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GM Skids, Slams Dow

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GM Skids, Slams Dow

The day opened to a huge profit warning from GM, and was followed up by news from the Commerce Department of a new record Current Account deficit for Q4. Despite a brief upside pop for the Nasdaq, all the major indices spent the day declining to new lows, with support breaks on the daily charts.

Volume was very high across the indices, with QQQQ breaking 161M shares compared with its average daily volume of 92.9M. Declining volume swamped advancing volume 2.5:1 on the NYSE and 4.06:1 on the Nasdaq.

Daily Dow Chart



A picture tells a thousand words, and the Dow's daily chart is particularly eloquent today. The 1.04% drop could not have come at a worse time for the bulls, with today's candle gapping clean below rising trendline support in place for the past 5 months. The Dow closed lower by 111.88 at 10633. Below 10625 support, 10575 is next. The daily cycle downphase should continue below 10760.


Daily S&P 500 Chart



We see the same story on the SPX, with the index opening lower at 1197 and never looking back, with the opening print also the session high. The low came at 1186, just above daily Bollinger support at the late February low. Bulls need to regain 1206 to stop the daily cycle downphase, but 1197-98 looks like stiff resistance from here.


Daily Nasdaq Chart



The Nasdaq has been trading an entirely different chart from those of its peers, but today's break took out an important support line as well, breaking the rise off the January lows for the first time in 3 months. That low was tested by today's 2012 low, below which there's only light support below 2000 until the 1975 confluence. Interestingly, the Nasdaq's volume was below the average, despite QQQQ's impressive 161.5M shares reported by Interactive Brokers.

Daily TNX Chart



The Mortgage Bankers Association released its weekly update for the week ended March 11th. The Purchase Index rose 2.5% to 462.8, while the Refi Index rose 4.2% to 2267.5. The Market Index, which measures the overall volume of mortgage loan applications, rose 3.2% for the week, but is down 33.4% from its year-ago level. The gains for the week occurred despite the average contract interest rate for 30-year fixed-rate mortgages increasing to 5.91% from 5.69% the previous week.

Today was a good day for treasury bonds, the first day in many without a large auction of new treasury debt. It also marked the third consecutive session in which the ten year note yield (TNX) made a lower low and lower high for the day, closing lower by 2.4 bps at 4.518% after breaking below the 4.5% mark. Gap support is at 4.44%, and bond bulls/yield bears will want to see that level broken to kick off a new daily cycle downphase, confirmed by a close below 4.4%.


The day kicked off on a sour note as GM warned, citing tight North American sales and lowering its quarterly and full-year earnings outlook. The company is expecting negative EPS of $1.50 for Q1, a big change from its former breakeven-or-better target. The full year outlook was reduced from a profit of $4-$5 per share to $1-$2 before items. GM expects negative cashflow of $2B for 2005, which represents a $4B decline from its previous target. Later in the session, Merrill downgraded GM to "sell" from "neutral," following which Standard & Poor's lowered its outlook on GM's debt from "stable" to "negative." Moody's also announced that it is reviewing GM's and GMAC's debt for possible downgrades. Fitch downgraded GM's and GMAC's ratings to "BBB-" from "BBB" and warned that these ratings could be lowered further to non-investment grade if GM's negativity continues to affect production in the second half of 2005.

It was a busy day for economic data, but the massive GM warning in the premarket cast a pall over the news. At 8:30, the Commerce Department announced a record current account deficit of $187.9B for Q4, exceeding estimates for a deficit of $183B. The $187.9B figure also represents a record 6.3% of GDP. 2004's current account deficit totaled a record $665.9B, or 5.7% of GDP- also a record. Foreign-owned assets in the US grew $460.2B in Q4, completing a $1.4T rise in 2004. Q3's current account deficit was revised to -$165.9B from the previously reported -$164.7B.

Also at 8:30, the Housing Starts and Building Permits reports were released. The Commerce Department reported 2.195M housing starts in February, a .5% increase that brought the rate of new home construction to a 21 year high and blew away estimates for a 2.03M increase. January's reading was revised upward from the 2.159M initially reported, to 2.183M.

Building permits declined 2.7% to a 2.074M gain, just north of estimates for a 2.07M gain. The prior 2.132M number for January was not revised.

The GM warning followed by the Current account data at 8:30AM delivered a one-two punch to the markets, and the equity indices broke to new lows for the week. Following the 8:30 data but before the Industrial production and Capacity utilization reports, CLX released an update based on the tax impact of various items in Q3 and Q4, which it expects to add an extra 2 cents per share in earnings for Q3. These factors should result in a reduction in Q4's earnings by 2 cents, however. The company expects earnings of 65-71 cents for Q3, and a 3%-5% increase in sales. The full year forecasted EPS is $5.95-$6.05, and profit from continuing operations of $2.72-$2.82 per share. CLX closed unchanged at 61.05.

GM closed lower by 13.97% at 29.01.

