The core inflation rate, however, which excludes volatile food and energy prices, only rose 0.2%, easing fears that rising commodity prices would feed into more widespread inflation

But can the government’s inflation data be trusted? John Brown in The Daily Reckoning doesn’t think so…

Perhaps, the greatest area of concern about statistical manipulation is the measurement of inflation, or Consumer Price Index (CPI). By manipulating this single statistic the government can miraculously transform rising prices into economic growth.

The Department of Labor has set so-called “core” inflation, excluding food and energy, at 2.2%. Even “headline” inflation, including food and energy, is published officially at only some 4%. The problem is that these figures bear very little relation to the reality of price increases experienced on Main Street, which some estimate to be in excess of 10%.

Statisticians assign different weights to the elements comprising the CPI that are often not reflective of the spending habits of ordinary citizens. For example, housing maintenance (including heating oil), a major expenditure, is given only a small part in the Index’s makeup. In addition, the re-pricing of items such as automobiles to allow for added “hedonistic” features such as enhanced “value for money” is wide open to varying judgments. How these statistical decisions are made is really anyone’s guess. But it is absurd to assume that the government’s overwhelming interest in reporting low inflation does not influence the final numbers.

The financial consequences for investors can be severe. For example, the Dow Jones Industrial Average Index, against which many investment returns are measured, closed at a nominal high of 14,093 on Oct. 12, 2007. The media reported it as a sign of good things to come. On May 23, 2008, the Dow closed at 12,480 – off a bit, but apparently not too bad. But if that day’s close is adjusted for the official CPI, then it’s not worth 12,480, but only 9,856 when compared with its previous market cycle high, of 11,723, in the year 2000.

Worse still, if adjusted for the more likely but still conservative inflation rate of 8%, the recent close of 12,480 becomes the equivalent of only 6,742 in the year 2000. What looks like a nominal gain of some 757 points or 6.4% is, in fact, a real loss of 4,981 points or some 42% over those eight years!

I visited the musical town of Salzburg, Austria in 1988. That was 20 years ago. The memory I have of Salzburg is one of music. I recall seeing a lot of young people walking around with musical instruments in black cases.

Salzburg is where the famous Wolfgang Amadeus Mozart was born in 1756. This quaint city is also the home of the Universitat Mozarteum Salzburg set up in 1841 which trains musicians, amongst other things.

But, 20 years later, I walked the cobble-stone streets and – there are no musicians. Maybe they are on holiday. Maybe, over the 20 year period, they all became bankers with CFAs and MBAs. Maybe some of them set up hedge funds. Maybe they all started buying Indian stocks and became rich and bought villas on the lakes in Austria.

Investing in India: ending on a bad note

But wait a minute that cannot be possible. If all the musicians in Salzburg had become investment managers with investments in India, I don’t see them on the streets of Bombay either!

And, more importantly, I don’t see their money sloshing around the Indian stock markets anymore. Alas, what is true of the musicians turned investment managers from Salzburg is true of many of the foreign investors.

Since CY 2003 (see Table 1), they have been buying approximately USD 10 billion worth of shares in the Indian stock markets. And their buying drove the markets wild. And more wild.

Then in a mad frenzy between mid-September 2007 and mid-October 2007, the foreign investors pumped in USD 6 billion. Pause and review that number.

From an average of USD 0.8 billion of buying every month (a 5 year average), they bought USD 6 billion in one month. That is 8x the normal monthly inflow.

But the music stopped – it must have been the cold winter and the desire to stay home huddled up in blankets. Heating oil is expensive these days.

In January 2008, the foreigners sold USD 3 billion. They bought small amounts since then.

But now in May they are out of the door again – the foreign investors probably sold USD 800 million worth of stock. And the Indian markets are not in the best of health.

Investing in India: tired of waiting

So I asked a few foreign investors: don’t you like India any more? “How can we like it”, exclaimed one investor, “the Indian market has done nothing.” “It is the worst performing country in my portfolio”, yelled another, “I am tired of waiting.” And we are not even in a bear market.

