Friday, August 18, 2006

Older and Wiser, or Just Older?

I just celebrated my 50th birthday. Some would say I'm older and wiser. Others, that I'm just older. Whatever I am, I'm still bearish on stocks.

Nonetheless, we did see a bit of a rally this week. That was primarily the result of better-than-expected PPI and CPI numbers. This gave credence to the Fed's theory that a slowing economy will dampen inflationary pressures. As a result, investors are now betting that the Fed will not have to resume raising rates.

The rally was also bolstered by oil prices, which fell quite a bit after BP's announcement that it wouldn't have to shut down Prudhoe Bay production completely as it initially said.

Now, let's see if I've got all this straight: Stocks rallied because economic growth is slowing and oil is only $70 per barrel. For some reason, it doesn't make much sense to me.

I expect GDP to grow at about 2.5%. That's not bad, but it's not exactly a reason to jump into stocks. Furthermore, $70 per barrel for oil is cheaper than the recent high, but it isn't cheap. Seven years ago, oil was less than $20 per barrel. Just three years ago it was around $30. So I'm supposed to be impressed that it's fallen all the way back to $70?

As for inflation, despite the seemingly good news this week, it's still a worry. The CPI is up 4.1% year-over-year. The core rate is up 2.7%. Year-to-date, the CPI is up 4.8% on a seasonally-adjusted basis.

Yes, I'd agree that right now there's a good chance the Fed won't raise rates at its Sept. 20 meeting. But before betting on that, I'd want to see more data. We'll get plenty of that between now and the Fed's next meeting.