The Trading Desk

THE BIPOLAR MARKET

2010-07-27T13:13:00.002-05:00

The bulls are frustrated, the bears are frustrated. The S&P is up 100 pts to 1120 since July 1, after falling 100 pts from Jun 21 - Jul 1. These are big moves 8-9% in weeks. Why. Well we had terrible economic data towards the end of June that gave us 9 out of 10 down days, everything from bad payroll, weaker ISM, lousy retail sales, etc. Then from the middle of July on we had terrific earnings news. They beat their numbers bottom and top and raised full year estimates while giving optimistic guidance.

This points out a great divergence. The S&P 500 which is the stock market to most of us, no longer correlates to the US economy, at least not like it used to. We've got almost 10% unemployment, two months of declining retail sales, new home sales at the second worst level since 1963, and companies are reporting earnings like its early 2008, and expected to do $92 in 2011 for a new record.

Those bears who correctly predicted this wave of dismal economic statistics, were completely blown out by this 10% rally. S&P 500 companies get almost 50% of their revenues internationally. They can cut to the bone in the US and ride the wave of demand in Asia, Europe and Latin America, which is exactly what they have been doing. Sure, if we fall off the table like we did in 2008, everything will go down, but look how well they are doing when we are just bouncing along the bottom. Forecasting the US economy is no longer forecasting the S&P500, except in the very long run. Yes our weakness should manifest itself in China and Europe and loop back to weakness for our multinationals, but that is taking some time.

MGM

2009-12-16T15:36:00.002-06:00

From a high of 100 on Oct 8 2007 to a low of 1.81 on Mar 02 2009, back to 10.35 today what a ride. With the opening of City Center, MGM expects to get it's mojo back. How?
Why is a residential development expected to draw visitors. Yes I know it has a few nice hotels. Who goes to look at apartment buildings. There is no volcano, no pirate ship, no fountains or circus. This is a mystery to me.
To put that much new living space on the market in the epicenter of the real estate debacle is insane, but then they have no choice. They have already cut asking prices by 30%.
Also, does the strip need 3 more casinos and hotels. Not to mention all the supply in Macau and the new casino in Singapore coming on line. More states are also turning to gambling to close budget deficits. Alas, vegas is no longer unique or forbidden as it was in the days of my youth.
Kirk Kekorian doubled down. At his age and wealth I wonder why he bothered. Well prince or pauper we'll soon find out.

STALEMATE

2009-12-09T17:53:00.002-06:00

It seems we have reached a stalemate in the markets as of late. Today we closed at 1095.95 in the S&P. A month ago 11/10/09 we closed at 1096.42. In between we have been as high as 1118 and as low as 1085, a 33 point range or about 3%. Just eyeballing the charts, we haven't gone sideways for this long in years. The forces of good and evil seem well balanced at the moment.

The bulls see continuing economic improvement. Unemployment claims are falling, job losses diminishing, stronger car sales, improving home sales and stronger growth overseas. China's PMI up to a record 55.7 and India's GDP up 14.6%. In addition, the bulk of the stimulus package is still to be spent, oil prices are falling, zero interest rates, low inflation and mortgage refi's liquefying consumer balance sheets are supportive.

The bears are an august group not to be taken lightly, Mauldin, Roubini,Hussman,Grantham, Smithers, Comstock, Rosenberg, Pimco and Prechter.Who wants to bet against them. Some of their arguments are: The economic rebound is tepid and won't last. The markets are overvalued. That the market is pricing in a recovery to peak earnings and peak profit margins. Volume is weak. Credit availability not improving. How can consumers spend when their credit lines are being reduced. Commercial real estate problems still ahead of us. De leveraging, debt reduction takes a long time.

The ying and the yang. The rally started with 2nd derivative improvements, the less bad and moved to absolute improvements, like the PMI's moving above 50. Companies made their numbers through tremendous cost cutting. They seem to indicate that they can hit their numbers going forward with the current level of demand. In that sense they are better off than main street who can't fire themselves to cut costs. But then we have Dubai and Greece. So which way do we break?

The news has been mixed lately. The non-manufacturing PMI was a disappointment, so were chain store sales, but payrolls were a great surprise.
That's why we are at a stalemate. The first leg of the bounce is over and the ride gets more bumpy from here. The numbers haven't and won't show clear uninterrupted trends.We won't have a V shaped recovery nor fall back into recession. Companies have adjusted to the current level of economic activity as well as the 80% of the working population that has jobs. Perhaps what the market is in for is a period like 2004 where the S&P traded between 1060 and 1160 from January to mid November. Most of the time it was between 1080 and 1140. That makes this months 30pts look huge. In other words, without a crises, we just muddle along.

REBOUND

2008-11-30T14:39:00.002-06:00

This weeks post will be short and sweet lest I become too redundant. Biggest 5 day rally since the 30's, even though the news continued atrocious. New homes sales lower as well as prices, durable goods down 6.2%, personal spending -1% and it's not going to get much better. But the market was deeply oversold and more importantly the mother of all fiscal stimulus packages is coming. The bad news is in the rear view mirror and being ignored as consensus over the stimulus package grows. If you recall, the last stimulus package gave us a quarterly growth rate of almost 3%. This one is going to be much bigger. It will buy us a temporary respite. Is it the right thing to do? That is a different question. The market will probably meander in a range of 800-1000 in the S&P. Bad news will be absorbed as good news is coming. Volatility will decrease. The next big leg will not come until we see if the next administration's policies turn things around or otherwise.
Good trading -till next week.

2008-11-23T10:50:00.002-06:00

We keep making new lows. Maybe Thursday was the washout. We finally broke the 10/10 lows and the 2002 lows. I don't think it is the final bottom. It might be a short term bottom perhaps even a intermediate bottom but not the final bottom. My reasoning is simple. This is much much worse than 2002 in every metric you want to measure, so I think the stock market low will be lower. How much lower? If we go into a depression which I don't believe we will, I don't think we will fall the 86% we fell in the thirties. We have an active Fed and government that we didn't have then. We are a much less manufacturing economy now. We have FDIC insurance and a wide range of social safety net programs we didn't have then. So I think the low will be somewhere between the 50% we are down now and the 86% we were down then. For lack of a better crystal ball, lets take the middle, which is roughly 68% and translate to an S&P of 500. Yikes! Seems improbable but consider we hit a high of 1007 on election day and Thursdays low was 746. That occurred in less than 3 weeks!

The problem in trading is how to turn prognostications into profit. That depends a lot on not on how right you are but on figuring out how the market will get there, what will all the twists and turns be. You can't be too early, you can't be too late, you can't get whipsawed. You have to be right within all the proper risk controls with a meaningful position. The speed of the move lower from 1255 on Sep22 to a low of 750 last Thursday Nov20, less than 2 months 43 trading sessions 500 S&P points certainly caught me off guard. Took profits too early. That's the problem going forward. Will we just continue to fall or bounce or trade sideways until the final low has been made. It is certainly difficult to commit new funds to the short side at these levels. The only confidence I have is to sell any rallies that get back to the 1000 level and to sell out of the money calls in the stocks of your choice as deflationary recessions do not end quickly. When and at what price we do hit bottom at, I think we will languish there for quite some time as the market goes through a period of apathy.

WHAT NOW

2008-11-08T09:41:00.004-06:00

Well. we have a new president and hope springs eternal. We have a bunch of problems and the hope is Barack has the solutions. Now the auto companies and insurance companies have their hand out. Pelosi wants to pass another stimulus bill even though its pretty much agreed that the first one did not work. Jobs and consumer spending are falling off a cliff and everywhere, everyone feels the need to take some kind of action. Infrastructure spending is the new cry. Eventually, most will come to the realization that there is no quick fix that will return us to the prosperity we just so recently enjoyed. Has everyone forgotten? Governments cannot legislate prosperity. They can only foster conditions for it at best. That does not stop them from trying. They have to get re-elected after all.

We need to step back a moment and consider how we got here to evaluate possible solutions. I believe three major secular trends contributed to where we are today and are not being discussed in terms of finding solutions to our current crises.

The first major trend of the last 15yrs, discussed often and in depth by Stephen Roach of Morgan Stanley has been the migration of jobs to the emerging economies as a result of labor arbitrage, as Roach calls it. This has led to the hollowing out of our industrial base, our huge trade deficit, and our stagnant wages. So first and foremost we have to protect any jobs we still have left while we try and create new ones. If that means bailing out the automakers so be it. Look, just like energy, where we are engaging in an enormous transfer of wealth that is unsustainable, if we lose our domestic auto industry , we will have another major transfer of wealth, mainly to Asian countries getting or auto money while the middle east gets our oil money. The point is. we can not buy everything we need from someone else. We have to pay for it. We earn it or we borrow it, and we're already in hock up to our eyeballs.
I think Obama has got this figured out. He seems to want to accommodate the automakers and he describes himself as a fair trader not only a free trader. So I think he will try to hang on to some jobs that would otherwise go overseas.

The second major trend has been the inexorable decline in the savings rate, year after year after year. Savings became passe over the past quarter of a century as first stocks and then our homes values marched inexorably higher. Why do you need savings when your getting 500 credit card offers a year. There are many reasons that have caused the age of thrift to vanish, down payments to become a thing of the past. Saving up for something-how quaint. But here, let it suffice to say we are at zero.

Third and most important, has been the rise of debt. In 1981, total credit market debt was about 5 trillion with GDP of about 3 trillion, by 2002 debt had grown to 31 trillion while GDP had only grown to 10 1/2 trillion. Debt was 3 times greater than GDP. As a comparison, in 1930 debt was about 2 1/2 times GDP the all time high until 2002. Since 2002, it has only increased with all the war spending adding billions to the debt and the recent bailout spending will cause this to accelerate and explode. It was of course the final folly of extending credit without any due diligence to those who couldn't repay that was the spark that lit the fuse of the sub-prime crises that has spiraled into what we have today.

To recap, the housing market starts to crumble as teaser rates are reset and the first defaults occur. Housing prices stop rising, inventory increases, adjustable rates are reset, the spiral continues. When prices continue to fall that undermines all the securities and derivatives associated with mortgage securities, causing catastrophic losses for holders of those instruments. The consumer whose real wages have been stagnant for a decade and whose net worth is mainly held in his home which has declined by 20% is also hit with stock market losses of 40%. As a result the economy weakens, job losses rise and without any savings to fall back on it becomes harder for Joe consumer to pay his bills. Mortgage, auto loan, and credit card delinquencies increase creating a negative feedback loop. Pretty scary stuff.
Many people compare us to Japan. At least the public had savings to ride it out. When unemployment benefits run out, what will happen then. As far as infrastructure spending goes, I remember Japan approving one supplementary budget after another building roads to nowhere. All it got them was the highest government debt to GDP ratio in the developed world.
At which point they had to stop.

As I said before, the government cannot legislate prosperity. It also cannot make the ramifications of living beyond our means for decades go away. Look at all the programs FDR put into place during the depression and unemployment was still 20% in the mid thirties. The public needs to fix its balance sheet. Debt can only be repaid or not. To help repay debt we have to keep and create as many jobs as possible. We have to buy time for people to pay their bills by extending unemployment insurance and enacting some type of mortgage help. Some one will have to break the bad news that sacrifice and belt tightening will be necessary, a message not heard since the war. Debt reduction and saving will become the watchwords. As far as not paying debt, some kind of liberalization of the bankruptcy laws might be in order to help people get a fresh start. Debt deflation's and deleveraging take so long because it is so hard to reduce debt service with diminished revenues and low asset prices. Finally, government Manhattan projects, that lead to innovations that create new industries and new jobs in which we can lead.

FREE TRADE

2008-03-16T15:38:00.002-05:00

I have been a free trader for most of my career, and I still believe free trade works in the long run. By the long run I mean a generation. In the short run there are clearly big winners and losers. This administration and this country has been oblivious to the para dime shift that has been occurring.

Trade is a heated issue. With all kinds of pro and con arguments. Trade costs jobs. Trade creates jobs. Trade allows us to buy cheap manufactured goods, trade opens up markets for us. We've all heard them to the point where people can't distinguish between the forest and the trees.

To me the test of whether trade is good or bad is simple. Follow the money. When you play monopoly, at the end of the game the winner is the one with all the money, hotels and houses. In terms of trade China has all our money, almost a trillion in reserves, and they are be able to buy our hotels , houses , companies and resources. This is not rocket science. We borrow and spend, and they save and invest and sell. This is a transfer of wealth at a speed and magnitude never before witnessed. We have tun trade and current deficits on a scale never before seen by any country in the history of the planet. When you have two billion people increasing their living standards as rapidly as has been occurring over the last two decades only a fool can think its not coming at some one's expense. Together with the transfer of wealth that is occurring to the oil producers and the cost of the war it's no wonder we are going broke.

What should have been done and still needs to be done, in my opinion is to have trade policies that slow this thing down. So that this monumental shift can take place over a greater length of time. We need to buy time to adjust to compete with these low wage behemoths without health care or environmental constraints. We need to keep jobs and dollars circulating in this country rather than sending them abroad. We should provide ourselves some time to fix our health care system retrain our workforce change our economic policies away from consumption to savings and investment, instead of allowing ourselves to be pillaged.

IN DENIAL

2007-04-04T09:44:00.000-05:00

It seems to becoming clear that the economy is slip slidin away. Factory orders, just released were soft, up 1% when a 2.5% bounce was expected. The non-manufacturing ISM came in at 52.4 much lower than the 55.5 expected, mortgage applications were lower again. Yesterday we heard the big three had what can only be described as lousy auto sales. Overall sales are slowing as well. I'll be financing is getting harder to find. The day before, manufacturing ISM came in at 50.9, lower than expected and below last months reading. we've got $64 oil which translates into gas at 2.70 a gallon nationwide.Earlier this week we had an earnings warning from a bank that the sub=prime is spreading into alt-A mortgage sector. Through a tightening of credit standards, availability is being reduced. The S&P is only about 2% off its high. Either we are going to see some better numbers soon or one of them will be the straw that breaks the camels back and down we go again. HAPPY EASTER

STILL RUNNING ON FUMES

2007-02-22T06:57:00.000-06:00

We are up 4% since I said that on my last post 11/16. Its even more true today. The fumes are, the statement the Fed issued at its last meeting, which were deemed to be less hawkish and paving the way to a move to a neutral stance. Secondly, the testimony of Bernanke, again more soothing words interpreted to be bullish, and finally the release of the Fed minutes, which even though superseded by Bernanke's testimony still helped provide a good tone to the markets. I guess the lesson is never underestimate the ability of the market to continue rallying on the same old news., very much like the Fed is done rallies we had earlier in the year.
The hard news has been anything but bullish. The sub prime mortgage market continues to deteriorate. Earnings are indeed slowing down. Retail sales were flat. Net foreign purchases of our securities were weak. Industrial production fell. Microsoft warned we are overestimating demand for Vista. Housing starts fell 14%. The BOJ raised rates, Bank of England said there is one more increase to come, and the ECB is signaling a rate increase for next month. Back on 11/16 71% of NYSE stocks were over their 200 day ma. Today 78.6% are over their 200 day ma.Almost everything is participating. Margin debt is at an all time record.
I didn't mention that the CPI came in a little hot yesterday, because the bond market really didn't react to it. There is the rub. All the negative news I mentioned is being tempered by the bond market backing down to a 4.7% 10 yr yield from 4.9% and the last GDP number coming in at 3.5% after we saw such weak numbers in December. The market has seen this movie before and is not going buy the economic weakness story so easily especially when a little weakness is good for softer bond yields.So we may have to wait for the GDP to be revised down to 2-2.5% and first qtr estimates to come in below that before that story gains traction. So even though we are long in the tooth, the catalyst is not yet upon us, but we may be running out of fumes.

WHERE ARE WE NOW

2006-11-16T06:32:00.000-06:00

First let me toot my own horn for a moment, something I do very infrequently. My last post, which was on Walmart was not only timely but right on the money. The stock hit its closing high the next day, 51.75 and went south consistently hitting its low two days ago at 46.32. I took my profits a little early, but I'm not complaining. My post prior to that was also pretty good and timely in laying out the bull case for the overall market. Although it saved me a lot of money, I didn't profit quite as handsomely. It serves as a good starting point to review where we are now.

One of the points I was trying to make then, was how remarkable the stock market rally was in light of all the economic weakness. In that regard, not much has changed, and in fact the economy has deteriorated since then. Back then I argued that the first revision in 2nd qtr GDP, up to 2.9% from 2.6% is what swept away all economic concerns and accelerated the stock rally. Similarly, when the Dow declined 6 days in a row from 10/26 to 11/03, it was the strong rebound in the ISM services index and the large revisions in non-farm payrolls for the prior two months and corresponding drop in the unemployment rate, that once again swept away economic concerns and reignited the rally.

