The title of this post sums up the next three weeks. This week will be filled with uncertainty, next week should bring a gradual improvement, and the last week of the month should start the reversal process.
Inflation: Its pretty much a given that the Fed will continue to raise interest rates into 2006. Of course, I would feel better with 1/2 point moves instead of the continuous dripping of 1/4 point increases.
As I have stated many times before, the inflation data that we were receiving was at best "false" information. Anytime you can "exclude" items of everyday use from inflation data, either someone is trying to hide something, or they're lying. In this case, it is probably a little bit of both.
The basic message here is that core inflation has been rising at a pace near the upper end of the Fed's comfort zone. In reality, it has been rising well above our comfort zone for quite some time. But, regardless of what warning signs you give investors (and sheep), some just will not listen.
Herding the Sheep
I didn't want to be too critical of news followers and trend chasers, so I looked up the definition of "sheep" in the dictionary. Here's what it said:
Sheep A person regarded as timid, weak, or submissive. One who is easily swayed or led.
Oh, and there are many sheep out there. For example, at the 2004 World Money Show in Orlando, when gas prices were around $1.65/ gallon, I predicted that an energy crisis was looming, and recommended that investors buy Exxon (XOM). I also said that consumers buying big SUV's would regret it, and when gas prices began to rise we would begin to see those same SUV's for sale on the side of the road, and piled up at used car lots. See, everyone has a pain threshold.
After I spoke, a veteran of over 20 years in the financial newsletter business basically told me I was wrong. He also told me that my prediction of $3-$4/ gallon gasoline would never happen because the people of China and India would go back to riding bicycles if prices ever got that high.
I learned a valuable lesson in sheep herding from this incident. Give the flock reason for hope, and when it doesn't work, give them even greater hope. Sorry, that I cannot do.
The Economy: Its pretty obvious that the hurricane's along the Gulf Coast will take their toll on the employment picture. But what is absolutely startling to me is how the media, and our politicians, allow corporate America to get away with their own version of a hurricane that is wiping out US jobs by shipping them overseas.
Why do they allow these corporations to get away with it? Its very simple, these same companies pay enormous amounts to networks for advertising, and contribute heavily to politicians campaigns.
That aside, the economy is gradually slowing as energy prices have taken their toll. If energy prices can continue to pullback from current levels, a recession can be avoided. Long term interest rates remain well below their historical norms, but rarely has an inverted yield curve resulted in anything positive.
Today's Market Action:
At best a relatively boring day (Dow +14, NASDAQ -17, S&P -2). The sell-off we have witnessed over the past few weeks was mainly concentrated in stocks that have made the most money. This is typical action at the end of a quarter. We saw a mini reversal in energy stocks as the price of crude rebounded today.
The beginning of the 3Q earnings season began yesterday. Alcoa (AA) reported earnings of 0.35 per share, beating the Street's estimates by a nickel, as operating revenues climbed 46% to $1.75 billion. Last quarter weaker aluminum prices caused a drop in revenues, but the company said that prices have strengthened recently. This explains our hidden inflation theory.
I am looking for a gradual improvement as we head into the end of the month. We will have to wait and see if today's rise in oil was a knee jerk oversold bounce. If so, oil prices may begin their second leg down, and this would be very positive for the overall market and the economy.
PS
I want to side step the sheep herding media to give you a dose of reality. My stepson who was a decorated war hero in Fallujah, Iraq, went to work for his former Sergeant Major as a contractor in New Orleans recently. He said that New Orleans (now) is as dangerous as it was in Fallujah . He said that gun shots are still being fired at contractors, and they were desperately looking for people to work.
When they encountered some of the people still living in New Orleans, he said they had their hands out saying help me. When they were offered them work at $200/ day, the people with their hands out declined. They also saw a sign at Burger King offering a $6,000 signing bonus for anyone who would work.
Why isnt this being reported on the news?
