END OF YEAR DOLDRUMS

In the fall the S&p fell from 1240 to 1170 on the Fed inflation and tightening scare. In November the third quarter GDP coming in at 3.8% put to rest fears that hurricanes, energy costs and the Fed had harmed the economy and we ran from 1170 to 1270. From there, for the last five weeks we sit between 1250-1275. Volume is low and nothing substantial appears to be going on. Underneath the surface however, change is taking place. Yesterday's 100 point plunge was a dailykey reversal and may become a weekly. The bank index BKX, that led the Nov rally looks like it may be rolling over as RSI is dropping. Housing continues to soften as the MBA mortgage application survey showed today by dropping further. From 95 to 2000 it was the internet driving the economy, from 2000 to 2005 housing has driven the economy. The market trades as if people are more interested in protecting this years profits than marking them higher. Christmas was no blowout and earnings warning season is not far away. Retail reports are due next week and the chart of the RTH doesn't look too good. It's a good time to be careful and maybe put out some shorts. Happy New Year.

MCDONALD'S

McDonald's reported their monthly sales this morning. Of course they touted their same store sales rising 4%. Less heralded were their global system-wide sales up a paltry 1.7% , the lowest in YEARS! Those are what will be reflected in total revenues. Furthermore, at the end of their press release they state they are taking a 2 cent charge for asset impairment in Korea and that if the dollar stays where it is and mind you this is Dec 8 their earnings will be impacted negatively by at least a penny a share. None of the stories on Yahoo or Marketwatch mention this amazingly. Thomson has consensus earnings at $.47 for 4th qtr vs $.45 a year ago for a 4.4% increase. It sounds to me like they issued an earnings warning this morning that every one missed. Of course tout TV also never mentioned either fact. Has anyone noticed this kind of thing in other widely covered large caps?

FEELIN HEAVY

An overbought market that can't rally on good news. that's the story today. New home sales, durable goods, consumer sentiment, all good. We are not going to fall off a cliff on that kind of news though. Look for choppy trade ahead. It definitely seems we have to consolidate the gains, before we decide where to go next.

The euro continues volatile around support at 117. It also is very oversold. As always I feel the dollar will follow the economy, and reflect its strength or weakness.

Bonds sold off on the strength of the new home sales and the fact that it will be hard for the curve to get much weaker without any signs of economic weakness.

GOLD

Very interesting action in gold this week. In spite of higher bond yields, lower oil, and a stronger dollar, all traditionally, bearish for gold, bullion kept marching higher. The inflation numbers both PPI and CPI were also pretty good with better numbers to come now that energy prices are receding. BCA research has a good analysis of this on their website today. That's not bullish either, so what's driving the price?

Kitco.com has the World Gold Council report for last quarter on their site and it says that while physical demand stayed strong especially in Asia and the Middle East, supply grew modestly as well. The biggest swing factor was increased investment demand from the growth in ETF's. So why the big rush into them now, after all they have been around awhile. GLD celebrated it's one year anniversary this week.
My take is that you may have several bearish factors mentioned above coming to and end. Oil may find support here as it sits on its 50day moving average and cold weather has begun. Bond yields fell after hitting resistance at close to one year highs and their 200 day moving avg. They also may not go higher again if inflation has indeed peaked and the economy slows. Finally, the dollar is testing resistance and may soon begin to fall. The ECB is talking about hiking rates today. That would narrow the interest rate spread currently in favor of the dollar. Also very importantly, the U.S. this week continues to press it's beggar thy neighbor polices, by pushing for a debasement of its currency. First, Greenspan in his latest speech made it explicit that a much weaker currency would have to be a large part of the solution of solving our huge current account deficit. Secondly, tomorrow, President Bush is again going to try to cajole China to revalue against us. In effect, you have the two most important men in the country, telling all the worldwide dollar holders, look out below. No wonder Russia, Argentina, and who knows who else, maybe China, want to double their Gold reserves.

SIDEWAYS

We are in our 5th day of sideways trading. A consolidation the bulls say. Never short a dull market says the axiom. Well perhaps, but if a market can"t make headway, it usually tests support. Fading concerns over the economy, pushed the market up and since then we have had a lack of catalysts. Tomorrow we get the trade figures and first look at Univ of Mich consumer sentiment readings, potential catalysts to be sure. The trade deficit could be a record, so it will be difficult to spin that one as bullish. On the other hand, if the consumer sentiment index shows a real bounce, that may be all the bulls need to go to higher ground. If we get a small bounce it will be important to see how the market reacts. A decline speaks for itself.

The dollar has been on a run and is somewhat overbought here. With the trade figures as catalyst, it seems an opportune time to play for a bounce in the Euro, gold or gold stocks. The wild card is how will bonds react. We are close to breaking the April highs in 10yr yields.

MCDONALD'S

MCD hit its lows in the spring of 2003. Same store sales were declining 4% a month. MCD had been a growth stock for decades. In an effort to keep the growth up, they started to diversify into other restaurant concepts in the late 90's as their markets became saturated and expansion opportunities waned. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line. Meanwhile, tastes were changing as the population aged and they had their eye off the ball and their core business faltered. New management was brought in, cutoff all the expansion and focused on their core business. They introduced new menu items such as salads to cater to older and healthier tastes, extended store hours, allowed credit cards for payment, etc. Essentially pushing more product through existing distribution channels. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03, the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to $27. June and July SSS were better than April and May and so the stock bounced back a little to $31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They are already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion, and eschewing other restaurant concepts, they are back to being a one trick pony, i.e. growing same store sales. This can be seen in the convergence of same store sales figures and total sales figures. The CEO has been quoted as saying that same store sales will be the driver of growth.

In August rumors started flying that Vornado the REIT was buying a stake in McDonald's. They had just done a secondary offering of 9 million shares raising about $800 million. It move the stock $4. At the time, I said it sounds like a lot but consider that in the last six months McDonald's bought back 33 million shares of it''s stock, approximately $1 billion dollars without much affect. I also said that they did not need the cash, that spinning them off into a REIT would provide. They have no major expansion plans. Well last week it finally came out that Vornado did indeed purchase a stake but even smaller than the initial rumors. According to AP they purchased a 1/2% stake amounting to 500 million dollars.

In September the stock was coming back down until it received a brokerage upgrade on rumors of it spinning off its Chipolte unit. I wrote at the time that while this was much more likely than spinning off the real estate, spinning off part of a 435 restaurant chain out of 30,000 was not that big a deal. More important I pointed out was the fact that total sales growth has been slowing on a quarterly basis since the 1st qtr of 04.

Today, they reported their Oct sales figures which were lauded for being better that the street expected, but look at the following table:

• Mthly SSS Total Sales Currency adj Total sales
• Jan 5.2 8.3 6.3
• Feb 1.6 4.4 2.7
• Mar 6.8 11.2 5.7
• Apr 2.8 6.7 3.9
• May 1.8 5.9 2.9
• Jun 3.8 6.2 4.9
• Jul 4.3 6.1 6.0
• Aug 3.4 5.7 4.4
• Sep 3.9 6.3 5.0

• Oct 3.4 3.9 4.4

What jumps out at me is that the trend in total sales growth, which is what correlates to total revenue growth, is really slowing. Secondly, that total sales growth is converging with SSS growth as I expected. Finally,most significantly, currency adjusted total sales were higher than total sales for the first time since I can remember. This means that the strong dollar is hurting total sales. According to their Website, a 10% move in the Euro equals a 6-7 cts per share on their earnings. This is significant considering that a 1% decrease in their SSS equals only a 2% decline in EPS. The dollar is about 13% higher than it was at the start of the year.

Finally both the CFO and CEO in the past couple of weeks have thrown cold water on any kind of REIT spinoff or restructuring. The CFO said it would be expensive and a distraction among other things. The CEO in a letter to employees said they had no intention of a spinoff or restructuring, that it would not serve the interest of their franchises or shareholders. I think he is exactly right. Do you want to lose control of your business by doing some financial engineering to get a one time pop. Spinning out the company owned restaurants so they can compete with the franchised one's is about as stupid idea as I've heard.

STRONG OR WEAK

As we wait for the Fed today, I must say it's been a while since I've read some many strong and contradictory opinions on the market. There is the Bill Gross and Steve Roach camp, that says a significant economic slowdown is just around the corner, which will weaken equity markets keep inflation under control and be good for long bonds. The opposing view, best personified by today's CNBC guest Brian Wesbury, is that GDP growth will remain strong and equities will rally, Inflation is the problem and interest rates will rise.
The big equity selloff in the first half of October certainly seemed to be driven by an inflation scare. Fed heads, one after the other proclaimed their fear of higher inflation and their intention to do something about it. Fears over a weak economy were also present as higher oil prices were seen as driving the consumer into hibernation.
Today, with the biggest two day rally in a year under our belts things look much better. Certainly the GDP report and today's ISM report show no sign of weakness. You have to admit, considering everything that has been thrown at it, high oil prices, plummeting consumer confidence, natural disasters, gargantuan trade and budget deficits, higher interest rates, high debt levels, low savings rates, that the economy can chug along at almost 4% is pretty amazing. You can appreciate the bulls point of view and see why the bears might want to throw in the towel, after all, what's it going to take.
The inflationists fear that inflation is already baked in the cake. Companies are finally raising prices, passing on costs that will find their way through to core price increases.

