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Market Wrap

Wilma Arrives, Bears Scatter

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Equities spent the morning trading an uncertain range in the aftermath of October's option expiration while Wilma made landfall in Florida as a Category 3 hurricane. There were no major earnings surprises, though additional volatility was contributed by the announcement of Ben Bernanke as outgoing Fed Chairman Greenspan's successor.

In the final hour of the morning, President Bush announced that he has chosen Chairman of the administration's Council of Economic Advisers to replace Alan Greenspan as Fed Chairman when he concludes his 18-year term on January 31, 2006. The President's nomination requires ratification by the Senate, and Chairman of the Senate Banking Committee, Richard Shelby, R-Ala., was on the tape today, saying that the nominee "is an eminently qualified and superb choice for the nomination of Federal Reserve chairman."


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Bernanke had served as a Fed Governor for three years prior to his appointment to the White House in June. He has been criticized for comments considered bearish to the dollar, and praised for his insistence on greater transparency for the Fed, including the publication of quantitative inflation targets, a measure that Greenspan has opposed.

The announcement resulted in mostly directionless churning within Friday's ranges, with treasuries generally weaker as yields rose, and equities bouncing off their intraday lows to set new highs. Those moves strengthened into their respective closes, with bonds finishing near their lows and equities running to new highs.

It was a lighter volume day than we had on Friday, still strong however, and volume breadth was overwhelmingly in favor of advancing volume- +5.56:1 on the NYSE and +4.29:1 on the Nasdaq.

Daily Dow Chart

A higher high and higher low gave the daily cycle upphase what it needed after stalling on Friday's closing print. The Dow closed 2 points off its 10387 high but failed to exceed last week's high. The downtrend from September has yet to be violated, but another day like today would change that. Confluence resistance is in play to 10410, above which is the 10450 intersection of the declining resistance line off the Sept high and the broken support line off the May lows. 10200-10220 is immediate support below the 10300 fib line.

Daily S&P 500 Chart

The SPX gained 19.79 to close at 1199.38, .01 off the day high. More bullish than the Dow, the SPX took out last week's high. The launch came off a higher low at 1179. Resistance is at 1200-1205, while 1190 is now support, followed by 1180 and 1176. The daily cycle upphase has plenty of room to run, while descending trendline resistance from the September high is at 1218.

Daily Nasdaq Chart

The Nasdaq didn't have as great a day as its peers percentage-wise, but the rise has been stronger since last week and the bounce has already chewed through first confluence resistance at 2100. The Nasdaq added 33.62 to close at 2115.83, closing .02 below the session high. 2120-25 is next resistance, followed by confluence and trendline resistance starting at 2140. 2100 and 2080 are now support- the session low was 2083.

Daily TNX Chart

The Treasury auctioned $36 billion in 13- and 26-week bills today, with indirect bidders (foreign central banks) purchasing $8.3 billion of the total, just below their usual 25% participation. The 13-week bills sold for 3.85% with a yield of 3.942%, 2.11 bids tendered for each accepted. The $16 billion in 26-week bills sold for 4.065% yielding 4.208%, with a 2.15 bid-to-cover ratio.

Treasury bonds had been generally weak this morning, but they got weaker following the announcements of Bernanke's nomination. As noted above, Bernanke has been criticized in the past for making statements considered bearish to the world's reserve currency, most famously in his November 21, 2002 speech titled "Deflation: Making Sure 'It' Doesn't Happen Here" accessible at http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm. As discussed in the Market Monitor, it's difficult to predict what would be the effect of a "printing press" offensive against deflationary forces, though higher asset prices comes quickly to mind. Would foreigners sell off or at least slow their purchases of US dollar-denominated debt instruments, or would they join the "hot" new printed money chasing asset prices higher (including treasury bonds)? The market responded with higher equity prices and lower bond prices, arguably an inflation trade, but crude oil, gold and the CRB all finished in the red. The story will obviously be more complicated than that, and in the absence of a clear intermarket relationship, it's far safer to follow the individual charts.

On the daily chart of the ten year note yield, we see that the TNX reversed its Friday losses and rose to test the broken daily cycle proxy trendline from below. A daily cycle downphase is in progress from the recent 4.5%+ high, but so far 4.4% continues to act as strong support. Ten year note yields finished +5.6 bps at 4.446%, a +1.28% change for the day.

Daily Chart of Crude oil

Hurricane Wilma, one of the strongest hurricanes ever recorded in the Atlantic, wrought destruction on the Yucatan Peninsula during the weekend, and continued on to Florida Sunday night, making landfall this morning as a Category 3 hurricane around Cape Romano, near Naples. Miami, Fort Lauderdale and West Palm Beach received the strongest winds, sustained at speeds as high as 125 mph, while gusts exceeding 74 mph struck the Florida Keys. Eqecat estimated that Wilma would cost insurers between $2 billion and $6 billion, while AIR worldwide put the range at $6 billion to $9 billion and Risk Management Services at $6 billion to $10 billion. Reuters reported that this hurricane season has now exceeded the records set in the early 1930s, and has become the busiest since records began 150 years ago, as tropical storm Alpha was named on Saturday. Alpha has reached the Dominican Republic and Haiti, but is expected to weaken as it leaves those countries.

