Inflation And Interest Rates
The bears' futile attempts to take stock prices lower have been good sport to watch. The first level of support on the S&P 500 is 1,280. The S&P 500 has closed above that level every day since January 12. That's 8 straight days.
Even last week, when it looked like a correction was looming -- after stocks sold-off on the good news from Apple (Nasdaq:AAPL) and IBM (NYSE:IBM) -- the S&P 500 fell all the way to 1,271. But it didn't close there.
Now, selling good news is unequivocally bearish. But the duration of that bearish swing was measured in hours. And it's curious, because there are plenty of reasons to be bearish.
First and foremost, there are rising prices for food in emerging economies. Bloomberg reports that citizens of the BRIC countries (Brazil, Russia, India and China) now spend 19% of their income on food. In the U.S., we're spending 6% on food. And even that's rising.
Interest rates have risen in China, and India raised rates 0.25% last night to combat inflation.
Interestingly, inflation-sensitive gold prices are at a two-month low at $1,326 an ounce.
*****The Fed's primary measure of inflation is wage inflation. When prices and wages start to rise, that's when the Fed gets worried that a vicious cycle is emerging. So far, that's only happening in emerging markets. And the Fed can't do much about that. In fact, I suspect that the Fed secretly cheers Chinese inflation as one consequence of China's yuan peg.
But any consumer will note that rising prices are rising prices. And whether it's from higher oil prices, or food shortages, or rising wages, the end result is less money in our pockets.
*****Then there are the banks. Citigroup wouldn't be profitable if it weren't for loan loss reserves that it could transfer to earnings. New regulations have impaired earnings about as much as favorable accounting changes have helped them.
Bloomberg reports that Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM) and Bank of America (NYSE:BAC) all trade with a forward P/E (based on 2011 earnings estimates) of less than 10.
These banks are among the cheapest stocks on the S&P 500. But I'm in no rush to buy them now. While I was bullish on the banks when this rally kicked off, I'm not anymore. Seems to me Citi and BofA could be due for some downward revisions to their earnings estimates. And I have no idea how they will be allowed to pay dividends (except for JP Morgan, it might make the cut).
*****And what about the surprise negative GDP reading for England? A record-cold snap in December is being credited with stalled construction and retail sales.
But let's be serious for a minute. England has refused to expand monetary stimulus. And there has been talk that interest rates would rise as soon as June. Those plans are probably on hold now...
Let's also not forget that England enacted a range of austerity measures back in October. England's plans to cut $81 billion in spending were expected to cost 500,000 public sector jobs.
I'm curious whether this is the outcome Americans would really prefer...
I suspect not. But I'd like to hear what you think. Would you sacrifice U.S. GDP growth (and probably employment growth) for fiscal austerity? Or would you rather the government and Fed continue to engage in deficit spending to foster growth? Let me hear your thoughts: dailyprofit@wyattresearch.com
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