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Fed Ahead

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Fed Ahead

The various markets traded an uncertain session on light volume ahead of tomorrow afternoon's FOMC announcement. Volume was well below average, with QQQQ failing to trade half of Friday's shares.

Breadth flip-flopped several times, with volume favoring the bulls and bears at various points but never decisively. Advancing volume prevailed, however, with 2 advancing NYSE shares for each declining and 1.24 advancing Nasdaqs for each declining. Both the TRIN and the TRINQ finished in neutral territory, with combined volume coming in just above the 3.1 billion mark.

Daily Dow Chart


The Dow bounced from a higher low at the top of Friday's range at 10188, closing just under the 10258 high at 10251. The daily cycle upphase is on unequivocal buy signals from the failure to retrace any of Friday's strong gains, and above 10260, next serious resistance is up at 10360.

Daily S&P 500 Chart


The SPX retraced a small part of Friday's gains but dojied back up, spending the rest of the session above the range. The low came at 1154.7, finishing less than a point off the 1162.87 high. As with the Dow, a daily cycle upphase is in progress off a bullish stochastic divergence, and a break of 1162 and 1166 resistance will have its next test at 1172 and 1180 confluence.

Daily Nasdaq Chart


The Nasdaq did not close on its highs, finishing 5 points below at 1928 after bouncing from a low of 1916. Despite its being the weakest of its peers, the Nasdaq also respected Friday's bullish high volume doji print, and while the daily cycle upphase is weaker, it's still an upphase. The higher stochastic low against the lower price low is bullish as well, but the true test will be at the declining resistance line in the 1950 area. Above that, 1975-80 is the heavier resistance, followed by 1996 and 2020.

Daily TNX Chart


The Treasury announced its market financing estimates for the quarter. It now anticipates paying down $42 billion in debt during Q2, the first such reduction in four years due to strong tax receipts and large recent State and Local security issuances. Today, the Treasury auctioned $28 billion worth of 13-week and 26-week bills today. Indirect bidders took just over $7 billion of the total, the 13-week bills fetching a high rate of 2.87% at a bid to cover ratio of 2.16 and the 26-week bills a high rate of 3.085% and 2.13 bids for each accepted.

Ten year treasuries lurched lower immediately following the announcement at 1PM. The ten year note yield had opened below the key 4.2% resistance level and bounced sharply above it following the disappointing ISM release at 10AM (see below). The yield pulled back following completion of the t-bill auction but held above 4.2%. The daily cycle oscillators began turning up from oversold territory last week, with Friday's doji reversal from 4.15% a likely candidate for the daily cycle bottom. Above 4.24%, the new upphase for TNX should be confirmed, targeting 4.3% and 4.4% resistance above. For the day, TNX closed lower by 0.7 bps at 4.194%.

Chart of Crude oil


Crude oil opened in the red after printing an overnight low one tick below 49 but bounced back to closed higher by 1.175 at 50.90, off a high of 50.957 and 2.36% for day. The daily print was an inside day within Friday's wide range, still well within the downtrend off the April high. Bulls need to clear 52 resistance to challenge the current downtrend.

In economic news, the Commerce Department reported that March construction spending rose by 0.5% in March, beating expectations by 0.2%. Private sector construction spending was up 0.5%, while public sector spending rose 0.3%. The National Association of Realtors reported that pending sales of US homes declined 0.3% in March, while still being 1.7% higher from March 2004's levels.


Shortly thereafter, the Institute for Supply Management reported its ISM Index for April. The Manufacturing Index fell to 53.3% from its March reading of 55.2%, the 5th consecutive month's decline and the lowest level since July 2003. Expectations were for a reading of 54.6%. The ISM Job Index also fell from its 55.2% reading in March to 52.3%. Readings above 50% indicate expansion, below 50% contraction.

PricewaterhouseCoopers later reported that IPO activity for Q1 2005 has been strong, as the average deal size rose from Q1 2004's $201.1 million level to $251.4 million, a 25% increase. Proceeds from IPOs for the quarter rose from $8.6 billion last year to $10.8 billion in the current quarter.

In corporate news, Brocade (BRCD) warned that revenues will come in lighter than the previously anticipated $155-$161 million at $144-$145 million for the quarter. The company cited weak demand, and expects net earnings of 7 cents per share. BRCD closed lower by one cent at 4.34 on more than double its average daily volume.

Tyson Foods (TSN) reported Q2 earnings of $183 million or 21 cents per share on sales of $6.4 billion, down from $263 million or 33 cents one year ago. Revenue rose $200 million from last years Q2. Analysts were expecting 17 cents and sales of $6.15 billion. TSN gained 3.32% to close at 17.45 on over 3 times its average daily volume.

Nortel (NT) reported a Q4 profit of 3 cents per share or $133 million on revenue of $2.62 billion, down from $528 million or 12 cents on revenue of $3.27 billion in last years Q4. The results include some $118 in one-time charges and $134 million in customer financing recovery gains. The companys gross margin was 45% of sales. Analysts were looking for $2.51 billion in revenue and margins in a range of 40%-44%. NT got smoked for a 7.23% loss, closing at 2.31.

