Looking Ahead

The dog days of summer are almost over and the market will be facing a crucial test next Tuesday as Wall Street returns to work. This week will be crucial in setting the tone for the fall to come.

Let’s look at a few charts:

S & P 500 looks set to test 200 EMA at the open today. Failure to close above should open up the index for a short term drop to 1140-80 support.

Old highs should become new lows as the NASDAQ closes in on support in the 2100 range.

NYSE Advancing/Declining Issues chart (oddly enough) strikes me as bullish. Coiling into moving average support, I would look for advancers to continue to win out over the next few months.

Oil continues to confound anyone forecasting a lower price (myself included), but does put in a few bearish divergences (circled). In case you are unfamiliar, this type of divergence is price making a new high without indicators confirming (with an accompanying high in the indicators value).

Will update on Friday, enjoy the week.

Potpourri

Because it is summer and the majority of Wall Street will not return to their posts until after Labor Day, it is worth noting that I am facing a dearth of topics to delve into. So today, I will put forth a group of random musings to shed some light on a few of the issues facing the market (and the world).

Iraq. It has been a very tough summer for Iraqi Security forces and the coalition. In addition, protests in Crawford, Texas have been leading stories in the mainstream media, providing anti-war activists with new fodder and quite possibly weighing on consumer confidence.

Iraqi Constitution. The document itself is perhaps not as important as the democratic process to arrive at an endpoint which is satisfactory to the parties involved. Will it be a proverbial Magna Carta or Bill of rights? Will it be socially progressive? In any case, ratification will be a major hallmark in the Middle East—surely enough to inspire others in the same way voting did.

Oil. Record highs. More hurricanes headed toward the gulf. U.S. revising fuel economy standards in light of prices at the pump.

Housing Market. Numbers yesterday weaker than expected but a strong showing nonetheless. Many economists feel strongly that increases in home prices have largely sustained the economic growth experienced over the past few years. Keep an eye out for more supply coming to the market and the exponential increase in license applications for realtors.

Middle East. The Gaza pullout went remarkably well, hopefully giving a much needed boost to the fledgling peace process.

Mergers and Acquisitions. M&A activity continues at a breakneck pace, reaching the biotech space earlier in the week. Look for further consolidation in this space and the strong possibility of Big Pharma entering the fray to strengthen their ailing pipelines.

Good Stewards Gone Wild. After the Enron/Worldcom/Tyco/Adelphia debacles convinced the public that every company was a Ponzi scheme and every corporate officer was a crook; this is to be expected. Companies are hoarding record amounts of cash. CFO’s continue to have nightmares of upgrading equipment, raising their dividend, buying back stock and investing in more capacity; for fear they might be doing it at “the top.” We are finally starting to see the fruits of the R&D from the large technology downturn realized—look no further than Intel and their new products, collaborations and performance.

Trading Places. True market rallies rarely occur without the leadership of the financials (brokers, banks, lenders, etc.), so naturally this begs a few questions:

1. What are the odds of a law firm putting a banker, broker or analyst (with little legal experience) in charge of the company?
2. What are the odds of a financial firm putting a lawyer (with little financial experience) in charge?

Classic example of linear logic, an “if a then b scenario” showing the idiosyncratic rationale behind either move. But as always on Wall Street—money talks—and the company referred to above continues to under-perform the market.

Terrorism. We are currently in year 5 of the misnomered “War on Terror” approaching the anniversary of 9-11. The color warning remains unchanged, yet a few stories of increased chatter, uncovering of plots and general melodrama have begun the rumor rounds.

Dollar, China and Rates. China’s elimination of the dollar peg (and subsequent shift to a basket) threw a monkey wrench in the natural order of rates. Since the announcement, the dollar has weakened substantially against most major currencies. That was to be expected. What Greenspan and Co. will do next is not. Oil is now a serious tax on the consumer. Will this sufficiently curb excesses in the economy, making interest rate increases redundant (and a big negative)? Does Greenspan think the economy can handle both higher oil and higher rates? One cannot be sure, as the post-modern Fed is known for tipping its hand (sending out Govs to give speeches, Fed minutes, etc) before undergoing any sort of policy shift.

