Producer Prices and Target's Earnings

November 17, 2009

Today's report on producer prices shows that inflation is still well-contained. Economists were expecting a rise of 0.6%, instead the PPI rose by just 0.3%. The "core rate," which doesn't include food and energy prices, dropped by 0.6%.

Still, I'm not so sure that inflation will stay contained. The dollar has suffered on the currency markets and gold continues to rally to all-time highs. This signals that investors are clearly worried about future inflation. I continue to like stocks for the "reflation trade" like GoldCorp (GG).

We're also seeing continued improvement in the retail sector. Target (TGT) just reported an 18% earnings gain. The big box retailer earned 58 cents a share last quarter which was 8 cents more than analysts were expecting. Target's gross margins improved to over 30%.

The weak spot is that revenue only rose by 1.1%. This means that Target is improving profits, not by growth, but by holdings costs down. In others words, Target's earnings report confirms the producer price report. I like Target but I want to see more top-line growth before I raise it to a Buy. The stock continues to be a Hold.

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