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Waiting for Jobs

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     06-03-2004            High     Low     Volume Advance/Decline
DJIA    10195.91 - 67.06 10281.92 10193.78 1.21 bln    725/2109
NASDAQ   1960.26 - 28.72  1983.86  1960.26 1.50 bln    846/2170
S&P 100   543.92 -  3.66   548.40   543.87   Totals   1571/4279
S&P 500  1116.64 -  8.35  1125.31 1116.56 
RUS 2000  562.44 - 11.12   573.56   562.44
DJ TRANS 2962.96 - 38.89  3001.13  2962.92
VIX        17.03 +  0.95    17.04    16.16
VXO        17.34 +  1.10    17.45    16.44
VXN        23.93 +  1.32    23.98    22.86
Total Volume 3,391M
Total UpVol    709M
Total DnVol  2,643M
52wk Highs     103
52wk Lows       82
TRIN          1.58
PUT/CALL      1.13

An afternoon decline picked up speed and urgency as the session drew to a close, with the Dow declining 67.06 to finish at 10195.91 and the Nasdaq losing 28.7 to close at 1960.3. While volume was light overall there were big upside moves in the volatility indices, with the VXO rising 6.77% to close at 17.34 and the QQV rising 7.03% to close at 22.07, well off its lows below 19. After the bell, the selling accelerated with the futures setting lower lows.

Breadth was decisively negative with decliners more than doubling advancers on the NYSE and Nasdaq, with down volume tripling up volume on the two exchanges- on the AMEX, down volume nearly sextupled up volume.

Daily Dow Chart

The Dow closed right on the ascending support line that forms a rough pennant against the declining resistance off the mid- February high. Its equivalent on the Nasdaq futures was broken to the downside today, helped along by the strong selling after 4PM, but on the Dow it held. While the daily cycle oscillators remain in upphases, we saw in last week's discussion that the weekly and monthly cycles remain down. This suggests that the daily cycle upphase is corrective within that longer-duration downtrend, which lines up with the pattern of lower lows and lower highs since February. A break below the rising daily support line, which will occur if tomorrow sees a failure to close in the green, suggests that the daily cycle upphase is coming to an end and should pave the way to a retest of the 9900 level or lower. A move above 10290, current resistance for the daily cycle upphase, should set up a test of 10360. If pulls can break that upper descending resistance line, they'll have a shot at turning this pattern into a bull wedge, but to do so will take a lot of buying from here.

Daily Nasdaq Chart

The Nasdaq closed below the rising pennant support line, and unlike the Dow, its 1o-day stochastic left off with the suggestion of a bearish kiss. The descending upper resistance line from February wasn't even touched, and a rollover from this lower, weaker high would be very bearish indeed. Note that the close was also below the 50 day EMA, with the 22 day EMA next support just above 1950. Next support is at 1940, followed by 1920. A close above 1996 should see a test of upper descending resistance at 2015, which would have bears significantly antsier than they currently are, as that same bull-flag interpretation discussed above would be on the table above that level.

Before the bell, it was announced that the ECB would leave its overnight rate unchanged as expected. The US Dollar Index had been strong overnight and remained so on the release the news, with US equity and bond futures negative approaching 8:30 and the release of key US economic data.

The Q1 non-farm productivity revision came in above the 3.7% estimated at 3.8%, up from the 3.5% initially reported. Unit labor costs exceeded expectations of .5% annual rate, posting .8%. This indicates greater than expected inflationary pressures on US corporations.

Initial jobless claims were also released at 8:30AM, with the seasonally-adjusted number of new claims down 6K to 339K, missing expectations of 335K for the week. The total number of workers receiving unemployment assistance rose 65K to 3M, which is a 5- week high. The week moving average of initial jobless claims rose by 4,250 to 341K, and the previous week's reading was revised up by 1K to 345K.

Bonds spiked lower on the release of the productivity numbers, but bounced immediately when the disappointing employment data hit the wires moments later. The productivity data reflected greater than expected inflation, but also an impressive worker- output-per-hour reading that shows the fastest productivity gains in over 30 years. Whether this is the result of unprecedented outsourcing of jobs or a genuine increase in domestic output-per- hour is a key interpretive question, but for the moment the persistence of US unemployment remains an important fly on the recovery's wedding cake. The record indulgence in debt at all levels of North American society sponsored by the Fed's reflationary / stimulative policies is less tenable if workers are unable to grow their salaries at a rate sufficient to keep ahead of broader price inflation.

On that topic, oil was once again a dominant topic in the headlines. It was reported in the early morning that Iraq's oil minister stated that his goal is to reach 2 million bpd production for export and overall output of 2.8 million bpd this year. Just after the bell, Qatari Oil Minister Abdullah al- Attiyah announced that OPEC had agreed to increase oil output by 2 million bpd immediately, with an additional 500,000 bpd increase to follow in August. Oil futures rose on the news, which was less of an increase than anticipated by traders. As Reuters reported, "This is bullish," said Nauman Barakat of brokers Refco in New York. "Forget the promise of another 500,000, this is just plain two million. The market was convinced it would get 2.5 million so this could wave a red flag to the bulls."

