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

World Food Prices Rise at Alarming Rate; Up 10% in July

Wednesday, September 5th, 2012
By for Profit Confidential

World Food Prices Rise at Alarming Rate; Up 10% in JulyFood prices are rising at an alarming rate.

World food prices jumped 10% in July from June! The price of corn and wheat skyrocketed 25% from June to July and soybean prices increased by 17% in the same period. (Source: World Bank, August 30, 2012.) This is all due to the drought being witnessed in the American Midwest, and a dry summer in Russia, the Ukraine, and Kazakhstan.

Rising food prices will take a toll on consumer spending and ultimately corporate earnings, as the more money consumers spend on food, the less they’ll have left to spend on other goods. Sure, corporations can pass their higher costs onto their customers, but in return, if consumers don’t buy as much because of higher prices, the corporate earnings decrease.

As we know, consumer spending in U.S. accounts for 70% of the gross domestic product (GDP); thus any change in consumer spending can have a ripple effect on the economy and corporate earnings. U.S. consumer spending rose 0.4% in July compared to June. (Source: U.S. Commerce Department, August 30, 2012.) Though a 0.4% increase in consumer spending may sound good, by no means is it impressive. There was no change in consumer spending in June and there was a decline in May.

Looking at a few big consumer companies, McDonald’s Corporation (NYSE/MCD), Buffalo Wild Wings, Inc. (NASDAQ/BWLD), Chipotle Mexican Grill, Inc. (NYSE/CMG), and Starbucks Corporation (NASDAQ/SBUX) are already experiencing the impact of higher food prices. Food prices are increasing and the retail prices are still fairly cheap, so basic math says higher costs result in lower profits.

The CEO of Buffalo Wild Wings cautioned investors that the company’s price per pound of chicken wings in the second quarter was up 86%! To cope with that dilemma, the company increased prices in July and is planning another hike in September. (Source: Wall Street Journal, August 28, 2012.) Just another example of how higher food cost will hurt corporate earnings.

Other companies, such as Burger King Worldwide, Inc. (NYSE/BKW), and The Wendy’s Company (NASDQ/WEN), are planning to revamp their menus and stores to keep costs low as corporate earnings in the industry are decreasing.

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From all the evidence provided, there are clear signs consumer spending is at the point of breaking down further due to higher food prices.

If consumer spending does not pick up, then corporate earnings will suffer. It’s that simple. For corporate earnings to increase, consumer spending and confidence have to increase. Companies can only pass on their increased costs to consumers to a certain point before consumers pull back. That economic growth we’ve been hearing about—it appears to be a myth.

Michael’s Personal Notes:

Economic uncertainty is in the air and the wealth of the common man is decreasing faster than ever. Consumer confidence is dreadful, unemployment is defective, and the prospects of economic growth are grim. What’s there to do in this situation? Find safety in gold bullion, and wait for the tide to turn.

Gold bullion prices have increased and gained some attention lately. And, at this point, I don’t think I need to convince you that gold bullion prices are going higher from here. There is enough evidence of that; central banks are buying gold bullion to add to their foreign exchange reserves, there are chances of more quantitative easing by the Federal Reserve and currency devaluation. (See: “China to Become World’s Biggest Buyer of Gold in 2012.”)

There was an excellent story recently in Toronto’s Globe & Mail (August 21, 2012) about a ticket inspector in Rome who was planning to sell his gold teeth to raise money to pay his debts.

Italy, eurozone’s third largest economy, has been in recession for more than a year now and life has just gotten worse for its people. There are about 28,000 cash-for-gold outlets in Italy and business is booming. More and more people are selling gold bullion and jewelry that they have accumulated to pay for their expenses and debts—gold bullion can help you pay for your bills when you have nothing left.

Lisbon, the capital of Portugal and one of the main economic hubs in eurozone, is facing a situation similar to Italy’s. The cash-for-gold shops have increased in number and people are selling their gold at an incredible rate. Why? Because people are running out of money and falling back into the safety net of gold bullion.

In Portugal, there was an increase of 29% in cash-for-gold shops in 2011 and, on average, two new stores were opened every day. (Source: Bloomberg, August 16, 2012).

The recent spree of citizens selling gold bullion in the eurozone countries is a true example of gold bullion as a store of value. Government bailouts and fiat currency sound great, but when times are uncertain, people turn toward gold bullion as a true currency to exchange with.

Don’t think this can never happen in U.S.! Eurozone economies are in trouble, because they had too much debt and high unemployment. Sadly, the U.S government is on the same path as the eurozone countries. There is everlasting evidence that there will be more debt in America, that consumers will have less money to spend, and that the value of the U.S. dollar will fall.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average gained a paltry six-tenths of a percent (0.6%) in August. It was an uneventful month for stocks, but the market is still up 6.7% for 2012.

Where exactly are we with the stock market? Corporate revenue growth could turn negative in the current quarter of 2012. (See: “Negative Revenue Growth for S&P 500 Companies Signals Recession.”) Economic growth worldwide is stalling and in some cases contracting. The stock market is being held up on the hope that the Federal Reserve will expand the money supply again (QE3).

The chances of a major market meltdown increases each passing day.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures, and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in Profit Confidential, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

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Michael Lombardi - Economist, Financial AdvisorMichael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Some of the stock recommendations in Michael's various financial newsletters have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland. Follow Michael and the latest from Profit Confidential on Twitter or Add Michael Lombardi to your Google+ circles