JUNE 20, 2005

Well here we sit, right about where we stared the year. Considering all the potential negatives, not too bad a showing. Higher interest rates are almost a positive for the market as it must mean the Fed's almost done. The same can't be said for the higher dollar or oil, at least not in my mind. The higher dollar is going to negatively impact some second quarter corporate profit reports. Oil will do the same as well as hurt consumer spending this summer.

I've written about this before, but I think it bears repeating. This market reminds me a lot of 86-87. The market just kept shrugging off all the negatives and floating higher until itdidn't.
We had trade frictions with the European and Japanese, record current a/c deficits, a budget deficit 4% of GDP, commodity prices moving higher as well as the CPI, gold moving up from 360 to 420 and yet GDP growth of 3 1/2% with Fed Funds moving higher.

Then the trigger was Secretary baker threating the Europeans over a weekend with letting the dollar fall to correct our current a/c deficit if they didn't lower their rates and reflate so they would buy more of our exports. The U.S. couldn't be the only economic engine of growth, it was argued.

What will be the trigger this time? It could be an oil spike, a trade war with China , or the housing bubble bursting, or something completely out of left field. I lean toward the housing market being the culprit. Consider the following scenario. Housing prices continue to escalate. As a consequence fewer and fewer people can qualify for mortgages as their incomes have not kept pace. Sales slow down. Prices fall ending the wealth effect on consumer spending.
You can write your own ending.

JUNE 7, 2005

We are up 10 S&P points from my last post 5/26, all of it coming today. The last surge up came from China bashing and the beneficial effects a revaluation would have. Today's rally comes from Greenspan's comments, that bond yields will stay low and a flat yield curve may not mean economic weakness the way it has in the past. Recent evicdence of economic weakness is being taken in stride, as the pause that refreshes. It is ascribed to an inventory correction largely attributable to the auto sector, that is now being worked off with better things to come in the second half. Friday's weak employment report is a distant memory. If final demand continues to hold up, then all the above is true. Long rates might get low enough to inspire another round of mortgage refinancings which would bolster the demand side. It's a light week for data and so a good week for a market rally. Although the market ignored it, Greenspan did say the bond market could be signaling economic weakness. So when the data flow resumes the sledding will get tougher if it follows the lead of the payroll numbers.