But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Click here to continue reading Mr. Fitzgerald’s article.

It is high time for our political leaders to make some key decisions.  And that translates into large uncertainties for investors that have held the market in a range and with low volume. We do not know whether “Cap and Trade” legislation will pass the Senate and we do not know whether and any healthcare bill will pass through Congress, or what that bill might entail.  And these two issues are paramount for the future of America.  

As we discussed earlier, cap and trade could cause incremental costs in energy for all of the United States, particularly in all carbon-based generation of electricity.  Increasing these costs will make carbon-based energy less competitive with alternative sources, like solar and nuclear.  The benefits of this legislation will be less carbon emissions, cleaner air, less dependence on imported oil and the creation of new jobs in the alternative energy sector.

However, this all comes at the expense of jobs in the traditional energy sector, which is currently the backbone of our energy policy. It also means higher job losses in the rest of the economy due to higher energy costs.  Remember that the United States is the “Saudi Arabia of coal,” given its abundance here.

All of these uncertainties are huge, as are the stakes for a multitude of sectors.  I have been surprised by the unpredictable decisions of our legislators many times.  In addition, legislative add-ons that tack hundreds of pages onto a bill right before it comes to a vote make prior analysis nearly impossible.  Therefore, unless the outcome is almost a foregone conclusion and the details are clearly spelled out well beforehand, making strong bets on their legislative outcomes is just plain gambling.

The unemployment rate rose to 9.5% in June as the economy shed 467,00 jobs. That’s up from 322,000 in May.  Jobs are a lagging indicator and tend to peak well after the economy has peaked.  But they are the best coincident indicator of economic activity.

Warren Buffet recently said that he has not yet seen any green shoots in the economy.  Conversely, General Electric Co. (NYSE: GE) Chief Executive Officer Jeffery Immelt said that all the pieces are in place for a recovery in the United States.  Yet the only areas of strength he mentioned were abroad:  China, some areas of the Middle East and other emerging economies.

But what we can all agree on right now is that there is no inflation in sight, despite the massive amounts of quantitative easing from the U.S. Federal Reserve.  But it won’t be long before inflation does rear its ugly head.

Like the people in Germany who were deeply affected by hyperinflation, I remember living and analyzing companies in Argentina in the 80s with inflation rising at a rate of 1% a day.  It was not fun, and the distortions to economic activity and financial statements were amazing.

Although the Fed has repeatedly indicated that it is ready to remove the monetary stimuli at the appropriate moment in an aggressive-enough fashion so as to preclude an inflationary spike, neither we can be sure that the central bank’s actions will meet with immediate success.

Federal Reserve Chairman Ben S. Bernanke is very capable and his resolve gives me comfort, but as former Fed Chairman Alan Greenspan told us when he was running the central bank, there are important variables in monetary policy that the Fed cannot know for sure: Among them are the lags between the Fed’s actions and the response in the economy and the precise sensitivity of the economy’s response to the Fed’s actions.  It is like steering a large transatlantic ship while watching in the rearview mirror.  By the time you see an iceberg, the ability to reverse or alter the course is very limited.

If we observe that the level of both monetary and fiscal intervention in the economy is at historic highs, then we have to understand that applying the just doses of intervention and reducing those doses as the economy gains a “self-sustaining” pace is a very tricky exercise.  Even allowing for the best of intentions and the immaculate professional abilities of the Fed, this will be a very difficult task to pull off.  And what is self-sustaining growth, anyhow?

We also need to understand that the current reflationary policy, which was employed to prevent the country from falling into a deflationary spiral, is actually seeking to create a little inflation.  And it would be unpardonable to see the country fall back into a double-dip recession after all this intervention, should the Fed pull on the reins too soon.

In fact, the Fed and the Treasury Secretary Timothy F. Geithner have repeatedly led us to believe that they intend to see the recovery ingrained before withdrawing significant amounts of stimuli.  It makes all the sense in the world.  The logical implication is that they would rather see an unpleasant reading or two on the inflation front than see an unpleasant reading on the growth side.  It is a very difficult situation to manage and they are not perfect.

So right now, when inflation expectations are well subdued, it is a good idea to add a position in Treasury Inflation-Protected Securities (TIPS).  The easy way of doing this is by buying the iShares Barclays TIPS Bond Fund (NYSE: TIP).

All of these pending uncertainties that I mentioned are adding to the traditional summer doldrums and we are seeing very low stock trading volumes.  So we are going to take advantage of the situation to get a good valuation on these bonds well before inflation expectations pick up.

