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.