“How to earn 367% off American Retail’s “Seven-Ten Split.”

“Biggest jump in wholesale food prices in more than a year!”

– Associated Press, commenting on the Labor Department’s latest wholesale prices report

I know that Justice and I have gone on for some length now on the recent rise in agricultural prices. And I now am about to delve into that same topic – again.

By now, you are probably wondering if you have accidentally subscribed to the Farm Report. But hey – it beats another column on car companies, eh?

(Oh wait, here’s an item on cars after all. I was just perusing Chrysler’s list of doomed dealerships. No wonder they are going under: In my area, there are some 25 or 30 outfits on the list that are all within an hour’s drive of each other. Many are mere miles apart, and a few could probably throw rocks at each other on slow days. With that sort of insane saturation, sooner or later, something was bound to bust!)

And Now, Back to the Farm Report…

I have two reports on my desk right now with almost completely contradictory messages. I am talking a real “seven-ten split” here (a technical term I filched from the local bowling league).

The first lauds the fact that there was almost no drop in consumer prices in April. The Labor Department thinks that this is just peachy because it means that we are not locked in a hideous deflationary spiral.

Apparently this has been a real fear in some quarters of Washington, as over the past 12 months, consumer prices have fallen a whopping 0.7%, the largest such drop since late 1956-early 1957.

Be Careful What You Wish For

The same report also brags that there was not but so much inflation to be found either. Core prices (which exclude most everything you use on a daily basis, particularly food and gasoline) actually did rise 0.3% in April. And while this was the biggest such spike since last July, the bean counters reassure us that 40% of that rise resulted from a huge spike in the Fed’s tax on tobacco.

So far as Washington is concerned, “it’s the best of all possible worlds.”

You know, those guys in Washington really ought to re-read Voltaire’s Candide before putting out such jolly statements. By the end, the kind professor who coins that Pollyannic phrase suffers through bankruptcy, the Spanish Inquisition, the Lisbon earthquake, and syphilis.

The Dangerous Gap

Because the other report on my desk has the latest wholesale figures, and they are a tad disturbing for all sorts of reasons.

In April, we saw a 0.3% increase in overall wholesale costs. This gain was roughly three times higher than expected. Annualize this and you get a wholesale inflation rate of 3.6%. That’s more than enough to completely neutralize the 3.7% drop we’ve seen over the past 12 months.

What’s more, the actual extent of this rise has been disguised by certain internal disparities. Over that same stretch, wholesale crude oil fell 0.1%. (You could be forgiven for somehow missing this, as the refined gasoline sold to retailers actually went up 2.7%.)

The New Luxury Food: Eggs

It’s that old “non-core devil,” food, that is really soaring. Overall it went up 1.5% in April. If you annualize that, you get an 18% rate of climb. But wait – eggs alone went up some 44%. And that’s not annualized. That’s just the jump for April, making for the largest such increase in the past 17 years.

Oh, and just to dot the “I,” as it were, pharmaceuticals went up at an annualized rate of 12.6%, just as swine flu began sweeping through the nation. (What lovely people in that biz. Ah well, this is, after all a capitalist nation, and they certainly have the right to charge what the market will bear.)

The Worst of All Possible Choices

Going forward, those businesses must do one of three things. They must either lower costs further (not gonna happen), raise their prices (not gonna happen), or admit that they lost their shirts come the next round of quarterly reports (and unless something changes, that is sooo gonna happen).

A few companies that you particularly ought to keep an eye on: Sears (SHLD:NASDAQ) is particularly vulnerable to increases in cotton, wool and synthetic fabric costs, and also Safeway (SWY:NYSE), which will have to start posting “apologies” signs on the egg bins again.

You would be in good company in these positions. The former is already being played short in WaveStrength Options Weekly to the tune of 37% gains as I sit to write, with gains over 118% anticipated in the near future and a final target of 367% lurking just out over the horizon. The latter, I believe is being shorted by my cellmate, Chris DeHaemer.

Source: Costs Up, Sales Down – A Formula for Retail Disaster

The Dow Jones Industrial Average was up 26.2 points, or 0.32% as of 11:00 a.m. today (Thursday), while the Standard & Poor’s 500 Index was up 4.58 points, or 0.52%.

