A strong dollar crushes stocks & commodities

Markets wanted to fly after the jobs report, but could not cope with sudden strength in the dollar. Dow shot out of the gate with a 150 gain bringing it above 9.5K, another high for 2009. Midday selling took away that gain in just 1 hour. Dow drifted near break even for the rest of the day (shown in the BigCharts widget on the right). However there was buying at the close, limiting damage. Dow ended up 22, advancers ahead of decliners by almost 2-1 & NAZ gained 21 for a very good day. The Financial Index ended with a good gain while it continues to drift along above 190.

S&P 500 FINANCIALS INDEX

Value 196.22

Change 3.30

% Change 1.7%

Th Alerian MLP Index dropped .39, still in the 266s. Its longer term chart shows MLPs have flattened in the last 2 months. But the Dow Jones REIT Index did well, up 5.27 (maybe helped by thoughts of the stronger dollar) just 2 below its 2009 high. Junk bond funds were generally a little higher. Treasuries had a very rough day, the yield on the 10-year Treasury bond rose 10 basis points to 3.48%. While above recent yields, it's still near the 3½% level it has been been close to for much of this year.


Alerian MLP Index --- YTD




Dow Jones REIT Index --- YTD





The strong dollar made for a rough day in commodities. Oil lost its early gains & is getting close to the 75 floor that has held recently. Gold had one of its biggest drops in history.

CLF10.NYM

..Crude Oil Jan 10

..75.59

.. 0.87 ......(1.1%)

GCZ09.CMX

..Gold Dec 09..

1,155.00

.. 62.40 ......(5.1%)

The strength in the dollar was too much for stocks & commodities. This was the biggest rally (1½% - shown below) for the dollar in 6 months. An unexpected drop in the unemployment rate triggered bets the Federal Reserve will lift borrowing costs. Gold slid the most in a year & Treasuries tumbled badly. Dollar weakened going into the close, but the market gyrations will be remembered.


DOLLAR INDEX SPOT

Value 75.92

Change 1.12

% Change 1.5%

Dollar Index - 1 year





Fundamentals have not changed. The unemployment rate continues at very high levels. There is no quick fix to solve this problem. As long as it remains high & inflation is quiet, the FED will be forced to keep interest rates at low levels. The sell-off is a vivid reminder about the unwinding process the FED will have to deal with & its painful consequences. Seeming, that will not begin until late in 2010 (at the earliest) if the economy can recover & reduce unemployment significantly below present levels.


Dow Jones Industrials --- YTD

Strong dollar sinks stocks

Dow tumbled 200 after barely going into the black for 2009 on Fri, decliners over advancers a very strong 7-1 & NAZ lost 51. Banks felt the selling pressure, although in line with the decline in the broader averages.


S&P 500 FINANCIALS INDEX

Value 163.39

Change -4.15

% Change -2.5%

The Alerian MLP Index dropped 3, the Dow Jones REIT Index fell 6 while junk bond funds also suffered a major sell-off. MLPs look to be topping out near 230 after an amazing run this year.

Alerian MLP Index --- 1 month




Alexei Kudrin, Russian Finance Minister, said the dollar is in “good shape.” This statement follows, Dmitry Medvedev, Russian President questioning its global status. China’s central bank has also been suggesting the world may need another benchmark currency. Today's comments sparked a rally in the dollar, causing commodity prices to sink. Commodities had been strong recently (just look at oil) on the "weak" dollar. The strong dollar is behind the stock market sell-off

•Kudrin Shows Dollar Has No Rival as World Currency While BRIC Leaders Meet


Nothing like a strong dollar to take oil down. But prices remain elevated at 70. Iran remains a wild card for oil but revised thinking has been calming worries. The Mideast, especially Saudi Arabia, is supposed to be flush with oil which would allow them help with more supply if there were supply problems from Iran.

CLN09.NYM

...Crude Oil Jul 09

...69.99

... 2.05 .......(2.9%)

At the G-8 meeting in Italy, they are talking about easing up on stimulus plans with signs of recovery. The finance ministers are concerned that too strong a recovery can bring on threats of inflation rates. "Exit strategy" is the new buzz phrase which refers to easing up on stimulus programs.

•G-8 Starts Planning to Reverse Stimulus as Economic Recovery Signs Mount


Dow looks to be topping out after reaching break even for 2009. The chart shows 2 weeks of sideways trading, suddenly it's at the bottom of that range. Have to run to see the dentist to put a crown back in.

Dow Jones Industrials --- 1 month

Markets waffle

After a 150+ drop by the Dow in early hours, markets recovered & settled down. Dow was up 32, S&P 500 gained 5, advancers equaled decliners & NAZ dropped 3. NYSE volume continues to drift along at 1.2B. Financials had a very good day. The S&P 500 FINANCIALS INDEX rose 9 (3%) to 290, still range-bound in recent weeks. Lehman (LEH) rose 1+ on rumors about selling assets. REITs recorded good gains, but junk bond funds continue to drift along at depressed levels offering 12+% yields. In the oils, Exxon Mobil (XOM) & Chevron (CVX), Dow stocks, dropped about 1% each. Exxon is at an 18 month low, the pullback in oil prices is hurting prospects.

Oil was down but closed above 105 & change, a previous close considered very important by day traders:

CLV08.NYM

.. Crude Oil Oct 08

...106.52

.... 1.37 .. (1.3%)

Alerian MLP index --- 2 years





The Alerian MLP index dropped 3 to 261. At midday it was at the 2 year low of 258 recorded a few weeks ago, then rallied in the PM to cut its losses. The graph illustrates the importance of sub 260 levels. Two years ago, it came off a flat period in the prior year for a sustained rise only to max out at 342. In the last year it lost all rally gains.

