Inflation? What Inflation?

by Larry Levin

How do you know when the market will go up? When a plethora of bad news is ignored. Today's latest salvo of bearish data was deep with; CPI, foreclosures, existing home sales, weekly unemployment numbers, and more. Apparently, however, they were irrelevant as investors decided it wasn't bad enough. At least that's what the media kept saying. Oh sure, I can see it now: At precisely 8:30am Eastern tens of millions of Joe Six-Packs and Beverly Bungalow's called their brokers and said, I can see that inflation was 50% higher than expected, but I don't care - buy more! The media actually believes the average guy on the street's (not Wall Street) reaction was Inflation? What inflation?

Umm, no. That's not how it works. When you buy into a fund, which about 95% of investors do, then that collective hoard of cash moves at the whim of the manager. And if that manager sees that other money managers have beaten him to the draw as the market rallies, well, they just plow in with your cash in fear of being left behind. So today's early rally in the face of bad news was not do to investors ignoring the data, as much as the media would love you to believe that, but it was because a relatively few (thousands vs. millions) money managers didn't want to be left behind.

Here's a quick list of the so-called not-so-bad-news:

1) First-time claims for jobless benefits fell by 10,000 last week to 450,000, but the four-week average rose to six-plus-year highs.

2) Existing U.S. home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6% as the real estate recession deepened.

3) Moreover, a third of all sales in the quarter were actually foreclosures or short sales, in which lenders take a loss on a property!

4) Home foreclosures jumped 8% from June and 55% from last year. July could go down as the worst month ever.

5) Bank home repossessions almost tripled in July from a year earlier.

6) More mega-banks settle with attorneys for scamming their customers with auction-rate securities.

7) According to Credit Suisse, foreclosures could put 8.4% of total U.S. homeowners or 12.7% of homeowners with mortgages out of their homes.

8) The Labor Department said today that average weekly wages, after adjusting for inflation, fell by 3.1% in July compared to a year ago, the biggest year-over-year decline since November 1990.

9) And finally - Inflation skyrockets to a 17-year high! And that's quite an accomplishment given the fact that so many administrations have instructed the BLS to change how inflation and employment are calculated.

Today's increasing inflation data shows the government CPI rising by 5.6% over the past year, the largest 12-month jump since the period ending in January 1991. Of course, that's the admitted number, the new inflation minus inflation data from the BLS. The real rate of inflation is closer to 10%. For now, let's go with the 5.6% inflation number, and with that in mind I would like to ask you a few questions. Have you received a 5.6% raise since last year? No, incomes are falling. Can you earn 5.6% at the bank in a CD? No, Wall Street banks need bailouts, partially in the form of excessively low interest rates. I'll bet your bank pays 2.5 - 2.75% on that CD, which means you lose money to inflation EVERY DAY. So I have one more question - where is the outrage? Why isn't this front page news?

For the average American, these inflation numbers are very bad news. It means that their purchasing power has been cut and their wages aren't going very far, said Mark Zandi, chief economist at Moody's Economy.com.

Yes sir, I'm sure that news made the average American pick of the phone this morning and instruct his broker to buy - buy - buy causing the Dow to rally over 180-points today before it settled up 82.97. Sure, if you believe in fairy tales that is.

Real Time Trading Signals*for

Trade Date: 8/14/08

E-Mini S&P Trades*
(before fees and commissions):

1) VA sell @ 8:35am at 1277.75 = -1.75 *2

2) Engf buy @ 9:15am at 1283.00 = +1.50 & +3.5

3) OTF buy @ 11:30am at 1293.00 = +4.00 (1 lot)

4) OTF sell @ 2:30pm at 1292.75 = b/e*2

5) Algorithm trades (6)...combined total...-1.00


ZB (30 Year Bond) Trades*
(before fees and commissions):

1) Sell @ 9:52am at 116.235 = -1.5*3

2) Sell @ 1:54pm at 116.300 = +2.0 & +1.5...combined total...-1.0


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