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.