ADDITIONAL DISCLOSURES: The information contained in this publication is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed.
The opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice.
This publication does not constitute an offer to sell or a solicitation of an offer to buy any securities. E1 Asset Management, Inc., and its officers, directors, and employees, and affiliates and members of their families may have positions in these securities and may, as principal or agent, buy and sell such securities before, after or concurrently with the publication.E1 Asset Management is a fully agency company and doesn’t seek any investment banking deals

The Real McCoy

Despite the gloom and doom that accompanies every newscast, news story, and update on Iraq, there is reason to be optimistic.

While clearly a good starting point for any examination of the inner-workings of the country would be security—but in the format of this blog, I believe it would behoove the reader to analyze the situation from a different perspective, which I will give a few examples.

The Wall Street Journal has an article on the cover page (above the fold) on the emergence of life insurance businesses geared exclusively toward terrorism. In other words, Terrorism Insurance. While some would clearly examine this story with a “when you have lemons, make lemonade” bend; it is far more important.

It is proof that the free flow of ideas and money is beginning. When people create, work, develop, innovate, etc. it is always a step in the right direction. Productivity is the ultimate expression of human freedom and individuality.

Trader Monthly has a feature on the Iraq Stock Exchange. Men and women crowding shoulder-to-shoulder in a non-descript building that is more heavily guarded than Fort Knox, just to trade equities. Before the Iraq invasion the Baghdad Stock Exchange averaged 500 million Iraqi Dinars in volume, two years later that has risen six-fold to over 3 billion/ day. This is a breath of fresh air compared to its predecessor, known for its corruption and constantly subject to the whims of the totalitarian regime which oversaw its operations.

Today market participants use dry-erase markers and boards to effect transactions. All records are kept by hand. As we speak, a new facility is under construction. The open out-cry system will remain intact, only the new compound will feature computerized record-keeping and clearing/reconciliation will be completely automated. One can only expect liquidity to increase as these reforms are implemented.


Take this update from the Mena Report earlier this month:

Iraq: Demand for stocks on the rise

Posted: 08-03-2005 , 10:59 GMT

According to Al-Taakhi newspaper, the Baghdad Stock Exchange has witnessed unprecedented trade levels in terms of demand for stocks in the early days of March.

Talib al-Tabatabaie, the Chairman of the Baghdad Stock Exchange, said that the value of the traded stocks on Wednesday session amounted to ID 7 billion compared with ID 5 billion on the previous session. The chairman expects the demand for stocks, particularly the banking stocks, to grow impressively through the upcoming period.

He added that if non-Iraqis are permitted to invest on the stock exchange, it will reach unprecedented trade figures in the future.
© 2005 Mena Report (www.menareport.com)

See for yourself at http://www.isx-iq.net/

There is also no capital gains tax in Iraq, something Americans could learn from our ally.

There is still a long way to go, no question. But it’s a start and I, for one, am optimistic.


Sources

Dreazen, Yochi. “As Iraqi Terror Rises, Businessmen Find Niche in Life Insurance.” The Wall Street Journal 19 Aug 2005: p1.

Robertson, Phillip. “The Bulls of Baghdad.” Trader Monthly Aug/Sep 2005: p80

Mena Report: http://www.menareport.com/

Watch and Worry

Forget about the usual suspects for a moment—Iran and North Korea. Yes they pose a nuclear threat, yes they are members of the “axis of evil,” and yes they are both ruled by autocrats.

But at least we know where we stand in our relations with these two rogue countries.

Watch and worry about Russia and China.

They are both relatively new members to the global community (both countries have existed far longer than most but using the criteria of normalized diplomatic relations with the rest of the world they are new).

It is worth noting that we have fought proxy wars with both countries (USSR- the Cold War, China- Korea/Vietnam).

Russia is one of the youngest democracies. They are also one of the largest. Some of Putin’s recent moves signal a weakness (or desire) to move toward the police-state machinations of the former U.S.S.R., under which he was head of the KGB.

China is the largest country in the world in terms of population. China really had no diplomatic relations with the U.S. pre-Nixon. They have recently begun shifting towards capitalism (economically), but remain dominated by the Maoist/Socialist hegemony pervading their culture.

If you really want to know how China feels about our government, read the statement released by CNOOQ on the day Unocal accepted the Chevron bid. Make no mistake; CNOOQ is nothing but a tentacle of the state. Sad to say, but the DOJ and Pentagon had already expressed their desire to negate the deal before proxies were even mailed out to Unocal shareholders.

