Wednesday, September 21, 2005

Good Thing There’s No Inflation


I'll keep this one brief so that even bond traders can focus on it.

CS First Boston analysts today lowered earnings estimates for 20 companies, mostly due to lower margins owing to higher energy prices and higher related materials prices.

And the firm's analysts raised estimates for three companies, due entirely to higher margins owing to higher energy prices.

Good thing there’s no inflation.


Jeff Matthews
I Am Not Making This Up


The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

17 comments:

Sith Lord said...

There is no inflation. The Sith Lord is in command.

DaleW said...

Forward rates on the short end of the curve kinked downward yesterday -- looks like the market disagrees with this conclusion. Personally, I don't see how Coca-Cola Bottling, for instance, will pass on price. For one, Wal-Mart doesn't want that and, two, the consumer will substitute. Listening to the Wal-Mart, Kroger, Albertson's, etc calls, I personally see very little in the way of end-market inflation for consumer goods. Maybe I am a pollyanna -- I'm not trying to push a bull case on the consumer (though I am more bullish than the market-implied expectations in many stocks in space), but I am just not seeing it.

DaleW said...

By the way, the Sith Lord comments were funny for a while, but they're getting a little tiresome. Just my two cents on that.

Alex Khenkin said...

Jeff, inflation is a monetary phenomenon - the price increases by themselves are not inflationary unless they are "monetized" - that is, more money is created out of thin air to compensate. Looking at the MZM growth chart at BullAndBearWise.com I just don't see the monetization happening. In fact, what we see, even from your post, is our capitalist system working - prices go up, some companies win, some loose.
-Alex.
Small Investor Chronicles

AA said...

Inflation and deflation can co-exist at the same time. Some call it stagflation, but retroflation is the better term.

When a highly indebted consumer is squeezed by high energy prices, and lack of income growth, is that inflationary or deflationary? If he stops consuming everything but energy, then?

If as a result, all economic activity (apart from energy related) shuts down, then?

bpl1000 said...

I thought it was interesting that gas inventories have moved upwards...

And, I was beginning to wonder when $3 gas was going to hurt!

econjohn said...

beginning to wonder when $3/gallon gas will hurt? it certainly doesn't seem to be hurting the consumer. in chicago, the magnificent mile is still rockin'. niketown and the apple store are packed and people aren't leaving empty handed. we just returned from a vacation in vermont. the flights were packed both directions and the college towns (middlebury, hanover, burlington) are alive with consumption. seriously alive. money is still flowing freely and SUVs are still rolling down the highway. if inflation is taking off, i do not see it having hit the consumer in any way, shape, or form.

MD said...

Something like 15% of US refining capacity is located around Houston and Corpus Christi. Hurricane Rita has the potential to make $3/gal gasoline seem cheap.

BelowTheCrowd said...

To get a feel for what's happenning in the "real world" I find that I really need to get away from L.A., New York, and all the places where people from both of those locations tend to congregate. I find one gets a very warped opinion about everything from economics to politics to real estate to general sentiment if you are focused in the larger coastal metro areas.

Going to be in Salt Lake for a few days starting Friday. I'll report back here and on my blog as to what I'm seeing there.

What I can already say is that the cost of my season ski ticket for Alta/Snowbird has gone up about 30% this year. Energy costs are given as a key reason, along with a need to upgrade some key facilities. I'm going to quiz management about this at my condo owners' meeting on Saturday.

[And yes, I will be passing the OSTK world headquarters every day, but doubt I'll be visiting, so don't ask...]

-btc

Aaron Koral said...

AA:

IMHO, US consumers, no matter how indebted they are, aren't going to "stop consuming everything..." despite the higher energy prices.

I will admit, however, that consumers may cut back on "discretionary" spending (i.e., fewer trips to the mall, shutting off the cable, etc.) but people still gotta eat, they gotta shave, and they gotta pay their insurance for their cars, their houses and other knick knacks.

Don't count the consumer out just yet.

I could be wrong, though IF, by way of our negative savings rate, consumers stop spending as much on "non-discretionary" items as they do on discretionary items and start putting money in the bank to pay down those mortgage/credit card/auto debts.

In addition, I could be wrong where the real "pain in the pocketbook" comes not from higher gasoline prices but from higher prices in natural gas. Even if gas inventories have declined, futures prices have skyrocketed for natural gas over the last six months.

Heating bills this winter could also be a real "hammer" to discretionary consumer spending as well. I agree, though, with dalew where I don't see any "major" inflationary trends other than at my local Citgo.

bsilly0 said...

Oil at $100 a barrel, or oil at $10 a barrel, what North American manufacturer of anything can raise its prices in the face of chinese competition, while Walmart and other large discount retailers aggressively scour the world for cheap goods?

Toothpaste and razor makers might be get away with a modest increase. But perhaps not TV's, electronics, toys, furniture, lawnmowers, cars, and appliances.

b.

bsilly0 said...

Sorry Sith, but I'm going to have to second dalew's comment above.

b.

AA said...

bsilly0, given the renminbi's peg to the dollar, Chinese costs are going up as well.

Hence, prices *will* start to increase if energy prices stay up. And it *will* flow through to the end consumer.

EricBrock said...

I doubt many of those companies cut by CSFB are raising wages to employees as part of the plan. Corporate profit margins are very high, another buffer for energy prices.

erikpupo said...

The primary reason inflation has not hit the consumer at any deep level of pain is due to the abundance of credit available. Rates still are fairly low for historical norms and the lax lending standards in place in the American financial system ensure that people can always use credit as prices rise to compensate.

This is the primary reason that Fed rate hikes have had little effect so far; the borrowing rates are still fairly low and many people are irresponsible with debt anyways. The Fed cannot necessarily stop that behavior simply by raising rates.

erikpupo said...

DALEW,

Dont look at short and long rates anymore; they basically are disconnected from reality due to foreigners buying bonds to support our dollar and our economy. Furthermore, I would not trust the market to sniff out inflation; Wall Street is notoriously disconnected from realities that occur on Main Street and in the economy.

bsilly0 said...

AA,

If Chinese manufacturers raise prices 5 or 10%, does it really affect the overall dynamic, if they they produce something at 1/2 the cost relative to a North American competitor?

It's a question of how far along we are on the cheap import substitution curve. Is everything that can be produced cheaply in China currently being produced there, or is there more to come?

Yes, high oil will affect consumer prices (they will be higher that they otherwise would be). My point is that it may not be enough to offset the offshoring trend & falling prices on the items I mentioned (i.e. anything that can be manufactured in Asia & shipped here).

Also - telecom prices are falling rapidly, for a different reason, and are not affected by oil.

b.