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Market Wrap

Fed Ahead

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Fed Ahead

Policy words from Hong Kong and speculation about the abandonment of the Fed's "measured pace" language roiled the markets today. Volumes were lighter than average across the indices as the US Dollar Index rocketed higher and gold and the CRB dived.

Breadth was mixed, with declining volume outpacing advancing volume 1.8:1 on the NYSE while advancing volume beat declining volume on the Nasdaq by a factor of 1.5:1. Option volatility declined for both the OEX and QQQQ, but the option markets were no doubt distorted by the unwinding and resetting of positions following op-ex Friday. There was plenty of sound and fury, but it wound up signifying next to nothing for Nasdaq, which closed the day less than a point lower, while the Dow lost .6% and the SPX .49%.

Daily Dow Chart

The Dow declined straight out of the gait, falling to its session low of 10534 just after 11AM. The bounce that followed failed to clear 10600, and an uneasy range ensued for the remainder of the session. On the daily chart, the trendline break has yet to be revisited as the daily cycle works its way lower, today's session again printing a lower low and lower high. The 10640-10650 confluence is immediate resistance, above which 10725 is the number for daily cycle bulls to beat. A close above that upper should be sufficient to reverse the daily cycle downphase.

Daily S&P 500 Chart

The SPX also declined, but the post-11AM bounce from the 1179 session low produced a lower doji shadow that, had the SPX closed 6 points higher, would have qualified as a bullish hammer. The decline from last week is less steep than on the Dow, with the 1185-1189 confluence exerting its pull for the 4th consecutive session. A break above that level would need to clear 1195-97 to reverse the daily cycle downphase, while below today's low, next support is in the 1173 area.

Daily Nasdaq Chart

The Nasdaq missed a bullish doji hammer by less than a point, with today's gyrations trading both sides of unchanged both in the morning and afternoon. The bounce came from a low of 1994, though the drop below the round number lasted less than 2 hours this morning. On the daily chart, 1st resistance is at 2025, but the daily cycle downphase should persist failing a close above 2040. Today's low reached a new low for 2005 and tested levels not seen since early November. Support below these lows is at 1970-75.

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Aside from the usual upgrades and downgrades, much of today's corporate news was merger-related. Internet ASKJ rallied from its premarket open on news that e-commerce company IAC/Interactive (IACI) is seeking to acquire ASKJ in a $1.85 billion deal. IACI would issue 1.2668 shares for each ASKJ share, with Reuters reporting that IACI would buy back no less than 60% of the newly issued shares to help offset the dilutive effect of the issuance. The plot thickened later in the session as IACI announced another agreement to sell its 48.6% holding of Euvia Media ProSiebenSat.1 Media AG for $204M. IACI closed lower by 2.96% at 21.63, while ASKJ added 18.28% to close at 28.67.

Other internet merger news included YHOO's agreement to acquire Ludicorp Research & Development Ltd. and its Flickr photo website. YHOO rose 1.64% to close at 31.62.

Media tech developer AVID announced an agreement to acquire digital video firm PCLE for $426M in a deal that valued PCLE at a 30% premium to Friday's closing print. PCLE shareholders are to receive $1 in cash and .0869 AVID shares for each PCLE share. AVID estimates that the deal with add to earnings as soon as Q4 2005, and anticipates 2005's full year pro-forma EPS at $2.70. AVID got slammed for 10.07% to close at 56.61, while PCLE gained 15.49% to close at 5.74.

Financial services software provider SDS rocketed higher on news that it is a takeover target by an unnamed bidder, though a NY Post article reported that a group comprised of Silver Lake Partners, Texas Pacific Group and Thomas H. Lee Partners LP were willing to pay as much as $10 billion for the company. SDS gapped up above 30 and stayed there, closing the day +24.53% at 31.07.

Onyx Pharmaceuticals (ONXX) rose sharply on news that, along with Bayer, the company is planning a New Drug Application for possible accelerated approval. ONYX rallied in the premarket and spent the session edging lower to close +1.37% at 33.25.

Other premarket rallies occurred in DNA and IMCL on news that Novartis and Schering are delaying plans to seek regulatory approval to market their own experimental PTK/ZK cancer medication after a failure in late-stage trials. DNA gapped higher and closed +10.46% at 58, while IMCL finished +1.75% at 39.58.

Time-Warner announced that it will pay a $300M fine to the SEC in settlement of fraud charges, along with which it will restate its financial results from Q4 2002 to 2002 to reduce its reported online ad revenues by approximately $500M in addition to the $190M that it has already restated. TWX closed lower by 1.55% at 18.41.

