For Tuesday, November 6, 2012, We Recommend Against Investing

Technical Comment:

The S&P 500 advanced 0.2% on volume below Friday and lighter than the 30 day moving average volume.  Our automatic forecast remains at an uncertain trend with the stop loss algorithm triggered.  If the S&P 500 advances about 3.5 points (+0.2%) on Tuesday our forecast is likely to change to a growth trend.

Subjective Comment:

The weak volume advance on Monday was not a signal of market strength.  In fact for most of the day the S&P 500 had been below Friday’s closing level and only managed to close up based on end-of-the-day trading.  This has become a frequent pattern lately where the market recovers towards the end of the day.  That’s not to say it will continue.  Our pattern detection software did not register anything of significance, although the S&P 500 over the past several days has begun to develop a pattern.  It will take a few more days to see if the pattern under development evolves into anything or not.  With US election on Tuesday and Eurozone debt issues remaining very serious we think US markets are likely to move based on these events.  We will not guess which way.  Continue to avoid all bonds, avoid US markets but be ready to invest if conditions change, and be prepared for serious price inflation.

The growing US Money Supply is driving prices higher.  The low “official” Consumer Price Index is not a reliable measure of price increases for many reasons, and prices also mask real inflation.  The December 2012 issue of Consumer Reports magazine has an article critical of the packaging of goods, including a few pages dedicated to undersized packaging (pp 13 – 15).  The first items list various goods that package a lot of empty space, from pasta, pills and snacks.  Following that are pictures of products that have reduced their sizes.  The magazine contacted the companies for explanations and provided quotes from upset consumers.  It’s too bad the article implies the problem is with manufactures seeking to trick consumers, but that is the point of the magazine.  The reality is the costs for manufactures have gone up and they are reducing the size of goods to keep sticker prices from going up.  The price per unit (per ounce, per pound, etc.) has gone up, but the box, bag or bottle is still selling for the same price.  Here are examples from the magazine article, and we’ve calculated the price increase per unit since the magazine left that part out:

  • Frozen Dinner – 17 ounces down to 16 ounces – 6.25% Price Increase
  • Shaving Cream – 11 ounces down to 10 ounces – 10% Price Increase
  • Coffee – 31.5 ounces down to 28 ounces – 12.5% Price Increase
  • Bar of Soap – 4.5 ounces down to 4 ounces – 12.5% Price Increase
  • Sugar – 5 pounds down to 4 pounds – 25% Price Increase
  • Raisins – 1.5 ounce box down to 1 ounce box – 50% Price Increase

To be fair, the article does not say if prices were held the same or not, so these price increases could be overstated.  Some of the companies responded with silly excuses, but the soap manufacture said “higher manufacturing costs meant increasing bar cost or decreasing bar size.”  Reduced sizes and reduced ingredient quality are common methods all manufactures are using to mask the price increases they fear consumers will be unable to bear.  This is a form of “stealth inflation” in addition to the various price indices attempting to measure actual increases.  Supply and Demand fluctuations are normal in free markets, so prices do go up and down.  The money printing by the Federal Reserve might be common, but it should not be considered a normal part of the free market.  Money printing causes price inflation.  This is a universally agreed upon economic principal.  Some economists think it is a good thing and others say it is bad (which it is), but they all agree on cause and effect.  If you invest part of your portfolio in hedges against price inflation you will preserve part of your purchasing power.

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