Tuesday, February 23, 2010

BAGAKOAA Feb 23, 2010 Are we on the Target with Inflation


Feb 23, 2010 Are we on the Target with Inflation

Ok I am picking lotto numbers this week because I almost nailed TGT The whisper number was 1.18 a share I went out for a stretch and said 1.22 and they came in at 1.24 on better than expected Holiday sales. So why did they finish down. The management had some cautious statements about the balance of the year, the consumer confidence report came in negative, and TGT’s credit card program was reporting bigger than expected delinquencies. So what does that mean. Buy buy buy! At 50.00 a share, TGT is looking good. At a PE of about 15. I like it. I am buying some July calls at 50. Macy’s did come in short of the 1.32 hitting 1.10 but their CEO had some upbeat comments.

And I was correct with HD that reported 20 cents a share which did blow away estimates of 16 cents a share. The bad news was I did get priced out of the calls. I might just go long on the stock. I will let you know. Many of you have HD and it was a good bet for you. The stock was up a point and a half today. Medtronic’s did what it was supposed to do but benefited from 3 cents a share in accounting change rules. They reported 75 compared to 73, but the accounting changes helped them. The stock was down.

We’ll see if I got CRM right tomorrow. Thursday’s earnings just to keep you ahead of the game include, Safeway should just barely beat its 53 cents a share estimate, Fluor should beat by a long shot the 87 cents a share, (do some homework on this stock it is lookin good), look for Kohls and GAP to keep the retail rally alive by beating estimates-sorry I don’t have them at my finger tips, the big looser will be Wynn who will struggle and probably not make the 13 cents a share estimated, Heinz will probably meet the 75 cents a share they are looking for, and Dr Pepper should be right in line with the 43 cents a share they expect.

Someone asked me about inflation today and what a good strategy might be for inflation. My first reaction is don’t worry about it. I really don’t think there is an inflation issue till well into 2011. Core inflation reported down last week and the fed tightened a bit by raising the bank to bank discount rate a quarter point. It doesn’t mean much except the feds are willing and able to tap on the breaks when necessary. Even China with a robust 9+% GDP tightened credit by increasing bank reserve requirements. Let me explain what that means. You can restrict the flow of capital in two ways, charge more for the use of the money, like a spike in the prime interest rates, or the central banks of a government like our Fed or the People Bank of China can go to their member banks and say instead of lending 30% of your capital reserve you can now only lend 25%. That means they have to come up with 5% more capital. This slows lending and cools of a hot economy.

Last week for the first time since the 1980s the core inflation rate, (less food and energy) actually dropped .1%. (You can blame WMT for lowering their prices. Seriously, they had a sales drop for the first time in the company’s history. This is not a coincidence. Was it tonnage or was it pricing. My guess is pricing.)

So I can’t get all excited about inflation. The dollar’s increase since its bottom in November isn’t helping matters but I don’t think there is a problem. B.U.T., Behold the Underlying Truth, what should you do to protect against inflation if you think it is creeping up on us. First of have 10-20% of your portfolio in gold. Avoid the individual gold stocks unless you have the time to do a thorough study of the company, its management, its geopolitical issues it might be dealing with and all the fun stuff you need to know to make a nice profit. By GLD a great ETF that tracks the underlying commodity.

After gold just think about what inflation does. It makes everything more expensive. Look at other ETFs for other commodities as a possible hedge. Also get one or two great energy related stocks now while they are relative cheap. Look for a decent yield on dividends while you are at it. I own CVX and RIG. For a spec play in energy look at NEP and GST, (I do not own them but they are on a watch list), You can also look at real estate investments. It can be REITs or land or troubled assets, but if there is true inflation, real estate has always done well during inflationary times. You can try your hand at Forex. I DO NOT RECOMMEND IT BECAUSE OF THE INCREDIBLE RISKS. You can play some currency ETFs. For instance if you think the dollar will drop agains the Euro, there are a couple of contra dollar ETFs you can play. You can also by TIPS. I did some research on these a while back for my friend Butch and they did not excite me but I was also not worried about inflation. I believe I talked him out of it. Here is a link to give more about TIPS http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm. If you want to get tricky, you can short bonds, but it is just easier to buy a short bond fund.

As far as a good book, I have not read it, but just downloaded it to my Kindle: The Handbook of Inflation Hedging Investments by Robert J. Greer

In a nutshell I would suggest reading about inflation now and not actually investing for it till late this year. Unless if Benanke surprises us all.

Salve Lucrum


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