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Secretary of State Powell says Iraq can't be trusted

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The markets are seeing intra-day volatility for a second consecutive session, which depicts great uncertainty after chief U.N Weapons inspector Hanz Blix said that recent Iraqi weapons inspections show no sign that Iraq holds weapons of mass destruction, or that any proof of Iraqi weapons facilities being alerted to U.N inspections ever took place.

Mr. Blix's testimony contradicts a recent address by Secretary of State Colin Powell to the U.N., where satellite photos of "unusual" activity at Iraqi weapons facilities, which hinted that weapons or evidence of weapons were being moved ahead of the readmittance of U.N. weapons inspectors.

Traders are left to wonder what plays out from here. Today's tone of Mr. Blix's report is that weapons inspection efforts should continue and that Iraq's recent posture has been growing toward a more cooperative stance with weapons inspectors. Mr. Blix's report along with comments from IAEA chief inspector Mohammed ElBaradei, which also implied the continuation of weapons inspections, looks to have the United States and Britain somewhat isolated on an island with respect to military intervention.

Soon after the Blix report to the U.N., Secretary of State Colin Powell reiterated in a stern statement that while he is pleased to hear from inspectors that Iraq is starting to show some cooperation, but believes that these are "tricks" being played by Iraq. Secretary Powel reiterated that what is needed from Iraq is for it to disarm, not more inspections.

The Dow Industrials (INDU) 7,805 +0.71% currently holds a 56- point gain, after jumping to a session high of 7,887. Secretary Powell's comments saw the Dow continue to reverse gains and fall to a session low of 7,725. Interpretation of this volatility is that the U.S. may continue to push the U.N. for some type of military action based on the U.S. belief that Iraq has been hidden weapons and create turmoil among U.N member countries, but will face stiff opposition from members in that a more peaceful resolution can be reached through inspections.

While the Blix report to the U.N. had created the bulk of volatility and made for very difficult markets to interpret or even trade, economic data that has been released during Blix's testimony has take a backseat.

However, an upside surprise was seen in the January industrial production numbers. Output at the nation's factories, mines and utilities expanded 0.7% in January. The increase is the most since a like-size gain was reported for last July.

Production rose with the help from new cars. Without the help of autos, output rose a tamer 0.4%, after being flat in December.

Manufacturing output rose 0.5% overall. Excluding autos, output was up a modest 0.1%.

Economists were looking for a 0.3% gain in January industrials production.

Capacity utilization improved, but remains at a level that shows much slack in production. It registered 75.7 in January, near the forecast and up from 75.2 in December. In manufacturing alone, capacity use remains in its recent range, last at 73.7.

Capacity use has increased from a year ago, but remains about 5.6 percentage points below the average of the last 30 years, Fed data showed.

Noting the influence from the auto sector, Joel Naroff, president of Naroff Economic Advisors, also stressed, "Only seven of the 19 manufacturing industries reported a decline in production. That points to a fairly broad-based recovery."

Also released during market hours was the University of Michigan Sentiment (preliminary) for February, which fell to 79.2 from January's un-revised 82.5 reading.

The U.S. Dollar Index (dx00y) 100.07 +0.48% has reclaimed the 100 level after falling back below on Wednesday. Current levels of trade are at a declining 50-day SMA, which would still have intermediate-term trend pointing lower. However, dollar action has been as volatile as equities, but today's trade does show slight confidence coming back into the dollar.

Treasuries, which were marginally lower just prior to Mr. Blix's report saw their intra-day lows reached as equities peaked. We've seen some resumption in selling in the last 15-minutes, which has come near this morning's highs. The strength in the dollar along with selling in treasuries looks to have a daily floor in the major that was found at the opening of today's trade.

At the 01:00 hour, NYSE volume is 707 million shares, while NASDAQ volume is 733 million shares traded. Internals at the NYSE have advancers outnumbering decliners by a narrow 8 to 7 margin, while NASDAQ shows 15 advancers for 13 decliners.

New highs compared to new lows has the NYSE showing 15 stocks having traded a new 52-week high compared to 73 stocks trading new lows. As the session has progressed, the number of new highs has been growing, while the same is true for new lows. NASDAQ has 40 stocks trading new 52-week highs compared to 65 stocks setting new 52-week lows. Similar observation of a growing number of new highs and new lows for the NASDAQ gives the impression that market participants truly are "torn" to a rather neutral stance from today's news.

Jeff Bailey

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