Don't Fight the Fed

[Geee]

Townhall:

“Don’t fight the Fed” is an old stock market adage. Successful investors pay a lot of attention to it. It means that when the central bank is easy, it’s bullish for stocks. And when the bank turns tight, it’s bearish for stocks. Obviously, the Bernanke Fed has been ultra-easy for a couple of years now: The bullish stock market has just doubled its value from the early March 2009 bottom.

However, another old stock market slogan is “follow profits.” Profits are the mother’s milk of stocks, and they have been doing very well over the past two-year market rally. So don’t fight profits, either.

But some new information raises a question mark about the longevity of rising profits. Namely, producer prices -- which used to be called wholesale prices -- are now rising much faster than consumer prices. In other words, if the input costs for a company are rising more than the prices it gets at final sale, that’s gonna squeeze earnings. And that’s exactly what’s happening now, even though the ebullient stock market seems to be ignoring it.

The January report on producer prices showed a third-straight outsized increase, summing to 9.6 percent at an annual rate. Over the past 12 months, PPI is up 3.6 percent. Behind these big jumps is the import-price index, which just increased above 5 percent year-on-year for the second-straight month.