Result of US April CPI: Profit Squeeze (unless you play it right)

US April CPI: Up 0.4% from March (seasonally adjusted)
US April CPI (excluding food and energy): Up 0.2% from March (seasonally adjusted)


To make a long story short about the numbers: energy, housing, transportation, food, and medical care all helped drive up CPI, especially energy (driven by a 4.7% increase in gasoline). There were only a few things that brought down the CPI, and those were: apparel (down 3.3% from last year) and a slight drop in air fares. So now that the numbers are out of the way, it’s time for the impact.
I’ll start by first talking about the US Federal Reserve. Headed by Ben Bernanke, these are the guys that essentially determine the cost of borrowing money. From the Fed’s perspective, the inflation reading for this report is neither too high nor too low, it’s as Goldie Locks would say, “just right”. This is a good thing for investors, as the Fed’s have been persistent in saying that inflation is their number one concern. This gives the Fed’s no reason for alarm, and no reason to raise rates (thereby hurting a company’s ability to grow). Although it isn’t low enough to warrant a drop in rates, a CPI that is too low would more often then not be the affect of a sluggish economy, and no one wants that. The other great thing from a Fed perspective is that the increases in gasoline do not seem to be driving up overall prices. Now this may be good in the sense that it gives the Fed’s more reasons to not hike rates; the result of this may hurt the profit margins of some of your portfolio companies.
When a company has rising costs, and is not raising prices to adequately compensate for them, the only end result is lower profit margins. This CPI gives me little incentive to invest in manufacturing companies; AKA the firms that would be most affected by increases in energy and raw materials costs (which also gained). This report also makes me want to shy away from airline companies who will be negatively impacted by the gains in oil, but whose fares actually decreased in April (a sort of ‘double whammy’ for profit margins). With oil on the rise, and the peak season for oil just beginning, I would be putting more money into quality refiners. Oil is in a bull market and with the basic fundamentals of dwindling supply and rising demand in its favor (not to mention the ever present geo-political tensions in the Middle East) the bull market will continue. But don’t just look at oil; also look at established mining companies who mine for such things as copper and uranium. Raw materials costs are on the rise, and like oil, they have the basic fundamentals of supply and demand working in their favor.
Overall this was a great report for markets. Inflation was up, but wasn’t so high as to raise alarm bells in Bernanke’s office. With oil and raw materials up, and overall prices not increasing to compensate for that, stay away from manufactures and airlines. If these numbers keep up you’re going to see them taking hits in their profit margins. This will happen regardless of how much they sell or how good their management is. Unless they raise prices and cut costs elsewhere, profits will take a hit. Get in on the right side of the bull market with oil and raw materials. Just always remember to buy quality miners and refiners. Sure everyone tells you about the tales of huge gains in no name miners or refiners, but what never makes the headlines are how much people have lost in speculative plays! Don’t get me wrong, I’m not saying never buy speculative plays, but never make them the majority of your portfolio. If they are, I salute you, because you’re either going to be going big or going broke. Always remember to be a cautious investor, and be weary of the crooks out there only out to make a fast buck.

This is: Simply Stocks

If you’d like to review the CPI report yourself, the following is the link to the US Bureau of Labor Statistics press release: http://www.bls.gov/news.release/cpi.nr0.htm