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Market Wrap

Oil Support Finally Cracking?

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+ 37.30



1.86 bln




+   8.30



1.70 bln


S&P 100


+   2.62





S&P 500


+   5.27







+   0.50





RUS 2000


+   0.74







+ 13.40







-    0.43







-    0.20







-    0.40




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52wk Highs







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Oil Support Finally Cracking?

It is far too soon to tell if we are going to get the normal Q2 price drop but signs are starting to appear suggesting price support is weakening. Wednesday's inventory numbers could be the push needed to produce a real downtrend. Lower crude prices today gave some relief to equities but the excitement was still lacking. A late cycle flurry of earnings warnings helped dampen excitement but good news from Pfizer helped keep the Dow in positive territory.

Dow Chart - Daily

Nasdaq Chart - Daily

The only economic report this morning was the Challenger Layoff report and it showed a drop in layoffs to 86,396 in March compared to 108,390 in February. This drop in layoffs completed the quarter where -287,134 workers lost their jobs. Despite the drop in March the rate for the quarter was +9.2% higher than the same period in 2004. Plant closings took the lead in reasons for the layoffs at 29%. February's main reason for layoffs was mergers and acquisitions at 43%. That number fell to 14% in March but with the recent surge in mergers it is likely only a temporary drop.

There are no material economic reports on Wednesday but the oil and gas inventories will be closely watch by stock traders. Oil fell back from its highs just over $58 on Monday to close at $56. This -$2 drop is still well above last week's low at $52.40 and the oil inventories could provide the added push to get a real drop started. Greenspan took to the airwaves today to discuss oil prices and his comments helped cool the buying urge. Greenspan noted that futures prices for the fall months were higher than current spot prices and that trend could not continue. He suggested that higher futures prices would prompt more production and eventually dampen current prices from excess inventory. He called the current ramp in prices a "frenzy" and indicates he may not be fully aware of the acceleration of the long term technicals. I never cease to be amazed at the comments from so called analysts and people in authority suggesting this is just a bubble and prices will return to normal eventually. This represents a complete lack of real research on their part because the numbers are there for anyone willing to spend 15 min to look for them. However on Greenspan's part I believe he is trying to avoid a panic by slowly turning up the heat as time passes. He did mention several key points but the message was downplayed to avoid crying wolf too soon. Greenspan is a gradualist and has been all his political life. Give the public the bad news one tidbit at a time until the entire mosaic completes the picture. I believe those who were paying attention got a couple more energy tidbits from him today. Full text at this link: http://www.federalreserve.gov/boarddocs/speeches/2005/20050405/default.htm

Regardless, Greenspan's comments did manage to take the excitement out of the crude market but there was definitely no selling surge. Nobody wants to be short oil and there are plenty of buyers waiting for every dip. Greenspan said that higher prices were already leading to a reduction in demand as consumers put off driving and turned down their thermostats to conserve money. He pointed out that the lack of new discoveries in natural gas had led to all time highs in prices that had all but priced the industrial consumer out of the market. Consumption of natural gas by industrial users has dropped -12% since 1998 as prices increased. This is good for U.S. consumers since gas fired electrical plants have been increasing in number and rate of consumption and all new gas production is being burned faster than it can be discovered. The peak gas scenario is now expected to be in 2007-2008 where supplies of natural gas will begin to decline rather than increase. This will produce monster spikes in utility bills as the gas-fired plants compete for dwindling supplies.

Greenspan suggested that the long-term outlook for oil and gas was conjectural at best. "Should prices continue to increase the use of energy would decline over time." The 200 million light vehicles in the U.S. consume 11% of total global oil production. $5 gas would definitely slow that consumption but not by 50% or even 25%. New drivers from adolescents to emigrants will continue to swell that overall demand for gasoline in the U.S. Greenspan also pointed out what I have been saying for the last year. Current proven reserves are congregated in geographic areas where substantial capital would be required to build the production infrastructure but where that capital investment is prohibited or restricted. Russia leads that list where proven oil reserves exist but little attempt is being made to produce them due to the political climate. Eventually they will come to market but not in this decade. By the time that oil begins to flow it will only replace oil supplies that are already shrinking.

Greenspan said advances in production technology were helping to extend recovery amounts despite "ever-fewer new discoveries of major oil fields." There you have it from the Fed head himself. "Ever fewer discoveries of major fields." There have been no major discoveries since the 1970s and there will not be any in the years ahead. All the big deposits have already been discovered. There are no oceans of oil that have escaped detection. This is what will continue to drive prices higher for the rest of our lives. Oil futures for September hit $60 on Monday and I believe that contract will hit $70 before it expires. September crude closed today at $58.30. This is a sure sign that refiners are already concerned about adequate supplies once the ramp up into the heating oil season begins.

Crude Chart - Daily

While the Greenspan comments on energy were the highlight of the day for the markets there was other news. Pfizer told analysts that although there were many struggles underway they would return to double-digit profitability in 2006 and accelerate after that. Pfizer warned that current earnings would fall short of analyst's estimates but they were taking steps to solve the problems. They plan on cutting up to $4 billion a year in costs by 2008. They also said they were going to accelerate their $5 billion share buyback program with 50% of it going into Q2. That alone should provide significant upside for Pfizer. PFE jumped +1 on the news but failed to break resistance at $27. I believe PFE is no longer a caution and may have turned into a long-term buy but problems still exist. Pfizer has dozens of drugs going off patent over the next couple of years and those drugs will have to be replaced.

