Prices Surging!

Just when Wall Street cheerleaders were chanting about “low inflation,” they got smacked with this morning’s report on producer prices (PPI).

They were expecting a one-month rise in the “core” PPI (minus energy and food) of just 0.1%. Instead, they got hit with a rise of FOUR times greater — 0.4%.

They were also counting on a one-month rise in the overall PPI (all items) of only 0.5%. In reality, prices rose TWICE as fast, jumping a full 1.0%.

Compared to one year ago, the signs are even more ominous. The last time core prices surged this much was in November 1995. And the last time they surged by a higher rate was way back in 1991!

So much for those who have been saying that it’s all driven just by energy! The truth is inflation and the producer level hasn’t been worse than this in nearly a decade and a half!

But despite all their cheers, chants, jumps and stunts, the game is still tied.

Looking at the Big Board score of the last three years, we can see that the Dow is still in flatland … the Nasdaq is still FAR from mustering a recovery from the tech wreck … and the S&P is no higher today than it was six years ago.

Bottom line: Most sectors are flat or down; most investors, disappointed or disgusted.

The Few Winners

So who are among the only ones making consistently good money?

Answer: Precisely those who have been betting on the opposite side of Wall Street’s cheerleaders … and on the right side of the one single force that’s now doing the most damage to the stock market inflation.

Inflation, the little monster that everyone thought was gone, is back with a vengeance.

The great fear now emerging on Wall Street: Inflation isn’t just rising it’s spreading! THAT’s why the market and the entire nation were so spooked yesterday. Consider, for example, this morning’s FRONT-PAGE article in the New York Times …

ECONOMY SHOWS
SIGNS OF STRAIN
FROM OIL PRICES
___________

INFLATION SURGED IN JULY
__________

Companies and Families
Are Seeking New Ways
to Trim Their Costs
___________

    … After absorbing the burden of oil at $40 a barrel, then at $50 and beyond, consumers have started to react as prices have risen above $60 in recent weeks.
    Wal-Mart blamed high oil prices yesterday as it reported that in the recent quarter its profits rose at their slowest rate in four years …
    Airlines have already felt the sting of increasing jet fuel costs. Last week, Delta, United and Continental raised domestic fairs in an attempt to stem losses; Delta is struggling to avoid bankruptcy …
    Across the country, families are trying to figure out where to cut corners …

All this should come as no surprise to you. It’s precisely what we’ve been warning you about all along.

You heard it here from me many times especially when we talked about how it would drive up interest rates. Now, expect even sharper rate increases.

You heard it here from Larry Edelson when he told you, week after week, how inflation in natural resources could make you a not-so-small fortune in oil, gold and related investments. Now, while oil is correcting a bit after its giant surge, gold and other metals are jumping still further. Copper for September delivery hit a high of $1.738 per pound yesterday, setting a new, all-time record. Gold futures closed up another $3.90, at $451.50 an ounce.

And you heard it here from Tony Sagami when he explained, repeatedly, how rising fuel and materials costs were becoming the common refrain of companies like American Woodmark, Cooper Tire, Docummun, Masco, Proctor & Gamble, Sarah Lee, Tyco. Now, add Wal-Mart to the list.

Larry, please give us the latest …

Oil Correction
Coming Soon
by Larry Edelson

Even the strongest bull markets don’t go straight up. They often stage temporary price corrections to cull out the weakest bulls … and trap the most brazen bears.

That’s precisely what I think the oil and gas markets could do very soon.

I don’t know if it will start today, tomorrow, or the next day. Nor can I pinpoint exactly how sharp it will be. But what I do know is this: Any price correction, big or small, could be one heck of a buying opportunity.

That’s why I want you to keep your ammo dry, and be fully ready to pull the trigger when my signals scream “buy” again. Here’s what I recommend in the meantime …

First, if you own any of the core energy recommendations in my Real Wealth Report or Martin’s Safe Money Report, stick with them. Those are long-term positions designed to get you some nice capital gains … and in many cases, nice dividends or royalty income.

There’s no need to dance around a correction with these positions. Hold them for the long haul.

Second, if, for whatever reason, you don’t own any core energy recommendations yet, then use the coming correction as your window to get in. On this particular move in oil, I think it could be the last and the subsequent surge, the biggest.

Third, wait for my signal to pull the trigger on my next option trades. When I told subscribers to take their first round of profits, my first three recommendations in Energy Options Alert were up 48% … 52% … and 161% in less than two weeks.

The fact that high gasoline prices are biting into the economy right now is precisely the symbolic sign I’ve been looking for to signal a correction in oil. But as Tony told you yesterday, this also comes hand in hand with the fact that consumers are NOT cutting back on their gasoline consumption. That’s the sign that the oil and gas boom are far from over!

Oil Hits Wal-Mart!
Now Ask Yourself:
Who’s Next?
by Tony Sagami

Wal-Mart blaming higher gas prices for cutting into its Q2 sales is not the big news. The big news is that their CEO Lee Scott admitted yesterday the worst may be yet to come.

Wal-Mart now expects Q3 earnings to fall somewhere between 55 to 59 cents a share, which is below the 57 to 62 cents a share Wall street was expecting.

