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Tuesday, February 8, 2011

China Raises Rates

The People's Bank of China, after Asian markets closed, said it would raise key lending and deposit interest rates to combat rising inflation pressures.  China's GDP growth is about 3 times that of most western countries, including the U.S.  Keep an eye on our rates as well - the 10-year treasury is slowly (once again) creeping up towards 4%, and is now at a nine-month high of 3.65%.   I believe, once it breaks-through that 4% level, that rates will push significantly higher. 

Home prices were down significantly in December and Beazer Homes showed a 24% drop in profits for the quarter (reported this morning).  Rising rates will not be kind to real estate prices - it will be the other shoe to drop.  We have already experienced more than a 40% decline in local Santa Barbara prices, even with rates remaining at historical lows.  

Many stocks are hitting all-time highs, or multi-year highs, with 19 of the 30 Dow stocks at (at least) multi-year highs, as of this morning.  One could view this as a positive sign that the economy is improving and that stocks will push higher, or one could see this as a very risky investing environment.  I lean towards caution. 

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