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Rise in Crude Oil Pressures Equities

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Moving off lows hit at 10 ET this morning, markets currently attempt to maintain positive numbers. As I type, most markets are flat on the day, either modestly positive or modestly negative.

Steve Price has often pointed out the inverse relationship between crude oil prices and equity prices. If that relationship holds, equities may remain under pressure in this afternoon's trading. Today's trading has seen crude oil futures touch their highest levels in a week as traders react to likely production delays in Nigeria due to ethnic clashes as well as to a likely protraction of the war in Iraq. Rising crude oil prices, war news, and perhaps also the slashing of Bush's tax relief plan might have contributed to market early declines. As I type, the CL03K contract is 30.52.

One sector under particular pressure today is the airline sector. After outperforming other sectors Tuesday, the airline index (XAL.X) underperforms today. This week, Senate Majority Leader Bill Frist spoke in favor of a relief package for the airline industry, with the airlines predicting that a prolonged war with Iraq could cost them up to $4 billion and eliminate 70,000 jobs. The current sector decline came after today's publication of the Standard & Poor's survey of the airline sector. As expected, this twice-yearly report concludes that the massive losses seen in recent years will be exacerbated by the effects of the war with Iraq. The study also concludes that if United Airlines (UAL) liquidates, the airline industry will benefit. Remaining carriers could raise fares and be more profitable. If, instead, unions, suppliers, lessors, and debt holders grant UAL the concessions it seeks, the airline might gain an advantage over other airlines.

In addition, yesterday the Air Transport Association announced 20% fewer bookings for the next 2-3 months for the U.S., and 40% for some international regions. Today, Continental Airlines (CAL) is one of the biggest losers among the airlines, currently down almost 9%. Yesterday, Continental said it would report significant first-quarter and full-year losses. Delta Air (DAL) declined almost 4%.

Problems with the airline industry are not limited to U.S. carriers. Over the last two days, Deutsche Lufthansa, British Airways, and Air France have announced various measures to combat the expected industry weakness, including cutting flights and postponing delivery of new aircraft.

Volume patterns have changed as the day progresses, showing weakness this morning but improving slightly as the day progresses. Currently, the NYSE shows more advancers than decliners, while advancing and declining issues are roughly equal on the Nasdaq. Up/down volume patterns have shown improvement as the day progresses, too. Currently, volume is 857 million shares on the NYSE and 1 billion on the Nasdaq.

Linda Piazza

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