Now however, I believe the rally is running on fumes, and here is why:
Not only was 2qtr GDP revised back down to 2.6%, but 3rd qtr came in at 1.6%.
Auto sales have declined further to 16.1 mln in Oct from 16.6 in Sep and manufacturers have cut production further in the 4th quarter because they are choking on inventories.
Existing home sales and prices continued to drop. Sales to 6.18 vs 6.3 in Aug, prices another 1.9% vs a 3% drop in Aug.
New home sales showed an uptick has they have for the last several months but then is revised away in subsequent data. Prices, however showed a steep drop from 239,000 in Aug to 217,100 in September.
The ISM dropped to 51.2 in Oct vs 52.9 in Sep.
The Democrats have indeed taken the house and Senate.
Walmart sales have been below the low end of forecasts for two months and not at the high end as the were in Aug.
It's hard to be bullish about $60n oil, when most of my working life $40-$50 oil was looked at with aghast.
Eventually, the top line rules. You can continue to generate earnings for a while as the top line slows down as many companies have, but eventually they have to follow.
Technically and sentiment wise the market is extremely overbought. Barchart's momentum indicator shows 79% of stocks are over their 100 day ma and 71% are over their 200day mvg. Newsletter writers are at their most bullish since May.

Those betting on a soft landing are now bucking the trend. We have all been told, the trend is your friend. They economic trend is now down and bulls are trying to catch the bottom. If you are bearish be just as careful and do not try to catch the top. In momentum markets like this, the last 10% in time can be very large in amount. Like Barry Ritholtz said recently on his blog thebigpicture.com you can be early being long, you can even be early going to cash, but the death of a money manager is being early going short. Or as I heard said once, the canyons of wall street are filled with the corpses of those who where right but too early.

Conclusion: Its to late to get in or but more. Its time to scale out and prepare an exit plan. What will be the straw that breaks the camels back? It could be and ISM reading below 50, a drop in auto sales below 16mln units, a further decline in home sales or prices, a renewed climb in oil prices, and actual decline in Walmart SSS, or many other things. Or as John Mauldin discusses in his e-letter of 8/26, fingers of instability, it could be some seemingly trivial event, the market not acting well after a good news item, one bad earnings or Christmas sales report. So as usual, we wait for a fundamental, technical or sentiment signal to ell when to hit the exit door. Time is drawing near.

WALMART

2006-10-25T12:00:00.000-05:00

There has been a lot of hoopla over Walmart the last two days. Well why not. They had their two day annual meeting giving them a chance to strut their stuff. Let me say at the outset, I didn't listen to their entire webcast of the meeting, so maybe there are some hidden pearls of wisdom I missed. Based on the news and analyst reports I read, I was not impressed. Of course I've been a bear on Walmart for sometime. I also sat out the recent rally from 42 to 52 but was not short. Back to the meeting. They said they were going to slow down new store expansion to a 7% increase in square feet from 8% and cut and plan to keep cap ex equal to their increase in same store sales growth, about 2-4%. This meant an increased focus on profits and their return on invested capital. Wow-wee! The bulls are trying to equate this with McDonalds turnaround of a couple of years ago. They also cut new store opening's to almost zero not a paltry 1% and pushed more of existing and new product through their existing distribution. They increased store hours, started accepting plastic for payment, introduced new products like premium salads and coffee. Walmart is also trying to increase traffic by remodeling stores and hiring a new lead ad agency among others. But they are of course always trying to increase sales and have not been too successful lately. McDonalds was coming off a low base after a couple of horrific years, Walmart is not. McDonalds after going astray had more potential and easier fixes. Adjusting their menu for more mature tastes and staying open longer and accepting credit cards were almost no brainers. They money they saved from stopping new construction they were able to put into huge share buybacks and dividend increases. Walmart plans do not include anything on that scale.

I think Walmart has terrific management. Their problem is the macro environment has just overwhelmed them. They are so large, that it is and will continue to be the largest influence on their performance. One thing you never hear mentioned, is sales growth versus inflation, probably because most retailers have sales at least equal to inflation, otherwise their unit sales would be dropping. So it was with Walmart, in 2000 same store sales were7.7% vs inflation of 2.7%, in the recession year of 2001 the SSS were 5.1% vs inflation of 3.4%. In 2002 inflation dropped to 1.5% and their SSS increased to 6.1%. Inflation was 2.4% in 2003 and their SSS were 5% . In 2004 the inflation dropped to 1.8% and SSS fell to 4%. In 2005, the trouble began, inflation went up to 3.3% and SSS dropped to 3.3%. After inflation they had zero increase in sales. The pattern continued in fiscal 2006. Inflation was 3.5% and SSS increased 3.6%. Only because they have opened new stores equaling about an 8% increase in sq footage that they have been able to show any decent profit growth. That 8% plus 3% SSS have given them the 10-12% total sales growth the last couple of years. No surprise last years EPS growth was 11.2%. It is no wonder they would take a very slow incremental approach to slowing new store growth. Why are they doing it at all? Last year SSS growth actually increased for the first time in 6 years, only marginally 3.6% vs 3.3%, but total sales growth fell nevertheless to 9.9% from 11.2%. They're getting less bang for the buck. Increase new stores by 8% and have total sales growth decline. Secondly, like a lot of companies announcing slowing capex, like Amazon yesterday, they see the slowdown coming and don't have to look any further than their own numbers. Hope the money saved and put into share buybacks can make up the difference.

A final word on gas prices. Walmart, like stocks in general , really took off on the lower gas prices helping their sales. They even said in their webcast that lower gas prices will help them. Yes, if they stay there for 6 months to a year, but a one month drop, even as large as its been, its effect has been over-rated. To prove that point, not widely reported, but they mentioned that SSS in October were only up 1% so far, well below their 2-4% estimate.

THE BULL CASE

2006-08-30T11:04:00.000-05:00

With this mornings GDP release, a revision to 2.9% from 2.5% for 2nd quarter growth, the bulls have strengthened their case. Nothing stops the resilient U.S. economy from chugging along at it's potential of about 3 %, and along with it, corporate profits and stocks.

A weaker housing market, well it's only 6-7% of the economy anyway. Weaker year over year auto sales, well we are really a service oriented economy now anyway. The industrial side has shriveled to about 15% and autos are a fraction of that. Higher interest rates, the Fed has paused and the interest rate cycle has peaked, and bond yields are falling. In addition, that bugaboo, oil prices, have also peaked and are falling, now below $70, adding support to consumer spending.

A potential Democratic victory, taking the House and Senate, well that's too far away to worry about. Inflation worries, the Fed has told us it will moderate as the year progresses, not to worry. A soft landing is in the cards, haven't you heard. That's why the market as acted so well even in the face of bad news, and the latest GDP proves it.

In addition, we have valuations at levels not seen in years, robust corporate share buybacks, and M&A activity being propelled by bigger and bigger pools of private equity. WMT sales were at the high end of forecasts, last months retail sales were better than expected and auto sales were over 17 million units.

Technically, we are breaking out to new highs, and sentiment as a contrary indicator is as bearish as we've seen in sometime, close to where we have seen big rallies in the past.

So if I were a bull I'd say, put that in your pipe and smoke it.

THE BEGINNING OF THE END

2006-08-20T16:54:00.000-05:00

Could this be the end of another Fed is done rally? This Fed is done rally has been a little different from the rest. If you recall the initial spike after the Fed announcement was transitory. They did pause, but their words did not indicate that they would stay paused. It was not until the release of the PPI and CPI which were weaker and gave credence to the idea that they would stay paused that the market really took flight.

Why might then this be the beginning of the end? Well, one reason is that volume has been pretty tepid throughout this rally. Secondly, the consumer confidence figures released by the University of Michigan were weak again, around the levels of the last recession. Finally, the Ford production cuts to levels not seen since the 80's are pretty ominous.

In the short run, liquidity and sentiment rule. In the long run sales,production,inflation i.e. fundamentals determine sentiment. Homes are not selling, autos are not selling, inventories are piling up. The growth rate of retail sales are slowing. When Ford says they are going to cut production 20% for the rest of the year, it is not a transitory event. Just like high oil prices it will have slow but grinding effect on the economy.

How about this. The rally was propelled by a CPI a tenth of one percent lower than expected. A large drop in car prices was a big factor. Ford cut it's price on the Expedition SUV $4,000. It cut prices because sales for SUV's are falling off a cliff. Have we got the cart before the horse?

NEVER MIND

2006-06-23T08:31:00.000-05:00

Wednesday's rally on FedEx earnings, FedEx being a bellwether, was quickly reversed on Thursday's, weaker leading indicators. I think by now everyone agrees the economy is going to slow, and the market is fighting about how much, how soon. Today, the takeover of Kerr-McGee, helping energy stocks of course, was offset by earnings warning of City National Bank blaming the yield curve. So the market overall is kind of sideways.

Next week doesn't look that great either, with new and existing home sales probably showing weakness, potential earnings warnings, the Fed raising rates with the potential for more hawkish rhetoric and the consumer sentiment indexes being a toss up. We will see if month end window dressing can save the day.

UP UP AND AWAY

2006-06-21T12:00:00.000-05:00

What I believe the market is telling us today, is that in spite of higher rates and oil and a slowdown in housing, if you stay away from homebuilders and automakers, earnings are good, and projected to stay good. Most companies are doing very well and think they will continue to do so in spite of the gloomy macro economic background. That's the spin today and can continue to be until the next bad economic number or earnings warning.

In my view it's a bear market bounce, but it can carry further. We are up about 1 1/2% today and it could go another 1 1/2-3% . At that point I'd certaintly start putting out some shorts again.

Life is so much easier as a bull. The market went up for four months and gave up all its gains in May. That is typical. Markets fall faster than they rise. In this example, everyone wound up at zero returns, but the bear had one month of bliss and four months of agony while the bull enjoyed the reverse, four months of bliss and one month of agony.

NEW HIGHS

2006-04-20T12:19:00.000-05:00

Well the S&P set a new intraday high today after another big rally on the Fed minutes. The market and earnings tell us in spite of all the potential negatives it's all good. Oil averaged roughly $62 this quarter and another quarter of double digit earnings are unfazed. Bond yields are up 75 basis points and that hasn't been much of an issue either, except for slowing housing a little. The Fed tells us the economy can handle a housing soft landing though. We obviously haven't reached a tipping point yet.

It looked to me like the run to new highs today was to blow out the stops at the 5yr highs and it is not uncommon for highs to be made right around option expiration day, which is tomorrow.
A tipping point is close I believe because even though oil is not at an inflation adjusted high, it is higher on an inflation adjusted basis than anytime but once. And even though the 10yr yield is low by 80's standards, an index of inflation adjusted oil and inflation adjusted 10yr yields I deep has never been higher except for the early 80's. True stocks began their long bull market about then but they were propelled by the Regan massive tax cuts, and the trends in inflation and interest rates were sharply down albeit from much higher levels. Today both are moving higher. Perhaps even more important, back then we were much less leveraged. Total government debt of GDP was half of what it is today and the consumer debt ratios were 20% lower with a savings rate of 10% versus 0% today.

A tipping point could come tomorrow or wait until the dangerous months of Sep and Oct. Obviously the Fed raising rates 15 times has been good for the market as it implies robust fundamentals. It;s when they are thinking of easing that we need to be worried.

WANT TO KNOW WHAT HAPPENED TODAY

2006-04-07T11:41:00.000-05:00

Seems as if everyone one on CNBC is perplexed by what happened to the rally today.
Here is what happened. The market opened higher. The S&P traded as high as 1314.07. The five year high was 1315.93 reached the week of 5/25/01 on a spike. Bonds also initially traded higher and then reversed. The high yield on the 10 yr was reached the week of 6/18/04 at 4.88%. When the bonds broke through that ceiling decisively on their way to 4.95% and the S&P at 5 year resistance, you can bet trading models picked that up all over the world and hence program selling began. That doesn't even take into account that the market was ripe for profit taking on weak fundamentals of higher oil prices, and lackluster retail and auto sales.

POSITIVE SPIN

2006-03-22T11:43:00.000-06:00

Let's try to put a positive spin on all the things I worry about. After all to climb a wall of worry is a good thing. My worries fall primarily into three categories, the economy, geopolitical, and the market itself.

Economy-
Interest rates- we are in our 4th year of rising rates, but don't worry they are still historically not high, so the market can still move forward. Hey I heard it on CNBC.
yield curve - Its flat to inverted but this time is different Bernanke told me so.
Housing is slowing down, along with prices, but the Fed said the economy can withstand a housing slowdown.
Sales- they have been weak, as stated in housing, autos , and most recently retail sales, but we are not at a danger point yet.
International rate hikes- Both the ECB and the Bank of Japan have snugged up monetary policy and as a result global liquidity is being reduced. The tightening is occurring from such a low level that it's not a problem.

Market-
We are overbought, but I guess we can get more overbought.
Mutual Fund cash is at record low levels so buying power is lacking. But,the little guy is coming back into the market.
Leadership- Some of the bellwethers have been shot down, Google and Intel to name two.
Others will emerge.
Insider selling is very high, especially in semiconductors. The little guy is buying.
NDX short interest is at very low levels, not much buying power left from short covering.
The little guy is buying.
Volume is low. It will pick up as soon as we break through the highs.
Block trades are way off signaling a lack of institutional participation, but you guessed it , the little guy is buying.
This is one of the longest periods ever without at least a 10% correction. So what.

Geopolitical-
Iraq- deteriorating into civil war. I remember when we turned over more responsibility to
ARVN the South Vietnamese regulars. It was the beginning of the end. Maybe it will force us out of there sooner.
Bird flu- the northern migration of wild birds should bring it to our shores soon. Think of all the pharmaceutical stocks that will benefit.
Iran- no end in sight to that confrontation. At least it's not in the headlines every day.
Trade - Senator Schummer is in China trying to get them to revalue their currency and threatening to slap a 27% tariff on their imports if they don't. If he does, that will thrash the dollar which will be extremely good for multinational earnings.

MCDONALD'S

2006-03-09T09:56:00.000-06:00

Earlier this week McDonald's reported February sales. Same store sales were up 4.7%, total sales up only 3%. Sofar this year SSS were up 5.7% in Jan and the 4.7% last month, This is the best back to back SSS increase since 2004 but the stock didn't react, and in fact has been acting week for a month. What gives? Total sales growth has been slowing significantly and persistently throughout 2005. Read my posts on 1/25 and 8/15/05 for background. It is now picking back up but the stock gets no benefit. Analysts have the first quarter earnings at .48 a share, about the same as last quarter, although last qtrs .48 included .015 impairment charge for South Korea, but was fairly clean otherwise. 2005 quarterly numbers have been a quagmire to sort out because of impairment charges, repatriation of overseas profits, large tax benefits, etc, making it easy to obfuscate the underlying trends.

To make .48 last quarter, they had 5.235 billion in revenues, which by the way was the first sequential revenue drop in a 4th quarter since 2002. With two months under our belts and total sales growth was 4.2% in Jan and 3% in Feb yoy. Total revenues are always a bit higher than the sales numbers they announce monthly because they do not include affiliated restaurants like Boston Market. So lets assume next month totals sales spurt to 5% and avg 4% for the quarter, throw in another 1% for Boston Market and say total revenues will be up 5% forma year ago. Last year's 1st qtr revenues were 4.8 bil, so a 5% increase would take them to 5.04 bil. Bottom line, I don't think they are going to make their numbers. They could miss by 2 cents. They sold some Chipolte shares and took a capital gain but that was offset with some further impairment charges. They also bought back a lot of share this quarter which will help and they could sell more Chipolte shares, but I think the street would see through that. In any event we will know in early April as they always pre-announce earnings with their monthly sales release. As an aside, I saw on Bernie Schaeffers website that the Mar 37 1/2 calls had large open interest, probably due to the earlier hedge fund interest in McDonald's. They look to expire worthless now.

2006-03-02T12:06:00.000-06:00

The markets rally over the past month that recaptured the highs of the beginning of the year was largely driven by lower oil prices. Most other rallies over the past several months were driven by the Fed is almost done mantra. Today we have a real trifecta weighing on the markets. Bond yields are at their highs for the year, oil is back over $62, and retail sales were softer. I won't go into it now, but final demand is critical to the economy, asset prices, the bond conundrum, exchange rates, etc. In that regard we saw evidence this week that it is faltering. New home sales, resales, auto sales, and today retail sales are all showing sign of softness. The housing market we've known about for a while, auto sales were already weaker last month but were obfuscated by fleet sales. Yesterday both GM and Ford said they were trimming production next quarter, so they don't see the softness going away any time soon. Walmart gave forward guidance of 1-3% for sales this month, not great either. One month does not a trend make, but it is time to keep our eyes open for the often predicted consumer slowdown.

