8-17-05 Eitherway we all pay

Good Morning.

Overseas markets were moderately lower. US Futures were slightly higher until the Producer Price Index (PPI) report hit the wires. This hotter than expected report knocked the futures down but have since stabilized around the flat line. Key tells today will be Hewlett Packard (symbol: HPQ), Applied Materials (symbol: AMAT), and Nordstrom (symbol: JWN) which bucked the poor retail trend with a solid report. Action in these stocks today may give an indication of whether or not an oversold bounce will kick in.

The Producer Price Index (PPI) was certainly alarming coming in at 1% versus 0.6% expected. The Core PPI also came in hotter at 0.4% versus 0.2% expected. The problem is that no matter how you slice it the economy has a clear headwind. Either corporations will have to pass on their increased costs to consumers or companies will have to eat it, thus by lowering profit margins. Take your pick, pressure on earnings or more retail inflation which will excite the Federal Reserve Hawks. It is very clear to us that the Federal Reserve is observing from the sidelines and has received solid confirmation that their job is not done yet. The concept of one or two more hikes before they are finished is now in severe jeopardy.

However, we also believe that Corporate America is in a strong position to absorb some of the increased costs which would reduce profit margins. This balanced approach where Corporate America does not hit the consumer to hard between the eyes should be goldilocks enough for the real economy over the longterm. Strong corporate profits are likely to materialize despite somewhat reduced profit margins. Combined with perhaps another 1% higher Fed Funds Rate the stock market should likely excel in that environment.

The market is still oversold and there is enough fear in the air to create another attempted bounce by the battered Bulls. We still believe it will be of the oversold kind that might last one or two days if it were to materialize. We would consider entering a one to two day long-side Nasdaq 100 Trust (symbol: QQQQ) swing trade if the NASDAQ comes down to the 2125 level.

-Good Trading-

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