MAY 26 2005

At the time of my last post, May 19, the S&P was at 1190, about where it closed last night. As I write we've popped back up to 1197, not to far from 1211 where we started the year. So overall the sideways action continues, making life hard for traders and investors alike. The goldilocks environment of 3% growth, low interest rates and low inflation provides support while the things we worry about-- trade deficit, budget deficit, high oil prices, flattening yield curve, declining leading indicators, real estate bubbles, etc. hamper the upside. The day to day statistics, earnings and news moves things up a little or down for a few days, but we always seem to revert to the mean. Eventually I believe the things we worry about will tip the scales lower beacuse some of them are unsustainable. The timing however is and has been quite uncertain. The resillency of the U.S. economy is amazing.

Next week looks to be moreof the same, slightly weaker economic stats, but nothing earth shattering it appears. However you never know what will tip the scales. Be wary of weak economic stats because one could break the camels back. The push up today got its impetus from Treasury Secretary Snow"s testimony putting more heat on the China to revalue. While this is certainly not good for mainstreet, having to pay higher prices for imported goods, it will have an immediate positive effect on corpoate profits. Good especially for those multinationals with a high percentage of their revenues coming form asia. In other currency matters, it will be interesting to see how much of an effect the French vote has on the euro, if they vote no on the EU constitution.

MAY 19, 2005

As I said in my last post, as long as there were no hedge fund disasters, the market could continue to gather strength. That was the first impetus, as nothing untoward happened over the weekend. Then came the Treasury report on China, putting them on notice to loosen their currency peg or else. Finally the core CPI at 0% was the frosting on the cake. Today so far, it looks like the better than expceted jobless claims are cancelling out the worse than expected Philly Fed index, which has been quite erratic lately. So the S&P sits at resistance near 1190.

The bonds sit near 4% resistance in yield and gold is around $420 support. Also it is not uncommon for stocks to hit their high around options expiration. The point being, that this would be a natural area for consolidation or reveral of current trends. No shocking news seems to be on tap for next week, which also fits the scenario. With this backdrop beware of false breakouts.

MAY 13, 2005

When I left on vacation 4/21 the S&P was at 1159 same as when I returned on May 3. As I start to write this blog it is trading at 1161. I love the quote by Martin Goldberg today on Financial Sense.com "The S&P500 touched 1155 on January 27th, 2004, over 15 mos ago and as of Wednesday night sits at about that same level. In that time, there has been so much analysis, so little movement and so much money floating about looking for a speculative gain." Isn't that the truth. In contrast however, on 4/21 oil was 54.20 vs 48.40 as I write. The dollar was 130,48 against the euro vs 126.32 now. 10yr notes were 4.22 vs 4.13 now. Gold was 434 vs 420 today. So, with all this activity, why haven't equity prices had a net change? A few weeks ago we were fretting over an economic soft patch, that now with the latest releases of retail sales, payrolls, and auto sales common wisdom says is over. GDP will be revised higher. With oil down $6 and 10yr note yields at 7 month lows, earnings pretty good, you would think equities would be higher than three weeks ago. My explanation for why they are not is simply, liquidity is contracting and the ripple effects of the GM and Ford downgrade to junk on the psychology and risk appetite of market participants is casting a pall. It scares the hell out of everybody and they pull back. First Fannie and Freddie, and AIG and now GM and Ford. Credit problems with interest rates this low. What if they move higher? Who else then gets caught. Credit spreads are widening as everyone waits to see if another shoe falls. Time will heal this wound. Everyday no hedge fund fails the market can gather strength.

I do have my reservations over the economic data maybe not being as strong as it appears. If you average March and April together it doesn't look as much has changed. Consumer confidence droped again and the purchaseing managers report was weak. Europe and Japan also continue weak.

MAY 4, 2005

To me, today's stock market strength stems from three factors. First, auto sales we pretty good in May, a 17 1/2 million annual rate. Fears that the economy is falling out of bed are not supported by this strong demand. Take heart, those in the soft patch camp. Secondly, the Fed is done for two months regardless of what they do at the next meeting. We have a respite. Third, oil inventories continue to rise. Crude finished up on the day, but with these numbers, we are not going to $60 anytime soon. So, if the economy can grow at 3% with oil at $50, and the Fed hasn't hurt the economy yet with talk that they are close to done, and profits are good. What's not to like. Thats the bull case that took the lead today.

MAY 2, 2005

Back from vacation refreshed and eager to jump back in. I left on the 21st of April, and the S&P clsoed at 1159.95 that day. As I write at 10:30 am the S&P is trading at 1159.51. On a net basis I didn"t miss much. You did have some big up and down days. The market hit its high, 1229 on the S&P on Mar 7. Crude oil was around 54, on its way to 57.46 closing high on 3/21 and the 10yr note yielded 4.3 on it's way to 4.6.from 4 in early Feb. So the market peaked about three weeks before oil and interest rates did. It was the combination of higher oil and interest rates that turned the market down, similar to past spikes in oil prices, 3/00 and 8/90. As they continued higher the market went lower. Even after they peaked and went lower the market declined. Here we are today and oil is close to $50 and notes around 4.20% and the market still struggles. The question is has oil done enough damage to cause a significant economic and profit slowdown. Gas is still $2.25 a gallon, so are the effects still working themselves into the economy. Secondly, to what levels must interest rates and oil fall to become positive catalysts to the market. In both the 1990 and 2000 spikes, oil came down to $20. One would think that long rates at these levels would be very supportive to the market, real estate and housing. But we are at a point where, if the 10yr breaks 4% in yield it could be interpeted very negatively.

The dollar continues to get support from the economic weakness in Europe and Japan and from rate hikes here in the U.S. not to mention the uncertainty around the EU constitution. Our problems however are large and structural. They won"t go away soon. The budget deficit, trade deficit, and overleveraged consumer and low savings rate to name a few. One could take comfort that we are at a higher absolute level of economic growth than Europe or Japan, but that might just mean we have farther to fall. In the 70's what made the dollar so weak was the European central banks had greater credibility as inflation fighters than the Fed. They only have one mandate-fight inflation and maintain the integrity of the currency. Economic growth was the politicians problem. Germany had been through hyper inflation making their currency worthless. The Fed on the other hand is always torn between two masters and your always guessing which one they will serve. If this slowdown continues will they continue their measured tightening? If not, keep your eye on the dollar then.