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Market Wrap

15 Minutes of Fame

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15 Minutes of Fame

The new kid on the block got his 15 minutes of fame this week and the instant notoriety was far more than he bargained for. Dallas Fed President, Richard Fisher, stunned investors and analysts alike with his eighth inning sports analogy on Wednesday and the talking heads will not let him forget it. It was the sound bite of choice every 15 min for the rest of the week. Word on the street according to Greg Valliere of The Stanford Washington Research Group, Mr. Fisher was reprimanded rather harshly for his off the cuff comments. With Greenspan trying his hardest to push rates higher using his patented Greenspeak approach I am sure he was not happy with the one-and-done suggestion from Fisher. In the space of about 60 seconds Fisher destroyed the continued rate hike risk and bonds headed into the stratosphere. The measured pace language had speculators predicting something in the 4% range for year-end and Fishers ninth inning scenario erased that potential in the minds of investors. As of Friday the Fed Funds Futures are showing less than a 50% chance of two more hikes by year-end much less four. Odds are good Fisher will not be doing any on camera interviews in the near future.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

We all know what the market did within seconds of Fishers comments. The Dow had weakened from Tuesday mornings open at 10540 and was looking like a world-class cliff diver getting ready to take the plunge after a disappointing ISM report. The Fisher comments prompted better than a +200 point spike to new two-month highs just over 10580. As Jonathan would say, it was a real bear-be-que. Shorts had just settled in for the summertime swoon and were rudely awakened by a massive short squeeze. The spike did not last the day but dip buyers struggled hard on Thursday to provide support. That support finally crumbled on Friday morning and all the gains for the week were erased despite what was called a market friendly Jobs report.

The Jobs report showed a net gain of only +78,000 jobs in May compared to estimates of +185,000 and a whopping +274,000 in April. There was no positive way to spin the drop in jobs but everyone with a microphone tried very hard. The two main retorts were "if you average the last five months you get +180,000 per month" and "over the last two years 2.5 million jobs have been created." Personally I don't think it makes any difference to the market how many jobs were created in 2003 or even 2004. The market wants to know which direction the economy is headed today, not last year. Secondly, the +274,000 jobs in April were bolstered with an adjustment of +207,000 jobs. This was the "estimated" jobs created by the birth/death fudge factor. Removing the 207,000 government guesstimate leaves only +67K in April. If you want to get really serious nearly two million of the +2.5 million jobs over the last two years were "guesstimate adjustments" based on that scenario.

The way I understand it the government tries to guess how many news jobs were created by new businesses being born as well as how many jobs were lost by businesses being closed. These small businesses are not covered by the actual payroll survey and it boils down to a calculated guessing game. These numbers are added to the actual survey numbers to provide the final tally. The internals of Friday's report were ugly. Service companies only added +64,000 jobs and well below the +232K reported in April. Also, March jobs were revised down by -24,000 to +122K from +146K. Manufacturing payrolls fell again as they have for seven of the last eight months. April's loss in manufacturing was revised even higher to -9,000.

The people in the administration tasked with facing the reporters tried to focus attention to a drop in the unemployment rate to 5.1% as strong evidence of a rising economy. Sorry, Ms Chao, but the unemployment rate fell not because of hiring but from a rising percentage of dropouts. Those are workers who have given up on finding a job or have exhausted their benefits. They are removed from the total "workforce" numbers making the unemployment ratio better than is actually is. Elaine Chao tried to claim that 5.1% was the low for the last decade but Ron Insana reminded her that 3.9% was the low during the dot com bubble. Gotcha!

The May Jobs number was the lowest monthly jobs growth since Dec-2003. Unfortunately wage growth is expanding rapidly with wages up +3.3% in the last six months.

By Friday morning the one-and-done crowd had morphed into a two-and-through stance and by Friday afternoon the majority of analysts were returning to the 4% fold. Several Fed heads had been approached and none were seen ready to rebut Fisher or agree with him. The gag order had gone out and Fed governors were avoiding the microphone. Edward Gramlich was trapped into a couple of hurried comments and after several refusals to answer he finally said he did not know what inning the Fed was in and then bolted for the safety of closed doors. Another analyst commented that Greenspan may have to penalize investors for Fisher's remarks by using stronger language to reemphasize his continued measured approach. Greenspan was rumored to be speaking Sunday night and the bond market raced to square up positions as they neared Friday's close. The actual time of his speech is 9:PM ET on Monday night when he does a remote video speech to Beijing China. Unfortunately he is going to do a Q&A session after the speech and you can bet Fisher's baseball analogy will get its fair share of coverage. Translators should also have their hands full as Greenspan will definitely try to set the record straight without actually saying anything definite. Considering how hard he is to understand in English I would hate to see how the translation comes out in Chinese. Greenspan will speak again on Thursday when he gives testimony to the joint economic committee in Washington and you can bet he will be grilled by the members on live TV.