The surge was prompted by an increase in U.S. wholesale prices, which allayed concern over deflation. Producer prices rose 0.3% in April after falling 1.2% in March. Food prices posted the biggest gain, soaring 1.5% – enough to offset a 0.1% fall in energy prices. Excluding food and fuel prices, so-called core-prices climbed 0.1%.

The rise in producer prices accompanied an increase in import prices, which climbed 1.6% in April, the government said yesterday. Producer prices and the cost of imports comprise two of the three major gauges of inflation. The third measure of inflation, consumer prices, is scheduled for release tomorrow.

The rise in U.S. equities was further supported by a solid earnings report from Wal-Mart Stores Inc., the world’s largest retailer. Wal-Mart posted a profit of $3 billion, or 77 cents a share, in the quarter ended April 30, up from 76 cents a year earlier, matching analysts’ forecasts, according to Thomson Reuters.

Net sales for the quarter fell 0.6% to $93.4 billion, but the company blamed that decline on the negative impact of a stronger dollar, which dented international sales. Wal-Mart’s international operating income fell 16.2% to $880 million on an 11.1% drop in sales to $21.3 billion.

However, international operating income at constant exchange rates was $1.13 billion in the three months ended April 30 on sales of $26.1 billion.

“In almost every country we grew the top line faster than the market despite the strong dollar and a recession that is even deeper in some countries than it is in the United States,” said chief executive Mike Duke.

Wal-Mart’s resilience offered a modicum of comfort to the retail sector after a report yesterday showed retail sales fell 0.4% in April, the eighth monthly decline in the last 10 months. Retail sales tumbled 1.3% in March.

Retail sales have been badly battered by a sharp rise in unemployment. And data from the Labor Department today furthered illustrated the frailty of the current labor market.

Initial claims for unemployment rose by 32,000 to 637,000 in the week ended May 9, from a revised 605,000 the week prior, the Labor Department said.

The economy has shed about 5.7 million jobs since the recession began in December 2007. Payrolls fell by 539,000 in April, as the jobless rate climbed to 8.9% – its highest level since 1983.

Source: Producer Prices and Wal-Mart Results Give the Market Edge Over Weak Jobs Data

European shares hit a one-week trough on Thursday, led lower by banks, as poor corporate results and fresh signs of deteriorating global economic outlook overshadowed a compromise deal on a massive U.S. stimulus plan.

By 0949 GMT, the FTSEurofirst 300 index of top European shares was down 1.5 percent to 791.78 points after falling as low as 787.14. The index is down 4.8 percent this year after plunging 45 percent in 2008.

Banks were among the top fallers on the index, with Commerzbank falling 5.4 percent, Credit Agricole down 3.5 percent and Societe Generale declining 3.4 percent.

Energy shares were also under pressure as crude prices eased to trade below $36 a barrel — down 75 percent from a record high near $150 just seven months ago. BP , Royal Dutch Shell , Repsol and Tullow Oil shed between 0.3 and 1.3 percent.

Governments are using “historically strong medicines to try to revive a patient that is looking very weak at the moment and so far almost everything that has been used has failed to work,” said Henk Potts, strategist at Barclays Stockbrokers.

Investors hoped the measures would support in the long term, but there was a lot of nervousness before they saw the results of the U.S. government’s efforts on the economy, he added.

The pessimism over a compromise deal on a $789 billion U.S. package, which helped Wall Street shares to gain overnight, evaporated after investors scrutinised a raft of disappointing corporate results and macroeconomic data.

Figures showed Japanese wholesale prices dropped in the year to January, the first drop in five years, bringing the world’s second-largest economy closer to its second bout of deflation in a decade as the economy slipped deeper into recession.

Earnings results also hurt sentiment.

Swiss engineering group ABB posted an 88 percent fall in fourth-quarter net profit, oil major Total reported an 8 percent drop in profits due to lower oil prices and output, while banking group KBC booked a $3.4 billion loss due to writedowns.

RIO TINTO STAKE

“Asides from the stimulus package, the big news has been the large stake in Rio Tinto (RIO) being sold to Chinalco,” said Andrew Turnbull, senior sales manager at ODL Securities.

“The deal is said to be the largest overseas deal by the Chinese and really does show how desperate for cash Rio Tinto has become,” he said.

Rio Tinto will sell $12.3 billion in asset stakes to Chinalco and raise a further $7.2 billion by issuing China’s top aluminium maker convertible notes to cut debt, the global miner said. Rio shares were up 1.2 percent.

