Interest rates vs inflation.....

There is a huge question that is brewing behind the scenes, when do we raise interest rates? Some analysts are saying we should raise them now, to avoid inflation spiralling out of control. However should the rates be raised now, we are going to throw cold water on the economic recovery, and risk the economy falling back into the recession. However should the FED wait until the economy is stronger, we risk losing buying power to inflation.

I personally think that we need to wait, as raising interest rates now would break the housing market, and cause major havoc on the financial industry which the FED has been working overtime to save. While inflation could be painful in the future, by being preemptive we are hurting the present.

- Arthur Smelyansky

Overblown economical hype

It seems like over the last few days investors have lost their minds. the SP500 is up more then 7% in a week, on mediocre economic news that point to the fact that the recession is not as bad as previously expected. Thank god for this mornings Bernanke testimony, to pour some cold water on the lemings.
Of note the SP500 pushed past the 950 mark for about an hour before getting slammed down again. Analysts are paying close attention to this number, as most predict that this is where the summer time rally will stall. There is a lot of money tied to the options around this number, so it will be very interesting to see just who will win this battle. A piece of advice to the average investor, sometimes its wise to pass.


- Arthur Smelyansky

A blow up is just around the corner

CIT group, which lends money to retailers, is on a verge of bankruptcy. Should it fail, it will be the largest bank failure ever, with more then 70 billion in assets. The company has already been rejected for a bailout, and the clock is ticking. If you think the credit markets froze when Lehman brothers failed, you have seen nothing yet.
This has the potential to devastate the whole economy.

There is a last minute effort to convert their debt into equity, however with mixed stories of exactly how much they need and by when is making this last minute attempt very difficult.

The fall out from this failure is going to be huge, should CIT file for chapter 11 bankruptcy, look for the financial and retail sectors to really take it on the chin the next day.


BTW and on top of this we are facing the sp950 hurdle, which many analysts are predicting is where the market will end the latest rally.
- Arthur Smelyansky

Investors must be pretty desperate when they bid the market up 2% on news that the industrial production didn't cut back output as much as initially expected. It seems like everyone is trying to catch the bottom of the economy, so they can ride the recovery to the top. The problem is catching a bottom is like catching a butcher knife thats falling by the blade. Lots of blood will be shed, and many will regret it later.

My advise for now, is to buy some Treasury Inflation Protected Securities. Because if history taught us anything,is that when interest rates are at an all time low, inflation is bound to spike at some point.

- Arthur Smelyansky D.M.S.

Minimum wage increase during a recession??? not smart

July 24th is around the corner, and on that date, 29 states will increase their minimum wage requirements to 7.25 an hour. While some people will be cheering the move as a step in the right direction which helps out the lower income class, I think its a move with bad implications.
When minimum wage is increased, it creates a very short term benefit with long term problems. Lets take Wal-Mart for example, most the employees are minimum wage earners, and would benefit from the increase. However the company faced with increasing cost of labour now has to increase the selling price of their products to maintain the same level of profitability as before. And who will get hurt the most when prices at the discount stores go up? the same people who just a week or so before got their "raises" which are now negated. Ad to that the fact that other people who shop at those stores are now faced with higher prices as well, and the minimum wage increase ends up being a bad thing. ( I am not even going to mention that raising employment wages during a recession will have its own negative results as well.)