FACTS TO CHEW ON

2006-02-09T08:04:00.000-06:00

Consider this. On 10/13/05 the market low, S&P500 @ 1170, oil was at $63 and the 10yr note was at about 4.5%. At the market high on 1/11/06 S&P500 @1295, oil was at $64 and the 10yr note was at about 4.5%. In between we have had weak economic stats and strong, good earnings and bad. If oil, bond yields, don't matter and we've had 4th qtr GDP at 3.8% and 1st qtr GDP at 1.1%, high profile earnings misses by INTC,GOOG, YAHOO, upside surprises by XOM, BA, CAT, what's driving the market? It seems to me nothing moves the market like perceptions over Fed policy. It was perceptions of further tightening that drove the market down in September, and after Fed minutes were released on the first trading day of the year, it was perceptions that they were almost done that pushed the market up to 1294. So the lesson seems to be ignore the noise and watch how the market feels about the Fed.

JOBS

2006-02-03T11:03:00.000-06:00

Wednesday's blog was somewhat prophetic. I said the market moves is bursts and I thought the next one would be down. I didn't think it would come so quickly. The move was surprising considering, auto sales and retail sales were very good. There was a lot of fleet sales in the auto numbers and a lot of gift card redemptions in the retail sales. I would suppose that is why they weren't taken seriously. The payroll number today was negative for the market, but the bond market rallied significantly. It's getting harder to read the tea leaves. Next week is a light data week and earnings are tapering off. We have Treasury auctions, which will be interesting in light of the fact that if prices hold here, buyers will have a negative carry. The Iran situation will also be front and center, so oil we be important. The last few days have seen a good sell off in both oil and gold. Both were overbought and up at resistance. I hope we have significant corrections so we can buy them again.

GOOGLE?

2006-02-01T11:48:00.000-06:00

In spite of the fact that Google is down 35 pts and 7 out of 10 of the largest NASDAQ stocks are negative, the index trades around flat as I write, not bad at all. However the negatives continue to pile up. Oil is approaching $69, the bond market is down again with lots of supply coming next week, with Intel, 2 out of the big 3 have reported punk earnings, housing stocks are weak as both the MBA survey fell 5% and the NRA index of pending sales fell 3%. Lately I've also noticed a correlation, which makes sense, between housing stocks, retailers and the bank index. They are all weak today. Mortgage lending and home equity loans have been a big source of bank profits, and of course we all know how dependent retailers are on home prices.
The character of this market this year and maybe longer has been long periods of little volatility and then big bursts up and down, ala the first day of the year and the big swoon on Jan 20th. I think we are headed for another swoon, it is just a question of what sends it over the edge. If you would have told me about Google beforehand, I would have said that would have been enough. Maybe oil touching 70 or a bad auction next week . Stay tuned.

PINS AND NEEDLES

2006-01-31T09:21:00.000-06:00

The market sits on pins and needles as well it should considering the surge the market got at the release of the last Fed minutes. My instincts tell me they will try it again. It is a perfect opportunity to squeeze the shorts as we are not far from the highs and a move above would run the stops. This time around I don't think it will be longlived. The fundamental background is quite different. Oil is near its highs. Real estate the locomotive of the economy the past few years is softening. Auto sales due out tomorrow, which bounced back in December but were blamed for the poor showing of GDP, are expected to show weakness. Finally, their is considerable doubt aver the strength of the consumer this year. Earnings, with the exception of Exxon, have also not blown anyone away particularly among the dow stocks. Greenspan the market's security blanket is also gone. Time to sell the rallies I think.

WALMART

2006-01-30T10:04:00.000-06:00

In addition to Exxon's record profits, helping the market as well is Walmart saying it's same store sales will come in at the high end of it's 3-5% estimate at 4.7%. No doubt this is due somewhat to the redemption of gift cards, as they said sales were greater than expected last month. However, at 4.7% this is the best month they have had since a 5.9% showing in Mar of 04. Since last month was so dismal at 2.2% perhaps averaging the two months together is a more accurate picture of the underlying trend, and that comes in at 3.45%.
Walmart has been a weak stock since Feb of 04. Last week it got one upgrade and one down, by major firms. We all know that the low end consumer in the current economic climate is being hurt the worst, Walmart's bread and butter. What is not well appreciated is that prior to last month, they had been running positive comparisons in same store sales to last year for the past six months. This year may be the first year in 4, that they beat last years same store sales growth, albeit only marginally.
The question is, in a slowing economy, will they attract more move down consumers from higher end stores to make up for the shortfall in purchasing power of their traditional customer base. So far so good. Stay tuned.

BOUNCE

2006-01-27T07:57:00.000-06:00

As I mentioned a couple of days ago, good earnings from CAT and HON in the dow was just what the doctor ordered and we had a triple digit increase in the dow. The market had a great rally to start the year and the bulls don't want to give up on it. Who can blame them. Every bit of good news is seized on with fervor. We will now pretty soon how this earnings season has come in, but of the 20 dow stocks that have reported, the bad still outnumber the good. Only 4 could characterized as unequivocally good. Not to say that is definitive, because some like AA and PFE are higher than when they reported because of favorable news flow, like higher aluminum prices and new drug announcements. The overall tone however is that the dow will be a lagger and revenue growth is hard to come by.

This morning, the lower than expected GDP report at 1.1% vs 2.8% expected is so far not doing much damage. To my mind, however, this is one more factor starting to deteriorate. Ten year yields are creeping up, the Fed is going to raise rates again next week, housing is slowing, the auto industry is in trouble and oil is getting close to $70 dollars again. Nothing is more lethal to the economy and the market than the combination of higher rates and energy. We have just to look back to Mar of 2000 to see what such a combination did.

MCDONALDS

2006-01-25T14:40:00.000-06:00

Reading the footnotes of Mcdonalds press release, 2004 earnings had one time charges of .14 cents per share so the 1.79 reported for the year was 1.93 operating earnings adjusted. 2005 had one time benefits of .06 per share, so adjust the 2.04 reported down to 1.98. That's growth of 3%., a lot different than the headlines ballyhooed on the news wires and CNBC of "McDonalds profit jumps 53%, or McDonalds stock soars on 4th qtr earnings. What's more, revenue DECLINED sequentially. The 4th quarter had the slowest total sales growth in YEARS, averaging 2.5% vs 6% for the 3rd qtr and 6.3% 2nd qtr. Currency is starting to hurt them. Where are the analysts and reporters? Does anyone look behind the headlines any more.

DOW LAGGARDS

2006-01-24T12:22:00.000-06:00

One reason the market has given up it's gains this year is the action of its generals. My count says we've had 14 Dow stocks report. All but three have been miserable. UTX is up two points on good earnings and AXP is slightly higher than when it reported. PFE loss was less than expected so it is trading higher. AA Alcoa's reported a fall of 16% in net income on higher energy costs. DD warned of a 200 mil revenue shortfall and issued very weak guidance. Big daddy INTC missed earnings badly and got clobbered. IBM earnings were OK but revenue was light and it is now trading lower. JPM had trading revenue disappoint and it has rolled over. GE was not impressive and its stock has traded consistently lower since reporting. C missed earnings by 2 cents and trading lower. MMM issued weak guidance and is down over a point. JNJ was light on sales, trading lower. MCD don't get me started, said their earnings were great but if you deduct one time factors from the comparisons, I think they were weak. MCD is up 1/4.

The good news is that most of the bad news should be out of the way for the remaining 16. Earnings for the rest should not be so lopsided. CAT, BA, HON should be good. As always forward guidance will be key. Good luck trading.

END OF YEAR DOLDRUMS

2005-12-28T13:47:00.000-06:00

In the fall the S&p fell from 1240 to 1170 on the Fed inflation and tightening scare. In November the third quarter GDP coming in at 3.8% put to rest fears that hurricanes, energy costs and the Fed had harmed the economy and we ran from 1170 to 1270. From there, for the last five weeks we sit between 1250-1275. Volume is low and nothing substantial appears to be going on. Underneath the surface however, change is taking place. Yesterday's 100 point plunge was a dailykey reversal and may become a weekly. The bank index BKX, that led the Nov rally looks like it may be rolling over as RSI is dropping. Housing continues to soften as the MBA mortgage application survey showed today by dropping further. From 95 to 2000 it was the internet driving the economy, from 2000 to 2005 housing has driven the economy. The market trades as if people are more interested in protecting this years profits than marking them higher. Christmas was no blowout and earnings warning season is not far away. Retail reports are due next week and the chart of the RTH doesn't look too good. It's a good time to be careful and maybe put out some shorts. Happy New Year.

MCDONALD'S

2005-12-08T10:34:00.000-06:00

McDonald's reported their monthly sales this morning. Of course they touted their same store sales rising 4%. Less heralded were their global system-wide sales up a paltry 1.7% , the lowest in YEARS! Those are what will be reflected in total revenues. Furthermore, at the end of their press release they state they are taking a 2 cent charge for asset impairment in Korea and that if the dollar stays where it is and mind you this is Dec 8 their earnings will be impacted negatively by at least a penny a share. None of the stories on Yahoo or Marketwatch mention this amazingly. Thomson has consensus earnings at $.47 for 4th qtr vs $.45 a year ago for a 4.4% increase. It sounds to me like they issued an earnings warning this morning that every one missed. Of course tout TV also never mentioned either fact. Has anyone noticed this kind of thing in other widely covered large caps?

FEELIN HEAVY

2005-11-29T12:48:00.000-06:00

An overbought market that can't rally on good news. that's the story today. New home sales, durable goods, consumer sentiment, all good. We are not going to fall off a cliff on that kind of news though. Look for choppy trade ahead. It definitely seems we have to consolidate the gains, before we decide where to go next.

The euro continues volatile around support at 117. It also is very oversold. As always I feel the dollar will follow the economy, and reflect its strength or weakness.

Bonds sold off on the strength of the new home sales and the fact that it will be hard for the curve to get much weaker without any signs of economic weakness.

GOLD

2005-11-18T11:21:00.000-06:00

Very interesting action in gold this week. In spite of higher bond yields, lower oil, and a stronger dollar, all traditionally, bearish for gold, bullion kept marching higher. The inflation numbers both PPI and CPI were also pretty good with better numbers to come now that energy prices are receding. BCA research has a good analysis of this on their website today. That's not bullish either, so what's driving the price?

Kitco.com has the World Gold Council report for last quarter on their site and it says that while physical demand stayed strong especially in Asia and the Middle East, supply grew modestly as well. The biggest swing factor was increased investment demand from the growth in ETF's. So why the big rush into them now, after all they have been around awhile. GLD celebrated it's one year anniversary this week.
My take is that you may have several bearish factors mentioned above coming to and end. Oil may find support here as it sits on its 50day moving average and cold weather has begun. Bond yields fell after hitting resistance at close to one year highs and their 200 day moving avg. They also may not go higher again if inflation has indeed peaked and the economy slows. Finally, the dollar is testing resistance and may soon begin to fall. The ECB is talking about hiking rates today. That would narrow the interest rate spread currently in favor of the dollar. Also very importantly, the U.S. this week continues to press it's beggar thy neighbor polices, by pushing for a debasement of its currency. First, Greenspan in his latest speech made it explicit that a much weaker currency would have to be a large part of the solution of solving our huge current account deficit. Secondly, tomorrow, President Bush is again going to try to cajole China to revalue against us. In effect, you have the two most important men in the country, telling all the worldwide dollar holders, look out below. No wonder Russia, Argentina, and who knows who else, maybe China, want to double their Gold reserves.

SIDEWAYS

2005-11-09T11:23:00.000-06:00

We are in our 5th day of sideways trading. A consolidation the bulls say. Never short a dull market says the axiom. Well perhaps, but if a market can"t make headway, it usually tests support. Fading concerns over the economy, pushed the market up and since then we have had a lack of catalysts. Tomorrow we get the trade figures and first look at Univ of Mich consumer sentiment readings, potential catalysts to be sure. The trade deficit could be a record, so it will be difficult to spin that one as bullish. On the other hand, if the consumer sentiment index shows a real bounce, that may be all the bulls need to go to higher ground. If we get a small bounce it will be important to see how the market reacts. A decline speaks for itself.

The dollar has been on a run and is somewhat overbought here. With the trade figures as catalyst, it seems an opportune time to play for a bounce in the Euro, gold or gold stocks. The wild card is how will bonds react. We are close to breaking the April highs in 10yr yields.

MCDONALD'S

2005-11-08T11:14:00.000-06:00

MCD hit its lows in the spring of 2003. Same store sales were declining 4% a month. MCD had been a growth stock for decades. In an effort to keep the growth up, they started to diversify into other restaurant concepts in the late 90's as their markets became saturated and expansion opportunities waned. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line. Meanwhile, tastes were changing as the population aged and they had their eye off the ball and their core business faltered. New management was brought in, cutoff all the expansion and focused on their core business. They introduced new menu items such as salads to cater to older and healthier tastes, extended store hours, allowed credit cards for payment, etc. Essentially pushing more product through existing distribution channels. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03, the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to $27. June and July SSS were better than April and May and so the stock bounced back a little to $31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They are already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion, and eschewing other restaurant concepts, they are back to being a one trick pony, i.e. growing same store sales. This can be seen in the convergence of same store sales figures and total sales figures. The CEO has been quoted as saying that same store sales will be the driver of growth.

In August rumors started flying that Vornado the REIT was buying a stake in McDonald's. They had just done a secondary offering of 9 million shares raising about $800 million. It move the stock $4. At the time, I said it sounds like a lot but consider that in the last six months McDonald's bought back 33 million shares of it''s stock, approximately $1 billion dollars without much affect. I also said that they did not need the cash, that spinning them off into a REIT would provide. They have no major expansion plans. Well last week it finally came out that Vornado did indeed purchase a stake but even smaller than the initial rumors. According to AP they purchased a 1/2% stake amounting to 500 million dollars.

In September the stock was coming back down until it received a brokerage upgrade on rumors of it spinning off its Chipolte unit. I wrote at the time that while this was much more likely than spinning off the real estate, spinning off part of a 435 restaurant chain out of 30,000 was not that big a deal. More important I pointed out was the fact that total sales growth has been slowing on a quarterly basis since the 1st qtr of 04.

Today, they reported their Oct sales figures which were lauded for being better that the street expected, but look at the following table:

Mthly SSS Total Sales Currency adj Total sales
Jan 5.2 8.3 6.3
Feb 1.6 4.4 2.7
Mar 6.8 11.2 5.7
Apr 2.8 6.7 3.9
May 1.8 5.9 2.9
Jun 3.8 6.2 4.9
Jul 4.3 6.1 6.0
Aug 3.4 5.7 4.4
Sep 3.9 6.3 5.0

Oct 3.4 3.9 4.4

What jumps out at me is that the trend in total sales growth, which is what correlates to total revenue growth, is really slowing. Secondly, that total sales growth is converging with SSS growth as I expected. Finally,most significantly, currency adjusted total sales were higher than total sales for the first time since I can remember. This means that the strong dollar is hurting total sales. According to their Website, a 10% move in the Euro equals a 6-7 cts per share on their earnings. This is significant considering that a 1% decrease in their SSS equals only a 2% decline in EPS. The dollar is about 13% higher than it was at the start of the year.

Finally both the CFO and CEO in the past couple of weeks have thrown cold water on any kind of REIT spinoff or restructuring. The CFO said it would be expensive and a distraction among other things. The CEO in a letter to employees said they had no intention of a spinoff or restructuring, that it would not serve the interest of their franchises or shareholders. I think he is exactly right. Do you want to lose control of your business by doing some financial engineering to get a one time pop. Spinning out the company owned restaurants so they can compete with the franchised one's is about as stupid idea as I've heard.

