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.