1/2 Tuesday Morning

"The Constitution gives the president the power of clemency to be used when he deems it to be warranted. It is my judgment that a commutation of the prison term in Mr. Libby's case is an appropriate exercise of this power." – GWB 

I'm going to refrain from commenting on the above as it's a short day and I don't want to get into it and it was very clever of the President to do this when John Stewart was on vacation! 

We're off on vacation today and the pre-markets make it look like we'll be off to a rockin' start as Asia and Europe kicked off the morning in high gear.  The Hang Seng jumped 378 points, closing at a record 22,151 led by 4.5% gains in CEO and PTR with brent crude at $72.50 a barrel in European trading.  The Nikkei was somewhat less excited but finished the day up 3 points despite concerns of high oil prices (how silly!) and a sell-off in exporters who are concerned that a near worthless dollar will eventually stop US consumers from borrowing money to buy stuff (also silly!).

Speaking of silly, those Greenpeace guys are at it again.  This time they're protesting the Chinese plan to build a road up Mount Everest, which is being done more as a way for China to mark their territory in Tibet than under the guise of preparing for the Olympics.  Aside from the obvious environmental impact that a 67 mile road would have in one of the most remote regions of the earth, imagine how you would feel heading up the mountain, loaded with supplies, led by your trusty sherpa – only to be passed by a bunch of drunken frat boys who toss beer cans at you as they cruise along to base camp in their SUV, where they will go to the gift shop and get one of those t-shirts that says "My brother climbed Mount Everest and all I got was this lousy t-shirt."  Ah, progress!

Europe is making too much progress in unemployment as their rate has dropped to what they consider an unhealthy 7%, an all-time low.  This is down sharply from 7.9% last year and is seen as a major inflationary pressure and is very likely to force the ECB to raise rates on Thursday, which will pressure rates over here as well.  At the terror probe continues with 3 more arrests, the European markets are getting back on track with the DAX up a full point this morning, joined by the London FTSE, up .6%.

Our markets should be able to reestablish themselves at higher levels and if oil behaves itself and rates behave themselves we should go into the holiday on a very positive note:

We have made some amazing progress on the chart this week.  I'd feel better if it wasn't all coming in just 2 day's worth of movement as we flipped from extreme concern to extreme jubilation overnight but we'll take what we can get if it's enough to break out the S&P, the Russell and the Transports.

The reversals were truly spectacular and we do have the Nasdaq leadership we always wanted but I'm not as happy as I should be because the rally is based on a falling dollar and low treasury rates.  In yesterday's wrap-up I cited a flight to quality as a reason for this odd bond market behavior and David Fry has an excellent theory about this:

"Treasury yields dropped despite a better-than-expected ISM number which should have had the opposite effect. Bullish equity investors appear to be misreading why bond yields fell. There was plenty of chatter "again" about the low "core inflation rate" as a cause for lower yields, and even another trial balloon that the Fed will cut rates.

"I could be wrong, but there may be something else going on with bonds recently — a rotation to Treasuries from soon-to-be-downgraded bonds from mortgages [subprime] and other debt instruments.  Remember there are many bond fund managers who can only own investment grade instruments. Some subprime issues may face credit rating downgrades forcing sales. We'll see."

As David also points out, this is a very low volume week and it's easy for the big boys to push the markets around and there's a huge psychological value to getting retail investors to spend July 4th talking about how great the markets are doing as, just like the post barbeque clean-up, they need someone to hold the bag when the party's over.

Speaking of bag holders, oil is rocketing higher as the dollar is rocketing lower (thank goodness we don't have any of those or we'd be screwed!) and Zman points out that the crack spreads are dropping, which is forcing the refiners to actually consider refining as a source of income – it's a World gone mad I tell you!

That's a 30-year low on the dollar you're looking at.  I'm a little peeved as I'm going to Europe this summer and things are about 20% more than they were last year but c'est la vie…

I was looking at the put/call ratio on the CBOE and we could be a lot more bullish than this so it looks like I may have to smash my brains out with a brick and join this rally if it's still going on Thursday but, for just this last day, I will continue to watch from the sidelines even though I know I will face derision at parties tomorrow when I have to tell people I went 80% cash in my Short-Term virtual portfolio because I was concerned about the markets.  Ah welll, at least there will be beer – which, by the way, is suffering from inflationary pressures that don't exist.

Have a very happy 4th,

– Phil