We also got the ISM Services number on Friday and like the earlier ISM number it fell unexpectedly to 58.5 from 61.7 in April and well below consensus estimates of 61.0. This was the second consecutive monthly decline. Export orders were mostly responsible for keeping it from being much lower. Exports rose to 62.0 from 52.5 and were the only component with a decent gain of more than a point.

Bonds saw some serious buying with yields on the ten-year notes falling to 3.81% shortly after the open. This was a 15-month low and appeared to show substantial worry by investors that the economy was slipping fast. Fortunately there was a key reversal of fortunes about 10:AM and the yields rose to close at 3.98%. Still under 4% as they had been for three days but it was a sizeable sell off. The 30-year bond yield fell to 4.15% a level that matched the June-2003 dip and an all time low for that issue. Given the effort by Greenspan to push rates higher this has got to be giving him some serious heartburn. The housing bubble he has been battling got a serious boost with rates back at decade lows. Tough to cool off that sector when the fires are being fueled by 4% money.

The Fed has a real challenge ahead for the June meeting. The economy is clearly slowing but rates are still well below where Greenspan wants them. Does he continue the measured pace language or sharpen the tone to offset the Fisher comments? The ISM on Wednesday came in at 51.4 and just enough to give him one more free rate hike. The Fed has never hiked rates with the ISM under 50 and odds are very good the June number, due out on July-1st, could break that 50 level. With the FOMC meeting on June-28th they can legitimately take another hike with ISM and Jobs not until the following week.

Offsetting the dismal economy blues has been a two-week spike in copper prices. Copper rose to $1.55 on Friday and levels not seen since 1989. If bull markets have a copper roof then we are very close to a strong rally. The $1.50 ceiling we have seen in 2005 was shattered and the most likely direction from here is up. According to analysts the recent copper inventory levels have fallen to 30-year lows. With 400 pounds of copper in every new home a new building cycle powered by low rates should push those inventory levels even lower.

Another commodity soaring this week was oil. The July contract closed over $55 and +$7 from its lows last week. Falling inventory levels of heating oil, multiple refinery outages and global production problems continue to push prices higher. Two refineries producing over 500,000 bbls each per day were hit with problems. Prices were also fueled by comments from the U.S. Energy Information Association director John Cook. He said oil will set new all time highs soon and prices could average over $60 before the year is out. He said rising demand will easily burn through the current inventory and production was not increasing as hoped. Russia said that their production would only increase by +3% in 2005-2006 compared to +11% two years ago. The problem is declining production in existing wells and insufficient capital to increase exploration and completion of new wells. Putin is feeling the cash squeeze after his Yukos takeover. Nobody wants to play in his backyard and risk having their toys confiscated. Three OPEC countries have been falling behind their production quotas due to declining output from existing wells. Saudi, Kuwait and Iran are trying to cover the shortage according to the EIA. This confirms in part the analysis released by FRO last week indicating that oil shipments from OPEC nations were decreasing. FRO is a holding company primarily engaged in operating oil tankers. It was also reported that a new record in jet fuel consumption was set in May. With the summer travel season upon us both gasoline and jet fuel consumption should rise. There was also a long-term weather report earlier in the week that predicted a stronger than normal hurricane season in the Caribbean. Last year's hurricanes removed 40 million bbls from production and helped send prices sharply higher. A repeat of that calamity this year could be a serious problem given the already tight supplies. If you took my advice to add to positions when oil dipped under $50 you had plenty of time to act in mid May and it is very doubtful we will see those levels again this year.

