Take-Off Tuesday???

Is inflation really the market’s best friend?

Inflation in England rose to 3.1%, up from 2.8% last quarter and over 50% above their inflation target of 2%.  This forces the Bank of England to draft a letter of explanation (imagine that, accountability!) to the Treasury, which then must make a public reply the same day.  While this may all seem like charming old world nonsense, it has the very real effect of sending the Pound to $2, the highest level since 1992 (Bush the 1st).

It’s not just the UK that takes inflation seriously, the entire EU operates under strict inflation guidelines and none of that "ex-food and energy" nonsense since they have done studies that show that many Europeans, unlike our government’s fantasy Americans, do in fact eat food and consume energy.  The actual CPI for March is up .6%, multiply that by 12 and we get 7.2% annual inflation but the markets will celebrate the 2.5% core rate because only the bottom 99% of the population care about the price of milk and gas and you people really, really haven’t mattered since we got rid of LBJ.

Let’s keep an eye on CSX’s earnings today, that will give us a hint on whether or not things are really slowing down (although Warren Buffett seems to think not).  There’s nothing inherently wrong with inflation, this is the policy Paulson and I have been pursuing since wrote my "Inflation Nation" policy last November and was the goal we pursued on our December trip to China where we explained the Roach Motel Theory to the Chinese as it applies to holders of US currency and debt. 

Let’s be more concerned about a pullback in Europe today than in our own markets but, if they can hold up, we will have a green light to head off to the races (kind of like Brazil in the good old days!):

It’s very much the SOX’s game to win or lose today but if a pullback in the EU doesn’t put the brakes on oil then, unfortunately, nothing will. 

Of course oil doesn’t look all that expensive to Europeans, whose currency is up 20% since Jan ’06, making oil an effective $59 for them.  So oil isn’t getting more expensive, the dollar is simply getting more worthless (gold too).  Let’s see how oil performs around the $65 mark today but Brent looks like it’s running out of steam and if the dollar doesn’t collapse below 80 then we might get a mild pullback but, if the dollar falls through the floor (look for gold to break $700) then we may realize T Boone’s wildest dreams this summer.

Check ZMan out for an excellent rundown of today’s energy market, we’re both patiently waiting for the fall, but we may have a long way to go as even I would rather have a barrel full of oil than a barrel full of dollars this week!

Earnings Update:

JNJ (got ’em) was much better than expected, KO (got em) did well everywhere in the world but here, WFC (need ’em) is up 11%, DJ (neutral) dropped but only because of a special gain last year, INTC, YHOO and IBM report later and we’ll be taking some QQQQ puts for security as the Nasdaq tops out this morning, just in case.

Let’s be careful out there – everyone was investing in Brazil’s "hot" market too!