Today the two countries began joint military exercises—very scary—sending a clear message to the West (mostly the U.S.) of the fraying relations with the two countries.

While the beginning of a schism is clearly in the air, it is important to keep this from widening; as relations at this stage are easier to solidify then they will be 10 years down the road. If one recalls the beginning of the cold war, namely the purported delaying of the second front (which Stalin thought was intentional on the part of FDR), the two superpowers did not reconcile on this issue, rather choosing to let Yalta and the Marshall Plan go by, resulting in the Soviet Blockade and Berlin airlift—escalating what was a relatively minor issue into one of saving face on the part of leadership. The rest is obviously history.

The Division Bell

The market is an exercise in the psychology of the masses. Nothing captures the essence of “what is” better than an hour, day, week, month, or year of trading. The reason is simple: money. If you watch any of the financial news programs or read any type of analysis you will find pundits and commentators ascribing many different motives to why the market did what it did. People talk for a myriad of reasons. People have opinions based on all sorts of complicated issues. The market doesn’t. The market goes up and down based on the most fundamental of principles, supply and demand. When demand for stock outweighs supply, markets go up. Conversely, when there is greater supply than demand, markets go down. Don’t believe people. Believe the market.

An easy way to prove this is simply to look at a few of the converging forces:

Energy vs. Productivity. Oil is at an all time high. So is productivity. The internet, just-in-time-inventory, outsourcing and supply chain improvements have led to record profits for corporations. Limited refining capacity has led to gas prices reaching nearly $3 gallon in the U.S. (I believe Holland is the highest globally at $6.50 USD). Oil in the high $50’s has not stymied consumer spending. Wal-Mart says oil is beginning to hurt their sales while luxury retailers and autos have enjoyed record #’s as of late.

Energy vs. Rates. Everything stated above about oil remains true. Oil has also represented a “tax” of sorts on the American consumer, giving the Fed pause in charting a course of higher rates. Had oil remained in the $40’s or low $50’s most economists would be inclined to agree that rates would be much higher than the current 3.5%. Which is more detrimental, less than a dollar more at the pump for the average American or higher borrowing costs for the U.S. Government, major corporations and mortgage rates?

China vs. China. We were on the precipice of a major trade war with China for the first half of the year. Last month China removed the Yuan peg favoring a basket of currencies instead. China continues to be a constant bid under energy prices, basic materials and development services. China continues to undercut the textile industries of competing nations via a barrage of WTO sanctioned strategies. China also is putting pressure on foreign regulators because of their desire to merge with and acquire foreign corporations. China continues to be the trading partner of the U.S. experiencing the greatest growth, hence so is the relationship.

U.S. Dollar vs. Euro. Up until this past May, a weaker dollar had been accompanied by a stock market rally. During periods of dollar strength, equity prices eased. Then in May, the Dollar and Market rose in tandem, putting to rest the spurious commentary of dollar bears. Since the decoupling of the Dollar/Yuan, the dollar has been weak and been accompanied with both rally and sell off in the past month +.

Prescribing value-based judgments to each of the above phenomena does no favors to your portfolio. It is easy to say “higher energy prices are bad for the economy” or “the market is going down because of the perception of a housing bubble.” But just because it is easy does not make it right.

Think about when a stock you own reported better than expected earnings and went down. Then the following quarter missed expectations and went up.

Think about how futures rallied on bad employment data, then sold off later in the day on a bad industrial capacity number.

I could give countless examples of the above. There is no cookie-cutter methodology that allows insight as to what way the market may or may not react to a particular metric.

Follow the lead of the market, do not try and figure out why, just react accordingly.

ADDITIONAL DISCLOSURES: The information contained in this publication is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed.

The opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice.

This publication does not constitute an offer to sell or a solicitation of an offer to buy any securities. E1 Asset Management, Inc., and its officers, directors, and employees, and affiliates and members of their families may have positions in these securities and may, as principal or agent, buy and sell such securities before, after or concurrently with the publication.E1 Asset Management is a fully agency company and doesn’t seek any investment banking deals.

