When I went to high school there was an apple machine in the cafeteria. It cost me a nickel to buy an apple. Today you can’t buy an apple seed for a nickel. The cost of apples has far eclipsed the national annualized inflation rate. Apples have even blown through 7% compound numbers. Food and energy are two sectors not included when the government calculates inflation. A 1960s dollar has a purchasing power of about $8.00 to today’s 2012 dollar! Just because you make more money than you ever thought you’d ever make in your life it doesn’t mean you’re getting paid your true value, or any closer to getting rich. The combination of inflation and taxes has robbed the middle class of purchasing power for this and future generations.
In many cases the inflation costs have been hidden. Some manufacturers have packaged less for the same price. Candy bars and bags of salty snacks come to mind. There are other consumer products that have been downsized and I can think of bath and laundry soap as two items that have increased in cost because of raw manufacturing ingredients and shipping. Today we are at the edges of an inflationary cycle that may stay with us for a decade or more. We are getting serious about our national debt and becoming a more prudent nation. With that will come higher taxes and a slow but steady increase in the Federal Fund rate which will make borrowing more expensive and increase the costs of most if not all goods and services.
To see how inflation has robbed you of purchasing power over the years here is a list of 1980s products:
- New Home: $76,500
- New Car: $7,200
- Gallon of gas: $1.25
- First class stamp: 15 cents
- Median Household Income: $17,710.
Today’s worry has to be inflation and not deflation. Deflation is when prices for goods and services fall and so does the demand. The spiral of less demand causes manufacturing to slow, forcing a layoff of employees and continued moribund slog that is almost impossible to control or change direction.
Investors are well advised to begin to prepare their portfolios to take advantage of future inflationary pressures.
Consumer Sentiment from Thomson-Reuters/University of Michigan report that we 
feel better than we’ve felt since July 2007. Inflation expectations fell from 3.3% to 3.1%. Feeling better results in more spending by consumers and I think they’re a bit conservative when predicting inflationary pressure. The cost of food, especially beef and pork, will be high going forward.
THE WSJ wished the winner of the presidential election a ‘good luck’. Here are what the winner faces:
- The Fiscal Cliff
- Jobs
- Retirement- Social Security-Medicare and the average saving for a retiree is $25,000.
- Debt
- China – this may be the last president the oversees a domestic economy that is the largest in the world. China is expected to overtake and pass the U.S. by the end of this election cycle.
Taxes on Dividends is Expected to top from a current 15% to either 18.8% or 43.4% if Congress does nothing about the Fiscal Cliff. Increasing dividend payout has been a systematic march the last few years. Even companies that traditionally did not have a dividend saw the wisdom to pay some profits to shareholders in 2012. Other companies had increased their dividend payout. Still dividend payouts are near an all time low according Jason Zweig. The good news is that the lower tax rate since 2009 has put about $350 billion extra into investors pockets.
I’m reading two financial articles- one moaning about the immediate poor numbers Facebook ‘may’ declare and another considering whether the same company is a ‘bargain’. 
There was too much bad baggage and mistakes (using the rear view mirror) made with the Facebook IPO but one thing remains true that there are 1 billion people who log in each month. It has enormous brand equity and has a reputation as being ‘sticky’-in other words imagine trying to move everything from Facebook to another social platform. Both the I-Like-Facebook camp and the others across the lake are at odds for their own personal economic benefit. Right now the I-Don’t Like-Facebook folk are winning.
We wait for bargains and sales on everything from canned tuna fish to bed sheets, and when prices do drop we snap them up by the 
carload. Stock bargains are another story. For some reason we think that when a stock dips, or falls out of favor, misses estimates or has a bad quarter the company is going out of business. It is precisely at these times that seasoned investors pounce. Weakness, blood on the street, whatever you call it those that know a bargain buy as long as the stock is cheap, gets cheaper and even as others get scared and run away. But…the trick is to do your homework and understand the difference between a bad stock that will keep on getting worse and one that has simply stumbled.
Here’s an idea to keep tabs on what stock you’d like to buy at a price you’d pay. Make a list of your favorites and either list them on your computer or set them up on my web site (there’s a place for that sort of thing)- you can check daily for those stocks that move down to your price.
Stocks Moved Up Monday! They closed lower than their highs but still a pretty nice 95 points. It was a reverse from a week ago and nicely done across all sectors. Whispers that conversations on Spanish debt were being held helped but the Big stimulant was the strong gain in retail for September. This may be signaling that the consumer is revving up to spend. 
Banks profited even as a WSJ article Heard on The Street column parsed the low interest climate and the fact that the big banks are awash in cash. A situation that wasn’t there four years back. This poses a serious problem since banks have little room to slice costs and far less places to earn money. With the Fed promising low rates for an extended period of time the gloom pervades the industry. Bank stocks did enjoy a mild bounce Monday.
Surprise Earnings-Of the 32 S&P 500 companies reporting earnings through October 12th 63% beat Wall Steet estimates, which is down from the 70% average over the past four quarters. Here are some that popped expectations:
- Lennar
- Constellation Brands
- ConAgra Foods
- Discover Financial
- Walgreen
Tom Noonan of Capital Markets Insights adds his wisdom into the swamp of retirement planning academia by preaching a four pronged approach for advisors to assist people in retirement planning. 
His pearls include such homilies that people would rather clean toilets than plan for retirement is rather over the top. Tommy means well even though he is as wrong as an anchovy pizza. The fact is that retirement and investment long-term planning doesn’t work and won’t work simply because of the nature of man and economies. Retirement Planners have the audacity to believe that their concepts take precedence over savings for a home, college education or simply creating an emergency fund. Invest your money for retirement and worry about your other obligations as they come up, they seem to say. Planners ignore that people have other priorities and/or obstacles that need their attention.
