Stocks & Investing
Stocks and Investing
Stocks and Investing
Mon, May 24, 2010
Fri, May 21, 2010
Thu, May 20, 2010 
CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: Ford (NYSE: [ F ]), Toyota (NYSE: [ TM ]), Honda (NYSE: [ HMC ]), Bank of America (NYSE: [ BAC ]) and Wells Fargo (NYSE: [ WFC ]).
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Here are highlights from Wednesdaya™s Analyst Blog:
Again We Ask: What Inflation?
Year over year, Energy -- and more specifically, energy commodities -- have been the major source of what inflation we have seen. Overall energy prices are up 18.5% over the last year. Energy commodities, most notably gasoline and heating oil, fell 2.1% -- the third straight monthly drop, and May will make it four in a row -- but that is just shaving off big gains from earlier in the year.
On a year-over-year basis, energy commodities are up 37.0%. Energy Services, like electric prices, have actually fallen by 0.2% over the last year. They fell 0.5% in April, partially reversing a 1.4% increase in March.
Used Cars?
The only other area that has seen a double-digit price increase over the last year is used cars, where prices are up 16.6% year over year. Even there, the rate of increase is slowing dramatically, rising only 0.2% in April and a smaller increase in each of the last four months. Put another way, in the fourth quarter, used car prices were escalating at an annual rate of 32.9%, in the first quarter they were up at an 11.3% rate, and if one were to annualize the April rate, they are increasing at just 2.4%.
New cars, on the other hand, saw no increase in prices in April, and are up just 2.5% year over year. Obviously, used car prices cannot continue to escalate over the long run unless the price of new cars does as well, or pretty soon one would be paying more for a 2008 Ford (NYSE: [ F ]) Focus than you would be for a 2010 Ford Focus.
Since used cars are a good substitute for new cars, the increased price of used cars has made new cars a more attractive (relative) alternative. That should mean more demand and pricing power, not only for Ford but for Toyota (NYSE: [ TM ]), Honda (NYSE: [ HMC ]) and the rest of the auto industry as well.
What About Health Care?
Health care costs -- both commodities like drugs and band aids, and services like doctor and hospital visits -- continue to see more inflation than the overall economy, but are running at 3.5% year over year for commodities, and 3.7% for services. It is not that they are all that high in absolute terms, but by consistently running above inflation in the rest of the economy, they continue to eat up more and more of the economic pie.
In April, health care commodities were up 0.2% after increases of 0.4% in March and 0.8% in February. Health care service inflation was 0.3% in both April and March and was 0.4% in February. It is too early to say if the new health care reform law is having any impact on health care inflation. But health care inflation is by far the biggest cause of the structural budget deficits that threaten to eventually bankrupt the government.
Holding Inflation Down
The biggest factor holding down inflation is shelter, which comprises 32.3% of the index. Over the last year, the cost of shelter is down 0.7% and was unchanged in April after falling 0.1% in March.
The largest part of shelter is owners equivalent rent, or what the government figures you are paying yourself to live in the house that you own. Using this method -- rather than tracking the price of houses -- does make a lot of analytical sense, but it tends to dampen the volatility of the CPI. If one used the actual transaction prices of houses (say, by using the Case Schiller Index), inflation would have been soaring during the bubble, and would be recording a serious deflation over the last two years.
Even though the measures of housing prices like the Case Schiller index have stabilized in recent months, this is in large part due to very aggressive and targeted government actions that were designed to prop up housing prices, and those programs are now going away. There is a real danger than housing prices could begin to slip again, although relative to both rents and incomes, housing prices are at far more reasonable (not cheap, but reasonable) levels than they were a few years ago.
Thus, while housing prices might fall again, it is unlikely that they will implode from here. But in any case, the inherent smoothing in the owners equivalent rent method means that inflation in the housing sector, which makes up about a third of the overall index and over 40% of the core index, will stay muted for some time to come.
Don't Worry About Fed Raising Rates
Thee should be no pressure at all for the Fed to raise interest rates anytime soon. In fact, this data would tend to argue for a cut in interest rates, not an increase, but with rates already at zero, that is not an option.
The recent sharp drop in oil prices -- and the equally sharp rise in the dollar -- were really not in the numbers for April, but will be for May. It is a near certainty that prices in May will be down at least on a headline basis, and the increase in the dollar will also affect core inflation, making a decline at that level a very real possibility as well.
Deflation is a nasty thing and will slow down the economy. Why go out and shop for something now if it is only going to be cheaper if I wait until next month or next year?
Low and stable, but positive, inflation is what policy makers like the Federal Reserve want to achieve. At this point, that means expanding the money supply to offset the deflationary forces elsewhere in the economy and the world. The Situation in Europe is inherently deflationary, and some of that is being exported to the U.S. in the form of a higher dollar.
Keeping short-term rates low, and thus the yield curve steep, also helps recapitalize the banks by allowing them to have big net interest margins. While there has been some improvement in the balance sheets of the "too big to fail" banks like Bank of America (NYSE: [ BAC ]) and Wells Fargo (NYSE: [ WFC ]), it has not been enough.
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