Alfred E. Neuman made his Mad debut in 1954 when he appeared on the cover of The Mad Reader, a paperback collection of reprints from the first two years of the comic book, Mad. In the first magazine version of Mad (July 1955), Neuman appeared on the cover in an illustrated border along with his now-familiar signature phrase "What, me worry?" written underneath. This border was used for five more issues, through Mad #30 (December 1956). After the Three Mile Island accident in 1979, an issue of Mad magazine featured Neuman with his intellectually incurious motto, "What, me worry?" changed to, "Yes, me worry!"
As a baby boomer, I grew up with Mad magazine and Alfred E. Neuman. Now, as a Wall Street strategist, I know exactly what he was talking about when he said, "Yes, me worry!" and "What, me worry?" because these phrases describe the way I feel about certain issues driving our markets today. Here are my three "Yes, me worry!" issues: inflation is understated, commodity inflation is still booming, and investors own too many bonds. My three "What, me worry?" issues are as follows: globally, cash is still king, money in motion, and Japan's headwind is turning into a tailwind. First, let me touch on my three "Yes, me worry!" issues, beginning with how inflation is understated.
I've focused on this issue in previous commentaries, and I feel I need to do it again. Due to the fact that the United States measures inflation with a flexible basket of goods (in which goods may be substituted in and out) instead of a fixed basket, I believe the rate of inflation is understated in this country.
Think about it this way. Suppose, for example, that the only consumer product being used to measure inflation is beef. In this example, there are only two different cuts of beef available: ribeye and New York strip. In the previous month, when prices and inflation were last measured, people only purchased the ribeye ($9.90 per pound), even though the New York strip ($9.00 per pound) cost 10% less than the ribeye. A month later, prices increased 10% on both cuts of meat. The ribeye cost $10.89, and the New York strip cost $9.90. A set of prices reflecting this scenario are presented in the table below.
If the CPI (Consumer Price Index), or inflation, for my beef scenario is calculated as the increase in the cost of a constant quantity and quality of beef (a fixed basket of goods), the inflation rate is 10%. This is essentially the way the CPI was originally calculated by the Bureau of Labor Statistics (BLS). This, however, isn't how we currently measure inflation in this country. The current BLS methodology of calculating CPI takes into account changes in consumer purchasing preferences. So, in my simplified beef example, we substitute New York strip steak for ribeye steak, resulting in a CPI of 0%. That's because last month we paid $9.90 per pound for beef (ribeye steak) and this month we're paying that exact same $9.90 per pound for beef (New York strip steak). Isn't this unbelievable? While the price of ribeye and New York strip steak both just went up 10%, due to BLS's method of measuring inflation with a flexible rather than a fixed basket of goods, the government's official inflation rate for beef is 0%. This doesn't make sense to me.
The second thing I worry about is commodity inflation. For any of you who wonder how the government can say there's no significant inflation, let me prove to you that we have an inflation problem-even with the recent pullback in commodity prices. I'm a long-term-investment kind of guy and I never worry about the daily, weekly, or even monthly moves in commodity prices. Instead, I always look at prices on a year-over-year basis. Take a look at these year-over-year commodity price increases as of June 3, 2011, and ask yourself if you think we have an inflation problem in the United States. Aluminum is up 30.7%. Orange juice is up 31.9%. Crude oil is up 32.0%. Rice is up 32.3%. Copper is up 38.2%. Gasoline is up 40.9%. Heating oil is up 47.0%. Soybeans are up 47.9%. Lead is up 48.5%. Tin is up 50.7%. Sugar is up 70.6%. Palladium is up 71.5%. Wheat is up 75.4%. Coffee is up 90.9%. Silver is up 98.6%. Now you might want to sit down for these final two because both are up triple digits. Cotton is up 114.2%. Last, but not least, corn is up 118.7%.
I've said this before, and I'll say it again-the inflation hedge that investors put in place today may be one of the most important investment decisions they make in the next decade.