Which view will prevail? I expected a slowdown last year as the effects of the tax cuts wore off. I'm always too early. Going back to my trading notes, I wrote to myself , economic stats should start coming in weaker. Look for weakness in housing ,autos and retail sales. It never happened, but today, housing is slowing down, sales down inventories up, and Ford just announced a 25% decline in auto sales. That's two months in a row of lousy sales. While we are on the subject of auto sales, a lot of bounce in the 3.8% GDP was attributed to auto sales that occurred early in the quarter. As far as inflation goes, Victor Niederhofer reports that the Goldman Sachs commodity index fell some 10% in October from its Sep close, one of the biggest drops ever. So maybe down the road we will get some moderation in the PPI.

OIL OIL OIL

Boy was I wrong. My last post 10/10 the S&P closed at 1186, I expected an oversold bounce, instead we got further selling and didn't bounce until Friday. Here we are at 1186. I was right in pointing out that oil remains the wild card and heavily influences the movement of everything else. Today, another storm and accompaning oil price concerns. Stocks are down, dollar stronger. Oil, however is no longer a one way street. Signs of slower global growth and high prices has raised concerns of what they now call demand destruction. So we will now have tug of war. Economic data showing weakness will exert downward bias while supply disruption news will be positive. Let's not forget the weather which of course can go either way but will have more impact if it's colder than normal.
As I write, we are having an up day thanks to GM and MO which are up on GM's agreement with the UAW re health care costs, and MO's favorable ruling from the Supreme Court on tobacco litigation. Even so, I feel the bears have the upper hand in the intermediate term. As I've outlined before, the things we know augur badly for the market. The Fed will continue to tighten. Inflation continues to march higher as the higher energy prices grind their way through the economy. The budget deficits will continue to grow larger, not only because of the large expenditures lately due to hurricane relief, but now we have to worry that receipts may be lower due to a slowdown, a double whammy. Gas prices will stay high and be a drag on consumer confidence. We just don't have the refining capacity to bring them down. Outside of energy, earning are being squezzed by higher costs. It seems like everyone is blaming higher energy for earnings misses, even some that seem to have no connection. If there is a year-end rally I think we would have to see much lower oil prices for some reason and a friendlier Fed as a catalyst.

I haven't written much about the dollar lately, but we are now at an interesting juncture. The dollar has gained strength this year on higher interest rates. So far it has tested its July highs against the Euro twice at around 119 and held. Today I saw comments from both the ECB and the Bundesbank about higher interest rates down the road. Higher energy is causing inflation targets to be exceeded there also.This would of course be very supportive of the Euro, however, they have the same problem we do. Their think tanks last week lowered economic growth estimates. So the question will be, which economy slows sooner and farther and which central bank blinks first. We will trade back and forth on each data point pro or con. As the Euro is near one year lows and the U.S. capital markets are having problems, the best risk reward trade here is to go long the Euro, at least until support is broken. I like trades where the market doesn't have to move too far to let me know I'm wrong.

BOUNCE

The market was oversold. The payroll data was better then expected. Oil prices were dropping. Rally, rally, rally. The bullish argument to take away from the payroll numbers, where the previous two months were revised significantly higher, is that going into the hurricanes the economy was strong, strong , strong. With hurricane season almost over, and reconstruction money pouring into the gulf, it may have all been just a bump in the road with sunny skies ahead. Only a hawkish Fed and higher inflation are restraining prices.

Bears point out, you don't fight the Fed, much higher heating bills lie ahead, and Mutual Fund cash levels are at record lows.

I believe we are now going to test the upside. How far will this rally carry and with what kind of volume. 1210 seems like the first line of resistance in the S&P. Energy is still the wild card and the market will remain sensitive to it. This week we will have higher inflation readings and retail sales, continuing the worry over interest rates. Cold weather or large drawdowns of distillate inventories this week could halt the slide in energy.

WHAT NOW?

Yesterday the S&P finished down by 2 pts, the first down day in eight trading sessions.

True nothing much has happened in most of the last eight trading sessions, with the exception of the month-end window dressing rally. The bulls are looking for a year-end rally. Their argument is:

• The uptrend from the 03 low is intact.
• The market has absorbed all the bad news and remained resilient.
• Fiscal policy will support the economy and generate corporate profitability on Katrina spending. Yesterday's ISM index, certainly supports this.
  
• The Fed is almost done.
• We've seen the worst on oil prices.
  

The bearish argument is:

• The higher oil prices of the past year are working their way through consumer and corporate pocketbooks and will hurt spending and profits for the rest of the year.
• The Fed will continue tightening until they get mortgage rates up and slow housing. Greenspan is now concerned about inflating asset prices.
• Corporate profits while good, are slowing and are on a downward path. Earnings misses will be blamed on energy and Katrina.
• Inflation is in the pipeline.
• Energy prices will stay high particularly natural gas. This will significantly slow consumer spending which accounts for 70% of GDP. Evidence of stress is starting to show up in the higher percentage of consumers who are charging their gas purchases rather than paying cash. Also the percentage of consumers who are late on their credit cards has been increasing.
  

HALF FULL HALF EMPTY

Well, it's been crazy. Good news is bad news, bad news is good news. Many counter-intuitive moves in the market. In times like these I find it;s best to step back, reassess and try to find some anchors. For only with strong conviction can you ride out the short term swings. Some anchors or truths are:

• Gas prices are going to stay high. Even if Rita does minimal damage, we have enough production closed to keep things tight for some time.
• Budget deficits are going to grow significantly.
• Corporate earnings are being impacted by higher energy prices. AA today is only the latest.
• Inflation is in the pipeline
  
• Fed tightening will continue.

The question is, do current prices reflect optimism or have they priced in the worst? One thing seems obvious, the market likes deficit spending. The increased fiscal spending, means and economic boost now, while payback is down the road. The budget deficit is going to be huge, but the market will worry about that later. Both politicians and corporate America live in a current quarter mentality. Nothing gets done without a crises, and planning does not look far ahead. Whatever happened to the Social Security crises.

The dollar has been strengthening lately. A German political crises has helped. The increased fiscal spending, which I have read could amount to 1 1/2% of GDP has provided even more support. With no fiscal discipline, the Fed has to continue tightening. As I've said many time before though, any economic weakness will quickly spill over to the buck. We could see the economy weakening despite the fiscal laggress because of the housing bubble bursting, the consumer being tapped out, higher rates, loss of confidence by foreigners in our financial markets.

The bonds will be important to watch over the next few months. Before this all started, we were already borrowing 80% of the worlds savings. Should their supply or preferences change where will the money come from? Even if we print it long rates will rise. Like the 70's we could have weak growth and higher inflation ahead.

DOUBLE TOP?

The market has started to give back some gains it made, if you recall, first on Katrina not expected to be as bad as feared and then when it was actually worse, on the bump from rebuilding. The 40 pt rally in S&P is a perfect example of the old sayings, that the market can do anything, the market can stay irrational longer than you can stay solvent, the market cannot be predicted using rational means, etc. The rally looks like it was a bull trap, short and powerful. No volume on the downside yet, so they all got em. The market is supported by fiscal spending on Katrina, lower oil, and hope the Fed is done or close to it.

The bonds are coming under pressure. Last week's manufacturing surveys showed very large increases in the inflation indexes. We have also had many companies start to raise prices as their energy costs increase. Oil prices are starting to pass through. If the Fed blinks they may be seen as falling behind the inflation curve. That of course would be very negative for bonds and the dollar as well.

The dollar keeps getting bailed out. First there was the failure of the referendum on the European constitution and now the deadlocked German elections. The talk is, we won't know the election results for weeks. Eventually it will recede from the headlines and since nothing has dramatically changed the dollar will resume its underlying downward move. It's a choice between the lesser of two evils.

Gold is reflecting slower growth, higher inflation, increased demand from China and India, and lower production. Back to the 70's.

OOOPS

You can see from the action of the bonds and the dollar today that the idea of the Fed blinking and not raising rates has reversed. Chicago Fed Pres helped that idea along with his midday comments where he voiced more concern over inflation. So it seems Greenspan will continue his mission to take away the punchbowl. I guess he wants to go out with his reputation as an inflation fighter intact. If they go ahead and raise rates, I think it will be the last time this year. Even the Treasury Secretary this morning acknowledged that the economy would slow. The political outcry that is already beginning will overwhelm the Fed's desire to raise rates if the economy fades.
A lot more news of higher spending today and higher costs. Higher transport costs from using alternate ports and methods of transportation and higher spending on everything from unemployment benefits surge to various relief expenditures. Not to mention lower tax revenues due to less people working and slowing economic activity.

