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Index Wrap

Oil and Auto Insurance

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Stocks were weighed lower as oil continued its rise, while Dow components General Motors (NYSE:GM) $38.84 -5.95% and American International Group (NYSE:AIG) $60.00 -10.43% had the Dow Industrials slipping further below the 10,000 level.

I don't think I can add anything to observations and comments I made in today's 11:00 and 03:15 intra-day updates in regards to oil's trade, and GM's earnings miss speaks for itself. So lets touch on today's "blow up" in the insurance sector.

As noted in today's 01:00 intra-day update, New York Attorney General Eliot Spitzer charged the nation's largest insurance broker, Marsh & McLennan (NYSE:MMC) $34.85 -24.45% with bid rigging and illegal pay-offs in a suit that marks Mr. Spitzer's latest campaign against corporate wrongdoing. The allegations sent insurance stocks plunging lower with the S&P Insurance Index ($IUX.X) 290.74 -6.88% leading today's list of sector losers, and sending financial sectors lower.

Two executives from Dow component American International Group (NYSE:AIG), Karen Radke, a senior vice president, and Jean- Baptist Tateossian, a manager, have pleaded guilty to charges related to the payments, Spitzer said.

Mr. Spitzer said that Ace Limited (NYSE:ACE) $36.47 -9.52%, Chubb Corp. (NYSE:CB) $65.65 -5.86% and Hartford Financial (NYSE:HIG) $58.40 -6.07% along with other firms were involved in the scheme, and are still under investigation.

Shares of Marsh & McLennan (MMC) were hardest hit when Mr. Spitzer said his office's investigation revealed that the insurer received at least $800 million in "contingent commissions," in 2003. When this was compared to the company's net income statement, and 2003 net income from continuing operations of $1.54 million, or roughly 1/2 of the company's reported net income, investors suddenly feared, perhaps with good reason, past, current and future valuations.

What weighed further on the group is what action insurance regulators may take against those involved. Fresh in trader's minds is Japan's Financial Services Agency baring Citigroup's (NYSE:C) $43.70 -0.92% private banking group from doing business in that country for violating banking laws.

In an interview on CNBC this evening, Mr. Spitzer said he was truly disheartened by the attitudes and seemingly lack of understanding that insurance executives had during several months of investigation. While not speaking on behalf of insurance regulators, Mr. Spitzer did not rule out the possibility that U.S. insurance regulators could ban some of the wrongdoers from doing business in the U.S., should they be found guilty of fraud.

S&P Insurance Index ($IUX.X) - Weekly Intervals

I'm showing a WEEKLY interval bar chart to gain some perspective of how negative the market's reaction was to today's allegations.

I went back and reviewed the IUX.X weekly interval bar chart (pre-split) and found the IUX.X fell 12.5% when trading resumed after the 09/11 terrorist attacks. The IUX.X erased those losses and then some the following week (09/24-09/28) when we learned that insurance providers actually had some insurance to cushion any losses and could raise premiums going forward to make up for losses.

What seems to be a concern at this point is if insurers will battle the allegations in court. Will insurers settle with no admittance of wrongdoing? If they do, will regulators then apply further regulations on the industry, which could impact earnings going forward?

Bottom line: This is a can of worms, and I don't know if anyone has the answer to any of the above questions. I do know that it creates UNCERTAINTY, which MARKETS tend to dislike or shy away from. Under a worse case scenario (those guilty not allowed to do business in U.S.) that other insurers would benefit as they could step in and get new business. However, investors will have to deal with those INSURERS that the New York Attorney General has accused of wrongdoings, where these insurers are components of the indices we might be trading.

Financials that comprise the OEX - Sorted by industry/market cap

Market capitalization figures are in billions of dollars, with American International Group's (AIG) market cap at 156.3 billion. Hartford Financial (HIG) was also mentioned as being under investigation.

What OEX and SPX traders might want to be cognizant of, is even though brokers and money center banks are not the target of the investigation, there are many funds that are set up to track the performance of both indices. Should AIG and HIG come under further selling pressure, it could create an "artificial" yet real negative impact on other financial-related sectors.

For instance, we can see the large volume in AIG and HIG today. Not every institution that may have wanted to sell at certain prices could find liquidity. In order to still come close to mimicking the OEX and SPX performance, some selling could have been directed to financials in order to compensate.

Now the good news! At some point in the future, we might see some type of relief in our insurance bills!

U.S. Market Watch - 10/14/04 Close

I'm making some various observations to indices/sectors tonight. Some are quick refreshers, while other remarks that follow are new observations.

