When it comes to assessing the Investment Climate, we pay particular attention to the trends of earnings, inflation and interest rates. As of last week's analysis, shown in the Climate section of the Views, we are in a Case 4, Bull Market Scenario in which earnings, inflation and interest rates are rising. Is this good or bad for stock prices?

As CNBC commentator, Mr. Larry Kudlow, likes to say, "Earnings is the mother's milk of the stock market." I agree. The VectorVest "Truth Chart," first described in my essay dated March 21, 2003, shows that Bull Market Scenarios exist when, and only when, earnings are rising. How do we know when earnings are rising? We access the S&P 500 WatchList, click on the Summary row at the bottom of the WatchList, click on Graph in the Local Tool Bar and display EPS to see the 52-week performance of average forecasted earnings per share of all the stocks in the WatchList. We then conduct a trend analysis of a 50-Day moving average of this EPS data and report it each week in the Climate section of the Views. It is also shown graphically in our Market Climate Graph, found by clicking Graphs on the Main Tool Bar. With a very favorable trend reading of 1.36, the earnings picture looks good. But what about those other rascals, inflation and interest rates?

I know, I know, we hear it all the time. Inflation is not a problem. But our trend indicators for the Consumer Price Index, CPI, and Commodity Research Bureau Index, CRB, show that inflation is rising rapidly. The CPI has a very unfavorable reading of 0.01 and the CRB has a modestly unfavorable reading of 0.92. Remarkably, a front page article in Monday's Wall Street Journal said that, "an influential band of policy makers (within The Federal Reserve) is fretting over the opposite: that the already low rate of inflation is slowing further." In other words, they are more concerned about deflation than they are about inflation. My goodness, this kind of cockeyed thinking got former Head of The Fed, Alan Greenspan, in trouble.

We also hear Dr. Ben Bernanke, current Chairman of the Federal Reserve Board, say that he will keep interest rates low for the foreseeable future. I believe him, but he doesn't control market interest rates. He has tremendous influence over market rates with his decisions on monetary policy, but he only controls the Fed Funds Rate and the Discount Rate. I prefer to track market interest rates, i.e., the 90-Day T-Bills, 10-Year T-Notes, and 10 Yr.+ AAA Corporate Bonds, because they give us a better reading on what the Investment Climate is really like.

October 24, 2003, I wrote an essay on, "The Case (4) Scenario." If you substitute the name of Ben Bernanke for Alan Greenspan, you would think I wrote that essay yesterday. Dr. Greenspan was severely criticized, if not berated, this past Wednesday by members of the Financial Crisis Inquiry Commission for his performance as Fed Chairman prior to the housing bubble and near collapse of our financial system. You may recall that Dr. Greenspan raised interest rates throughout the stock market's collapse in 2000 and only began to lower them in 2001. He lowered them again and again, bit by bit, until he got the Fed Funds Rate down to 1.00%; then kept them there for much too long of a time. He said he was fearful of deflation.

Now we have Dr. Bernanke following essentially the same path of raising interest rates too high; then lowering them to historically low levels. And it comes out that some members of his policy making team are afraid of deflation. Will he follow in Dr. Greenspan's footsteps and keep interest rates too low for too long? It all depends on his perception of inflation. Yes, inflation: The Wild Card.