Sense on Cents

The dynamics at work in the economy, markets, on Wall Street, in Washington, and around the world continue to be very much the same. Economic signals are decidedly mixed. The consumer and savers remain challenged. Markets remain firm. The greenback remains weak. Commodities remain firm.

While many of the Washington wizards and market mavens focus on the positives and many bloggers and naysayers focus on the negatives, I hope readers at Sense on Cents feel they can get a full and honest assessment on all these topics. Please do not hesitate to tell me when you think I’m not being objective.

I thank you for reading my work, and now let’s collectively ‘navigate the economic landscape,’ the mission of Sense on Cents.

ECONOMIC DATA

> Retail Sales: declined 1.5% but less than the expected decline of 2.1%. The media gave no credence to the fact that the prior month’s figures were revised lower by .5 %. Over the last two months, retail sales are marginally positive but the coming holiday sales will be very challenging with heavy discounting still expected.

> Consumer Price Index: rose .2 versus an expectation of .1. While prices are currently well behaved with the recent weakening of the dollar and sharp move higher in commodities, we should expect food and gas prices to move higher.

> Jobless Claims: overall claims declined marginally again, but nobody is willing to bet that the employment situation is improving rapidly. The claims data is a sign that perhaps unemployment is stabilizing, albeit at very elevated levels.

> Philadelphia Fed Manufacturing Report: registered at 11.5 versus an expectation of 12.5 and a prior month 14.1 reading. Not a sign of a robust rebound in activity.

>Industrial Production: posted a surprisingly strong reading of a .7 increase against an expectation of a .2 increase.

> Consumer Confidence: against an expected reading of 74.0, this report registered a significant disappointment of 69.4. What happened? Consumers are very nervous about the overall economic outlook.

Add all of this economic data up and I focus on the last comment about consumer confidence. The consumer, which represents 70% of our economy, is nervous and the economy as a whole is as well.

Let’s move along to market performance. I would typically lead my review with focus on the equity and bond markets, but those sectors are actually following developments in the currency and commodity markets so let’s shift our focus accordingly.

The figures I provide are the weekly close and the month-to-date returns on a percentage basis:

U.S. DOLLAR

$/Yen: 90.87 versus 89.68, +1.3%
Euro/Dollar: 1.4894 versus 1.4635, +1.8%
U.S. Dollar Index: 75.58 versus 76.72, -1.5% !!!

Commentary: the overall U.S. Dollar Index continues to decline as the U.S. budget deficit for 2009 exploded to an astronomical $1.42 trillion. That figure is more than triple the 2008 level.  The decline in the dollar continues to support the equity and commodity markets, while raising some concerns on the long end of the yield curve as a continuing decline in the dollar is inflationary which would push long maturity interest rates higher. The dollar actually did improve versus the Japanese yen while weakening versus the Euro. I recommend that readers focus on the dollar index which is why I link to it above. Track it and expect the index to move inversely to equities and commodities.

I reiterate my comments from last week. While I think Washington is not disappointed in a relatively weak dollar, although they should be (“Dollar Devaluation Is a Dangerous Game”), other countries are not overly keen about further dollar weakness. Why? A weak dollar puts those countries in a marginally less competitive position in international trade.

COMMODITIES

Oil: $78.67/barrel versus $70.39, +11.8% THE BIG MOVER THIS WEEK
Gold: $1055/oz. versus $1008.2, +4.6%
DJ-UBS Commodity Index: 134.32 versus 127.683, +5.2%

Commentary: Unless you grow your own crops or have your own source of energy, you should expect to get increasingly squeezed as prices at the supermarket and gas station are likely to head higher. While Washington will not address this development, these price moves are directly correlated with Washington’s weak dollar policy. The banks and others able to borrow cheap money for trading and investing benefit from the weak dollar. American consumers and savers get stuck with the bill.

The  Baltic Dry Index did move higher this week following the upward moves in commodities, though, rather then leading the move.

I read these commodity tea leaves as a sign of inflationary expectations in these ‘inputs’ while we encounter deflationary pressures in wages and real estate.

Summary/Conclusion

I reiterate, the game continues. The disconnect between the overall domestic economy and the price action in the markets presents what one noted investor described as ‘the greatest experiment’ in modern finance. To the extent that people are putting money to work, I would focus on buying quality and utilizing ‘dollar cost averaging’ techniques.

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Thoughts, comments, questions always appreciated.

Please join me this Sunday evening on BlogTalkRadio (8-9pm EDT) for what will assuredly be a fascinating dialogue with a high profile attorney, Richard Greenfield, who has three complaints ongoing versus the Wall Street regulatory organization, FINRA.

Have a great day and weekend.

LD

This entry was posted on Saturday, October 17th, 2009 at 5:46 AM and is filed under bond market, commodities, Economy, Equity Markets, General, markets, Wall Street, Washington D.C.. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.