Let's start with the NASDAQ-100 Index (NDX.X) 1,425.21 -0.64%, which showed some relative strength in today's rather decidedly negative trade. The NDX/QQQ strength came from Apple Computer (AAPL) $44.98 +13.15% surging on strong quarterly earnings, while First Health (FHCC) $17.04 +13.29% jumped higher after fellow HMO Index (HMO.X) 967.27 -0.69% component Coventry Health (NYSE:CVH) $46.29 -11.06% said it was going to buy FHCC for about $1.8 billion in stock and cash.

The HMO.X was relatively unchanged, but its running out of components as consolidation continues. Remaining components are SIE, HUM, HNT, AET, CI, WLP, PHS and CVH.

SanDisk (NASDAQ:SNDK) $20.52 -27.2% was today's NDX/QQQ casualty, where SNDK is also a component of the Disk Drive Index (DDX.X) 103.96 -4.75%. SNDK is also a component of the Semiconductor HOLDRs (AMEX:SMH) $29.75 -3.22%

Since I mentioned the semiconductors, the SOX.X rests right back at its MONTHLY Pivot, and Intel (NASDAQ:INTC) $20.51 -2.28% gave back the bulk of yesterday's gains.

The CBOE Internet Index (INX.X) 178.29 -0.75%, not nearly as weak as the SOX.X. Yahoo! Inc. (NASDAQ:YHOO) $34.96 (unch) did give back all of yesterday's gains intra-day as it fell to $34.22 in the opening minutes of trade, but unlike INTC, bulls seemed a little more eager to buy in today's session.

Analysis: Perhaps Intel's gains on Wednesday were largely attributed to bearish short covering, where the news wasn't as "bad" as expected, and gains not necessarily representative of a near-term bottom truly being found. Will continue to monitor.

Telecom sectors showed some relative strength in today's session, and while the Combined Telecom Index (IXTCX) still finds resistance at its flat 200-day SMA (180.75), Nokia (NYSE:NOK) $14.20 managed to beat the forecast it made September 9 when it predicted earnings of 13 to 16 cents a share. Sales came in at the high end of September guidance with the company crediting better-than-expected cell phone sales. Some broader-sector positives came from Nokia's cautiously optimistic outlook for a strong cell phone sales this holiday season.

Qualcomm (NASDAQ:QCOM) $42.16 +1.46% was one of the 41 stocks at the NASDAQ that traded a new 52-week high today. Verizon (NYSE:VZ) $40.77 -0.73%, a Dow component traded a 52-week high yesterday.

The Airline Index (XAL.X) 44.14 +2.67% gained, and that's somewhat unusual to see when oil is on the rise. Southwest Airlines (LUV) $14.14 +4.2% reported quarterly earnings of $0.15 per share, which was 2 cents above consensus, and said revenues rose 7.8% year-over-year.

Treasuries saw price gains and YIELDs were lower across the major maturities. With oil on the rise, and equities lower, this bond trade has a defensive look to it. Weather it was today's bond trade, or this morning's weekly jobless data, I did get an alert from my March Fed Funds futures (ff05h) futures at the 97.75 level. I made note in the Market Monitor (03:56:01 PM EDT) that this contract, which gives us some observation of what the MARKET believes the Fed will be doing with interest rates in the future, now has the market seeing four 25-basis point rate hikes between now and March. Whereas just before the September nonfarm payroll figures were released on October 8, this futures contract was forecasting a 50% of five 25-basis point rate hikes.

Analysis: MARKET may be seeing oil's rise starting to have more significant impact on economic growth.

Market Snapshot / Internals - 10/14/04 Close

Upon intra-day reviews of Marsh McLennan's (MMC) $34.85 -24% chart, the stock started its dive just after 11:00 AM EDT. At 11:00 AM EDT, the stock was trading $46.00.

It wasn't until 11:47:28 AM that I made note that the IUX.X was falling at 302.11 -3.24%, where just after that, a downside alert I had set on AIG at $63.00 was triggered on my QCharts.

If I make a time reference on our Snapshot/Internals, we get some perspective of the impact this news may have brought to the markets. Not just the NYSE either, but NASDAQ too.

I would want to note that today's 5-day NH/NL ratio reading for the NYSE did give a "sell signal" against a prior relative low measure of 78% for this shorter-term indicator of bullish leadership.

NYSE Composite ($NYA.X) Chart - Daily Intervals

With the NH/NL ratios showing a greater lack of bullish leadership than on 09/21/04, and the NYSE having traded up into the projected zone where we might expect a rest, the NYSE may be near-term vulnerable to the 6,411-6,435 area. Will have to keep a close eye on insurers, and even the deep cyclicals as depicted by the Morgan Stanley Cyclical Index (CYX.X) 675.74 -0.69%, which closed below its 200-day SMA.

I will post the pivot analysis matrix in tonight's Market Monitor, and again in tomorrow morning's 09:00 AM EDT update.

Jeff Bailey

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