It seems like it has been many years since foreign investors could not get enough of India. But – as Table 1 indicates – it was only a few months ago when the foreign buying of Indian stocks was 5x the buying by local mutual funds.

For every one rupee the local Indian put in the market via the mutual funds, the foreign investor pumped in five rupees. The poor Indian investor is still putting his money in but the foreign investor is tired of waiting and is heading home with the cash.

The price of a share is determined by many factors, some of which are:

1. The business prospect of the company – how profitable is it likely to be?
2. Does a company borrow from banks or issues more shares to fund its growth?
3. Will the managements of these companies share the wealth they create fairly with the non-family members (what we call “minorities” – the people like you and me who don’t run the companies but are shareholders)?
4. Are there many IPO’s about to hit the market – will the supply of shares increase?
5. Is there anyone willing to buy the shares – is there a demand for shares?

Well, by the sounds of the noises made by some foreign investors I spoke to, the demand for Indian shares seems to have dried up.

That is not to say that India is bad; or that the Indian businesses will do badly; or that Indian managements are not worthy of investing in (some definitely are to be avoided – but that is a global phenomena!).

All that it means is that the foreign investor is not buying because he or she is not buying. Like the spouse who says: “abhi mood nahin hai”. That is also – by the way – a global phenomenon.

Investing in India: keep at it

No one has a clue when the foreign investors will come in. Or what will make them jump back into India.

Just like no one has any idea why they pumped in USD 6 billion into the Indian stock markets in September/October 2007. Or sold USD 3 billion in January 2008.

And no one has any idea when India will no longer be the worst performing market in someone’s global stock portfolio. You should not worry about it. Don’t brood on it.

Keep on buying into shares you like or mutual funds you like (have you made an investment in Quantum Long Term Equity Fund? You should consider it!).

Don’t borrow money to invest. Don’t try to hit “sixers” – or you will be bowled out. Just go for the steady batting. A regular rhythm of strokes, taking every ball as it comes. Seek professional help to confirm what you are investing in matches with what you should be investing in. India is on sale. And it may be for some more time, who knows.

As we head into the Memorial Day weekend, Tom Kloza, chief oil analyst at the Oil Price Information Service, toted up the cost: “It looks as though we’ll pay about $1.5 billion to $1.6 billion each day during the four-day Memorial Day weekend, and that adds up to $6 billion to $6.4 billion in U.S. motor fuel expense,” he said. “That compares with about $2 billion for the total Memorial Day weekend six years ago.”

With consumers paying about $1 billion more each day for gasoline than they did six years ago, Kloza said, “You really wonder how much the U.S. consumer can take.” And he added that the “more insidious increases are in the diesel segment … A back-of-the-envelope extrapolation would put diesel and heating-oil costs at about $807 million per day currently vs. about $217 million six years ago.”

Net result: “We are seeing numerous bankruptcies among small and mid-sized trucking firms with more to come,” Kloza forecast grimly.

Source: Oil Back on the Upswing – Small Truckers Going Bankrupt.

The day’s focal point was the weekly inventory report from the Energy Information Administration. Crude inventories rose 200,000 barrels for the week ended May 9, the EIA said.
Gasoline supplies fell more than expected last week, the EIA report showed, down 1.7 million barrels, while distillate inventories, which include heating oil and jet fuel, climbed 1.4 million barrels. But the refinery utilization rate stood at 86.6% of capacity last week, up from 85.0% a week earlier.

“Although the DOE numbers were slightly disappointing to traders’ estimates, we still had a build in crude supplies and perhaps more importantly, saw a large increase in refinery utilization rates,” said Thomas Hartmann, of Altavest Worldwide Trading.

“We’ve seen the crack spread widen materially in the last two weeks, which should encourage more gasoline production over the coming weeks as refiners see better profit margins,” Hartmann added.

Source: Crude Backs Down