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Market Wrap

Bernanke Bounce Fades

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The sudden bounce on word of the Bernanke nomination faded as oil prices jumped +2.12 to $62.40 and natural gas soared +$1.32 or +10%. Conflicting economics and soaring interest rates offset good earnings news across various sectors. Confusion continues to be the order of the day with expectations running high but reality sometimes leaving a lot to be desired. But, contrary to what we have seen lately traders bought the close and erased much of the losses leaving the nearly +170 point gain from Monday mostly intact.

Dow Chart - 30 min

NYSE Composite Chart - 30 min

Nasdaq Chart - 30 min

SPX Chart - 30 min

The morning started off negative with soaring mass layoffs and a decline in Consumer Confidence. Mass layoffs for September soared to 2,069 from 1,142 events in August and workers impacted at 257,454 more than doubled the August level at 127,466. This was the highest level for any month since Nov-2001. Katrina and Rita were major factors impacting these numbers with 81% of the events coming from the south and centered in the hurricane area. Needless to say this report was eventually ignored as old news. As the rebuilding effort gains speed and companies begin to reopen this impact should evaporate.


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Consumer Confidence fell again to 85.0 for the final October reading dropping from the preliminary release at 87.5. Both major components declined. Present conditions fell to 108.2 from 110.4 and future expectations fell to 69.5 from 72.3. Higher gasoline prices, higher interest rates and weakness in the markets were given as the prime reasons. The drop from 106.2 in June to Octobers 85.0 is the largest drop since 2001. Six of the seven times we have seen a drop of this magnitude a recession resulted. Those planning on buying homes and appliances fell sharply but those thinking about a new car purchase rose slightly. They are probably thinking about getting ready to dump the gas-guzzlers in favor of something more economical. While they may not be ready to adopt the European concept of small cars the pain at the pump may have started many in that direction. When I was in Rome for 10 days earlier in the summer I only saw two SUVs the entire time. With gasoline selling for the equivalent of $6 per gallon the favorite car for Italians was the For-Two, a car with phenomenal gas mileage that you can park anywhere. I doubt the U.S. will make the switch any time soon but with consumers feeling pain at the pump with every fill up the mass consciousness may be awakening and a 60mpg car may become appealing.

Smart Car Models

Contrary to the decline in Consumer Confidence it appears consumers are still buying homes. Existing home sales for September remained at 7.28 million units on an annualized basis and the same high rate we saw in August. Home prices were holding at +13.4% over last years levels but -2.4% below the August prices. This should be noted since homes were only able to hold their torrid sale pace with a -2.4% drop in prices. It appeared to be market forces at work as interest rates rise and the selling season ends. Looking under the hood in this report showed that a strong spike in home sales in the south that could have been a direct result of hurricane movement. Residents getting out of the danger area and residents staying there but moving to higher ground were said to have upped the numbers. It appears that a large majority of those who were wiped out are taking their insurance proceeds and moving rather than trying to rebuild. Lots with destroyed homes are selling like hotcakes as developers try to acquire land on the hopes that they can rebuild and get out before another disaster arrives. This could also be the reason for the drop in the average selling price due to the steeply discounted sale of damaged homes in the Gulf. Nationwide the number of existing homes for sale is at an all time high, up +20% over last year

The best economic news of the day was a jump in the Richmond Fed Manufacturing Survey to 12 in October from 8 in September. This area hit a cycle low in June/July at -3 and has now posted three months of acceleration in manufacturing activity. New orders jumped from 8 to 15 and the six-month outlook jumped to 24 from 10, a very strong increase. The bad news came from the jump in prices paid by +3.87% compared to an already strong +2.11% jump in September. Energy costs were the main component in the price increases.

Earnings and guidance again took center stage with energy stocks leading the list. Despite monster charges related to hurricane damage and lost production BP managed to post a +34% rise in profits or a whopping $6.54 billion. Record oil and gas prices helped offset the charges related to the damage. BP also said their Thunder Horse platform was damaged more than previously thought and would not be ready to put online until late in 2006. Recovery costs for Thunder Horse were $107 million in Q3 as they attempted to save it from sinking. This delays by more than a year the expected 250,000 bpd in production. They also mentioned that the Shell Mars Platform would remain offline until 2006. BP only rose +77 cents because the results were expected after their earlier guidance.

Nabors Industries (NBR) shot up +3.75 after reporting earnings that doubled last year's levels and beat the street by +11 cents. They are a drilling contractor and rising day rates show no indications of falling. Nabors said pricing in North America as well as globally was surprisingly strong with global rig demand substantially exceeding the industry's ability to add capacity.

Murphy Oil reported profits of +$1.23 per share that nearly doubled last years earnings and took a $21.3 million charge due to hurricane damage. Analysts had expected MUR to earn +1.01 per share. Revenues were up +45%. Murphy also warned that continuing problems with restarting production would depress Q4 earnings to between 70 cents and $1. Analysts were expecting $1.22. MUR dropped -77 cents in after hours and it remains to be seen if the Q4 warning will take any more off their price since they were already well off their highs in expectation of problems.