THREE QUICK THOUGHTS

• Yesterday was a low volume rally, only 1.42 B shares. Today's volume doesn't seem much better. Breadth was good.
• We are seeing a divergence between the S&P and the transports. Obviously this can go on for a while. It is not a timing tool but like volume it tells you something about the character of the advance.
• McDonalds is up over a dollar on a broker upgrade. I wrote about this stock a while back when it was under the influence of rumors on it spinning off its real estate. I thought that was highly unlikely and the stock started to come back down until it came under rumors about a spinoff of its Chipolte unit. While I think that is more likely, spinning off 435 restaurants out of 30,000 is not that big a deal. European sales are improving, but total sales have been slowing on a quarterly basis since the 1st qtr of 04.
• 1st 04 - 17.8%
• 2nd04 - 11.7%
• 3rd04 - 9.8%
• 4th04 - 10.3%
• 1st05 - 7.97%
• 2nd05 - 6.3%
• Doesn't look like the receipe for a 20% gainer since 7/7.
  

Maybe we should have a natural disaster more often. Stocks are higher now than a week before we ever heard of Katrina. The U.S. govt spending machine is revving up and that is what the market likes. We're going to spend another 100 billion we don't have and that means a pretty hefty boost to GDP in the short term. Destruction of wealth does not show up in GDP but replacing that destruction does. With Europe sending us some of their product reserves of oil over the next 30 days, that should keep oil prices relatively quiescent. Inventory numbers will be released Thursday and will probably show big draws so we will be able to see the price response then. Everyone is always eager to shout the good news, the bad news will dribble out.
Energy supplies will remain tight. We will remain short of refining capacity for some time to come. Oil is still $3 bucks a gallon and along with high natural gas prices will grind away at the consumer and the economy. Most of the government spending is going to security, housing, clean-up, repair etc. Relief spending does not increase productive capacity or profitability, regardless of how necessary it is.

BACK TO WORK

It looks like we will start post Labor Day trading with a bounce. The market seems to be taking heart from lower oil and gas prices as a result of crude coming out of the SPR and products coming from IEA reserves. Also progress is finally being made in Louisiana. So the glass is half full at the moment.
The volatility in perception will continue for the next several months at least. The data will be lousy, but if you wish to view the glass as half full you can ignore it as temporary, due to Katrina. The bears will view it more ominoulsy of course, as undermining the fabric of economic growth. I continue to lean toward the bears and view this shock as one pushing and economy that was already slowing toward stall speed and a recession next year.

THE DOLLAR- WATCH OUT BELOW

On Aug 19, I said "We have had our first small whiff of possible economic slowdown and the buck was non-plussed. When the market gets stronger evidence of this possibility and starts to look forward to the day the Fed blinks, put a fork in it, the dollar rally is done.". Well, I think we are there. The fallout from hurricane Katrina will slow the economy. This will reduce the growth differential between us and Europe and stop the interest rate difference from widening further. Yes this will slow global growth but Europe will be seen as being less leveraged than the U.S. and of course they are not pursuing a Mideast war that is going badly. Can you imagine what our trade deficit is going to look like.

A weakening dollar and high oil prices should also be bullish for gold. I worry about gold stocks though, because they use so much energy in their operations and the gold price has not gone anywhere since year-end while oil is up 65%. Their margins are getting crushed.

The S&P topped out at 1246. If it could have made it to 1253, that would have been a .618 retracement from the 3/24/00 high of 1553 and the 10/10/02 of 768. Close enough for me . Take a look at a weekly chart and you can see this may have just begun.

Finally, the law of unintended consequences is at work. The ramifications of the hurricane and our responses have just barely been scratched. This will be a story with staying power.
Their will be negative news flow from these consequences for some time.

LIQUIDITY

Throw out yesterday because the range was so narrow and stocks have finished near the lows of the day for 7 days running. I wonder when the last time that occurred? Ever since Walmart said gas is affecting sales 8/16, we have been in a funk. The homebuilders, retailers and banks are taking the brunt. We have rolled over. How far and how fast do we go. Think about this. Short term CD rates, 6mth, are almost 4%. That's beat a lot of asset classes lately, RISK FREE! I mean stocks, gold, bonds, etc have been mostly sideways. With all the uncertainty over oil prices effect on asset values and all bubble talk over real estate, these kind of short rates are going to start draining liquidity out of risk assets. In three weeks the Feds going to give you another 1/4%.

The CEO of DRD gold commented that the oil/gold ratio was at historical lows and had a long way to go up to catch up. That can be said just about everything. The price of oil is outstripping everything, and either prices rise or profits fall, particularly amongst heavy energy users like airlines, mining and chemicals to name a few. It doesn't look like prices are rising.

AUGUST 25, 2005

The bond market has retraced about 1/2 of it's losses from July highs to August lows. This is where the rubber meets the road. The yield curve shouldn't flatten any further especially after hawkish statements by the Chicago Fed Prez yesterday, unless the economy is really rolling over, which may well be the case. But one would think that we would really have a battle here for days if not weeks.

Pre opening it looks like stocks could get a bounce today. They are oversold. The hurricane looks like it will miss oil installations so crude is of its highs. But if your going to play the rallies in this type of environment, remember they are most likely going to be sharp and short.
You can almost feel the consensus build on CNBC one by one that oil is finally going to hurt the economy and markets. I might go one further and say its baked in the cake. Past price increases are now working their way through the economy and profit chains and we will see negative news flow continue to grind away. Local news yesterday reporting on the impact on local governments that operate huge fleets of school buses bracing for huge budget shortfalls as a consequence of higher gas. Isn't school just about to start

It is amazing how quickly the perspective on oil has changed. It was only 2yrs ago that oil was trading at $30 a barrel midway between its decade range of $20-40. That's when OPEC was concerned about losing market share, limiting production output, afraid of high prices causing a drop in demand, concern over alternative fuels etc. Today an analyst on CNBC is concerned over Venezuela or Iran withholding a measly hundred thousand barrels of oil for political purposes. To punish the U.S. and display their power, which they could easily do as they are awash in oil riches. It almost seems like any place that produces the stuff has potential geo political issues so that we will never return to the placid world we knew before. As I've said before price will ration supply

AUGUST 24, 2005

Is it me or does the market feel really really heavy. About week ago I wrote about the correlation between strong stock closings with strong bond closings with oil having little influence. The past 5 trading sessions has seen a complete reversal of that correlation. For the past 4 trading sessions bonds have closed near the highs of their daily range while stocks near the low of their daily range. More importantly, every trading session since Walmart reported earnings 8/16 and said they were concerned about gas prices hurting sales, stocks have closed at low end of the trading range for the day. Bonds started their rally shortly thereafter. Data showing the housing boom may be slowing hurt the homebuilders that even the bond rally couldn't help. To ice the cake, a couple days after the Walmart news, oil after trading as low as $62.25 started moving back up dashing hopes of an intermediate correction.



So here we sit. Our leadership of retail and homebuilders has rolled over, oil is close to threatening the highs again. Google the poster child of the bulls, may be rolling over. It will be interesting to see if their news today about introducing instant messaging lifts the shares back over $300 the next few days. Anecdotal stories about higher gas prices inflicting pain are now every where and multiplying. Airlines are getting killed, farmers are getting hurt, delivery companies, big energy users off all types and stripes. It's becoming the lead story on the evening news and that can't be good for confidence. The worst month for the market is around the corner and the big boys will be back from vacation soon.

AUGUST 19, 2005

Yesterday's low in oil $62.25 was 8/1 high. So we are basically unch in oil for the month. Bond yields on the other hand, after falling most of the month have rallied over the past few days and are lower around the 4.20 level from 4.30 at the start of the month. So why is the S&P 20 pts lower. The DOW by the way has fared better, as a series of individual stories helped propel individual stocks. We had the MCD rumors of a real estate play. MO got a favorable court ruling, HPQ reported good earnings and popped $3 bucks. I think higher gas prices and WMT's warning have spooked the market. No knockout blow has been delivered by either bull or bear, but we are starting to tilt lower.



The bond rallied as oil prices hit $67 indicating the vigilantes do not see inflation and are more concerned about a consequent economic slowdown. Each major bond rally has been accompanied by a spike in refi's that kept the economy going. But each refi spike has been smaller than the last. The psychological effect of these gas prices may curtail refis even more this time, even if the bonds continue their economic weakness rally in the face of Fed tightening. The consumer may flinch about borrowing more. Then we will have arrived at the proverbial pushing on a string.

The dollar has had a nice rally this week on the back of data showing greater inflow of funds into Treasuries from abroad and the outlook for further Fed tightening continuing to add to our yield advantage. We have had our first small whiff of possible economic slowdown and the buck was non plussed. When the market gets stronger evidence of this possibility and starts to look forward to the day the Fed blinks, put a fork in it the dollar rally is done.

AUGUST 15, 2005

An interesting correlation last week, well actually since 8/2, is that every day the bond market closed near the high of its range for the day, so did stocks, regardless of what oil prices did. The opposite was true as well. Every day bonds closed near their lows of the range of the day, so did stocks, even if oil fell like it did 8/4. So oil didn't matter or its rise was compensated for by lower interest rates. Friday, however stocks closed neutral, about the middle of their range for the day, even though bonds had a big rally and finished strong. Oil might finally be exerting some influence as it broke the $67 barrier with fears of $70 around the corner. Inflation measures this week and gas pump prices will be negative, as will lingering concerns over tech stocks in light of DELL and CISCO. Earnings from retailers should be good, but it will be their guidance that matters most.

