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Market Wrap

Are We There Yet?

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      01-06-2005           High     Low     Volume   Adv/Dcl
DJIA    10622.88 + 25.10 10667.58 10589.33 1.95 bln 1848/1364
NASDAQ   2090.00 -  1.20  2103.90  2088.03 2.20 bln 1536/1526
S&P 100   567.54 +  2.33   569.24   565.21   Totals 2384/2890
S&P 500  1187.89 +  4.15  1191.63  1183.23 
SOX       402.14 -  2.10   408.68   402.08
RUS 2000  619.82 +  2.34   624.29   616.96
DJ TRANS 3667.12 + 13.58  3680.69  3652.84
VIX        13.58 -  0.51    14.09    13.33
VXO (VIX-O)14.17 +  0.20    14.69    13.89
VXN        20.13 -  0.05    20.26    19.76  
Total Volume 4,435M
Total UpVol  2,259M
Total DnVol  2,107M
Total Adv  3872
Total Dcl  3327
52wk Highs   96
52wk Lows    39
TRIN       1.53
NAZTRIN    1.34
PUT/CALL   0.77

How often have you been asked that question on a long road trip? My email was full of that same question today as traders wanted to know if we had reached the rebound point. Was today's weak rebound the start of the January liquidity bounce? Are we there yet? Is it safe to go back into the water?

Dow Chart

Nasdaq Chart

SOX Chart

The short answer is maybe but I doubt that is what everyone wants to hear. The sharp sell off into the close put the fear back into the bulls and the market pundits were quick to suggest it confirms a new negative market bias. I am not yet ready to read the eulogy on the bull market and hopefully after you finish this commentary you will feel better about the rest of the week.

The economics were mixed again with Chain Store Sales for December rising +2.7% and slightly better than the +2.4% analysts expected. Still nothing to brag about and the holiday season (Nov-Dec) rose only +2.3% and far less than the 4% gain last year. The holiday season only amounted to 22.2% of annual chain store sales and was the lowest on record. Meanwhile sales for the entire year rose +3.8% and nearly recovered to levels seen in 2000. The ICSC is projecting 2.5% to 3% growth for January. Wal-Mart posted +3% gains in December and projected +2% to +4% for January. Target, Zales and Pier 1 warned that expectations would not be met. Target said relying too heavily on special promotional discounts hurt profits. With the record online sales for the period it is not surprising that chain stores were struggling to meet their previous levels.

There was a flurry of employment reports out today in advance of tomorrows Jobs data. The Hudson Employment Index dropped 1.3 points to 103.6 making the December number the lowest level of the year. Hudson said private firms were growing less confident in the recovery and were lowering expectations for future hiring. Only 35% of firms are now expecting to add employees, down -2 points from November.

The Monster Employment Index fell to 113 and the lowest level since August. However this index is not seasonally adjusted and this could be a result of holiday layoffs. The Monster Index is +33% higher than Dec-2003 and some claim this shows a strong hiring cycle. I believe is shows a stronger use of online job shops over print ads and therefore a stronger index. I am sure hiring is higher than last year but I don't think the actual employment numbers support the higher Monster Index.

Jobless Claims for last week surged to 364,000 and an increase of +42,000 over the prior week. This was the largest increase since March and the highest claims level since the 372,000 on September 25th. Analysts were quick to blame improper seasonal adjustments as the culprit once again. This may be true as we saw the same problems around the Thanksgiving holiday but all the employment reports are trending in the same direction. This could be a time for caution.

The Challenger Layoff Report on Wednesday showed plans for 109,045 layoffs and the highest level since January. The planned layoffs have been over 100K for the last four months. Auto and Consumer Products accounted for the most of the cuts. Hiring plans also increased with 21,262 projected new jobs compared to only 18,740 in November. You can do the math. If we are averaging 100K in planned layoffs and 20K in planned hiring then the there is a net drain of 80K in jobs per month.

This leads up to tomorrows Jobs Report. The current official forecast is for a gain of +200,000 jobs with whisper numbers ranging from 150K to 300K. As usual some of those analysts are on drugs with their far out projections. It would be good for consumers if we did blow away the official estimates with a 300K number but it will be very negative for the market. A very strong employment number would cause excessive rate fear and the interest rates would rocket higher. This would put pressure on stocks and pressure on the Fed to act quickly to suppress growth that is too rapid to be sustained. Personally I have not seen any of that growth but it may exist somewhere. Every economic report we have seen lately suggests the recovery is steadily moving higher but is still struggling.

I believe the end of day drop in the major indexes was related to the flurry of negative employment indexes. The market is expecting that +200K or better in the Jobs Data tomorrow morning and there is a risk of a lesser number. Possibly much less. This Jobs fear kept traders from buying a weak bounce and probably pushed other longs back to the sidelines. If you really want to see the market move higher on Friday we need to see 150K jobs. This is a number that will not cause a great disappointment and also a number that will keep the Fed on its measured pace.

