AUGUST 19, 2005

Yesterday's low in oil $62.25 was 8/1 high. So we are basically unch in oil for the month. Bond yields on the other hand, after falling most of the month have rallied over the past few days and are lower around the 4.20 level from 4.30 at the start of the month. So why is the S&P 20 pts lower. The DOW by the way has fared better, as a series of individual stories helped propel individual stocks. We had the MCD rumors of a real estate play. MO got a favorable court ruling, HPQ reported good earnings and popped $3 bucks. I think higher gas prices and WMT's warning have spooked the market. No knockout blow has been delivered by either bull or bear, but we are starting to tilt lower.



The bond rallied as oil prices hit $67 indicating the vigilantes do not see inflation and are more concerned about a consequent economic slowdown. Each major bond rally has been accompanied by a spike in refi's that kept the economy going. But each refi spike has been smaller than the last. The psychological effect of these gas prices may curtail refis even more this time, even if the bonds continue their economic weakness rally in the face of Fed tightening. The consumer may flinch about borrowing more. Then we will have arrived at the proverbial pushing on a string.

The dollar has had a nice rally this week on the back of data showing greater inflow of funds into Treasuries from abroad and the outlook for further Fed tightening continuing to add to our yield advantage. We have had our first small whiff of possible economic slowdown and the buck was non plussed. When the market gets stronger evidence of this possibility and starts to look forward to the day the Fed blinks, put a fork in it the dollar rally is done.