The U.S. Labor Department reported yesterday that the Producer Price Index (a measure of wholesale prices) rose by 0.3% in November, an annualized rate of 3.6%. The Labor Department also reported that Import Prices rose 0.7% in November, an annualized rate of 8.4%!
The numbers being released confirm my fears about rapid inflation ahead. If you think the rally in gold bullion is over, look at the inflation numbers coming from the Labor Department and you can’t but help rethink your opinion.
Government debt gone made, a central bank buying U.S. Treasuries, and an unprecedented expansion of the money supply, we can’t escape rapid inflation!
The only place deflation is happening is in the housing market!
Yesterday, the standard 30-yearU.S.mortgage rate fell to 3.94% (Source: Freddie Mac). You can get a home mortgage in theU.S.at the lowest interest rate since 1971, just before the energy crisis hit.
But hold on a minute. Won’t rapid inflation eventually lead to higher interest rates? Yes is the answer to this question. And won’t that mean mortgage rates will rise, further punishing theU.S. housing market? Yes is the answer to that question, too.
Two trillion dollars: that’s how much the Fed has increased its balance sheet by buying securities. And where did the two trillion dollars come from? It was created. My final question for you, dear reader: how can you create two trillion dollars, on top of the five trillion the Obama administration has expanded its debt, and have rapid inflation not become a problem? (Also see, Economic Analysis: And Then Came Rapid Inflation.)
Here is the simple formula: rising government debt plus lots of money printing = rapid inflation, which = higher interest rates, which = higher gold bullion prices, which = higher prices for quality gold mining stocks. (See: Answered: Can I Still Make Money Buying Gold Now.)
Happy to see someone’s buying stock…
The year 2011 has been a difficult year for the stock market considering how well stocks performed in 2009 and 2010. Looking at the stock market and all the negative news we hear about the economy and the eurozone, it sounds like investors are avoiding the market. Wrong.
Appetite for stocks in the last quarter of this year has been exceptionally strong for IPOs with a good story. Consider these new IPOs:
Zynga Inc., the biggest maker of games for the web site Facebook, will raise about $1.0 billion in it initial pubic offering today, making it one of the hottest of this week’s IPOs. This offering values Zynga at $7.0 billion, almost seven times revenue.
Michael Kors Holdings Limited (NYSE/KORS) jumped 21% yesterday on its first day of trading. Another one of the hot IPOs, this company, which competes with Coach, Inc. (NYSE/COH) selling handbags at the retail level for about $400.00, is valued at almost five times sales.
Other hot IPOs…
Angie’s List, Inc. (NASDAQ/ANGI) raised $132 million in November. Groupon, Inc. (NASDAQ/GRPN), one of the most awaited IPOs of the year, raised $805 million in November.
Not only are these IPOs raising big money, but they are also selling at high multiples of sales instead of multiples of earnings! Would I buy any of these IPOs? Of course not: I don’t have the appetite for the risk they present. And when the bear market rally we are currently experiencing finally ends, it will be these kinds of companies, companies selling at five to 10 times sales with unstable earnings that will fall the fastest.
My strategy? Same it’s been the last 10 years. I just continue to buy boring, not-so-sexy senior gold mining stocks when the price of gold bullion corrects sharply on the downside, like it did this week. As for those hot IPOs, while I’m happy to see that investor appetite for them remains strong, I’m staying away from them.
Wall Street’s making big money over these overpriced IPOs. They’ve gotten so smart; most companies are only selling 10% to 20% of their equity. This creates perceived value for the company issuing the stock. With so many investors and funds out there chasing the little stock that is offered, only “quality” clients of the big brokerage houses are able to get in at the early stages of the IPOs. It’s one of those “the public be damned” situations again.
Where the Market Stands; Where it’s Headed:
Only two more trading weeks in the year and the stock market continues to keep investors on edge—will the market close higher for the year or not? The Dow Jones Industrial Average opens this morning at 11,868. The world’s most widely followed stock market index started the year at 11,557. And yes, I’m betting 2011 will squeeze by as a winner year for stocks.
I continue to believe that we are in a bear market rally that started in March of 2009. I also believe that stock prices will head higher first, before heading back down. Hence, I see the bear market rally, while limited in life, still having room on the upside.
What He Said:
“There is no mixed signal about this: foreclosures in the U.S.will continue to rise, the real estate market will get weaker, and the U.S.economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.