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
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

*****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
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

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

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.
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:
[email protected]

*****On January 10, 2011 at high noon,
Daily Stock Alerts
trading strategist Jason
Cimpl issued the BORN Ultimatum on shares of Borun (Nasdaq:BORN).

Jason told his readers to buy shares of BORN at
$11.19. And from yesterday’s close at $14.29, TradeMaster Daily Stock
members are up 28%. In two weeks.

Their position in Dot Hill (Nasdaq:HILL) is up 72%
since December 15. TradeMaster Daily Stock
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And when they take gains on BORN and HILL, it will be 9.

If you’re looking for strong short-term gains in
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. Jason Cimpl is as good as they

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