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 twenty 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.
Source: Top Stock Portfolios