The third and final thing I worry about is that many investors own too many bonds. Basically, bonds have two risks: interest-rate risk and inflation risk. In other words, you don't want to own bonds when interest rates are going higher and when inflation is rising, which is what I believe is going to happen. I think it's not a question of if, but a matter of when this will occur (later in 2011 or sometime in 2012).
You may be asking yourself, exactly what do I mean by too many bonds? Look at the latest information put out by Strategas Research Partners. In 2009, net fund flow was +$375.9 billion for bonds, and -$8.8 billion for equities. The trend continued in 2010 when the net fund flow was +$246.1 billion for bonds, and -$34.8 billion for equities. Year-to-date through June 6, 2011, the trend finally slowed down as net fund flows were +$41.3 billion for equities and +$29.1 billion for bonds. No matter how you look at these numbers, with interest rates and inflation heading higher, many investors simply have too many bonds.
Let me shift gears and tell you the three things that I don't worry about at all. I call them my "What, me worry?" issues. The first is that globally, cash is still king. Companies in both the U.S. and Europe managed to improve working-capital performance in 2010 compared with 2009, with the key measure of cash-to-cash (C2C) dropping by 2% and 4%, respectively, according to Ernst & Young's latest Annual Working Capital Management Survey. This year's analysis shows that the 2,000 companies in the survey still have an aggregate total of U.S. $1.1 trillion in cash unnecessarily tied up in working capital. This is equivalent to nearly 7% of their sales-similar to the figure from 12 months ago.
Looking at performance by sector in both the U.S. and Europe, cyclical industries such as automotive supply, chemicals, diversified industrials, semiconductors, and steel achieved significant progress in reducing levels of working capital in 2010.
So, just how much is one trillion dollars? To provide some perspective, think about it like this: A trillion dollars is the number one followed by 12 zeroes. Or, you can think of it this way: One trillion dollar bills stacked one on top of the other would reach nearly 68,000 miles (about 109,400 kilometers) into the sky, or about one third of the way from the Earth to the moon. Or, if you laid dollar bills end-to-end, you could make a chain that stretches from the Earth to the moon and back again 200 times before you ran out of dollar bills! Finally, a military jet flying at the speed of sound, reeling out a roll of dollar bills behind it, would take 14 years to reel out one trillion dollar bills. I think you get my point that $1.1 trillion is a lot of cash. And remember that money makes the investment world go 'round.
The second issue I don't worry about is that some cash is finally being put in motion. And when cash goes in motion, it tends to be bullish for our stock market.
What are some real-time examples of how some of that cash is being used? Wal-Mart disclosed that it's embarking on a $15 billion share buyback plan. That's not only an indication of Walmart senior management's confidence in the company, but it's also a sign of Walmart's confidence in our overall stock market. Second, Schneider Electric is paying $2 billion to buy Telvent. Third, and finally, Marathon Oil is paying $3.5 billion for 141,000 acres in South Texas, which will double its position in the Eagle Ford shale formation (one of the nation's biggest oil and gas fields).
The third and final thing I no longer worry about is Japan. While I'd be the first to admit that Japan has a long way to go until it fully recovers from the recent axis of evil (earthquake, tsunami, and nuclear meltdown), it's important to note that these headwinds are now fading, and there are signs of tailwinds on the horizon. All one has to do is look at the most recent economic release out of Japan for proof: The May Small Business Confidence number came in at 37.8, which was an improvement over last month's 36.1 reading. The May Purchasing Managers Index (PMI) came in at 51.3. (When this number is more than 50, it's an extremely bullish sign.) Last month, the PMI was 45.7. May Household Spending was -3.0%, which was a tremendous improvement from the prior month's reading of a dismal -8.5%. Finally, May Housing Starts turned positive as well. The Housing Starts were +0.3%, which was a marked improvement over the prior month's -2.4% level.
What does all of this mean? I think it means three things. First, inflation is going higher, and you'd better get ready for it. Second, be wary of the bond market. Third, the global economy just might surprise all of us on the upside.
As always, I'll end this commentary with my customary pearls-of-wisdom quote. This one's from none other than Alfred E. Neuman himself: "How come we choose from just two people for President, and 50 for Miss America?"
