Strange Inflation News
CPI gets released this morning at 8:30.
Consensus forecast for September 07 -- both the headline number, and the Core -- are for +0.2%.
Meanwhile, in one of those weird coincidences, three odd inflation anecdotes crossed my path this week.
Travel: On the LIRR yesterday, officials handed out flyers about the upcoming hearings for price increases, ranging from 8% to 11.1%. Obviously, the cost of fuel is impacting the railroad's ability to keep its deficit closed -- a feat accomplished after the last fare increase, passed 18 months ago.
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Food Costs: Domino's Pizza (DPZ), the nations largest pizza chain,missed on both revenues and earnings yesterday. Why? Let's go to the company's CEO: "Unprecedented cost pressures and a weak consumer environment negatively impacted our domestic results in the quarter, which made striking the right balance between increasing prices, while operating in a period of declining traffic, very difficult."
Unprecedented. Cost. Pressures.
The firm noted that higher labor, food and packaging costs, as well as higher interest expenses, were only part of the problem: The company's own pizza price increases could not implemented fast enough by franchisees to outpace their rising input costs.
That's right, inflation has been running faster than their ability to print new menus!
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Works of Art: No, this isn't another screed about how high prices are in the Art world. This is a different type of observation. It comes from the What's Offline section of the weekend NYT:
"Higher prices for metals are being blamed for an increase in the theft of sculptures worldwide, Art & Antiques Magazine reports. More than 300 bronze, aluminum and copper sculptures have been registered with the Art Loss Register, an industry database, since January 2005."
Works of art are being stolen not to be resold them into the high priced collector's market, but rather, because the underlying metal has increased so much in price, they are valuable for the scrap metal alone.
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All I can say is, thank goodness inflation is contained! Imagine what would be going on if it were actually elevated!
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Sources:
Domino's Pizza profit down 55 pct, shares tumble
Aarthi Sivaraman
Reuters, Oct 16 2007
http://tinyurl.com/22ctco
What's Offline
The Revolt of the Childless
PAUL B. BROWN
NYT, October 13, 2007
http://www.nytimes.com/2007/10/13/business/media/13offline.html
Wednesday, October 17, 2007 | 08:08 AM | Permalink
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"WASHINGTON (AP) -- Come January, the nation's nearly 50 million Social Security recipients will see the smallest cost-of-living increases in their monthly checks in four years, even though they are paying significantly more for such items as food, energy and medical care."
COLA ex reality
Posted by: Winston Munn | Oct 17, 2007 8:42:07 AM
Barry--
It's not just here. In fact, given time, inflation may outstrip toxic mortgage-backs as our biggest export. Note Ambrose Evans-Pritchard in the Telegraph today. http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/15/ccview115.xml
Then note Reuters quoting a strategist talking about India, whose stock market was limit down today, and its central bank US$ purchases: “The central bank must have got tired of pressing the bid button on the dollar all of the time”.
John Williams' shadow government statistics estimates of broad money growth hit 14.6% in September, after 13.9% growth in August. Those are the biggest numbers since 1971. As I remember the '70s, they were not a happy time economically or for the markets. Good thing we've got Dr. Bernanke watching over us--I'm sure it's all going to come out just fine.
Posted by: Scott Frew | Oct 17, 2007 8:43:07 AM
Moin from Germany,
you only can stand statistics like this with sarcasm :-)
Posted by: jmf | Oct 17, 2007 8:43:55 AM
Do you think?
The talk over on the yahoo QQQQ board is elation...Hmmmm? Why does tech seem to be in a world of its own right now? I read where Intel's strong numbers was due to vendors over-buying chips. Somewhere things are going to get backed-up terribly.
Posted by: Justin | Oct 17, 2007 8:48:53 AM
More on tech
Massive Warning From Ericsson / Stock Tanking 25 Percent
and Fleckenstein has some insights on RIMM
Bulls ignore tech's tough reality
Posted by: jmf | Oct 17, 2007 8:55:36 AM
Barry-
Just look at the TIPS! They've been on a steady up trend.
Posted by: Yaser Anwar | Oct 17, 2007 9:10:16 AM
Well, as Barry posted here sometime ago, the Goldman Sachs Commodity Index is zooming along at a pretty good clip. Energy costs are certainly higher than they were a year ago. It seems funny to me (or maybe at this point it shouldn't any longer) the Financial News Media isn't mentioning much about OIL being up in the mid 80's. How long before gasoline prices at the pump catch up??? If last year was any indication one would think $4.00 per gallon gasoline is in the not too distant future (even if Oil corrects back down ot the mid 70's.).
On another note if the pullback in construction related jobs is keeping Inflation in check why is this data not showing up in the jobs numbers.
And are these "increases" in wage growth just showing up in the upper class and scuing the numbers...?
Posted by: John | Oct 17, 2007 9:25:16 AM
so who likes bonds? yesterday's TIC number is somewhat shocking; a negative number indicating capital outflows from foreigners in august. are domestic buyers little old ladies now eating cat food as their interest doesn't cover human food and hedge funds sitting on a pile of derivatives to cover themselves should reality ever intrude?
Posted by: ferd mertz | Oct 17, 2007 9:27:23 AM
The domino's pizza example is right on. American consumers have been spending like madmen because of the great deals they have gotten starting with 0% interest for autos. The reason the negative consumer sentiment numbers never correlate to lower sales is that retailers have been able to keep lowering prices thanks to China and low interest rates. As this phase ends, we are likely to enter a period where the consumer finally pulls back given the demographic trends. The fears of inflation are overdone becuase consumers will stop spending and pressure the economy. If the Fed does not overract, inflation will not be the main problem.