The answer- Pay Yourself First, should be the keystone to any savings plan. It’s something everyone can do no matter the age. Do that and everything else falls into place. When I started in the biz I met a guy retiring as middle manager from Michigan Bell- he was a multi-millionaire- back then! When I asked how he did it he answered he always paid himself first. Before he paid rent or utilities he would write a check to his savings/investment account. It obviously worked.
Bill Minor Shares His Monthly Real Estate Newsletter with me 
and its appreciated as it keeps me informed on what’s important in home sales and mortgages. I’m sure he’d put you on his mailing list if you’d pop him an email to www.billminor.kwrealty.com Right now 30-year mortgages are 3.49%. These are record lows and may get lower given the Fed’s QE3 to buy the long-end of mortgages. 
Housing starts, see above US Commerce Dept Chart, surge 15%. The highest level in 4 years. With extremely low interest, artificially induced values, homes appear to be a true value. Home builders are still a viable sector. Call or e for more information and if this fits your portfolio.
Everyone in the Pool! 
Two days in a row markets posted strong results across the board. This was the best 2 day advance in about a month. Goldman Sachs beat estimates and doubled revenue, although the bank earned less from customer trading. Intel and IBM swung lower after the bell on lower earnings. Coca Cola fell slightly missing expectations but with strong earnings. The big news is that manufacturing seems to be getting some momentum. Retail sales were strong. Inflation concerns are muted, if not altogether invisible. Consumer spending remains relatively strong. Housing also showed signs of showing more gains going forward. Dow up 127 points along with the rest of the indices.
Mitch Tuchman in his column for 
MarketWatch agreed with PIMCO CEO Mohamed El-Erian that investors have been lulled into a false sense of security. Raising awareness that the Federal Reserve’s rate setting committee could undue low rates through 2015 in an hour, day or week. He goes on to write that the Fed won’t do much about rates until they see a solid recovery. They also want to avoid inflation by cutting the flow of cheap money. El-Erian, Tuchman explains, writes of responsive management of overall risk that reflects more durable global themes. Basically he more than strong suggests to reallocate into more than just stocks. Hard assets, global assets, cash and bonds added to stocks is just where you want to be. 
Clients who are desiring to reduce their equities or risk positions should call for an analysis of their portfolios.
Gold is thought to be a hedge against inflation and yet with little inflation the sparkly metal has moved up substantially in price since 2007…primarily as the monetary policies of the world have changed. Interestingly gold has also moved up in step with the 
stock market. (If you noticed last Friday as the Dow and other indices sold off so did gold). Bob Kirtly in his Seeking Alpha blog gives ammunition to the thinking of being long gold for one reason only and that is the uncertainty of currencies. While there is a direct correlation between governments printing money and the price of gold it is the lack of faith of the actual currency that moves gold prices. Given that- investors should understand as the U.S. printed money to buy bonds back in QE1 the actual value of our dollar compared to a basket of world currencies fell eight percent in value. Sovereign banks have also filled coffers with the metal for the very reason of lack of faith in ‘who-do-you-trust’ currencies. You can buy gold in coins or ETFs or even options on the gold ETFs. Want to know more call or email me.
Google missed and was punished Thursday. 
Microsoft ditto. ( Microsoft missed numbers as businesses and individuals held off buying until new operating system was introduced in October). IBM also hit with missed earning numbers. Apple continues to be hit. Thursday markets fell across the board. Zacks says tech is a mess with the aforementioned behemoths offering up lackluster news. Zacks is lightening long positions till early November and hopes for a Santa Claus rally.
A Rotation out of Tech and Small Caps and into large cap financial and health-care stocks, sez Keven Marder. 
The action this past week, he continues, is nothing more than a short-term oversold pop. China’s equity market starts to outperform and the U.S. and this is a good thing and says that the Chinese economy may have already troughed. The best thing the markets and the ECONOMY have going for it is the ‘smart’ rebound in the housing sector. 
Housing has always lead the economy out of previous recessions and the absence has been notable. Housing supports a multiple pronged market rally that includes furniture, appliances, raw materials, financial services and heavy equipment makers. Get Bill Minor’s newsletter- it’s free and it’ll keep you up to date on real estate and mortgage rates. (see above)
Finally- The Dow dropped 205 points on Friday as traders worried over lower than expected earnings. Historically October has always been a month filled with caution. I still have a framed front page of the Detroit Free Press from October 20th announcing the market meltdown of 22%!
Happy 
Birthday 1987 October 19th!
Don’t see 1987 on worst list-? It didn’t last and while a huge fall, no market breakers in 1987, those who invested in January, 1987 were able to either break-even, find a small gain or minimize losses, depending on what they owned by year-end.
Investors got their ears pinned as U.S. stocks had their worst day since June. It’s spooky out there as investors are taking profits and waiting for better news. Even stalwart McDonalds fell 4.5% as it announced it missed consensus for the third quarter. GE fell 3.4% after it also came up short. Three weeks ago the company expected revenue growth for 2012 of five percent and Friday cut it to 3 percent. (It’s not like we didn’t know this was coming. Most numbers were created on a whistle and a hope). This week 140 companies announce their earnings. The WSJ called the fall a ‘ding’ but Nasdaq was really burned as tech came to be the true villain of the week. (Anytime you see and hear optimism as we did in the beginning of the week you better bet some bad news is also lurking). Ingersoll Rand CEO Michael Lamach said China’s persistent weakness has disrupted many companies growth expectations for 2013, forcing them to rework their strategies. Timothy Basset @ Talmer Bank & Trust wrote to remind us that stocks were still positive for the week and GDP numbers would be released this coming Friday. He also wrote that he would be advising against adding, at this time, to equity positions or long-bonds.
Questions call Paul @ 586 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.
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