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Market Wrap

Why Worry?

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On Monday night Greenspan calmed the investment community with his rendition of the current rate scenario. In an uncharacteristically lucid performance, probably for the benefit of the translators, he said he did not understand why rates persisted in remaining low despite the Fed trying to push them higher. He did not touch on the baseball analogy used by Fisher or try in any way to confirm or correct Fisher's statement. The lack of a rebuttal response seemed to give the all clear to investors and the market blasted ahead at the open.

Dow Chart - Daily

Nasdaq Chart - Daily

Greenspan said the decline in U.S. Treasury rates over the past year, despite a +200 basis point hike by the Fed, was clearly without precedent. The yield on the ten-year note at sub 4% levels is nearly -100 points lower than when the Fed began its rate hike cycle. For a central banker trying to create the opposite impact this scenario represents an unprecedented reversal of fortunes. Greenspan went on to suggest multiple reasons for the divergence but none were seen as the primary cause. Greenspan noted that the drop in rates was not limited to the U.S. but was currently a global phenomenon. He said the rate convergence was providing low risk capital for investors who were trying to squeeze higher profits out of slimmer margins. A prospect he suggested would eventually end in failure.

He said the hedge fund community had exhausted the low hanging fruit of readily available profits leaving markets with little potential for better than normal returns. In a very Greenspan like comments he suggested those returns would be hard to produce. "Consequently, after its recent very rapid advance, the hedge fund industry could temporarily shrink, and many wealthy fund managers and investors could become less wealthy." "Could become less wealthy" is a Greenspanism for strong losses ahead if funds persist in trying to squeeze the last drop of gains out of the market by excessive leveraging using these low rates. This suggests to me that he plans on continuing to hike rates until he sees the desired impact. Those funds failing to understand this scenario are doomed to lose money.


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If Greenspan wants to see ten-year yields back in the 5-6% range to slow the easy access to cheap money then he will continue the rate hikes until the market reacts to the level he wants. We may be in the eighth inning according to Fisher but with the rate hike doves and hawks tied this game could go well into extra innings. With the analysts fixing their hopes on one and done in June I feel there is a huge potential for disappointment. There is also the potential that Greenspan decided his speech to Beijing was not the place to talk in baseball analogies when he has televised testimony and Q&A coming on Thursday. If he wants to send a message to the markets this is where he typically does it. Many market moving comments have come out of the testimony sessions and odds are growing that Thursday's comments could be repeated for many weeks to come. We are three weeks away from the June Fed meeting and it is entirely possible that the measured pace language could be discarded in an attempt to suggest faster hikes ahead. This is one way the Fed could shock the market back into a more cautionary stance without actually raising more than 25 points in June. Fear of larger future hikes could put risk back into treasuries and rates could become much more volatile. If you have not refinanced yet I think the low rate window will close in about three weeks.

The Atlanta Fed President, Jack Guynn, said on Tuesday that the Fed was NOT at a neutral point yet on rates and had some distance to go. This comment wilted the morning bloom in the market and helped push stocks back to the lows for the day just after 2:PM. This comment called into question the comments from Fisher last week. All eyes will be on Greenspan on Thursday for the real answer.

In other news GM shocked the market with a plan to cut -25,000 workers by 2008 and close several U.S. plants. CEO Rick Wagoner, speaking at the GM shareholder meeting, said it would produce annual savings of nearly $2.5 billion. This came on the day that Kirk Kerkorian's offer to purchase 28 million shares at $31 expires. GM had declined to $30.40 on Monday but the news from the shareholder meeting sent the price back to $31 with Kirk's tender seen as a floor under the stock at least until Tuesday's close. The company said it was in talks with the unions in an effort to reduce the $1500 per car attributable to health care costs. Wagoner said it was preferable to work out a deal with the unions but he suggested there was some doubt it would happen. From the tone of the Q&A it would appear GM has a major union battle ahead and for GM to recover it would require a major union concession and one that might only be gained after a prolonged battle including strikes and a potential bankruptcy to break the contracts. Overseas autoworkers cost only about 10% of the comparable U.S. worker. This puts GM under serious competitive pressures at a time where consumers are faced with many attractive options when shopping for a new car.

