Palpable

The stock market opened the week with a little rally for about a half hour and held it for about another half hour before letting go and falling into the afternoon.  Just before the close and into after hours trading the market made a recovery and in overnight trading is up.  The overnight trading thinks that the selloff on Monday was overdone and of course the market will rally again on Tuesday.  

The Dow ended down over 60 points and the NASDAQ was down about 15, neither number much to worry about on the surface.  But, there is much to look at under the covers, such as the price of oil (over $70 on Monday) and its relationship to the dollar, or the price of gold (over $600 on Monday) and its relationship to inflation, at least commodity inflation.

On Monday the WSJ had an article on the fate of the dollar in the near term.  As many of you know, oil has traditionally been valued in dollars because the producers wanted a strong currency for their product.  Recently, especially with the introduction of the Euro currency, the oil producing nations have started to consider other currencies in exchange for their product.  The dollar has been the World’s Reserve currency for many years and now the dollar may be resuming its retreat after a counter trend rally over the past few years.  

The WSJ article “Dollar May Resume Slide As Foreign Oil Producers Invest In Other Markets” on page A2 of Monday’s edition is well worth the read.  Their point, as ours, is that as the dollar was falling in price from early 2002 the oil producers have accumulated dollars in hopes that it would rally out of its doldrums once the Fed started pushing up interest rates.  If the dollar is about to embark on another trip south, the oil exporters may decide its time to diversify away from the dollar and that would certainly cause a more rapid fall in the greenback.

We here at the Wednesday Update feel that the exodus from the currency is one of the primary reasons that the Fed has continued to raise rates.  They are not concerned about inflation as such and they are not worried about the economy overheating.  Quite the contrary, they are worried about the devaluation of the dollar.  They think they can control the value of the dollar by pumping up rates.  

The markets have come to a confluence all of a sudden, intensified by the commodities, especially gold.  The stock market is hoping for an end to the rate increases, the dollar wants them to continue.  The inflation fighting Fed (that is tongue in cheek) is watching the twin deficits grow and are slowly losing control.  We say that Real Estate, residential real estate in particular, is the canary in the coal mine and, that might be blamed on interest rates rising.  The Fed is definitely in a quandary or they should be.  I don’t like to use this word but it seems to be right:  There is a palpable feeling of an impending dislocation in the air.  

With the release of the PPI (Producer Price Index) on Tuesday morning and the CPI on Wednesday morning, there could very well be some trouble in the markets.  There is really no reason to be long stocks any more.  The market is about to wake up to the recognition that the road for prices is down and there could easily be a rush for the exits that will surprise most.

Please keep a close eye on your investments—we would of course recommend selling them as soon as possible…You should

Be careful out there, very careful…

Dow Industrials:  11,073.78  -63.87
RYVNX:   18.54
RYAIX:  21.99
TLT:  84.75
BEGBX:  12.97