Thu, May 26, 2011|Dan Ferris

Wage hikes are here...

Last night, my wife lamented the higher cost of everything. Her favorite coffee, which we have delivered to the

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house every few weeks, is raising prices starting next month. The price of garbanzo beans (a favorite snack of hers) recently rose from $0.99 per can to $1.39.

"I bet the workers who pick these things aren't getting paid more," she said last night.

"Maybe not," I said. "But when wages start to rise, the inflation deniers won't have a leg to stand on anymore."

Higher wages traditionally make up the last link in the inflation chain. Money is created at the Federal Reserve, goes into the banking system, and then makes its way into the economy. Laborers get the counterfeit money after it's been spent everywhere else by banks and businesses. So laborers' wages are one of the last places inflation's effect tends to appear…

Well, guess what? The wage hikes have begun.

Calabasas, California-based temp agency On Assignment raised its bill rates 6.3% in the quarter ended March 31, 2011. SunTrust Robinson Humphrey analyst Tobey Summer says temp wages are the "canary in the coal mine" for more widespread wage increases.

San Diego-based AMN Healthcare Services, Boca Raton, Florida-based Cross Country Healthcare, and Menlo Park, California-based Robert Half International – all temp agencies – are all charging higher wages right now or are planning to do so in the coming months.

One company that benefits from higher wages is Extreme Value World Dominator Automatic Data Processing (ADP). ADP is the biggest payroll processor, handling about one-sixth of all U.S. paychecks. It holds employee wages overnight to take out taxes and other deductions before issuing checks and making deposits to its clients' employees. ADP earns interest on this "float," the way insurance companies invest policyholders' premiums. In the nine months ended March 31, 2011, ADP earned $404 million on its float, about 26% of pretax earnings.

ADP's average client balances were up 12% in the first quarter and hit their all-time high in April. After you consider a larger client base and other items, there's still some room for the effects of higher wages. ADP serves more than 550,000 client firms.

I recommended ADP in October 2008, right after the market crashed. It's returned 62% in dividends and capital gains since then, beating the S&P 500's total return by 15%, while taking much less risk than the average S&P 500 stock.

I've recently found another company that's No. 1 in the world in its market and whose business ought to do well in good times and bad. The stock is dirt-cheap, and management is making all the right moves. It is selling noncore assets, paying down debt, and buying back shares – exactly what I like to see.

This stock could easily double in another year or two. Unlike most World Dominator stocks, it's relatively small, at less than $10 billion in market cap. I have some more work to do, but it looks like it'll wind up in the June issue of Extreme Value, which comes out in a little over one week. To access Extreme Value and the next issue, click here.

Inflation doesn't seem to bother Tiffany's much. The world-famous jeweler filed its quarterly report today. Mr. Market must have liked it, pushing up Tiffany's stock 8%. The jeweler's sales rose 20% in the first quarter, compared to the same period last year, with earnings per share up 26%.

Higher precious metals are a cost for Tiffany's, so it could suffer with gold and silver way up the last few years... But it's got the biggest jewelry brand name in the world. It had no trouble raising prices earlier this year. Mark Aaron, Tiffany's vice president for investor relations, said the company hasn't "experienced any meaningful resistance to higher prices."

And if you really want to beat inflation as an investor, all you need to do is get elected to Congress...

In a new academic study, four university professors examined investment results on more than 16,000 stock transactions made by 300 House delegates from 1985 to 2001. The result was clear: They beat the market by an average of 0.55% per month, around 6.6% a year. The professors note a previous study showed members of the U.S. Senate did so well they outperformed hedge funds.

In fact, if members of Congress didn't beat the market, they'd be bigger morons than you already think they are. Why? Because insider trading laws don't apply to members of Congress…

You heard that correctly. The Securities and Exchange Act does not apply to members of the U.S. Senate or House of Representatives. Congressional ethics rules say Congressional members aren't allowed to use privileged information for personal gain. But it's just a rule, not a law. It's not legally enforceable. And it's obvious they're taking excess profits out of the stock market…

This must be one of the most underreported financial stories of the century. Take one example: The Senate Armed Services Committee forbids staff and presidential appointees requiring Senate confirmation from owning securities in more than 48,000 companies that contract with the Defense Department.

But 19 of the 28 senators on that same committee held assets worth between $3.8 million to $10.2 million in companies on the prohibited list between 2004 and 2009.

One place you see no signs of inflation is interest rates. This morning, the 10-year Treasury yield was 3.07%. In its latest survey of mortgage rates, Freddie Mac says the average 30-year fixed rate mortgage was offered at 4.6% for the week ending May 26, down from 4.61% the previous week.

Housing prices also show no signs of inflation. On the contrary, sales are still depressed compared to a year ago. Many homes were bought in anticipation of the April 30, 2010 expiration of Obama's housing incentive programs. I took advantage of it last year and got a $6,500 tax credit. April 2011 new home sales were 23% below April 2010 sales, according to the U.S. Department of Housing and Urban Development.

End of America Watch

March 30 was the 30th anniversary of the assassination attempt on President Ronald Reagan. In that attack, then-White House press secretary Jim Brady was shot in the head and permanently disabled. Brady and his wife, Sarah, became gun-control advocates after the attack. The law they lobbied for – and which today is known as "the Brady law" – requires background checks on handgun purchasers.

According to Fox News, the two visited Capital Hill on March 30 to push for a ban on magazines for rifles that hold extra rounds of ammunition, which opponents say aren't necessary for self-defense or hunting purposes. The Bradys met with current White House press secretary Jay Carney on March 30. President Obama dropped in during the meeting.

According to Sarah Brady, Obama said, "I just want you to know that we are working on [gun control]." Obama is also reported to have said, "We have to go through a few processes, but under the radar."

Three days ago, on May 23, California state Senator Alex Padilla introduced a bill to ban large magazines there. Padilla cited several incidents when maniacs used guns with large magazines to kill people in public. As the biggest state on the left coast and the world's eighth-largest economy, California is the perfect testing ground for new, highly restrictive gun-control laws.

To see the End of America video that started it all, click here...

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To sign up to receive the latest information about our Project to Restore America, click here.

New 52-week highs (as of 5/25/11): Prestige Brands (PBH), Sprint (S), Royal Gold (RGLD), McDonald's (MCD).

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Regards,

Dan Ferris

Medford, Oregon

May 26, 2011

Wage hikes are here... ADP's "float"... How TIF beats inflation... Congress scam: legal insider trading... Rates still low (and falling)... New home sales -23%...