Oil is actually killing Wal-Mart on two fronts.

Its bread-and-butter customers are spending so much on gas that they have very little left over to spend at Wal-Mart and …
The cost of operating its trucking fleet and air conditioning its stores is going through the roof. According to the company’s CEO yesterday, “this impacted our operating profit by $30 million and our total utility expense rose by $100 million in the quarter.”

Rising interest rates are also taking a toll. Approximately 50% of Wal-Mart’s $33 billion of debt is adjustable or floating rate debt, which means that its borrowing costs will rise and fall with interest rates.

How much? Wal-Mart saw its overall borrowing costs rise by 5 basis points in Q2. And before you pooh-pooh 5 basis points, just remember that it translates into $165 million dollars on $33 billion of debt.

Plus, there are all sorts of other lessons you should take away from the Wal-Mart report:

Lesson #1. If you place any credence whatsoever (and you should) on the notion that Wal-Mart is a barometer of the economy, you should be very worried that our consumer-driven economy may run into some big trouble in the not-too-distant future.

Lesson #2. If you’re hoping that’s going to pull down inflation and interest rates, don’t hold your breath. It’s going to take a heck of a lot more than slower consumer spending to make a dent in that category.

Lesson #3. The Jack-and-the-beanstalk crowd doesn’t think that $60 oil is a problem, but the people at Wal-Mart know different. Every extra dollar Americans spend on gas is a dollar that they don’t spend at Wal-Mart or Marriot or Albertsons or Sears or P.F. Chang’s.

Look, we’re not talking about a Mom-and-Pop store at a strip mall. We’re talking about Wal-Mart, a company so big that it gets one dollar out of every seven retail dollars in the U.S.

So do not ignore this Wal-Mart warning.

If Official Inflation in July Was Jumping,
The REAL Inflation in July Was Soaring!

Sure, the Labor Department reported a 0.5% increase in the Consumer Price Index in July, above the 0.4% that Wall Street was expecting.

But remember the out-of-sight, red-hot housing data I showed you yesterday? Compare that to this little data point, and you will laugh … or cry.

According to this CPI report, housing prices, which account for 40% of the CPI, increased by only 2.9% over the last 12 months.

That’s right! Just 2.9%. That’s what the government expects you and me to believe.
But that’s not what the National Association of Realtors (NAR) told us on Monday when it reported that the price of an average home in the last 12 months rose by an average of 13.6% the fastest increase in history.

Whom are you going to believe? The government’s 2.9% number or the NAR’s 13.6% number?

I don’t have to say this because it’s obvious. But I’ll say it anyhow: The government inflation numbers are a joke, and anybody dumb enough to believe them needs to have their head examined.

By the way, as inaccurate as the CPI numbers are, the 0.5% increase leaves little doubt that the Fed will raise its interest rates AGAIN when they meet in September.

PC Woes Infect
Gateway Results

Gateway released its first quarterly profit in more than three years, but just like Dell it painted a very disappointing picture of life going forward.

The company reported a $17.2 million Q2 profit. BUT … $15.1 million of that were the proceeds from a legal settlement with Microsoft.
It lowered its Q3 profit forecast from 15-17 cents to 11-13 cents and its Q3 sales forecast to $3.9-$4 billion from $4-$4.25 billion.

And by the way, a whopping 73% of the small profit Gateway did make came from everything BUT PC sales.

What’s the problem? It’s the same simple formula I’ve been talking about since before the tech wreck …

competition + excess capacity = shrinking profit margins

Their own words: “We had to contend with gross margin pressure in all of our major business units in the second quarter due to competitive pressures.”

Plus, here’s a little timely coincidence: Yesterday’s inflation report showed that computer prices actually fell 1.5% in July (the third consecutive monthly decline) and are 16% cheaper today than they were 12 months ago.

Do you want to be in a business that’s suffering from chronically and rapidly falling prices? Not me! Nor would I want to invest my hard earned money anywhere near that business.

Gateway’s warning is another one that shouldn’t be a surprise to you. Not only have I been warning you to stay far away from the PC business Dell, Gateway, and Hewlett Packard you heard a similar tale of woe from Dell last week.

And, again, the worst is yet to come.

If You Want to
Lose Money,
Follow the Crowd

Two professors, Lamont and Frazzini, have found that individual investors following the crowd can be their own worst enemy. According to MoneyBox,

When they crunched the numbers, Lamont and Frazzini found that for every period longer than three months (and out to five years), the stocks receiving the highest flows of new mutual-fund money performed significantly worse than the stocks that received the lowest flows of new money.

Over a three-year period, the difference was 8% points a year. In other words, individual investors had lousy timing, and their efforts to chase returns ended up costing them dearly. As a result, the authors conclude that “individual investors in aggregate are unambiguously dumb.”

Unambiguously dumb? I disagree. The only dumb thing investors are doing is following the dumb Wall Street cheerleaders Martin told you about at the outset. Otherwise, I’ve found that individual investors are often smarter than most pros.

Hint: To make good money, pay close attention to all the investments the pros tell you NOT to invest in.

Best wishes,

Martin Weiss,
Larry Edelson, and
Tony Sagami

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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