Tuesday, March 30, 2010
Friday, March 19, 2010
Winners and losers if inflation skyrockets
The word "inflation" strikes fear into the hearts of many Americans. It conjures worries of a stagnating economy, rising prices, a falling dollar and an income that just can't keep up with the cost of living. But while a high inflation rate hurts many Americans financially, others actually see a benefit. Following are some potential winners and losers in an inflationary cycle:
Winners
Fixed-rate mortgage holders. Anyone with large, fixed-rate debts such as mortgages benefit from higher inflation, says Mark Thoma, professor of economics at the University of Oregon in Eugene.
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Bankrate can help you find the lowest available mortgage rate.
"They're going to be paying back with devalued dollars," Thoma says.
A higher inflation rate also helps homeowners who bought during the peak of the real estate boom and are now "under water" by bringing equity back into the positive column more quickly.
Auto-loan holders. Auto-loan holders who bought before inflation and locked in a relatively low interest rate benefit from high inflation because they pay off a sizable debt with devalued dollars, says Nancy Lowenberg, a financial adviser with Hiawatha, Iowa-based Securian Advisors MidAmerica.
Investors in stocks. Stockholders get some protection from inflation because the same factors that raise the price of goods also raise the values of companies.
"Theoretically, the value of equities varies directly and proportionally with inflation," Thoma says. "When you double all prices and wages, you double profits and you double the value of stocks, basically."
Small-business owners with big fixed-rate debts. As prices for products go up, small-business owners find themselves better able to manage fixed-rate debt from investments in equipment and other business necessities, Lowenberg says.
"Think about a business that's expanding and borrows money to put in state-of-the-art equipment so that it can grow," Lowenberg says. "If inflation is higher than normal, and they're getting paid more for their product because raw material prices were up and they're paying their workers more, they're paying the debt back in stable dollars."
Investors in commodities. Bankrate senior financial analyst Greg McBride says commodity prices track the inflation rate closely. Buying storable commodities such as gold can be a good hedge against inflation.
Losers
The American economy. High inflation historically has hurt the American economy, McBride says.
"If you look at periods of strong growth in U.S. history, the one constant has been a very modest rate of inflation over that time."
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In periods of high inflation, consumers' purchasing power falls and their standard of living slides with it.
Also, borrowing to fund new businesses, buy homes and finance other tasks necessary for a healthy economy becomes more difficult as lenders jack up interest rates to hedge against further inflation.
Winners
Fixed-rate mortgage holders. Anyone with large, fixed-rate debts such as mortgages benefit from higher inflation, says Mark Thoma, professor of economics at the University of Oregon in Eugene.
Find the best mortgage rates
Bankrate can help you find the lowest available mortgage rate.
"They're going to be paying back with devalued dollars," Thoma says.
A higher inflation rate also helps homeowners who bought during the peak of the real estate boom and are now "under water" by bringing equity back into the positive column more quickly.
Auto-loan holders. Auto-loan holders who bought before inflation and locked in a relatively low interest rate benefit from high inflation because they pay off a sizable debt with devalued dollars, says Nancy Lowenberg, a financial adviser with Hiawatha, Iowa-based Securian Advisors MidAmerica.
Investors in stocks. Stockholders get some protection from inflation because the same factors that raise the price of goods also raise the values of companies.
"Theoretically, the value of equities varies directly and proportionally with inflation," Thoma says. "When you double all prices and wages, you double profits and you double the value of stocks, basically."
Small-business owners with big fixed-rate debts. As prices for products go up, small-business owners find themselves better able to manage fixed-rate debt from investments in equipment and other business necessities, Lowenberg says.
"Think about a business that's expanding and borrows money to put in state-of-the-art equipment so that it can grow," Lowenberg says. "If inflation is higher than normal, and they're getting paid more for their product because raw material prices were up and they're paying their workers more, they're paying the debt back in stable dollars."
Investors in commodities. Bankrate senior financial analyst Greg McBride says commodity prices track the inflation rate closely. Buying storable commodities such as gold can be a good hedge against inflation.
Losers
The American economy. High inflation historically has hurt the American economy, McBride says.
"If you look at periods of strong growth in U.S. history, the one constant has been a very modest rate of inflation over that time."
advertisement
In periods of high inflation, consumers' purchasing power falls and their standard of living slides with it.
Also, borrowing to fund new businesses, buy homes and finance other tasks necessary for a healthy economy becomes more difficult as lenders jack up interest rates to hedge against further inflation.
Thursday, March 11, 2010
Thursday Look Ahead: Financials Could be the Trigger for Stocks to Move Higher
Stocks may be setting up for a spring fling.
Sandra Baker | Photographer's Choice | Getty Images
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The S&P 500 is within striking distance of its January 19 high of 1150, and the market this week has literally been inching closer and closer to that level. If the S&P can break above 1150 and hold, it will be a sign to many that stocks would be ready to move higher.
"I can't stress this enough. There are no magic numbers," said Jordan Kotick, head of global technical strategy at Barclays Capital. "But 1150 is important. It is the previous high and it is a short term pivot point."
The S&P 500 closed 5 points higher at 1145 Wednesday, while the Dow finished up 2 at 10,567. The Nasdaq rose 18 to 2358. Financials and tech led the action.
