JULY 26, 2005

The market continues firm since my last post. The S&P is up about 9 points to 1233. Bonds and the dollar have not changed one iota. Let's be honest. We are in the summer doldrums. We have had a China revaluation, lots and lots of earnings, Greenspan testimony, and the usual economic stats, and nothing is moving the markets very much. Volatility is so low its hard to sit through a whole day of trading. What are you e-mini traders doing?

It would not surprise me to see stocks continue to creep higher. I'll try another short at 1250 on the S&P. I'll stay short bonds untill I see economic weakness and I will start thinking about a short dollar position if the euro falls to the 117-118 area.

There is a lot of talk lately that oil has reached a short to intermediate top. This will be important if true. Energy stocks have been the leaders that have pulled the market higher. Financial stocks have lagged. Some of the big banks in their earning reports had lower net intest income because of the flat yield curve. The other leaders in the market and the economy , are the homebuilders and retail stocks. They have had great runs and are near their highs, but look tired. If oil comes down, what's going to pull the market higher.

JULY 18, 2005

The S&P is up 28 pts from my last post, from 1196 to 1224. The prime mover in my mind being that so far there has been no visible impact on the economy or earnings from either higher oil or higher short term interest rates. Those of us, and we are legion, who thought the consumer was overleveraged, underpaid, undersaved, and would be hurt by low income growth in wages and salaries, and squeezed by higher oil prices and rates, Not!!!!! Neither higher gas prices or heating bills or air condidioning for that matter, which have increased substantially, look no further than the huge increase from utilitiies in the latest industrial output report, have made much of a difference lately, Look no further than the latest strong retail sales report. Think pent up demand has been spent, think sales have been pulled forward. No evidence in sight yet. Look at the appettite for SUV's during GM's latest sales incentive.

The consumer cuts back his standard of living very reluctantly, even during recessions, studies have shown. The housing bubble has let homeowners extract ever increasing amounts of cash out of their equity according to BCA Research in their July 7 report. As postulated in an earlier post, and end to this process could likely be the trigger for the inevitable economic slowdown. As has been shown in Holland and the U.K. even just a flattenting in home prices can be quickly felt in retail spending. Even super bears are starting to throw in the towel or waffle on their timing, like Michael Metz last week. There are a few signs, like the dollar stores are underperforming the retail index, and they of course cater to the lowest strata of shoppers. Fewer new home buyers can qualify for loans due to higher home prices in hot markets. Signs like these will have to become more wide spread for the market to take heed. We will be patient in the meantime.

Friday and today the market seems to have stalled. The leaders, oil stocks an homebuilders have sucumbed to profit taking. Oil inventories seem comfortable and the hurricane fears have receded, so taking some chips off the table seems reasonable. All this talk of the Fed not stopping soon provides a similar excuse in the homebuilders after some big moves. Today Citi also dissapointed, in the biggest sector of the market. Last week Fifth Third as well. The Contrarian Investor.com had a great report foreshaowding these results.

I'm still short bonds. Nothing has happened to change my mind, that until we see some economic weakness the curve will have trouble flattening further, and the Fed will push rates higher. The dollar will be supported as long as higher rates are expected.

JULY 1, 2005

The S&P is down about 15pts from my last post, from 1211 to 1196. What has happened is that oil reached the tipping point of $60. Oil had been advancing smartly the weeks before by about 8% without any adverse impact on stocks. But a $60 oil price was enough to cause a couple of triple digit down days for the Dow. The market then got back 50% of its losses, recovering to 1204 when oil broke back below $57. There was also some hope that the Fed might signal an end to their rate increases. Those hopes were dashed yesterday and the market sold off. Economic wise, we get a nice bounce in the purchasing managers index and the consumer sentiment numbers are supportive. The economic news has not been a big mover lately.
It is all about the Fed, oil and soon earnings. The euro fell below 1.20 today, not good for multinational earnings. The Fed is not done, also not good for the market. There is no sign of economic weakness in housing and autos. If you squint you might see the consumer slowing down a little. To me it all adds up to oil and earnings being the swing factors over the next couple of weeks. I'm skeptical of this fall in oil being little more than profit taking after hitting a big round number as the oil stocks gave up very little. On profits I fear higher commodity cost and a stronger dollar hurting margins. I'm shorting the market on rallies with a stop at 1206.

I'm short term bearish on the bonds now. I think the curve will have trouble flattening further until we see some sign of economic weakness, so I've gone short for a trade. Prices have approached the old highs and they are technically overbought.

The euro looks like it can fall to 117-118. Like Bill Gross I believe economic weakness is enevitable down the road and that is what I think will turn the buck lower again. For now the interest rate theme provides the lift.