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Market Wrap

Capacity Constraint DeLayed End of Quarter Bounce

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The major indices finished mixed to higher where an early morning bid on the heels of last night's last-minute tentative agreement between the Canadian Auto Workers (CAW) and General Motors (GM) $30.84 +0.22% had the union agreeing to modest wage increases of roughly 1.5% in the first year, followed by 1% gains in each of the next two years. The CAW also agreed to a pension increase of just $6.80 per month over the life of the contract for retired workers.

The news was viewed as a positive by investors because of GM's need to cut their plant capacity by as much as 20% due to declining market share.

General Motors (GM) popped higher at the open and traded a morning high of $31.54, but those gains didn't last long as parts supplier to the "Big 3" (GM, Ford (F) $9.95 +1.01% and DaimlerChrysler (DCX) $54.83 +3.78%) had Delphi's (DPH) $2.65 -3.63% CEO once again warning that unless GM and the United Auto Workers (UAW), which represents Delphi's workers, helps the company to drastically cut costs, then Delphi is prepared to file bankruptcy at any time.


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Delphi, which was spun-off from GM, refused comment on rumors that it has asked GM for a bailout package worth $6 billion to help it avoid bankruptcy.

DaimlerChrysler's (DCX) shares outperformed on the session on news that the automaker is planning to cut more than 8,000 jobs at its Mercedes division in Germany. This would be 3,000 more than the 5,000 previously expected.

Stock futures did trade higher overnight on the GM/CAW news and early morning economic data had orders for durable goods showing a sharp 3.3% rise to $210.82 billion in August, a resumption in growth after July's revised plunge of 5.3%. August's increase was much stronger than the 0.5% rise expected by economists. The rise in orders was broad and showed higher capital spending. Orders for non-defense capital goods excluding aircraft increased 3.6% during August after falling 3.3% in July.

Then at 10:30 AM EDT, the EIA reported its weekly inventory figures. The agency said crude oil inventories fell for a fifth-straight week and were down 2.4 million barrels for the week ended September 23. Unleaded gasoline stockpiles rose for a third-straight week by 4.4 million barrels, while distillate inventories fell by 573,000 barrels.

While the inventory figures found an immediate mixed trade from the energy futures markets, it was the decline in operable capacity among the nation's refiners that drew a bullish bid in the various energy contracts.

As I was anxiously awaiting last night's news out of the Canadian Auto Workers talks with GM, there was a continuing roll of press releases being issued by energy producers and refiners as they assessed damage from Hurricane Katrina and Rita.

The EIA also tracks changes in operable refiner capacity. While operable capacity fell 10.22% for the week ended September 2 (Katrina), this week's data showed a 4.06% decline in operable capacity from Rita.

All energy futures settled sharply higher with November Unleaded Gasoline futures (hu05x) surging as high as $2.34 intra-day, to settle up $0.08, or 4.03%. Helping exacerbate the move was today's October contract settlement, where traders seemed pressed to cover any obligations instead of risking delivery. November Heating Oil (ho05x) settled up $0.074, or 3.56% at $2.168, while November Crude Oil (cl05x) settled higher by $1.28, or 1.97% at $66.35.

November Natural Gas futures (ng05x) continued to surge and settled up $0.98, or 7.47% at $14.10.

U.S. Market Watch - 09/28/05 Close

On a week-to-week basis, November Crude Oil is relatively unchanged, but the refined products such as unleaded gas and heating oil suggest market participants remain concerned about refiner's ability to get back online as hurricane damage continues to be assessed.

Gulf of Mexico production concerns also show up in the natural gas complex as winter approaches.

Kerr McGee (KMG) $96.89 +1.35% is perhaps a good example of just how "forgiving" market participants are for energy-related stocks. Today, KMG warned that it was lowering its Q3 and Q4 production estimates due to recent hurricane activity. The producer/explorer said it now anticipates a reduction in production of 1.2 million barrels of oil equivalent in the third quarter, and Q4 production was seen down by 1.7 million barrels of oil equivalent a day. Kerr-McGee expected a reduction of 3% in its annual Gulf of Mexico production volumes, but "with two category five hurricanes in one month we expect to exceed this allowance," said Buterbaugh.