I don't usually comment a lot on individual stocks but the action in McDonald's last week, is to good to pass up. Rumors of a big REIT like Vornado buying a stake in the company to monetize it's real estate values sent the stock and its call options flying last week. MCD started to hit its lows in the spring of 2003, as same store sales were declining 4% a month. MCD had been a growth stock for decades and old management in an effort to keep that up started to diversify into other restaurant concepts in the late 90's as expansion opportunities waned and competition increased for their burger joints. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line and meanwhile tastes were changing as the population aged and they had their eye off the ball of their core business and it faltered. New management was brought in, cutoff all the expansion focused on the core business, introducing new menu items to cater to older and healthier tastes, extended store hours etc. Essentially pushing more product through existing distribution. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03 the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to 27. June and July were better than April and May and so the stock bounced back a little to 31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They're already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion and eschewing other restaurant concepts, they are back to being a one trick pony. Grow same store sales. This can be seen in the convergence of same store sales figures and total sales figures.
That brings us to the present. Up pops the rumor of Vornado, perhaps helped by the fact that they just recently raised some money in a secondary offering. Roughly 9m share at their current price, lets say 90 equals about 800M, sounds like a lot. Could it pop the stock $4? Sure, but consider this. MCD bought back 33M of its share in the last 6 months, approximately 1 billion dollars without much effect. Not to mention several analysts pointed out on Friday that MCD is not like Kmart. Though they have some nice parcels, most McDonald's are located on major streets next to gas stations and dry cleaners and the parcels are not that large if you are considering re-development. McDonald's picks their sites for a reason, so I don't think they want to go anywhere in the first place. Do they need the cash, that spinning them off in a REIT might provide. They have no major expansion plans, just the opposite.
Maybe someone should look into who benefited most from these rumors.

AUGUST 11, 2005

Since 6/27 the S&P has gone from 1190 to 1230, oil from 60 to 65 bond yields from 4% to 4.40% and fed funds from 3.25% to 3.5%. We might have hit a tipping point today. The reason I say this is that rising bond yields are finally starting to raise mortgage rates. Both the homebuilders and banks have rolled over. Oil at 65 will put pump prices at new records and finally influence consumer behavior. Gas prices always came back down in the past. New records will put that into question in consumer minds. 1253 is strong resistance and I thought we would challenge it at least once. We still might if something caused a selloff in oil, but stop waiting for inventories to do it. In commodities, price leads inventories. To me, oil looks like its entering the final phase of a blowoff top. I would not venture a guess to where that top could be. Bull markets in commodities accelerate near the end of their movcs. Remember gold going to 850? It was moving $50 a day toward the end, or beans in the teens or nasdaq to 5000, you get the idea. Pick a top? Not me. It's just doing its job. With so much demand, price has to ration supply. The danger of course is that we can't seem to do anything about it and the price might break the economy. I know the Fed will ease, but this time it may finally be pushing on a string.
The market acts like it definitely wants to go up. Any slight pullback in oil is an excuse for a rally. Rising bond yeilds however, seem to stop it in its tracks. Something to be on the alert for is any sign of economic weakness might cause a bond rally which ironically might ignite stocks. Short banks, homebuilders, and retail and stay long the energy group.

Even though the interest rate spread continues to widen in the dollar's favor, it continues to weaken. Stronger economic fundamentals in Euroland and Japan are overriding the rate advantage. Gold and gold shares have gone along for the ride. Higher oil and commodities in general are also pulling gold along. If bond yeilds continue to rise, can this continue? Opinions welcome.

AUGUST 8, 2005

Stocks did creep higher as I suggested in my last post, until they ran into weaker retail sales and higher oil. Bonds continue to be short and although the dollar did not get to 118 euro, I was correct in thinking it was about time to short the dollar.

Oil stocks have been the undisputed leaders, followed by homebuilders and retailers. So it should be. We are after all a consumption based economy. Financial stocks are the biggest sector of the S&P, and they have lagged badly. The higher bond yields and oil prices hurt 3 out of the four sectors very badly. Homebuilders look like they have finally topped out helped along by prodigious selling by insiders of course. The flat yield curve is hurting net interest margins and so the banks stocks got hit. The BKX looks like its broken down. Retailer's also were sold, starting with Target, the subject of a bearish Barrons article. The group sports pretty high PEs for such large companies in such a mundane businesses. Over the long run their sales growth can't run ahead of GDP. Just ask WMT. That leaves the energy stocks, and at least today they can't lift the entire market by themselves.

A few recent indicators have also become troubling. Sentiment, as reflected in the number of weeks that bulls have outnumbered bears at 145 is approaching its record of 152 weeks. Mutual Fund cash levels are at historic lows. Real Estate as a percentage of GDP is at a historic high. Insider selling is very high. The breadth divergence between big and small stocks is very wide. The current acct deficit at 6 1/2% of GDP is in no mans land. None of these are very good timing indicators, but together they do paint a picture of caution. We can't all get out the door at the same time.

JULY 26, 2005

The market continues firm since my last post. The S&P is up about 9 points to 1233. Bonds and the dollar have not changed one iota. Let's be honest. We are in the summer doldrums. We have had a China revaluation, lots and lots of earnings, Greenspan testimony, and the usual economic stats, and nothing is moving the markets very much. Volatility is so low its hard to sit through a whole day of trading. What are you e-mini traders doing?

It would not surprise me to see stocks continue to creep higher. I'll try another short at 1250 on the S&P. I'll stay short bonds untill I see economic weakness and I will start thinking about a short dollar position if the euro falls to the 117-118 area.

There is a lot of talk lately that oil has reached a short to intermediate top. This will be important if true. Energy stocks have been the leaders that have pulled the market higher. Financial stocks have lagged. Some of the big banks in their earning reports had lower net intest income because of the flat yield curve. The other leaders in the market and the economy , are the homebuilders and retail stocks. They have had great runs and are near their highs, but look tired. If oil comes down, what's going to pull the market higher.

JULY 18, 2005

The S&P is up 28 pts from my last post, from 1196 to 1224. The prime mover in my mind being that so far there has been no visible impact on the economy or earnings from either higher oil or higher short term interest rates. Those of us, and we are legion, who thought the consumer was overleveraged, underpaid, undersaved, and would be hurt by low income growth in wages and salaries, and squeezed by higher oil prices and rates, Not!!!!! Neither higher gas prices or heating bills or air condidioning for that matter, which have increased substantially, look no further than the huge increase from utilitiies in the latest industrial output report, have made much of a difference lately, Look no further than the latest strong retail sales report. Think pent up demand has been spent, think sales have been pulled forward. No evidence in sight yet. Look at the appettite for SUV's during GM's latest sales incentive.

The consumer cuts back his standard of living very reluctantly, even during recessions, studies have shown. The housing bubble has let homeowners extract ever increasing amounts of cash out of their equity according to BCA Research in their July 7 report. As postulated in an earlier post, and end to this process could likely be the trigger for the inevitable economic slowdown. As has been shown in Holland and the U.K. even just a flattenting in home prices can be quickly felt in retail spending. Even super bears are starting to throw in the towel or waffle on their timing, like Michael Metz last week. There are a few signs, like the dollar stores are underperforming the retail index, and they of course cater to the lowest strata of shoppers. Fewer new home buyers can qualify for loans due to higher home prices in hot markets. Signs like these will have to become more wide spread for the market to take heed. We will be patient in the meantime.

Friday and today the market seems to have stalled. The leaders, oil stocks an homebuilders have sucumbed to profit taking. Oil inventories seem comfortable and the hurricane fears have receded, so taking some chips off the table seems reasonable. All this talk of the Fed not stopping soon provides a similar excuse in the homebuilders after some big moves. Today Citi also dissapointed, in the biggest sector of the market. Last week Fifth Third as well. The Contrarian Investor.com had a great report foreshaowding these results.

I'm still short bonds. Nothing has happened to change my mind, that until we see some economic weakness the curve will have trouble flattening further, and the Fed will push rates higher. The dollar will be supported as long as higher rates are expected.

JULY 1, 2005

The S&P is down about 15pts from my last post, from 1211 to 1196. What has happened is that oil reached the tipping point of $60. Oil had been advancing smartly the weeks before by about 8% without any adverse impact on stocks. But a $60 oil price was enough to cause a couple of triple digit down days for the Dow. The market then got back 50% of its losses, recovering to 1204 when oil broke back below $57. There was also some hope that the Fed might signal an end to their rate increases. Those hopes were dashed yesterday and the market sold off. Economic wise, we get a nice bounce in the purchasing managers index and the consumer sentiment numbers are supportive. The economic news has not been a big mover lately.
It is all about the Fed, oil and soon earnings. The euro fell below 1.20 today, not good for multinational earnings. The Fed is not done, also not good for the market. There is no sign of economic weakness in housing and autos. If you squint you might see the consumer slowing down a little. To me it all adds up to oil and earnings being the swing factors over the next couple of weeks. I'm skeptical of this fall in oil being little more than profit taking after hitting a big round number as the oil stocks gave up very little. On profits I fear higher commodity cost and a stronger dollar hurting margins. I'm shorting the market on rallies with a stop at 1206.

