3 M - Diversified Manufacturer Lowers Forecast

I can hardly overstate how important it is to let go of companies that are incurring rising raw material costs. One by one, they are being taken to the woodshed. Last week, KMB KMB manufacturer of diapers lowered guidance because of higher cotton costs. Investors sold with prejudice. The same fate happened to 3M MMM a day later last week. There is a serious narrowing of market breadth and sector rotation underway. Please make an effort to reduce exposure to manufacturers incurring higher commodity costs. The broad stock market will go higher into year end, but the narrowing and sector rotation is underway. We are late in the expansion part of the business cycle precisely because Bernanke accelerated it with his QE programs. This is creating a disorderly inflationary ramp up in raw commodities prices, and not where he most wants it to go ~ in the mbs securities sitting on his stinking rotten balance sheet. The points I am driving home underscore the adverse outcomes of a blunt non-conventional monetary tool such as quantitative easing is. It is simply high time to get out of the Fed's way, and decompose risks exposures to companies that will struggle to grow earnings under a rising raw material cost regime. Above is a chart that indicates the energy sector is beginning to outperform basic materials as of Sept 20. Energy is up 1% today, and basic materials are virtually unchanged. Both sectors are trending higher, but the shift in relative strength underscores a sector rotation is underway that confirms we are getting late in the business cycle expansion just as fiscal stimulus comes to an end in 2010 thereby further drying up what little final demand there is out there. The ratio charts showing energy outperforming both the SP500 and basic materials needs more confirmation to confirm we are indeed late in the business cycle expansion, but the early indications are that we are there now. I can feel it in my bones right now. But that doesn't mean the stock market won't squeak higher into the New Year. It most likely will after a slight pause following the anti-climax to this week's elections and FOMC meeting. More will be addressed on this very important topic later this week, at the weekend by the latest in a big powerpoint presentation.