Also, adding bonds to the portfolio has a stabilizing effect.  And the two traditional worries with bonds: A drop in the value of the U.S. Dollar and an increase in inflation are actually hedged, at least in part, with TIPS.  Because inflation is fully hedged as the principal is indexed by the consumer price index (CPI) index.

Recommendation: iShares Barclays TIPS Bond Fund (NYSE: TIP)at market (**).
(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the iShares Barclays TIPS Bond Fund. ]]> http://www.contrarianprofits.com/articles/the-ishares-barclays-tips-bond-fund-is-a-good-way-to-brace-for-imminent-inflation/18728/feed 0 http://www.contrarianprofits.com/articles/investment-news-briefs-thursday-june-11-2009/17783 http://www.contrarianprofits.com/articles/investment-news-briefs-thursday-june-11-2009/17783#comments Thu, 11 Jun 2009 14:58:49 +0000 William Patalon III http://www.contrarianprofits.com/?p=17783 Fed’s Beige Book Shows Downturn Slowing; Home Depot Says Worst Is Over; ReFi Apps Slowest Since November; Senate Mulls Bigger Home Loan Tax Credit; U.S. Becomes Largest Shareholder in Citi; Rising Energy Costs Could Stunt Global Recovery; Top Economist Considering Senate Run

• The U.S. economic downturn may be slowing, but conditions remained weak in almost half of its regions, the Federal Reserve reported in its Beige Book business survey. “Contacts from several districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year,” the central bank said in the report. But the words “stable” or “stabilize” appeared in some form more than 60 times in yesterday’s (Wednesday’s) report,according toBloomberg. Many…

With that being said, the calendar this week is full of some important reports that could set the tone for the early part of next year.

On Tuesday, the Building Permits report for November is released, and is anticipated to show only a slight decline of around 8k units. I am not sure if this is simply due to the seasonal slowdown of building in northern climates, or if perhaps builders have finally found an equilibrium point with the market, but I view it as a positive sign if the number holds close to expectations.

The same can be said about the November Housing Starts report that comes out at the same time. A decline is expected, but again, it could just be do to seasonal issues (you can’t build in northern climates when the ground is frozen) rather than a worsening housing sector.

The big reports of the week are the November CPI and Core CPI figures.  Much like last week’s PPI and Core PPI reports, the Core CPI figure is expected to show a slight increase while the CPI figure will likely show a continued drop. Energy costs (oil) continue to drop, and this will be reflected in the CPI figure.

The Philly Fed report comes out Thursday morning, and it looks like reality has set in again. As I reported last month, expectations for the November report were for a rather large improvement versus October. Well not only did that not come true, but the report was actually worse than October. This month, expectations are for a slight decline.

The attention grabber this week is the FOMC Policy Statement on Tuesday. As it stands, expectations are for a huge rate cut. Currently the Fed Funds rate is 1.00%, and the probability chart shows a 65 percent chance of a cut down to 0.25%. This is especially shocking for two reasons. One is the shear size of the cut, which would be three-quarters of a percent. The second aspect is that if the cut is down to 0.25%, it leaves only one more bullet left in the gun for the Fed to cut rates.

Source: FOMC Statement Highlights The Week … Will The Fed Be Left With One Bullet?

Today, I’m going to share with you a health care investment you’ve probably never considered… one that’s set to grow in step with the aging population, returning hefty yields along with steady capital growth. Let me explain…

Today, health care accounts for 15% of U.S. spending, about $2.2 trillion. That already staggering number is set to skyrocket in the next decade as the waves of the “silver tsunami” wash ashore.

You see, regardless of how healthy you are as you age, the majority of your lifetime medical expenses – approximately 80% – will come due in the final years of your life. As you would expect, a large portion of these dollars will flow to hospitals and assisted-living centers. So, as an investor, you might be tempted to buy the companies operating these medical centers and nursing homes. It’s not a bad idea… But I’ve got a much better one…

The safest way to play this megatrend is to buy the landlords… the companies that own hospital buildings, medical offices, and other health care facilities. Here’s why…

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REITs, by law, must pay 90% of their income to shareholders. In return, these companies pay little to no taxes. Health care REITs lease their buildings to medical-service providers or “operators,” who sign 10- to 20-year leases and are responsible for all property taxes, utilities, and expenses.

So health care landlords are practically immune to rising energy costs. In addition, automatic rent escalators – about 2%-4% annually – protect landlords from inflation.