I'm short term bearish on the bonds now. I think the curve will have trouble flattening further until we see some sign of economic weakness, so I've gone short for a trade. Prices have approached the old highs and they are technically overbought.

The euro looks like it can fall to 117-118. Like Bill Gross I believe economic weakness is enevitable down the road and that is what I think will turn the buck lower again. For now the interest rate theme provides the lift.

JUNE 20, 2005

Well here we sit, right about where we stared the year. Considering all the potential negatives, not too bad a showing. Higher interest rates are almost a positive for the market as it must mean the Fed's almost done. The same can't be said for the higher dollar or oil, at least not in my mind. The higher dollar is going to negatively impact some second quarter corporate profit reports. Oil will do the same as well as hurt consumer spending this summer.

I've written about this before, but I think it bears repeating. This market reminds me a lot of 86-87. The market just kept shrugging off all the negatives and floating higher until itdidn't.
We had trade frictions with the European and Japanese, record current a/c deficits, a budget deficit 4% of GDP, commodity prices moving higher as well as the CPI, gold moving up from 360 to 420 and yet GDP growth of 3 1/2% with Fed Funds moving higher.

Then the trigger was Secretary baker threating the Europeans over a weekend with letting the dollar fall to correct our current a/c deficit if they didn't lower their rates and reflate so they would buy more of our exports. The U.S. couldn't be the only economic engine of growth, it was argued.

What will be the trigger this time? It could be an oil spike, a trade war with China , or the housing bubble bursting, or something completely out of left field. I lean toward the housing market being the culprit. Consider the following scenario. Housing prices continue to escalate. As a consequence fewer and fewer people can qualify for mortgages as their incomes have not kept pace. Sales slow down. Prices fall ending the wealth effect on consumer spending.
You can write your own ending.

JUNE 7, 2005

We are up 10 S&P points from my last post 5/26, all of it coming today. The last surge up came from China bashing and the beneficial effects a revaluation would have. Today's rally comes from Greenspan's comments, that bond yields will stay low and a flat yield curve may not mean economic weakness the way it has in the past. Recent evicdence of economic weakness is being taken in stride, as the pause that refreshes. It is ascribed to an inventory correction largely attributable to the auto sector, that is now being worked off with better things to come in the second half. Friday's weak employment report is a distant memory. If final demand continues to hold up, then all the above is true. Long rates might get low enough to inspire another round of mortgage refinancings which would bolster the demand side. It's a light week for data and so a good week for a market rally. Although the market ignored it, Greenspan did say the bond market could be signaling economic weakness. So when the data flow resumes the sledding will get tougher if it follows the lead of the payroll numbers.

MAY 26 2005

At the time of my last post, May 19, the S&P was at 1190, about where it closed last night. As I write we've popped back up to 1197, not to far from 1211 where we started the year. So overall the sideways action continues, making life hard for traders and investors alike. The goldilocks environment of 3% growth, low interest rates and low inflation provides support while the things we worry about-- trade deficit, budget deficit, high oil prices, flattening yield curve, declining leading indicators, real estate bubbles, etc. hamper the upside. The day to day statistics, earnings and news moves things up a little or down for a few days, but we always seem to revert to the mean. Eventually I believe the things we worry about will tip the scales lower beacuse some of them are unsustainable. The timing however is and has been quite uncertain. The resillency of the U.S. economy is amazing.

Next week looks to be moreof the same, slightly weaker economic stats, but nothing earth shattering it appears. However you never know what will tip the scales. Be wary of weak economic stats because one could break the camels back. The push up today got its impetus from Treasury Secretary Snow"s testimony putting more heat on the China to revalue. While this is certainly not good for mainstreet, having to pay higher prices for imported goods, it will have an immediate positive effect on corpoate profits. Good especially for those multinationals with a high percentage of their revenues coming form asia. In other currency matters, it will be interesting to see how much of an effect the French vote has on the euro, if they vote no on the EU constitution.

MAY 19, 2005

As I said in my last post, as long as there were no hedge fund disasters, the market could continue to gather strength. That was the first impetus, as nothing untoward happened over the weekend. Then came the Treasury report on China, putting them on notice to loosen their currency peg or else. Finally the core CPI at 0% was the frosting on the cake. Today so far, it looks like the better than expceted jobless claims are cancelling out the worse than expected Philly Fed index, which has been quite erratic lately. So the S&P sits at resistance near 1190.

The bonds sit near 4% resistance in yield and gold is around $420 support. Also it is not uncommon for stocks to hit their high around options expiration. The point being, that this would be a natural area for consolidation or reveral of current trends. No shocking news seems to be on tap for next week, which also fits the scenario. With this backdrop beware of false breakouts.

MAY 13, 2005

When I left on vacation 4/21 the S&P was at 1159 same as when I returned on May 3. As I start to write this blog it is trading at 1161. I love the quote by Martin Goldberg today on Financial Sense.com "The S&P500 touched 1155 on January 27th, 2004, over 15 mos ago and as of Wednesday night sits at about that same level. In that time, there has been so much analysis, so little movement and so much money floating about looking for a speculative gain." Isn't that the truth. In contrast however, on 4/21 oil was 54.20 vs 48.40 as I write. The dollar was 130,48 against the euro vs 126.32 now. 10yr notes were 4.22 vs 4.13 now. Gold was 434 vs 420 today. So, with all this activity, why haven't equity prices had a net change? A few weeks ago we were fretting over an economic soft patch, that now with the latest releases of retail sales, payrolls, and auto sales common wisdom says is over. GDP will be revised higher. With oil down $6 and 10yr note yields at 7 month lows, earnings pretty good, you would think equities would be higher than three weeks ago. My explanation for why they are not is simply, liquidity is contracting and the ripple effects of the GM and Ford downgrade to junk on the psychology and risk appetite of market participants is casting a pall. It scares the hell out of everybody and they pull back. First Fannie and Freddie, and AIG and now GM and Ford. Credit problems with interest rates this low. What if they move higher? Who else then gets caught. Credit spreads are widening as everyone waits to see if another shoe falls. Time will heal this wound. Everyday no hedge fund fails the market can gather strength.

I do have my reservations over the economic data maybe not being as strong as it appears. If you average March and April together it doesn't look as much has changed. Consumer confidence droped again and the purchaseing managers report was weak. Europe and Japan also continue weak.

MAY 4, 2005

To me, today's stock market strength stems from three factors. First, auto sales we pretty good in May, a 17 1/2 million annual rate. Fears that the economy is falling out of bed are not supported by this strong demand. Take heart, those in the soft patch camp. Secondly, the Fed is done for two months regardless of what they do at the next meeting. We have a respite. Third, oil inventories continue to rise. Crude finished up on the day, but with these numbers, we are not going to $60 anytime soon. So, if the economy can grow at 3% with oil at $50, and the Fed hasn't hurt the economy yet with talk that they are close to done, and profits are good. What's not to like. Thats the bull case that took the lead today.

MAY 2, 2005

Back from vacation refreshed and eager to jump back in. I left on the 21st of April, and the S&P clsoed at 1159.95 that day. As I write at 10:30 am the S&P is trading at 1159.51. On a net basis I didn"t miss much. You did have some big up and down days. The market hit its high, 1229 on the S&P on Mar 7. Crude oil was around 54, on its way to 57.46 closing high on 3/21 and the 10yr note yielded 4.3 on it's way to 4.6.from 4 in early Feb. So the market peaked about three weeks before oil and interest rates did. It was the combination of higher oil and interest rates that turned the market down, similar to past spikes in oil prices, 3/00 and 8/90. As they continued higher the market went lower. Even after they peaked and went lower the market declined. Here we are today and oil is close to $50 and notes around 4.20% and the market still struggles. The question is has oil done enough damage to cause a significant economic and profit slowdown. Gas is still $2.25 a gallon, so are the effects still working themselves into the economy. Secondly, to what levels must interest rates and oil fall to become positive catalysts to the market. In both the 1990 and 2000 spikes, oil came down to $20. One would think that long rates at these levels would be very supportive to the market, real estate and housing. But we are at a point where, if the 10yr breaks 4% in yield it could be interpeted very negatively.

The dollar continues to get support from the economic weakness in Europe and Japan and from rate hikes here in the U.S. not to mention the uncertainty around the EU constitution. Our problems however are large and structural. They won"t go away soon. The budget deficit, trade deficit, and overleveraged consumer and low savings rate to name a few. One could take comfort that we are at a higher absolute level of economic growth than Europe or Japan, but that might just mean we have farther to fall. In the 70's what made the dollar so weak was the European central banks had greater credibility as inflation fighters than the Fed. They only have one mandate-fight inflation and maintain the integrity of the currency. Economic growth was the politicians problem. Germany had been through hyper inflation making their currency worthless. The Fed on the other hand is always torn between two masters and your always guessing which one they will serve. If this slowdown continues will they continue their measured tightening? If not, keep your eye on the dollar then.

