For Tuesday February 12, 2013, We Recommend Investing in US Markets

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Technical Comment:

The S&P 500 declined 0.9 points (-0.06%) on Monday with volume below Friday and lighter than the 30 day moving average.  Volume can be light on Friday’s for lots of reasons, and last week the coming snowstorm could have motivated traders to leave work early.  Since Friday’s volume was light, Monday’s even smaller volume is interesting.  For the past few trading sessions the daily pattern of index direction and volume has been inconsistent with a growing market, but Monday’s light-volume down-day was again consistent with bull market patterns.  Should the S&P 500 decline about 9 points on Tuesday (-0.5%) our automated forecast could change to an uncertain trend based on our stop loss algorithm.

Subjective Comment:

We remain concerned about the US money supply growth because US M2 has declined for the past 4 weeks, and this caused an out-of-control condition from the previous up-trend.  We will not know until Thursday if M2 will continue to decline or resume its climb.  Given the other sources of data we think US M2 is actually climbing and the data for M2 might be erroneous.  The very light volume on Monday with US markets being down is not a bad sign.  We still think US markets are going to continue to boom upwards from here in response to the large amounts of money that has been created by the Fed and US bank lending.  We encourage our readers to hold their investments in US equities and price inflation hedges while avoiding all bonds.

The massive money printing that has already occurred will cause price inflation to accelerate later this year.  The highly manipulated “official” Consumer Price Index will probably remain around 2% while the more accurate CPI, based on 1980 calculation method, is near 10%.  Another thing to watch for is stealth inflation.  Stealth inflation occurs when products are reduced in size or quality while prices are unchanged.  For example, Maker’s Mark bourbon announced a reduction of their product’s alcohol content by 3%.  The company cited increasing demand and their inability to keep up production as the cause.  That is absurd!  If a company has the “problem” of so much demand for its product that it can’t keep up with production, the typical response is to raise price.  The press release spin said “taste of the bourbon will remain the same”.  The leadership of the company doesn’t want to discuss rising costs and their fear they will lose market share to the competition if they raise price, so they’ve cut the alcohol to keep profitability up at current prices.  The company is not to blame for their circumstances, but their Public Relations spin leaves a lot to be desired.  This is an example of stealth price inflation that will never show up in any of the Consumer Price Indices, regardless of the methodology used to measure CPI.

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