My Mea Culpa and Chicago’s Notorious Airport

When it comes to oil, there are few who have been more wrong than me. I have repeatedly looked for oil to top out in the $50-60/barrel range, which has obviously not happened (as oil is presently at $65.86, off its $67 high). The only positive that may emerge (as stated previously in this blog) is that higher prices for a sustained period of time may force the invisible hand of the market to stymie demand, while forcing suppliers to amend the refining process to support higher volumes. Until this happens, the fate of the global economy dangles precariously by the fraying strings of refiners, held up by the Saudi ARAMCO puppeteer. Not a good thing.


In respect of V-J Day (celebrated yesterday), it is only fitting to say a word or two about one fine citizen, Edward “Butch” O’Hare, the namesake of Chicago’s O’Hare International Airport.

Butch became the U.S.’s first flying “Ace” in WWII. He graduated from Annapolis and later became the recipient of the Medal of Honor, Distinguished Flying Cross, Navy Cross and Gold Star. He died at the age of 29 in November 1943.

Butch made a name for himself during a routine flight in 1942. After taking off from his carrier, he realized that his plane was low on fuel and that he would not have enough to make his run and return. Having no choice but to break formation and turn around, he realized that the ship was under attack, with no air support in the area. Out-manned by a large margin and without time to radio for back up, Butch shot down 5-6 planes using his cannons, until he had emptied his ammunition. Showing the determination and courage that would earn him his accolades, Butch proceeded to use his plane as a weapon, flying the chassis into the wings and tails of his enemies until they went into full retreat.

OIL CHART


Crude Oil continues to soar to new record highs.

O’Hare Picture



Edward “Butch” O’Hare

A Sidebar on Japan Inc.

I do not want to go too much further into this issue but The Wall Street Journal is reporting this morning that PM Koizumi’s approval rating is around 50%, a very high mark for all PM’s since the Nipponese deflationary spiral. This will also certainly ensure his move to dissolve the lower house of the National Diet of Japan (legislature) will not end the 50 year reign of the LDP, nor cast a shadow on his legacy.

Above and beyond politics (as usual) this proves to be another exciting point. Capitalism and free trade ultimately result in a meritocracy, or a system based on individual achievement. This is because capitalism breeds competition, which breeds success, which once again, inevitably breeds more competition—a proven winning formula for economic growth and personal freedoms.

The famous economist Joseph Schumpeter often spoke and wrote about “the perennial gale of creative destruction.” Simply put, new technologies will replace older technologies. I am not quite sure if Schumpeter envisioned the present day manifestation of this phenomenon.

Think about Intel. Think about what replaced the Pentium I? The Pentium II. And after that? The Pentium III. Then came the Pentium IV. This cycle runs all the way through the present Dual Core Chip Technology. Why?

40 years later, 3 things hold particularly true:

1. Moore’s Law is still intact
2. The carnage of Intel’s technological advances was their own previous proprietary technology
3. Schumpeter’s analysis was spot on and is not only limited to companies

Using deductive reasoning to apply this to Japan, the only logical conclusion is that Japan will change. If I am right, the entire world should reap the benefits.







ADDITIONAL DISCLOSURES: The information contained in this publication is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice. This publication does not constitute an offer to sell or a solicitation of an offer to buy any securities. E1 Asset Management, Inc., and its officers, directors, and employees, and affiliates and members of their families may have positions in these securities and may, as principal or agent, buy and sell such securities before, after or concurrently with the publication.E1 Asset Management is a fully agency company and doesn’t seek any investment banking deals.

Speculating on Japan Inc.

If you remember the 1980’s, you remember Japan Inc.—a pejorative term used by the West to describe the blurred line that separated business and Government in Japan. If I were a betting man (coincidentally which I am) I would be speculating on the break-up of this imaginary conglomerate and the huge boon for the world that would follow.

Perhaps a few appendages will remain forever (mostly those relating to the BOJ and their holy grail—keeping the yen weak to every major currency), but the very issue that put PM Koizumi’s legacy on the line is one that will surely start the rolling stone in its pursuit of moss.

The attempted privatization of the postal service in Japan on the part of Koizumi rattled the MITI, Parliament and big business, not to mention many members of his own party. It represents a major departure from the fraternalism that is so thoroughly omnipresent and omnipotent in Japanese culture, beginning at school and ending in the boardroom. It is a modern day characteristic that has took place in an office setting, as opposed to the shogun tradition in the days of Oda Nobunaga, where dedication to one’s clan resembled dedication to one’s plant today.

