Higher Commodity Prices Pushing Inflation Limits
Thursday, February 2nd, 2012
By Michael Lombardi, MBA for Profit Confidential
When the world’s largest toy company—Mattel, Inc. (NASDAQ/MAT)—raises prices in order to offset rising material costs (as detailed in their latest earnings report), one takes notice.
When Whirlpool Corporation (NYSE/WHR), the world’s largest appliance maker, cited higher material costs as one of the major factors that impacted its latest earnings report, you can see rising prices again. The company is focused on reducing costs and raising prices, in order to counteract this.
The Hershey Company (NYSE/HSY), a global leader in chocolate and sugar confectionery, released a strong earnings report. However, it wasn’t an increase in demand that spurred their earnings report; instead, the company was able to raise prices enough to offset the increase in the cost of its inputs.
The Proctor & Gamble Company (NYSE/PG), one of the world’s largest consumer products makers, lowered its 2012 estimates due to—along with foreign exchange rates—higher commodity costs. The company is attempting to offset these with multiple measures, including raising prices.
These blue-chip leaders are all citing rising commodity prices as putting pressure on their margins and earnings reports. And most of these blue-chips have been able to offset higher commodity prices, as detailed in their earnings report, by raising prices to the end consumer.
There are two trends happening here, my dear reader…
Since the Federal Reserve made its historic announcement last week that it would be keeping interest rates near zero until late 2014, commodity prices have resumed their rise. Mattel, as an example, believes that commodity prices will continue to rise in 2012, as indicated in its latest earnings report.
The other trend that is critical to highlight is that these blue-chip companies have been, by and large, able to maintain their margins by raising prices.
I’ve been talking about how strained the American consumer is. And since the blue-chips I’m talking about above are multinational companies, it is safe to say that European consumers are feeling the pinch as well, while even economies in Asia are slowing, pressuring their consumers.
As 2012 rolls along and the global economy continues to slow, will these blue-chip companies be able to pass along higher prices to consumers? I doubt it. But if they don’t, they’ll hurt their margins, earnings reports, and share prices. If they do raise prices, inflation will become a problem for the end consumer—who is squeezed already with no wage growth and no jobs. It’s a no-win situation.
Where the Market Stands; Where it’s Headed:
Yesterday was a nice start to the month of February. Since the beginning of 2012, the Dow Jones Industrial Average has risen 4.1%. Could we be getting close to that final blow-off for the bear market rally I’ve been waiting for? Maybe. After all, the Dow Jones is getting closer and closer to that magic 13,000 level.
We are in a bear market rally in stocks that started in March of 2009.
What He Said:
“We will wish Greenspan never brought rates down so low as to entice so many consumers to have such big mortgages.” Michael Lombardi in PROFIT CONFIDENTIAL, April 27, 2004. Michael first started warning about the negative repercussions of Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.
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Michael 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. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, 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
