Why There’s More Behind The Fall In Stocks And Dollar Prices

Daily State of the Markets 
Wednesday – May 25, 2011

Tuesday’s headlines from the popular press all seemed to highlight the Dow’s third straight daily decline. Such an event has only happened a few times so far this year, so it wasn’t surprising to see the loss, modest as it was, in the headlines. As for the reasons behind the drop, some news sources cited ongoing concerns about Europe while others talked about the economic data and/or worries about economic growth here at home. And while all of the above may be true, we’re thinking that there might be more to the story.

Although there haven’t been very many three-peats for the bear camp this year, there have been even fewer days lately in which stocks and the dollar moved in the same direction. As we’ve detailed a time or 20 in this column, “the trade” amongst the fast-money in hedgieland has been to play the correlation game between the Euro, the dollar, and the stock market. As we’ve detailed, almost on a daily basis, the stock market has been moving inversely to the dollar. And although the linkage could return at any time, it is worth noting that the dollar AND the stock market indices were both down on Tuesday.

One argument for the change in the game may be Goldman’s call on oil and commodities. In a report issued Tuesday, Goldman Sachs said that it was turning “more bullish” on raw materials. And in a complete reversal of last month’s call, Goldman suggested buying oil, copper and zinc. The firm said it believes the market has shifted back into a demand-driven story for commodities. And not to be left out of the commodity fun, both JPMorgan and Morgan Stanley also upped their forecasts for Brent crude yesterday.

Could it be that the idea of higher oil prices may not be such a good thing for the U.S. economy and/or the U.S. consumer? This would certainly explain the reason both stocks and the dollar declined yesterday. But, on the other hand, if the big boys on Wall Street are telling us that demand for oil and commodities is rising, wouldn’t that suggest that economic growth will be improving along with demand – at least somewhere around the world? Hmmm…

While we’re on the topic of things that may be counterintuitive, the argument that worries about the debt situation in the Eurozone is causing stocks to decline here in the U.S. doesn’t seem to fit with yesterday’s rising Euro/falling dollar. The way this game has been played lately is that increased worries about Europe has meant a lower Euro/higher dollar. To which I’d like to once again say, “Hmmm….”

So, while it would be very easy to say that stocks fell again on Tuesday due to worries about the situation in the Eurozone as well as concerns about the state of the U.S. economy (the Richmond Fed Index did follow a host of recent reports by coming in on the punk side), these arguments don’t quite fit with the action in the Euro, the dollar, and the commodities. And as such, I’m going to suggest that there might be more to the story here (a new “trade” perhaps?). Thus, it will be important to stay tuned and pay close attention to the little things in the next couple of days.

Turning to this morning… The sloppy period looks to be continuing in the early going as overseas markets and U.S. futures are modestly lower.

On the Economic front… Orders for long-lasting goods fell in April. The Commerce Department reported that Durable Goods orders dropped by -3.6% during the month, which was below the consensus expectations for a decline of -2.4%. When you strip out the volatile orders for transportation, orders fell by -1.5%, which was below the consensus for +0.5%. The March reading was revised higher to +2.5% from +2.3%.

Thought for the day… Are you feeling inspired today? Would you like to be?

Pre-Game Indicators

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

  • Major Foreign Markets: Australia: -0.99% Shanghai: -0.90% Hong Kong: +0.07% Japan: -0.57% France: -0.14% Germany: -0.10% London: -0.06%
  • Australia: -0.99%
  • Shanghai: -0.90%
  • Hong Kong: +0.07%
  • Japan: -0.57%
  • France: -0.14%
  • Germany: -0.10%
  • London: -0.06%
  • Crude Oil Futures: -$0.67 to $98.92
  • Gold: +$1.90 to $1525.20
  • Dollar: lower against the Yen and Pound, higher vs. Euro
  • 10-Year Bond Yield: Currently trading at 3.152%
  • Stocks Futures Ahead of Open in U.S. (relative to fair value): S&P 500: -3.08 Dow Jones Industrial Average: -22 NASDAQ Composite: -2.50
  • S&P 500: -3.08
  • Dow Jones Industrial Average: -22
  • NASDAQ Composite: -2.50

Wall Street Research Summary


  • Diamond Foods (DMND) – BofA/Merrill
  • Con-Way (CNW) – BofA/Merrill
  • Johnson & Johnson (JNJ) – Bernstein
  • Pinnacle Entertainment (PNK) – Estimates and target increased at BMO Capital
  • Boston Scientific (BSX) – Goldman Sachs
  • NTELOS Holdings (NTLS) – JPMorgan
  • Halliburton (HAL) – Morgan Stanley
  • Tiffany (TIF) – Mentioned positively at Oppenheimer
  • Micros Systems (MCRS) – Mentioned positively at Oppenheimer
  • Career Education (CECO) – Piper Jaffray
  • Bridgepoint Education (BPI) – Piper Jaffray
  • PepsiCo (PEP) – Target increased at UBS



  • Juniper Networks (JNPR) – Auriga
  • Netlogic Microsystems (NETL) – Auriga
  • Knight Transportation (KNX) – BofA/Merrill
  • Sapient (SAPE) – Goldman Sachs


Long positions in stocks mentioned: none

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