The Domino Effect That Will End this Stock Market Rally

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 difficult 2012, also due to commodity prices.

ConAgra is experiencing rapid inflation in commodity prices from grain to meat to fuel. ConAgra decided to raise prices on consumers, but the higher prices hurt demand and its sales fell.

One of the largest food companies in the world is General Mills, Inc. (NYSE/GIS). It recently reported reduced quarterly numbers, which met Wall Street’s lowered expectations. The company says it will meet its reduced 2012 forecast; it looks to increase sales as higher commodity prices eat into margins.

It is strange, dear reader, that the Federal Reserve has been saying for some time now that inflation is moderate and that recent rises in commodity prices are only temporary in nature.

This is in contrast to what readers from Profit Confidential are experiencing in their daily lives, along with the above evidence.

I’d like to add the comments from Kendall Powell, CEO of General Mills, from March 2012’s conference call (Powell has been with General Mills since 1979 and has held multiple management positions in the various food divisions of the company, before assuming the CEO position in 2007):

“Fiscal 2012 has represented a challenging operating environment, with the highest level of commodity inflation that we’ve seen in 30 years.”

Rapid inflation in commodity prices will eventually push interest rates higher (a domino effect), ending the bear market rally we have so enjoyed since March of 2009. (Also see: Two Best Investor Cures for Rapid Inflation.)

Michael’s Personal Notes :

A few months ago, I wrote about the U.S. real estate market changing from a “buyers’ market” to a “renters’ market.” This is evidenced by the fact that home prices, on average, have fallen by 32% since 2006, while rents have risen 20%, on average, since that time (source: Wall Street Journal).

Not only were potential new home buyers afraid to enter the U.S. real estate market after the collapse that occurred in 2007, opting to rent instead, but I also commented on the fact that private-equity and hedge-fund money was finding its way into the U.S. real estate market.

The latter bought home foreclosures, contacted the families living in those homes, and attempted to sign a rental agreement with them. In this unusual U.S. real estate market, it presents a win-win situation, as the hedge-fund and/or private equity firm makes money on its investment, while the owner gets to keep his/her home, albeit as a renter.

It has been shown that home foreclosures in the U.S. real estate market, if the property is left vacant, can further drag down the property values in the neighborhood.

At the time, I mentioned that Fannie Mae and Freddie Mac were possibly going to begin a pilot program to convert homeowners to renters, as a way to stem the oncoming home foreclosure onslaught that will visit the U.S. real estate market this year.

The Federal Reserve Bank of New York expects at least 1.8 million home foreclosures in the U.S. real estate market in 2012.

Instead, Bank of America Corporation (NYSE/BAC) announced that it is launching a pilot program that will allow homeowners, who have exhausted other options, to exchange their deed for a lease.

This new “Mortgage to Lease” program for the U.S. real estate market is starting small, with Bank of America targeting only a thousand homeowners, but it is a very radical shift for the bank as it attempts to deal with mounting home foreclosures.

I have a feeling this type of program could expand and other banks could jump on the bandwagon, because it reduces the costs of the paperwork involved to evict a homeowner, to say nothing about the maintenance and reselling costs of the now empty home.

As it stands today, homeowners cannot apply for the program. Only homeowners that receive a letter from the bank can participate. The 1,000 homeowners selected from the U.S. real estate market have to meet the criteria of no second mortgages and no other liens on their home.

The homeowners would sign a different type of home foreclosure document, which is less costly to Bank of America than a typical home foreclosure document in the U.S. real estate market.

In exchange, the homeowner is offered a one-year lease at market or below market rate, determined by the bank.

These are unusual times, dear reader, as the homeowner is reduced to being a renter in the U.S. real estate market; but, unfortunately, that is the reality of America today. Although this won’t reignite the U.S. real estate market, it will help those families facing eviction and a complete disruption of their lives. At the very least, that’s something. (Also see: U.S. Real Estate Market Numbers Look Good on the Surface…Closer Look Screams Caution.)

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average struggles to stay atop the 13,000 level. Is the bear market rally in stocks that started in March of 2009 over?

We are getting close, dear reader, very close to the end of the 36-month “bounce” rally. But don’t count it out just yet!

What He Said:

“As for the stock market, it continues along its merry way oblivious to what is happening to home buyers’ wealth. ( Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. A dire prediction that came true.