Inflation

February 9, 2011

Equity futures are slightly down this morning in spite of robust earnings as concerns about inflation roll through the global markets. Emerging markets fell for a 5th straight day as wheat hit its highest level since before the financial crisis. The S&P 500 closed yesterday at its highest level since June 2008 on optimism that the recovery will be sustainable. The 10 year treasury continues to weaken, rising to 3.72%. Commodities are flat today.

The US Labor Department announced today that there is a widening gap between the creation of jobs and hiring. The number of private-sector jobs being advertised has increased since 2009, but the rate of hiring fell off in late 2010. As of December, there were nearly five job seekers per advertised opening.

The DOT announced today that the “unintended acceleration” problem facing Toyota was not an electrical problem. The report tested 3000 vehicles, but could not replicate the issue. The conclusion was that possibly floor mats became bunched up and kept the pedal from coming back up when pressure was reduced by the driver. That was an expensive floor mat for Toyota, who recalled millions of vehicles and saw its reputation damaged and its market position in the US drop from #2 to #3.

UK food prices rose at the fastest pace in 19 months, and China raised rates again, the third time since October, putting pressure on copper and other industrial commodities. The rate was raised from 5.81% to 6.06%. Chairman Bernanke will be on the defensive again today as speaks in Washington, however, this time the pressure is being applied by his own team as two Fed Presidents call for higher rates, saying the Fed is now compliant with Congress in sustaining the budget crisis.

Deutsche Bank is reporting that declining rental vacancies will drive up the housing payment component of core CPI this year, driving the measure up to over 2% vs. 0.8% in 2010. Rents account for 40% of the core measure of CPI. The vacancy rate dropped in Dec 2010 by a record 0.9% to 9.4%.

Strong earnings last night and this morning were reported by Disney, Northrop Grumman, and Coca Cola. Disney reported strength at their theme parks and in advertising sales at both ABC and ESPN. The stock is approaching its all-time high set on May 3, 2000.



Danaher agreed to acquired Beckman Coulter yesterday in a $7 billion transaction valuing Beckman at $83.50 per share, or 8.6x the past 12 months’ EBITDA. That valuation is the cheapest deal on record for a medical-instruments maker. This is the first deal in the space over $1 billion that has been valued at less than 10x EBITDA.

The Pirates are back! Not in Pittsburgh, but in the high seas. An 1100 foot supertanker carrying almost 2 million barrels Kuwaiti oil to the US was high jacked this morning off the coast of Oman. This is the first high jacking of a large vessel since April. During 2010 pirates hijacked 53 ships and 1181 crew members, primarily off the coast of Somalia. The average ransom payment rose to $5.4 million last year vs. $150K in 2005. The value of the oil on the ship taken today is roughly $168 million.

Asian markets were weak last night in response to China’s rate increase. European markets are down slightly in afternoon trading. Investors are expecting spending cuts of $24 billion in Brazil, and rates declined in response, falling 17 bps to 12.68% on the 2-year note.

Have a great day

Ned