STRONG OR WEAK

2005-11-01T11:13:00.000-06:00

As we wait for the Fed today, I must say it's been a while since I've read some many strong and contradictory opinions on the market. There is the Bill Gross and Steve Roach camp, that says a significant economic slowdown is just around the corner, which will weaken equity markets keep inflation under control and be good for long bonds. The opposing view, best personified by today's CNBC guest Brian Wesbury, is that GDP growth will remain strong and equities will rally, Inflation is the problem and interest rates will rise.
The big equity selloff in the first half of October certainly seemed to be driven by an inflation scare. Fed heads, one after the other proclaimed their fear of higher inflation and their intention to do something about it. Fears over a weak economy were also present as higher oil prices were seen as driving the consumer into hibernation.
Today, with the biggest two day rally in a year under our belts things look much better. Certainly the GDP report and today's ISM report show no sign of weakness. You have to admit, considering everything that has been thrown at it, high oil prices, plummeting consumer confidence, natural disasters, gargantuan trade and budget deficits, higher interest rates, high debt levels, low savings rates, that the economy can chug along at almost 4% is pretty amazing. You can appreciate the bulls point of view and see why the bears might want to throw in the towel, after all, what's it going to take.
The inflationists fear that inflation is already baked in the cake. Companies are finally raising prices, passing on costs that will find their way through to core price increases.

Which view will prevail? I expected a slowdown last year as the effects of the tax cuts wore off. I'm always too early. Going back to my trading notes, I wrote to myself , economic stats should start coming in weaker. Look for weakness in housing ,autos and retail sales. It never happened, but today, housing is slowing down, sales down inventories up, and Ford just announced a 25% decline in auto sales. That's two months in a row of lousy sales. While we are on the subject of auto sales, a lot of bounce in the 3.8% GDP was attributed to auto sales that occurred early in the quarter. As far as inflation goes, Victor Niederhofer reports that the Goldman Sachs commodity index fell some 10% in October from its Sep close, one of the biggest drops ever. So maybe down the road we will get some moderation in the PPI.

OIL OIL OIL

2005-10-17T10:30:00.000-05:00

Boy was I wrong. My last post 10/10 the S&P closed at 1186, I expected an oversold bounce, instead we got further selling and didn't bounce until Friday. Here we are at 1186. I was right in pointing out that oil remains the wild card and heavily influences the movement of everything else. Today, another storm and accompaning oil price concerns. Stocks are down, dollar stronger. Oil, however is no longer a one way street. Signs of slower global growth and high prices has raised concerns of what they now call demand destruction. So we will now have tug of war. Economic data showing weakness will exert downward bias while supply disruption news will be positive. Let's not forget the weather which of course can go either way but will have more impact if it's colder than normal.
As I write, we are having an up day thanks to GM and MO which are up on GM's agreement with the UAW re health care costs, and MO's favorable ruling from the Supreme Court on tobacco litigation. Even so, I feel the bears have the upper hand in the intermediate term. As I've outlined before, the things we know augur badly for the market. The Fed will continue to tighten. Inflation continues to march higher as the higher energy prices grind their way through the economy. The budget deficits will continue to grow larger, not only because of the large expenditures lately due to hurricane relief, but now we have to worry that receipts may be lower due to a slowdown, a double whammy. Gas prices will stay high and be a drag on consumer confidence. We just don't have the refining capacity to bring them down. Outside of energy, earning are being squezzed by higher costs. It seems like everyone is blaming higher energy for earnings misses, even some that seem to have no connection. If there is a year-end rally I think we would have to see much lower oil prices for some reason and a friendlier Fed as a catalyst.

I haven't written much about the dollar lately, but we are now at an interesting juncture. The dollar has gained strength this year on higher interest rates. So far it has tested its July highs against the Euro twice at around 119 and held. Today I saw comments from both the ECB and the Bundesbank about higher interest rates down the road. Higher energy is causing inflation targets to be exceeded there also.This would of course be very supportive of the Euro, however, they have the same problem we do. Their think tanks last week lowered economic growth estimates. So the question will be, which economy slows sooner and farther and which central bank blinks first. We will trade back and forth on each data point pro or con. As the Euro is near one year lows and the U.S. capital markets are having problems, the best risk reward trade here is to go long the Euro, at least until support is broken. I like trades where the market doesn't have to move too far to let me know I'm wrong.

BOUNCE

2005-10-10T07:56:00.000-05:00

The market was oversold. The payroll data was better then expected. Oil prices were dropping. Rally, rally, rally. The bullish argument to take away from the payroll numbers, where the previous two months were revised significantly higher, is that going into the hurricanes the economy was strong, strong , strong. With hurricane season almost over, and reconstruction money pouring into the gulf, it may have all been just a bump in the road with sunny skies ahead. Only a hawkish Fed and higher inflation are restraining prices.

Bears point out, you don't fight the Fed, much higher heating bills lie ahead, and Mutual Fund cash levels are at record lows.

I believe we are now going to test the upside. How far will this rally carry and with what kind of volume. 1210 seems like the first line of resistance in the S&P. Energy is still the wild card and the market will remain sensitive to it. This week we will have higher inflation readings and retail sales, continuing the worry over interest rates. Cold weather or large drawdowns of distillate inventories this week could halt the slide in energy.

WHAT NOW?

2005-10-04T07:51:00.000-05:00

Yesterday the S&P finished down by 2 pts, the first down day in eight trading sessions.

True nothing much has happened in most of the last eight trading sessions, with the exception of the month-end window dressing rally. The bulls are looking for a year-end rally. Their argument is:

The uptrend from the 03 low is intact.
The market has absorbed all the bad news and remained resilient.
Fiscal policy will support the economy and generate corporate profitability on Katrina spending. Yesterday's ISM index, certainly supports this.
The Fed is almost done.
We've seen the worst on oil prices.

The bearish argument is:

The higher oil prices of the past year are working their way through consumer and corporate pocketbooks and will hurt spending and profits for the rest of the year.
The Fed will continue tightening until they get mortgage rates up and slow housing. Greenspan is now concerned about inflating asset prices.
Corporate profits while good, are slowing and are on a downward path. Earnings misses will be blamed on energy and Katrina.
Inflation is in the pipeline.
Energy prices will stay high particularly natural gas. This will significantly slow consumer spending which accounts for 70% of GDP. Evidence of stress is starting to show up in the higher percentage of consumers who are charging their gas purchases rather than paying cash. Also the percentage of consumers who are late on their credit cards has been increasing.

HALF FULL HALF EMPTY

2005-09-23T00:16:00.000-05:00

Well, it's been crazy. Good news is bad news, bad news is good news. Many counter-intuitive moves in the market. In times like these I find it;s best to step back, reassess and try to find some anchors. For only with strong conviction can you ride out the short term swings. Some anchors or truths are:

Gas prices are going to stay high. Even if Rita does minimal damage, we have enough production closed to keep things tight for some time.
Budget deficits are going to grow significantly.
Corporate earnings are being impacted by higher energy prices. AA today is only the latest.
Inflation is in the pipeline
Fed tightening will continue.

The question is, do current prices reflect optimism or have they priced in the worst? One thing seems obvious, the market likes deficit spending. The increased fiscal spending, means and economic boost now, while payback is down the road. The budget deficit is going to be huge, but the market will worry about that later. Both politicians and corporate America live in a current quarter mentality. Nothing gets done without a crises, and planning does not look far ahead. Whatever happened to the Social Security crises.

The dollar has been strengthening lately. A German political crises has helped. The increased fiscal spending, which I have read could amount to 1 1/2% of GDP has provided even more support. With no fiscal discipline, the Fed has to continue tightening. As I've said many time before though, any economic weakness will quickly spill over to the buck. We could see the economy weakening despite the fiscal laggress because of the housing bubble bursting, the consumer being tapped out, higher rates, loss of confidence by foreigners in our financial markets.

The bonds will be important to watch over the next few months. Before this all started, we were already borrowing 80% of the worlds savings. Should their supply or preferences change where will the money come from? Even if we print it long rates will rise. Like the 70's we could have weak growth and higher inflation ahead.

DOUBLE TOP?

2005-09-15T07:49:00.000-05:00

The market has started to give back some gains it made, if you recall, first on Katrina not expected to be as bad as feared and then when it was actually worse, on the bump from rebuilding. The 40 pt rally in S&P is a perfect example of the old sayings, that the market can do anything, the market can stay irrational longer than you can stay solvent, the market cannot be predicted using rational means, etc. The rally looks like it was a bull trap, short and powerful. No volume on the downside yet, so they all got em. The market is supported by fiscal spending on Katrina, lower oil, and hope the Fed is done or close to it.

The bonds are coming under pressure. Last week's manufacturing surveys showed very large increases in the inflation indexes. We have also had many companies start to raise prices as their energy costs increase. Oil prices are starting to pass through. If the Fed blinks they may be seen as falling behind the inflation curve. That of course would be very negative for bonds and the dollar as well.

The dollar keeps getting bailed out. First there was the failure of the referendum on the European constitution and now the deadlocked German elections. The talk is, we won't know the election results for weeks. Eventually it will recede from the headlines and since nothing has dramatically changed the dollar will resume its underlying downward move. It's a choice between the lesser of two evils.

Gold is reflecting slower growth, higher inflation, increased demand from China and India, and lower production. Back to the 70's.

OOOPS

2005-09-07T13:41:00.000-05:00

You can see from the action of the bonds and the dollar today that the idea of the Fed blinking and not raising rates has reversed. Chicago Fed Pres helped that idea along with his midday comments where he voiced more concern over inflation. So it seems Greenspan will continue his mission to take away the punchbowl. I guess he wants to go out with his reputation as an inflation fighter intact. If they go ahead and raise rates, I think it will be the last time this year. Even the Treasury Secretary this morning acknowledged that the economy would slow. The political outcry that is already beginning will overwhelm the Fed's desire to raise rates if the economy fades.
A lot more news of higher spending today and higher costs. Higher transport costs from using alternate ports and methods of transportation and higher spending on everything from unemployment benefits surge to various relief expenditures. Not to mention lower tax revenues due to less people working and slowing economic activity.

THREE QUICK THOUGHTS

2005-09-07T12:11:00.000-05:00

Yesterday was a low volume rally, only 1.42 B shares. Today's volume doesn't seem much better. Breadth was good.
We are seeing a divergence between the S&P and the transports. Obviously this can go on for a while. It is not a timing tool but like volume it tells you something about the character of the advance.
McDonalds is up over a dollar on a broker upgrade. I wrote about this stock a while back when it was under the influence of rumors on it spinning off its real estate. I thought that was highly unlikely and the stock started to come back down until it came under rumors about a spinoff of its Chipolte unit. While I think that is more likely, spinning off 435 restaurants out of 30,000 is not that big a deal. European sales are improving, but total sales have been slowing on a quarterly basis since the 1st qtr of 04.
1st 04 - 17.8%
2nd04 - 11.7%
3rd04 - 9.8%
4th04 - 10.3%
1st05 - 7.97%
2nd05 - 6.3%
Doesn't look like the receipe for a 20% gainer since 7/7.

2005-09-06T14:01:00.000-05:00

Maybe we should have a natural disaster more often. Stocks are higher now than a week before we ever heard of Katrina. The U.S. govt spending machine is revving up and that is what the market likes. We're going to spend another 100 billion we don't have and that means a pretty hefty boost to GDP in the short term. Destruction of wealth does not show up in GDP but replacing that destruction does. With Europe sending us some of their product reserves of oil over the next 30 days, that should keep oil prices relatively quiescent. Inventory numbers will be released Thursday and will probably show big draws so we will be able to see the price response then. Everyone is always eager to shout the good news, the bad news will dribble out.
Energy supplies will remain tight. We will remain short of refining capacity for some time to come. Oil is still $3 bucks a gallon and along with high natural gas prices will grind away at the consumer and the economy. Most of the government spending is going to security, housing, clean-up, repair etc. Relief spending does not increase productive capacity or profitability, regardless of how necessary it is.

BACK TO WORK

2005-09-06T07:58:00.000-05:00

It looks like we will start post Labor Day trading with a bounce. The market seems to be taking heart from lower oil and gas prices as a result of crude coming out of the SPR and products coming from IEA reserves. Also progress is finally being made in Louisiana. So the glass is half full at the moment.
The volatility in perception will continue for the next several months at least. The data will be lousy, but if you wish to view the glass as half full you can ignore it as temporary, due to Katrina. The bears will view it more ominoulsy of course, as undermining the fabric of economic growth. I continue to lean toward the bears and view this shock as one pushing and economy that was already slowing toward stall speed and a recession next year.

THE DOLLAR- WATCH OUT BELOW

2005-08-31T12:40:00.000-05:00

On Aug 19, I said "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.". Well, I think we are there. The fallout from hurricane Katrina will slow the economy. This will reduce the growth differential between us and Europe and stop the interest rate difference from widening further. Yes this will slow global growth but Europe will be seen as being less leveraged than the U.S. and of course they are not pursuing a Mideast war that is going badly. Can you imagine what our trade deficit is going to look like.

A weakening dollar and high oil prices should also be bullish for gold. I worry about gold stocks though, because they use so much energy in their operations and the gold price has not gone anywhere since year-end while oil is up 65%. Their margins are getting crushed.

The S&P topped out at 1246. If it could have made it to 1253, that would have been a .618 retracement from the 3/24/00 high of 1553 and the 10/10/02 of 768. Close enough for me . Take a look at a weekly chart and you can see this may have just begun.

Finally, the law of unintended consequences is at work. The ramifications of the hurricane and our responses have just barely been scratched. This will be a story with staying power.
Their will be negative news flow from these consequences for some time.

LIQUIDITY

2005-08-26T13:19:00.000-05:00

Throw out yesterday because the range was so narrow and stocks have finished near the lows of the day for 7 days running. I wonder when the last time that occurred? Ever since Walmart said gas is affecting sales 8/16, we have been in a funk. The homebuilders, retailers and banks are taking the brunt. We have rolled over. How far and how fast do we go. Think about this. Short term CD rates, 6mth, are almost 4%. That's beat a lot of asset classes lately, RISK FREE! I mean stocks, gold, bonds, etc have been mostly sideways. With all the uncertainty over oil prices effect on asset values and all bubble talk over real estate, these kind of short rates are going to start draining liquidity out of risk assets. In three weeks the Feds going to give you another 1/4%.

The CEO of DRD gold commented that the oil/gold ratio was at historical lows and had a long way to go up to catch up. That can be said just about everything. The price of oil is outstripping everything, and either prices rise or profits fall, particularly amongst heavy energy users like airlines, mining and chemicals to name a few. It doesn't look like prices are rising.

AUGUST 25, 2005

2005-08-25T08:14:00.000-05:00

The bond market has retraced about 1/2 of it's losses from July highs to August lows. This is where the rubber meets the road. The yield curve shouldn't flatten any further especially after hawkish statements by the Chicago Fed Prez yesterday, unless the economy is really rolling over, which may well be the case. But one would think that we would really have a battle here for days if not weeks.

Pre opening it looks like stocks could get a bounce today. They are oversold. The hurricane looks like it will miss oil installations so crude is of its highs. But if your going to play the rallies in this type of environment, remember they are most likely going to be sharp and short.
You can almost feel the consensus build on CNBC one by one that oil is finally going to hurt the economy and markets. I might go one further and say its baked in the cake. Past price increases are now working their way through the economy and profit chains and we will see negative news flow continue to grind away. Local news yesterday reporting on the impact on local governments that operate huge fleets of school buses bracing for huge budget shortfalls as a consequence of higher gas. Isn't school just about to start

It is amazing how quickly the perspective on oil has changed. It was only 2yrs ago that oil was trading at $30 a barrel midway between its decade range of $20-40. That's when OPEC was concerned about losing market share, limiting production output, afraid of high prices causing a drop in demand, concern over alternative fuels etc. Today an analyst on CNBC is concerned over Venezuela or Iran withholding a measly hundred thousand barrels of oil for political purposes. To punish the U.S. and display their power, which they could easily do as they are awash in oil riches. It almost seems like any place that produces the stuff has potential geo political issues so that we will never return to the placid world we knew before. As I've said before price will ration supply

AUGUST 24, 2005

2005-08-24T08:19:00.000-05:00

Is it me or does the market feel really really heavy. About week ago I wrote about the correlation between strong stock closings with strong bond closings with oil having little influence. The past 5 trading sessions has seen a complete reversal of that correlation. For the past 4 trading sessions bonds have closed near the highs of their daily range while stocks near the low of their daily range. More importantly, every trading session since Walmart reported earnings 8/16 and said they were concerned about gas prices hurting sales, stocks have closed at low end of the trading range for the day. Bonds started their rally shortly thereafter . Data showing the housing boom may be slowing hurt the homebuilders that even the bond rally couldn't help. To ice the cake, a couple days after the Walmart news, oil after trading as low as $62.25 started moving back up dashing hopes of an intermediate correction.

So here we sit. Our leadership of retail and homebuilders has rolled over, oil is close to threatening the highs again. Google the poster child of the bulls, may be rolling over. It will be interesting to see if their news today about introducing instant messaging lifts the shares back over $300 the next few days. Anecdotal stories about higher gas prices inflicting pain are now every where and multiplying. Airlines are getting killed, farmers are getting hurt, delivery companies, big energy users off all types and stripes. It's becoming the lead story on the evening news and that can't be good for confidence. The worst month for the market is around the corner and the big boys will be back from vacation soon.