From OPEC's most recent press release today:

Having reviewed market developments since its 130th Meeting, held on 31 March 2004, as well as the supply/demand outlook, the Conference noted with concern that, as a result of several factors, prices have continued to escalate, despite the efforts by OPEC Member Countries to meet market requirements. These factors are mainly the robust growth in demand in the USA and China, which had not been fully anticipated; geopolitical tensions; and refining and distribution industry bottlenecks in some major consuming regions, coupled with more stringent product specifications. Combined, these factors have led to unwarranted fear of a possible future supply shortage of crude oil, which has, in turn, resulted in increased speculation in the futures markets with substantial upward pressure on crude oil prices.

Given current high and volatile prices and prevailing concerns regarding supply security, and in order to ensure continued, robust, global economic growth, especially in the economies of fellow Developing Countries, the Conference decided to increase the OPEC production ceiling (excluding Iraq) to 25.5 mb/d, with effect from 1 July 2004, and to 26 mb/d, with effect from 1 August 2004, in order to ensure adequate supply and give a clear signal of OPEC's commitment to market stability and to maintaining prices at acceptable levels to both producers and consumers. The Conference also decided to convene an Extraordinary Meeting in Vienna, Austria, on 21 July 2004 to review market developments.

Shortly following that release, it was announced that the United Workers Union of Venezuela oil workers had voted to commence a general strike at all industrial installations of the state-owned Ecopetrol to commence on June 22, 2004. I was unable to determine the amount of oil that such could involve.

The Department of Energy reported crude oil stocks up 2.8M barrels for the week ended May 28. Gasoline supplies rose 1.3M barrels and refineries ran at 94.9% capacity. Distillate inventories rose by 200,000 barrels, and U.S. natural gas stocks rose by 87 bcf to 1.564 trillion cubic feet. The American Petroleum Institute delayed its data today, citing technical difficulties, but later announced an increase in crude stocks by 860,000 barrels and in distillate inventories 1.4M barrels. For the day, crude oil futures finished lower by 1.88% at 39.21.

At 10AM, the Commerce Department released the April factory report, with factory orders falling 1.7% following March's 5% gain, the steepest decline since April 2003. Expectations were for a drop of 1.2%. Durable goods orders were revised lower to a 3.2% drop rom the previously reported 2.9%, the largest drop since September 2002. Non-durables were unchanged. The May non- manufacturing index dropped to 65.2%, missing expectations of 66.3% following the record 68.4% April reading. Readings over 50 are said to indicate expansion overall.

President Bush announced that CIA director George Tenet will resign in July for personal reasons, praising his "superb" job. There was speculation that the move was somehow related to the President's meeting with private counsel yesterday and the ongoing "Wilsongate" affair, but overall reaction to the news was muted.

In corporate news. there was a slew of May updates from retailers. Some highlights include Sears, Roebuck (S) reporting that May domestic same-store sales fell 3.7% y-o-y and total sales fell 4.7% to $2.08B. WMT reported a 5.9% y-o-y increase in same-store sales, led by its Sam's Club chain, with total sales up 13% to $21.43B. Costco (COST) reported a 16% y-o-y same-store increase, with total sales for the month rising 19% to $3.8B. May Department Stores (MAY) reported same-store lower by 3.8% from May 2003, with total sales down 2.7% to $978M. Kohl's (KSS) reported same-store sales higher by 5% y-o-y and total sales higher by 20% to $815.8M. Nordstrom (JWM), pronounced "Nahdstram" in the Commonwealth of Massachusetts, reported May same-store sales up 9.4% from May 2003, and total sales higher by 12% to $499M. Gap (GPS) reported a 6% same-store increase and net sales of $1.2B for May. The RLX closed lower by .47% at 403.64.

After the bell, INTC gave its mid-quarter update, raising its Q2 revenue target to $8B - $8.2B and upping its estimate for gross margins to 60%-61%. Analysts had been expecting revenue of $7.98B, and the upside surprise combined with the lack of material news helped gap INTC to a spike high of 28.40 on the news, following which price settled into a range just below 28 as of this writing. The company cited strength in demand for communications products and said that demand for microprocessors, chipsets and motherboards is consistent with previous expectations.

For tomorrow, we await the May employment report, including nonfarm payrolls (est. +225K), the unemployment rate (est. 5.6%), hourly earnings (est. .2%) and the average workweek (est. 33.8). I noted in the Futures Wrap that bonds diverged to the upside today, failing to fall despite the strong showing from the US Dollar Index. I would take that divergence to indicate the market's expectation for a downside surprise in tomorrow's 8:30AM report, but we'll find out soon enough. I would expect a terrible report to drop the US Dollar Index and rally bonds, equities and metals, while a strong report should do the reverse. An unexciting report would likely leave the market to its own devices, which here looks like a trend of a strong dollar and weaker equities. Tomorrow will help complete the picture.


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