Thursday, April 14, 2005

APRIL 14, 2005

The positive effects of lower oil prices on stocks was agian over ridden by economic weakness. This was very similar to what happened a few days ago when we got lower oil prices but a large drop in the transport index, based on economic weakness drove the market lower. Yesterday the culprit was weak retail sales. Just about everyone has been talking about if and when the overindebted consumer will crack for over a year now, so its a big deal. Ex auto and gas the number was -.1%,. The last time it was negative Greenspan was talking about a soft patch. Obviously this can have important ramifications for the dollar and interest rates.

I have a hunch that the pattern we will see now, is weakness on days of reports reinforcing the economic weakness theme and recoveries thereafter. We have very supportive oil prices and long term interest rates to provide some rally days.

The dollar is stronger on an IMF report reinforcing the theme of stronger U.S. growth and weaker growth in Europe and Japan. This is old news of course. The euro should find support around the February lows of 127.40. It should start to firm if more sign of U.S. economic weakeness emerge.

Tuesday, April 12, 2005

APRIL 12, 2005

The headlines say "stocks trade higher on FOMC minutes". It isn"t that simple. Today was a very complex day. Readers of this blog know I have been using a very simple but effective index lately. As an example, if oil is $55 and the 10yr yield is 4.5% the index value is 10. Stocks have been weak when the index is over 10 and stronger when the index is under 10. A few days ago when oil broke $55 on the downside, I expected stocks to firm. They didn't because on that same day the transports crashed on USFC's earnings warning. The trucking company's weakness spread to the other transports and then to the market in general. The warning did not blame higher oil, but rather weakness in the auto sector and a slowdown in business in the northeast U.S. That is why the weakness spread to the general market. It implied a weakning economy and the cyclicals got hit. Oil continued to come down yesterday and more today. When the FOMC minutes came out and caused a modest rally in bonds that was the straw that broke the camels back, as higher interest rates were not going to offset the benefit of a $5 drop in oil. The Dow staged a 140 pt turnaround. With the index now at 9.58 there should be good support for stocks.

To many the, action in the dollar was confounding as well. It fell as soon as the record U.S. trade figures were released but then did a 180 and rallied almost a 100 pips at the close.
I won't argue if a record deficit was expected or not, but we know they are going to be large every month, particularly if oil prices are high that month. I believe what is keeping dollar sellers sidelined is the G7 meeting in Washington this weekend. The G7 is going to pressure China once again to do something about their currency. Notice, I said G7 and not the U.S. If and when they finally act it will take a lot of pressure off the euro. Any action or statement hinting they are leaning that way will be enough to send the buck flying.

Wednesday, April 06, 2005

APRIL 6, 2005

With 10 yr yields around 4.40 and oil at 56, we are right at my magic index number of 10 i.e 4.4+5.6=10, that I have been talking about for some time on this blog. It has been working I must say like a charm. Above 10 there is downward pressure on the stock market and at 10 or below the market acts better and starts to recover. Since it doesn't look like we are going to get a biig rally in bonds in the near future, it seems to all come down to oil, I;m a long term bull on oil but in the short run anything is possible. In my last post 3/23 I said I didn't expcet the S&P to rally much past 1190. So far so good, but I think I'd revise it a liitle to 1196 which is a 50% retracement.

The dollar is strong, especially against the yen. Economic weakness in Japan and Europe, something I harped a lot about in my earlier postings, is responsilble along with the Fed tightenings of course. Look for this to change when the U.S. recovery starts to falter.