Dollar Continues to Weaken on Inflationary Worries

Markets continued to strengthen in overnight activity in the wake of Ben Bernanke’s words of assurance that the recession appears to be behind us. His assurance was later confirmed by legendary investor Warren Buffet. (hmmm)

The Dollar continues to weaken on inflationary worries with traders holding their breath in advance of this morning’s Consumer Price Index report. Currency and metals traders are still thinking about yesterday’s surprise surge in the Producer Price Index. Wall Street expects the Consumer Price Index (CPI) to clock in with a rise of .3% versus last month’s reading of 0%. Traders are whispering the rise might be higher than the estimate. Last on the Euro $1.4679 up 44/100ths of U.S cent.

As we look overseas we find Silver up another 40 cents at $17.30. Gold is $12.00 higher at $1016.00. Palladium is $296.00 up $6.00. Platinum is $10.00 higher and changing hands at $1335.00.

Over in the energy markets we find Oil trading flat to a shade lower in advance of today’s Weekly Inventories. The estimate calls for a decline of 3 million barrels, but traders are taking no chances given the recent surge in the price of Oil.

Over in the stock market the Dow ended yesterday with a gain of 56 points and appears to be headed for another opening gain of 46 points. Today’s economic calendar also contains the latest look at U.S. Industrial Production where stock traders expect to see a rise of .6% compared to last month’s rise of .5%. In world matters Chinese officials indicated that they are pushing for a quick negotiated solution to the tire trade spat with the U.S.

Today’s economic calendar:

U.S. Consumer Prices
U.S. Current Account
U.S. Industrial Production
EZ Consumer Prices
U.K. Employment

Conflicting Beige Book Report

Stocks appear to be taking a breather this morning after yesterday’s 49 point gain in the Dow Jones Industrial Average. Traders are playing close to the vest after having had time to dissect yesterday’s Fed Beige Book where we got conflicting snippets like, retail sales are flat, loan demand continues to be weak, slight improvement in residential real estate, commercial real estate is weak, but overall economic activity seems to be stabilizing.

Traders are also standing pat in advance of this morning’s economic data where the Weekly Initial Jobless Claims are estimated to clock in at 560,000 versus last week’s 570,000. The July Balance of Trade is expected to show a deficit of $27.3 billion compared to June’s $27 billion. Given the recent precipitous decline in the value of our Dollar you might expect to see the next two reports show a significant easing in the deficit. Remember a weaker Dollar makes our exports more attractive to overseas buyers.

As for the Dow it appears to be headed for a 13 point lower open. The Euro eased to $1.4522 down a third of a U.S cent. Crude appears to be defying the stronger Dollar with traders awaiting today’s Weekly Oil Inventories where the latest estimate calls for a 1.8 million barrel decline in available Oil supplies, and a 1.5 million barrel drop in Gasoline. Last trade on Crude $71.68 up 37 cents.

As for the metals we find them flat to lower with Silver trading at $16.11 off 34 cents. Gold is $4.00 lower at $985.00. Palladium is $292.00 up $2.00. Platinum is off $5.00 and changing hands at $1279.00.

In other matters; President Obama laid out his new Health Care proposal in a one hour speech last night in front of the full Congress and the nation. While most agree that he did a masterful selling job; initial reaction shows no softening along party lines.

Today’s economic calendar:

BANK OF ENGLAND Rate Decision (volatile market event)
U.S. Initial Claims
U.S. Trade Balance
BANK OF CANADA Rate Decision (volatile market event)

Crude Rises on the Dollar’s Decline

The metals closed the New York trading day only marginally higher after Gold was unable to hold the magic $1000 level.v Despite the sharply higher Euro and a $3.00 jump in the price of Oil; the metals finished the day only a shade higher and well below the session highs.

Silver closed up 8 cents at $16.42. Gold finished at $997.00 up $1.10 per ounce. Palladium slipped $3.00 to $292.00. Platinum rose by $16.00 to $1280.00. Volume was moderate.

Over in the currencies the Dollar continued to weaken on fears of Chinese Dollar liquidations and growing concerns of U.S inflation. Last on the Euro $1.4504 up 1.69 cents against our Greenback.

Crude rose on the back of the weak Dollar gaining $3.38 per barrel to $71.40. Remember tomorrow’s OPEC meeting. Stocks are also well off the session highs with the Dow Jones industrial Average currently sitting at 9469 up only 27 points.

When we return tomorrow traders will have two fresh pieces of data to contend with. We get the Weekly Oil Inventories and the latest Fed Beige Book. The Beige Book; named for the color of it’s cover is an anecdotal compilation of business conditions in the 12 Federal Reserve Bank districts.

Tomorrow’s economic calendar:

RESERVE BANK OF NEW ZEALAND Rate Decision
OPEC Meeting
Weekly Oil Inventories
U.S. Fed Beige Book

Markets Lifeless as Traders Await Today’s GDP Reading

Markets are trading or expected to open flat this morning with traders expressing nervousness over the pending 2nd Quarter release of our Gross Domestic Product (GDP). Despite all the optimism having been thrown about in the wake of recent economic data; traders will face the stark reality of what it all means when the GDP gets released this morning. GDP is the sum total of all goods and services produced in our country. In other words it’s the bottom line result of all our economic data.