APRIL 14, 2005

The positive effects of lower oil prices on stocks was agian over ridden by economic weakness. This was very similar to what happened a few days ago when we got lower oil prices but a large drop in the transport index, based on economic weakness drove the market lower. Yesterday the culprit was weak retail sales. Just about everyone has been talking about if and when the overindebted consumer will crack for over a year now, so its a big deal. Ex auto and gas the number was -.1%,. The last time it was negative Greenspan was talking about a soft patch. Obviously this can have important ramifications for the dollar and interest rates.

I have a hunch that the pattern we will see now, is weakness on days of reports reinforcing the economic weakness theme and recoveries thereafter. We have very supportive oil prices and long term interest rates to provide some rally days.

The dollar is stronger on an IMF report reinforcing the theme of stronger U.S. growth and weaker growth in Europe and Japan. This is old news of course. The euro should find support around the February lows of 127.40. It should start to firm if more sign of U.S. economic weakeness emerge.

APRIL 12, 2005

The headlines say "stocks trade higher on FOMC minutes". It isn"t that simple. Today was a very complex day. Readers of this blog know I have been using a very simple but effective index lately. As an example, if oil is $55 and the 10yr yield is 4.5% the index value is 10. Stocks have been weak when the index is over 10 and stronger when the index is under 10. A few days ago when oil broke $55 on the downside, I expected stocks to firm. They didn't because on that same day the transports crashed on USFC's earnings warning. The trucking company's weakness spread to the other transports and then to the market in general. The warning did not blame higher oil, but rather weakness in the auto sector and a slowdown in business in the northeast U.S. That is why the weakness spread to the general market. It implied a weakning economy and the cyclicals got hit. Oil continued to come down yesterday and more today. When the FOMC minutes came out and caused a modest rally in bonds that was the straw that broke the camels back, as higher interest rates were not going to offset the benefit of a $5 drop in oil. The Dow staged a 140 pt turnaround. With the index now at 9.58 there should be good support for stocks.

To many the, action in the dollar was confounding as well. It fell as soon as the record U.S. trade figures were released but then did a 180 and rallied almost a 100 pips at the close.
I won't argue if a record deficit was expected or not, but we know they are going to be large every month, particularly if oil prices are high that month. I believe what is keeping dollar sellers sidelined is the G7 meeting in Washington this weekend. The G7 is going to pressure China once again to do something about their currency. Notice, I said G7 and not the U.S. If and when they finally act it will take a lot of pressure off the euro. Any action or statement hinting they are leaning that way will be enough to send the buck flying.

APRIL 6, 2005

With 10 yr yields around 4.40 and oil at 56, we are right at my magic index number of 10 i.e 4.4+5.6=10, that I have been talking about for some time on this blog. It has been working I must say like a charm. Above 10 there is downward pressure on the stock market and at 10 or below the market acts better and starts to recover. Since it doesn't look like we are going to get a biig rally in bonds in the near future, it seems to all come down to oil, I;m a long term bull on oil but in the short run anything is possible. In my last post 3/23 I said I didn't expcet the S&P to rally much past 1190. So far so good, but I think I'd revise it a liitle to 1196 which is a 50% retracement.

The dollar is strong, especially against the yen. Economic weakness in Japan and Europe, something I harped a lot about in my earlier postings, is responsilble along with the Fed tightenings of course. Look for this to change when the U.S. recovery starts to falter.

MARCH 23, 2005

Sorry for the lack of recent posts but I have been preoccupied with other things and actually everything has been going according to script. Stock have not been able to stand up to higher rates and higher oil as my previous posts have commented on. Oil was down over $2 today, so we have a chance for an oversold bounce as bonds rallied a bit as well. Should those two trends continue I think we will get the bounce. But how long it lasts and how far does it carry is the question. It will probably last 1-3 days and not carry past yesterday's highs, pretty weak. Get in the sell the rallies mode, because playing the bounces will be to hard.

The first sign of any economic weakness will see a bond rally, but I grant you it may be awhile before we see that. They are talking pretty good durable good figures for tommorrow. Yes the higher interest rates have helped the dollar and thereby hurt gold. That was to be expected around Fed time. The eurozone having a trade deficit, the first in 22 months I believe and weaker German business confidence gauges don't help either. But gold will be back and I think we are getting close to a buying zone again. Gold is now closer to where it ended 2003 than 2004. The dollar will also come under attack again. The economy is built on frail foundations. We are overextended militarily. We have large budget and trade deficits. We spend to much and save too little. We are overleveraged and underinvested. Our manufacturing base is down to 13% of our economy. Housing has peaked and may be in a bubble. For those who think none of these problems will ever come home to roost and that the piper will never have to be paid, think again.

MARCH 14, 2005

Things have finally changed. Higher oil prices used to cause fear of a weaker economy and the bond market would rally, the lower rates would weaken the dollar which would cause gold to rise. The weaker dollar and lower rates would ususally be good for stocks.

Recent comments from central banks on diversifying their reserves added to comments from Greenspan regarding a conundrum and losing money on rising rates finally got the bond markets attention and rates have been moving higher since. The rising rates have not helped the dollar nor hurt gold in its quest for a new high this year. Visions of central banks dumping dollars has taken precedence over everything else.

As I stated in my last post of 03/08,regarding the stock market, "a little bit higher oil and interest rates would tip the scales". In my post of February 18, I gave my formula for a simple rule of thumb, whereby any combination of oil and ten year yeild that equals and index of 10 is a sell signal for stocks. For example if the 10yr yield is 4.5 and oil is$55 it equals and index of 10. Oil touched 54.60 on March 8 and has traded around there ever since. Interest rates also started moving up on that day. It's no coincidence that that day also marked the high for stocks.

MARCH 8, 2005

The news today from euro central bankers talking about raising interest rates was a big deal. It took the euro up 1.35 pts to 133.41 and that helped gold tack on $5.60. You have to wonder what are they thinking. Their economies are staggering under their strong currency. Do they just want to shoot themselves in the foot with these kinds of comments? Remember the South Koreans comments on diversifying their reserves a week ago? They had to back pedal pretty quickly. It would not surprise me to see the same reaction here, in which case the euro and gold would give back some of todays gains. The long term trend of a lower dollar will still be intact even then. It won't be this trade figure but perhaps the next one, which, with the move in oil we had will be quite large and cause the euro to test its highs.

Stocks were down with the S&P falling 5.88, but considering oil touched $55, you have say that was a pretty good performance. Also, the bonds got hit pretty hard today. The long bond fell to 110 today driving the yield to 4.71. The excuse given was the CRB index led by copper moving to 24 yr highs at 312.65, reviving inflation worries. The coming 5 and 10 yr auctions also were a factor. We always liked to get prices down when we had to buy a bunch.

The market seems to sit still for long periods and then lurches up or down to sit again. Which way will the next lurch be. The market is so close to a new high, it doesn't want to give up easilly, but the combination of higher oil and interest rates has been lethal every time before. If these trends continue stocks are living on borrowed time. Sometimes the market has to see the whites of their eyes, i.e. actual damage from higher rates or commodities and sometimes it just takes a mild comment or event ala 1987. Whatever straw breaks the camels back this time, I don't think lies to far ahead. The stage is set. We are at multi-year highs, valuations are stretched, There has been little action to deal with the deficits. Bush's reform programs seem to be losing momentum. A little bit higher in oil and rates would tip the scales I think. There is the chance we could pull back from the brink once or twice before we go over though. I'm writing this late so excuse the typos.

march 2, 2005

The market drops 175 points when oil went over $50. Today when it goes over $53 its a big yawn, the Dow loses 18 pts. What's up? I think it ties in to what Greenspan said today, words to the effect that the economy is growing reasonablly well and more importantly, that there are few signs of it weakening soon.

So far higher oil prices have shown up on a macro basis mainly in two places. The higher trade deficit and higher wholesale price indexes. True the higher inflation has led to higher short interest rates, but they are still so low that they don't seem to be influencing any buying decisions yet. We are still close to generational lows. In time or in price oil will start to show up in weaker economic stats. It may be already. We have had two months of weak auto sales, but we've bounced back before with higher incentives and thats what the market expects this time. New home sales have started to trend lower but from very high levels. With long rates still quite low no one is concerned here either. However, undeniably inventories of both homes and autos are higher than in quite some time. These two sectors are a big part of the economy. Final demand in 2004 grew at the strongest rate since 1999, 4%. When we start to see a slowdown in general merchandise sales the market will take notice. Tommorrow the retailers report Feb sales, and they should on balance be good. We are not there yet.

The S&P has closed at 1210 today, 1210 Yesterday, 1203 Friday and 1211 Thursday. It feels toppy and if it can't breakthrough soon it will fall of its own weight. It is ironic that it is up here in the first place because of higher oil stocks dragging the index higher and now is threatened by high oil prices. Stock groups like the trucker and retailers, restaurants that should be hurt by lower discretionary spending are not making new highs but they haven't totally capitualed yet either. The money flowing into oil stocks must be coming out of most other sectors without hurting any of them too much.

The dollar was higher today. It wants to go down due to our trade and budget deficits but our economy and interest rates are so much firmer than Euroland that we get these rallies. The ECB lowered growth forecasts today for 2005 and 2006.

