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Five Things You Need to Know for Thursday

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What you need to know (and what it means).

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Five things you need to know to stay ahead of the pack on Wall Street.

1. The Six Hundred Dollar Man, Adjusted for Inflation, a Bionic Hedge?

This morning gold reached a 25-year high, topping $600 in the June futures contract.

  • Since December, gold has rallied more than 14%, and silver has rallied more than 32%, compared to a rise of about 5% for the S&P 500.
  • The 10-year Treasury note is down 2.6%.
  • The new Gold ETF is responsible in part for the recent increased demand. The gold ETF by charter is backed by physical gold held in a trust.
  • Increased foreign central bank demand (Russia, China, Argentina) is also part of the story.
  • Russia's central bank recently said it would increase gold reserves from 5% to 10%.
  • About 75% of China's reserves are held in dollars, but recent comments from government officials have suggested moving some of those reserves into gold.
  • In the middle east, four countries - the UAE, Oman, Qatar and Bahrain - have sold out nearly all of their gold.
  • However, and this is important, there are increasing signs middle eastern countries are looking to shed dollar reserves.
  • The new Gold ETF is responsible in part for the recent increased demand.
  • Newmont Australia chief Paul Dowd noted yesterday that gold has been rising versus every major currency for the first time.
  • An interesting exercise for an enterprising Minyan might be to consider the price of other items in gold; real estate, sugar, corn, milk, oil. Are these items more expensive now, than say, in 2002 or less expensive?

2. China's Newest Export: Inflation?

The Asian Development Bank said today that growth in Asia's developing economies will slow... to, ahem, 7.2% from 7.4%. Sorry, that kind of "slow down" sounds pretty good to those of us in the sub-2% GDP areas of the world... especially after 15 consecutive rate hikes.

  • In its 2006 outlook, the Asian Development Bank raised its forecast for developing Asia's gross domestic product growth this year to 7.2 percent from 6.6 percent in its September update.
  • The ADB said the economies of China and India are forecast to expand this year at 9.5 percent and 7.6 percent, respectively.
  • Meanwhile, one of the key components of China's growth story has been an abundance of cheap labor.
  • The combination of cheap labor in labor-intensive manufacturing industries, an undervalued yuan and access to low-cost capital has "allowed" China to "export deflation."
  • However, there are increasing signs of labor shortages in China, particularly in the textile, footwear and electronic equipment sectors.
  • An increase in labor costs coupled with even a gradual increase in the yuan could make Chinese products less of a bargain.

3. Minyanville's Five Things... Suddenly Obsessed With Hyperinflation!

"Whoa, hold on one minute there Five Things... people," a reader just said. "In order for China to export their inflationary pressures, doesn't there need to be sufficient demand for their (potentially) higher-priced goods? And now you're talking about hyperinflation?"

  • Ok, you caught us with our proverbial economic pants down... or so the Weimar Republic would have you believe
  • Although inflation as measured by the government's reporting of the Consumer Price Index and Producer Price Index shows it to be benign, there could conceivably be a vicious circle of Hyperinflation developing if a number of factors collide.
  • Factors such as:
  • An uninterrupted, and uncontrolled increase in the money supply.
    (See: Fed Ceases Reporting M3 Money Supply)
  • A drastic devaluation of the currency, say, if a country is running unsustainable current account and trade deficits.
    (See: Should GCC States Diversify Away From U.S. Dollar?)
  • A move to store "wealth" in non-monetary assets... such as real estate, for example... eventually moving on to other "real" goods such as raw materials, art - anything other than currency.
    (See: Real Estate Investors Hit Paydirt)
    (See: Commodities Boom)
  • In Germany, during the Hyperinflation of the early 1920s, thieves stole copper and brass infrastructure to sell and even siphoned gasoline from cars.
  • We have to stop now... we're freaking ourselves out.


4. Immigration Legislation and the 10-Year T-Note?

"No one seemed to pick up the correlation between the recent ugly action in the 10-year Treasury, and the discussion over immigration currently underway in Congress," Minyanville Professor Brian Gilmartin noted this morning. True. Tell us more, we said.

  • With an approximate US domestic unemployment rate of 4.5%, that implies that 95.5% of all Americans are employed.
  • "If the rug gets pulled out of the labor pool in terms of having some portion of alien workers sent back to their country of origin, and having to re-apply for citizenship, that could certainly be inflationary," Gilmartin noted.
  • Interestingly, the Fed has been increasingly noting their focus on employment costs.
  • Fed heads Hoenig and Lacker yesterday separately noted that the U.S. is close to "full employment."
  • And then tomorrow, there is the week's most important piece of economic data: The nonfarm employment report.
  • Funny how things all come together in the end like that.

5. Martha Stewart: In the News

Martha Stewart is launching a line of upscale home merchandise for Federated Dept. Stores.

  • The Martha Stewart Collection line, which will appear in Macy's across the country starting in the fall of 2007.
  • It will include bed and bath textiles, housewares, dinnerware, glasses and holiday decorations.
  • The agreement between the companies will extend for five years starting in 2007, with options for renewal.
  • Martha Stewart already sells a line of home furnishings in discount retailer Kmart.
  • Did you notice the grace and restraint with which we treated this potentially humorous subject?
  • Might be because of the electronic smart-alec surveillance bracelet we're wearing.



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Copyright 2006 Minyanville Publishing and Multimedia, LLC. All Rights Reserved.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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