Zacks Analyst Blog Highlights: ProShares UltraShort 20+ Year ETF, Pfizer, Merck, Ford and CarMax - Press Releases

For Immediate Release

Chicago, IL – September 20, 2010 – Zacks.com Analyst Blog features: ProShares UltraShort 20+ Year ETF (TBT), Pfizer (PFE), Merck (MRK) and Ford (F). and CarMax (KMX).

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Here are highlights from Friday's Analyst Blog:

Core CPI Remains Unchanged

Right now, the risk of deflation is greater than the risk of runaway inflation. This report does little to alleviate those fears, although the somewhat hotter than expected PPI yesterday did help a bit. We are not in it yet, at least as measured by core prices, but we are uncomfortably close.

The threat of deflation is one of the reasons that long-term T-note yields are so low. A return of under 2.7% per year is not very enticing for locking up your money for ten years. If inflation were to average over the next ten years, what it has averaged over the last ten years (2.5%) the increased amount of goods and services you could get for delaying your gratification for a decade would be almost nothing. If it were to average what it has since 1988 (the period covered by the graph above, 2.9%) you would actually lose purchasing power by locking up your money.

At the first hint that inflation is picking up, bond yields can be expected to head much higher. Even though I think that deflation is a greater threat right now than a return to the high inflation of the 1970's, I do not think that the Fed will allow it to happen. Deflation is the only scenario under which the purchase of long-term treasuries makes sense at these levels. To buy a T-note, you have to be rooting for breadlines and Hoovervilles. A good way to bet on T-note yields rising is the ProShares UltraShort 20+ Year ETF (TBT).

Where Do Price Increases Exist?

So what areas are showing price increases? Health care costs always seem to run faster than overall inflation, but even they seem relatively well behaved. Medical commodity prices (i.e. Drugs) were up 0.2% in August, but that simply reversed a 0.2% decline in July and came after they were unchanged in June.

While year over year they were up 3.0%, if the pace of the last three months were sustained, there would be no inflation at all in the price of medical commodities. Part of the reason for that is probably the increasing substitution of generic drugs for name-brand prescriptions. While the drugs are still on patent, firms like Pfizer (PFE) and Merck (MRK) are still aggressively raising prices, but they are now losing share to their slightly older drugs that are no longer state-enforced monopolies and have to face the free market.

Medical Services prices (i.e. a visit to the hospital) also were up 0.2% in August after being unchanged in July but up 0.4% in June. Year over year, medical service prices are up 3.2%, but if the last three month pace were maintained, they would only be up 2.4%.

The other noteworthy area of inflation is in car prices, particularly used car prices. In August, the price of a used car rose 0.7%, and that is on the heels of a 0.8% increase in July and a 0.9% increase in June. Hey, at least the trend is in the right direction. Still, we are talking about a 15.5% rise over the last year. In contrast, the price of new cars rose just 0.3% after back-to-back increases of 0.1% in June and July.

Year over year, new car prices are up 2.3%. While that is still more than the overall rate of inflation, which indicates more pricing power on the part of Ford (F)than the average company has it pales in comparison to the jump in used car prices. The differential seems obviously unsustainable to me, but yet it persists month after month.

That is probably good news for the big used car dealers like CarMax (KMX). However, if it were to continue for a few more years, a 1999 Ford Escort would cost more than a new Ford Focus. Somehow I don't see that happening. What we are probably seeing is a large “inferior good” effect. In other words, in tough times people gravitate to buying the cheaper product, even if is of inferior quality. Used cars relative to new cars meet that description.

Overall, this was a fairly solid report. It does not totally put to bed the danger of deflation, but it does not further fan the worries of it. It certainly does not raise the specter of run away inflation anytime soon. It will not resolve the debate within the Fed about resorting to unconventional methods of increasing the money supply by buying up lar

 

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