Bonds did not do much today, but they have broken down and are nearing support levels.
They are important to watch from here. It closed today at 4.38%. If we go above 4.5% it will be a drag on stocks.

FEBRUARY 28, 2005

Have to make it short and sweet today. Energy stocks call the tune. They ran up, sold off and then recovered and the rest of the market followed along. Energy stocks made a higher high, a lower low and lower close than Friday, so profit taking may be the order for the rest of the week. The rest of the market should follow along.

Bonds got hit hard on the PCE deflator being higher than expected. Looks like we may be ready to test the spike in 10yr yield that we made in December, around 4.42. The homebuilders did not like this especially with new home sales down much greater than expected, down 9%. Walmart couldn't hold its gains even though it reported its best SSS since May, very suspicious.

FEBRUARY 25, 2005

Led by the home builders the market had an afternoon spurt and finished on its highs. The Citibank strategist Lekovich, helped as he put out a call for the S&P to move to 1300 and said that might be conservative. Of course as usual the oil stocks were also very strong. Also helping was today's GDP figure, which everyone expected to be revised higher.


Bonds, gold, the dollar and even oil were small movers. Oil held up in spite of bearish inventory data. Its hard to believe that the reaction of the stock market to oil cracking $50 on the upside Tuesday, can be so easilly forgotten. It is hard to argue that we are not in a goldilocks environment. Economic growth is good but not too good. Inflation is not too low anymore nor too high. Profits are good even though their growth rate may be slowing. The dollar is weak, but not crashing and the multinationals love that. Long term interest rates are very supportive, to housing to stock valuations, to consumer borrowing.


All the major problems are in the future and do not seem to be affecting the here and now. Budget deficits, current account deficits, savings rates, consumer debt, oil prices, the slowdown in Europe and Japan, and worries over job growth. All these things, it is said cannot continue without impacting our well being. But, as the old saying goes, it doesn't matter until it matters. What should we be on the lookout for to see when it matters? Look for any or all of the factors to start to slow housing and auto sales, weakness in low end consumer spending, the budget deficit coming in higher than forecast, inflation numbers higher than expected, profit margin squeeze due to higher costs, and consumer debt distress showing up among the sub-prime lenders. Until then, this week is probably a good microcosm of how the market will behave.

FEBRUARY 23, 2005

Not to much to say about yesterday, an oversold rally. If oil stays over $50, a definite dead cat bounce. The rally retraced 50% of the selloff in the S&P and promptly turned. Because of the president's holiday we get the oil inventories today, if they don't turn oil lower, look for a down day. As most everything was ralling, Walmart broke $52 a long standing support level. It being a leading indicator of the low end consumer< I think it's sending a message.

South Korea reminded me of a Gilder Radner skit, in that when apprised of what the market would do because of its statement on reserves, it said "never mind". That is one central banker that ought to be canned. Funny though, the dollar did not gain back what it lost even after their retraction, because the cat was out of the bag. This might also get many of the smaller central banks around the world thinking, they might want to get through the dollar diversification door before the big boys start. They used to say higher oil prices were good for the dollar as countries had to scramble and buy more dollars as oil went up. Not true anymore, if George Soros is right and the recipients of those dollars, middle east producers and Russia, are diversifying their reserves.

The bonds stay range bound. Bill Gross said he is convinced yields are 100 basis points too low along the yield curve. As I have enumerated many times, there are a long list of reasons this year and last to have expected yields to rise, and they have not. Huge budget deficits, trade deficits, a weak dollar, fed tightening, higher inflation have not done the job. Central bank buying, pension and mortgage buying, and economic fears have kept yields low. In the ongoing debate between inflationists and deflationists I am starting to favor the deflation scenario. This debate could take pages to do justice to, which I won't do now. To begin though, 70% of business expenses are wages and benefits. It is hard to get ingrained, escalating inflation without wage inflation. Globalization and the indutrialization of China and India with the accomanying labor arbitrage and outsourcing, make wage inflation unlikely. The huge debt to GDP ratio that the U.S. now has is very deflationary, and its effect will be exacerbated in any economic downturn.

FEBRUARY 21, 2005

Today was pretty obvious. Everybody got it. Which is why the magnitude of today's move was so large. One salient point however, after the open the S&P rallied from 1196 to 1202, a respectable rally. The market came unglued when oil broke $50, a big resistance level on the charts. There was also big volume on this move down, a harbinger of things to come.

South Korea"s central bank making comments about diversifying reserves away from the dollar, knocked the buck down big. The euro closed at 1.3252, up .0178. This gave gold an $8 lift and of course gold stocks had a good day. Bonds did not like the reserve talk either and finished lower.

Oil inventory data and the CPI tommorrow could derail the market further. If the data support oil staying over $50 and the CPI keeps yields creeping higher, look for further downside followthrough, if not, a respite is in order. In my last comments, I said it was a strong possibility that the market had put in a double top and the combination of higher oil and rates was dangerous. I also said a couple of post's ago that if gold stocks moved higher rather than consolidating their gains, it may me a warning of trouble ahead. It looks like the latter is the case.

FEBRUARY 18, 2005

Has the stock market put in a double top? Higher oil prices and higher long term interest rates are creating a witch's brew that make it a strong possibility. Greenspan, scared the bond market so it fell significantly yesterday and today. The 10yr yield is now at 4.27. The April oil contract closed at 49.01. If oil moves over $50 and the 10yr breaks 4.5%, in my opinion we are in a real danzer zone. My simple index is that any combination of oil prices and 10yr yields that adds up to and index level of 10 is a sell signal, for example March of 2000 oil was $34 and 10yr was 6.8% adding them together gives you and index value of 10.2. Our economy is probably even more leveraged now so we may not even have to get that high.

The euro, gold and gold shares rested today which was very encouraging. They all could have fallen significantly on the higher rates. Oil stocks are on fire and probably represent one the few sectors where a buy and hold strategy applies. Even if your timing is wrong time will bail you out.

Barrick has been one of the strongest major gold stocks. Good earnings and guidance, increasing production. Surprising how few buy ratings on the stock.

Next week- will CPI do the same damage as the PPI did? Will GDP be revised higher as the rumors advertised.

If we had to listen to the House interrogate Greenspan every day I don't think the market would ever go up. I found it very depressing, trade deficits, budget deficits, trillions for social security and medicare, a problem several times in magnitude of social security. The sky was falling and the market can't like that. The saving grace of course, is that it won't happen tommorrow. No doubt we will forget about it soon and start worrying about the next earnings report.

By now, everyone knows that Japan is in recession, for the last 3 quarters no less, after they revised their data. Not to worry though, they announced today they are not revising their forecast showing a pickup in February. The same confidence is proffered by the Germans who seem confident growth will pickup next quarter. Where this confidence comes from I don't know. The trends in place look strong to me. Japan did say they are poised to stop the appreciation of the Yen in case China revalues. Now that is the kind of tlalk gold likes

The euro, gold and the stocks had a nice move higher today, overall they've had a nice bounce from being oversold. The way I read the charts they are now close to resistance and will probably mill around here for awhile. If they continue to move sharply higher I think they will be telling us there is trouble ahead.

Greenspan said little about bonds today, but they still fell modestly 19/32 iin the 30yr. The one thing that really bothered me about his testimony, was his answer regarding the large foreign ownership of our securities. His response, that foreign purchases reflect the fact that we are the safest and most liquid securities, was an answer of omission. He knows that China and Japan have all those dollars with which to purchase securities because they sell us more than we sell them and they want to keep it that way. If they were to sell those dollars to invest in gilts or eurobonds that would weaken the dollar further eventually putting more pressure on their currencies, which is exactly what their trying to prevent. Private fund flows are receding, which he knows. Saying that official flow are increasing because we are such a great place to invest is somewhat disingenous.

FEBRUARY 16, 2005

Germany reported their GDP dropped in the 4th qtr by .2% and the 3rd qtr was revised lower bringing growth for the year to 1.5%. Don't tell the stock market, it's as high as it has been since 9/2002. The Euro as well finished up on the day by .42 to 1.3012. one of the reasons the Euro is so strong in spite of the poor economic growth is illustrated by a comment by their central banker. Stephen Roach in his latest commentary said that, while in Davos for the economic forum, he asked 'Trichet point blank if he could ever contemplate a situation when European monetary authorities would be willing to provide special support to domestic demand if their externally led growth model were derailed by a further strengthening of the euro. His answer was an unequivocal no." They have a single mandate unlike the Fed. They are charged with maintaining the integrity of the financial system, by fighting inflation to protect the value of their currency, period. It reminds me a lot of the 70's where the strongest currencies were those with the strongest central banks and not the strongest economies.

A lot of Greenspan testimony will revolve around the deficits and social security. I don't expect anything exciting. His view on these are well known. He favors cutting spending to raising taxes. He favors reinstituing pay-go rules to enforce budget discipline. He thinks benefit cuts are part of the social security solution, particularly raising the retirement age. I've heard him so often I almost think I could give his testimony for him.