On the heels of last week's slam for GM, the company announced today that it plans to cut white-collar jobs, with reductions of up to 28% of staff in some departments. Banc of America reiterated its "sell" rating on the company. GM dropped at the open but bounced 2 cents above its 52-week low of 27.98, finishing the day higher by 1.08 or 3.77% at 29.70.

After the bell, payroll and benefit provider PAYX reported Q3 earnings that rose from $80.5M or 21 cents in Q3 last year to $92.8M or 24 cents per share on revenue of $373.9M in the current quarter. These results met expectations on EPS and beat on revenue, with analysts expecting sales of $372.6M. PAYX closed the day -.19% at 31.10 and was trading 31.20 in the aftermarket as of this writing.

The bigger news today was in the treasury and currency markets, ahead of the FOMC announcement tomorrow, as the session opened with the US Dollar Index rallying, bond yields rising and gold and foreign currencies diving. Bloomberg reported that Hong Kong Monetary Authority Chief Executive Joseph Yam was suggesting that Asian central banks should be hesitant to shift to euro acquisitions at the expense of the U.S. Dollar. Addressing business executives in Hong Kong, Yam said "The euro may become so popular in this region, it may undermine the stability of international finance."

Euro futures had benefited recently from speculation that Asian central banks, which have been huge supporters of the US Dollar and treasury markets in recent years, would begin to shift their focus to favor euros over dollars. Today, this news was sufficient to take euro futures down over 1$ to a low of 1.3167, with the June contract finishing the session lower by 1.06% at 1.3197.

At the same time, reports were circulating this morning to the effect that the FOMC is taking the rallies in oil and other commodities very seriously- sufficiently so to consider the removal of the "measured pace" language that it has been using with respect to its projected interest rate hikes. Bloomberg reported that of the Fed's 22 primary dealers, 13 believe that the abandonment of the "measured" pace of rate increases could come as soon as the June 2005 FOMC meeting, with another 3 expecting that this could occur at tomorrow's announcement of the widely anticipated 25 bp increase.

Weekly TNX Chart

Predictably, the acknowledgment that interest rates must rise more quickly to keep pace with rallying commodities was bullish for the dollar and bearish for US treasury bonds. The 3 year weekly candle chart of crude oil (below) shows the effect of interest rates at sustained multidecade lows and the dollar's decline during that period. Despite this news, however, bonds were only fractionally weaker for most of the session, with ten year treasury yields (TNX) finishing higher by .8 bps at 4.519%.

In other news, the Treasury auctioned $38 billion worth of debt today, with $20 billion in 3 month t-bills auctioned at a high rate of 2.8% and generating a bid-to-cover ratio on the low-side at 1.8. Another $18 billion of 6 month t-bills was auctioned at a high rate of 3.035%, generating a stronger bid-to-cover ratio of 2.21.

Weekly chart of Crude oil

Oil was higher again as the media circulated morning reports about supply fears arising from another flare up of Nigerian labor disputes, with talk of a 3-day strike planned in April. This news overshadowed the promise of addition production hikes from Saudi Arabia, with Sheik Ahmad already discussing a second 500,000 increase and Saudi Oil Minister al-Naimi saying that there is spare capacity of up to 1.5M bpd that could be deployed immediately if necessary. Different sources quoted the amount he cited at 2M barrels per day. In any event and as Jim Brown discussed in the weekend Market Wrap, these amounts have so far failed to impress the markets, with last Wednesday's supply increases met with rising prices in the futures that day. Today, despite this news in the morning, futures traded both sides of unchanged with the May contract finishing higher by 20 cents at 57.45 after touching a high of 57.675. Marketwatch reported that the average retail price of gasoline reached a record $2.149 US per gallon, up 5.1 cents today.

The weekly chart of crude oil shows potential bearish divergences against the higher (record) high printed last week. These divergences will require downside bearish crosses for confirmation, and from the chart it appear that a weekly close below 52-53 support could be sufficient.

Tomorrow, the Commerce Department will release the PPI and Core PPI at 8:30AM, following which will be the FOMC announcement at 2:15 PM. Fear of the Fed had clearly set in, with volumes dropping toward the end of the session. On the one hand, the conventional wisdom would see rising treasury yields as being bearish for stocks, as the "risk-free" rate of return rises. On the other hand, a dollar seen to be rising could benefit equities as it attracts foreign capital seeking a positive return- the reverse of the 2002 combined dollar/stock decline.

These macro-economic trends are most difficult to predict, and I believe that the uncertainty in the markets today was the result of this dilemma. Added to the mix was post-opex week repositioning and the shortened trading week. The greatest clarity to be found today was the stronger dollar and weaker commodities and metals. My own guess is for lower equities against rising yields, but much will hinge on the Fed's words to accompany its rate decision tomorrow.


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