I think the most important thing is that the loading animation be anchored to the bottom of the loaded content so that it never obscures content that's already loaded. If the user manages to outrace your loader and gets to the bottom, some kind of indication that the app is churning away would no doubt be welcome.
You can try throwing a 'position: fixed; bottom: 21px;' on your #loading div instead of positioning w/ JS.
Also, the animation on the items isn't very smooth and I find it distracting. It'll probably feel smoother without the drop down animation (maybe a quick $.fadeIn) might look good.