Avon (AVP) reported Q1 earnings of $172 million or 36 cents on revenue of $1.88 billion, up from 31 cents or $148.1 million in the year-ago quarter, beating estimates by a penny. The company raised its guidance for 2005 full-year EPS from a range of $1.95-2$ to $2.12-$2.17. AVP lost 3.12% to close at 38.83 on triple its average volume.

Another wrinkle in the ongoing Qwest/Verizon/MCI triangle, with VZ sweetening its offer for MCI in the wake of Qwests later offer. MCI had given VZ until today to revisit its already-accepted bid. This morning, it was announced that VZ had upper its offer for MCI to $8.45 billion, in a deal comprised of $5.60 in cash to be paid upon MCI shareholder approval, in addition to the great of .5743 VZ shares for each MCI shares, or VZ shares, or cash valued at $20.40 per MCI share. While the latest offer falls slightly short of the Qwest offer on the raw numbers, MCI said that it considers the VZ offer to be stronger on a "risk to versus reward" basis. Later in the session, Q stood down, stating that "It is no longer in the best interests of shareowners, customers and employees to continue in a process that seems to be permanently skewed against Qwest." Q closed higher by 2.05% at 3.49, VZ lost 2.35% to close at 34.96, and MCI lost 3.13% to close at 25.70.

In a related story, it was reported that the SEC is looking into the trading of Q's shares. In particular, certain trades that intervened to support Q's price on days when the shares were dipping below the minimum threshold on the terms of its buyout offer for MCI are being examined.

The markets got a lift from AIG, which announced yesterday that it will restate its earnings to 2000. The restatement will correct accounting errors that exaggerated the company's net worth to the tune of $2.7 billion. The company's 10-page statement indicated that AIG expects to file by May 31st. It placed part of the blame on former executives, stating that "certain entries appear to have been made at the direction of certain former members of senior management without appropriate support." The restatement will trim approximately 3.3% from the company's net worth, which $1 billion more than the previous estimates of $1.7 billion. Moody's responded by reducing AIG's long-term debt rating from "Aa1" to "Aa2," as well as the ratings of a number of AIG's related companies. AIG closed higher by 5.09% at 53.44.

Yellow Roadway (YELL) announced that it has upped the cash portion of its $1.37 billion big for tucker USF. USF shareholders would receive approximately 65% in cash and 35% in YELL stock, changed from a 50-50 split of cash and stock. However, there will no longer be a cash election component of the deal for USF shareholders, and YELL shareholders will no longer be required to approve the deal as the number of new shares issued will be less than 20% of the total issued and outstanding. The USF shareholder vote is expected to take place on May 23rd. YELL gained 4.18% to close at 51.05 on twice its average daily volume.

Retailer Neiman Marcus (NMGA) announced that it has accepted to be acquired to by 2 private equity firms, Texas Pacific and Warburg Pincus, for approximately $5.1 billion. NMGA got pummeled for the session, near the end of which Moody's announced that it had placed the company's debt ratings on credit watch negative. NMGA got clipped for a 5.45% loss to close at 92.96 on nearly 9 times its average volume.

With all eyes turning to tomorrow's FOMC rate decision, today's economic highlights presented the Fed's dilemma clearly. With the Fed Funds rate at levels that remain very stimulative, the benefit has been bypassing US manufacturing and employees. Both sectors remain weak, while the corporate sector is strengthening as seen in the strong increases in quarterly IPO deal-size and total proceeds. More stimulation will not necessarily serve the purpose that the Fed seeks to achieve, like pumping more air into a leaky tire. The ten year note yield popped above 4.2% resistance shortly after the ISM report, simultaneously with June gold futures breaking below the key 432 support level.

Worse yet is the potential pressure that over-stimulation can bring to bear on consumers. Costco's CEO Jim Sinegal in a speech today noted that he's seeing price inflation beginning to creep in "for the first time." Those of us who follow the markets have been observing it for years in the commodity, real estate, foreign currency, equity and bond rallies. What Sinegal is highlighting is that this inflation is impacting consumers' ability to purchase the products Costco sells- a clearly negative effect of the Fed's stimulative policies. The Fed finds itself in a difficult spot, as usual, and the dilemma provides ample fuel for inflationists and deflationists, bulls and bears alike. The announcement is scheduled for 2:15PM EST.

Also scheduled for tomorrow is Factory Orders for March and, throughout the day, reports from the various manufacturers on April's truck and auto sales. As is usually the pattern, volume should be thin and get thinner approaching 2PM, following which the pre-Fed volatility will kick in. With many participants waiting for a sign of direction in the wake of the announcement and many fading the initial move and fading the fade and so on, tomorrow afternoon promises to be more action than many like to handle. For now, the daily cycles favor upside for equities while an upphase for treasury yields is overdue. As Jim says, enter passively, exit aggressively.
 

 
 



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