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Panic: Inflation At All Levels, Will The Market Drop



February 16, 2011 – Comments (0)

The markets are higher today after Dell Inc. (NASDAQ:DELL) and Deere & Company (NYSE:DE) reported better than expected earnings for the latest quarter. However, we have seen some massive selling bringing the markets sharply off their highs. Prior to the markets open, the futures were up nicely. At 8:30am ET, the Producer Price Index (PPI) was released. This economic signal gives the market an idea on inflation at the producer level. The PPI came in at 0.09. This number included food and energy which the Federal Reserve says does not count. However, the Core PPI which excludes food and energy came in at 0.05. This was a shockingly high number, showing inflation is creeping into all things now on the producer level.

Why is this a negative? For many reasons but namely it is bad because the costs to produce all products are rising for corporations. This means margins will decline and profits will shrink. On a secondary level, it also means that inflation will probably pick up at the consumer level as the producers pass on some of the costs. In addition, rising inflation at a faster pace than the Federal Reserve had thought, tells us there is little chance of QE-3, once QE2 is done.  The markets have been rallying non stop of late because of the massive stimulus of QE-2.  Without the drug in the future, it is likely the markets will go into withdrawal and panic. Keep a close eye on the markets in the coming weeks for signals. This could get very bumpy.

While the markets are higher today, earnings are only half the reason.  Since the markets opened, the Dollar has been falling sharply. This initially helped the markets remain positive but now seems to be having a negative effect.  The PowerShares DB US Dollar Index Bullish (NYSE:UUP) were higher at the open but are now trading at $22.49, -0.11 (-0.51%).

Analyzing the current market activity, one must begin to wonder whether or not the markets are not starting to look at that PPI inflationary number and starting to panic. The markets are starting to sell here, though still positive. 

Gareth Soloway

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