Tuesday, May 23, 2006


The "rotation" out of what was working is well under way. Some sectors, such as metal and oil stocks have taken a huge hit. The excuse most folks use for the declines is the jump in the core inflation rate. OLD NEWS!

"Headline inflation" normally takes about 7 months before some portion of it creeps into the core rate. The latest blip was right on schedule. It was last September when oil prices spiked up to $70.50 per barrel. A few days ago, the market made a big deal out of a small jump in the core rate of inflation. The market has moved as if it believes that the Fed will have to raise rates much higher to suppress inflation; a poor reading of the tea leaves.

Look at it this way, oil hit $70.50 per barrel in September of 2005 and today it is trading at $68.45 per barrel. For the past seven months oil has not contributed to inflation but instead has declined about 3%. The new global work force simply does not permit wages to get out of hand and wages account for the bulk of the cost of most products.

Please do not get too excited about the current decline. Remember that the current churning out of stocks is a way to provide cover for the market to set up for the next BIG BULL RUN! The next big run will be "second stage stocks". Now is the time to add to your account if you can. Now is the time to get ready to make good money as more and more of the billions and billions of dollars held by foreigners begin to flow into US products. Also, remember that the US tends to sell high dollar products. We cannot compete with China in labor intensive industries. However, when China spends its dollars, it will buy expensive capital goods; goods that require lots of money, talent and research to make. The range of products include everything from movies, drugs, airplanes and computer software. The other thing to keep in mind is that big companies with steady earnings will grow more and more attractive as the cycle matures.

In the short run, it is good to know that many technical indicators have already gotten over extended. Value investors are already pecking away at stocks that have declined too far too fast. I believe the value of the big S&P sized stocks relative to expensive bonds and real estate, should give investors a lot of comfort. We are not likely to see a major decline with earnings yields so high.