Dividing Lines and Societal Trends: PPI, CPI, and an Inflation Picture

February 18, 2010, 08:33 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Anyone who has been following me for a while already realizes I am not your every day economist.  My observations are not limited to data, and statistics.  Instead, I get my hands dirty too.  I have been digging deep recently, and this is what I found.

There is a strong division between classes surfacing.  On one side of the tracks, it is business as usual.  On the other, it is hardship and heartache.  The dividing line was hard to see a year ago.  Now, that line is obvious.  This observation offers important insight, some of which I expect to surface soon.

Preemptively, I wrote about reflation in the "Heads Up" section of my Newsletter this week.  You can read it in the Newsletter on the Website now.  For example, a handful of months ago I mentioned Aveeno, and how Aveeno prices were coming down, to more closely match the CVS or Walgreens competing products on the shelves next to them.  In tough times, if CVS is charging $4, and Aveeno prices are $5 for the same product, most people will opt for the $4 option.  This happens regardless of how it might ‘look.’

Almost immediately, I expect that to change.  I expect brand names to reflate.  This is part of the dividing line I am observing in societal trends.  I do not believe the PPI data will show this, but the CPI data may start to show this soon.  If this week's data does not show it, I expect it next time.  Reflation will show up as inflation initially, and may cause some eyebrows to rise,  but reflation is not inflation.  Instead, it has a ceiling, and will not spiral out of control.

Pricing power is a good thing, especially in weak economic conditions.  If pricing power is being realized, even if it has a ceiling, Wall Street will embrace it. 

Furthermore, on the side of the tracks where business is happening, everything seems fine.  There is no panic; this is not 2008.  Instead, businesspersons are acting like professionals, and getting work done.  In this environment, I am hard pressed to forecast a meltdown. 

Reasonably, we all know bad things loom on the horizon.  From commercial real estate, to the long-term findings of the Investment Rate, there are plenty of things to be concerned about.  Interestingly though, the worries that exist may take some time to play out.  If they hit now, it will be a shock to the Market, and require a major event.  That means we need to watch, and I will alert you if I see something.

However, we cannot make investment decisions based on the supposition of major news hitting the Market.  Instead, we need to use the tools that are in front of us, and let Smart Money guide us.  Right now, my tools suggest that the increases from 2009 are not yet over.  The pullback from the January highs was healthy, but there is more room to increase. 

Afterwards, we will have overshot to the upside again.  When these businesspersons start to talk about their superior stock picking skills, when the barista at Starbucks tells you he just bought 100 shares of UYG, or when your mail carrier tells you his 401K is doing great, you too will see some of the red flags I watch for every day.

Today, those red flags do not exist.  The only red flags I see are the ones that are being covered up by our Government.  They may keep those covered for a while longer.  Eventually they will need to pay the piper, but they may not have to start paying immediately.

Good Trading.Thomas H. Kee Jr.

President and CEO

Stock Traders Daily

http://www.stocktradersdaily.com

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