A break from this cycle will benefit the most important class of them all—the consumer. Think about American dissatisfaction in the days before the break-up of Ma Bell. Now look at the glut that plagues these industries and the cost cutting that has accompanied the build out. Think about the pangs of frustration that still bubble in BBC and BT-led Britain. As the UK continues to deregulate their cable and telecom industries the level of satisfaction of consumers has risen in lockstep with the increases in the quality of programming and service from competitors (and forced BT and the BBC to offer more choices and lower prices).

If I could build on the famous words of Oliver Stone’s fictitious character Gordon Gekko, “Greed is good”—but only in a society where trade is uninhibited and is accompanied by the free flow of ideas and capital.

The proof is simple, look no further than the two most competitive companies in Japan at present, Sony and Nissan. Who runs them?

Not your run-of-the-mill former member of MITI, LDP Parliamentarian and perhaps a board member of Mitsubishi. Sony is run by British Businessman and decorated (U.S.) Soldier, Sir Howard Stringer, the first non-Japanese Chief Executive of that company. Nissan is run by Brazilian-born Carlos Ghosn, known to industry insiders as “Le Cost Cutter.”

Why?

1. They are successful. They both possess track records that are self-explanatory.
2. Their ideas. They have the best ideas of how to generate profits going forward. In a society where consumers have a choice, they tend to purchase on the criteria of: cost, product, service, convenience.


As I stated earlier, rolling stones gather moss and I believe this will be no exception. Japan will benefit, their trading partners will benefit and hopefully this will serve as a model for future deregulation around the world.

Green and Black Bracelets

It started at the gym about a year ago. That was the first time I saw someone wearing a yellow bracelet. At first I was confused. I wondered if the gentleman had checked out of the hospital and forgot to tear his ID tag off his arm. Then I thought maybe his kid had made it for him at camp. At any rate I didn’t give it a second thought until a few weeks later when I had noticed this yellow accessory had become as ubiquitous as the common cold. Everyone had them! People wore them with suits, skirts, formal-wear, jeans, you name it—it was everywhere.

Finally I saw an advertisement featuring Nike and Lance Armstrong (the famed cyclist) that explained they were to raise money and awareness for Cancer. Of course, this begat a few follow ups, Red Bracelets for AIDS and maybe Pink Bracelets for Breast Cancer. But what began as a novel idea has evolved into something far less.

Now, I see bracelets of every color for every cause. Moave Bracelets for Insominia. Tan bracelets to increase awareness of auto theft. Purple Bracelets for Acne. Orange Bracelets for smoking. Maroon Bracelets for Athlete’s foot. Blue Bracelets to stop bullies—yes, apparently bullies are a growing phenomena that need to be stopped now. I even heard Simon Cowell, the malevolent American Idol judge has signed on as a sponsor.

Now, I have a proposal. I would like to see Green Bracelets for lower interest rates (the color green representing an ample money supply) and Black Bracelets for energy consumption (to signal awareness of the need for more oil refineries). These two issues (especially together) pose a major problem for the long term success of the U.S. economy, far outweighing the dangers that bullies pose to our infrastructure.

I have been kicking a dead horse for months on this blog and it pains me to keep writing on the subject, but it needs to be done. Oil is a tricky issue, we know it is a demand story here (even though shocks to supply would be devastating) and it is not something that can be fixed as easy as say….interest rates.

According to a non-voting member of the FOMC a few months ago we were in the 8th inning of the increasing interest rate cycle (for those of you who do not follow America’s pastime, a baseball game has 9 innings, ergo-- near the end). Now, it is beginning to feel like the 4th inning and our pitcher is running out of juice (that pitcher being Chairman Greenspan), with some fresh arms being called up in the bullpen (meaning his possible successors Bernacke, Feldstein, Fisher, Summers, Lindsay and Boskin).

The old adage surrounding the Fed and higher rates is that they “tend to raise rates until something blows up.” This is not a good adage. There is a fair amount of truth to back this statement up, as one needs to look no farther than the trials and tribulations (Russia, Asia, Long-Term Capital Management, Internet Bubble, etc.) of the central bank that plagued the bull in the 1990’s and early 2000. I would be remiss not to mention that the market wound up at record highs during this time, but needless to say the many cycles (and blow ups) during that span gave the average investor his/her share of heartburn and despite these trillions of gains, many lost their shirts.

