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Shakeup in Washington finds markets unchanged

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After a lower open on November unemployment data that has the annualized unemployment rate back at 6%, news out of Washington regarding resignations by Treasury Secretary Paul O'Neill and key White House economic advisor Larry Lindsey has investors looking to the future and not the past.

The major market averages rebounded from their lows just as the Dow Industrials (INDU) 8,623 (unchanged) came within 1-point of testing near-term psychological support of 8,500.

Intra-morning news that Treasury Secretary Paul O'Neill would resign his post in the coming weeks found selling in the longer- dated Treasuries, as O'Neill had been candidly outspoken that individual U.S. taxpayers didn't need a tax cut in order to help spur what O'Neill felt was a strengthening economy.

Both resignations hint that the Bush administration is indeed concerned and focused on the national economy, and not guilty of tunnel vision on war with Iraq's and it believed possession of weapons of mass destruction.

President Bush's economic team was a frequent target of criticism by Democrats as well as some Republican politicians. Democrat's criticism has been that President Bush has been ignoring the U.S. economy, while top GOP officials have been at difference with O'Neill on the need for individual taxpayers to receive tax cuts to further help stimulate the economy.

The action in the bond markets is a tail of today's top two stories as the shorter-dated maturities see buying, most likely based on the weaker than expected unemployment data, while the longer-dated 30-year Treasury has reversed all of its morning's gains to trade unchanged, while the 30-year YILED ($TYX.X) 4.992% edges modestly higher.

In essence, bond traders and investors appear to be moving cash to the shorter-dated "less risky" treasuries on the though of near-term economic uncertainty due to the jobless claims, while there's some selling in the longer-dated 30-year, with the thought that today's shakeup in Bush's economic team and Treasury post may have longer-term benefit to the economy. Don't confuse the 30-year action with what might be taking place 30-years from now, but perhaps 4-6 months under some type of tax cut initiative for individuals, be it income tax or taxes on dividends received from stock/bond investments.

Shares of Cephalon (NASDAQ:CEPH) $53.67 +2.03% are trading higher despite Briefing.com reporting that there has been a large buyer of puts in the stock, with the buyer speculating that a number of generic drugs ready to be filed on December 24th for a generic version of Cephalon's (CEPH) Provigil could then threaten CEPH's product line. Generic versions of CEPH's Provigil could be accpeted by the FDA by late January and CEPH would then have 45 days to initiate some type of litigation.

Quick review of CEPH's option chain does indeed show some unusual volume action in the CEPH Jan. 45 puts (CQEMI) with 1,911 traded, versus open interest of 2,620. Also active are the CEPH Jan. 60 calls (CQEAL) and Dec. 55 puts (CQEXK). It would be my analysis that the Jan. 45 put action is highly speculative in nature, while the Jan. 55 puts action is more in tune with some type of at the money hedge position being implemented. In essence, an institution holding a large position in CEPH may look to be hedging at the $55 strike. If they were really worried or convinced the stock would trade $45, then it would have been flushed long ago or even today. This may be a stock to monitor for unusual STOCK volume on an intraday basis, but that's it at this point.

Rational Software (NASDAQ:RATL) $10.26 +25.58% remains today's volume leader after IBM (NYSE:IBM) $82.15 -1.09% announced it was making a cash offer of $10.50 per share to acquire the software maker.

Sector action has been rather mixed at the mid-point of today's trading session. Financials look to be benefiting from today's shakeup in Washington and both banking indexes (BIX.X) +1.4% and (BKX.X) 1.5% along with Brokerage (XBD.X) +1.18% challenge telecommunications stocks as depicted by the Combined Telecom Index (IXTCX) +2.54%, Airlines (XAL.X) +2.33%, Oil Service (OSX.X) and the Gold/Silver Index (XAU.X) +2% for today's sector winners. Key technicals noticed here is that the XAU.X after making a rebound move on Tuesday from below 65.00 has once again tried to break above its rounding flat 200-day SMA of $70. On November 7th, similar technicals were found and gold stocks were pushed lower. As mentioned in a prior note the past couple of days, the point and figure chart has key technical resistance below $72, but a trade at $72 would have the XAU.X breaking above downward trend and triggering a spread-triple top. Gold bugs should remain cautious here as according to Dorsey/Wright and Associates, their gold sector bullish % is "bear confirmed" at 42%.

A stock for gold bugs to watch for a reversing upside move is Newmont Mining (NYSE:NEM) $26.59 +3.7%. This is one of the gold stocks in Dorsey's bullish % currently on a sell signal, but the stock has been holding right on its longer-term bullish support trend. A trade at $27 would have the stock back on a buy signal and tight stop under $22 provides a good risk reward trade longer-term. Newmont is "much like" an Intel in the semiconductors, an IBM in computers, or a Cisco Systems in networking. It's a "benchmark" name that institutions would look for exposure if a prolonged sector move higher would be expected to take place.

A trader/investor should continue to follow the developments in gold stocks and recent action in the longer-dated 30-year Treasury and some renewed bullishness in gold, certainly plays into the scenario of economic growth. At least in my opinion. The dual action in higher YIELD developments on the longer-dated 30-year, combined with some bullishness in gold, hints of some market "worry" about inflation. Early in any type of economic recovery that last thing an economic bull is worried about is inflation. It's closer to the latter part of economic expansion when labor markets get tight and demand for products begins to escalate pricing that inflation becomes a concern.

Weakness has the CBOE Internet Index (INX.X) 97.35 -2.77% back below the psychological 100 level with a sub group in the financials finding the Insurance Index (IUX.X) -1.45% trading lower.

Jeff Bailey

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