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Walmart Surprises Bears

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Walmart Surprises Bears

Wal-Mart surprised the street on Tuesday with a report of better than expected June sales. This sudden improvement provided a boost to market sentiment given the record energy prices. If consumers boosted spending while staring down $60 oil and gasoline at $2.25 then maybe there is hope for the economy. Maybe the economy is actually stronger than analysts had been led to believe. 

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

The Wal-Mart surprise and +1.50 gain helped the blue chips climb higher after closing last week in the doldrums. Also helping the tech stocks rally was an upgrade for Apple, which also added +1.50. Adding to the bullish sentiment was a strong Factory Orders report, which jumped +2.9% compared to the April reading at only +0.7%. Analysts were hoping for a +3.0% gain and came very close with their estimates. Unfortunately like the Durable Goods Orders last week the majority of the gains came from Boeing sales. Boeing received orders for nearly 200 airplanes and that spiked the Aircraft and Parts component of the report by a whopping +125%. Aircraft was the ONLY positive component. Non-defense capital goods fell -2.50, computer equipment -11.92, communications equipment -0.04, industrial machinery -14.61 and metals -0.01. Obviously the headline number did not reflect the true state of the manufacturing economy. Granted Boeing sales do help the economy but a -12% drop in computer orders suggests the corporate buyers have zipped their wallets heading into summer. 

The strong headline number helped add to the Wal-Mart sentiment but it was based on a misleading info since 99% of investors don't look under the hood of these economic reports. All most investors heard was the Factory Orders came in at a 14 month high. In reality if you exclude aircraft the remaining orders have fallen for the last two months and have trended down since January. 

Semiconductor billings fell for the second consecutive month with a -0.5% drop. This was less than the -1.4% drop in April but still trending downward since early 2004. Analysts continue to predict a resurgence for the semiconductor sector but instead it continues to report discouraging news. The SOX rallied to resistance at 425 early in the day but struggled to hold that level into the close. 

With earnings just ahead the bearish analysts were breaking out all over. They took Oracle's prediction of a -2% currency impact on future earnings as the first in a long line of estimate cuts. A Bank of America analyst said global earnings for U.S. companies have peaked and multinationals profits will begin to slide. High energy prices are expected to depress global economies and the high dollar will continue to make U.S. products more expensive. 

The energy problem will not go away and in Colorado we are seeing $2.50 diesel and $2.25 regular unleaded with prices much higher in other states. Crude oil rose to break $60 again on the August contract on multiple fears. The December contract spent most of the day at $62.50. The current problem is the weather with tropical storm Cindy heading for Louisiana. BP, Shell, Chevron, Total and Marathon spent the day evacuating rigs in the gulf and shutting in production once again. Right behind Cindy is tropical storm Dennis also heading for Louisiana. Dennis is expected to be a major storm developing into a hurricane and possibly the strongest July storm in many years. It is interesting that all the 2005 storms are heading for Louisiana after Fox did their "Oil Storm" made for TV movie last month focusing on damage to the U.S. economy resulting a major storm hitting LA. Regardless of any damage caused by future storms the impact of having the Gulf platforms shut down for several days as a precaution will continue to prevent any significant build in inventories. With the storms stacking up back to back in the gulf this accentuates the problem and greatly enhances the potential for eventual damage. 

Another problem for the energy business is the current weather over the U.S. June ended with a surge of hotter than normal weather and July predictions are for a broad band of hotter than normal weather across much of the country. Estimates are for temperatures better than +5% above normal. The problem is in the width of the band of heat. Normally electric companies in the middle of the heat wave can draw excess power from the national grid to compensate for the higher usage. Areas where the weather is mild contribute excess energy into the grid. With much of the country expected to be fully involved in the heat wave there will not be any excess capacity available. This means plants will be running at full capacity and burning coal and gas in record amounts. 

There was some good news with BP announcing its Q2 production rose +3.5% compared to 2004 levels. This was slightly higher than analysts had expected. BP said it was on track to meet its 2005 production goals of 4.1-4.2 mbpd including oil equivalent. Q2 production levels were 4.11 mbpd. The BP update followed positive production comments from COP and UCL last week. The Unocal war is heating up with China officially requesting on Friday that CFIUS review the deal. CFIUS will not agree to look at the deal until it receives what it calls a "complete notification". Once that is received the committee can take up to 30 days to decide if they want to do a full review. From my point of view they could easily stall until after the August 10th vote on the Chevron bid and avoid any political fallout. Today China basically told the U.S. administration to "butt out" of the deal and let shareholders decide if they wanted to accept the deal. I suspect China will get a better outcome if they ask nicely through the proper channels than with blustery outbursts in the media. 