And people get sick and go to the doctor no matter what the economy is doing. That’s why medical stocks like health care REITs are the ultimate “defensive” stocks… investments that perform well regardless of tumultuous economic cycles.
Of course, the words “real estate” now make the average investor cringe… Nearly every REIT started to tumble early last year, and health care REITs were no exception. But consider this: While REITs in general have fallen another 15% in the last 12 months, health care REITs are about flat. And that’s not counting their 6% dividend yield, which is 50% higher than the general REIT industry.

Now take a look at this chart…

This plots the one-year performances of the Dow Jones REIT index (black) and bellwether health care REIT HCP Inc (blue). HCP is the market’s largest, most diversified health care REIT. And it’s led the charge into laboratory space in biotech hot spots like San Francisco and San Diego.

HCP is up about 20%, including dividends, since I introduced Growth Stock Wire readers to the idea of collecting “health care rent checks” in July last year. And it’s up 9% since I revisited the opportunity in November, while the S&P is down 4%.
HCP is one of four health care REIT recommendations I’ve made to my paid subscribers. Including dividends, we’re up an average 22% in just one year. But with America’s 60+ club adding 8,000 new members daily, I think this is just the beginning.

Good investing,

Rob Fannon
Source:The Safest Way to Profit as the Boomers Retire

Every business is affected by oil. As long as crude oil remains above US$80-$85 per barrel, I’m staying defensive in stocks. The market is slowly beginning to discount another difficult period ahead for corporate earnings.

With oil prices soaring nearly 40% in just three months, companies are going to start revising their expectations for the next 3-6 months just because input costs are squeezing margins. There is just no way earnings are going to boom in the midst of surging energy costs.

If companies are being squeezed by high oil, what about the consumer? Will the American consumer come to the rescue and support a flagging economy?

The government’s US$100 billion fiscal stimulus package is now hitting American households this month. But I’ve got to wonder what an average US$1,000 check will do to boost spending? With gas prices quickly approaching US$4 per gallon and food costs sharply higher over the last 12 months, any boost in discretionary spending will largely be directed towards energy and food, not a new car or a vacation.

The sub-prime crisis is now largely history. That’s the good news. The bad news is that a new wave of write-downs lies ahead in the consumer installment debt sector. We’re also approaching a storm for earnings expectations amid high oil prices, a protracted bear market in housing and a contraction in bank credit.

ERIC ROSEMAN, Investment Director

Source: Why I’m ‘Still’ Bearish on Stocks

The day’s economic numbers were pretty grim.

The Conference Board reported that its May consumer confidence index fell to 57.2 from a reading in April that had been revised up to 62.8 from a prior estimate of 62.3. That represents a 16-year low, and was far below economists’ expectations for a reading of 59.5. Confidence is off by nearly 50% since last July.

“With home price deflation deepening, the unemployment rate rising, and food & energy costs climbing, there’s little to buoy consumers’ outlook,” wrote Benjamin Reitzes, an economist at BMO Capital Markets. Yet the stock market rose and gold fell. Go figure.

The deflation was confirmed by Standard & Poor’s 20-city Case-Shiller home price index, which fell 2.2% from February to March, for a 16th consecutive decline in prices. Home prices in the 20 major U.S. metropolitan areas have now plunged by a record 14.1% in the past quarter.

Meanwhile, the euro got no lift from comments by European Central Bank Governing Council member Axel Weber. Weber said in an interview that rate cut speculation this year is “wishful thinking,” given high inflationary pressures and robust economic growth.

Source: Dollar Gains Against Euro

The world’s second-largest producer, Russia, is now experiencing a production decline. The Saudis can’t pump any more oil.

So forget hedge-fund speculation and the value of the dollar, that’s what it really comes down to.

And it’s why one German political party’s answer to the high oil price is, frankly, utterly absurd…

Why oil futures are vital to the world economy

Uwe Beckmeyer, transport chief for the country’s Social Democrat Party, has told the German press that his party would call for joint measures by the G8 powers to prohibit leveraged trading on energy contracts. “It’s an extreme step but it has to be done,” he said.

No it doesn’t, my friend.

So, let’s get this clear: One of the major German political parties wants to ban the futures markets in oil and related products as a way to curb prices. It is an utterly stupid and inept way of dealing with inflation and it will end up causing crises in many industries across the globe.

Imagine if airlines weren’t able to hedge their exposure to rising energy costs… any up-tick in energy prices would create a wave of bankruptcies across the sector.

