Sterling Weekly for the Week of October 17th, 2011 – Time to Start the Inflation Watch

Sterling Weekly for the Week of October 17th, 2011
Time to Start the Inflation Watch

Since the previous edition of the Sterling Weekly the Dow Jones Industrial Average rose 483.62 points or approximately 4.4% to 11,397.00 Over the course of the last 2 weeks the overall market staged a fairly impressive rally with the Dow Jones climbing from a closing low of 10,655.30 set on October 3rd to a closing high of 11,644.49 on October 14th, for a gain of 989.19 points or approximately 9.3%. Despite this strong move higher, I have been commenting in my daily blog that I have been skeptical that it would continue much past its current levels, let alone reach the highs of the summer. I have continued to maintain that I thought the overall market was in a sideway’s trading pattern with a slight downward bias. While I could easily be proven wrong in the next few days on that opinion, the light volume in the market has been causing me a lot of concern, and until I see a volume confirmation I am going to be skeptical of any breakout.

The economy continues to be a major topic of conversation for most of the country. The European Debt Crisis continues to be a major talking point and news item. However, I have serious concerns that the European Crisis while very severe in nature is also distracting us from our own economic problems here in the United States. Our economy has stagnated as a businesses adopt a defensive posture over concerns about rising regulatory costs and general uncertainty. Additonally you do not need to talk to anyone in business for too long before they start to voice concerns about rising inflation as a result of the sky-high budget deficits being run by the Federal government.

I have constantly stated that I believe inflation is a cancer that eats away at our assets and standard of living. Inflation numbers are due to be released this week with the Producer Price Index ‘PPI’ being released on the 18th, and Consumer Price Index ‘CPI’ being released on the 19th. In looking at the available information, which can be found below, the year over year change in the PPI is running at just over 6%, and the year over year change in the CPI is just under 4%. With the exception of 2007, this will be the highest inflation rate since 2007. Inflation is a very damaging thing to have in the economy. I remember the economic pain of the 1970’s and it wasn’t a fun time, and the inflation we are experiencing now is causing real pain.

In case you think I am barking at moon or crying wolf, I took a look at our current expenses and compared them to five years ago. In our household we have seen a 40% increse in our cost per kilowatt on our electric bill, making our utiltiy bill our second largest monthly expense after our house payment. We’ve seen our home and auto insurance rise a nearly equal amount; and gasoline having risen from $2.195 a gallon five years ago this week to $3.41 per gallon for an increase of $1.236 a gallon or 56% Additionally as my wife constantly reminds me, our weekly food bill has risen quite dramatically. These are real expenses that hit every American; and those with lower incomes take the hit the worst. The unfortunate reality is that when incomes fail to keep up with the rising inflation, consumers are forced to cut back in other areas. This hurts the economy and slows economic growth. Eventually interest rates will rise in response to rising inflation. When they eventually do the economic pain will be worse.

Unfortunately when I look to towards the future I do not see any changes being implemented in the near future to deal with what I view as a rising inflationary problem. President Obama and the Congressional Democrats are comitted to full throttle spending and sky high deficits along with tax increases that are only going to worsen the problem; and the Bernanke is doing his best to repeat the mistakes of the Gernan central bank between the two World Wars. I expect that a year from now, the inflation rate will be higher than it currently it is and the economy will be entering another recession. As for the stock market, rising inflation and high interest rates reduce the Price to Earnings ‘PE’ multiple of the market; basically a lower stock market.

It should also be noted that we have entered a period of such malaise that we now consider what used to be rotten economic numbers to be something to cheer about and be excited over. Just think of jobless claims numbers to be released on Thursday. A few short years ago we would have thought 400,000 in new jobless claims would be a disaster, now we consider them good news.

Finally, in the September 26th, 2011 edition of the Sterling Weekly I commented on where I thought interest rates would be with higher inflation. If the economy is not doing well now, what do you think higher interest rates will do?

Sterling Calendars for the Week of October 17th, 2011
Economic Calendar
Date Est.
Release For Consensus Prior
10/17 8:30am Empire Manufacturing Oct. (4.0) (8.82)
10/17 9:15am Industrial Production Sep. 0.2% 0.0%
10/17 9:15am Capacity Utilization Sep. 77.5% 77.3%
10/18 8:30am Producer Price Index ‘PPI’ Sep. 0.2% 0.0%
10/18 8:30am Core PPI Sep. 0.1% 0.1%
10/18 9:00am Net Long Term TIC Flows Aug. N/A $9.5B
10/18 10:00am NAHB Housing Market Index Oct. 15 14
10/19 7:00am MBA Mortgage Index 10/15 N/A 1.3%
10/19 8:30am Consumer Price Index ‘CPI’ Sep. 0.3% 0.4%
10/19 8:30am Core CPI Sep. 0.2% 0.2%
10/19 8:30am Housing Starts Sep. 595K 571K
10/19 8:30am Building Permits Sep. 610K 620K
10/19 10:30am Crude Inventories 10/15 N/A 1.344M
10/19 2:00pm Fed’s Beige Book Oct.
10/20 8:30am Initial Claims 10/15 403K 404K
10/20 8:30am Continuing Claims 10/08 3,690K 3,670K
10/20 10:00am Existing Home Sales Sep. 4.92M 5.03M
10/20 10:00am Philadelphia Fed. Oct. (8.8) (17.5)
10/20 10:00am Leading Indicators Sep. 0.3% 0.3%

Sterling Market Commentary Blog

As part of our new services we are now publishing a blog. The primary focus of our blog is a daily market commentary. Over the course of the last 12-18 months there have been a lot of changes to the functioning of the stock market. One of the biggest being the growth in computer driven algorithmic and flash trading. While this form of trading serves to help increase the liquidity in the market, it has also dramatically changed the nature of the open of the market; specifically in my opinion it has dramatically increased the swings in the pre-market futures to the point where the expected open could change completely in the last 20 minutes prior to the open. While I still believe it is possible to engage in the form of short term trading I wrote about in the Prime Stock Newsletter, I no longer felt it was possible to publish the Prime Stock Newsletter with enough time prior to the open for it to be of meaningful value to our readers. As a result we have discontinued the publication of the Prime Stock Newsletter. Additionally I have decided to continue to write the daily commentary portion of the Prime Stock Newsletter as the main part of the Sterling Market Commentary Blog, making it free to the general public.

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