Oil prices fell to $53.50 on fears that inventories will show an increase on Wednesday. These inventory fears were offset by rumors that OPEC was considering another production increase at its June-15th meeting. Their official quota now is 27.5mb per day but rumors are suggesting that a surge in demand has boosted that output to just over 30mb over the last two weeks. This is crazy for anybody trying to understand the real facts. Frontline said last week that May deliveries from OPEC had slowed but today we hear that they are considering raising their quota. OPEC is definitely managing price expectations with their alternating comments designed both to depress new exploration and keep prices over $50. The EIA raised their official Q3 average price prediction to $53 and said gasoline would likely remain over $2 the rest of the year with short term prices in the $2.17 range. Many analysts think speculators are creating the price pressures but a recent survey showed that traders on the floor controlled less than 9% of all contracts. More than 91% of all contracts are held by institutions either as investments or hedges.

GOOG came within 49 cents of $300 early today but that was close enough to the magic $300 number to trigger selling. After a flurry of new price targets by analysts at the $300 number and higher the gains have been coming almost daily. Unfortunately the attention also attracted sellers and those holding the stock probably feel the attention signals the end of the bounce. It is widely expected GOOG will be added to the S&P soon and much of the buying is speculators hoping to capitalize on the announcement when it comes. GOOG closed at $293.

SMSC garnered the chip spotlight by raising guidance for the current quarter. Guidance was raised to a profit of 13-16 cents, up from prior guidance of 8-12 cents. AAPL fell over a buck to $36.50 a day after it announced a switch to Intel chips instead of IBM. This was a continuation of the four-day down trend. IBM rebounded sharply from Monday's drop but erased most of its gains before the day was over. The SOX spiked sharply to 439 at the morning open on short covering and several positive chip comments. Before the day was over the SOX gave up all its gains and retreated to 428 and the bottom of the range we have seen over the last two weeks. This is a very precarious position as we near the Intel update on Thursday. A good report could provide some serious short covering but any flat or negative news could provoke a substantial drop back to the 405-415 level where all the major averages converge.

The drop in the SOX knocked the props from under the Nasdaq and the tech index fell to close down -8.60 for the day at 2067. This was a substantial drop from the intraday highs at 2096 which was only one point away from its June highs and highs for the last five months. There is definitely some fear of Intel's update on Thursday even if it is just means taking some profits off the table in caution. The SOX drop was the sharpest sector drop in techs but there was general afternoon weakness across all the majors. It was not just chip related. The Nasdaq closed just above support at 2065 that has held for the last two weeks and the very bottom of its range for that period. A further drop from there on volume could see a return to the prior support level in the 2000-2010 range.

SOX Chart

The Dow closed nearly in the middle of its recent range at 10485. The Dow has been swapping sides with 10425 and 10575 several times a week for the last two weeks. The 10425 support will likely be tested before Greenspan's testimony on Thursday and without any further advance Fedspeak that support should hold. The volatility on the Dow has been extreme with alternating triple digit moves with morning short squeezes being followed by strong retracements. Investors are being chopped to ribbons by the bungee markets but traders are having a ball buying support and selling resistance.

SPX Chart - Daily

Wilshire Chart - Daily

The SPX has been moving progressively higher although in jerky fashion. The morning spike to 1209 was erased with a closing drop to 1197 with 1195 uptrend support. The Wilshire 5000 and NYSE composite are also showing the uptrend pattern of the SPX. The broader market is inching higher while the Dow and Nasdaq Compx are struggling. This uptrend by the broader indexes is slowly making bullish converts out of prior bears. Should the Greenspan testimony and Intel update on Thursday pass without a negative surprise I will probably revert to buying support and abandon my neutral to bearish bias I had for summer. My Sunday commentary should be interesting.

Wednesday is sorely lacking in material economics with Wholesale Trade and Oil and Gas Inventories the only reports on tap. Oil inventories are expected to show slight increases and a negative surprise here could really ramp prices given the current news. The only real events remaining this week are the Greenspan testimony and Intel. I believe traders are marking time until those events pass before committing additional funds. I suggest everyone do the same. Continue to enter passively and exit aggressively.

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