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Correction’s End is Close

May 19, 2010 – 4:48 pm

This morning the CPI (Consumer Price Index) showed inflation numbers for last month as flat. Actually they fell .1% if you exclude energy and food. This is important because both the wholesale and retail inflation statistics are clearly benign. There is no inflation and that is giving the Fed the freedom to keep interest rates as low as they want. They are not under any pressure to raise them. Add to that the flood of money coming out of the Euro and into the Dollar, overall interest rates are under downward pressure. That is going to continue for the short term. Long term it’s a different story, interest rates will rise as a function of debt.

Our current expected correction is close to running its course. The primary cause has been Europe but our market was already due for a correction and traders and investors were looking for an excuse. Please note that none of this weakness in stock prices was caused by any weakness in earnings or sales. Will Europe’s problem affect us? Yes, just not by much and those large international companies based in Europe are getting hit very hard unjustly. As the Euro weakens and our dollar strengthens that helps exports for European corporations. Their earnings will actually go up and yet their stock prices are falling with their market. At some point they are going to be very good buys, just not yet.

Meanwhile, our market is now very reasonably priced and our economy is strengthening. That is a mix that leads to higher stock prices.

Good Trading
Steve Peasley

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