It's a Whole New Ballgame

Wow! Another unpredictable day. It may be impossible to predict where the market will end up, but it's starting to become like deja vu waking up every morning. It seems like every morning I wake up to the same low futures prices. Today was no exception. Losses accelerated into the opening only to studder sideways and move to largely unchanged. Actually, soon before the non-manufacturing ISM numbers were reported, the market was marching into positive territory nicely. Unfortunately, the numbers were a little weaker than what the bulls were hoping for so the market started to retreat. For the rest of the day the market traded in a channel until seeing the bottom fall out into the close. (In case you missed it, the Dow ended down 64 points (.5%) with the Nasdaq and S&P 500 trimming about a percent.)

It's amazing how much the market mood seems to effect the way it interprets economic data. Until last Tuesday's free fall, the bulls seemed to be bullet-proof. They managed to plow right ever every bit of bearish data. Now the mood has definitely changed. Two weeks ago almost everybody acknowledged the economy was in great shape, but we were in need of a correction so that the indices can continue to shoot to the moon. Now the "greatest story never told" that CNBC's Kudlow can't seem to shutup about seems a little more vulnerable. Much to Bernanke's delight, the economy does seem to be cooling. We've seen the labor market loosening up and ISM reports lightening up to name two. GDP, even after its revision downward, is still strong and corporate profits are looking healthy as well.

Of course not everybody can get along. What a boring market that would make! Some argue that we will overshoot our "soft landing" and fall into a recession while others believe inflationary pressures are still running rampant. (At least crude dropped about $1 today. That should make you SUV drivers feel better.) Of course many of these problems seem like problems at the end of the tunnel. What should you be worried about now? Well, we have the Yen carry-trade. Who knows how much capital we have holding up our markets due to selling the Yen and buying higher yielding assets. The stronger the Yen gets, the less profitable this carry-trade becomes. In order to get out, these people, presumably hedge funds, are going to have to dump the assets they now own so that they can close out their short Yen positions. The strengthening of the Yen could be further exacerbated by the nearing fiscal year-end in which many Japanese companies will be bringing profits back to Japan.

Next, we also have the whole sub-prime issue. I would have said on the brink of becoming a major problem, but nobody, including myself, has any true idea if mortgage defaults will move up the chain. I wouldn't be surprised if it did though. You have to expect this sub-prime fiasco. Banks were loaning money to whoever asked for it without any due diligence. As far as defaults among higher qualified borrows, anything is possible. We have started to live on impulse buying and financing everything. Combine that with a negative savings rate and of course you'll have issues.

You know what, forget everything I just said. All that matters is what the market tells you that matters. Right now, the Asia market looks green and US futures are up. Will the market follow Asia up like it has followed it down? Only the market knows.