Thursday, March 29, 2007

Is the Sky Falling? Again?

"People know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."

Ben Bernanke (Nov.2002)

In listening to the news outlets, one would think inflation is the worse thing that could happen to an economy. When inflation grows, it can be a result of consumption and be a product of a strong economy. The United States is the biggest economy in the world. The consumption by the United States is greater per capita that any group in the history of the world. That being said, it is not the only economy and it is not the fastest growing economy in the world now. China's economy growing at what some say is close to 10% per year, is going to have a greater effect on the price of natural resources than anything a retiring baby boomer generation is going to do.

In the previous post there are two charts of the metal nickel and lead. Nickel is used to make stainless steel. Stainless steel is found in so many higher end products that are now in demand in China, and also in India. Lead is a metal used in batteries, among other things. As China's economy grows, bicycles will be replaced by motorbikes and cars. All these motors require batteries. These batteries need lead, and the process to start a lead mine is not an easy environmental issue to over come. These two metals are just examples of the many things whose price is effected by growing economies and inflation. This demand/inflation is not controlled by the Federal Reserve.

Inflation is like alcohol, a little is a good thing. Have too much and you will want to pray to God and swear off it forever. We as a country are addicted to low interest rates because we finance and leverage ourselves in almost any situation possible. People don't save up and buy a car, the buy the car and pay as they go. It is part of our culture now. In some new commercials, people can even finance and draw a loan against their future paycheck. How crazy can it get?

Controlled inflation is something that the Federal Reserve Board wants, and with our national debt, we need it. Do you want a strong dollar or a weak dollar? We may not have a choice.

A sell off of can be a blessing in disguise. It shows which stocks are strong and can hold their own on weak days; imagine what the future holds if the market finds its feet and rally.

1.Shows the divergence in the advance/decline moving average with the highs made earlier this year. The rally was being carried by a smaller and smaller group of stocks.

2.This shows that the second lower low that was made 2 weeks ago, was extremely oversold. The adv/decl moving average showed that as the new low was made in prices, the selling was not as strong. Time to cover shorts, the world wasn't coming to an end yet.

3.In this situation, the adv/decl moving average showed buying that was a result of short covering and buying that came in when the old low became support for new buying. This buying got carried away, and the price did not match the amount of buying. Consolidation is needed before we can build off the recent lows.

Juniper Networks has been a quiet leader in the Nasdaq rally since last fall. It has now shown some strength again by breaking out of a channel when the over all market has been weak. It looks like good days ahead.

Boeing showing some strength.

Both Colgate-Palmolive and General Mills are showing they don't have the same selling compared to the over all market. A good place to invest if the economy is weakening. Some things people will by no matter how bad things get.

Zoltek Companies Inc is strong, good volume and finishing near the high when the market took it on the chin.

Burlington Northern Santa Fe and CSX both have declined the last couple days with declining volume. This could be a set up for a short squeeze. These stocks can become very thin when you want to cover a short.

Two other stocks on the radar are Goldman Sachs and Lehman Brothers. On a percentage basis GS has held stronger on this sell off than LEH. Brokerage stocks tend to lead the market both up and down. This is a group to watch as oil breaks 70 and talk of mortgage trouble takes over the news. They often profit when commodities move, and are hedged way better than people give them credit for on interest rates.

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