The BK Index

Shock…that is all I felt when I saw the BK index soar last week. As background, I must remind you that the government indicated last week that, during the month of August, “core inflation” (accounting by the U.S. Government that does not include food or energy costs, but is used to calculate the COLA benefits for things like Social Security) was flat during the month. They did indicate that the “inflation rate” went up by 0.3% for an annualized rate of 3.6%. At the time, I didn’t think much about the statement because everything I had been reading indicated that inflation was “under control” and the worry was about possible deflation. Now back to the BK Index. I am a creature of habit, as my wife will tell anyone. When I leave my Denver office to come home I always stop at a Burger King on the way to the airport. I always buy a Whopper Junior with cheese, no pickle, at this same Burger King where they give me a free soda (no age disclosure). The cost of this meal has always been $1.35 ($1.25 for the meal plus 10 cents tax). Last week I went into my Burger King, ordered my Whopper Junior with cheese and was told my bill was $1.72! What? There must be a mistake! No mistake, I was told. The week before, prices had been raised at BK, and the Whopper Junior, which had been a mere $1 meal, was now $1.29, to add cheese was now 30 cents instead of 25 cents, and to make matters worse, the tax on my meal had gone up from 10 cents to 13 cents! As you read this I know what you are thinking: it’s only a burger and it’s only an additional 37 cents and he is still getting his free soda. True enough, but it is an increase of 27%. For the state of Colorado, it is an increase of 30%. I was truly shocked and began to wonder if something was happening in September that was being missed by everyone else. To go to the other end of the spectrum, I looked at the MB Index (Mercedes Benz) and discovered that the price on their bread and butter E 350 had gone up by 3.3% for the 2011 model year. Finally, in desperation, I checked the BB Index (Brooks Brothers). They always send me 25% off coupons to buy at their outlet store in Kittery, Maine. Not so for the latest coupons, which are only 15% off. That means the dress shirt that was $37.50 before would now cost me $42.50 or an increase of 13%. So I ask you, is inflation beginning to creep up on us, or am I being too selective? Personally, I think it is time for the Federal Reserve to signal that they are going to start inching up the Fed Funds rate 0.25% at each of their next meetings and get it up to at least 1%. Being careful and signaling what they are doing will have a mild effect on the economy, but will help them be in a better position if inflation heats up. Ed Mallon

Hey, Wait for Me!

You might be wondering where the stock market is going these days. As of the close on September 13th, the DJIA had gained 5.3% since August 31st while the S&P 500 was up 7% and the NASDAQ was up 8.1%. My, what is going on? Let's start by understanding that August was a very poor month for the market. To put it in perspective, the S&P 500 was down 6.8% in August. What we have seen, therefore, is a move back to where the market was at the beginning of August. This is not a bad thing; it’s just that you need to remember we don't have a runaway train on our hands! The news has been good. The private sector added about 67,000 new jobs in August. New unemployment claims last week were 451,000 vs. 472,000 the week before (we are looking for that number to go below 450,000 and will be happier at 400,000 or lower). The economy appears to have grown by about 2.85% from the end of September 2009, which is not great, but it is growth. Today, retail sales were reported to be up, which was totally unexpected. In addition, the winds of positive tax reform appear to be blowing in the right direction. The possible large increase in taxes in 2011 has weighed heavily on the markets. The idea of 100% write-off of new plant and equipment investment through next year sits well with me. I think its biggest impact is on large corporations that have lots of surplus cash to spend. The trickle down of this to smaller businesses, which will manufacture all or parts of the plant and equipment, is good. The one bone of contention seems to be taxes on those who earn more than $250,000 each year. The implication is that these are the "fat cats" but history shows us the "fat cats" can always figure a way out of paying taxes. The real burden of this measure once again falls on small business owners who have been massacred during this downturn with little or no help from the government. All in all, the economy is looking better, consumer confidence may be gaining, and the likelihood of a "double dip" is looking far less likely. So how do I feel about the market? Short term, I think it is too high. September is notoriously a bad month for the stock market as investors start to worry about the all-important third quarter earnings. I think that, between now and the middle of October, we may hit a rough spot or two. Looking out to the mid term and long term, I think we are still in a bull market that is going through a correction. Ed Mallon