Getting back to my point, while there is no quick fix with oil, there is one with rates—they can stop raising them, or at the very least signal an endpoint. The fed does not seem keen on noting that inflation is clearly in check. Or that the forces of recession outweigh those of inflation, therefore the balance of risk would suggest moving toward a neutral stance is prudent. The fed also seems to be omitting that the raison d’etra of their body is price stability. In keeping with this theme they would also be slipshod in ignoring the effect of Chinese and Indian demand on basic materials, and understanding the inability of U.S. wholesalers and retailers to control it.

The biggest problem I have with this entire scenario emanates from a statement that Chairman Greenspan made in his recent testimony to congress when he declared that the yield curve, and more specifically an inverted yield curve, is no longer a predictor of recession. This is based on the presupposition that banks are no longer wholly responsible for lending money to consumers (i.e. mortgages, small business loans, etc.) and that heightened competition in this area has virtually negated the effect on bank-set loan rates (which are reflected in the curve).

To a certain extent this is true—and the Chairman’s theories for the most part should be beyond reproach based on his track record (but if they were all I could write about is oil). But what if there is a glitch in the housing market? What if these “no-money down” mortgages wind up in default with little to no collateral? What if the value of the mortgage upon repossession exceeds that of the current market price of the home? Essentially, if the curve inverts and the balance of the credit markets shifts from the banks (which are huge, protected by FDIC, and liquid) to the smaller, more competitive lenders; what will happen?

At any rate, if you see black and green bracelets on Main Street, now you will know why.

Enjoy the Silence

Summer months are typically quiet on Wall Street. Most traders go out to the Hamptons, the Wall Street Journal is unusually thin and the market tends to make somewhat sizable moves on less than average volume. So far this summer has lived up to expectations.

The market has also been overwhelmingly bullish since late spring, but no one seems to have noticed. Under the cover of an unrelenting news cycle focused on every issue that should be viewed as a negative for equities—namely: trade tensions with China, Japanese Steel Tariffs, Terrorism, Oil, Hurricanes, Iraq, Iran and so forth—without discussing the sheer ignorance on the part of traders, who have put a bid under any negative headline.

If you are a bull, this is a best case scenario.

If you are a bear, most likely you have been scratching your head wondering when the news will be reflected in stock prices.

As it has been stated numerous times in this column in the past—the news is already reflected in share prices!

Enjoy the silence while it lasts. As each of these fears begin to subside (which they inevitably will) and stories appear in major publications lauding the resilience of the market and how well it should do now as a result of the __(fill in the blank)__ problem being gone, gains will be harder to come by.

If commentators on CNBC speculate that September should be terrific because all the market participants returning from their vacations will be eager to put money into equities, gains will be harder to come by (see January 2005).

If those handy market maxims like “all years that end in 5 have been very good to investors” return to normal dialogue, gains will be harder to come by.

Most of all, be wary of outside (non-financial) effects and news having a bullish effect on the market. Typically when futures are limit up on stories like Saddam Hussein’s capture, gains will be harder to come by.

More often than not, when sentiment turns overwhelmingly positive (as a result of any of the above), gains won’t be harder to come by—they will be gone.

DOW CHART



The Dow Continues to lag the S&P 500 and NASDAQ, chopping its way through overhead resistance.

OIL CHART



The Continuous Contract (NYMEX Crude) prints a reversal candle (outside bearish) alongside bearish divergences in RSI and MACD (price makes higher high without confirmation from indicators.

The Good, The Bad and The Ugly

Two months down, one to go. If you followed the old adage of “sell in May and go away” you would have missed out on a nice rally that has taken the S&P 500 and NASDAQ to 4 year highs. Today we will have a little look at what has taken place over the summer (so far) and look for clues as to what to expect for August and the rest of the quarter.

The Good

The Stock Market. Without question, this is the best the broader market has looked in a year. Breath is good, Advancing-Declining Volume is good, Fundamentals are good, Sentiment is in check, etc.

The Economy. The underlying strength of the U.S. Economy is incredible. The economic data has been solid (to say the least). Unemployment is at a record low, output is strong and inflation remains in check. The housing market continues to defy odds and has maintained its up-trend in the face of higher rates as well.

