Oil Climbing, but No Inflation?

oil prices and inflationThat's right,. Ignore the financial burden that you and I have felt over the past couple years of rising commodity prices, because analysts say there is no inflation...Rubbish.

Anyone who has lived in the United States the past two years has noticed a strong climb in commodities. The latest release on inflationary numbers from our so called analysts is that core commodities are only rising at a 1-2% rate. This number would shun any ideas that indeed inflation is an immediate concern, but the real question is are the analysts correct?

In regards to oil, we of course know this is not the case. The cause of the most recent ascent in oil prices above $100 per barrel is largely due to the recent turmoil throughout the region. Honestly, is this new? The Middle East has been in turmoil since the beginning of time. However, anytime any new threat is known globally, there becomes a rush into oil prices. As this tends to be the trend, I would expect oil to start peaking shortly.

Oil is not the only thing rising at this point. We have seen increases in phone costs, utilities, health care, food, and construction. I just received a letter from my health insurance telling me that my monthly premium was being increased 25% next month due to inflationary reasons! However, Wall Street is telling me that we are moving at a 1-2% rate.

Hopefully, no one reading this site is naive to think that this is true. Our government has just spent trillions of dollars in borrowed stimulus money in hopes to jump start the market. For the time being, it seems that indeed the market is running, but this injection will come with consequences. That is of course years of massive inflation. We are already beginning to see early seeds.

At this point, I have to believe oil is not going much higher. In fact, within the next couple weeks, I will be taking positions in DUG or even consider purchasing some September expiring DIG put options. Oil is going for a roller coaster ride once again, and I believe we are nearing the top soon.

For those non-believers thinking that indeed inflation is not in our midst. I thought I would share an interesting study Jeff Cox, CNBC analyst, did illustrating commodities recent moves. The following are prices he found in products showing first their month/month change (December to January) and then year over year change (2009/2010). The results are scary.

* Ground beef up 6.8 percent month over month, and 11.1 pct year over year.
* Butter, up 3.2 percent monthly and a stunning 27 percent over the past year.
* Coffee, up 6.5 percent and 16 percent.
* Potatoes, up 3.6 percent and 7.1 percent.
* Lettuce actually fell 5 percent monthly after a spike higher in December, but is up 5 percent over the past year.
* Bread up 1 percent and 3 percent.
* Chicken up 0.8 percent. and 4.3 percent .
* Egg prices have been fairly steady.
* Milk, down slightly month over month, but up 2 percent year over year.

Now you decide...Are we experiencing inflation?

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Uncle Sam Wants Payback - Buffett Speaks

government tax increaseWhat? You thought the government was just going to keep giving handouts for free? Never. The IRS has announced that those who took advantage of the first time home buyer tax credit that was issued in 2008, will now need to start paying that back on 2010's tax return.

How this will work is that all those who took advantage of the $7,500 maximum tax credit in 2008 will be asked to add $500 to their taxable income for the next 15 years. If the house is sold before the 15 years is up, then the full amount will be due upon the sale.

What will really ruffle some feathers is that only people who took the credit in 2008 will be required to pay.

Not like this is going to affect the overall economy much. When you consider that about 70% of Americans are estimated to not be paying their home mortgage right now, you better believe their not paying their taxes either. At any rate, Uncle Sam is starting to look for payback, and its only going to get worse.

Another interesting side note is that Warren Buffett has reduced his portfolio holdings of Berkshire Hathaway to 25 positions, the lowest we've seen form Buffett in several years. Obviously, Warren himself, is having to think that indeed this run has to be coming to an end soon. This was surprising to many, considering that Buffett has been rather optimistic through much of the recovery.

In addition to reducing his holdings, Buffett also sold off all the remaining of his Bank of America stock, and up'd his positions in Wells Fargo. It seems as though Warren had seen enough of bad underwriting and news from the bank giant and has not gotten out. Wells seems to be a safe play at this point for financials as they remain as the high standard of underwriting and continue to make a killing off of interest spreads. Happy Trading.

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