Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Commodity Prices

The commodities in commodity prices include all categories, from industrial—iron ore, steel, aluminum, copper—to agricultural—wheat, soybeans, corn, cattle—to precious metals—gold, silver, platinum. The prices of these commodities that sell on the Chicago Mercantile Exchange for the purpose of the definition of commodity prices will be today’s prices. In terms of the Chicago Mercantile Exchange, today’s prices are referred to as the “spot” price. Commodity prices, therefore, refer to all commodities at today’s (spot) prices.

How “Peak Oil” Will Affect You

By for Profit Confidential

stock market rallyOnce the issue with Iran resolves itself, will oil prices crash? Many are saying “yes.” I think they are wrong.

Certainly oil prices are higher than they normally might be because of the ongoing conflict with Iran. And if war breaks out, oil prices will spike even higher.

On the other hand, I have to completely disagree with the position that oil prices will crash.

According to the International Energy Agency (IEA), the world supply of oil is just under 90 million barrels per day…about the same level as daily world consumption.

While some point to the fact that oil inventories in the U.S. are high (which is one of the factors why some point to a crash in oil prices), they are forgetting to note that oil inventories in other parts of the world are falling.

Most experts in the oil industry, including the IEA, agree that the oil wells supplying the world with oil are declining at a rate of three percent to five percent per year.

That means that if there is no economic growth in the world, we still need to find roughly 3.6 million barrels a day more of oil to replace the wells that are running dry.

If worldwide economic growth is 1.5%, this is another 1.35 million barrels per day needed to meet demand, bringing the total supply required to roughly five million barrels a day. To put this into perspective, Saudi Arabia exports about six million to six and a half million barrels per day. Five million barrels a day is a significant amount of oil that needs to be replaced.

In … Read More

Many Public Companies Predicting Soft
Earnings for Balance of 2012

By for Profit Confidential

Over 80% of the S&P 500 companies that have reported earnings so far for the first quarter of 2012 have beaten analyst earnings expectations. But the rest of the year doesn’t look that rosy…

The Coca-Cola Company (NYSE/KO), an S&P 500 company, beat first-quarter analyst earnings expectations, but stated that prices for aluminum, juice and plastic—commodity prices—increased its costs by 10% over last year, decreasing their profit margins.

The company stated that the U.S. market seemed fine and certainly much better than Europe, which will continue to be an issue in 2012. The company also cited a slowdown in its business in China.

Kellogg Company (NYSE/K), an S&P 500 company, did not meet analyst earnings expectations because of its European business. It foresees a difficult 2012 with commodity prices remaining high. Although the company cited higher commodity prices as impacting its current earnings, the company stated that, at least to this point, they have been able to raise prices to offset higher commodity prices.

WD-40 Company (NASDAQ/WDFC) reported better earnings, but noted that Europe was still a major concern. The company mentioned how high oil prices were reducing its margins, while higher commodity prices in general impacted its business.

Nestle S.A. (Pink Sheets/NSRGF) warned that 2012 would be a difficult year, as its U.S. and European businesses remain challenging. The company has experienced higher commodity prices, which impacted their business by 10%-11%, but partially offset this by raising prices.

PACCAR Inc. (NASDAQ/PCAR), also an S&P 500 company, is the second-largest maker of large trucks in North America. The company is viewed as an economic indicator. If large truck demand is … Read More

The Domino Effect That Will End this Stock Market Rally

By for Profit Confidential

commodity pricesReaders of Profit Confidential have made their voices heard on the topic of rapid inflation. In our recent survey, over 2,000 of our readers said they believe we are experiencing rapid inflation closer to 10%, while the official government Consumer Price Index (CPI) states that inflation is at 2.9%.

On these pages, I have been detailing the input cost (Cost of Goods) for manufacturers—higher commodity prices—from many parts of the world. In the next month, the first-quarter earnings reports start coming out and major U.S. companies will give us a good idea of how 2012 will shape up in terms of economic growth and rapid inflation.