Demand destruction was talked about again last night by Asian analysts. They say this is what is dragging markets down, both here & foreign markets. Higher inflation is forcing customers to cut back purchases causing slowdowns in many economies.

Changes in foreign currencies will also impact the US economy, particularly exports which has been the strong sector of the US economy. The Euro has fallen to under $1.43 or 10% in the last couple of months while the ¥ rose from under 100 to 110 before settling back to 107s. The stronger dollar will make US exports more expensive to foreigners.

Let me close with another brief mention about junk (high yield) bonds. They continue to get no respect, even in today's rally for financials. They offer 12+% yields with no mortgage exposure and much better fundamentals than during the 2 previous major downturns (1990 & 2000 periods). Their traditional spread over Treasuries has been around 400-450 basis points. Today that spread has doubled. The very brave may want to check out high yield bond funds.

Strong dollar strengthens markets

The dollar has been on a winning steak, up 11 days in a row. This is the longest winning streak in 37 years. The strong dollar sent Dow up 44, advancers were a little ahead of decliners & NAZ was essentially even. NYSE volume continues low at 1B. The S&P 500 Financial Index rose 3 to 285, down from the earlier highs for the day.

Oil is down again, hitting a 3 month low:

CLU08.NYM

Crude Oil Sep08

113.82

1.19 (1.03%)

Oil is not the only commodity to fall in recent weeks. Gold at 787 is down from 950s a few weeks ago. Corn is back down to 5.30. While still high, these prices are far below recent peaks. Money coming out of the commodities seems to be going into stocks. The strong dollar sounds good but it also makes US exports more expensive, exports have been the only bright spot for this year's US economy.

The decline in oil has been a drag on the Alerian MLP index:

Alerian MLP Index

____________ AMZ _____AMZX

6/30/08........278.61..........648.54
7/15/08.........265.52.........618.05
7/31/08.........271.27.........637.40
8/13/08.........264.80........628.00

This comparison for the Alerian MLP Index (AMZ) shows recent dates along with its related index. July 15 was the low for the Dow, today it's 700 points higher. The MLP index did not change in the last month, closing at 264.05 today, sending the yield up to 8%. The AMZX index shows the performance with reinvested distributions. Both began on 12/31/96 at 100, they've done quite well. The 2nd column shows the value of reinvesting high yearly incomes giving an annual compounded growth rate of over 16%. Based on my eyeballs, betas for the indices are low as they have generally had mild price swings.





For the new or nervous, these are limited partnerships which sell units, not shares, and pay distributions, not dividends. However many have yields near or even more than junk bond funds with their 12% yields and 80-90% of the distributions are not taxable in the current year.

Stronger dollar brings higher stock prices

The dollar has had surprising strength in recent weeks. Today the Euro is worth less than $1.47 (down 12¢ in just a few weeks) & it takes over 110¥ to buy a dollar. The strong dollar has helped sink oil prices while sending stock prices north. Dow is up 54, but advancers are just barely ahead of decliners while NAZ is up only 7. Helping stocks is oil falling below 114. Lower oil prices are from increased awareness that slowing economies around the world will use less oil plus it's less desirable as a way to profit from a rising dollar. As oil goes, so goes the Alerian MLP index, down 1 to the 263s.

S&P 500 FINANCIALS INDEX

Value.....286.96__Change...up 4.34__% Change...up 1.5%

Financials are having another good day, maybe they're going to make another attempt to reach 302 resistance.

Sorry but there is more gloomy news on consumer confidence, rising to "only" 61.7 in July vs 61.2 in the prior month. Forecasts were for 62. Disappointing numbers dovetail with those early signals about a disappointing back-to-school retail selling season.

For lighter reading, here's an article about Warren Buffet's investment changes during Q2.

Banks punished

Dow dropped 140, decliners over advancers 2-1 but NAZ was down only 9. Volume continues low at 1.1B. JP Morgan (JPM), a Dow stock, fell 4.20 on very bad news about losing $1½B already in this quarter. UBS (UBS), the big Swiss bank, fell 6%, on more gloomy news about not knowing what it was doing. Their investment write-downs will cost another $5B bringing the total to $42B. Wells Fargo (WFC), down 1.23, got slammed with just embarrassing news. It was one of those days for banks & they were punished badly, leading markets lower:

S&P 500 FINANCIALS INDEX

Value 284.01__ Change -15.56___ % Change -5.2%

JPM is the most serious story. They had been one of the best performing major banks with a high of 50 in the last 12 months. They were getting by without severe damage other banks endured, even after today they're 38. Today's sell-off suggests that ugly credit crisis/banks problems are not over or even ending soon.

Oil was down while fighting goes on in Georgia. A few weeks ago, this fighting could have added $10 to oil. Today, as with other bad news, is largely ignored in oil markets:

CLU08.NYM
Crude Oil Sep 08 113.22 1.23 (1.07%)

Oil is driven more by the weak dollar. The dollar was risen sharply while oil & other commodities were declining in recent weeks. The Euro has fallen to 1.49 (down 10¢) in recent weeks while it takes more than 109¥ to buy a dollar. The strong dollar helps their economies export more (vital for Japan) but muddies the investment picture here. Strong dollar has brought a strong stock market, there is a connection. The Shanghai market sold off 10% in the first 2 trading days of the Olympics & slipped a little more today to a 20 month low. They are not getting benefits from the Olympics.

Tomorrow US retail sales, hang in there. This is the kind of day I'll leave you with glum forecast from the Philly FED.