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A Pause for the Cause - Money Matters for 10/14/05 Don Bravo | 10/14/05
Traders took a respite from their frenzied selling on Friday, scooping up bargains in relatively slow trade, especially on the tech side. While all major indices trended higher throughout the day even as news on inflation fanned inflation fears, the prevailing mood was that the worse was behind us... for now.
Despite the impressive gains and the advance decline line getting healthy in a hurry, the new lows once again outstripped new highs, though by a margin not quite as large as the last few sessions. We remain in a downtrend until the gap narrows significantly and that does not seem about to happen.
After the Labor Department reported the sickening news on the CPI (up a whopping 1.2%) the markets began the day in a kind of limbo, but soon began to reflect on earnings news and more importantly, earnings reports due out next week. Today's earnings highlights were limited to a yawn over GE's better than expected report, UnitedHealth (UNH) beating the street by a penny, while First Data (FDC), Boston Scientific (BSX) and hauler J. B. Hunt (JBHT) reporting disappointments.
Due to report next week are a slew of heavyweights, including General Motors (GM), Citigroup (C), IBM (IBM) and Rambus (RMBS) on Monday; 3M (MMM), Merrill Lynch (MER), Intel (INTC) and Yahoo (YHOO) on Tuesday; Altria (MO), Honeywell (HON), Ebay (EBAY) and Amgen (AMGN), Wednesday; Coca-Cola (KO), Ford (F), Pfizer (PFE) and Google (GOOG) on Thursday; and Radio Shack (RSH), Caterpillar (CAT) and Weyerhaeuser (WY) reporting on Friday.
On the matter of higher interest rates and lower oil prices being related, first mentioned here yesterday, my thesis is as follows: As the price of energy, in particular, oil, as it is used to heat homes and as the base element for automotive gasoline, rises, it can effect a significant drag on the economy, as shown vividly in today's consumer price index figures. The CPI was 1.2% higher for the month of September, the largest gain in 25 years. Annualized, that's an inflation rate of 14.4%. September, fortunately, signals the peak of the oil price curve, and thus far into October, that is what we have seen.
With the economy sufficiently dampened by the peak oil prices, interest rates will continue to rise as the economy improves to keep a lid on inflation and runaway growth. The whole inverse ratio between the two seemingly disparate elements could have easily been dreamt up by either the Fed governors or the heads of the major oil companies, but the most logical explanation, aside from the notion that the concoction was brewed up by a consortium of rich bankers and oil magnates, is that natural market forces are in play. Conspiracy theory aside, the recent run in oil and gasoline prices had less to do with supply and demand and more to do with profit motive, and the Fed still needs room to maneuver rates lower should the economy hit a more severe soft patch, commonly known as recession.
In the world view of bankers and oil men, a balance must be struck between supply, demand and access to capital. Their scheme, or the natural workings of markets and economies, works wonderfully and avoids both recession and inflation to any damaging degree. The whole thing works wonderfully and is a premium example of why economics is less of a science than an art.
Overall, US indices went practically nowhere for the week, so the earnings reports from major companies will be chiefly in focus next week.
BY THE NUMBERS
Dow Jones: +70.75; 10,287.34 close
NYSE Advancers: 2237
Nasdaq Advancers: 2073
NYSE New Highs: 23
Nasdaq New Highs: 48
Gold: -2.00; 471.80 close
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