But some companies have already started crying the blues…

On its conference call this week, Sears Holdings Corporation (NASDAQ/SHLD) cited a significant increase in commodity costs, particularly cotton, as one of the reasons for its margin decline.

Many restaurant chains across the nation have been discussing their biggest struggle: raising prices for food on their menus…weighing high commodity prices—like the rise in the price of beef—against the fragile economic recovery.

Beef prices have climbed 30% over the last two years, and many restaurant chains do not believe the rise in commodity prices—rapid inflation—will subside anytime soon. Some are getting creative; ensuring they serve their steaks with the bone, so customers feel as though they are getting more meat on their plates for that higher price.

ConAgra Foods, Inc. (NYSE/CAG), a global food maker of such products as “Chef Boyardee” and “Banquet” frozen meals, just released its fourth-quarter numbers, which slightly exceeded expectations—but the company lowered its expectations for the current quarter and sees a … Read More

Two Best Investor Cures for Rapid Inflation

By for Profit Confidential

rapid inflationThe growth in manufacturing in the U.S. has been flat. Despite this, the Empire State Manufacturing Survey noted that input costs—oil and commodity prices for manufacturers—has risen steadily over the last few months, with February’s high level not seen since the summer of 2011…more rapid inflation (source: Federal Reserve Bank of New York).

Import prices of goods to the U.S. rose 0.4% in February and, although higher oil prices can be blamed, goods and services imported from overseas also contributed to the rise. From a year ago, import prices have gained 5.5% (source: U.S. Labor Department)! More rapid inflation.

In China, their latest Purchasing Managers’ Index for March showed that their input costs (cost of goods) were flat, but that inflationary pressures remained high (source: Markit Economics). The index noted that input costs—oil and commodity prices—have been rising over the last half of 2011; rapid inflation.

In India, their latest Purchasing Managers’ Index for February revealed that their input costs—oil and commodity prices—are rising at a historically rapid inflation rate. The rapid inflation rise in input costs has persisted for the last six months. As with China, both countries are increasing their prices to compensate, which is why import prices in the U.S. or these goods and services are higher.

In Europe, their March Purchasing Managers’ Index revealed the steepest rise—again, rapid inflation—in input prices since the summer of 2011 (sound familiar?). The inflation rate recorded matches the highest long-run average in its 14-year history!

Just so readers don’t get the wrong impression that it is just the troubled nations in Europe experiencing rapid inflation,Germany’s Purchasing Managers’ Index also reported … Read More

Medium-term Economic Picture Worsens

By for Profit Confidential

economic analysisThere is rapid inflation in the system, dear reader, but let’s not speak too loudly about it.

 I’ll keep this note to a whisper as we turn our attention to the just-released Institute of Supply Management’s factor index. The institute’s survey of manufacturers throughout the U.S. includes a discussion on commodity prices. Commodity prices are a critical component of manufacturers’ costs, because they are the inputs used to produce all of the goods that consumers purchase in this country.

 For February of this year, commodity prices increased six percent from January’s level! What is critical to note is that this rate is accelerating and manufacturers are growing concerned about the vigorous increase in commodity prices.

 At the same time that the U.S. released its manufacturing data, Europe did the same. Manufacturing in Europe continues to contract, but one of the most important components of the survey showed that commodity prices—from oil to plastics to steel—had the sharpest rise since June 2011.

 Worse, the acceleration—rapid inflation—in commodity prices is occurring at the fastest rate in the survey’s history!

 It was not one or two of the countries in Europe that was responsible for this record rise. The survey highlighted the fact that the rapid inflation rise in commodity prices was found in all of the 17 members of the eurozone.

 This note of concern from the survey in Europe was confirmed by the Producer-Price Inflation European Index, which increased 0.7% in January. The annual rate of increase for this index is accelerating.

 England just released its measure for January’s producer prices. Commodity prices increased in January at the fastest pace in … Read More

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