AUGUST 19, 2005

2005-08-19T10:14:00.000-05:00

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.

AUGUST 15, 2005

2005-08-15T07:03:00.000-05:00

An interesting correlation last week, well actually since 8/2, is that every day the bond market closed near the high of its range for the day, so did stocks, regardless of what oil prices did. The opposite was true as well. Every day bonds closed near their lows of the range of the day, so did stocks, even if oil fell like it did 8/4. So oil didn't matter or its rise was compensated for by lower interest rates. Friday, however stocks closed neutral, about the middle of their range for the day, even though bonds had a big rally and finished strong. Oil might finally be exerting some influence as it broke the $67 barrier with fears of $70 around the corner. Inflation measures this week and gas pump prices will be negative, as will lingering concerns over tech stocks in light of DELL and CISCO. Earnings from retailers should be good, but it will be their guidance that matters most.

I don't usually comment a lot on individual stocks but the action in McDonald's last week, is to good to pass up. Rumors of a big REIT like Vornado buying a stake in the company to monetize it's real estate values sent the stock and its call options flying last week. MCD started to hit its lows in the spring of 2003, as same store sales were declining 4% a month. MCD had been a growth stock for decades and old management in an effort to keep that up started to diversify into other restaurant concepts in the late 90's as expansion opportunities waned and competition increased for their burger joints. That strategy failed, as their forays into other businesses never reached critical mass to contribute significantly to the bottom line and meanwhile tastes were changing as the population aged and they had their eye off the ball of their core business and it faltered. New management was brought in, cutoff all the expansion focused on the core business, introducing new menu items to cater to older and healthier tastes, extended store hours etc. Essentially pushing more product through existing distribution. It worked. Same store sales started to improve peaking at 13.9% growth in the spring of 2004. So from its low of around $14 a share in 2/03 the stock rallied to 34 1/2 in 3/05. But then same store sales started to settle down, as the comparisons grew more difficult and the stock pulled back to 27. June and July were better than April and May and so the stock bounced back a little to 31. The company itself is looking for mid single digit EPS growth. They fixed the business but are now in the same spot the old management was. How do you get growth out of a large, mature business going forward. They're already the biggest in every thing. They have the largest breakfast business, they expanded their menu, expanded their hours to get the late night crowd. By slowing international and domestic expansion and eschewing other restaurant concepts, they are back to being a one trick pony. Grow same store sales. This can be seen in the convergence of same store sales figures and total sales figures.
That brings us to the present. Up pops the rumor of Vornado, perhaps helped by the fact that they just recently raised some money in a secondary offering. Roughly 9m share at their current price, lets say 90 equals about 800M, sounds like a lot. Could it pop the stock $4? Sure, but consider this. MCD bought back 33M of its share in the last 6 months, approximately 1 billion dollars without much effect. Not to mention several analysts pointed out on Friday that MCD is not like Kmart. Though they have some nice parcels, most McDonald's are located on major streets next to gas stations and dry cleaners and the parcels are not that large if you are considering re-development. McDonald's picks their sites for a reason, so I don't think they want to go anywhere in the first place. Do they need the cash, that spinning them off in a REIT might provide. They have no major expansion plans, just the opposite.
Maybe someone should look into who benefited most from these rumors.

AUGUST 11, 2005

2005-08-11T18:27:00.000-05:00

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.

AUGUST 8, 2005

2005-08-08T11:26:00.000-05:00

Stocks did creep higher as I suggested in my last post, until they ran into weaker retail sales and higher oil. Bonds continue to be short and although the dollar did not get to 118 euro, I was correct in thinking it was about time to short the dollar.

Oil stocks have been the undisputed leaders, followed by homebuilders and retailers. So it should be. We are after all a consumption based economy. Financial stocks are the biggest sector of the S&P, and they have lagged badly. The higher bond yields and oil prices hurt 3 out of the four sectors very badly. Homebuilders look like they have finally topped out helped along by prodigious selling by insiders of course. The flat yield curve is hurting net interest margins and so the banks stocks got hit. The BKX looks like its broken down. Retailer's also were sold, starting with Target, the subject of a bearish Barrons article. The group sports pretty high PEs for such large companies in such a mundane businesses. Over the long run their sales growth can't run ahead of GDP. Just ask WMT. That leaves the energy stocks, and at least today they can't lift the entire market by themselves.

A few recent indicators have also become troubling. Sentiment, as reflected in the number of weeks that bulls have outnumbered bears at 145 is approaching its record of 152 weeks. Mutual Fund cash levels are at historic lows. Real Estate as a percentage of GDP is at a historic high. Insider selling is very high. The breadth divergence between big and small stocks is very wide. The current acct deficit at 6 1/2% of GDP is in no mans land. None of these are very good timing indicators, but together they do paint a picture of caution. We can't all get out the door at the same time.

JULY 26, 2005

2005-07-27T12:44:00.000-05:00

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

2005-07-18T11:19:00.000-05:00

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

2005-07-01T11:08:00.000-05:00

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.

JUNE 20, 2005

2005-06-20T11:26:00.000-05:00

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

2005-06-07T11:08:00.000-05:00

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.

MAY 26 2005

2005-05-26T10:45:00.000-05:00

At the time of my last post, May 19, the S&P was at 1190, about where it closed last night. As I write we've popped back up to 1197, not to far from 1211 where we started the year. So overall the sideways action continues, making life hard for traders and investors alike. The goldilocks environment of 3% growth, low interest rates and low inflation provides support while the things we worry about-- trade deficit, budget deficit, high oil prices, flattening yield curve, declining leading indicators, real estate bubbles, etc. hamper the upside. The day to day statistics, earnings and news moves things up a little or down for a few days, but we always seem to revert to the mean. Eventually I believe the things we worry about will tip the scales lower beacuse some of them are unsustainable. The timing however is and has been quite uncertain. The resillency of the U.S. economy is amazing.

Next week looks to be moreof the same, slightly weaker economic stats, but nothing earth shattering it appears. However you never know what will tip the scales. Be wary of weak economic stats because one could break the camels back. The push up today got its impetus from Treasury Secretary Snow"s testimony putting more heat on the China to revalue. While this is certainly not good for mainstreet, having to pay higher prices for imported goods, it will have an immediate positive effect on corpoate profits. Good especially for those multinationals with a high percentage of their revenues coming form asia. In other currency matters, it will be interesting to see how much of an effect the French vote has on the euro, if they vote no on the EU constitution.

MAY 19, 2005

2005-05-19T00:20:00.000-05:00

As I said in my last post, as long as there were no hedge fund disasters, the market could continue to gather strength. That was the first impetus, as nothing untoward happened over the weekend. Then came the Treasury report on China, putting them on notice to loosen their currency peg or else. Finally the core CPI at 0% was the frosting on the cake. Today so far, it looks like the better than expceted jobless claims are cancelling out the worse than expected Philly Fed index, which has been quite erratic lately. So the S&P sits at resistance near 1190.

The bonds sit near 4% resistance in yield and gold is around $420 support. Also it is not uncommon for stocks to hit their high around options expiration. The point being, that this would be a natural area for consolidation or reveral of current trends. No shocking news seems to be on tap for next week, which also fits the scenario. With this backdrop beware of false breakouts.

MAY 13, 2005

2005-05-13T11:20:00.000-05:00

When I left on vacation 4/21 the S&P was at 1159 same as when I returned on May 3. As I start to write this blog it is trading at 1161. I love the quote by Martin Goldberg today on Financial Sense.com "The S&P500 touched 1155 on January 27th, 2004, over 15 mos ago and as of Wednesday night sits at about that same level. In that time, there has been so much analysis, so little movement and so much money floating about looking for a speculative gain." Isn't that the truth. In contrast however, on 4/21 oil was 54.20 vs 48.40 as I write. The dollar was 130,48 against the euro vs 126.32 now. 10yr notes were 4.22 vs 4.13 now. Gold was 434 vs 420 today. So, with all this activity, why haven't equity prices had a net change? A few weeks ago we were fretting over an economic soft patch, that now with the latest releases of retail sales, payrolls, and auto sales common wisdom says is over. GDP will be revised higher. With oil down $6 and 10yr note yields at 7 month lows, earnings pretty good, you would think equities would be higher than three weeks ago. My explanation for why they are not is simply, liquidity is contracting and the ripple effects of the GM and Ford downgrade to junk on the psychology and risk appetite of market participants is casting a pall. It scares the hell out of everybody and they pull back. First Fannie and Freddie, and AIG and now GM and Ford. Credit problems with interest rates this low. What if they move higher? Who else then gets caught. Credit spreads are widening as everyone waits to see if another shoe falls. Time will heal this wound. Everyday no hedge fund fails the market can gather strength.

I do have my reservations over the economic data maybe not being as strong as it appears. If you average March and April together it doesn't look as much has changed. Consumer confidence droped again and the purchaseing managers report was weak. Europe and Japan also continue weak.

MAY 4, 2005

2005-05-04T14:56:00.000-05:00

To me, today's stock market strength stems from three factors. First, auto sales we pretty good in May, a 17 1/2 million annual rate. Fears that the economy is falling out of bed are not supported by this strong demand. Take heart, those in the soft patch camp. Secondly, the Fed is done for two months regardless of what they do at the next meeting. We have a respite. Third, oil inventories continue to rise. Crude finished up on the day, but with these numbers, we are not going to $60 anytime soon. So, if the economy can grow at 3% with oil at $50, and the Fed hasn't hurt the economy yet with talk that they are close to done, and profits are good. What's not to like. Thats the bull case that took the lead today.

MAY 2, 2005

2005-05-02T00:20:00.000-05:00

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.

APRIL 14, 2005

2005-04-14T07:45:00.000-05:00

The positive effects of lower oil prices on stocks was agian over ridden by economic weakness. This was very similar to what happened a few days ago when we got lower oil prices but a large drop in the transport index, based on economic weakness drove the market lower. Yesterday the culprit was weak retail sales. Just about everyone has been talking about if and when the overindebted consumer will crack for over a year now, so its a big deal. Ex auto and gas the number was -.1%,. The last time it was negative Greenspan was talking about a soft patch. Obviously this can have important ramifications for the dollar and interest rates.

I have a hunch that the pattern we will see now, is weakness on days of reports reinforcing the economic weakness theme and recoveries thereafter. We have very supportive oil prices and long term interest rates to provide some rally days.

The dollar is stronger on an IMF report reinforcing the theme of stronger U.S. growth and weaker growth in Europe and Japan. This is old news of course. The euro should find support around the February lows of 127.40. It should start to firm if more sign of U.S. economic weakeness emerge.

APRIL 12, 2005

2005-04-12T15:26:00.000-05:00

The headlines say "stocks trade higher on FOMC minutes". It isn"t that simple. Today was a very complex day. Readers of this blog know I have been using a very simple but effective index lately. As an example, if oil is $55 and the 10yr yield is 4.5% the index value is 10. Stocks have been weak when the index is over 10 and stronger when the index is under 10. A few days ago when oil broke $55 on the downside, I expected stocks to firm. They didn't because on that same day the transports crashed on USFC's earnings warning. The trucking company's weakness spread to the other transports and then to the market in general. The warning did not blame higher oil, but rather weakness in the auto sector and a slowdown in business in the northeast U.S. That is why the weakness spread to the general market. It implied a weakning economy and the cyclicals got hit. Oil continued to come down yesterday and more today. When the FOMC minutes came out and caused a modest rally in bonds that was the straw that broke the camels back, as higher interest rates were not going to offset the benefit of a $5 drop in oil. The Dow staged a 140 pt turnaround. With the index now at 9.58 there should be good support for stocks.

To many the, action in the dollar was confounding as well. It fell as soon as the record U.S. trade figures were released but then did a 180 and rallied almost a 100 pips at the close.
I won't argue if a record deficit was expected or not, but we know they are going to be large every month, particularly if oil prices are high that month. I believe what is keeping dollar sellers sidelined is the G7 meeting in Washington this weekend. The G7 is going to pressure China once again to do something about their currency. Notice, I said G7 and not the U.S. If and when they finally act it will take a lot of pressure off the euro. Any action or statement hinting they are leaning that way will be enough to send the buck flying.

APRIL 6, 2005

2005-04-06T14:01:00.000-05:00

With 10 yr yields around 4.40 and oil at 56, we are right at my magic index number of 10 i.e 4.4+5.6=10, that I have been talking about for some time on this blog. It has been working I must say like a charm. Above 10 there is downward pressure on the stock market and at 10 or below the market acts better and starts to recover. Since it doesn't look like we are going to get a biig rally in bonds in the near future, it seems to all come down to oil, I;m a long term bull on oil but in the short run anything is possible. In my last post 3/23 I said I didn't expcet the S&P to rally much past 1190. So far so good, but I think I'd revise it a liitle to 1196 which is a 50% retracement.

The dollar is strong, especially against the yen. Economic weakness in Japan and Europe, something I harped a lot about in my earlier postings, is responsilble along with the Fed tightenings of course. Look for this to change when the U.S. recovery starts to falter.

MARCH 23, 2005

2005-03-23T15:35:00.000-06:00

Sorry for the lack of recent posts but I have been preoccupied with other things and actually everything has been going according to script. Stock have not been able to stand up to higher rates and higher oil as my previous posts have commented on. Oil was down over $2 today, so we have a chance for an oversold bounce as bonds rallied a bit as well. Should those two trends continue I think we will get the bounce. But how long it lasts and how far does it carry is the question. It will probably last 1-3 days and not carry past yesterday's highs, pretty weak. Get in the sell the rallies mode, because playing the bounces will be to hard.

The first sign of any economic weakness will see a bond rally, but I grant you it may be awhile before we see that. They are talking pretty good durable good figures for tommorrow. Yes the higher interest rates have helped the dollar and thereby hurt gold. That was to be expected around Fed time. The eurozone having a trade deficit, the first in 22 months I believe and weaker German business confidence gauges don't help either. But gold will be back and I think we are getting close to a buying zone again. Gold is now closer to where it ended 2003 than 2004. The dollar will also come under attack again. The economy is built on frail foundations. We are overextended militarily. We have large budget and trade deficits. We spend to much and save too little. We are overleveraged and underinvested. Our manufacturing base is down to 13% of our economy. Housing has peaked and may be in a bubble. For those who think none of these problems will ever come home to roost and that the piper will never have to be paid, think again.

MARCH 14, 2005

2005-03-14T14:03:00.000-06:00

Things have finally changed. Higher oil prices used to cause fear of a weaker economy and the bond market would rally, the lower rates would weaken the dollar which would cause gold to rise. The weaker dollar and lower rates would ususally be good for stocks.

Recent comments from central banks on diversifying their reserves added to comments from Greenspan regarding a conundrum and losing money on rising rates finally got the bond markets attention and rates have been moving higher since. The rising rates have not helped the dollar nor hurt gold in its quest for a new high this year. Visions of central banks dumping dollars has taken precedence over everything else.

As I stated in my last post of 03/08,regarding the stock market, "a little bit higher oil and interest rates would tip the scales". In my post of February 18, I gave my formula for a simple rule of thumb, whereby any combination of oil and ten year yeild that equals and index of 10 is a sell signal for stocks. For example if the 10yr yield is 4.5 and oil is$55 it equals and index of 10. Oil touched 54.60 on March 8 and has traded around there ever since. Interest rates also started moving up on that day. It's no coincidence that that day also marked the high for stocks.

MARCH 8, 2005

2005-03-08T18:05:00.000-06:00

The news today from euro central bankers talking about raising interest rates was a big deal. It took the euro up 1.35 pts to 133.41 and that helped gold tack on $5.60. You have to wonder what are they thinking. Their economies are staggering under their strong currency. Do they just want to shoot themselves in the foot with these kinds of comments? Remember the South Koreans comments on diversifying their reserves a week ago? They had to back pedal pretty quickly. It would not surprise me to see the same reaction here, in which case the euro and gold would give back some of todays gains. The long term trend of a lower dollar will still be intact even then. It won't be this trade figure but perhaps the next one, which, with the move in oil we had will be quite large and cause the euro to test its highs.

Stocks were down with the S&P falling 5.88, but considering oil touched $55, you have say that was a pretty good performance. Also, the bonds got hit pretty hard today. The long bond fell to 110 today driving the yield to 4.71. The excuse given was the CRB index led by copper moving to 24 yr highs at 312.65, reviving inflation worries. The coming 5 and 10 yr auctions also were a factor. We always liked to get prices down when we had to buy a bunch.

