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.