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PAST ECONOMIC PERFORMANCE DOES NOT ENSURE FUTURE RESULTS.
The views expressed here are those of Dr. Bob Froehlich. Dr. Bob Froehlich's views are not necessarily those of The Hartford and should not be construed as investment advice. They are subject to change. All economic and performance information is historical and does not indicate future results.
Dr. Bob Froehlichâ??s sources of information include Bank of Canada, The Bank of England, Bank of Japan, Bloomberg News, Business Roundtable, China Investment Corporation, CIA. World Fact Book, CNBC, Congressional Budget Office, Deutsche Bank, The European Monetary Union, Federal Reserve Board, The Financial Times, Freddie Mac, FOX Business, Goldman Sachs, International Monetary Fund, International Strategy & Investment, Journal of Commerce, Merrill Lynch, PIERS Global Intelligence Solutions, Strategas Research, Thomson Reuters, Union Bank of Switzerland, U.S. Census Bureau, U.S. Department of Commerce, U.S. Department of Labor, U.S. State Department, U.S. Treasury Department, The Wall Street Journal, and The World Bank.
â??The Hartfordâ? is The Hartford Financial Services Group, Inc. and its subsidiaries, including the issuing companies of Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company. Variable annuities are issued by Hartford Life and Annuity Insurance Company and by Hartford Life Insurance Company, and are underwritten and distributed by Hartford Securities Distribution Company, Inc. The Hartford Mutual Funds are underwritten and distributed by Hartford Investment Financial Services, LLC.
You should carefully consider investment objectives, risks, and charges and expenses of The Hartford Mutual Funds before investing. You can find this and other information in the Funds' prospectus, which you can obtain from your investment representative or by calling 888-843-7824. Please read it carefully before you invest or send money.
You should carefully consider the investment objectives, risks, and charges and expenses of The Hartford variable annuities and their underlying funds before investing. You can find this and other information in the prospectus for the variable annuity and the prospectuses for the underlying funds, which you can obtain from your investment representative or by calling 800-862-6668. Please read them carefully before you invest or send money.
401 retirement programs (excluding 401(a)) are funded by group variable annuity contracts (countrywide: HL-14991; NY & FL: HL-14973) and group variable funding agreements (HL-16553 and HL-16553 (NY)) issued by Hartford Life Insurance Company (Simsbury, CT), or by The Hartford Mutual Funds, which are underwritten and distributed by Hartford Investment Financial Services, LLC. 401(a), 457, and 403(b) retirement programs are funded by group variable annuity contracts (HL-15811, HVL-11002 and HVL-21002 series, HVL-14000, HVL-14001, HVL-20000, HL-17402, HL-14848, HL-17402 and HL-15420 with Rider HL-16957) and group variable funding agreements (HL-16553 and HL-16553 (NY)) issued by Hartford Life Insurance Company (Simsbury, CT). Group variable annuity contracts are underwritten and distributed by Hartford Securities Distribution Company, Inc. where applicable. Retirement programs can be funded by group fixed annuities (HL-19799) issued by Hartford Life Insurance Company (Simsbury, CT) and can also invest in mutual funds through custodial accounts. Hartford Securities Distribution Company, Inc. (member FINRA and SIPC), a registered broker/dealer affiliate of The Hartford, has established certain service programs for retirement plans, including defined contribution employee retirement benefit plans, through which a sponsor or administrator of a Plan may invest in mutual funds on behalf of Plan Participants.
You should carefully consider the investment objectives, risks, and charges and expenses of the mutual funds or The Hartford's group variable annuities, group variable funding agreements, and their underlying funds before investing. You can find this and other information in the fund's prospectus, which you can obtain from your investment representative. You can also find this in the disclosure documents (whichever is applicable). To obtain the applicable product prospectus or disclosure documents and the underlying fund prospectus, call 1-800-528-9009. Please read them carefully before you invest or send money.
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PAST ECONOMIC PERFORMANCE DOES NOT ENSURE FUTURE RESULTS.
