Morning Market Report

The futures look slightly higher after an awful day yesterday. The Dow was down 162 to 8163, the S&P was down 17 to 881, and the NASDAQ was down 41 to 1746. All markets looked like they were headed for a mild day until Presidential advisor, Laura Tyson, suggested that another stimulus might be necessary. This sent most stocks headed way down. Both the S&P and the DJIA tested lows not seen since the beginning of May.

Major world indices continued the weakness in the U.S. overnight, though things looked much worse in the Far East. The NIKKEI, in Japan, was down 2.35%, the Hang Seng in China was down .79%, while the Straits Time Index was down .55%. In Europe, the FTSE in London was down .24%, the DAX in German was down .14%, while the worst performing index in Europe was in Spain which was down .98%.

The bright side to all this bad economic news continues to be that it's improving not only bonds but the price of most commodities, mainly oil. U.S. Treasury bonds were down an average of 5 bases points yesterday (five hundreds of a percent) and they are down another 1 to 2 bases points before the open this morning. In London, all but the 10 year GILT slashed their rates. (the ten year was up five thousands of a percent) Meanwhile, in Germany, their bonds were all up slightly. Meanwhile, oil is trading at just above $62 a barrel. A week and a half ago, oil was trading at $72 a barrel.

Meanwhile, the U.S. Dollar looks like it will open higher against all major indices except the Japanese Yen which continues to be the leading currency for the second straight day. The Russian Ruble was the weakest of all major currencies. Alcoa is up over 1% in pre market trading with traders expecting them to beat earnings.

The VIX index, which measures volatility, crossed above 30 yesterday for the first time in two weeks. It had fallen below 25 just within the last two weeks and this was taken by many traders another so called green shot. Now, it's being viewed as yet another sign of bad times to come.

My analysis:

When the market hit 6700 on the Dow, its rise began with a leak of an internal email at Citigroup that indicated that the company was looking good going forward. Upon release of this email, the market was up significantly that day and the market shot up in the intermediate term from there. That seemed like a peculiar piece of information for the market to get excited about. So, that indicated that the market was "oversold". In other words, the market was looking for reasons to go up because there was buyers on the sidelines and most sellers had already sold.

Two days ago, the ISM announced their June numbers. They beat expectations and continued a trend of improvement. The market shrugged off this data and was up only marginally. Yesterday, a presidential advisor suggests we may need a "contingency plan" for a second stimulus and most market indices are down about two percent. That's an indication the market is over bought. It's looking for reasons to sell.

The next few days are critical. If the Dow breaks 8000 there is likely little technical support all the way down to 7600 or so. (I predicted dow 7600-7200 by the end of September) Meanwhile, the silver lining in all of this is that all this weakness means that interest rates are improving and most commodities are cheapening, including oil.

Finally, the story to watch is this.

Russia and India said in the past week the world economy is too dependent on the dollar and called for revisions to how $6.5 trillion in currency reserves are managed. “The dollar system or the system based on the dollar and euro have shown that they are flawed,” Russian President Dmitry Medvedev said in an interview with the Italian newspaper Corriere della Sera, repeating his proposal for a new reserve currency.

The president seemed to have secured some concessions for Russia during his trip. Yet, he didn't seem to discuss world currencies at all. Meanwhile, Medvedev, with Putin likely pulling the strings, continues his assault on the Dollar. This is not the first time the Russians have suggested that the Dollar should no longer be the world's currency. This is now nothing less than an assault on the Dollar. Given that Russia is the second or third biggest investor in our bonds, it's also a bit self destructive. It appears the Russias are willing to threaten their bond investment in order to weaken our currency.