Posted by: Mike | Oct 17, 2007 9:31:12 AM
DBA (Powershares Ag. ETF) is a nice way to play the inflation mentioned in the article. It's has pulled back to a nice entry point.
Posted by: Matt M. | Oct 17, 2007 9:35:49 AM
We have a lot of transient workers in our neighborhood. My neighbor had a $25,000 bronze sculpture in his garden. Poof! Stolen for scrap. It really is happening.
Posted by: dan in michigan | Oct 17, 2007 9:46:21 AM
Here in Northwest, theft of copper from electrical systems has been a major headache causing power outages. In one case a brave thief stole all 1500 lbs from an Air force Radar, no less!
http://www.statesmanjournal.com/apps/pbcs.dll/article?AID=200671015018
http://www.eurekareporter.com/ArticleDisplay.aspx?ArticleID=28964
Posted by: BSR | Oct 17, 2007 9:56:35 AM
Amazing: I have been reading since 4 o'clock this morning, (not that I'm a speed reader), and by the time the market opened I had the biggest feeling of gloom, from all that I have read, (except tech)...still I look at my board just a minute ago and it's greener than the hills of Ireland! Go figure, I guess shit does makes grass grow...
Posted by: Justin | Oct 17, 2007 10:00:11 AM
Barry,
A very elementary point, but the mere fact that the CPI/PPI hoax has been carried off for so long raises the previous comps to a point where the stealth standard of living devlaution has occured already but will not get talked about. If core were top become headline, the already higher cost inputs would make that number look benign no? How convenient. if Americans could wean themselves from the credit card for a minute, might I suggest reading about what happened to savings/standard of living etc after the LAtam/Asia devaluations....
Interesting that the cost of finshed products report last week increased almost five percent and yet the core remained wek. The dominos report is the beginning of comapnies who have cost cut and leverage recapped there way to record earnings over the past few years begin to take it on the chin (margin). Eventually this "oil/ebergy" doesn;t matter anymore will burst through the margin line and that presents a great risk into '08 EPS.
Posted by: C | Oct 17, 2007 10:13:40 AM
So what market making event is going to occur between now and options expiry.??
That's what I want to know......
You know it's coming.
Ciao
MS
Posted by: michael schumacher | Oct 17, 2007 10:17:25 AM
Mike,
you confuse revenue growth with margin pressure -- two sides of the eps coin...if consumers stop spending, as they appear to be doing, doesn't impact global commodity markets - so we are to believe.
let's remember, companies haven't had pricing power in any way for the past five years or so - that is in everything we care about. The low cost subsidy is what powered the system. That has insulated people from the recognition that their wages are stagnant/declining. Companies used sept 11th downdraft and globalization fears to keep employees thinking "just glad to have job." The productivity dividend was temporary.
Now What? pent up inflation will force itself through the system. check the china stats
Posted by: S | Oct 17, 2007 10:20:37 AM
If the Fed won't fight inflation, who will? We are all doomed.
Posted by: JJ | Oct 17, 2007 10:21:25 AM
I'm new to this blog and just learning what some of this data means, but the thing I know for sure is that in 9/05 when my son was born, a gallon of milk was $2.50 here in Kansas City, Mo. Now it is $4.09.
Something seriously has gone wrong when milk, bread, and cereal have gone up so much in just two years
Posted by: M.W. | Oct 17, 2007 10:24:53 AM
MS,
im with you. There has to be some "GREAT NEWS" before Friday
Posted by: Costa | Oct 17, 2007 10:47:50 AM
and right on cue ANOTHER oversubscribed repo. by a factor of 10
http://www.newyorkfed.org/markets/omo/dmm/temp.cfm
Just too easy to figure this one out.
Ciao
MS
Posted by: michael schumacher | Oct 17, 2007 10:51:40 AM
If the rising cost of inputs can't be passed on to the consumer, then they have to come out of earnings. This is part of the reason we're seeing gas prices hold steady while oil prices soar (there's ample evidence this is due to speculators, not legitimate demand). Ultimately business has to scale back. But the "hedgies" all get fed in the meantime.
Posted by: super-anon | Oct 17, 2007 10:55:15 AM
BTW please tell me why does the fed drop the amount it offers for repos. from over $10-15b and have them not become oversubscribed at all to between $6-7b and have them oversubbed. by 10X.....
and here comes the layoffs:
Morgan Stanley lays off 300 traders,bankers
at least that is what the ticker says.....
Ciao
MS
Posted by: michael schumacher | Oct 17, 2007 11:00:33 AM
MS,
For those of us (me) who don't understand fed repo offers, could you give a more basic explanation?
Posted by: Camille | Oct 17, 2007 11:26:47 AM
This just in; SS payments set to increase 2.3%!!! When, not if, the the commoners go on the warpath there will be hell to pay. Stagflation is a reality. The Fed is monitizing not only oil price increases ala 1972 but now monitizes losses in securitized debt. Buy hard assets and bury them on your farm.
Posted by: Ross | Oct 17, 2007 11:33:52 AM
No inflation? Flu shot 2003 $15. Flu shot 2006 $25. Flu shot 2007 $30.
Posted by: Bob A | Oct 17, 2007 11:36:18 AM