At 9:15, the Federal Reserve released the Industrial production and Capacity utilization data for February, showing a 3% increase in industrial production that missed expectations by .1%. January's unchanged result was revised up to a .1% gain. Capacity utilization rose to 79.4%, exceeding expectations for 79.2%. The January number was revised up from 79.0% to 79.2%.

The White House announced that Deputy Secretary of Defense Paul Wolfowitz will be nominated by the President to head the World Bank, replacing James Wolfensohn who has held the spot for ten years. While I don't watch CNN, I'm hoping that Wolf Blitzer will have reported on the replacement of Wolfensohn by Wolfowitz.

GM's warning was a shackle on the Dow, SPX and the Nasdaq. Its warning blamed a huge downside adjustment to their quarterly and annual targets on weakness in the North American market, and was then followed by the poor Current account report. GM weighed particularly hard on automotive parts manufacturers, with DPH (-5.06%), GNTX (-2.75%) and VC (-4.12%) getting hit along with GT (-3.31%). Combined with the new highs in commodities, with the CRB breaking to new 25 year highs today led by agricultural futures, as well as the rise in treasury yields, today's picture looked bleak for consumers as well as the companies who sell to them.

Steel manufacturer STLD also reduced its quarterly (Q1) forecast, lowering its target to $1.1-$1.2 per share citing poor market conditions and high raw material costs as well as production outages caused by equipment failures. Nevertheless, the company expects Q2's results to beat lowered Q1 forecasts by 30%-40%, and 2005's results to meet or exceed those of 2004. STLD lost 8.47% to close at 36.94.

There was no help from the energy market, with Crude oil futures spiking following the release of the Energy Department's weekly inventory update. Gasoline supplies declined 2.9 million barrels, exceeding expectations for a 1 million barrel drop. Crude oil supplies rose 2.6M barrels, compared with expectations of a 2 million barrel increase, while distillate supplies declined 1.8 million barrels. Shortly following the announcement, ticker headlines reported that front month crude hit a record all-time high of 56.20. Nymex later reported the session high at 56.70 on my feed. The API released its own numbers, which confirmed a rise in crude and distillate inventories and a decline for gasoline.


Daily chart of Crude oil



Ahead of today's OPEC meeting, an OPEC spokesman announced that production quotas will be raised by 500,000 barrels per day in April to 27.5M bpd, to be followed by an additional increase in the second quarter of 500,000 bpd should it be needed. Saudi Oil Minister Ali al-Naimi said that Saudi Arabia prefers the price of crude oil between $40-$50 per barrel, and feels that the current prices are high.

The daily chart of June crude shows today's new break above 56 and test of the 150% retracement off the 40.00 level in September. Bollinger resistance is at 57.92, and the daily cycle is either on the verge of an upside trending move or a bearish stochastic divergence should the contract break back below the 54 support level. For the day, Nymex crude gained 2.5% to close at 56.425, while the Amex Oil Index, XOI, rose .20% to 853.82.

The futures did not react to news announced just past 2PM that the US Senate has voted to maintain language in federal budget legislation to open the Alaska Artic National Wildlife Refuge to oil drilling. In a victory for the Bush administration, energy companies would be given the green light to exploit the Wildlife Refuge's estimated billions of barrels of oil. The federal budget will be voted later this week, following which it must pass the House of Representatives.

In the afternoon, F reaffirmed is Q1 and 2005 earnings projections, targeting Q1 EPS of $.25-$.35 and full year EPS of $1.75-$1.95 excluding items. Cashflow is expected to come in between $1.2B and $1.5B. Japanese automakers benefited from GM's weakness, with NSANY and HMC holding positive and TM declining fractionally. F closed lower by 2.62% at 11.91, while NSANY gained .43%, HMC rose .89% and TM lost .59% to close at 77.08.

In other news, JPM announced its agreement to pay $2B in settlement of a class action arising from the Worldcom debacle. JPM closed higher by 1 cent at 36.26 The FDA warned that BIIB's Avonex drug for multiple sclerosis can cause severe liver damage, and issued an advisory to physicians about the drug. BIIB closed lower by 2.31% at 37.19.

There will be less economic data tomorrow, with Initial claims to be released at 8:30, then Leading economic indicators at 10AM and at noon, the Philadelphia Fed. The picture is, predictably, mixed, with bears focusing on the significant support breaks on the daily charts and the utter lack of support or strength on the intraday charts. Bulls will point to heavy volume for the day for QQQQ and the deviation of today's decline from upside options expiration "maximum pain" prices. As often happens during op-ex week, strong directional moves and breakouts occur and suddenly reverse as market makers who may be short expiring contracts attempt to shake the corresponding long positions loose. Today's move, with its trendline breaks and absence of bounces, no doubt separated a great many call holders from their positions. While the damage done to the daily charts is very suggestive of more downside to come, it would not be out of character for an op-ex bounce tomorrow. As well, the intraday cycles are deeply oversold. A significant bounce would surprise me as I'm more persuaded by the message of the daily charts, and in any event, such a bounce should be corrective within the context of the declining daily cycle. But caution is the rule, particularly as op-ex Friday approaches.
 

 
 



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