The market seems to sit still for long periods and then lurches up or down to sit again. Which way will the next lurch be. The market is so close to a new high, it doesn't want to give up easilly, but the combination of higher oil and interest rates has been lethal every time before. If these trends continue stocks are living on borrowed time. Sometimes the market has to see the whites of their eyes, i.e. actual damage from higher rates or commodities and sometimes it just takes a mild comment or event ala 1987. Whatever straw breaks the camels back this time, I don't think lies to far ahead. The stage is set. We are at multi-year highs, valuations are stretched, There has been little action to deal with the deficits. Bush's reform programs seem to be losing momentum. A little bit higher in oil and rates would tip the scales I think. There is the chance we could pull back from the brink once or twice before we go over though. I'm writing this late so excuse the typos.

march 2, 2005

2005-03-02T15:59:00.000-06:00

The market drops 175 points when oil went over $50. Today when it goes over $53 its a big yawn, the Dow loses 18 pts. What's up? I think it ties in to what Greenspan said today, words to the effect that the economy is growing reasonablly well and more importantly, that there are few signs of it weakening soon.

So far higher oil prices have shown up on a macro basis mainly in two places. The higher trade deficit and higher wholesale price indexes. True the higher inflation has led to higher short interest rates, but they are still so low that they don't seem to be influencing any buying decisions yet. We are still close to generational lows. In time or in price oil will start to show up in weaker economic stats. It may be already. We have had two months of weak auto sales, but we've bounced back before with higher incentives and thats what the market expects this time. New home sales have started to trend lower but from very high levels. With long rates still quite low no one is concerned here either. However, undeniably inventories of both homes and autos are higher than in quite some time. These two sectors are a big part of the economy. Final demand in 2004 grew at the strongest rate since 1999, 4%. When we start to see a slowdown in general merchandise sales the market will take notice. Tommorrow the retailers report Feb sales, and they should on balance be good. We are not there yet.

The S&P has closed at 1210 today, 1210 Yesterday, 1203 Friday and 1211 Thursday. It feels toppy and if it can't breakthrough soon it will fall of its own weight. It is ironic that it is up here in the first place because of higher oil stocks dragging the index higher and now is threatened by high oil prices. Stock groups like the trucker and retailers, restaurants that should be hurt by lower discretionary spending are not making new highs but they haven't totally capitualed yet either. The money flowing into oil stocks must be coming out of most other sectors without hurting any of them too much.

The dollar was higher today. It wants to go down due to our trade and budget deficits but our economy and interest rates are so much firmer than Euroland that we get these rallies. The ECB lowered growth forecasts today for 2005 and 2006.

Bonds did not do much today, but they have broken down and are nearing support levels.
They are important to watch from here. It closed today at 4.38%. If we go above 4.5% it will be a drag on stocks.

FEBRUARY 28, 2005

2005-02-28T15:19:00.000-06:00

Have to make it short and sweet today. Energy stocks call the tune. They ran up, sold off and then recovered and the rest of the market followed along. Energy stocks made a higher high, a lower low and lower close than Friday, so profit taking may be the order for the rest of the week. The rest of the market should follow along.

Bonds got hit hard on the PCE deflator being higher than expected. Looks like we may be ready to test the spike in 10yr yield that we made in December, around 4.42. The homebuilders did not like this especially with new home sales down much greater than expected, down 9%. Walmart couldn't hold its gains even though it reported its best SSS since May, very suspicious.

FEBRUARY 25, 2005

2005-02-25T08:17:00.000-06:00

Led by the home builders the market had an afternoon spurt and finished on its highs. The Citibank strategist Lekovich, helped as he put out a call for the S&P to move to 1300 and said that might be conservative. Of course as usual the oil stocks were also very strong. Also helping was today's GDP figure, which everyone expected to be revised higher.

Bonds, gold, the dollar and even oil were small movers. Oil held up in spite of bearish inventory data. Its hard to believe that the reaction of the stock market to oil cracking $50 on the upside Tuesday, can be so easilly forgotten. It is hard to argue that we are not in a goldilocks environment. Economic growth is good but not too good. Inflation is not too low anymore nor too high. Profits are good even though their growth rate may be slowing. The dollar is weak, but not crashing and the multinationals love that. Long term interest rates are very supportive, to housing to stock valuations, to consumer borrowing.

All the major problems are in the future and do not seem to be affecting the here and now. Budget deficits, current account deficits, savings rates, consumer debt, oil prices, the slowdown in Europe and Japan, and worries over job growth. All these things, it is said cannot continue without impacting our well being. But, as the old saying goes, it doesn't matter until it matters. What should we be on the lookout for to see when it matters? Look for any or all of the factors to start to slow housing and auto sales, weakness in low end consumer spending, the budget deficit coming in higher than forecast, inflation numbers higher than expected, profit margin squeeze due to higher costs, and consumer debt distress showing up among the sub-prime lenders. Until then, this week is probably a good microcosm of how the market will behave.

FEBRUARY 23, 2005

2005-02-24T07:02:00.000-06:00

Not to much to say about yesterday, an oversold rally. If oil stays over $50, a definite dead cat bounce. The rally retraced 50% of the selloff in the S&P and promptly turned. Because of the president's holiday we get the oil inventories today, if they don't turn oil lower, look for a down day. As most everything was ralling, Walmart broke $52 a long standing support level. It being a leading indicator of the low end consumer< I think it's sending a message.

South Korea reminded me of a Gilder Radner skit, in that when apprised of what the market would do because of its statement on reserves, it said "never mind". That is one central banker that ought to be canned. Funny though, the dollar did not gain back what it lost even after their retraction, because the cat was out of the bag. This might also get many of the smaller central banks around the world thinking, they might want to get through the dollar diversification door before the big boys start. They used to say higher oil prices were good for the dollar as countries had to scramble and buy more dollars as oil went up. Not true anymore, if George Soros is right and the recipients of those dollars, middle east producers and Russia, are diversifying their reserves.

The bonds stay range bound. Bill Gross said he is convinced yields are 100 basis points too low along the yield curve. As I have enumerated many times, there are a long list of reasons this year and last to have expected yields to rise, and they have not. Huge budget deficits, trade deficits, a weak dollar, fed tightening, higher inflation have not done the job. Central bank buying, pension and mortgage buying, and economic fears have kept yields low. In the ongoing debate between inflationists and deflationists I am starting to favor the deflation scenario. This debate could take pages to do justice to, which I won't do now. To begin though, 70% of business expenses are wages and benefits. It is hard to get ingrained, escalating inflation without wage inflation. Globalization and the indutrialization of China and India with the accomanying labor arbitrage and outsourcing, make wage inflation unlikely. The huge debt to GDP ratio that the U.S. now has is very deflationary, and its effect will be exacerbated in any economic downturn.

FEBRUARY 21, 2005

2005-02-22T15:46:00.000-06:00

Today was pretty obvious. Everybody got it. Which is why the magnitude of today's move was so large. One salient point however, after the open the S&P rallied from 1196 to 1202, a respectable rally. The market came unglued when oil broke $50, a big resistance level on the charts. There was also big volume on this move down, a harbinger of things to come.

South Korea"s central bank making comments about diversifying reserves away from the dollar, knocked the buck down big. The euro closed at 1.3252, up .0178. This gave gold an $8 lift and of course gold stocks had a good day. Bonds did not like the reserve talk either and finished lower.

Oil inventory data and the CPI tommorrow could derail the market further. If the data support oil staying over $50 and the CPI keeps yields creeping higher, look for further downside followthrough, if not, a respite is in order. In my last comments, I said it was a strong possibility that the market had put in a double top and the combination of higher oil and rates was dangerous. I also said a couple of post's ago that if gold stocks moved higher rather than consolidating their gains, it may me a warning of trouble ahead. It looks like the latter is the case.

FEBRUARY 18, 2005

2005-02-18T14:57:00.000-06:00

Has the stock market put in a double top? Higher oil prices and higher long term interest rates are creating a witch's brew that make it a strong possibility. Greenspan, scared the bond market so it fell significantly yesterday and today. The 10yr yield is now at 4.27. The April oil contract closed at 49.01. If oil moves over $50 and the 10yr breaks 4.5%, in my opinion we are in a real danzer zone. My simple index is that any combination of oil prices and 10yr yields that adds up to and index level of 10 is a sell signal, for example March of 2000 oil was $34 and 10yr was 6.8% adding them together gives you and index value of 10.2. Our economy is probably even more leveraged now so we may not even have to get that high.

The euro, gold and gold shares rested today which was very encouraging. They all could have fallen significantly on the higher rates. Oil stocks are on fire and probably represent one the few sectors where a buy and hold strategy applies. Even if your timing is wrong time will bail you out.

Barrick has been one of the strongest major gold stocks. Good earnings and guidance, increasing production. Surprising how few buy ratings on the stock.

Next week- will CPI do the same damage as the PPI did? Will GDP be revised higher as the rumors advertised.

2005-02-17T14:46:00.000-06:00

If we had to listen to the House interrogate Greenspan every day I don't think the market would ever go up. I found it very depressing, trade deficits, budget deficits, trillions for social security and medicare, a problem several times in magnitude of social security. The sky was falling and the market can't like that. The saving grace of course, is that it won't happen tommorrow. No doubt we will forget about it soon and start worrying about the next earnings report.

By now, everyone knows that Japan is in recession, for the last 3 quarters no less, after they revised their data. Not to worry though, they announced today they are not revising their forecast showing a pickup in February. The same confidence is proffered by the Germans who seem confident growth will pickup next quarter. Where this confidence comes from I don't know. The trends in place look strong to me. Japan did say they are poised to stop the appreciation of the Yen in case China revalues. Now that is the kind of tlalk gold likes

The euro, gold and the stocks had a nice move higher today, overall they've had a nice bounce from being oversold. The way I read the charts they are now close to resistance and will probably mill around here for awhile. If they continue to move sharply higher I think they will be telling us there is trouble ahead.

Greenspan said little about bonds today, but they still fell modestly 19/32 iin the 30yr. The one thing that really bothered me about his testimony, was his answer regarding the large foreign ownership of our securities. His response, that foreign purchases reflect the fact that we are the safest and most liquid securities, was an answer of omission. He knows that China and Japan have all those dollars with which to purchase securities because they sell us more than we sell them and they want to keep it that way. If they were to sell those dollars to invest in gilts or eurobonds that would weaken the dollar further eventually putting more pressure on their currencies, which is exactly what their trying to prevent. Private fund flows are receding, which he knows. Saying that official flow are increasing because we are such a great place to invest is somewhat disingenous.

FEBRUARY 16, 2005

2005-02-16T19:00:00.000-06:00

Germany reported their GDP dropped in the 4th qtr by .2% and the 3rd qtr was revised lower bringing growth for the year to 1.5%. Don't tell the stock market, it's as high as it has been since 9/2002. The Euro as well finished up on the day by .42 to 1.3012. one of the reasons the Euro is so strong in spite of the poor economic growth is illustrated by a comment by their central banker. Stephen Roach in his latest commentary said that, while in Davos for the economic forum, he asked 'Trichet point blank if he could ever contemplate a situation when European monetary authorities would be willing to provide special support to domestic demand if their externally led growth model were derailed by a further strengthening of the euro. His answer was an unequivocal no." They have a single mandate unlike the Fed. They are charged with maintaining the integrity of the financial system, by fighting inflation to protect the value of their currency, period. It reminds me a lot of the 70's where the strongest currencies were those with the strongest central banks and not the strongest economies.

A lot of Greenspan testimony will revolve around the deficits and social security. I don't expect anything exciting. His view on these are well known. He favors cutting spending to raising taxes. He favors reinstituing pay-go rules to enforce budget discipline. He thinks benefit cuts are part of the social security solution, particularly raising the retirement age. I've heard him so often I almost think I could give his testimony for him.

In Morgan Stanley's Stephen Roach's latest comments he makes the case that nothing much has been accomplished toward resolving the world's current imbalances and everyone is content to let the current games go on and hope that we grow our way out of all our problems. I guess this should not be too surprising. Looking back on history, nothing much gets done until their is a crises. Also, I think its quite clear that Bush has patterned his presidency on Regan's, both strong on defense, tax cutters, supply siders, big budget deficit creators. Both had a weak dollar and large trade deficits. The question is will it end the same way. The reason for doubt is that in each recovery the job growth is weaker and the leverage is higher. Can taxes be cut further? Can interest rates go lower? Can the trade deficit grow wider. Can consumer debt ratios go higher. Most importantly is the economy now self sustaining, becuase if the answers to the previous questions are no, then the question becomes how deep is the recession. Roach's point is, it seems we've but all our eggs in one basket.

FEBRUARY 13, 2005

2005-02-14T07:23:00.000-06:00

The rally in stocks on Friday that CNBC attributed to rumors of the North Korean dictator stepping asside, I think was more a result of Congress moving closer to tort reform. The Senate passed a class action reform bill that as I understand it will send more of these actions to federal courts which have been less kind to class action suits. This is very business freindly. As you remember the market rallied strongly after the election and I thought at the time that tort reform, tax reform, health care reform, and social security reform all themes Bush articulated in his acceptance speeches and all very corporate and wall street freindly were the reason then. If indeed these measures move closer to fruition, they will provide support to stocks and the dollar as they will have a meaningful impact on corporate America's bottom line.

The only other market to show meaningful net change was gold up $3.30. I don't argue with those that say gold and gold shares have bottomed, I just don't see an imminent broad advance until the economy weakens, China revalues, or we have some kind of financial crises.

I usually never write much about individual stocks.I'm more interested in the macro, the big picture as in general most of a stock's movement is dependent on the overall market. I'm not interested in outperforming or underperforming, only in absolute returns. So let me say right up front these comments should not be construed as advice and are informational only. Now with that common disclaimer out of the way I can't help but comment on Alan Abelson's column in Barrons where he mentions "a shrewd technician friend of his professes to find Walmart intriguing as a great story that's topping out. He warns that should the stock fall below 50-51, a level at which it has gathered support whenever it started to fade in the past year and a half, that would signal the trend is definetly down; he also suggest that for obvious reasons, including its stature and size, the action of Walmart's stock could be a barometer for the consumer, the economy and the market as a whole".

I,ve been following Walmart closely for the last several years exactly for those reasons. From a fundamental point of view I've noticed the following:
Fiscal yr 2000 2001 2002 2003 2004 2005
SameStoreSales% 7.7, 5.1, 6.1, 5, 4, 3
Total Sales% 19.8, 15.6, 13.9, 11.6, 11.5, 11.2

Clearly same store sales are slowing. No surprise then that on the CFO's last appearance on CNBC he said they were going to de-empahasize SSS and focus more on total sales. He acknowledged that their current strategy cannibalizes sales from other stores but they do gain market share. He is right, but this is the first sign of saturation. Secondly, their SSS used to grow at nominal GDP, but in the last few years that has not been the case. Nominal GDP the last three years has been 3.8%, 5.2%, and 6.5%, increasing as their SSS have been declining. The growth in total sales is also slowing albeit very slowly the past few years. This is occuring in spite of all their international expansion and turnaround of SAM's clubs. This shows that the U.S. is still at the core of their operations and maybe the law of large numbers is begining to take effect. It is becoming increasingly a market share game. Unlike many of our other big multinationals, retailers fates are tied to the economy. Walmart's customers, as they have stated are particulary impacted by energy prices. Retailers as a group are one of the most interest sensitive sectors and any upward change in the Chinese Yuan can't be good as it would squeeze profit margins or hurt demand. Finally, S&P is changing the weighting of their indexes to account for actual float, eliminating shares held by governments and insiders. Walmart will be the stock most affected in the index and will reduce its weighting to 1.35% vs 2.16%. Half of this take place at the end of March and the other half at the end of September, I believe. A lot of index holders will have to sell a lot of shares.

Walmart is a well managed company, their pre-tax margin is still rising, but the hill is getting steeper to climb. I agree with Abelson's freind and believe they are a barometer for the consumer, economy and market. When the consumer slows down, one month we will see negative SSS. Twice this year we came close. SSS we up only .5% in Aug and .7% in Nov. Two months, in one year that close to zero, I don't believe has ever happened before. Since the consumer is 70% of the economy, so goes he goes the economy, earnings and the market.
Of course that doesn't have to be tommorrow, next week, or month, but keep a sharp eye out.

