Market Commentary for the week of April 9, 2007

Don’t be surprised if you start to see a rise in household/daily use commodities prices. Already, the most egregious of this “price creep” phenomenon has been the acceleration in price increases for gasoline at the pump. As conflict pervades in the Middle East and usage rises in China, expect to see further increases in crude oil costs and a widening of the oil reserves deficit.

Anecdotal reality.
But now comes word that in addition to pharmaceutical cost increases, paper cost increases and raw materials cost increases comes an increase in the cost of milk and other foodstuffs. Keep in mind that these announcements are “anecdotal” in nature, drawn from headlines and inferences or expectations.

But do you really expect anything less? As grain and feed and fertilizer costs rise, dairy farmers naturally pass along their costs to the consumer. Some might heed my message as alarmist. After all, price increases are the natural order of things. A hot dog doesn’t cost a nickel any longer, and gum isn’t sold for 25¢ per pack.

Whether by accident or design, however, today’s cost push derives from significantly different factors than evolutionary or generational change.

As the profit margin of business shrinks, owing to diminishing unit volume sales, the consumer becomes the end-user of last resort, forced to carry the burden of rising prices and diminishing sales. In other words, the mistakes of poor product engineering or failed fiscal policy are being heaped onto the backs of those who are innocent of the crime.

Few solutions.
One might conclude that the onus of fixing deficit spending falls upon the government, but it won’t or can’t address the problem. Further, one might expect that the burden of creating product demand and “buzz” rests with the corporations that manufacture and distribute products to the marketplace. But instead, they outsource jobs and raise prices to effect a margin expansion that is specious, at best.

One might expect the Federal Reserve to reign in aggressive or negligent monetary policy to avoid a manic speculative bubble that manifests in stocks, or home-building, or mergers and acquisitions. Instead, they sit back and wait, allowing the financial market to fall off the precipice.

Bond yields are so low, historically and actually, that a nominal bear market retreat can’t happen progressively and logically without witnessing speculators profiting from gains derived with “borrowed money”.

Consumers don’t know whether to laugh or cry, whether we’re in a boom or a bust.

The subliminal message while goods are cheap is to keep spending, whereas the anecdotal data says we’re running out of discretionary funds.

Cover your bets.
The market is still relatively overvalued even though its performance year-to-date has been anemic. I would prefer a correction and recalibration of valuation and relative strength levels, but each decline is met with new borrowing, new purchasing. Only time can rebalance the starting point under those manic conditions.

The best thing to do is to measure portfolio asset allocation levels and to make sure that one is overweighted in sectors that benefit from price creep and to avoid speculation in “value” stocks until the near term clues recalibrate.

There will be no Outlook published next week. Please watch for my second quarter forecast entitled “Crossfire”, being mailed the week of April 15th.