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  • How Inflation is Hurting Corporate America 1 comment
    Feb 12, 2011 1:38 AM | about stocks: MDLZ, PEP, TBT, GLD, USO, RJA, TAP, HBI, CMG
    The nations that compose the global economy are intricately connected; economic imbalances currently spread faster through the system than history would predict. 

    Ben Bernanke recently stated that “There is not really an indication in our financial markets that, in the United States, there is an expectation of inflation.”

    I believe that our well respected Chairman of the Federal Reserve is wrong about that. 

    If the financial crisis of 2008 showed us anything, it is that the global economy is extemely interrelated and economic imbalances spread faster than ever before. That means commodity inflation in emerging markets and developing nations can very well effect prices here in America.

    Here is a sample of what 'Blue-Chip' American companies have recently told us about their experiences with commodity and food inflation.


    Chipotle (NYSE:CMG): 

    "In addition, while difficult to predict with certainty, we expect commodity inflation will steadily increase our food cost during each of the next two or three quarters. So rather than strike preemptively by raising prices now, we plan to hold tight on our menu pricing till the second half of the year both to allow our transaction to hold as strong as possible and to allow us to fully see the timing and magnitude of sustained inflation, even though this means our margins will be pressured over the next few quarters

    Pepsi (NYSE:PEP): 

    "Soft drinks maker PepsiCo has cut its earnings forecast for 2011, warning that higher commodity prices will push its costs up and citing a weak economy." 

    HanesBrands (NYSE:HBI): 

    Cotton prices have surged to a new record high amid global imbalances. The cost of the commodity has jumped 150% since 2010 began. "Hanesbrands' fourth-quarter results reflected strong top-line growth but weaker margins because of higher cotton prices.

    Even America's favorite beverage, Beer is not saved from the pain. 

    (NYSE:TAP):

    "U.S. Brewers really have to be imaginative these days. They are facing the paradox that while sales are dropping, the costs to produce products is increasing in the form of commodity ingredients. Molson Coors Brewing Company reported yesterday its Q4 net income fell by more than half partially because of ingredient costs."

    (KFT):

    Many large consumer goods companies are reviewing their business models in the face of rising commodity costs to mitigate the effect on profits and their bottom line "Whether through raising prices, cutting costs, adjusting product size or altering ingredient mix, companies such as Unilever PLC, Reckitt Benckiser, and Kraft Foods Inc. are all having to take action as rising input costs show no sign of abating. As escalating costs have hit all categories of commodities, no single company is better placed than another, so their differing strategies will be under close scrutiny."

    Inflation has many negative side-effects, the ones I believe we may be currently experiencing are:

    1) Rising prices creates uncertainty. In a climate of uncertainty both domestic and foreign entrepreneurs will be reluctant to invest. This will slow down the potential for economic growth.

    2) Low savings is a factor contributing to the cycle of poverty. During periods of inflation households that do have surplus funds are reluctant to save. Inflation erodes the real value of saving and hence there is less incentive to forego current consumption. Decreasing levels of savings and hence of investment will lead to a decline in economic growth and development.

    3) Rising prices causes worsening poverty as the essentials for survival become more expensive and thus less attainable to those with low incomes. In an economy where unemployment and underemployment is increasing, family incomes are less able to purchase the basic requirements such as staple foodstuffs.

    So as an investor, how do we profit from the sinister rise of inflation?

    The basic answers most investors would say are Gold (NYSEARCA:GLD), Oil (NYSEARCA:USO), and Interest Rates (NYSEARCA:TBT). I think a better overall play would be something like RJA, the commodity basket created by expert investor Jim Rogers. According to one popular stock website "
    RJA is one-stop shopping for the indecisive investor. The ETN features weights of 13.6% to corn and wheat, respectively, and a 12% weight to cotton. Coffee, cattle, cocoa and sugar can also be found among the ETN's top-10 holdings."

    I will close out with Congressman Ryan Paul's recent remarks to Ben Bernanke regarding the effects of the Quantitative Easing II program on the American people,

     "There is nothing more insidious that a country can do to its citizens than debase its currency,"  




    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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  • LA_CPA
    , contributor
    Comments (63) | Send Message
     
    Actually, in a trade deficit and high unemployment situation due to the outsourcing of many jobs to cheaper labor countries, I would disagree with Congressman Ryan that there is 'nothing more insidious that a country can do to its citizens than debase its currency..." In fact, the Congressman is probably doing more harm by misleading the public regarding the underlying assumptions in his so-called 'serious' plan.

     

    It's interesting to note that most of the companies quoted in the article seem to be focused on absorbing the rising prices of commodities rather than passing the increase along to consumers. Does this imply they think the rising commodity prices are the result of speculative trading rather than true inflation in the source countries and that prices may settle as we are indeed seeing now, four months later?
    8 Jun 2011, 07:59 PM Reply Like
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