The company did say it expects to restore 60,000 barrels of oil equivalent a day, or close to 50% of its net pre-Katrina production, by the end of the week.

The S&P Banks Index (BIX.X) 333.02 -1.46% was notably weak today and has sported a 1.8% decline on a Wednesday-to-Wednesday close. While a 10.4 basis point rise in the shorter-dated 5-year yield ($FVX.X) versus a more modest 3.1 basis point rise in the longer-dated 30-year yield ($TYX.X) over the past week would represent yield curve flattening, that's wasn't the only "bad news," this sector had to deal with.

Mortgage lender Fannie Mae (FNM) $41.71 -10.68% plunged $4.99 per share by the close, with the bulk of today's decline coming in the final 90-minutes of trade, on unconfirmed reports that investigators found new accounting violations.

A spokeswoman for the Office of Federal Housing Enterprise Oversight, which overseas Fannie Mae's financial soundness, would not confirm or deny reports that extensive additional problems had been found.

For many mortgage companies, commercial banks, savings and loans as well as credit unions, news of further accounting problems at Fannie Mae creates a potential "capacity constraint." Many mortgage loan originators count on Fannie Mae to facilitate the flow of mortgage capital.

Freddie Mac (FRE) $54.60 -1.97% also traded weak and closed at a 52-week low.

Equity markets were roiled late in the session on news that a Texas grand jury charged Rep. Tom DeLay and two political associates with conspiracy in a campaign finance scheme, forcing the House majority leader to temporarily relinquish his post. DeLay says that charges leveled against him are an act of "blatant political partisanship" and that he is innocent of all charges. Republicans selected Rep. Roy Blunt (R., Mo.), the current Republican whip to fill DeLay's role.

Today's "DeLay news" becomes a bit unnerving to investors as the nation tries to deal with the aftermath of two powerful hurricanes. While Democrats may be guilty of political partisanship, politicians know how to "strike while the iron is hot."

Yes, President Bush's poll numbers are at their lows, and with congressional Republican leaders saying they will try and reduce funding to other federal programs to help cover the cost (estimated at $250 billion) of Hurricanes Katrina and Rita, the opportunity for Democrats to unseat some Republicans in the upcoming elections is prime for the taking. Make no mistake about it. If the proverbial shoe was on the other foot, I believe Republicans would be trying to do the same thing to Democrats.

It is said that the market hates uncertainty and the "DeLay disruption" looms as a negative as the nation's politicians try and sort out what is to be done in hurricane-ravaged portions of the south are to receive federal tax dollars to rebuild.

S&P Banks Index (BIX.X) - Weekly Intervals

Anytime I see a chart where the analyst starts rolling out to weekly, or monthly intervals to find support, or resistance, it is usually a sign that building trend is taking hold. The above chart of the BIX.X is just that. A weekly interval chart as the BIX.X breaks to a new 52-week low. Next support for the BIX.X looks to be the 322.50-327.00 level, and this week's highs were capped quickly at the 343 level.

Networking Index (NWX.X) - Weekly Intervals

Today's durable goods report revealed a 5.5% rise in orders for computers and other electronic products. I do think some of the networker's gains have come on the anticipated spending brought on by repairing infrastructure from hurricane damage in the south.

The Semiconductor Index (SOX.X) has been "on fire" since April, but has cooled off with a 1.99% decline the past four weeks and we could well be seeing some rotation to the networking side of things. I'm a bit skeptical of the networkers' relative strength and 4.97% gain over the past 5-days, as it is some of the smaller-priced names doing the bulk of the work. I can't say for certain that institutions would be marking things up into the quarter by targeting the smaller-priced names, but the "big gun" in the group, Cisco Systems (CSCO) $17.92 +1.12% is battling both its 50-day SMA and 200-day SMA at $18.25 and $18.40 respectively and shows a more modest 0.39% gain for the past 5-days and 2.34% gain for the past 20-days.

Networking Index (NWX.X) Components - Sorted by 5-day % gains

Traders talk about "end of quarter marking up," and a quick look at the NWX.X components shows some of the "smaller cap" and lower priced names providing the bulk of the lift.

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