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August 19, 2009

 

*****Small-cap Update

*****Financial Integrity?

*****Will Congress Protect Your Wealth?

 

Fellow Investor,

 

As of noon Eastern Time stocks across the major indices are trading up again after a downward slide all morning. The Dow, the Nasdaq, and the S&P 500 are all trading slightly up and bucking the general trends set earlier in Asia and Europe. Indeed, Asia has seen some of the biggest drops with the Shanghai index shedding almost 5 percent on mounting concerns over the sustainability of China’s economic recovery. With the exception of London’s FTSE, the major European markets are also all currently trading down, though not as much as Asian markets.

 

The Dow is currently trading at 9,277, up 59 points; the Nasdaq has nudged up 7 points with trading at 1,963; and the S&P 500 is sitting at 995, down 6 points.

 

Small-cap price gainers from the morning session include Cerus Corporation (Nasdaq:CERS), up 73%; American Axle & Manufacturing Holdings (NYSE:AXL), up 21%; and Cell Therapeutics (Nasdaq:CTIC), up 12%.

 

*****If you didn’t see Warren Buffett’s Op/Ed piece in the New York Times yesterday, here’s the link here's the link. Buffett is calling on Congress to make the hard choices when the economy gets back on track.

 

It should be obvious that at some point in the future, inflation will become a concern. Some of the solution rests with Ben Bernanke and the Fed. They must reverse expansive monetary policy.

 

But perhaps the bigger challenge is for Congress; it will need to reduce spending and adopt policies that will bring the U.S. government debt in line.

 

If you’re like me, you’re skeptical. Congress has rarely shown the kind of “tough love” that will be needed. And as Buffett points out, failure to get our national books in order will be the equivalent of a silent tax (inflation) on us, the taxpayer. And even worse, America will start to lose its “…reputation for financial integrity…” as Buffett puts it.

 

*****Right now, deflation is still the major threat to the U.S. economy. Savings are on the rise, prices are weak, wages are down, and unemployment is rising. This is all a direct consequence of the massive wealth destruction that occurred in the wake of the financial crisis.

 

At some point, prices and employment will reach a balance point and growth will resume. It’s at that point that inflation becomes a threat.

 

But it should be obvious that some are preparing for the threat of inflation now. After all, can we really trust Congress to make the hard choices? Have our elected officials on Capitol Hill ever demonstrated this ability?

 

Just look at oil prices. Demand is at 20 year lows. There’s more oil in storage than there’s been in decades. Most analysts have no idea when demand for oil will increase. And yet oil prices are stubborn around the $70 level.

 

Just imagine what will happen to oil prices when demand does return? Ralph Kramden’s “To the moon, Alice!” seems about right. And it won’t be just oil. Gold, copper, silver, nickel, zinc – all commodities will move much higher to account for the weakening purchasing power of the U.S. dollar.

 

Investors can sit back and hope that Congress does the right thing to protect their wealth. Or, investors can start buying the assets that will increase their wealth when Congress ultimately fails to act. For more on buying commodity stocks to protect your wealth from inflation, click here.

 

Ian Wyatt

Editor

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Posted 08-19-2009 12:03 PM by Ian Wyatt