay us extra money to buy the product. If the citizens of Florida decide to sell at an extra low price, it would be the citizens of NC that would benefit, not the citizens of Florida!

Buy US stocks, companies are making money, buying back shares and growing their businesses. There is no need to worry over every negative comment made about the market potential. Half of what you hear is being presented by someone who has an ax to grind. Half of what you hear is dead wrong. The truth is that the person who invested his retirement funds steadily in the stock market every month for the past 20,30, 40, 50, or 60 years has made a higher return than 90% of the professional managers in those 50 years. His compounded rate of return has beaten CDs, Bonds, Savings and Real Estate. It is a mathematical fact that corporations will not over the long-term pay more interest on bonds than the rate earned on the companies equity!