Tags: Stocks | Fade | Dollar | Worries | Remain | But | There

Stocks Fade As Dollar Worries Remain - But There Still May Be Room for a Bull

Wednesday, 16 March 2005 12:00 AM

Early gains evaporated after a strong start courtesy of more evidence that spending at the mall remained healthy in February.

Investors were wrong-footed as they chased stocks back towards 2005 highs. Meanwhile the dollar regained its footing, for now at least, as evidence that investors and foreign central banks bought more U.S. equities and government debt in January.

According to data from Standard & Poor's all but 16 S&P 500 constituents had reported their fourth-quarter 2004 earnings.

Of those that reported: 82% had either met or exceeded analysts' forecasts - likely leading earnings to their fifth consecutive 20% plus rate of growth.

That's impressive especially against estimates of 14% before earnings season began!

Investors are still left wondering what the outlook for 2005 will be.

At the end of 2005 analysts forecast a growth rate of 11% for S&P 500 companies. That's down from the past couple of years as low interest rates and surging, post-recession demand boosted revenues and profits.

Room for a Bull?

The big question as we head into the second quarter is whether or not such a mediocre forecast will start to creep upwards. And can you blame investors for betting that it will?

After all, global equity markets are at multi-year highs and still pushing northwards.

Couldn't U.S. markets - especially when most economic data is coming in pretty firm?

Take this Tuesday's retail sales data for February, which rose 0.5% in February. While the headline number was below the 0.7% forecast, revisions to January and December data more than offset. The bottom line is that retail sales are 7.7% higher than a year ago.

The sound of ringing bells at the cash register continues to support the broader economy.

A major difference between the driving forces behind European and U.S. equity markets is the role of the dollar.

Dollar Woes

In the United States the dollar has been undergoing a bout of weakness for some time, a victim of rapidly increasing trade and budget woes. While the falling dollar is good news for American corporations earning revenues overseas, it's bad news for corporations abroad selling to the U.S.

For now the greenback has passed the poison chalice elsewhere.

Tuesday saw the release of government data showing that foreign investors poured a net $91.5 billion into U.S. capital accounts In January. They spent $16.5 billion on U.S. equities and $30.7 billion on government bonds and notes in January. Evidence of that demand serves to give dollar bears food for thought and so underpin the dollar on global foreign exchanges.

While the U.S. dollar index against a basket of world currencies on New York's Board of Trade rose to 82.17 this morning, gains were most evident against the South African rand, Polish Zloty and the euro, which fell back to around $1.33.

Meanwhile by lunchtime gains were fast evaporating with the dollar losing ground to the British pound, the Japanese yen and Canadian dollar.

Part of the reason for the ongoing dollar weakness has been a fundamental buying spree of global commodities.

The Commodities Factor

Most raw materials, energy sources and agricultural products are priced in dollars. Their value tends to increase as the dollar sinks. Savvy investors know these items to be a store of wealth against currency weakness.

Add to the story that fundamental end-user demand for raw materials is at a multi-decade high and you'll start to piece together why commodity trading is back in vogue.

News on Tuesday that China - the culprit in chief of surging overseas demand - reported a 16.9% rise in output in January and February, put the icing on the cake of a back-revision to December's output data, which now shows an increase of 15% instead of 14%.

Economists state that this output level is consistent with a growth rate of around 9%. That throws a wet blanket on the measures the Chinese authorities tried to implement as 2005 began aimed at curbing growth.

That story served as a reminder to commodity speculators that despite a recent 25-year high in the Commodity Research Bureau index of material prices, the bull market may still have some way to go.

But the question is what happens if speculators take crude back to December's $56.91 peak? With demand at the mall failing to feel the pinch from clearly high gas prices, it makes us wonder. But the cost of running a car is but one factor.

Heating oil for April delivery traded at $1.5500 on Tuesday morning. If last week's high of $1.5560 gives way traders will be betting heavily for a further assault at $1.6553 - the October peak.

Meanwhile April natural gas is trading at a three-month high indicating once again that fundamental demand is bolstering up the price. Back in October prices reached more than $10.50 per contract.

And if you don't like a java from Starbucks and would rather have a glass of orange juice, that's not doing much better. May frozen orange juice traded at $101.85 last week honing in on a price not seen since September 2003. That's 60% more expensive at the breakfast table!

May cotton just traded above its September high at $53.62. Soybean meal just broke above last summer's high while soybean oil is back to last September's high point. Wheat is trading at a similar level and is 21% more expensive than in February. Even corn has added 10% in price since mid-February's low point.

Following a Washington Post news article stating that traces of anthrax had been found at a Washington post office, major stock indices immediately lost ground. The Dow lost 59 points to end at 10,745 points to 10,790 while the S&P 500 index closed below 1200, down 9 points to 1197.75.

The tech-sector couldn't stand the heat in the kitchen and wilted more than 16 points with a 0.78% loss at 2034.98. With minor losses on the ten-year U.S. government note, yields are steady at around 4.54%.

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Early gains evaporated after a strong start courtesy of more evidence that spending at the mall remained healthy in February. Investors were wrong-footed as they chased stocks back towards 2005 highs. Meanwhile the dollar regained its footing, for now at least, as evidence...
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Wednesday, 16 March 2005 12:00 AM
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