Yesterday's Market
The Dow Jones industrials, once up as much as 141 points yesterday, closed with a 90-point gain, or 0.8%, at 11,503. The Standard & Poor's 500 Index gained 10 points, 0.8%, to 1,282. And the Nasdaq Composite Index finished up 20 points, 0.9%, to 2,382. A good day for traders who knew what they were doing, because it was all about oil yesterday. And probably again today and tomorrow, before we go into a long holiday weekend - with a concerned eye on the movements of Tropical Storm Gustav.

Yet volume yesterday was extremely light because many investors and traders were on vacation. New York Stock Exchange volume was less than 800 million shares; 1.6 billion shares is normal. Nasdaq volume barely hit 1.57 billion shares, well below the 2.2 billion-share average.

Energy was the strongest sector of the market as crude oil rose to $118.15 a barrel, up $1.88 from Tuesday. Most weather forecasts said Gustav would intensify back into a Category 3 hurricane and make landfall Monday along the Gulf Coast.

Dollar Unfazed By Strong Durable Goods

Orders for durable goods produced in the United States unexpectedly gained 1.3 percent, the Commerce Department said Wednesday in Washington. To some extent, the gain in orders reflected growing demand from abroad because of a relatively cheap U.S. dollar. In fact, despite the recent gains, the U.S. dollar exchange rate is still very cheap when we look at the last five years. Indeed, Dollar’s undervaluation is now likely to lead to a substantial improvement of the U.S. Balance of Payments through continued strong export performance. Moreover, the recent sell off in commodities, particularly in oil, should alleviate some external pressure in the U.S. economy. The U.S. runs a current account deficit of nearly 6 percent of the GDP and the U.S. economy benefits the most when energy prices are lower. Unfortunately we are entering the height of the Hurricane Season, with Hurricane Gustav threathening the Gulf of Mexico and the oil facilities. The Gulf is home to about one-fifth of all U.S. oil production and about 16% of the nation's natural-gas output, and any disruption to operations there would push oil, natural-gas and gasoline prices higher. Expectation is that crude oil will push $130 before the Holiday weekend arrives. Also, with the world economy slowing down it is reasonable to think that the demand for U.S. products will also begin to slow down. Moreover, some members of the Federal Reserve are deeply concerned that the recent spike in economic activity had more to do with short term spending of tax rebates than anything else, according to the latest FOMC minutes released last Tuesday. In fact, according to Fed Funds futures there is a 90% change that the Federal Reserve will keep rates unchanged.

In support of the dollar

LONDON (MarketWatch) -- U.S., European and Japanese authorities drafted an intervention plan in March designed to rescue the U.S. dollar if it continued to plunge, Japan's Nikkei business newspaper reported. The plan, which went unused, was drafted the weekend of March 15-16, at the time the dollar was under heavy pressure amid the collapse of investment bank Bear Stearns, Reuters reported, citing the Nikkei article. The plan was reportedly drafted by officials from the U.S. Treasury, Japan's Finance Ministry and the European Central Bank. The plan didn't specify levels that would trigger the the rescue, but marked an agreement to coordinate aggressive dollar-buying while selling yen and euros, the report said. It seems that the world is not ready yet to say goodbye to the greenback. Louis Basenese might be right in his assessment in our article from last weekend.