FEBRUARY 10, 2005

2005-02-11T07:36:00.000-06:00

It was a Dow kind of day . That average, powered by AIG, CAT,UTX,XOM, was stronger than all the rest. the transports actually down. It feels like there is finally a move to quality afoot. It makes sense. The market seems to be on precarious footing with nothing on the near term horizon to act as a driving force higher. The budget Bush released has no credibility. The cuts won't happen, just like they didn't last time. The military spending will be greater than estimated. Rates are going higher, so is inflation. Oil is staying above $45. We've never had a period where oil stayed above $35 for a period of time and not had a recession, except for now.It different so far because the Fed lowered rates as never before. Earnings growth is slowing, comparisons are tougher.

I don't want to sound alarmist, but it does remind me a lot of 1987, which I remember well. Nothing mattered until it did. The dollar was crashing, Yen went from Y200 to the buck to Y165 and then Y130 in 1988. Swiss Franc's went from .48c in 85 to .75c in 87. Gold went from $360 in 86 to $420 in 87 and $520 in 88. The CPI was 1.1% in 86 and 4.4% in 87. The CRB went from 228 to 258 in 87. The budget deficit was 4% of GDP. The current a/c deficit was at a then record 160 billion. GDP growth was about 3.5%. Fed Funds were rising. Stocks in the face of all this kept floating higher until they droped. Trade frictions were very high and the drop was triggered over a weekend by Treasury Secretary Baker telling the Europeans in so many words. You have to stop raising rates, you have to stimulate your economies by easing rates. You have to buy more stuff from us to help ease our trade deficit, we can't be the only economic locomotive in the world. If you don't, I'll let the dollar crash.

FEBRUARY 9 2005

2005-02-09T15:09:00.000-06:00

As I write, the 10yr thouches 3.99 in yield, and stocks are down in spite of a nice gain in Hewlett Packard. As I've stated before one of the best things that can happen for stocks, is low long term interest rates.It was no accident that the bull market of the 80's and 90's was accompanied by the biggest bond bull market in a generation. Unless we start seeing economic weakness or financial distress, which the bonds may be telling us is coming, these rates should provide support. Unlike last time, when they had a run there is no fear of deflation this time around, an important distinction. However, it could be different this time. Since this is one of the most levered economy's ever and financials are the largest sector in the S&P, and many other company's get a significant portion of their profits from financial activities, it is logical to think that the unwinding of the carry trade, the flattening of the yeild curve may have a greater impact on the economy and profits than ever before.

The dollar is modestly lower at around 1.28 the Euro, probably in part becaue of the trade figures due tommorrow. They are expected to improve modestly, but they surprised us last time. Gold was little changed, but the stocks were up modestly the South Africans more than most. Marc Faber, a pretty smart guy, says with the Rand at this level, they can't compete with China. In the Barron's round table he advocated shorting the currency. Obviously, if he is right that would make those gold stocks very attractive. I still believe, absent a financial crises gold and the euro won"t start a new run higher until the U.S. econonmy starts showing signs of weakness.

FEBRUARY 7, 2005

2005-02-07T15:49:00.000-06:00

Well the range in the S&P was about 4pts, 1200-1204. It doesn't get much tighter than that. Certainly not good for all those E-mini day traders. The action today was in the bonds and the gold shares. GLD the gold ETF, itself was only down the equivalent of $1.20. The gold shares however fell a lot more. Placer Dome 5%, NEM 2%, ABX 1 1/2%. The news was that the IMF was going to sell some gold to help the poor countries with their indebtedness and Mr Greenspan said some soothing things about how the current account deficit is going to get better. Those things certainly added a little push, but this is just a continuation of what we've been seeing. The dollar is correcting from oversold levels because our money market rates are going higher and theirs are not. Our economy is stronger and theirs is weakening. They did keep the heat on the Asian currencies over the weekend at the G-7 finance minister's meeting, saying they favor greater flexibility in exchange rates. Of course later in the the day China again balked at doing anything now. If and when China does widen their bands or floats, it will take a lot of pressure off the Euro and we could see it weaken significantly.

The action in bonds continue to mystify most people, much like they did last year. Just about everything that happened last year should have made bond yields go up. The Fed raised rates, the dollar fell, inflation went up, the economy strengthened, oil prices shot the moon, but still, yeilds did not rise. The question is, does foreign central bank buying account for everything. Someone certainly needs to buy long duration assets. One other thing could be at work that no one has mentioned. During the bubble everyone's asset mix got out of whack with historical experience. Bonds used to be a much larger portion of assets held by pension funds, insurance companies and other instiiutional investors than stocks. But during the bubble, stock weightings increased to levels never seen before. Those holders, need long duration assets and maybe the pendulum is swinging the other way. Last months payroll number wasn't that much different from this one and we did not get this kind of reaction.

Looks like a quiet week ahead. The big stuff is behind us, earnings are winding down, slow news week, volatility is low. The dollar will probably deep rising and oil could keep falling to provide catalysts for now.

FEBRUARY 3, 2005

2005-02-04T09:05:00.000-06:00

Not a lot to comment on today from a macro point of view, as you know if you've been watching the markets today. The president of the EU central bank, Trichet did make comments today indicating he was going to maintain interest rates at six decade lows for awhile. With U.S. rates higher now and the Fed continuing to tighten, the dollar and gold were the big movers. The ECU fell .74 and gold fell $4.40. Nothing else moved.

On the economic front, chain store sales were good at 3.6% vs 2.7%. Jobless claims were down to 316m vs 327m. These good numbers were countered somewhat by factory orders coming in at .3% vs .5% consensus and the non-manufacturing ISM at 59.2 vs last months 63.9.

Tommorrow we get the jobs number and I must be the only one on the planet that thinks if payrolls show a really large increase that it won't be good for stocks. To me it means higher unit labor cost, lower profit margins and faster Fed tightening.

FEBRUARY 2, 2005

2005-02-02T16:37:00.000-06:00

The range for the S&P was 1189-1195, but for most of the day more like 1190-1193. The day traders are not going to get rich on that. It was no better in bonds or gold or the dollar. Even oil was realitively subdued. It did close below 47.50 so I take that as a bullish omen for equities.

Oil has me puzzled in the short run. The chart looks like a head and shoulders, but the XLE has been making new highs and in the past it has led the commodity. Oil has been the most volatile of the markets lately and has the capacity to influence all the others. We are also in the period where we transition from the heating season to the driving season. Venezuela is rattling her sabre at us, threating to sell her U.S. assets and sell more oil to China. It has a lot of leeway. It can trade between 40-50 without breaking major support or resistance. In the long run, its a buy period. I think a great trade would be to buy the December 2008 futures contract on selloffs. It closed today at 40.02.

The markets need new catalysts. The dollar has sold off and bounced, gold has come off its highs and stabilzed. bonds have been steady, stocks sold off and have now retraced half of that. Interest rates have moved up but they are still low, growth has slowed but is still good, the budget deficit is large, but we are cutting it in half, the Iraq elections are over but the violence continues. I think a lolt of the blue chips fall into the category of having had pretty good earnings but uninspired guidance. The market reflects this. There is no crises of any kind, but nothing to get excited about either.

Tommorrow brings the retailers reports, jobless claims and factory orders. The U.S. consumer is the lynchpin of the world economy so it will be important to see how he did.

German retail sales fell sharply in December and have been falling on a YoY basis since July of 2003. German unemployment hit its highest level since December of 1998. These numbers should make for a lively debate at the G-7 finance ministers meeting this weekend. I wonder if China will criticize the EU the way they did us if pressure is brought to bear on them over their currency peg. As I have mentioned many times in the past Europe and Japan's economies are faltering. They can't seem to generate any internal demand and are totally relying on exports for the growth they have. That is why the dollar bounced and with the Fed raising rates I don't expect a renewed decline until our economy starts to serioulsy slow.

February 1,2005

2005-02-01T15:26:00.000-06:00

Well it was all stocks today. Bonds, gold and the dollar we very quiet in comparison. In spite of a lower ISM manufacturing survey and oil above 47.50 for most ofthe day, it did finish at 47.20, lousy auto sales, stocks went on a tear. Volume was good at almost 1.7 bil shares, new highs picked up to 360 vs new lows of only 12, breadth was pretty good. In general you can't argue with the internals today. The market closed on its highs as well.

I thought with that background the market would have a tougher time. But the mergers, spinoffs, momentum and the rumor that GDP would be revised jup .5% in the next few days due to technical problems in accounting for Canadian trade accurately overcame all obstacles. It was a good day not great.

Tomorrow we get the oil inventories and of course the Fed raises rates a quarter. A few days ago I said I'm a seller of rallies with a stop at 1196 in the S&P. Tomorrow I think will provide a low risk opportunity to try the short side.

JANUARY 31, 2005

2005-01-31T15:47:00.000-06:00

Just about everything I laid out in my Thursday missive played out, except the Dow gaped up 80 instead of 100 points and it didn't build on its gains. The other thing that bothered me was the volume was light. Also, although oil did go down $3 it didn't stay down and finished at about $48.

Bonds and the dollar are mostly unchanged and gold fell $4.70. Gold doesn't like rising interest rates and especially the prospect of rates going to positive real rates from the negative real rates we have had. Gold and gold stocks need to see either more inflation or economic weakness to stop rising rates. Both of which I think we'll see, but not for a while.

Tommorrow Auto sales should really be lousy and the ISM index is expected to slip a little. If oil stays above $47.50 and the news is as stated above I fear the market will have tough sleding.

I was surprised today by the strength in the homebuilders. Although todays number on new home sales was just marginally lower, last month was revised down and mortgage application numbers have been trending down, inventories are building, but the stocks are making all time highs. I guess the bulls don't want to give up a good thing.

Finally, the comments about GDP being better than the headline number shows, because underlying demand is strong, consumption was up 4.6%, drive me to distraction. Yes we are sending more dollars to China for consumer goods and to the mideast for their oil, and this is supposed to be a good thing. Measuring the well being of an economy by how much it consumes is folly.

January 27, 2005

2005-01-27T15:43:00.000-06:00

Today was a non-event. Stocks, bonds, gold, oil had very nominal net changes. However, we have GDP tommorrow, three dow stocks report. OPEC meets this weekend, WMT sales on Saturday, Iraq elections, and the Fed meeting next week. Strap yourself in.

For the bulls, I paint this scenario. GDP comes in at 3.3% for the 4th quarter. It is just weak enough to make some pundits postulate that the Fed will slow down a little in their rate increases. The three Dow stocks that report- McDonalds, Procter and Gamble and Honeywell all report good results as expected and offer optimistic guidance. Walmart says their sales will be above the middle of their 2-4% range. OPEC meets and decides against any further production cuts. Iraq elects a government and the process is considered credible even though not perfect.

As a result, oil in electronic trading before Monday's open, drops $3. Stocks have an upside gap opening,up 100 on the dow. Stocks close on their highs up 165 for the day.

Do I believe the scenario above? Not really.Is it realistic and possible? I thicnk so. As Bruce Kovner, one of the best hedge fund managers ever, was once quoted as saying "One of the jobs of a good trader is to imagine alternative scenarios.

JANUARY 26, 2005

2005-01-26T15:30:00.000-06:00

Very quiet day in stocks today. Second day of higher highs and lower lows. There was a lack of compelling news to provide a catalyst. Mortgage applications fell 4% and oil and gas inventories came in about as expected. Crude closed the day at about $49, so no great change there.

The Euro current a/c surplus came in at a surplus of 3.2 billion euros. The German business climate index jumped unexpectedly to 96.4 vs 96.2 in Dec, and the U.K. GDP came in at a stroger than expected 2.8%. All this helped the Euro close stronger at 130.78 up over a penny from yesterday. Gold followed up $4.50.

Bomds were fairly quiet, altough the two year note auction of 24 billion yeilded the highest rate sine May of 2002 at 3.245%.

Tommorrow I think we will have to look to earnings releases to provide a spark as I don't believe that durable goods or non-farm payroll numbers will have a lasting impact. Only six Dow stocks moved more that a half point and only UTX more than a point. After the last two months of last year I bet a lot of brokerage execs were looking for more of the same this year with more volatility and volume. Sorry. No wonder the New York Stock Exchange wants to increase trading hours.

JANUARY 25, 2005

2005-01-25T15:18:00.000-06:00

We finally got a bounce today. It was an oversold rally. Breadth started out strong but finished the day only 57 issues ahead. A late rally by oil to 49.60 in the front contract cut the stock rally in half, as measured by the S&P.

Bonds did the oppisite and had an overbought selloff. The 20yr TIPS auction didn't really go that well, bid to cover was weak. Consumer confidence readings came in a little higher than expected.

Higher rates helped the dollar as well as Germany downgrading her growth prospects for the 3rd time in 9 months to 1.6% GDP. Dollar strength knocked gold down over $5.

Although, we've held the support, first time down that I've talked about the last few days, and we are above the weekly uptrend line that comes in at around 1150 on the S&P, I think the trading strategy should be to sell rallies, as long as oil is above 47.50, with 1200 as a stop.

It is going to be hard for gold stocks and gold to rally as the Fed raises rates and current levels of inflation are shrugged off. Better buying opportunities may lay down the road. I feel strongly though that as global economic activity weakens, central banks will be under enormous pressure to monetize the run-up in oil prices and to cheapen their currencies to protect their export markets . When they begin, it will be time to grab the shares and metals with both hands. That time is not yet here.

JANUARY 24, 2005

2005-01-24T16:11:00.000-06:00

Another late day fade. The market closes right on its lows. Oil finished close to $49, more weak economic stats from Europe and Asia. Taiwan industrial production fell 0.9% and Italian retail sales fell 0.4%. Walmart stuck with their 2-4% SSS forecast. Next week will be the acid test. They ususally don't change it until the final week. The bond market had a nice little rally. The TLT Lehman 20yr bond index closed at a 52 week high. The buck and gold were pretty much unchanged.

You can blame it on a lot of things, but a let's not forget most of the things to worry about were around during the year-end rally. The Fed raising rates, the trade deficit, the budget deficit, Iraq elections, consumer debt, valuations, a housing bubble, the weak dollar were all part of the wall of worry the maket climbed in Nov and Dec.

I think what is driving both markets is oil. It closed at around $42 on the first trading day of the year, as opposed to $49 today. A lot of people at the end of the year thought at $42 it was on its way to the mid $30's. The economy was able to absorb high forties oil in 2004. I don't think it can absorb $50 oil with the Fed raising rates. The longer we stay above $47.50. The quicker and deeper will the economy slow down. Profits will follow. That is what the bond market is saying . $50 oil is certainly not good for the inflation indexes.

As I've mentioned before , we are in the 1160-1170 support range for the S&P. If we break down it will be because the market will be pricing in the coming economic and profit slowdown.European economic weakness and Fed tightening is preventing the dollar form weakening and providing support to the market. We were at 134.87 euro at the begining of the year and at 130.47 now. Stocks like a weaker dollar and we are not getting it.

January 21, 2004

2005-01-21T15:07:00.000-06:00

Rick Santelli of CNBC fame said gold and silver were up because the dollar was down and not because oil was up as some others on the floor were postulating. Oh, but oil had a lot to do with it. We have seen this before. Oil up equals economic weakness, keeps the fed at bay both of which weaken the dollar , whcih helps the metals. Gold was up almost $5 and gold stocks also had a good day inspite of the beating the overall market took. The dollar fell almost a cent against the Euro. This oil dollar relationship seems to kick in when oil is over $47.50 a barrel. Similar to the stock market the dollar seems to ignore oil when we are under that level.

I thuink the catalyst for stocks getting hammered today was oil. The news from GE and UTX was good , but it was history. Oil getting within spitting distance of $50 was the new information, or at least the newer information. Saturday Walmart announces weekly sales trends and Friday we get GDP which could be lower than expected to due our huge trade deficit.. That will be what to watch next week along with oil prices and the technicals, as we are at critical support 1160-1170 in the S&P. Before the big election rally, 1160 was the high, tested in Jan, Feb, and Mar. and 1170 was the the first reaction closing low of the the fall rally. Finally, option expirations in the past have often marked either the high or low for the month.

January 20, 2005

2005-01-20T16:32:00.000-06:00

Well the S&P closed below December's closing low and printed below the intraday low. This is an important support area going back to early November. The Philly Fed index droped by a large 12 points to 13.2. That is hardly conclusive. We have seen that movie before. In September it dropped from 29.2 to 15.9, but then bounced right back to 27.2 in October. I think the earnings so far have not been to bad, but the outlooks have been very gaurded. Tommorrow is expiration Friday, usually a very quiet day. Support around 1170 should hold. If it doesn't its worse than I thought. The nightmare scenario is that this weak guidance is followed up with weak fundamentals over the next few weeks, like the Philly Fed today.

Stocks were definetly the story today as the dollar, bonds and gold were all quiet.

