The Street woke up to the strength of the dollar and surging yields yesterday as the bond rotation (years overdue) was a boon for stocks. It also presented a problem for housing with surging mortgage rates.  The “strong dollar” sounds great and even patriotic. However, could the dollar be too strong to achieve goals such as a higher stock market, better trade (exports too expensive/imports too cheap), and even easier border control and immigration policy enforcement?

The answer is yes. It does wonders for the domestic economy. In a nation with a nationalistic zeal, it’s also seen as a badge of honor.

The U.S. dollar is breaking out to its highest level since April 2003 against a basket of currencies while China’s yuan is changing hands at an eight-year low.  If America is going to fight China’s weak currency, it’s starting from a massive position of weakness.  I understand that China must worry about capital flight and other woes that come with a plunging currency, but it’s an export-driven economy.

The spike in bond yields means a higher borrowing cost, which isn’t good news for would-be homebuyers.  However, perhaps the great bond rotation has begun and funds will flow into stocks, making folks feel rich enough to overlook higher mortgage rates.

The strong dollar and the flaccid Mexican peso will also make it harder to police the border, as the rewards are so tempting versus little consequences that illegal entry tries are bound to soar.

Energy Independence

In yesterday’s Industrial Production and Capacity Utilization report, there was an energy silver lining. Oil and gas well drilling production increased for the fifth straight month to 9.0%, still down 31.5% from a year earlier. 

Mining flashed a 2.1% improvement that was paced by a surge in coal production, down 7.0% from a year ago. It remains to be seen if this is an anomaly or a turn that matches the surge in price.

I know it’s early and a lot can go wrong, but those animal spirits are in the air. Make sure you are riding the wave, which doesn’t mean you have to be 100% invested at all times, but you must have a foot in the door and your head out of the sand.

Today’s Session

The market is looking to open flat, but there is something big brewing that reflects my theory about animal spirits growing on Main Street.  Retail earnings out this morning saw earnings beats, but it is the guidance that is really impressive.

Children’s Place (PLCE)

• Same store sales +4.6%
• Guidance $5.00 to $5.05 prior guidance $4.60 to $4.70
• Management said sales momentum grew during the quarter = momentum

Best Buy

• Same store +1.8%
• Guidance $1.62 to $1.67 versus $1.53 year ago and $1.58 consensus

Walmart

• Only lifted the lower end of prior guidance, but this is a behemoth and small moves have outsize implications for the economy

We don’t have to force the issue out the gate, but we may put money to work so stay tuned for the afternoon note. If you are not already a Hotline subscriber, contact your representative or email info@wstreet.com to get started today.