Why A Weakening In The Dollar Was A Good Thing

Daily State of the Markets 
Thursday Morning – May 19, 2011

Good Morning. Something happened yesterday afternoon that made me do a complete double-take. Could it be? Did my eyes deceive me? I knew I had been on that conference call for a while but did the Euro and the stock indices actually avoid trading tick-for-tick for a brief period? This, of course, prompted a question or thirteen such as, has the linkage weakened? Is the Euro/Dollar/Stock “trade” over? And can we now get back to the business of investing in stocks again?

If you looked closely at the charts, it did appear that the parallel patterns of both the Euro and the stock indices were still recognisable yesterday afternoon. However, I’m here to say that for at least a couple of hours, the action did not appear to be completely, absolutely, one-hundred per cent in sync. So, what happened when the computers released their death-grip on stocks? The market indices rallied, of course.

Up until the end of April, the thinking in the market was that with the economy improving, the job market gaining some traction, and earnings still coming in above consensus, higher stock prices were sure to follow. And while no one expected to see the indices move in a straight line, most analysts on Wall Street were still looking for higher prices by the time New Year’s Eve parties were to begin.

But ever since the “sell in May and go away” period commenced, the combination of “the trade,” a renewed focus on the Eurozone, and maybe some concern about the state of the economy has made it tough sledding at the corner of Broad and Wall. And as I’ve lamented, the computerized trading has made it especially tough to decipher the action. So, a weakening in the linkage between the dollar and the stock market, brief as it might turn out to be, was welcomed yesterday.

And don’t look now fans, but some of the commodity markets actually traded on fundamentals yesterday. Despite a general lack of direction from the greenback, the commodities indices enjoyed their best one-day rally in a couple months. Weaker than expected inventory data helped crude oil surge. Wheat, corn, and the rest of the “Ags” gained ground on what was described as “adverse growing conditions” in many of the world’s important growing areas. Ditto for sugar and coffee. And the industrial metals rebounded on the idea that the recent pullback have been sufficient to discount the potential economic slowdowns, which may or may not materialise.

In other words, once traders stopped focusing on the minute-to-minute movements in the currencies, some investing themes developed – just like the good old days.

So, does one day a trend make? Will the link between the dollar and stocks continue to weaken? The bulls remind us of a very old saw that goes something like this: “On Wall Street, if something happens once it is a trend. If that something happens twice it is a tradition. And if by some chance, it happens three times, well, it’s a commandment going forward.” As such, it looks like we will have to see if the weak link that was apparent for a while yesterday afternoon can morph from a brief trend into the “tradition” category.

Turning to this morning… The news from across the pond is mixed this morning with concerns still centered on Greece. However, European markets are mostly higher and the pre-market futures are pointing to modest gains at the present time.

On the Economic front… Initial Claims for Unemployment Insurance for the week ending 5/14 fell by 29K to 409K. This was below the consensus estimate for 418K but below last week’s total of 438K. Continuing Claims for the week ending 5/7 came in at 3.711M vs. 3.711M and last week’s 3.792M.

There is lots more data to come this morning with the Bloomberg Comfort Index at 9:45 am eastern and then Existing Home Sales, the Conference Board’s Leading Economic Indicators, and the May Philly Fed report all at 10:00 am eastern.

Thought for the day… Here’s wishing you all the best for a productive and enjoyable day…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

  • Major Foreign Markets: Australia: +1.32% Shanghai: -0.45% Hong Kong: +0.66% Japan: -0.43% France: +1.33% Germany: +1.32% London: +1.03%
  • Australia: +1.32%
  • Shanghai: -0.45%
  • Hong Kong: +0.66%
  • Japan: -0.43%
  • France: +1.33%
  • Germany: +1.32%
  • London: +1.03%
  • Crude Oil Futures: +$0.07 to $99.97
  • Gold: -$5.30 to $1490.50
  • Dollar: lower against the Yen, higher vs. Euro and Pound
  • 10-Year Bond Yield: Currently trading at 3.219%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: +5.22 Dow Jones Industrial Average: +38 NASDAQ Composite: +7.2
  • S&P 500: +5.22
  • Dow Jones Industrial Average: +38
  • NASDAQ Composite: +7.2

Wall Street Research Summary


  • Schnitzer Steel (SCHN) – CLSA
  • Petroleum Development (PETD) – Credit Suisse
  • Lam Research (LRCX) – Goldman
  • CF Industries (CF) – Estimates increased at JPMorgan
  • Six Flags (SIX) – Target increased at Oppenheimer
  • Olin (OLN) – Target increased at Oppenheimer
  • Incyte (INCY) – Target increased at Oppenheimer
  • Ann (ANN) – Target increased at UBS
  • Deere & Company (DE) – Mentioned positively at UBS
  • Natural Resource Partners (NRP) – UBS


  • Country Style Cooking (CCSC) – BofA/Merrill
  • Suntech Power (STP) – Collins Stewart
  • Smart Technologies (SMT) – Cowen, Piper Jaffray
  • Applied Materials (AMAT) – Goldman
  • Intel (INTC) – Goldman
  • KLA-Tencor (KLAC) – Goldman
  • Deere & Company (DE) – Jefferies
  • OfficeMax (OMX) – Oppenheimer
  • Staples (SPLS) – Oppenheimer

Long positions in stocks mentioned: none

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