Financial shares have been on a tear this week, especially the companies that were hit hardest and knocked down to low single digits during the financial crisis. Traders though say it is an important move even though it started amid a flurry of rumors and speculation. Most encouraging, they say, was the pricing by Citigroup of its oversubscribed preferred offering.
"It appears there is capital out there that is looking to be put in financials," said one trader, adding that the buyers in the group initially were hedge funds but have been joined Wednesday by more conservative institutions.
The stocks getting the most attention include Citi and AIG, but others have been moving higher, including the sector darlings J.P. Morgan and Goldman Sachs. Regional stocks have also been big movers, including KeyCorp, Regions, Zion and Huntington Bancshares.
"The tape is financially lit," said Michael O'Hare of LaBranche Financial. "If you take the financials away, you have a little bit of a problem. The commodities ran into a little bit of a headwind." The S&P materials sector was down just fractionally Wednesday.
FOR INVESTORS
Current DateTime: 12:06:58 11 Mar 2010
LinksList Documentid: 35806905
Banks Will Vastly Outperform in 2010: Expert
Citi Stock Likely to Keep Climbing: Bove
Citigroup Announces Terms of Trust Offering
US Pre-Market Futures
Traders have blamed the low volume market and tiny sideways moves on indecisive investors, afraid the economy could tilt the wrong way. For that reason, Thursday's weekly jobless claims will be watched to see if the number confirms the improving jobs picture seen in the February employment report last week.
The report is released at 8:30 a.m., as is international trade data for January.
"I think Citi got this thing moving...A lot of people are putting money in financial stocks. They were beaten up pretty good and it looks like a new leadership move," said O'Hare.
Keefe Bruyette's Pete McCorry, who trades bank stocks, said the move in financials could be meaningful. "I think you can use the word 'significant.' But I'd like to see volume confirmation of the entire market.. not just the $3 names," he said.
Break out?
Kotick, however, believes the move in financial stocks is a real indicator that the stock market is poised to move higher. "In the last two to three sessions, the financial sector has begun to break out," he said. The group was the cause of the market's tail spin and its improvement should help lift the entire market.
"We had a Q1 decline. Now we think it's over and we look for a higher Q2," he said. Kotick said he expects the market to keep moving higher for a couple of quarters. "It's going to be higher at year end, but not aggressively higher like 2009," he said.
Sandra Baker | Photographer's Choice | Getty Images
--------------------------------------------------------------------------------
The S&P 500 is within striking distance of its January 19 high of 1150, and the market this week has literally been inching closer and closer to that level. If the S&P can break above 1150 and hold, it will be a sign to many that stocks would be ready to move higher.
"I can't stress this enough. There are no magic numbers," said Jordan Kotick, head of global technical strategy at Barclays Capital. "But 1150 is important. It is the previous high and it is a short term pivot point."
The S&P 500 closed 5 points higher at 1145 Wednesday, while the Dow finished up 2 at 10,567. The Nasdaq rose 18 to 2358. Financials and tech led the action.
Financial shares have been on a tear this week, especially the companies that were hit hardest and knocked down to low single digits during the financial crisis. Traders though say it is an important move even though it started amid a flurry of rumors and speculation. Most encouraging, they say, was the pricing by Citigroup of its oversubscribed preferred offering.
"It appears there is capital out there that is looking to be put in financials," said one trader, adding that the buyers in the group initially were hedge funds but have been joined Wednesday by more conservative institutions.
The stocks getting the most attention include Citi and AIG, but others have been moving higher, including the sector darlings J.P. Morgan and Goldman Sachs. Regional stocks have also been big movers, including KeyCorp, Regions, Zion and Huntington Bancshares.
"The tape is financially lit," said Michael O'Hare of LaBranche Financial. "If you take the financials away, you have a little bit of a problem. The commodities ran into a little bit of a headwind." The S&P materials sector was down just fractionally Wednesday.
FOR INVESTORS
Current DateTime: 12:06:58 11 Mar 2010
LinksList Documentid: 35806905
Banks Will Vastly Outperform in 2010: Expert
Citi Stock Likely to Keep Climbing: Bove
Citigroup Announces Terms of Trust Offering
US Pre-Market Futures
Traders have blamed the low volume market and tiny sideways moves on indecisive investors, afraid the economy could tilt the wrong way. For that reason, Thursday's weekly jobless claims will be watched to see if the number confirms the improving jobs picture seen in the February employment report last week.
The report is released at 8:30 a.m., as is international trade data for January.
"I think Citi got this thing moving...A lot of people are putting money in financial stocks. They were beaten up pretty good and it looks like a new leadership move," said O'Hare.
Keefe Bruyette's Pete McCorry, who trades bank stocks, said the move in financials could be meaningful. "I think you can use the word 'significant.' But I'd like to see volume confirmation of the entire market.. not just the $3 names," he said.
Break out?
Kotick, however, believes the move in financial stocks is a real indicator that the stock market is poised to move higher. "In the last two to three sessions, the financial sector has begun to break out," he said. The group was the cause of the market's tail spin and its improvement should help lift the entire market.
"We had a Q1 decline. Now we think it's over and we look for a higher Q2," he said. Kotick said he expects the market to keep moving higher for a couple of quarters. "It's going to be higher at year end, but not aggressively higher like 2009," he said.
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