This week’s commentary will be somewhat short and abbreviated as tax season and the lack of an editor has stifled our efforts to a degree.

1.The BLS and Bernanke vs. the World on Inflation
: The CPI released by the BLS on Wednesday showed inflation as virtually non-existent and Bernanke reiterates FOMC view of ‘Extended period on (low) rates’.   The CPI showed inflation up 0.1% (MoM) in March, which if annualized would register a paltry 1.2% estimated increase for the year.

The CPI showed Shelter (32.289% of CPI) declining 0.1% and Owners-equivalent rent also declining by 0.1%.  Gasoline prices were also down by 0.8% for the month.

MWM:  A credit driven economy cannot afford an excuse to raise rates and stave off inflation, at least not until it hurts.  Despite independent reports showing rents up sharply in the 1st quarter of 2010 and real world gas prices increasing by 4.6% in US DoE Terms (US dept of Energy) the BLS continues to find ways to adjust the increases away.  It appears that Ben has nothing to worry about on the inflation front –  if of course it weren’t for the mini speculative mania at work in stocks, the consequences of which we know all too well.

2. A word on the quality of earnings – 2nd quarter 2010: Companies of note reporting this week: JP Morgan (JPM), United Postal Service (UPS), Banc of America (BAC), Intel (INTC) and General Electric (GE).

MWM: We won’t bore you with all the details, but as a whole, we don’t think the market was impressed.  Even though most companies (with the exception of GE, whose earnings were down 18% y/y) earnings beat estimates and were clearly out of negative territory, the quality of the earnings were quite poor, revealing that creative accounting (JPM in particular) and or cost cuts are still the primary driver of earnings growth.  Intel we will concede had decent numbers with few flaws due to a powerful shift toward Apple products.  However, this should be viewed as more of a ”one-up” for the mature PC industry rather than a boon for the economy as a whole.

3. A new Bull Market or an inflection point for stocks?:
Stocks have broken several technical milestones in recent weeks, suggesting bullishness is here to stay.  Besides reaching new interim highs, most indexes have all confirmed these new highs at the same time.  This is a development that has many technicians cooing.

MWM: Near vertical chart patterns usually highlight tops rather than bottoms (or a light at the end of the tunnel is really a train wreck headed in your direction?)…

With earnings growth stalling, interest rates rising, non-BLS inflation advancing, foreclosures rising and wages dropping, we remain skeptical.  Moreover, the chart patterns look very similar to those formed just before the crisis hit in 2008 (especially for the NASDAQ).

We understand that George Soros may not be a popular man among many of our readers, but he has been fairly adept at calling inflection points. He made some interesting comments that we would like to share.  Please click below to view.

Thank you everyone, and have a great weekend!

David H. Burgess Jr.
VP Investment Management