Crude Oil Chart

Oil prices exploded once again with crude closing up +$2 at $45.50 after the natural gas storage report showed a significant drop in inventory. Also, OPEC said its total daily production fell during December to 29.5mbpd, down -260,000bpd from November. They cited oil disruptions in Iraq as well as other problems in maintaining the flow. There is also another rumor they are not satisfied with the price holding around $42 for the last months and they may cut production by another million barrels on Jan-30th. I believe this is a concerted effort to manage expectations while they wait for further global production declines to raise the price and put them in a position of power. Remember the OPEC stranglehold in 1973?

There is another shot being loaded in the coming oil wars. China's 3rd largest oil company, CNOOC, is in talks to acquire Unocal or at least the reserves owned by Unocal in Asia. CNOOC as well as the other Chinese oil companies are trying to acquire all the reserves they can and there appears to be an increasing pressure to do it quickly. CNOOC is rumored to be readying a bid of $13 billion for UCL with a plan to sell the UCL assets in the U.S. to somebody else for $5B. China is solidifying its ties with Russia in an effort to lock up oil and gas supplies for several decades in advance. China and Russia are also planning some joint military exercises soon. Does anybody but me see the sides being formed for the coming oil wars?

Another interesting oil negotiation is underway between OPEC, Saudi Arabia and India. India currently imports 2.2mbpd from OPEC. They expect that demand to increase by 50% before 2010 but they have no storage or refinery capacity to support the additional demand. CNBC reported today that $800 billion, yes billion, would have to be invested to handle that demand by constructing storage, refinery and distribution locations in India. India wants OPEC/Saudi to invest the money with an eye towards locking in an OPEC/Saudi supply for the future. The idea is an $800B investment would force OPEC to keep supplying oil to recover the investment. Not surprisingly Saudi wants India to invest that money in building the assets in SAUDI ARABIA. They would then ship the refined fuel to India. What is wrong with this picture? Obviously it would be India out the money and the assets would be under Saudi control. If they wanted to nationalize them in future times of oil stress then India would just be out of luck and out of oil. Do you see how everything is pointing to a future game of brinksmanship? Recent government documents released from the time of the 1973 oil embargo revealed administration plans to invade Saudi, Kuwait and possibly Dubai in order to capture their oil assets and insure future U.S. oil supplies. Nixon was prepared to do it but they were able to resolve it peacefully. Do you think maybe OPEC countries have read those recent releases? Oil was $5 a barrel in 1973.

Sorry, I got off the track there but I believe readers need to be aware well in advance of the potential problem ahead. Closer to our immediate future is the market direction. The bounce today was more of a relief rally than a rebound. The Dow managed to add +25 points but the SOX dragged the Nasdaq back to negative territory at the close. The Russell gave up nearly -5 points in its closing drop but still finished slightly positive. As I stated earlier I believe the majority of this afternoon selling was due to the impending Jobs report.

If the report is positive we could have a chance for another bounce but the weak internals today suggest the selling may not be over. Next week begins the liquidity flow and funds may take Friday as their last chance to balance positions before dealing with that cash. Trimtabs is still expecting a large influx of cash and much of that cash is destined for ETFs, Exchange Traded Funds. Cash flows into ETFs in 2004 were more than three times the 2003 rate. This is not expected to change. Investors have found they can pick their own sector/market funds and jump in and out at will. With mutual funds having holding periods as a result of the fund scandal it limits exits. This suggests funds could see less cash than they previously expected with the rest going to ETFs. The market will benefit from either investment.

With the Dow hovering just over 10600 we have risk to 10450 if that 10600 level breaks. The Nasdaq normally corrects about 5% in January and we are nearly there at the 2089 close. With the SOX the weakest link today the SOX support is critical for Nasdaq health. The SOX is resting on three different support lines at 400 and a break there could see a -20 point drop. Since it closed at the low of the day there is still appears to be some sellers leaning on that index.

The Nasdaq has risk to 2050 and more than a minor dip in the SOX could setup a sharp drop in the Nasdaq. I would be a buyer at 2050 if it occurs. I would like to see a sharp drop on Friday to punctuate this week and put an end to the profit taking. Either way I am expecting next week to be positive. Earnings will officially begin with Alcoa, DNA and NT on Monday. Also check out GBX which reports on Monday. I found them when I was doing the research on the Oil Crisis Report. They make railcars and they are two years behind because of the demand for coal, oil/gas and commodity cars.

One stock of note after the close was UTSI. The stock had crashed from over $22.50 on Tuesday to 20.50 just before the close. They warned that earnings would now be a loss of 40-45 cents compared to expectations of a penny profit. Last year they posted a Q4 profit of 52 cents. They said a slowing Chinese economy and a drop in capex spending by major carriers had hurt sales with revenue now expected to be $740-$775 million instead of the $875-$885 million previously predicted. The stock fell from 20.50 to 16.50 in after hours.

For Friday I would watch the volume and the A/D line for signs the weakness is over. If we get a sharp dip I would be a buyer on expectations next week will see the bulls return to the market.

Are we there yet? Ask me again in a week.

Jim Brown
Editor

"You cannot stop people from thinking. The tough job is to get some people started."

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