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A Little Inflation Won’t Hurt

Investor’s first read      - Brooksie’s edge before the openFriday, March 16, 2012        9:02 a.m. ETDJIA: 13,252.71     S&P 5400:  1402.60The economy has managed a

Investor’s first read      – Brooksie’s edge before the open

Friday, March 16, 2012        9:02 a.m. ET

DJIA: 13,252.71     S&P 5400:  1402.60

The economy has managed a recovery since the recession ended in mid-2009. At times, a double-dip looked possible, only to yield to rebounds in the numerous sectors following the worst setback since the 1930s.

It did this without help from the housing sector, which with sagging prices and a plunging perception of personal wealth by homeowners, was actually a drag on the recovery.

But, as I alerted readers on December 19, “BIG Week: Economic Reports –Watch Housing… this vital sector of the economy is overdue to contribute rather than inhibit growth. I sense it will be an important contributor in 2012.”

February home sales jumped 35%  vs. a year ago in our region of North Carolina. That number is most likely distorted somewhat  by the fact year ago sales were still depressed by the expiration of home buyers’ tax credits in June 2010.

A LOT OF ANALYSIS BOILS DOWN TO COMMON SENSE.  Housing is about as basic to one’s daily life and needs as food.  The cycle has to reverse – has to ! And with mortgage rates at these levels and house prices depressed as much as they are, it’s a no brainer – BUY.   However, it  has similarities with the stock market.  At bottoms, many buyers feel prices can go lower or once prices start to rise, they feel the prices will come back down. Eventually, they make the plunge (as the individual investor will in the stock market this time) at much higher prices.

HOUSING WILL have a big impact on the economy this year taking a simmer to the boiling point over the next 12 months.

(For your notebook:  When possible, always look at the raw data when given percent changes or averages to detect potential distortions).

Should we worry about INFLATION ?

The CPI was up 0.4% in February vs, a gain of 0.2% in January (Core was plus 0.1% vs 0.1% in Jan.).  Expect the doomsters to harp on the potential for soaring inflation now that they are seeing their other talking points vanish.

We  witnessed deflation in the stock market between 2007 and early 2009, as well as in the prices of houses –  are people going to worry about a little inflation now ?

Initially, investors will worry about inflation, because they will fear it will force the Fed to tighten credit.

But stock markets have coexisted with inflation  for years before it triggered a sustained market decline.

Here’s another common sense issue. With “safe haven” investments ( yielding next to squat), will investors opt to continue to take a beating vs. the rising cost of living, or will they switch to stocks in search of an investment that will offset the reduction in the buying power of their investments ?

The doomsters will play this card, and be able to orchestrate  enough fear to ensure a following, but we have a long way to go before inflation rules.

CONCLUSION: A slow start is good.  Big opens seem to attract too many scalpers. I suspect a lot of investors are scrambling to find “buys,” fearful that the train has left the station.  At some point, could be now or months from now, money will  stampede out of “safe havens” and go into the stock market.

ECONOMIC REPORTS:  The stock market doesn’t always march to the drumbeat of the economy.  This time around, the intensity of the economic recovery is critical to a further extension of the bull market that started three years ago.  This recovery must continue to gain traction, even accelerate to offset the drag of a slowing international  economy if the market is able to move higher.


Retail Sales (8:30 a.m.) February Retail Sales posted a solid 1.1% gain with gains in 11 of 13 categories. Autos were strong.  This comes on the heels of a 0.4% advance in January after no gain in December as a result of a slowdown in auto sales.

Business Inventories (10 a.m.) January Business Inventories increased more than projected, rising 0.7% on top of a 0.6% rise in December. Economists expected a 0.5% rise.  The increase is mostly attributed to  an increase in auto production in anticipation of  increasing sales.

FOMC Meeting (2:15)  Rates  remained the same, no mention of QE3.


MBA Purchase Applications (7 a.m.) Measures application for mortgages with lenders. Apps jumped 8.4% for the week ended Feb. 24.

Import/Export Prices (8:30 a.m.) Imports rose 0.03 in Jan., The numbers were goosed by petroleum prices.


Jobless Claims (8:30 a.m.)  Just in: Down 14,000 to 351,000, a good number.

Producer Price Index (830 a.m.)  Up 0.4% in Feb. vs. a 0.1% rise in Jan.  However, core PPI was a plus 0.2% in Feb. vs. a 0.4% in Jan.

Empire State Manufacturing Survey (8:30 a.m.) The index of this regional survey of business rose sharply in February to 19.53 the best reading in 18 months.  March came in even higher at 20.21.

Philly Fed Survey (10 a.m.)  March’s index it an 11 month high with a jump in the  to 12.5, well ahead  of the projected 12.0, following a 2.9 points jump in Feb., reflecting good business activity in the Mid-Atlantic manufacturing area.


Consumer Prices (8:30a.m.)  January CPI rose 0.4% following a 0.2% rise in January, following no change in the prior two months.

Industrial Production (9:15 a.m.): Was unchanged in Jan.  after a 1.0% increase in  Dec.Monthly reports have varied. Capacity utilization has trended up six out of the last seven months.

Consumer Sentiment (9:55 a.m.) has been on the rise since August. It will be interesting to see if rising gasoline prices can reverse sentiments.

George  Brooks


The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.