Tags: stagflation

Stagflation Warning — Time to be a Value Player

Tuesday, 17 Jun 2008 11:24 AM

There is mounting evidence of stagflation — rapidly rising inflation combined with recession — in the U.S. economy.

Just yesterday, the Federal Reserve Bank of New York reported that a measure of economic activity pointed to contraction in June. Its index of manufacturing activity for the state of New York fell to negative 8.68 in early June, from negative 3.3 in May — readings below zero indicate economic contraction.

Similar indices computed by the Philadelphia Fed and the Institute of Supply Management (ISM) indicate that manufacturing activity and overall economic growth in the U.S. will continue to expand at an anemic rate throughout the remainder of this year.

Meanwhile, inflationary pressures continue to grow. Consumer prices have risen at rapid rates in each of the past eight months, primarily as a result of skyrocketing energy prices. Today’s report on producer prices from the U.S. Department of Labor suggests that consumer prices could rise at even faster rates in the months ahead. For example, the prices of a broad basket of commodities (including crude oil, industrial metals, cotton, timber, and raw foodstuffs) increased 7.2 percent in May, as compared to a year ago. Excluding energy and food products, producer prices rose 3 percent — the fastest pace since December 1991.

Although I expect oil and gas prices to decline during the next couple of months, persistent demand from China, India and other emerging economies for natural resources other than oil, such as coal, industrial metals, textiles, and grains, suggests that economies around the world may face significant inflation rates for at least the next few years.

Stagflation, contrary to popular belief, can often present huge buying opportunities to investors who are patient enough to wait for a more normalized period of economic growth and stabilizing prices to begin.

For example, stock prices barely made any ground during the mid- to late-1970s, with the S&P 500 generating an average annual return of only 0.5 percent from the beginning of 1976 to the end of 1979. However, once oil prices moderated and economic growth improved significantly during early 1983, the beaten-down stocks of solid companies rose sharply throughout the remainder of the 1980s.

Growth companies tend to struggle in times of stagflation. That’s because most growth companies rely on rapidly expanding economies and outside financing to grow their sales and earnings at a fast rate. Technology companies are the one exception due to the fact that they tend to provide ways for other companies to significantly increase their productivity.

My research indicates that today’s investment environment shares many similarities with the late 1970s. I therefore recommend that you take a look at some longer-term value plays during the currently turbulent investment environment — at stocks of companies that are currently trading at low prices relative to the value of their company’s underlying assets and estimated long-term earnings outlook.

I suggest that you begin by reviewing the balance sheets and turnaround initiatives of companies in the financial sector. Although many so-called “experts” recently began shunning that sector of the market, my research reveals that numerous financial institutions have significantly improved their financial condition and have begun to implement plans to return to profitability within the next 12 months.

Click here to learn more about the turnaround efforts being made by companies in the financial sector, as well as the names of some ETFs that focus on the financial sector.

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DavidFrazier
There is mounting evidence of stagflation — rapidly rising inflation combined with recession — in the U.S. economy. Just yesterday, the Federal Reserve Bank of New York reported that a measure of economic activity pointed to contraction in June. Its index of manufacturing...
stagflation
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2008-24-17
Tuesday, 17 Jun 2008 11:24 AM
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