Our models indicate the market will open higher today and trade in a narrow range. Volatility is dramatically down after the peak in late August. Because of the low volatility, economic data is the market catalyst and earning news drives trading. The Dollar-Yen carrying trade is gaining favor again with the Dollar strengthening to 112.42 to the Yen. However, the Dollar is still very weak relative to the Euro and other major currencies. Meaning higher import price, in essence we are importing inflation which caused by the Fed’s rate cuts, depresses the Dollar. As we have reported in earlier posts, the Fed is in a tight spot concerning interest rates: cut too much and built in inflation rises due to the falling Dollar, cut too little, the economy slows down causing recession. A tough choice, juggling many balls at once.
Republican Presidential Debate on Tuesday was covered by our economic analysis team. Our consensus view is that Romney was the clear winner with Giuliani a close second.
We rate the candidates as follows for the odds of winning the nomination:
1. Romney 4:1
2. Giuliani 6:1
3. McCain 10:1
4. Thompson 13:1
We feel if Romney is the candidate he would favor Wall Street, i.e., financial sector would rise. GS, MER, LEH, BAC, JPM, C
If Giuliani we feel defense stocks will rise strongly. Lockheed, Raytheon, etc.
We are constantly asked why does it matter where the Dollar trades relative to other currencies.
The answer is that because of the huge trade deficit the US has with Japan, i.e., the relative amount of imports to exports, Japan has a huge surplus of Dollars as reserve foreign exchange and has to invest the Dollars some place usually in treasury bills and the stock market. Tending to support the market with recycled dollars.
Dow stocks will rise today based on the retail news of WMT.
Wal-Mart (WMT) up however, same store sales flat, i.e., growth came from opening new stores.
Target (TGT) down on weak sales.