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Wednesday, July 26, 2006

Inflation

Inflation figured were released today and they don't look good for the market.

Apparently CPI rose 4% in the last 12 months with a rise of 1.6% this quarter. It is attributed to petrol costs pushing up prices for other items.

This will lead to another interest rate rise but talk is that it may now be a 0.5% instead of just a 0.25% increase. This will hit hard for those with large mortgages who are already finding it difficult to pay the monthly interest bill.

How does this affect the market ? Well it means people have less money to spend, therefore profits for companies will not be as high as they will have reduced revenues, Companies with debt will have higher interest costs and this will push down profits. With lower profits, alternative investments become better options as the growth and income will not be available in the share market. People will take their money out of the market and the market will decline. The higher interest rates go, the more money moves to term deposits and high interest bank accounts as they rise with the rising interest rates.

This can be a bargain time to be buying stocks if you buy the right kind of stocks in the first place. This is where technical analysts get hurt IF they do not know how to short sell, or make money in a declining market.

This is a minor issue for fundamental analysts who have taken a rising interest rate into account. I am happy with my selections and would not want to sell them at this stage unless there is a drastic change to the fundamentals or my assumptions are proven wrong on the shares I purchased.

Well I hope that helps with everyone's trading and investing .....

Good Luck...

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