On Sunday there will be a movie on TV called Oil Storm. This is a docudrama suggesting what would happen given several very plausible events. Oil prices could rise to $150 a bbl according to the film if a hurricane hit Port Fourchon LA crippling production in the gulf. The nation turns to Saudi for help but terrorists chose that time to cripple output given the emergency demand. (check out Fox for times in your area)

Copper Chart - Daily

Oil Chart - Daily

The Nasdaq spent three days at 2095 resistance, which dates back to multiple breakout attempts in the first quarter. This was a very strong rebound for techs given the sub 1900 dip in late April. The Nasdaq has seen gains in 19 of the last 23 days. Much of the gains came on the back of the SOX, which rebounded sharply to strong resistance at 440 and a long jump away from its 376 low in late April. Intel was a strong supporter of the SOX with gains on 15 of the last 16 sessions. Unfortunately the wheels may be ready to come off this chip rally. Nearly all analysts feel the chips have come too far too fast and far too early in the cycle. The SOX lost nearly -6 points on Friday and there is a serious pothole ahead. Intel gives it's mid quarter update on Thursday night and while they are not expected to cause waves there is always fear of the unknown. A late report out on Friday showed that laptops/notebooks outsold desktop PCs in May for the first time ever. Another analyst said channel checks showed those sales rising rapidly due to the wide acceptance of the Wi-Fi standards and proliferation of hot spots. It was estimated that portable computers could post a 3:1 margin over desktop deliveries by 2006. This is very good news for Intel and Dell. Intel has the largest share of the laptop market and that share is very high margin. It stands to reason that Intel could be reaping the profit rewards of this new trend. For that reason I would not bet against Intel next Thursday but I would not bet on them either. They have returned to very strong resistance at $28 and it will take a strong report to push them higher.

Despite the Nasdaq dive on Friday the markets are not in that bad of shape. The Dow is the weakest link this time around and ended the day clinging to 10460 as support. I mentioned on Tuesday night that without a catalyst the path of least resistance was down and I would short Dow 10550 and S&P 1195-1200 if given the chance. Well the catalyst came with the Fisher comments just before 10:00 on Wednesday and gave us an excellent short entry at 1203-1205 on the S&P. The futures traders in the Futures Monitor loaded up at 1205 on Friday and are looking good this weekend. The Dow is hard to use as a market indicator this week because of the volatility within its 30 stocks.

A better view is seen using the Russell-2000 and the Wilshire-5000. The Russell failed at 625 resistance but did not fail far with a 620 close. The Russell has been uncharacteristically strong for an early summer. The rebound to 625 put it just a strong week away from a potential break to test the highs. The Wilshire-5000 came within rock throwing distance of 12000 and its resistance highs. Both of these indexes suggest the market breadth is much stronger than the Dow/Nasdaq would suggest.

Russell Chart - Daily

Wilshire 5000 Chart - Daily

While I have not entirely lost my bearish view there is a lot of bullishness building in the market despite the calendar. The selling on Friday was due in part to simple profit taking given the three-week rally. Most of that rally was built on short squeezes prompted by sudden news events. Still any way you look at it the markets have held up rather well given the circumstances.

For next week the challenge is going to be the Fed and Intel. Greenspan has at least two chances to blame Fisher's comments on irrational exuberance from the new kid on the block. He will likely restate the measured pace party line and could punctuate it with some sharper comments just to remind everyone who is really in control. This means there is substantial event risk surrounding the Greenspan appearances. Everyone has their party hats on to celebrate the end of rate hikes and Greenspan could easily cancel the party. Secondly the Intel update needs to be very strong to push techs higher. Any inline comments could be seen as insufficient justification for further tech buying. The Intel bar has been set high after the news on notebooks this week. Everyone will be expecting a strong upward revision and I doubt they will be happy if Intel says desktop components are piling up in the warehouse.

There are no material economic reports next week so we will have to get by on a daily rehash of the ISM/Jobs while waiting for Greenspan's testimony and Intel's update on Thursday. I am neutral on the market for direction. It still feels heavy to me but the natives are getting restless. I plan on remaining short under 1205 but would go long on a break over that level. 1205 has become my short/long indicator and that keeps me from having to make a trading decision over and over again as the week progresses. I only have to worry about one number and then follow the market from there. The challenge I see is the lure of only one more rate hike. Historically investors like to buy the market with only one rate hike to go. Up until Wednesday that was projected to be somewhere in the November time frame. Now they have been promised an early Christmas in June and any reference to a bag of coal instead of the desired end of hike scenario is not going to sit well. Cash is always a position. Definitely enter passively and take profits quickly.


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