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.