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Market Wrap

Iraq Officially Free Yet Stocks Sink

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     06-28-2004            High     Low     Volume Advance/Decline
DJIA    10357.09 - 14.75 10464.38 10337.70 1.65 bln   1245/1564
NASDAQ   2019.82 -  5.65  2039.93  2013.73 1.59 bln   1324/1725
S&P 100   550.48 +  0.73   555.01   549.27   Totals   2569/3289
S&P 500  1133.35 -  1.08  1142.60  1131.62 
RUS 2000  584.10 -  3.60   588.82   583.38
DJ TRANS 3177.97 + 13.79  3205.56  3164.45
VIX        16.07 +  0.88    16.13    15.19
VXO        15.60 +  0.71    15.86    14.65
VXN        20.59 +  1.63    20.72    19.45
Total Volume 3,567M
Total UpVol  1,261M
Total DnVol  2,242M
52wk Highs     303
52wk Lows       81
TRIN          1.63
PUT/CALL      0.62

Stocks were off to a strong start this morning on the surprising news that the formal handover of power in Iraq had occurred two days earlier than expected. Unfortunately, U.S. equities began to weaken in late afternoon trading and the major indices turned negative by the closing bell. Disappointing comments from Dow- components General Motors (GM) and Wal-Mart (WMT) weighed on the index while concerns over rising rates resurfaced to tug at the broader S&P 500 and NASDAQ Composite.

After fourteen months of a U.S.-led occupation the coalition formally handed over the political power in Iraq to its new interim government. The move has long been expected to occur on the June 30th deadline but in what some are calling a brilliant move the Iraqi Prime Minister Iyad Allawi urged an earlier turnover to catch insurgents off guard.

The new provisional government's main focus is to prepare the country for general elections by January 2005. Security remains the real challenge today and the new government will continue to work with the U.S.-led coalition forces numbering more than 100,000 men. Global markets were also happy to hear that NATO has stepped up to offer training to security forces for Iraq's new government. President Bush, who was in Turkey for a UN meeting, praised the move calling it a "proud day" for the Iraqi people. European stocks, which had opened lower on the session, were strongly positive by the closing bell. The English FTSE jumped 24 points to close at 4518. The French CAC rose 29 points to 3771. The German DAX soared 56 points to 4069.

Unfortunately, U.S. averages weren't so bullish. The Dow Jones Industrials rallied to 10,464 (+93 points) early in the session before drifting sideways. Around 1:30 PM ET the index began to sink into what would become a sharp afternoon sell-off. The Industrials closed down nearly 15 points to 10,357 just points above its simple 100-dma. The NASDAQ Composite managed to hit new two-month highs earlier in the session at 2,039 but slipped sharply toward recent support in the 2013-2015 range in the afternoon decline. The NASDAQ bounced back to 2019 (-5.6 points) at the close. Meanwhile the S&P 500 index mimicked the action in the Dow but only lost a point to 1133.

Chart of the Dow Jones Industrials:

Chart of the NASDAQ Composite:

Market internals were bearish by the close. Declining stocks outnumbered advancers 5 to 4 on the NYSE and 17 to 13 on the NASDAQ. Down volume overshadowed up volume on both exchanges while total volume came in somewhat light. Technology, energy and interest-rate sensitive sectors took the heaviest beating. The GHA.X hardware index lost 1.5%. The SOX semiconductor index slipped 1.76%. The NWX networking index fell 1.37%. The OSX oil services index dropped more than 2%. Homebuilders sank to a 3% decline on rising interest rate worries. The successful transfer in Iraq undermined demand for gold, which is seen as a safe haven when geo-political worries rise. Gold futures melted for a $1.90 loss to $401.30 and ounce while the XAU gold & silver index tarnished with a 2.74% decline.

Crude oil was a big story today. August crude oil futures fell $1.31 (about 4%) to $36.24 a barrel nearing the psychological $36 level and its simple 100-dma. The drop was fueled by the Iraq handover of power and news that another Iraq pipeline in Basra had become operational. Traders are expecting there to be less sabotage now that the new Iraq government is in power since any new damage would be seen as an attack against the Iraqi people and not the coalition and the West. The drop in oil fueled a big move in the Dow Jones Transportation index, which hit new four- year highs above the 3200 level intraday before slipping back to 3177. Several stocks in the sector like JBHT, UPS, and FDX all hit new all-time highs during the session.

