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S&P High in the Face of Inflationary Pressures MoneyNewsWilkinson's Edge (Headlines - scroll down for complete stories) 1. S&P High in the Face of Inflationary Pressures 1. S&P High in the Face of Inflationary Pressures A quick glance at the current state of the U.S. economy tells us that while earnings growth is slowing and interest rates are only languidly rising, the consumer is still able to withdraw copious amounts of equity from a steadily rising housing market.
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Somehow, the market has garnered enough optimism to send the S&P 500 index to a four-year high. If we are indeed experiencing the Goldilocks syndrome and there is plenty of "not too hot, not too cold" evidence about surely it would warrant similar lukewarm equity valuations in the middle of the recent trading range, as opposed to a breakthrough at the top. But it's possible that stronger growth is brewing and portfolio managers don't want to miss the boat. Data in May for international capital flows suggests that the strengthening of the dollar is fundamentally supported by demand. And that demand could translate as a core confidence in the future path of the U.S. economy a path Joe Public just doesn't see yet. Plus bond yields are teetering on the brink and need to be watched closely as well. The common opinion is that the Federal Reserve can't raise rates much further because inflation looks set to remain low. But yields are hovering at their highest level in two months, despite numerous comments from bond managers who argue that, on balance, yields will fall not rise for the remainder of this year. Here at MoneyNews, we find this to be fascinating stuff. It could be a great buying opportunity but it also has all the hallmarks of the next bear market for bonds. And in our search for a catalyst, we notice the latest report from the National Association for Business Economics (NABE), whose members assert that we have a "solid" pace of economic growth. They observed that the economy displayed above 3% economic growth, expansion of hiring and a nine-year high in prices charged by businesses. Following last week's tame consumer and producer inflation reports, this latest evidence causes us to perk up and listen very carefully. On-balance demand is rising and it looks as though it's happening with stronger conviction abroad. Domestically, NABE members forecast that demand was strong enough to persuade them to boost inventories and increase capital spending. The NABE pointed to a brisk rate of price increases in manufactured goods and energy-intensive products. But prices also rose in retailing, wholesaling, lodging and real estate. Add to that a potential hiring squeeze and you see why the Federal Reserve might be at least worried as they ponder their next move on interest rates in August. With one out of five panelists surveyed predicting that a barrel of oil would exceed $60 in 2006, many respondents also predicted that the biggest threat to the economy was still a potentially large rise in official interest rates which would be aimed at capping inflationary pressures as the biggest threat to growth. Editor's Note:
2. Overheated Florida Real Estate Can't Last We hear that CBS had planned to film a 60 Minutes documentary about Miami that condo-crazed city some 72 miles south of the NewsMax Media offices. But we wonder whether there is any truth to the rumor that the shoot was scrapped because the crew couldn't find affordable accommodations anywhere near the tropical locale! Then we saw a local TV news story showing hundreds of area residents lining up to buy a Delray Beach condo for $300,000. But were they actually residents or merely investors? We suspect the latter. That's because property in South Florida is hotter than those gorgeous ladies tanning under the hot sun of South Beach just a bit farther down the coast. But local residents shrug off the boom and tell reporters that it is being generated by buyers who don't even live in the state. Evidence of this fact is astounding and grows by the day, yet nothing seems to stop the hoards of buyers who remain convinced that they are certain to turn a healthy profit. One local Realtor pointed to the real estate booms that have occurred in almost every decade. The 1920s land boom in South Florida was ingloriously wiped out, courtesy of several severe hurricanes that were followed up several years later by a Wall Street crash. But other booms occurred in the '50s, '60s and '80s. As one realtor put it: "We are in the 13th year of a ten-year cycle." Meanwhile, Jack McCabe of local Deerfield Beach firm McCabe Research & Consulting points out that the current supply of condos hitting the market over the next 2 ½ years is equivalent to a normal four- or five-year supply. And Mr. McCabe warns of the potential for an adjustment process in the medium term. With 25,000 new condos reaching the skyline and some 40,000 on the building boards courtesy of a 25 to 37% price rise over the past few years, investors have been lining their pockets. The early birds often find that they can see prices rise throughout the day. And that mentality beats messing around with stocks for now. However, some buildings are currently 70% investor-owned, and that could cause a severe weight on the market when the bubble bursts. As one stockbroker so succinctly put it: "I'll probably buy a few [condos] myself they'll be in foreclosure."
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