Tech stocks managed a +8 point rebound on the Nasdaq but they were hindered by a flurry of earnings warnings by software stocks. More than a dozen software stocks warned that quarterly results would disappoint and customers were not focusing on capital spending. SBYN, BVEW and VNWK said orders failed to appear because customers were too preoccupied with accounting issues to upgrade software. That sounds a lot like the dog ate my homework to me. I have a hard time making that connection but that was the excuse they used and blaming it on Sarbanes Oxley. Mentor Graphics (MENT), Altiris (ATRS) and RSA security (RSAS) said a general slowdown in sales was to blame for their warnings. Siebel Systems warned after the close that lower license revenue would result in a loss for the quarter. Analysts were tripping all over themselves to downgrade individual stocks and the sector and reiterated that this was historically the slowest quarter for the industry. Several companies failed to give future guidance saying future visibility was very bad. You can translate that into "we don't have any orders and we don't see any in the pipeline."

Analysts were quick to remind investors that the software sector can be a leading indicator for the overall health of techs. Weak economics and higher rates tend to depress software acquisitions more than other investments. Software is somewhat of a luxury purchase for those with existing systems in place. It typically produces higher productivity for the acquiring company but the expense is down on the priority list for tight budgets. Typically the "if it is not broken, don't fix it" rule applies. It is an easy budget item to strike if companies are unsure about the future. The flurry of warnings today would be more alarming if it were not a typically weak quarter. This bears watching as the earnings parade continues.

RIMM announced earnings after the close and promptly lost -$5 in after hours. The company said the cost of settling the patent lawsuit with NTP pushed them into a loss for the quarter. Without the charge RIMM earned +71 cents and well over the +65 cents analysts expected. The lawsuit charge was not the real problem. Revenue appeared to be slightly less than expected and guidance for the current quarter and the next quarter was below analyst estimates. Subscribers were up strongly to 2.51 million from only 1.07 million the same time last year. The company said it would surpass 3 million this quarter and they planned to launch BlackBerry with an additional 100 carriers this year alone. Personally I would love to see a drop back to $60-65 for a long entry. With the suit behind them and sales poised to explode I think the sky is the limit once again. I also heard an analyst talking about a potential RIMM takeover. They are growing very fast and in the right space for a big telecom company to decide they would be a nice snack and gobble them up.

The Dow rebounded at the open from its Monday low for the year at 10356 but plateaued at 10470 and below the resistance at 10525 that has held for the last two weeks. While the Pfizer/Oil news allowed the markets to recover some lost ground it was a minor victory. There is still strong overhead resistance and investor sentiment has yet to really improve. The Dow has a tough road ahead between today's close and a breakout over 10600 and it would take a lot of faith to go long at this level. The Monday dip pierced the 200-day average at 10378 but the afternoon bounce saved the day. The 200-day average is more critical for the Nasdaq than the Dow but it is still a technical level traders would rather not see the Dow break.

The Nasdaq continues to trade across its 200-day average at 1992 on an intraday basis as it has for the last two weeks. It refuses to release its grip to the downside but also refuses to move back over the 2000 level for more than brief spurts. Like the Dow, the Nasdaq has tough resistance from 2000-2020 and it appears to be marking time until the earnings parade begins. We have seen two strong sell offs to 1975 and both were quickly bought. I do mean quickly! Both sparked strong buy programs for a +20 point rebound but the second dip spent most of the day at 1975 before the buy program appeared. It was as though the program traders wanted to make sure 1975 was going to hold before pulling the trigger.

The SOX is still supporting the Nasdaq with its hold on 410 support but it is starting to look very heavy. We are in that neutral zone between warnings and earnings and the Sox appears to be cringing in fear of a potential problem ahead. With the book-to-bill at .78 for the last two months investors had hoped a bottom was forming for chip demand. The software warnings plus several recent downgrades on the chip sector are starting to take their toll. Positive news had better appear quickly or the SOX could be headed for a test of 400. This would not be a disaster for the Nasdaq as 400 has long been acknowledged as real support but it would be just one more weight for tech stocks to carry.

SOX Chart - Daily

SPX Chart - 30 min

Since last Tuesday's test of critical support at 1165 the S&P has traded in a narrow range between 1170-1185. There appears to be no interest in moving higher but buyers appear on every dip to 1170. The SPX has a love/hate affair with the 100/130 period exp averages on the 30-min chart. They act as magnets in times of indecision and act as a launching point for major moves in both directions. The averages are converging at 1180 and the SPX used them as support all afternoon with hardly a wobble.

The small spark in the market today on the dip in oil prices suggests we could see a few bargain hunters if tomorrow's oil inventories continue to show an inventory buildup of crude. This is the make or break week for crude prices and it could be the make or break week for equities as well. The earnings calendar starts building in intensity as the week closes with the lineup increasing as we start next week. The earnings are not going to be as key as the guidance and it will not take several weeks of earnings to see how the guidance is trending. If it appears less than exciting then April 15th would be my target for a market turning point. With inflation building and the Fed gearing up for a protracted battle I don't see the catalyst for a real rally once earnings are known. The next couple of weeks should be critical and until something changes I am still bearish heading into summer. Definitely, enter passively and exit aggressively.


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