The negative market sentiment spread to other sectors such as mining, electricity, telecommunications and retail.

Miners, struggling due to falling prices and slowing demand of metals, fell again. BHP Billiton , Anglo American (AAL), Xstrata (AXTA) and Antofagasta (ANTO) fell between 0.8 percent and 3.3 percent.

Among electricity companies, Enel dropped 2 percent and Renewable Energy slipped 1.4 percent.

France’s EDF fell 7 percent after it posted a dip in 2008 core earnings, hit by a larger-than-expected 1.2 billion euro ($1.55 billion) charge related to French regulated tariffs.

Britain’s BT Group dropped more than 5 percent after its core earnings slumped 9 percent in the third quarter and pre-tax profits slumped 81 percent.

Among gainers, French carmaker Renault rose 5.9 percent after it dropped its once sacrosanct 2009 profit targets and said it would focus on cutting inventories this year.

Across Europe, the FTSE 100 index, Germany’s DAX and France’s CAC 40 were down 1.1-1.9 percent.

LONDON, Feb 12 (Reuters)

It is an interesting time for gold investors. On one hand, gold prices should be soaring as investors flee to the precious metal for security. On the other, gold’s value should be dropping precipitously as deflationary concerns gain momentum.

It is no wonder gold prices remain horizontal and the gold hedge I recently created is paying profits. Last week we cashed in for gains of up to 50%.

Some interesting reports released today will help illustrate why gold prices are acting the way they are.

First, let’s look at the demand side of the equation. Global orders for gold increased by over 120% during the third quarter on a year-over-year basis. Retail investors moved 232 tons of the metal, compared to 105 tons this time last year.

Exchange-traded funds (ETFs) significantly boosted their physical possession of gold over the past three months. Third-quarter holdings increased by 150 tons. During the second quarter of the year, they only added 4 tons of gold.

These figures are proof that global demand is soaring. But why are prices staying flat and showing signs of a serious collapse?

They want it, but we don’t

There are two answers.  For the first, we have to look at the situation here in the States. During the previous quarter, Americans demanded 20% less gold than the same period a year ago. Thanks to a strengthening dollar, American investors are shying away from gold as it typically moves inversely to the greenback.

Remember, gold is a vehicle used to protect against inflation. Right now, the American economy is anything but inflationary. The headline reading of the latest producer price index, released yesterday, showed a record 2.8% decline in wholesale prices last month. Today’s consumer index confirms the deflationary environment with a negative reading of one percent.

Deflating prices will be a major drag on gold’s appreciation. Enough American investors will be dumping their gold holdings in exchange for stronger assets to nearly offset the significant increase in global demand.

If a deflating economy is not enough to drag gold valuations down, the fact that institutional investors are abandoning the metal certainly will. The world’s largest funds unloaded 300 tons of gold recently. As they are forced to meet margin calls or as their investors cash out, institutional investors are unloading their gold holdings as the metal is liquid and, compared to their other holdings, has held much of its value.

By reviewing this information, it is easy to see why gold prices have made relatively little moves over the past three months. When prices get pulled in both directions, they tend to stay put.

Something’s gotta give

Eventually one of the forces will give and gold valuations will make a significant move. If the break is caused by a slowdown in global demand thanks to signs of economic recovery, gold prices will plunge. If it institutional sellers stop unloading while global demand is at record levels, prices will soar.

History and basic economic principles point towards falling prices so I am naturally bearish on gold’s long-term valuation. But there are plenty of folks that tell me I am wrong. As the world economy tanks and the U.S. floods the market with its currency, they say, gold price will soar.

Never one to invest unprotected, I created a hedge play that will profit no matter which way valuations move over the next year. If I am right, the bearish leg of the hedge will win. (Last week we proved my theory by cashing in gains of over 50%). And if I am wrong, the bullish side will win. No matter what, the hedge is designed to pay out profits.

If you want to learn about this unique hedge, click here.

This is an interesting time for investors. Never before have so many unique, yet infinitely strong forces, tugged at the market.

As we slowly weigh and understand all of the variables, the economic future will become clear. But for now, it is prudent to take protection and seek shelter in the opportunities that have historically provided profitable recessionary havens.

Source: The gold dichotomy: Demand rises, prices fall