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Good Times and Riches?


Let's go!


"If it suddenly ended tomorrow,
I could somehow adjust to the fall.
Good times and riches and son of a bitches,
I've seen more than I can recall"

(Jimmy Buffett)

Good morning. The market remains in a holding pattern ahead of Friday's employment report. On Tuesday, Chairman Greenspan and the Fed provided the first clues in the rates, inflation, growth equation - doing the expected by leaving rates unchanged. With that behind us, the market wrestles with what's on the horizon. Remember, that last month's payroll data essentially served as a fulcrum for the recent action. I had wondered at the time whether or not the bond market would be the key tell for the financial markets and what impact higher rates (or prospects thereof) could have (unwind carry trade). Clearly that scenario has been the area of focus and has driven yields on the 10 year from from 3.88% (4/1) to yesterday's close at 4.581% (testing the Aug / Sept '03 highs around 4.60%ish). Please take a look at Brian Reynold's excellent analysis of the current juncture from yesterday. We'll have to see if a move thru key levels will trigger mortgage-related action which could exacerbate the volatility (as it did on the way down).

Assuming we are in the later innings, I continue to keep an eye on the Russell 2000 Index (RTY) as a theme, with an unwinding of the carry trade / draining of liquidity likely presenting itself to a greater extent there (excess liquidity particularly benefits the speculative names).

I was discussing the importance of market sentiment yesterday with Toddo and clearly there are numerous macro-level concerns which continue to weigh on psychology. The latest Investor's Intelligence figures don't necessarily indicate that as they reported only a slight drop in bulls from 50.0% to 46.4% and a slight rise in Bears from 22.4% to 23.7%. Those levels, while moving in the right direction, are still too optimistic. Tradeable rallies, in a difficult period of uncertainty, will likely result on the back of a re-entering of fear / worry to the equation. As that could make the waters choppy - discipline and selectivity remain the key. Let's take a look at where we are in the psychology anthology.

The issues in Iraq continue to impact sentiment and the costs of the action by a few U.S. troops are incalculable - as they may continue to sow the seeds of global outrage. In an environment where relations are tenuous at best, mistreatment of Iraqi prisoners is an absolute nightmare for the administration - and one not likely to quietly go away. An escalation of the outrage further demonizes the U.S. as imperialists in certain minds and domestically that has to be considered as we evaluate the election prospects (clearly fuel for the Dem's). Add the fact that President Bush will seek additional funds of $25 bln from Congress for Iraq for '05 and it is unclear how to side-step this swirling hurricane.

The threat of terrorism, has only increased of late and it remains an extremely unpleasant fact-of-life - as the very recent bombing in Iraq, Greece (ahead of the Olympics), explosive detection system in D.C. railway, and NYC suitcase plot all demonstrate. However, one cannot ignore the impact of global geo-political tension on sentiment, regardless of how unpleasant, as it's a critical factor as one attempts to evaluate risk in the investment landscape.

The situation in China still looms and whether or not concerns are overdone - perception has become reality recently. I had wondered about the potential impact of China's problems in terms of global trade and specifically in the commodity arena. We will simply have to see how that situation unravels. In the meantime, until we can manage to find some clarity and remove the stigma of anything China-related, the waters could remain murky. A monster in the closest? Not sure, but China could present itself as one awfully ugly monster (due to its size) if that economy can't manage to properly manuver in order to land on its feet. Policy should be able to curb over-investment and cool things down, however, as the banter on Minyanville illustrates, policy-tinkering is not an exact science and there are unintended consequences on the entire economy. If the intent is to slow certain sectors, and not the entire economy, that may be easier said than done. As the global economic linkages have intensified, conditions overseas are increasingly magnified as they unfold. Maybe none of this is today's news, but it's something to think about when considering global risk (as well as the future interest of foreign buyers of U.S. treasuries).

Perhaps one of the biggest conditional elements lurking from an economic standpoint (as well as sentiment) is the 13 year high in oil prices which continue to remain a drag on businesses and consumers. Oil closed at $39.57 on the Nymex and that is a spike of + 15% since early April. Terrorism, specifically the fear of attacks on oil infrastructure, along with the ridiculously suspect tactics of OPEC, remain at issue. For their part, gasoline futures touched new highs yesterday and at these levels are up 34% since January (25% since just beginning of April). It would seem a great deal of geo-political turmoil is priced into energy at these levels, however, with the summer months approaching (peak driving season) some are worried about potential shortages. In any event, there are clearly a number of cross currents (and rhetoric) that could make things dicey. Whatever methodology the Bureau of Labor Statistics uses to "compute" the data, the pain people are feeling is real and cannot simply be wiped away. Higher energy prices are a huge weight on operating margins and they simply end up getting passed along to consumers.

Finally as a manifestation of all of this, I've got an eye on the volume data. Volume flows were again on the light side yesterday with 1.47 bln shares changing hands on the Big Board and 1.58 bln on the Nasdaq. Breadth was muted with 1635 advancers to 1654 decliners on the NYSE while advancers outpaced decliners 1661 to 1437 on the Naz. The pullback in volume flows is notable, as they had increased on the move lower and have thinned in recent trade as we drift around. That, in part, is likely a reflection of the wait-and-see mindset.

I wonder if that's the situation until we get a change in attitude...

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