2011Feb27 Climbing a Wall of Worry

 

The stock market loves to climb a wall of worry. The general trend in stocks continues to be higher despite increasing concerns over inflation, debt, global conflict, rising interest rates and oil prices, continued housing and job issues, and a variety of other worries. With growing concerns that are just enough to make investors doubt the sustainability of the recovery (but not rising to the point of actually derailing economic expansion), sentiment conditions remain relatively benign and have improved following the selling that accompanied increased violence in Libya.

 

Inflation: "A nickel ain't worth a dime anymore." ~ Yogi Berra

 

The rate of inflation is a hot topic these days both domestically and internationally. Much of the unrest in the Mideast is driven by unemployment and the rapid inflation in food costs. PIMCO recently released a commentary on their inflation outlook, here is their summary:

 

 ·         We expect popular measures of inflation to show modest increases in price levels this year from last year.

 

·         Masked behind these seemingly benign near-term increases in inflation are a number of longer-term factors that we believe could actually result in undesirably high rates of inflation in the not-too-distant future.

 

·         Higher rates of increases in food, energy and other commodity prices are leading to a divergence between the core rate of inflation that the Fed focuses on and the headline rate that includes food and energy prices and actually affects consumers.

 

That's a pretty calm way of saying 1) inflation is going up, especially if you eat or drive, and 2) it could get out of control. We have been telling you that inflation has not yet been an issue in the US because of the massive private sector deleveraging. This remains true today. We are watching vigilantly for any signs that inflation is getting a foothold in our economy. The Fed has stated steadfastly that inflation does not worry them at all and can be handled with ease and speed. We are not nearly as confident in their abilities.

 

Oil: "Kilometers are shorter than miles. Save gas, take your next trip in kilometers." ~ George Carlin

 

First Tunisia was stricken with political unrest and investors barely noticed. Then Egypt suffered through a revolution which initiated a change in leadership, and the markets offered a collective yawn. Now Libya faces mass protests and traders are on edge. So what's different in this case? One word...OIL.  

 

Libya is the first major oil producing state to encounter the violent turmoil that threatens a major shift in power (and hopefully a chance for real democracy?). It produces 1.6 million barrels of oil a day and crude prices surged in the immediate aftermath of the revolution on fears of a production slowdown. In fact, crude pushed past $100/barrel for the first time since 2008 and now analysts worry about the impact on gas prices, and ultimately inflationary pressures both in the United States and abroad.

 

Fortunately, the US imports less than one percent of its oil from Libya, and Saudi Arabia has already stepped up to increase its daily crude output to help compensate for any lost supply.

 

For each ten dollar increase in the price of a barrel of oil there will be about a twenty five cent increase in the price of a gallon of gas. This well increase Americans spending on energy by about twenty five billion dollars with a .2% decline in the economic growth rate. Will the price of oil be a game changer? It bears watching.

 

Manufacturing: "Reports of my death have been greatly exaggerated." ~ Mark Twain

 

With the constant reporting of the departure of all US manufacturing, it is important to take a look at the facts of the matter.