Wilkinson's Edge:

It's All Good — Isn't It?

Tech stocks have been a big winner since that July low. As the cost of energy has slumped, investors have slowly yet bravely bought higher risk technology stocks. The Nasdaq composite has rallied 24.6 percent – easily outpacing the Dow.

During the winter months' milder weather and the subsequently lower price of crude oil, investors have factored in the removal of an effective consumer tax. As such the perception has grown that consumers have more cash leftover each paycheck simply because the price of gas has fallen.

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Retail stocks have outpaced the 15.8 percent rise in the S&P 500 index by an additional 7 percentage points.

The question mark isn't necessarily hovering over consumption, rather it should be focused on whether inflation is really at bay.

I devoted last week's column to the bolt-out-of-the-blue interest rate increase by the Bank of England and its far-reaching implications.

This week bond prices continued to fall in response to ongoing negative sentiment towards bonds.

There was nothing especially bad about either incoming producer or consumer price report this week.

However, two events did seem to hit home. One of the committee members at the Bank of England raised a fresh red flag over interest rates. Timothy Besley noted that the extremely brisk pace of growth in the service sector raised the risk of wage-push inflation.

"Shortages of skilled labor may lead to upward wage pressure and spill over into the rest of the economy," he said.

Second, the commodity markets were tossed an all-new hot potato last week. Corn prices traded at more than $4.00 per bushel for the first time in history. The price of soybean futures surged as traders bought in sympathy. Meanwhile wheat prices rallied, having registered 10-year price peaks just last October.

On the one hand, a sliding price for crude oil, which fell south of $50 for the first time in two years, has created buoyant consumer optimism. Yet on the other, we're seeing a continuation of the bull market for other commodity prices.

Orange juice futures surged again this week following frost in California, which reports expect has ruined half of the harvest.

Tropicana Products, maker of orange juice with the same name announced plans to raise juice prices for the second time in two months. Last year Minute Maid raised juice prices four times.

Is inflation really dead? Are things really precisely as they seem once again?

If they are not, then my boldest prediction is that stock investors are best advised to be on the lookout!

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Already earnings growth has been revised down for the final quarter of last year. Thomson Financial now estimates 9.1 percent instead of 9.7 percent net income growth.

If the example of the Bank of England is followed in the United States, it's not going to do a grain of good for the earnings of corporate America.

Moreover there will be a nasty backlash as far as investor sentiment goes. I can imagine re-writing this column again in the summer and discussing the extreme optimism pervading investor sentiment midway through January 2007.

Imagine me reporting on a near 20 percent index decline and raising a question mark over an impending technical bear market.

If bond yields start to close-in on 5 percent (they traded as high as 4.79 percent Thursday) I'd bet that equities would be a lot lower than they are today.