• Inflation fears were quelled at least temporarily as U.S. consumer prices were raised only slightly last month, and actually experienced their biggest drop in almost 60 years. Higher gas prices contributed to the 0.1% increase in the Labor Department’s Consumer Price Index (CPI) versus the April’s CPI, which was flat. Financial markets had expected a 0.3% increase. The CPI fell 1.3% versus the same period last year, the largest drop since April 1950. “There is no sign that there has been widespread inflation because of the Fed’s quantitative easing regime. In fact, long-term inflation expectations haven’t budged and the Fed is still ahead of curve on inflation,” economic and investment strategist John Canally of LPL Financial told Reuters.

• Four of the nation’s largest banks repaid $54.7 billion to the U.S. Treasury’s Troubled Asset Relief Program (TARP), freeing themselves of government restrictions on lending and pay.JPMorgan & Chase Co. (NYSE: JPM) repaid $25 billion, andMorgan Stanley (NYSE: MS) and Goldman Sachs Group Inc.(NYSE: GS) repaid $10 billion each, Bloomberg News reported. As Money Morning’s Martin Hutchinson reported yesterday (Wednesday), the other two banks, U.S. Bancorp (NYSE: USB) and BB&T Corporation (NYSE: BBT) repaid their debts of $6.6 billion and $3.1 billion respectively. The banks are among 10 other that agreed last week to repay $68 billion in TARP funds,Bloomberg News reported. “Our strong capital position allowed us to pay back TARP in a very short amount of time,” BB&T Chief Executive Officer Kelly King said in the bank’s statement.

• Beleaguered outdoor clothing retailer Eddie Bauer Holdings Inc.(Nasdaq: EBHI) yesterday (Wednesday) filed for Chapter 11 bankruptcy protection and said it planned to sell itself to private equity firm CCMP Capital LLC for $202 million. The sale to CCMP, known as a 363 sale, means the sale needs the approval of a judge, and other bidders could emerge. CCMP is entitled to a $5 million breakup fee if it loses to a higher bidder. Court filings show that Bank of America Corp. (NYSE: BAC), General Electric Company (NYSE: GE) and CIT Group Inc. (NYSE: CIT) will provide up to $100 million in financing during the bankruptcy case,The New York Times reported. Eddie Bauer said its 371 stores in the United States and Canada are operating as usual.

• Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) options will begin trading on the Chicago Board Options Exchange (CBOE), enabling investors to bet on the company using a technique Chairman and Chief Executive Officer Warren Buffet has rejected, Bloomberg News reported. “Usually, if you want to buy or sell a stock, you should buy or sell the stock,” Buffett said last year on the weekend of the company’s annual meeting. “Using options, four times out of five you will be right, the last one you’ll miss. I’ve virtually never used options as a way to enter or exit a position.” CBOE will offer contracts on Buffet’s conglomerate starting today (Thursday).

• FedEx Corp.’s (NYSE: FDX) losses more than tripled in its last quarter, and the company said things won’t be much better in the near future, The Associated Press reported. The nation’s second-largest package shipper reported a loss of $876 million, or $2.82 per share in the quarter ended May 30. That compares to a loss of $241 million, or 78 cents per share in the same period last year. “The operating environment for our first two quarters in fiscal 2010 is expected to be extremely difficult,” Executive Vice President and Chief Financial Officer Alan B. Graf Jr. said. The company has not yet decided whether it will have to lay off more workers or make further cutbacks due to poor economic conditions, Graf said in a conference call with investors.

• Newly sold automaker Saab secured a key court ruling yesterday (Wednesday) to cut 75% of the more than $1.28 billion (10 billion in Swedish crowns) of debt after a vast majority of creditors approved the proposal, Reuters reported.  Sweden-based Saab was sold on Tuesday to fellow countrymen Koenigsegg Group ABby soon-to-be former parent General Motors Corp. (OTC:GMGMQ).

• The annual rise in gas prices entered its 50th straight dayyesterday (Wednesday) after crude prices bounced back after an initial slump in the beginning of this week, The Associated Pressreported. Pump prices are now at a national average of $2.67 per gallon. The rising crude prices and less production has added to the typical increase in demand in the late spring and summer months as more Americans take to the roads for vacation-related travel.

• After being dogged by reports of orderless days at the Paris Air Show, The Boeing Co. (NYSE: BA) finally got a $153 million order for two single-aisle planes, The Associated Press reported. But this order pales when compared to the $6.2 billion in orders already attained by rival Airbus S.A.S. Both aircraft makers are feeling the economic crunch by the worldwide recession.

• China will use part of its $200 billion sovereign wealth fund to invest in hedge funds, according to Felix Chee, who will initially run the fund. “We will have a preference for managed accounts,” he said in an interview with Bloomberg News Wednesday at the GAIM International hedge fund conference at Monaco’s Grimaldi Forum. “The platform would like a core of single-manager funds and fund-of-funds.” Chee, is a special adviser to the chief investment officer of China Investment Corp.’s hedge fund and proprietary trading effort, “It’ll be across the spectrum of strategies,” he said. “We’re looking for the best managers and a handful of fund of funds, and when I say handful I mean five or less.”

• A prominent Wall Street analyst sees the benchmark S&P 500 Index (NYSE: .INX) breaking its all-time record by the end 2012. JPMorgan Chase & Co. (NYSE: JPM) Chief U.S. Equity Strategist Thomas Lee said on Wednesday the index should surge back above 1,500, its October 2007 high in less than three years, provided the U.S. economy sees a V-shaped recovery.  “The global economy is in the midst of a synchronized recovery,” Lee said at the Reuters Investment Outlook Summit.  Lee also reiterated his year-end 2009 target of 1,100 for the S&P 500, saying the United States will likely come out of its recession some time this summer, followed by the rest of the developed world.

