Market Outlook

Our market outlook, as reported in the TickerSense Blogger Sentiment Poll, continues to be bullish.  Regular readers of "A Dash" know that we have been bullish on the fundamentals for a long time.  Our vote in the sentiment poll is based upon Vince's technical models, which we use for short-term trading.  That position has ranged, including  neutral or bearish readings in the past, but it has been correctly bullish for much of the run.  We have been on record with a correct contrarian call.

Bloggers Turn Bullish?

The blogger poll has been bearish since its inception, so it has been something of a contrarian indicator.  This week it had a major bullish spike.  Should we be worried?  Stockbee, one of  our daily reads, highlights the issue.  The level-headed Muckdog, whom we view as a helpful voice of reason, makes similar observations.

While we always prefer to be on the contrarian side, we just go with our models for short-term trading.

Inflation?

Another wise voice of reason is Dick Green, the President of Briefing.com.  He has had an excellent record in his overall market perspective for several years.  While we subscribe to the "Platinum" service, well worth it for serious investors, there is plenty of content available for free.

Dick's comments on inflation are worth noting:

The trends are very favorable.  In fact, apart from some pressures in January and February, when inflation rates tend to pick up a bit, there is little sign of inflationary pressures.

The annual rate of increase in the core CPI over the seven months is about 1.9%.  The annual rate of increase in the core PCE over the six months (May data will be out on June 29) is just 1.4%.

He also writes that energy does not change the picture:

The year-over-year increase in total CPI stands at 2.7% compared to the 2.2% increase in the core rate.  The year-over-year increase for the total PCE deflator is only 2.2% compared to the 2.0% core increase. 

A spike in energy prices the past three months has pushed the total indices higher than the core rates, but the impact has not been huge from a broader perspective.

The entire article is worth reading carefully.

The implications of the inflation trend were noted on the Wall Street Journals Economics Blog.  Greg Ip writes that the numbers are so good that the Fed may have to change the language of their statement.

Bonus Idea

Those focused on the headline CPI instead of the core rate have emphasized the trends in food and energy.  We have written about this divergence in an article aimed at the individual investor and a follow-up.

Now let us look ahead.  The energy futures market sees current prices as the new norm.  The forward curve shows a pretty flat picture, indicating that the big-money traders at the NYMEX see modest increases in prices for years ahead.  If they are correct, the headline inflation numbers will stabilize.

For energy to be a continuing source of inflation, oil prices must move higher.  Those who are highlighting this concern can make their bets by going long oil futures.  This is a more direct way to profit than trying to predict an economic collapse and going short on equities.

Full disclosure:  We continue to believe that "upstream" energy companies are dramatically undervalued, so we hold Transocean, Inc. (RIG) and Global SantaFe (GSF).

Comments

[muckdog]

Level-headed? lol.

Well, I agree with DG on the inflation outlook. Even though some interviewee on CNBC this morning was talking about how all this global liquidity was fueling rampant inflation. What globe does he live on?

Higher energy prices and interest rates have taxed consumers' pocket books. Take a look at earnings from DRI and BBY. Or HD. That's where folks spend "extra" money.

Also agree with your point on today's energy prices being "the new pink." We accept them. We have to drive. We prioritize our mobility. Folks are just cutting back on the hushpuppies, DVDs and petunias.

But also notice that wages have been going up faster than the CPI of late. Maybe the Fed has their eyes on the potential for wage inflation down the road; especially with the low unemployment rate.

[shrek]

The fed's use of CPI as a guide for further interest rate moves is narrow and out of date. They should be much more concerned about the amount of leverage and potential systemic risk in markets.