Crude oil finished lower by 40 cents at 60.225, off an end-of-session high of 60.50 and an earlier low of 59.35, while natural gas gained .06 to close at 13.225, 5.5 cents off the high. The latest figures from the Minerals Management Service has nearly 68% of daily Gulf of Mexico oil production shut in, and 55% of natural gas output- a minimal increase from Friday's pre-Wilma figures.

On the daily chart of crude oil, we see a broad descending channel to coincide with the current daily cycle downphase, and a so-far tractionless bounce off the 59+ low. If the bears can take out 61, a possible bull wedge break would target the 67-68 area, while a whipsaw down here would target the 58.50 confluence and channel support area.

European Russia was the latest country to report a confirmed outbreak of bird flu, 250 miles southeast of Moscow in Tambov. The bird flu has now been reported in 4 Asian countries as well as Britain, Russia, Turkey and Romania. Britain discovered the virus in a dead parrot on Friday. The bird had been in quarantine, and therefore did not jeopardize Britain's disease-free status.

There were no economic data released today, but earnings were fast and furious. Merck (MRK) reported Q3 profits which rose from last year's Q3 $1.33 billion or 60 cents on sales of $5.54 billion to $1.42 billion or 65 cents per share on sales of $5.42 billion. The company attributed the decline in sales revenue to its withdrawal of Vioxx. Estimates were EPS of 62 cents on $5.45 billion revenue. MRK expects to earn $2.477-$2.51 per share for the full year net of a one-time tax-related charge, and disclosed that it has no reserves for a negative outcome in the Vioxx litigation, and that such could have a material adverse impact on the company. MRK gained 3.13% to close at 27.

Kimberly-Clark (KMB) reported Q3 net imcome which fell from $441.3 million or 89 cents on sales of $3.78 billion to $325.3 million or 68 cents per share on sales of $4 billion. Net of charges, the company earned 95 cents, meeting estimates, while beating on the sales figure by $1 million. The company expects EPS of 94-96 cents for Q4, with analysts expecting 97 cents. KMB closed +2.15% at 58.04.

Johnson Control (JCI) announced Q4 earnings which rose 4% to $283.8 million or $1.45 per share on revenue which rose 7.2% to $6.9 billion, below expectations of $7.07 billion. The company earned $1.5 per share net of one-time tax-related charges, beating expectations by 1 cent. The company cited a 37% increase in sales of power solutions and expects sales to rise another 15% in 2006. JCI closed +3.92% at 68.45.

In other news, Johnson & Johnson (JNJ) has announced that its Personal Products Co. has agreed to purchase Gillette's Rembrandt oral care brand of products, which is owned by PG. No terms have been announced for the transaction, which is expected to close in Q4. Rembrandt includes mouth rinses and teeth whitening products. JNJ lost .11% to close at 64, while PG rose .53% to close at 55.10.

American Express (AXP) reported a Q3 profit that rose from $879 million or 69 cents per share on revenue of $5.48 billion to $1.03 billion or 82 cents on revenue of $6.07 billion. Earnings from continuing operations were 69 cents per share, beating expectations by a penny Revenue came in light, however, with analysts looking for $7.46 billion. Amex credit card spending increased by 18%, with 5.7 new cards issued in the past year and double-digit spending increases by cardholders. AXP gained 5.07% to close at 49.54.

After the close, Pitney Bowes (PBI) reported a profit of $144.3 million or 62 cents per share, or 66 cents net of restructuring charges compared with 63 cents in the year ago quarter. These results met expectations. PBI closed lower by .15 at 41.54. Aflac (AFL) reported net income up from 57 cents or $293 million to 90 cents or $455 million in the current quarter, a 55% gain. Operating earnings beat expectations by 2 cents, coming in at 66 cents on revenue that rpse 11% to $3.7 billion.

TXN reported record revenue that rose 10% from the year-ago quarter, with record gross and operating margins. Orders rose 24% from the year-ago quarter, revenue coming in at $3.59 billion, beating First Call estimates for $3.55 billion. EPS was 38 cents, including a 3 cent expense for stock-based compensation and 1 cent charge for higher than expected taxes. The EPS number missed First Call estimates by 2 pennies while beating the year-ago quarter's 32 cent result. TXN closed +.40 or 1.31% at 30.92, and traded -3.74% at 29.38 as of this writing.

Tomorrow kicks off the week's economic data with Existing Home Sales and Consumer Confidence, followed by the weekly EIA petroleum report on Wednesday, Durable Orders, Initial Claims, the Help Wanted Index and New Home Sales on Thursday, followed by the Q3 GDP, Michigan Sentiment and the monthly Employment Report on Friday. The key question is whether today's gains were news/noise-related, or whether they're sustainable. While I have my doubts about a continued equity rally alongside a rally in yields, such would certainly not be without precedent, and I'm taking my own advice against overthinking these intermarket relationships. The daily cycle has room to run higher, and while the weekly cycles suggest that the year highs will not be tested, there's no need to guess that far ahead. The first step for bulls is to break the downtrend from September's high. How equities perform at those levels will give us our first clue as to what the remainder of the year holds. So far, it's a bounce within a downtrend.

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