JANUARY 19, 2005

The biggest thing that struck me today, with the perspective of a few days off, is that we are still in the pattern of late day fades. Secondly the market is not acting well in the face of good news. The beige book was good, the CPI fell, jobless claims dropped, housing starts hit 2 mil and oil was lower. Third, the dollar is making new highs. The market seems to be looking past the current news and doesn't like what it sees ahead. As Michael Marcus, one of the great original Commodities Corp traders has said, the best trades are the one where you have the fundamental, technical, and market tone going for you. The fundamentals are good, but the technicals are not and neither is market tone.

The dollar keeps rising on the good fundamentals of the economy versus the the weakening economies of Europe and Japan as discussed on these pages before. Marc Faber in this week's Barron's has a theory that the dollar will go higher this year and that all asset prices will move inversely, stocks, bonds, commodities, gold, etc.

Bonds acted well today helped by the CPI and Beige book. There has been and continues to be a great debate about long rates in the coming year, because everyone was so wrong last year, looking for higher rates. Steve Roach, Morgan Stanley's Chief Global Economist put it best "Take yourself back a year ago :If you had known that the Fed would tighten by 125 basis points, that the US core inflation rate would essentially double, that crude oil prices would shoot up into the mid-$50 range, that the US economy would grow by nearly 4.5%, that America's twin deficits would soar, and that the dollar would come under renewed pressure, the bearish call for longer-term US interest rates would have been a no-brainer." The fact that they did not as he says "Hard as it may be to admit, this result basically turns the art of interest rate forecasting inside out" Its basically a debate between inflation-deflation and strong growth versus slow growth, something to get into more detail at another time.

Gold has stabilized around support.