The current estimate calls for a preliminary 2nd Quarter reading of -1.5%. This is an unfavorable comparison to the first quarter where our economic contraction was only 1%. If correct it will have traders scratching their heads.

Today’s other report of significance will be this week’s Initial Jobless Claims. Wall Street expects to see a number of 565,000 versus last week’s 576,000. Core PCE Inflation is expected to have remained unchanged at 2%.

As for the markets; Silver remains unchanged at $14.25. Gold is $2.00 higher at $947.00. Palladium is $283.00 up $1.00. Platinum is flat at $1235.00.

Our day to day barometers are mixed and quiet. Crude is 52 cents per barrel lower at 70.92. The Euro is 28/100ths of U.S. cent higher at $1.4258. Over in the equities market the Dow finished the Wednesday trading day with a 4 point gain. This morning the index is being called to open 2 points lower.

On the geo-political front it appears the predicted public uproar surrounding the planned visit to New Jersey by Libya’s Moammar Gadhafi has already started according to a front page article in today’s Wall Street Journal. It’s sort of reminiscent of Iran’s Ahmadinejad visiting New York City.

Efficient Market Hypothesis: True “Villain” of the Financial Crisis?

Editor’s Note: The following article discusses Robert Prechter’s view of the Efficient Market Hypothesis. For more information, download this free 10-page issue of Prechter’s Elliott Wave Theorist.

When a maverick idea becomes vindicated, there’s a good story to tell. It usually involves a person (or small group of people) who courageously challenge the orthodoxy of the day — and, over time, the unorthodox yet better idea prevails.

A “good story” of this sort has surfaced during the current financial crisis. A chapter of the story appeared in a recent New York Times article, “Poking Holes in a Theory on Markets.” The theory in question is the efficient market hypothesis (EMH), which the article suggested is so hazardous that it “is more or less responsible for the financial crisis.” This quote tells you most of what you need to know:

“In the last decade, the efficient market hypothesis, which had been near dogma since the early 1970s, has taken some serious body blows. First came the rise of the behavioral economists, like Richard H. Thaler at the University of Chicago and Robert J. Shiller at Yale, who convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices — meaning that perhaps the market isn’t quite so efficient after all. Then came a bit more tangible proof: the dot-com bubble, quickly followed by the housing bubble. Quod erat demonstrandum.”

In case your Latin is rusty, Quod erat demonstrandum means “which was to be demonstrated.” Its abbreviation (QED) appears at the conclusion of a mathematical proof. In this case, the massive financial bubbles of recent years are the proof that refutes the efficient market hypothesis, which argues that markets move in a “random walk” and are not patterned.

Similar articles in the financial press have reported the demise of the EMH. Just this week an Economist magazine blog included this bold declaration:

“No one has yet produced a version of the EMH which can be tested and fits the evidence. Thus, the EMH must logically be discarded, as a valid hypothesis must be testable.”

QED, indeed — I agreed years ago that the random walk was implausible. But I didn’t come to this view because of behavioral economists, although their work over the past decade has certainly been valuable. Instead, I was persuaded by the work of someone who first challenged the financial orthodoxy more than three decades ago, specifically April 1977. As a young technical analyst at Merrill Lynch in New York, his research circulated among several of Merrill’s clients. His name for these studies was the Elliott Wave Theorist: the April ‘77 study was a detailed analysis of the 1975-76 stock market, which offered this comment on the random walk model:

“If market moves are arbitrary (as the random walk proponents suggest), then internal components would rarely ‘make sense’ mathematically, and then only by statistically insignificant fluke occurrences. However, there seems to be enough evidence that mass psychology, as recorded in the Dow Jones Industrials, form patterns that are uncannily interrelated….At least this much can be fairly reliably stated as a result of this work: This idea that the market is a ‘random walk’ is probably false.”

Robert Prechter left Merrill soon after; he has published the Elliott Wave Theorist in every month since. Every issue has, in one way or another, “convincingly showed that mass psychology, herd behavior and the like can have an enormous effect on stock prices.”

So while there may be a good story to tell about behavioral economists, I trust you see why I believe there is a vastly better one to tell.

The “enormous effect” of “mass psychology” and “herd behavior” is exactly what explains the financial downturn that began in late 2007. Prechter’s Elliott Wave Theorist anticipated the crisis and warned subscribers beforehand. Likewise, he alerted them to the bear market rally that began last March.

For more information from Robert Prechter, download a FREE 10-page issue of The Elliott Wave Theorist. It challenges current recovery hype with hard facts, independent analysis, and insightful charts. You’ll find out why the worst is NOT over and what you can do to safeguard your financial future.

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Robert Folsom is a financial writer and editor for Elliott Wave International. He has covered politics, popular culture, economics and the financial markets for two decades, via print, radio and the Internet. Robert earned his degree in political science from Columbia University in 1985.

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