The economies of our major trading partners (sans France and Germany) are in very good shape as well. Japan seems to have kicked the deflationary bug and China’s soft landing hasn’t happened—in fact, no landing has happened as GDP came in at 9.5% last quarter!

Washington. It has been a win-win so far this year with Washington and Wall Street. Politicians have been able to get their much needed photo-ops and avoid a trade war with China simultaneously. Congress has also managed to pass important (pro-business) legislation, beating the clock before summer recess.

Chalk up CAFTA (Central America Free Trade Agreement) and the Energy Bill as major wins. Senators Schumer and Graham deferring to Greenspan before bringing the China Tariff to the floor for a vote was also a major win—as only weeks later China pulled the dollar peg in favor of a basket, a welcome and much overdue first step. Look for tort-reform and asbestos relief to re-emerge for debate after the Supreme Court appointment media circus has run its course.

Continuity in the Judicial Branch. Here is a win for continuity. Justice O’Conner was a friend of business. Her dissent in the recent Kelo v. New London case summed up a dynamic record on the bench. In the short, but heated legal career of John Roberts, nominee for the Supreme Court, his decisions have closely paralleled those of his predecessor, with a focus on precedent and state’s rights.


The Bad

Oil. From refinery problems to the recent death of King Fahd; oil has remained one of the largest variables out there. Oil has also transformed itself from a supply problem to one of demand, fueled primarily by the growth of the Chinese and Indian economies.

Commodities. Commodities prices have also remained firm (alongside oil) as the need for basic materials continues to outstrip supply. Resources like copper, natural gas, coal, copper, iron ore, etc. face thinning inventories and a shortage of labor adding to current woes.

Mother Nature. Yesterday, the National Weather Service increased this year’s hurricane total to a range of 9 to 11. Since many of these storms tend to find their way to the gulf, home to many of our refineries and ports, expect further pricing pressure to exert itself on the economy.

Washington. While Washington finds itself under “the Good” section as well, one must remain concerned with the recent anti-China sentiment swelling in the legislature. To find the Chinese position on trade, one needs to look no further than the statement out of CNOOQ regarding their failed bid for Unocal. While the DOJ and Congress did not render the final ruling on the potential acquisition, it is clear that any transaction involving a Chinese company will face equal scrutiny (with a dash of fervor), take tensions up a notch and risk a total implosion of relations.

The Ugly.

Terrorism. Without delving too much into this subject, it is noteworthy to mention the transformation of attacks from the spectacular to the mundane and frequent. Greater intelligence has (so far) prevented another 9-11 from happening, but is faced with the daunting task of dealing with a homegrown and much smaller threat. How do you prevent five guys from bringing bombs in knapsacks to train stations when they don’t use the typical terrorist communications network (cell phones, flagged internet sites, chat rooms, etc.)?

The biggest positive to come from this is the response of the British population and capital markets, which were equally unfazed—TWICE!

The Loss of a Best Friend. The market has not had a better friend than current Fed Chair Alan Greenspan, whose term is set to expire. A friend and follower of Ayn Rand, he led us higher in the late 1980’s after Black Monday. He nursed us through the many crises that plagued the 1990’s and onto all time highs on all major indices. He telegraphed that there was trouble ahead in 2000 and held our hands as the NASDAQ slowly withered away. He accommodated us after 9-11 and kept pumping liquidity into the system until we stabilized a year later.

His term is almost over. While there are a host of qualified candidates of the same philosophy and intelligence, he is forever irreplaceable. Look forward to Wall Street sweating through the selection and confirmation processes coming up.

Great News. Luckily, there has not been much of this. So far, the news has been good, but well short of “great”—no where near the levels that precede major market declines. Terrorism, oil and the “housing bubble gotcha game” have largely over-shadowed the market’s recent run-up, but as these concerns begin to fade (which they inevitably will) your ears should begin to perk up.

When the mainstream media starts sending reporters to the NYSE floor to report on higher equity prices, run for the hills. When corporate earnings accelerate to a point when it seems that year over year comparisons (in 2006) have zero chance of exceeding expectations, run for the hills.

SPX CHART



S&P 500 Weekly Chart. Index breaks to new highs for the year, with technical confirmation. 1250 area represents next important resistance.