The XAL airline index also managed to early morning gains on the Iraq news and drop in oil prices despite negative headlines from giant United Air Lines (symbol: UALAQ or UALAQ.OB). United Air Lines, which is struggling to emerge from Chapter 11 bankruptcy, was turned down for the third and final time for a $1.1 billion government loan guarantee. The three-member panel of the Air Transportation Stabilization Board voted against giving UAL the loan and said they would not accept any future requests from the company. UAL will have to look for financing from private investors, which will force it to pay higher yields on its loans and raising its expenses. A number of UAL's rivals traded higher on the news, since UAL may be forced to sell some of its assets or more lucrative routes to raise cash.

Dow components General Motors (GM) and Wal-Mart (WMT) also issued some bad news today. Shares of GM sunk 2.4% to close right at its simple 200-dma after its head of sales analysis said June numbers would be disappointing. Last month GM, the country's largest automaker, posted huge numbers in May, which helped the industry, hit an annual pace of 17.8 million units, the strongest rate in nine months. Now the industry expects June's totals to be in the 16.3 million-unit range (that's for the whole sector not just GM). While this may not be a surprise for industry watchers who knew last month's results would be hard to follow it's not the kind of news Wall Street likes to hear. On a similar note Wal-Mart reported that June same-store sales would likely fall in the 2%-4% range, below its previously forecasted 4%-6% range. The world's largest retailer is blaming weak Father's day sales and uncommonly cool weather in several parts of the country hampering normal seasonal summer item sales. Shares of WMT ended the session down 5 cents to $52.46.

The Altria Group (a.k.a. Phillip Morris, symbol: MO) happened to be one of the Dow's best performing components. Shares of MO soared more than 5% intraday and closed at $49.60, up 3.76% as investors responded to news in the government's lawsuit against the tobacco industry. Late Friday a U.S. district court judge gave permission for the tobacco sector to appeal an earlier decision regarding government prosecutor's plans to seek disgorgement in billions of dollar in profits. Currently U.S. prosecutors are seeking a $280 billion reward in their fraud and racketeering case against the industry. The new decision will allow tobacco companies to go to an appellate court and hopefully dismiss the decision that "disgorgement" is an appropriate remedy. If the appellate court chooses to review the matter it could delay the current lawsuit expected to begin in September.

Monday was not without its economic data. The Commerce Department reported that U.S. consumer spending rose 1% in May, which was the best increase since October 2001. Unfortunately, real disposable incomes came in flat after being adjusted for inflation. Likewise the PCE price index or personal consumption expenditure price index jumped 0.5%, the biggest move in more than a year, indicating a rise in inflation. The core PCE rate only rose 0.2%. Today's round of economic data helped fan the rising interest rate fears. While no one expects the FOMC to raise rates by more than 1/4 point on Wednesday Wall Street is now looking to the August meeting and wondering if a 50-point hike is in the works. Monday's data sent bonds lower and the 10- year note hit a new seven-week low as its yield shot up to 4.7%. CNBC mentioned that the month of May saw a record outflow of $17 billion from bond funds as investors worried about rising rates.

Tomorrow could be another tough session for interest rate sensitive issues and mortgage lenders. After the closing bell tonight Washington Mutual (WM) lowered its 2004 earnings forecast due to rising rates impacting its home-loan business. Wall Street analysts were expecting 2004 earnings to come in at $4.24 a share but WM now expects profits to fall in the $3.00-3.60 range. WM's CEO Kerry Killinger sums it up in the company's press release: "It now appears to us that the shift in the interest rate environment in recent months, with a sharp increase in long-term rates and a related reduction in mortgage volumes, will continue through the rest of the year. The effects of these changes are likely to outpace the timing of ongoing cost reduction plans in our Mortgage Banking business."

Tuesday also brings the latest consumer confidence numbers (for June) and begins the two-day FOMC meeting. It is the FOMC meeting that is likely to keep stocks trading sideways for the next couple of sessions even though no one expects any surprises. After the interest rate decision Wall Street will focus on the Friday non-farm payrolls report, which should be positive for stocks and the market if the current up trend remains in place. I also want to remind readers that traders need to stay wary of negative news out of Iraq. Yes, the formal handover of power has passed and without incident but odds are good that insurgents will follow through on whatever evil plans they had set for the June 30th deadline.


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