We are somewhat oversold here. That can be cured by going sideways tommorrow or bouncing a little. We can then resume this slide next week if the news flow so dictates.

Personally, I'm expecting the economy to slow. I'm expecting it to slow because of the consumer. The consumer should be very close to trimming his sails. Studies have shown that the first reaction to unexpected expenses is to reduce savings, and if the increased expenses do not subside, retrenchment in spending commences. With gas prices stuck over $1.75 and winter heating bills coming due, the crunch should be coming soon. The retail index (RLX) has recently been at multi-year highs.. It now looks to me like it is rolling over. Stay tuned.

JANUARY 19, 2005

2005-01-19T15:01:00.000-06:00

The biggest thing that struck me today, with the perspective of a few days off, is that we are still in the pattern of late day fades. Secondly the market is not acting well in the face of good news. The beige book was good, the CPI fell, jobless claims dropped, housing starts hit 2 mil and oil was lower. Third, the dollar is making new highs. The market seems to be looking past the current news and doesn't like what it sees ahead. As Michael Marcus, one of the great original Commodities Corp traders has said, the best trades are the one where you have the fundamental, technical, and market tone going for you. The fundamentals are good, but the technicals are not and neither is market tone.

The dollar keeps rising on the good fundamentals of the economy versus the the weakening economies of Europe and Japan as discussed on these pages before. Marc Faber in this week's Barron's has a theory that the dollar will go higher this year and that all asset prices will move inversely, stocks, bonds, commodities, gold, etc.

Bonds acted well today helped by the CPI and Beige book. There has been and continues to be a great debate about long rates in the coming year, because everyone was so wrong last year, looking for higher rates. Steve Roach, Morgan Stanley's Chief Global Economist put it best "Take yourself back a year ago :If you had known that the Fed would tighten by 125 basis points, that the US core inflation rate would essentially double, that crude oil prices would shoot up into the mid-$50 range, that the US economy would grow by nearly 4.5%, that America's twin deficits would soar, and that the dollar would come under renewed pressure, the bearish call for longer-term US interest rates would have been a no-brainer." The fact that they did not as he says "Hard as it may be to admit, this result basically turns the art of interest rate forecasting inside out" Its basically a debate between inflation-deflation and strong growth versus slow growth, something to get into more detail at another time.

Gold has stabilized around support.

JANUARY 13, 2205

2005-01-13T15:26:00.000-06:00

A couple of days ago I said this market looked like it was in trouble, and today proved it. When oil broke through Monday's high around $47, I thought that would be the straw that broke the camel's back. However, the market just laid there until the last hour. Most of the internals now look awful. Market breadth is crumbling. It looks like January will be a down month. NASDAQ broke its December low. As I said before I think a lot of longs are trapped above, as it was a sharp and quick rally to end the year.

We are back to another pattern as well. The bond market takes higher oil as economy slowing and rallies, rather than fear the inflationary aspects of higher oil prices.

The dollar did not feel the knock-on effects of the lower rates and weaken like it has in the past. Perhaps because it got hit so hard yesterday, but also because the economy is getting very soft over there. Trichet, the ECB president said today inflation was moderating and consequently a rate hike is off the table. They left their rates unchanged as expected.

Over the years one of the most bullish and supportive stock market factors, has always been low long interest rates. Much more important that short rates. Get inflation under control so we can have lower long rates was always the mantra. Now we have them and we have these low long rates supporting stocks but these high oil prices are hurting stocks. The high oil prices are helping lower long rates. Did you see how well the interest sensitive homebuilders did today. Round and round we go.

This is my last post until Tuesday. Going to get out of this icebox and get some sun.

JANUARY 12, 2005

2005-01-12T17:52:00.000-06:00

The biggest story today was the dollar. It fell about 150 pts ag the Euro.n A record 60 billion dollar trade deficit was to blame. This is truly incredible. Of course the weak dollar pushed gold up $3.90. Neither seemed to help gold stocks much, maybe because they had a nice bounce the last two days. A weak dollar has been and is good for stocks, until the Fed tries to prevent it with sharply higher rates. So perhaps it was partially respoonsible for the late day rally we got. You can't call it more than an oversold rally so far. Nothing seems to matter to bonds. They had a five year auction today, oil fell then rose $1.50 and the selloff in the aforementioned dollar, could not get them excited.

As I mentioned several days ago, Treasury wants a lower dollar to help correct the trade deficit, protect American jobs, and put pressure on europe to help them put pressure on China to revalue or better yet float the yuan. Finally today I saw that Bloomberg reported European Central Bank Chief Economist, Otmar Issing suggested yesterday that Asian nations must let their currencies strengthen to help shrink the U.S. trade deficit. Considering the awful relations we have had lately with our allies, this is big stuff. They are finally tired of taking all the heat. Now that the door has been opened, we should start hearing a lot more of this. Remember just recently when Chin a chided us that it is our problem and we should get our house in order. Its finally not just us whining. The flip side of this that I did hear reported on CNBC, is that today China reported a 33% increase in their exports, which widened their trade surplus in december to a record 11.1 billion. Finally, the U.S.-China Economic and Security Review Commission, a congressionally appointed panel released a report that estimates imports from China displaced 1.659 million jobs between 1989-2003 while exports generated only 199,000 additional U>S> jobs. All you stock, bond, gold and oil traders, this very likely will be the big issue of 2005.

JANUARY 11TH, 2005

2005-01-11T15:48:00.000-06:00

This market looks like it's in real trouble. They are really pounding the SOX. Resource stocks, with the exception of oil are also getting hit pretty hard. It really feels like there are a lot of longs trapped above. I think that's why we haven't seen much of a bounce, too many sellers every time the market pops up. Well we are starting to get earnings disappointments, and warnings. The economic news flow so far this year has been ok and as long as in general it continues to reflect 3%+ growth, should not be a negative for the market. We may have to wait until earnings season is over before we get that sustained bounce. We do have oil as a wild card and from day to day it's volatility is amazing. Sometimes it runs the market and other days its ignored. It is the single most difficult thing to factor into day to day trading decisions.

Gold may have made a bottom here, but I don't think we will get a big upward move until the U.S. economy starts showing weakness again and the Euro starts another leg up. A weak economy is paradoxically good for gold because it weakens our currency, prevents or slows down any monetary tightening and in this new world of scarce commodities, lets inflation creep in. Gold closed 2003 at around $417 and 2004 at $438, so at todays close of $422 I feel we are in a support area. Gold will really start to move higher if reflation takes hold in Europe and they start to lower rates to combat economic weakness. Germany reported their industrial production for November fell 1.7% today. Alternatively, gold would rise if Europe experienced a sustained pick-up in inflation and was unable to raise rates to fight it due to economic weakness. So far inflation has been below 2 1/2% for the last 3 yrs. Their strong currency has helped mute higher oil and commodity prices.

JANUARY 10, 2005

2005-01-10T13:36:00.000-06:00

Today we almost got a modest oversold bounce in the equitiy markets.Unfortunately, we gave up all the gains at the end of the day, once again. This pattern of late day weakness is most auspicious. The FX and bond markets were quiet today also. The dollar fell 28 pts against the Euro after a five day rally. That helped Gold and gold stocks bounce modestly after their recent selloff. Seems like everyone"s waiting for some earnings announcements to get things moving. The day traders must be having a tough time. A lot of one day wonders with no followthrough.

Since there is nothing real exciting today, let's talk about the big picture. Anyone reading the finacial press has come across the debate over our budget and current a/c deficits and what they mean for our economic future. First of all, the reason we're talking about them is they are the biggest they've ever been. Of course opinion varies widely about them. Some look at them as portending an economic armageddon and others like Dick Cheney say deficits don"t matter and Art Laffer says the current account deficits just shows we are a magnet for capital. As an aside , in another life, a group I used to be part of , used to have him come in on a regular basis to share his views. If nothing else, he is the most unconventional thinker I have ever come across.

Either this can go on or it can't. The budget deficit can surely get a little larger, if it couldn"t we would have trouble attracting bids at our autions and rates would be going up at a much faster rate. Our trade deficit can surely get bigger and probably will because of oil,after all we are 'THE' reserve currency. Some people proclaim what's wrong with them sending us all this good stuff and us sending them T-Bonds, its a virtous circle. For those chicken littles who are afraid that one day the buyers won't show up because the dollar is falling and they are taking a beating on their holdings, I say, they were taking a beating in the 70's when Japanese Yen were 360 to the dollar when the German mark was worth 25 cents. The dollar has been declining for decades. The central banks of G-10 don't manage their reserves for profit. Can you imagine the havoc they could reek if they did.The same cannot be said for smaller central banks. The U.S. has been the largest holder of gold in the world, when it was $35 and ounce $850 and back to $250. The Bank of China will manage its reserves to achieve the greatest amount of economic growth and jobs and security for its country. They will revalue by 2007 per their agreement, but they will be accumulating dollars for many years to come, as long as they continue to sell us stuff. Hopefully, not as much and hopefully they buy a lot more from us. A weak dollar is part of the solution to this problem.

As far as the budget deficit goes, even President Bush says he doesn't want to increase it further, and has a plan to cut it in half in four years. Good enough, lets say for the sake of argument, that problem has been licked. Although another terrorist attack or armed conflict somewhere else in the world would throw that up for grabs. That leaves the current account. If they will take more dollars and we will take more stuff, where will this end? I see two possibilities, either the world runs out of money to lend us or we run out money to buy. What I mean by the former is we are consuming 80% of the world's savings currently and there is an upward boundary there somewhere, or they may need more of their savings domestically, or they may stop saving so much and consume more. Regarding the latter, our ability to buy, well our savings rate is down to almost zero, our debt is at record highs, our ability to get more is impaired in a rising rate environment because the refi window is closed, our income growth is menial, as is our job growth. When our consumption hits a wall, as it must, the current a/c will shrink as it has in the past.

Next time lets look at the ramifications of the above on the markets.

JANUARY 6, 2005

2005-01-06T14:20:00.000-06:00

Today we had more weak economic news from Europe. Their business consumer survey, French consumer confidence,German retail sales and UK services PMI all were down. These numbers again contributed to a higher dollar for the fifth consecutive day, the euro falling almost a cent. Following the dollars lead, Gold fell another $5 bucks. Bonds were again lackluster waiting for tommorrow's unemployment report which has been the big mover for that market in the past year. Natural gas reserves had a big draw today and OPEC cut crude production, sending oil up over $2 bucks. Neither a stronger dollar nor higher oil prices, nor a surge in initial unemployment claims could restrain stocks as they rallied strongly in what is being termed and oversold bounce. Cyclicals like Tyco and MMM particularly strong. Fed's Hoenig thinks the job number will be better.

Looks like the retail indexes have finally broken down, the RTH and RLX. One more downward thrust and the same could be said of the transports, housing and banks.
There was some talk today of higher delinquencies and late paymnets on credit card, home equity and mortgage payments.

Regarding tommorrows job number. There have been long periods where we have had a good economy and a lousy stock market and vice versa. So whats good for main street is not always good for wall street. The few good job numbers we had last year, I was disappointed by the markets response. So if we get a good number tommorrow don't be suprised if we get a muted response. More jobs could lead to faster rate hikes, lower productivity and profits, after all.

JANUARY 5,2005

2005-01-05T18:09:00.000-06:00

Today was a pretty lackluster day. The economic stats, however continued to show strength in the U.S. in the form of strong auto sales, over 18mil units and the ISM Non-Mfg-Idx at a robust 63.1, whereas the Euro-Zone Services PMI was unchanged at a realitivley subdued 52.6.. True, the falling mortgage applications survey seems to coroborate the decline in new home sales we saw earlier. However none of these were market movers. The market is still repricing its overbought condition at year-end and grappling with the implications of weaker foreign economies and rate hikes at home

The President was pushing his tort reform pakage today. As you recall his election win kcik-started the rally that lasted into year-end. In my November missive I stated that I believed that the strong market reaction to his win , was strongly tied to his platform of tort reform, health care reform, and social security reform. they are all market friendly and very beneficial to big corporate and wall street. Much like most of his policies in his first term, they benefit everyone, but the big and rich most of all..

Now that the oil inventory figures are out of the way, the important news tommorrow will be intial claims for unemployment , possibly somewhat distorted by the holidays and of greater import, Walmarts guidance for same store sales in January. They have a though comparison.

JANUARY 4, 2005

2005-01-04T11:58:00.000-06:00

READING THE NEWS THIS MORNING I CAME ACROSS TWO ITEMS THAT INTERESTED ME BUT DID NOT REGISTER IMMEDIATELY AS HAVING A SIGNIFICANT IMPACT ON TRADING TODAY. FIRST, GERMAN UNEMPLOYMENT HIT A 7YR HIGH. SECONDLY, FRENCH 3RD QTR GDP WAS REVISED DOWN TO ZERO . WATCHING THE MARKETS THIS MORNING IT FINALLY CLICKED. WHAT I THINK WE ARE SEEING IS THE BEGINING OF THE FIRST NEW MINI-TREND OF THE NEW YEAR PRECIPITATED BY THE TWO CATALYSTS MENTIONED ABOVE.

THE MARKETS ARE REACTING BY TAKING THE DOLLAR MUCH HIGHER, 200 POINTS AS I WRITE. ALSO THE COMMODITY STOCKS THAT HAD SO BENEFITED BY THE WEAK DOLLAR AND STRONG DEMAND, ARE DOWN ACROSS THE BOARD, ALUMINUM, COAL, STEEL , COPPER, NICKEL , PRECIOUS METALS ETC. THE WEAKER DOLLAR HAS BEEN GOOD FOR STOCKS IN GENERAL AND MULTIANATIONAL IN PARTICULAR, SO THIS MAY BE RETARDING EQUITIES IN THE FACE OF THE SUPPOSED MUTUAL FUND INFLOWS.THE SECTORS THAT BENIFITED MOST BY CHINESE DEMAND AND A WEAK DOLLAR ARE VERY MUCH RIPE FOR PROFIT TAKING, JUST LOOK AT THEIR CHARTS. THE DOLLAR WAS ALSO RIPE FOR A REVERSAL WITH EVERYONE LEANING AGAINST IT. OVER THE NEXT DAYS THE JOSTLING WILL BEGIN ON HOW LONG AND FAR THIS WILL CARRY.
THE IMPACT OF THE WEAK DOLLAR IS FINALLY STARTING TO SHOW UP IN EUROPE'S ECONOMIC STATISTIICS. THESE KINDS OF NUMBERS WILL PUT TREMENDOUS PRESSURE ON EUROPEAN POLITICANS . THAT IS EXACTLY WHAT THE U.S. TREASURY WANTS. IT PUTS PRESSURE ON THEM TO LOWER RATES, RESTRUCTURE THEIR ECONOMY, AND JOIN THE U.S. IN EXERTING PRESSURE ON CHINA TO REVALUE THEIR CURRENCY.

SO IT LOOKS LIKE WE ARE GOING TO REVERSE SOME OF WHAT WENT ON IN 2004. IN RETROSPECT I GUESS THIS SHOULD NOT BE MUCH OF A SURPRISE.

November 14, 2004

2004-11-14T16:59:00.000-06:00

Another week, another rally. How long can this go on? I fear awhile longer. No money manager worth his salt can afford to be left behind. Every tick higher creates the fear of being left behind.
But why did the bull start running? Common wisdom says it was the fact that the uncertainty over the election was over and oil prices started coming down. This is more than a relief rally, and oil in the high forties is not something to go topsy turvy over. Indeed, I believe it was the election result, and the President's comments at his first press conference,that kicked off the vigours buying. Over the last couple of years, Bush has been very good for the markets.His policies have benefitted Wall Street over Main Street for quite some time. That is not meant to be a political statement, but rather and economic one. His tax cuts benefitted the wealthy to a much greater extent than the middle class, so did the changes in the estate taxes, and dividend
rules. Corporate profits as a percentage of GDP have rarely been higher. We've just come off four consecutive quarters of 20% plus profit growth. Corporate America has been a big beneficiary of the defense spending as we all know. Job growth has been sub par as well as the growth in wages. His second term, according to his outline, seems like more of the same, and thats great for Wall Street. Tort reform, which many believe will be his first prioity, will greatly benefit corporate profits, by limiting individual awards, at least over the short run. Health care reform, which attempts to shift more of the responsibilty for health care to the individual, to help create an ownership society, will help corporate america as well, as they will assume a larger role as government assumes a smaller one. Finally, social security reform, a partial privitization of the system, allowing for more investment into the market, I think speaks for itself. The Republicans increased their majority in both houses of Congress, so the likelihood that some of this stuff is going to happen has increased. That is my insight into why the market is in such a fever over the last two weeks.