I just read a commentary by RaJa’s Jeff Saut, that is dead on target with our prior commentary:
"The call for this week: We don’t believe the geometrically weighted,
seasonally adjusted, hedonically priced, owner-equivalent rented, core-CPI
numbers; instead, we use the non-core CPI numbers that do not exclude food and
energy. And last week the non-core CPI was reported to have increased +0.7% for
the month. That is an 8.4% annualized inflation rate, implying that despite all
of the Fed’s rate ratchets we may still be in a negative real interest rate
environment. If true, the Federal Reserve might continue to raise rates higher
than most expect.
We don’t think the equity markets are prepared for such a
potential “rate rape” given their 19.3x P/E ratio combined with some of the
highest profit margins in history. Since profit margins are probably
mean-reverting, we think earnings estimates are overly optimistic. Consequently,
we keep hearing the band Chicago Transit Authority echoing down the canyons of
Wall Street and the tune is their 1970 hit “Does Anybody Really Know What Time
It Is?” So far that question has been followed by the next line from that song,
“does anyone really care?!” Clearly we do, which why we remain cautious and
continue to invest/trade accordingly."
To put a picture to that, consider these charts: Do they reveal inflationary pressures or not?
Higher Energy and Non-energy Prices Lift Overall CPI
Northern Trust Global Economic Research
February 22, 2006