August Crude Chart - Daily

December Crude Chart - Daily

Bausch and Lomb announced on Tuesday that it was buying a 55% stake in China's Shandong Chia Tai Freda Pharmaceutical Group. In addition BOL has an option to buy another 15% at a later date. BOL already does business in China with 20% of its income from Asia and 37% from Europe. Now we will see if China holds up any further purchases of Chinese companies for national security concerns as payback for the Unocal criticism. 

GM announced that it was continuing its employee pricing deal through August. It did exclude some of its best selling models. It only took a few minutes before other companies followed suit. Ford excluded its new Mustang and a couple other models. The suddenly lower prices on the majority of cars sold in the U.S. sent GM sales to 19-year highs in June. With the price wars firmly in price for August the analysts were quick to predict slow sales for the rest of the year. The surge of buying came generally from buyers already planning to buy in the fall. 

We are in the last week of warning season and all eyes are on the giants led by IBM. Back in April IBM disappointed the street and the stock fell from $90 to $71. It has done nothing in three months and remains fixed at the $75 level. There are persistent rumors that IBM has seen a slowdown in sales and could miss estimates again. They are rapidly running out of time in the warning window if they plan to guide estimates lower ahead of earnings. This worry and the lack of excitement in semiconductors is keeping tech investors from getting too excited about putting money into the market. 

The Dow posted a decent day with a gain of +68 points but most of it was due to short covering at the open on the news about Factory Orders, Wal-Mart and Apple Computer. The Dow surged to 10350 in the first hour of trading and then wandered in the 10350-10370 range the rest of the day. This was well below the 10400-10425 resistance highs we saw last week. Support remains at the 10300 level but despite today's gains there is no real direction. 

The Nasdaq did manage to ease over last week's highs at 2075 but ran into trouble as it tried to move higher. The Apple news helped the Nasdaq tack on gains of +21 points but that 2075 resistance was firmly in control. 

The SPX also managed to move over last week's levels by a couple points but resistance at 1205 maintained a solid grip. The real winner for the day was the Russell-2000, which soared another +10 points (+1.58%) to 653 and only three points away from an all time high. I mentioned on Sunday that I expected the Russell to maintain an upward bias as the week progressed as laggard funds continued to balance positions to the new index weighting. The exact index weightings were not known until the close of trading on Friday, June 25th. Normally index funds have acquired the majority of the stock they need by that close but have to adjust those positions over the next week once the exact weightings are known. With over a trillion dollars pegged to the various Russell indexes the rebalance typically provides a positive bias for a couple weeks. The S&P small cap and mid cap indexes both hit all time highs today on this Russell buying. Small cap buying is infectious and retail traders add to the pressure as they see small caps rising without really understanding the reasons. We could see the Russell find some technical resistance when it hits the 656 all time high. 

Russell-2000 Chart - Daily

The remainder of the week should be governed by any remaining earnings warnings with real earnings not beginning in earnest until next week. Friday has the June Jobs Report with the current consensus in the 180,000 range. With May's jobs falling to 78,000 there are some serious concerns that June could also be weak. This is the proverbial good news bad news joke. Another month of low jobs would almost guarantee the Fed will pause after the August meeting but that would also require a weak July report in early August. Do investors want a weak economy and weak earnings or a Fed that adds another 50-75 points? Personally I would vote for the stronger economy and let the chips fall where they may. 

As for market direction I think any earnings news will govern our direction. If the market does move higher I am looking to get short in the 1210-1215 range on the SPX. 1220 is material resistance and I want to beat the rush and try to avoid picking a top. I took a small short position in the futures at 1209 this afternoon. Volume remains weak and there is a serious lack of conviction on both sides. With July-Oct typically weaker than the rest of the year there is waning interest by the bulls in buying the dips. Funds not required to be fully invested will start easing out of unwanted positions to raise cash for an October entry. It is early for this process to begin with late July early August typically the timeframe. The wild card here is the strength in the energy sector. With 15% of the S&P comprised of energy stocks they could almost support the S&P on their own once oil breaks above $60. Funds seeing energy continue to rise could use their excess cash in that sector and provide a soft landing for the S&P as the summer progresses. Unfortunately all of that is just a calculated musing and anything is possible. Watch any bounces over SPX 1210 for signs of weakness and be ready to capitalize on any failures. 


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