In Morgan Stanley's Stephen Roach's latest comments he makes the case that nothing much has been accomplished toward resolving the world's current imbalances and everyone is content to let the current games go on and hope that we grow our way out of all our problems. I guess this should not be too surprising. Looking back on history, nothing much gets done until their is a crises. Also, I think its quite clear that Bush has patterned his presidency on Regan's, both strong on defense, tax cutters, supply siders, big budget deficit creators. Both had a weak dollar and large trade deficits. The question is will it end the same way. The reason for doubt is that in each recovery the job growth is weaker and the leverage is higher. Can taxes be cut further? Can interest rates go lower? Can the trade deficit grow wider. Can consumer debt ratios go higher. Most importantly is the economy now self sustaining, becuase if the answers to the previous questions are no, then the question becomes how deep is the recession. Roach's point is, it seems we've but all our eggs in one basket.

FEBRUARY 13, 2005

The rally in stocks on Friday that CNBC attributed to rumors of the North Korean dictator stepping asside, I think was more a result of Congress moving closer to tort reform. The Senate passed a class action reform bill that as I understand it will send more of these actions to federal courts which have been less kind to class action suits. This is very business freindly. As you remember the market rallied strongly after the election and I thought at the time that tort reform, tax reform, health care reform, and social security reform all themes Bush articulated in his acceptance speeches and all very corporate and wall street freindly were the reason then. If indeed these measures move closer to fruition, they will provide support to stocks and the dollar as they will have a meaningful impact on corporate America's bottom line.

The only other market to show meaningful net change was gold up $3.30. I don't argue with those that say gold and gold shares have bottomed, I just don't see an imminent broad advance until the economy weakens, China revalues, or we have some kind of financial crises.

I usually never write much about individual stocks.I'm more interested in the macro, the big picture as in general most of a stock's movement is dependent on the overall market. I'm not interested in outperforming or underperforming, only in absolute returns. So let me say right up front these comments should not be construed as advice and are informational only. Now with that common disclaimer out of the way I can't help but comment on Alan Abelson's column in Barrons where he mentions "a shrewd technician friend of his professes to find Walmart intriguing as a great story that's topping out. He warns that should the stock fall below 50-51, a level at which it has gathered support whenever it started to fade in the past year and a half, that would signal the trend is definetly down; he also suggest that for obvious reasons, including its stature and size, the action of Walmart's stock could be a barometer for the consumer, the economy and the market as a whole".

I,ve been following Walmart closely for the last several years exactly for those reasons. From a fundamental point of view I've noticed the following:
Fiscal yr 2000 2001 2002 2003 2004 2005
SameStoreSales% 7.7, 5.1, 6.1, 5, 4, 3
Total Sales% 19.8, 15.6, 13.9, 11.6, 11.5, 11.2

Clearly same store sales are slowing. No surprise then that on the CFO's last appearance on CNBC he said they were going to de-empahasize SSS and focus more on total sales. He acknowledged that their current strategy cannibalizes sales from other stores but they do gain market share. He is right, but this is the first sign of saturation. Secondly, their SSS used to grow at nominal GDP, but in the last few years that has not been the case. Nominal GDP the last three years has been 3.8%, 5.2%, and 6.5%, increasing as their SSS have been declining. The growth in total sales is also slowing albeit very slowly the past few years. This is occuring in spite of all their international expansion and turnaround of SAM's clubs. This shows that the U.S. is still at the core of their operations and maybe the law of large numbers is begining to take effect. It is becoming increasingly a market share game. Unlike many of our other big multinationals, retailers fates are tied to the economy. Walmart's customers, as they have stated are particulary impacted by energy prices. Retailers as a group are one of the most interest sensitive sectors and any upward change in the Chinese Yuan can't be good as it would squeeze profit margins or hurt demand. Finally, S&P is changing the weighting of their indexes to account for actual float, eliminating shares held by governments and insiders. Walmart will be the stock most affected in the index and will reduce its weighting to 1.35% vs 2.16%. Half of this take place at the end of March and the other half at the end of September, I believe. A lot of index holders will have to sell a lot of shares.

Walmart is a well managed company, their pre-tax margin is still rising, but the hill is getting steeper to climb. I agree with Abelson's freind and believe they are a barometer for the consumer, economy and market. When the consumer slows down, one month we will see negative SSS. Twice this year we came close. SSS we up only .5% in Aug and .7% in Nov. Two months, in one year that close to zero, I don't believe has ever happened before. Since the consumer is 70% of the economy, so goes he goes the economy, earnings and the market.
Of course that doesn't have to be tommorrow, next week, or month, but keep a sharp eye out.

FEBRUARY 10, 2005

It was a Dow kind of day . That average, powered by AIG, CAT,UTX,XOM, was stronger than all the rest. the transports actually down. It feels like there is finally a move to quality afoot. It makes sense. The market seems to be on precarious footing with nothing on the near term horizon to act as a driving force higher. The budget Bush released has no credibility. The cuts won't happen, just like they didn't last time. The military spending will be greater than estimated. Rates are going higher, so is inflation. Oil is staying above $45. We've never had a period where oil stayed above $35 for a period of time and not had a recession, except for now.It different so far because the Fed lowered rates as never before. Earnings growth is slowing, comparisons are tougher.

I don't want to sound alarmist, but it does remind me a lot of 1987, which I remember well. Nothing mattered until it did. The dollar was crashing, Yen went from Y200 to the buck to Y165 and then Y130 in 1988. Swiss Franc's went from .48c in 85 to .75c in 87. Gold went from $360 in 86 to $420 in 87 and $520 in 88. The CPI was 1.1% in 86 and 4.4% in 87. The CRB went from 228 to 258 in 87. The budget deficit was 4% of GDP. The current a/c deficit was at a then record 160 billion. GDP growth was about 3.5%. Fed Funds were rising. Stocks in the face of all this kept floating higher until they droped. Trade frictions were very high and the drop was triggered over a weekend by Treasury Secretary Baker telling the Europeans in so many words. You have to stop raising rates, you have to stimulate your economies by easing rates. You have to buy more stuff from us to help ease our trade deficit, we can't be the only economic locomotive in the world. If you don't, I'll let the dollar crash.

FEBRUARY 9 2005

As I write, the 10yr thouches 3.99 in yield, and stocks are down in spite of a nice gain in Hewlett Packard. As I've stated before one of the best things that can happen for stocks, is low long term interest rates.It was no accident that the bull market of the 80's and 90's was accompanied by the biggest bond bull market in a generation. Unless we start seeing economic weakness or financial distress, which the bonds may be telling us is coming, these rates should provide support. Unlike last time, when they had a run there is no fear of deflation this time around, an important distinction. However, it could be different this time. Since this is one of the most levered economy's ever and financials are the largest sector in the S&P, and many other company's get a significant portion of their profits from financial activities, it is logical to think that the unwinding of the carry trade, the flattening of the yeild curve may have a greater impact on the economy and profits than ever before.

The dollar is modestly lower at around 1.28 the Euro, probably in part becaue of the trade figures due tommorrow. They are expected to improve modestly, but they surprised us last time. Gold was little changed, but the stocks were up modestly the South Africans more than most. Marc Faber, a pretty smart guy, says with the Rand at this level, they can't compete with China. In the Barron's round table he advocated shorting the currency. Obviously, if he is right that would make those gold stocks very attractive. I still believe, absent a financial crises gold and the euro won"t start a new run higher until the U.S. econonmy starts showing signs of weakness.

FEBRUARY 7, 2005

Well the range in the S&P was about 4pts, 1200-1204. It doesn't get much tighter than that. Certainly not good for all those E-mini day traders. The action today was in the bonds and the gold shares. GLD the gold ETF, itself was only down the equivalent of $1.20. The gold shares however fell a lot more. Placer Dome 5%, NEM 2%, ABX 1 1/2%. The news was that the IMF was going to sell some gold to help the poor countries with their indebtedness and Mr Greenspan said some soothing things about how the current account deficit is going to get better. Those things certainly added a little push, but this is just a continuation of what we've been seeing. The dollar is correcting from oversold levels because our money market rates are going higher and theirs are not. Our economy is stronger and theirs is weakening. They did keep the heat on the Asian currencies over the weekend at the G-7 finance minister's meeting, saying they favor greater flexibility in exchange rates. Of course later in the the day China again balked at doing anything now. If and when China does widen their bands or floats, it will take a lot of pressure off the Euro and we could see it weaken significantly.

The action in bonds continue to mystify most people, much like they did last year. Just about everything that happened last year should have made bond yields go up. The Fed raised rates, the dollar fell, inflation went up, the economy strengthened, oil prices shot the moon, but still, yeilds did not rise. The question is, does foreign central bank buying account for everything. Someone certainly needs to buy long duration assets. One other thing could be at work that no one has mentioned. During the bubble everyone's asset mix got out of whack with historical experience. Bonds used to be a much larger portion of assets held by pension funds, insurance companies and other instiiutional investors than stocks. But during the bubble, stock weightings increased to levels never seen before. Those holders, need long duration assets and maybe the pendulum is swinging the other way. Last months payroll number wasn't that much different from this one and we did not get this kind of reaction.

Looks like a quiet week ahead. The big stuff is behind us, earnings are winding down, slow news week, volatility is low. The dollar will probably deep rising and oil could keep falling to provide catalysts for now.