At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 12.16.04

TIPS in the Right Direction

Although there is continuing debate as to whether inflation is really a factor, the fixed income investor, if their actions are to be followed, believes that there is a real danger ahead.

Evidence that these investors are finding inflation worth betting against can be found by subtracting the yield from Treasuries of similar maturity against the yield of Treasury Inflation Protected Securities or TIPS. For instance, based on last weekšs close of the ten-year note, the most popular measure of bonds, the spread had widened to 2.53%. That is a significant increase from the yearšs low point of 2.25%.

So what do these investors see? One of the first and easiest indicators that inflation has gained some ground recently is in the PPI or the Producer Price Index. Prices on this index, have jumped dramatically and are now at a fourteen year high. While this might be perceived as pricing power, investors in TIPS see it as a sign that securities that can be adjusted for inflation is the best place to park conservative money. The 12.10.04 report showed another month of increases especially among raw materials.

The Consumer Price Index or CPI has also seen gains even when food and fuel are excluded as they are in the core index.

Fixed income investors see this as a warning sign of future price increases. November report on the CPI is due this week and without much skill needed to predict that it will surely show continued gains in prices making TIPS a safe bet for the near and possibly long term future.

At Arm's Length: 12.15.04

The Data Drama

The Federal Reserve Board met today and in language similar to November, hiked rates a quarter of a point. They suggested that things were progressing nicely affording the Greenspan fans an opportunity to stand and cheer.

Not so fast. There is data drama brewing and I believe that the Fed is fully aware of it.

Understand their penchant for drama themselves, the Fed believes that inflation is at a level that is both acceptable and tenable. They also believe that the productivity is at an acceptable level, which according to recent figures finds industry at a 77% capacity, well below a comfortable target for growth.

While oil, which is fifteen dollars off a speculative high, the price, according to the Board doesn't seem to being having a negative effect on economic growth.

Personally I believe that the Fed is worried. Although their pace and language have been surefooted, and if you believe that it will take a good number of months for these rate increases to trickle down, they are bracing for downturn in data.

The mounting trade deficit will be the first sign that things are not as they seem. This will be followed by retail sales data at the end of the quarter which will show a significant consumer pull back. Imports will continue to increase at a record pace. We will also sell off assets to foreigners because they are priced so incredibly cheap.

The Bush Economic Summit will find the President surrounded once again by folks willing to tell him what he wants to hear and not the reality that he is so obviously ignoring. The sound bites will include: The jobs numbers will be rosily projected. Economic growth will be seen as steady. Another big piece of news emerging from the meeting in Washington will be the manageability of the federal deficit through permanent tax cuts and of course, that Social Security Reform is possible using the President's plan.

Without any room to maneuver until they hit the 2.25% range, the Fed can now reverse its position and go back down should the data cause enough drama to be noticed.

The previous week's articles.

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