JANUARY 11TH, 2005

This market looks like it's in real trouble. They are really pounding the SOX. Resource stocks, with the exception of oil are also getting hit pretty hard. It really feels like there are a lot of longs trapped above. I think that's why we haven't seen much of a bounce, too many sellers every time the market pops up. Well we are starting to get earnings disappointments, and warnings. The economic news flow so far this year has been ok and as long as in general it continues to reflect 3%+ growth, should not be a negative for the market. We may have to wait until earnings season is over before we get that sustained bounce. We do have oil as a wild card and from day to day it's volatility is amazing. Sometimes it runs the market and other days its ignored. It is the single most difficult thing to factor into day to day trading decisions.

Gold may have made a bottom here, but I don't think we will get a big upward move until the U.S. economy starts showing weakness again and the Euro starts another leg up. A weak economy is paradoxically good for gold because it weakens our currency, prevents or slows down any monetary tightening and in this new world of scarce commodities, lets inflation creep in. Gold closed 2003 at around $417 and 2004 at $438, so at todays close of $422 I feel we are in a support area. Gold will really start to move higher if reflation takes hold in Europe and they start to lower rates to combat economic weakness. Germany reported their industrial production for November fell 1.7% today. Alternatively, gold would rise if Europe experienced a sustained pick-up in inflation and was unable to raise rates to fight it due to economic weakness. So far inflation has been below 2 1/2% for the last 3 yrs. Their strong currency has helped mute higher oil and commodity prices.