AUGUST 11, 2005

Since 6/27 the S&P has gone from 1190 to 1230, oil from 60 to 65 bond yields from 4% to 4.40% and fed funds from 3.25% to 3.5%. We might have hit a tipping point today. The reason I say this is that rising bond yields are finally starting to raise mortgage rates. Both the homebuilders and banks have rolled over. Oil at 65 will put pump prices at new records and finally influence consumer behavior. Gas prices always came back down in the past. New records will put that into question in consumer minds. 1253 is strong resistance and I thought we would challenge it at least once. We still might if something caused a selloff in oil, but stop waiting for inventories to do it. In commodities, price leads inventories. To me, oil looks like its entering the final phase of a blowoff top. I would not venture a guess to where that top could be. Bull markets in commodities accelerate near the end of their movcs. Remember gold going to 850? It was moving $50 a day toward the end, or beans in the teens or nasdaq to 5000, you get the idea. Pick a top? Not me. It's just doing its job. With so much demand, price has to ration supply. The danger of course is that we can't seem to do anything about it and the price might break the economy. I know the Fed will ease, but this time it may finally be pushing on a string.
The market acts like it definitely wants to go up. Any slight pullback in oil is an excuse for a rally. Rising bond yeilds however, seem to stop it in its tracks. Something to be on the alert for is any sign of economic weakness might cause a bond rally which ironically might ignite stocks. Short banks, homebuilders, and retail and stay long the energy group.

Even though the interest rate spread continues to widen in the dollar's favor, it continues to weaken. Stronger economic fundamentals in Euroland and Japan are overriding the rate advantage. Gold and gold shares have gone along for the ride. Higher oil and commodities in general are also pulling gold along. If bond yeilds continue to rise, can this continue? Opinions welcome.