• Prices on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE:FRE) mortgage securities rose for the fifth day Wednesday, pushing yields down as they tracked a drop in rates on benchmark U.S. Treasuries, foreshadowing possible further declines in borrowing costs for new home-loans. Yields on Washington-based Fannie Mae’s 30- year fixed-rate mortgage bonds fell by 0.02% to 4.56% in New York trading, the lowest since June 3, according to data compiled by Bloomberg. Treasuries and so-called agency mortgage bonds rallied after a government report showed the cost of living rose less than forecast in May. The mortgage-bond yields are down from 5.07% on June 10, the highest level since the Federal Reserve announced plans to buy home-loan bonds in November.

• Applications for mortgages fell for a fourth consecutive week, with overall demand plunging to its lowest level in nearly seven months, according to a report Wednesday from the Mortgage Bankers Association.  Rising interest rates have tempered demand for refinancings and new purchase applications, as the industry group’s seasonally-adjusted index fell 15.8% to 514.4 for the week ended June 12, the lowest since the week ended November 21, 2008.  Rates on 30-year fixed-rate mortgages averaged 5.50%, down 0.07% from the previous week, but significantly higher than the all-time low of 4.61% set in the week ended March 27,Reuters reported.

Source: Investment News Briefs Thursday June 18, 2009

Martin Hutchinson says the Fed has finally starting doing its job: putting price stability over Wall Street’s demands. Real interest rates are negative. This is feeding inflation. It also means Treasury bond yields – also currently below the rate of inflation – are too low and should begin to rise again.

Martin says investors can profit from this situation with the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX).

More from Martin in Money Morning:

The statement that was issued after the policymaking meeting was somewhat “hawkish,” suggesting that the U.S. Federal Reserve is awakening to the dangers of persistent and gently rising inflation.

Wall Street was initially spooked: it had hoped for the usual bounce that follows a Fed rate cut. However, investors subsequently decided the Fed’s inaction meant things weren’t so bad after all. Actually, the inaction was the first example in several years of the Fed doing its job – standing up to the easy-money politicians and Wall Street in the pursuit of lower inflation.

The Consumer Price Index (CPI) for August registered a decline in prices of 0.1%, which observers hailed as an indication that inflation worries are at an end. But don’t you believe a word of it; the decline was entirely due to the recent fall in oil prices, which we here at Money Morning expect will one day reverse course and resume their upward march. The only question is when that will happen and what the catalyst will be to make it so.

In terms of the CPI, the “real” consumer price inflation was actually 5.4% over the past 12 months, which makes the 2.0% Federal Funds rate look pretty silly.

The same is true all over the world: Inflation rates are either well above the local bank base rates (2.3% vs. 0.5% in Japan, 12.1% vs. 9.0% in India), or are only just below them (3.8% vs. 4.25% in the Eurozone, 4.8% vs. 5.0% in Britain). Only China has inflation of 4.8% to go against a bank rate of 7.2% – just reduced from 7.47% – but China had been holding prices down with direct controls for the Summer Olympic Games, so its current inflation number is pretty dodgy.

If interest rates are at or below the inflation rate in most of the world, then it follows that global monetary policy is expansionary and inflation can be expected to increase generally.

You can’t entirely blame the world’s central banks; we have been in a credit crunch for more than a year now, and investment banks the size of Lehman Brothers (NYSE:LEH) and Merrill Lynch (NYSE:MER) getting in trouble is a pretty good indication that all is not well. However, there’s also no denying that low or negative real interest rates will tend to produce an acceleration of inflation.

The two objectives – saving the world banking system, and keeping inflation under control – are in conflict.

The market demonstrates the solution to the conflict.

On Monday the Federal Funds rate traded for much of the day at 6.0%, versus the Fed’s target of 2.0%. To get the market Federal Funds rate down towards the target, the Fed needed to inject lots of liquidity, which it did – to the tune of about $70 billion.

That liquidity increased the money supply, but only to make up for the decrease caused by bank failures and market fear, thus restoring the market’s balance and lowering the Federal Funds rate to about 3.0% by the end of the day’s trading. An interest rate cut Tuesday would simply have moved the “target” Federal Funds rate, rather than the actual rate, and would have led to more inflationary pressures without materially helping the banking system.

Indeed, one can wish that the Fed had confined itself to injecting liquidity throughout this prolonged credit crunch, keeping the Federal Funds rate level at its September 2007 level of 5.25%. In that case oil prices would probably never have soared to $147 a barrel, and U.S. inflation might have remained safely around 3.0%.

Going forward, it seems clear that next time the FOMC meets without having had about half of Wall Street disappear in the preceding week (the next scheduled meeting is Oct. 28-29), it will be tempted to announce a modest interest-rate rise, unless the U.S. economy is truly in the tank by then. Of course, the Fed would remain ready to lower rates again if a deep recession appeared, or to inject liquidity if more banks got in trouble.

That would suggest that the current sharp drop in yields on long Treasury bonds has been overdone (from 4.25% in June to 3.25% yesterday (Tuesday) morning, before rebounding to 3.49% at yesterday’s close). Thus, a rebound in Treasury bond yield – taking them significantly above the level of inflation – is called for as money is tightened and the Federal Funds rate rises.

To take advantage of such a yield rebound, you should consider the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX). This invests in short futures contracts on long-term Treasuries. It can be expected to gain as Treasury yields rise.

Source: Federal Reserve Policymakers Stand Up to Wall Street’s Easy-Money Crowd

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!