Then there are the farmers. If they do not know how much they will receive for their crops, it makes it impossible to plan properly. After all, isn’t this why futures were derived in the first place?

Futures are not a high-risk investment strategy for manipulative mega-rich bankers. They are a way of REDUCING risk for people operating in the business. Ban futures trading and market risk actually increases.

It is a vital market that keeps the cogs of the global economy turning in a well-oiled and efficient manner. It also improves price transparency going forward, allowing businesses and farmers to effectively plan their finances.

It is clear that these proposals come from people who do not understand the futures market or what it is for.

Of course it’s not just the Germans acting dumb, the Indians and Americans have got in on the act as well.

India bans potato futures

The Indian government has already suspended futures trading in potatoes, chickpeas, rubber and soybean oil in an attempt to combat food inflation.

The move was derided by anyone with any sense. Not only did the ban cover four foodstuffs that made up just 1% of the country’s inflation index, but the price of potatoes has actually FALLEN 27% this year. The move defies logic on so many levels.

Even in that bastion of the free markets, the USA, politicians want to interfere.

Democratic Representative John B Larson has asked Congress to pass legislation which would prevent speculation within the sector from those who do not intend to acquire the commodities on which they bid. He argues that it is speculation that is driving the oil price, while completely ignoring supply issues.

The amount of speculation in the oil price is an unknown, but one thing is very clear…

Oil supply is extremely tight

Over the weekend, Lloyd’s Marine Intelligence reported that Opec oil shipments had fallen by 1m barrels a day in the four-week period to 4 May. Another oil pipeline in Nigeria was also blown up and a Norwegian oil rig operating in the North Sea was shut down after a leak was discovered.

What the Germans, the Americans and the Indians have to remember is that you cannot tell farmers or businesses what to sell and whom to sell to. That is a Stalinist way of running an economy that puts businesses in a straightjacket.

The derivatives markets also play a proper and important role in signalling the need to expand investment in production capacity. Vitally, it provides liquidity to hedgers.

Banning futures trading is a knee-jerk reactionary move by dumb politicians wanting to grab a headline. It is not the way to make markets work efficiently and the G8 should dismiss any proposals tabled.

I would be astonished if the US proposals were passed into law – it is just so “un-American”. Banning futures trading is an utterly preposterous idea. The only way that any limits on futures trading should be considered is when speculation becomes manipulation. This is certainly not the case at the moment.

Regards,

Garry White
Editor
Smart Commodities UK

Source: Why a Ban on Oil Futures And Speculation Will Devastate the Markets

Nickel finally found some buyers as it dipped below $10.25 and it pushed back over the $11 mark and held there, barely, at $11.0011/lb., up 42 cents. Zinc had a rollercoaster chart but with an up bias to close at $0.977/lb., up nearly 2¾ cents. Aluminum was higher for most of the day to end at $1.3458/lb., up a penny and a half, while lead fell below 90 cents on several occasions before scratching back to $0.9027/lb., down more than a penny.

Copper advanced on renewed optimism about the demand profile, long-term supply concerns, and a sinking dollar that makes it cheaper for holders of other currencies.

“The market tried to make new lows, but it seems like we are getting some profit-taking and some modest support at the bottom,” said Steve Platt, futures analyst with Archer Financial Services in Chicago. “We could be due for a little bit of a bounce after absorbing some of the negative news over the past week.”

“Copper has to be a buy here,” Ron Goodis, of Equidex Brokerage Group in Closter, New Jersey, stated firmly.

Aluminum was strong, even after worries raised by rising inventories, up more than 10% this month.

But analysts reasoned that prices should be supported by escalating energy costs, since electricity accounts for one-third of the cost of smelting aluminum. And an increasingly strained power grid in China was seen as capping future growth in aluminum output in the world’s biggest producer and consumer.

And in company news, the Sydney Morning Herald reported that, “BHP Billiton does not foresee any ‘insurmountable’ operating constraints as it works to ramp up its new $US2.2 billion (A$2.3 billion) Ravensthorpe nickel laterite mine to full production by the first half of 2010.

“After the official opening of the West Australian mine [on Thursday], BHP’s stainless steel materials president, Jimmy Wilson, told media it was running at about 35 per cent of its full production capacity of 50,000 tonnes a year.

“The technically challenging project – expected to cost $US1.05 billion when it was approved in 2004 – had been emblematic of the cost blow-outs and delays the resources industry has suffered during boom times.”
Source: Nickel Finally has an Up Day – But Production will Increase as Ravensthorpe Comes on Line