Deal making, an easing of tensions in Egypt, and a surprising rise in the use of credit cards in December, lifted the stock market on Monday. As might be expected, financial stocks led the market to another day of new highs.

Daily Stock Market News

Dow: +69 points at 12,162
S&P 500: +8 points at 1,319
Nasdaq: +15 points at 2,783

Volume and Breadth

NYSE: 878 million shares; decliners ahead  2.1-to-1
Nasdaq: 462 million shares; decliners ahead 2.1-to-1

Futures and Related ETFs

March Crude Oil: -$1.55 per barrel at $87.48; Energy Select Sector SPDR (NYSE: XLE) +43 cents at $75.22
April Gold: -80 cents an ounce at $1,348.20; PHLX Gold/Silver Sector Index (NASDAQ: XAU) -1.2 points at 206.05

What the Markets Are Saying

The Daily Market Outlook has been warning for months that the continued stimulus under QE2 was bound to result in inflation. And yet, as recently as last week, Fed Chairman Ben Bernanke refused to agree that the Fed’s pumping of new money into the economy had anything to do with the worldwide rise in commodity prices.

But the word is finally getting around that when governments make new money it is inflationary, and that the Fed through the Treasury Department is “making new money.” In a column in The Wall Street Journal that focuses on the bond market, Mark Gongloff said, “The U.S. bond market has begun sending a message that inflation risks are rising and the Federal Reserve may be too slow to act, potentially marking a significant turning point in the economic recovery.” 

Bond holders of all types (but especially those owning municipal bonds) have already been drubbed by unstable credit ratings from the impact of “Obama care” on the budgets of many states. Now they must contend with the impact of inflation. From a technical analysis standpoint, the article says, “Adding to the almost-panicky feel in the bond market on Friday, traders circulated a chart of 30-year-bond yields showing that the yields had broken out of a 30-year trendline — a sign that the decades-long bull market in Treasurys may be drawing to a close.” The yield on the 30-year Treasury bond is at 4.732%, its highest level since April, and as we all know, when yields rise, prices drop. 

Let’s go back to Econ 101 and explore the causes of inflation. Most economists will agree to three types of inflation:

“Demand-pull inflation” is caused by increases in government spending, which in turn, create a demand for more goods and, thus, higher prices. In other words,QE1, QE2 and now the frequently discussed possibility of a QE3.

“Cost-push inflation” results from a drop in the supply of commodities like crude oil, food grains, etc. On Friday, Barclays Capital raised their forecast for interest rates in 2011, due in part to the market’s increasing focus on soaring prices for oil, food and other commodities.

“Built-in inflation” is caused by higher wages and salaries in order for workers’ buying power to keep up with increases in the CPI. This is the “dog chasing its tail” type of inflation.

Currently, all three causes of inflation are present — yes , even the last, “built-in inflation” as on Friday, the bond markets focused on a report showing that in January, average hourly earnings increased by 0.4%, the biggest increase since 2008.

In a recent interview, Chairman Bernanke was asked if he would be able to detect inflation early enough to do something about it, and the chairman not only said that he could, but that he was “100% certain” that he could. “We could raise interest rates in 15 minutes if we have to.”

A word of advice: Don’t wait for the government to do something about it. Do it yourself. Commodities and equivalents, TRIPS (bonds that adjust for inflation), certain common stocks, and ETFs of various types can help offset the coming inflation. See the Trade of the Day for an inflation-proof investment idea.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

If you have questions or comments for Sam Collins, please e-mail him at samailc@cox.net.