Wall Street Strategies'  Instablog

It was pretty clear out the gate that the market would struggle as equity futures faded into the opening bell. There wasn't any panic per se, but tension in the air was thick enough to cut with a knife. The things that bugged me early on was the weakness in Chinese stocks and the inability of U.S. stocks to maintain momentum past 10:00 AM (the first 30-minutes of trading is often referred to as the "sucker's period" so it was a red flag that larger investors didn't step up to the plate). Professional investors are at a crossroad of sorts. Over the next couple of weeks they must decide to play along or hope their refusal to put money to work will pressure the market. Of course, the coolest customers out there have been buyers and who have become reluctant sellers, yesterday's lull notwithstanding. No matter what happens, even if the market does breakout this week, there isn't going to be mass hysteria.

The fact is that this trip through Dow 10,000, assuming it happens, doesn't have the economic backdrop of the other two trips beyond this now mythical number.

 

So if anyone thinks that investors will be cheering a move through Dow 10,000, think again. Even the second trip through Dow 10,000 didn't spark widespread jubilation. Heck, Dow 14,000 didn't have people talking about quitting their jobs and retiring at 40. There is no doubt that by historic standards the market is ahead of itself, though that doesn't mean it can't move higher. After breaking through in 1999, the Dow went on to power up to 11,723 by January 2001. The market would need constant fuel to keep the rally going, but it's not impossible. In this case, a continuation of "green shoots" but also some bloom on the flowers. Since it's a given that unemployment will reach 10.0%, the news shouldn't derail the market even as it jars our senses and stirs our compassion for our fellow citizen. This earnings season needs to keep the ball rolling, aided by upbeat guidance from management teams.

There is no arguing the dubious aspects of this rally, but I learned a long time ago to not put logic ahead of making money. The market has easy comparisons, the benefit of trillions of idle dollars on the sidelines, and the weak dollar working for it. Yes, the dollar is a double-edged sword because its continued weakness could wreak havoc on Main Street but for now it's powering those multinational corporations that in turn, power the stock market. When the Dow got back above 10,000 in December 2003, it was the beginning of a multi-year rally. That year the dollar was down 14.67%. Problems are looming large, and I always want to reiterate that.

However, I've made it clear all year long that it's time to buy stocks when it feels most uncomfortable. There are things that we should be prepared for, and when there is a transition and the bias is decidedly to the downside there will be some losses absorbed but nothing that should erase the kinds of gains you should have by now.

On the Topic of the Dollar

I've always been the kind of person that wanted the dollar a tad weak so our businesses could compete. I realize that has been a selfish position, and like extended low interest rates only creates short-term benefits at the expense of longer-term risks. I don't think that the dollar has to be at parity or higher than other currencies but it's falling fast, and there is no sign it will reach terminal velocity any time soon. There is an economic reality about a freefalling dollar that isn't reflected in the stock market...at least not early on.

As the dollar freefalls, people have less real money to spend as inflation rises; this ultimately is a tax on every single person in America. You just can't buy as much as you used to be able to buy with the same paycheck, so it's like taking a pay cut. It makes everyday living much more expensive. For instance, gasoline ended last year at $1.67 a gallon, but it's already $2.52 a gallon currently, up 51.0% and driven overwhelmingly by the weak dollar.

It's hard for me to pinpoint exact price increases for other products but it's easy to explain. Soda, for example, is made with corn syrup and the price of corn has moved higher despite a massive crop having held down prices somewhat. However, like all commodities the price will move higher as the dollar moves lower. Then, there is the cost of shipping items, an expense that has to be passed on, and the plastic used to bottle the product is a byproduct of crude oil.

Gold is a great hedge, real estate, antique watches...hard assets whose prices might "inflate" with the deflating dollar.
 

Green Shoots from the Desert

Last night, after the closing bell, Pier One (PIR) updated analysts from Wall Street and wowed them with several surprises. (This was a long idea last week; at one point it was up 28.0% from our suggested entry point!)

* Same-store sales were +9.9% versus -11.7% in September 2008
* Merchandise margins continued to improve
* Increased traffic continued
* Will avoid conversions of 9.0% notes issued in 2Q
Tidbits

Word out of China is that the country is lowering taxes on steel makers. Hmm...that's a novel idea and could be a great way to clean up an industry, spark gains, and create jobs.