The Impact of Rising Prices on Consumers and Producers

By: Paul_J_Nolte

The litany of banks surrendering to the siren call of raising additional capital expanded again last week, in addition to various write-downs from some of the money center banks put the market back on its' heals for the week and opened the door to yet another “test” of the January/March lows. While energy prices have been blamed for the declined last week, in fact oil prices have declined in each of the past two weeks. The inflation reports continue to run uncomfortably “hot” as energy and food prices impact both the consumer and producer prices.

There seems to be a lack of ability of companies to pass along all the price increases, as producer prices are rising faster than consumer prices. While we expect inflation reports to look ugly over the summer, we also expect a decline into the winter as the economy struggles to get footing. Manufacturing remains very weak, with the auto industry shutting production, overall industrial production falling and oh, by the way housing still can not catch a break as mortgage rates remain at or above year ago levels. We'll see both new/existing home sales this week – given the already weak reports from home builders over the past few weeks, it will be a long hot summer for housing and related industries.

Usually the markets look a few months into the future and begin to discount the news – either good or bad. However during the last few weeks the markets seemed to be held hostage to the news of the day – from a bank raising capital to a rise/fall in oil prices. The past four weeks have been tough on stocks, as they have declined by over 7.5% indicating more than the impact of oil or banking issues. Volume figures are also beginning to expand on the decline, indicating that the SP500 is likely to head for 1270 (from current 1318) that marked the lows of January/March.

If there is any good news in the decline, many of our indicators are beginning to approach levels that generally see an improving market. While Without a turnaround early next week, we expect a decline into the lows, a rally back toward 1325 that should determine whether the “test” is a success or we will finally break the 2008 range and begin a decline toward the low 1200s in the SP500. The combination of lower bullishness in the markets and better overall valuations make the 1200 range much more conducive to a good long-term buying opportunity in stocks. 

The bond market may be finally done with the two-month decline in prices (increases in yields) as one report we look at is indicating excessive bearishness among bond investors. While our bond model does not yet flash a buy signal, we are beginning to watch it closely for a likely turning point, especially in the face of lower stock prices. One other feature we are seeing is a definite flattening of the yield curve, once nearly 3½-percentage point difference between 13 week and 30-year bonds, today is nearly a full percentage point narrower. While we don't expect it to go completely flat, it is indicating an increasing sense of recessionary fears among bond investors. A key feature of this week will be the Fed meeting, which we expect rates to be unchanged, however comments about the economy are likely to move both the stock and bond markets.

By Paul J. Nolte CFA
http://www.hinsdaleassociates.com
mailto:pnolte@hinsdaleassociates.com

Copyright © 2008 Paul J. Nolte - All Rights Reserved.
Paul J Nolte is Director of Investments at Hinsdale Associates of Hinsdale. His qualifications include : Chartered Financial Analyst (CFA) , and a Member Investment Analyst Society of Chicago.

Disclaimer - The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

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