The views expressed here are those of Dr. Bob Froehlich. Dr. Bob Froehlich's views are not necessarily those of The Hartford and should not be construed as investment advice. They are subject to change. All economic and performance information is historical and does not indicate future results.
Dr. Bob Froehlichâ??s sources of information include Bank of Canada, The Bank of England, Bank of Japan, Bloomberg News, Business Roundtable, China Investment Corporation, CIA. World Fact Book, CNBC, Congressional Budget Office, Deutsche Bank, The European Monetary Union, Federal Reserve Board, The Financial Times, Freddie Mac, FOX Business, Goldman Sachs, International Monetary Fund, International Strategy & Investment, Journal of Commerce, Merrill Lynch, PIERS Global Intelligence Solutions, Strategas Research, Thomson Reuters, Union Bank of Switzerland, U.S. Census Bureau, U.S. Department of Commerce, U.S. Department of Labor, U.S. State Department, U.S. Treasury Department, The Wall Street Journal, and The World Bank.
â??The Hartfordâ? is The Hartford Financial Services Group, Inc. and its subsidiaries, including the issuing companies of Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company. Variable annuities are issued by Hartford Life and Annuity Insurance Company and by Hartford Life Insurance Company, and are underwritten and distributed by Hartford Securities Distribution Company, Inc. The Hartford Mutual Funds are underwritten and distributed by Hartford Investment Financial Services, LLC.
You should carefully consider investment objectives, risks, and charges and expenses of The Hartford Mutual Funds before investing. You can find this and other information in the Funds' prospectus, which you can obtain from your investment representative or by calling 888-843-7824. Please read it carefully before you invest or send money.
You should carefully consider the investment objectives, risks, and charges and expenses of The Hartford variable annuities and their underlying funds before investing. You can find this and other information in the prospectus for the variable annuity and the prospectuses for the underlying funds, which you can obtain from your investment representative or by calling 800-862-6668. Please read them carefully before you invest or send money.
401 retirement programs (excluding 401(a)) are funded by group variable annuity contracts (countrywide: HL-14991; NY & FL: HL-14973) and group variable funding agreements (HL-16553 and HL-16553 (NY)) issued by Hartford Life Insurance Company (Simsbury, CT), or by The Hartford Mutual Funds, which are underwritten and distributed by Hartford Investment Financial Services, LLC. 401(a), 457, and 403(b) retirement programs are funded by group variable annuity contracts (HL-15811, HVL-11002 and HVL-21002 series, HVL-14000, HVL-14001, HVL-20000, HL-17402, HL-14848, HL-17402 and HL-15420 with Rider HL-16957) and group variable funding agreements (HL-16553 and HL-16553 (NY)) issued by Hartford Life Insurance Company (Simsbury, CT). Group variable annuity contracts are underwritten and distributed by Hartford Securities Distribution Company, Inc. where applicable. Retirement programs can be funded by group fixed annuities (HL-19799) issued by Hartford Life Insurance Company (Simsbury, CT) and can also invest in mutual funds through custodial accounts. Hartford Securities Distribution Company, Inc. (member FINRA and SIPC), a registered broker/dealer affiliate of The Hartford, has established certain service programs for retirement plans, including defined contribution employee retirement benefit plans, through which a sponsor or administrator of a Plan may invest in mutual funds on behalf of Plan Participants.
You should carefully consider the investment objectives, risks, and charges and expenses of the mutual funds or The Hartford's group variable annuities, group variable funding agreements, and their underlying funds before investing. You can find this and other information in the fund's prospectus, which you can obtain from your investment representative. You can also find this in the disclosure documents (whichever is applicable). To obtain the applicable product prospectus or disclosure documents and the underlying fund prospectus, call 1-800-528-9009. Please read them carefully before you invest or send money.
â??The Hartfordâ? is The Hartford Financial Services Group, Inc. and its subsidiaries.
Distributed by Hartford Securities Distribution Company, Inc.
All information and representations herein are as of 6/11, unless otherwise noted.
P6170_061311 106144 6/11
©2011 The Hartford Financial Services Group, Inc. All Rights Reserved
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