02/16/11   Inflation Not Hyper, Yet

Editor’s Corner

Investor Heat Map: 1/26/11Inflation Not Hyper, Yet

Ron Rowland

Stock markets – at least those in the developed part of the world – shrugged off inflation fears and proceeded higher again in the last week.  The U.S. Producer Price Index rose 0.8% in January, the seventh consecutive monthly increase.  The “core” measure was up 0.5%, suggesting that food and energy prices are not entirely to blame.  PPI was up a total of 3.6% in the last twelve months.

This is far from hyperinflation, of course, but does indicate that rampant money-creation activity over the last few years is having an impact.  We do not yet see inflation fears in the market for Treasury Inflation-Protected Securities: the primary ETF covering this bond sector is actually down so far this month and down even more since mid-October.  Either U.S. investors are unconcerned about inflation for now, or TIPS are way underpriced. 

In China the picture is quite different: their Consumer Price Index came out at 4.9% for the last year, less than expected but still ahead of Beijing’s 4% target.  Food inflation was at 10.3% for the year.  Year-end data confirmed what we reported a few months ago, that China would overtake Japan as the world’s second-largest national economy.  Japan held that position for 42 years – which should tell you something about the trends in the two biggest Asian economic powers.  Fear of what the Chinese government may do to head off further inflation is driving down equity prices throughout the region.

Divergence between developed and emerging markets is turning into a big story this year, with inflation (or its absence) the key factor.  With huge debt and high unemployment, monetary authorities in the U.S., Japan, U.K. and most of Europe have little choice but to keep interest rates artificially low.  Places like China have more wiggle room, yet their sheer size is making it difficult to keep food and energy prices from rising.  This in turn causes domestic unrest and events like the protests in Egypt that brought down a long-standing regime in a matter of weeks.  How it will all play out remains to be seen.  We won’t be surprised to see more surprises.


Energy held on to the top spot and marked another 52-week high today.  Industrials maintained the second place position.  A four-way battle is underway for third place, with Consumer Discretionary, Materials, Technology and Financials all within a few points of each other.  For now Materials has a slight edge within this group, but the positions could change quickly.  Telecom is lagging well behind, while defensive sectors are still in the basement.


All Style categories were strong again in the last week, and we see a small increase in the spread between top and bottom.  Mid Cap Growth stayed in first place, and the upper half of the table is dominated by Mid Cap and Small Cap groups.  Mega Caps fell back into last place once again with Large Cap Value slightly ahead.  While the momentum is still impressively bullish even for the worst groups, there is no sign that investors are seeking the relative “safety” of Large Cap and Mega Cap stocks.


Europe’s three-week reign on top of the Global markets came to an end, but the continent only fell to third place.  Most of the change was due to relative weakness in the Euro currency, which took a sharp drop last Thursday and has continued lower since.  Europe’s downfall was a gain for the U.S. which is once again in first place, followed by Canada.  Japan is hanging tough in the #4 spot even though economic reports and investor sentiment have been negative.  Overall, we see a clear delineation in the Global markets with all the Emerging Markets categories trending down while all the Developed Markets categories are trending up.  Inflation, particularly food inflation, is hitting the Emerging Markets much harder – at least for now.


The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

“Money’s only something you need in case you don’t die tomorrow.”

Carl Fox, character in Wall Street




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