The Fed's Influence on Markets, Commodities

NEW YORK (TheStreet) - Over the weekend, The Wall Street Journal published a story on how commodity prices are hitting your wallets.

According to the article, "A lot of manufacturers and retailers are expected to bump up prices this year on many basics -- from ribs to coffee to khaki pants -- as they pass along the escalating prices of the commodities, or raw materials, they use."

Then yesterday, the Dow just missed the 12,000 mark -- a level we haven't seen since 2008.

So, the prices of raw materials are rising in lock-step with publicly traded companies.

It would seem unlikely, if not impossible, that companies could become more profitable and so demand higher valuations in the stock market at the same time that they pay more for the raw materials that they use to run their businesses, manufacture products and provide services.

In other words, how can shares of McDonald's ( MCD) rise from $55 to over $75, while revenues stay relatively flat at the same time that their costs are rising?

Incidentally, McDonald's hasn't yet raised prices, although that's about to change.

The fast-food chain just announced during their quarterly earnings call that they would be raising the prices on some menu items over the next few months.

But the point is, the company hasn't yet raised their prices, and we know their input costs are rising.

It doesn't make much sense that investors would be willing to pay more for the same earnings of McDonald's -- unless there's a malevolent group of central bankers who have a government mandate to increase liquidity.

That malevolent group's actions would also simultaneously account for higher commodity prices as well.

It's almost as if quantitative easing and its sequel have had the effect of boosting the price of everything.

It seems as though there are more dollars chasing the same amount of goods, which is creating what some folks are calling an "inflation of prices."

A truly shocking development.

All sarcasm aside, you'd be best advised to pay close attention to the Federal Reserve. Stock market investors especially need to understand that valuations are screaming higher as a strict and natural consequence of a flood of money from the Federal Reserve.

Some people will quibble and equivocate about the assertion that the Fed is printing money.

You don't have to agree that the Fed is printing money in the most rigorous definition of the word, but the effect is the same on the balance sheet of the Fed (they're buying billions of dollars of Treasuries) as well as the effect it has on the stock market.

I'll use the Dow as the measure of the stock market, just to point out the obvious effects of the Fed's ventures into the market in the forms of Mortgage Backed Securities Purchases, QE1 and QE2:

Now, it might be a bizarre coincidence that the Fed's actions have preceded rallies and followed dips in the broad market, but then I guess it's also a coincidence that commodity prices have risen too.

But just in case it's not a coincidence, stock market investors should have some kind of plan should Ben Bernanke not hint at, and then initiate, QE3 once QE2 expires this June.

My plan? I'm using dips in gold and silver to add to my supply of physical precious metals. I'm also looking for compelling gold and silver miners to pick up at a discount during this dip.

The question is, will the market wait for June, or will they start dumping shares ahead of a QE3 that might not come?

Thoughts? Send them to me at editorial@resourceprospector.com.

Good investing,

Kevin McElroy, editor of Resource Prospector

At the time of publication, Wyatt did not have positions in any equities or in gold or silver.

Wyatt Investment Research, founded in 2001 as a publisher of newsletters, offers independent investment research of financial markets, stocks, bonds, ETFs and mutual funds to about 250,000 individual investors. The company is led by founder Ian Wyatt, who serves as publisher and chief investment strategist.

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