ESV reported earnings that nearly tripled the prior year despite a -3 cent charge for hurricane damage and gained +2.86. Day rates for their jackup rigs jumped +37% to $75,400 per day with utilization up to 85% despite the storms. HAL fell -1.69 after reporting earnings of 95 cents compared to 60 cents in 2004 and analyst's expectations of 82 cents. Hurricane impact was estimated at $33 million or -5 cents per share.

Big oil earnings incurred the wrath of lawmakers with several taking to the microphone to complain. Leading the list was Hillary Clinton suggesting an annual windfall profits tax in the form of an "Energy Assessment Fee" to fund research on new forms of energy. She suggested it would raise $20 billion a year for research. Yes, Hillary, but that is $20 billion that would not be put back to work trying to find and produce more oil. If you tax oil companies for profits are you going to tax homebuilders for record profits over the last five years? I doubt it. How about Citicorp or IBM who routinely post billions in earnings every quarter?

Big oil earnings just ahead are Conoco (COP) Wednesday, Exxon (XOM) on Thursday and Chevron (CVX) on Friday. Meanwhile oil prices spiked +2.12 to close at $62.40 and December natural gas jumped back well over $14 to close at $14.48. Colder weather brought back fears of shortages after the various energy agencies said they saw demand returning after a month long slump. The IEA said oil prices would remain over $50 in 2006 and could go even higher if demand returns as expected. U.S. demand dropped -4% after the hurricanes but most analysts fear that is only temporary. The sharp jump in oil and gas prices at the close helped push prices of energy stocks higher and the sector gains almost pushed the indexes back into the green. Other winners were SLB +3.53, VLO +3.30, BR +3.19, MVK +3.29 and EOG +2.90 with the point gainer list heavily weighted to oil symbols. Resistance on the December oil contract is $63-$64 and a break over those levels would indicate the two month long down trend may be over. A failure there could lead to even more dumping of energy stocks but support at $59 has been tested for three straight days and held firm.

December Crude Chart - Daily

December Natural Gas Chart - Daily

After the bell AMZN reported earnings that beat the street by +2 cents but was a penny less than the comparison quarter. Unfortunately guidance was less than exciting and the stock took a -$4 hit, nearly -10%, in after hours trading. Amazon is still growing revenues but profits are being squeezed by higher energy costs, shipping rates and growing competition from other online retailers. One survey reported that visitors to AMZN only rose by +25% over the past year while visitors to BBY grew by +27%, WMT +46% and TGT +83%. Personally I think this is fraudulent reporting. Amazon was so far ahead of the pack and has such a large customer base that the others could post some strong percentage gains and still not come even remotely close to the numbers Amazon commands. Still competition is growing and margins are shrinking.

Big movers today were Pentair (PNR), which fell -5.46 after posting lower than expected earnings and warning about Q4. Intuitive Surgical (ISRG) more than tripled earnings and the stock jumped +$20 in after hours trading. XRAY jumped +4.23 after beating the street by +2 cents. PLAY was knocked for a -7.71 loss after saying they were issuing 4.5 million shares of new stock that would dilute current shareholders by 18%. In a flashback to the bursting of the Internet bubble ITWO lost -$7 or -34% after saying Q3 profit fell -50%. Coventry Health Care (CVH) -7.57 and Horizon Health Care (HORC) -6.32 took top honors in the losers department for a battered health care sector after warning about guidance. Legg Mason dropped -6.22 after missing estimates by 15 cents.

EBAY fell -1.41 after news broke that Google was implementing a classified advertising service. Dubbed "Google Base" the test site allows people to place ads for things like used cars, real estate, computers, personal and business services as well as current events. The link was discovered by a researcher and reported by the WSJ. Google finally admitted to be testing the service after hastily taking down the link. Any competitor to the EBAY space with the power of Google would be a serious threat.

Sherwin Williams (SHW), Dupont (DD) and International Paper (IP) warned that higher energy costs and rising commodity prices would impact future earnings. Only SHW suffered substantially with a -$4 drop with DD actually posting a gain after they announced a $5 billion stock buyback. Chip stocks were under pressure after TXN said Q4 earnings would be less than expected. Flextronics posted a loss after the close and warned that Q4 would be less than expected. Lexmark said Q3 profits fell and Q4 profits would be worse but the drop of -2.77 was muted after the company prewarned several weeks ago.

I think you are seeing a trend here with many companies suggesting that Q4 and even 2006 will be weaker than expected. I am surprised that the markets were not weaker than they were. Actually I was very surprised about the strength of the rally on Monday but we all know that short squeezes tend to get overdone very quickly. That was the mother of all squeezes when the Bernanke announcement caught many who had just shorted the mornings bounce to resistance off guard.

I am developing a new negative bias based on fundamentals and the heavy surge of warnings but that bias is muted given the lack of a retracement today. I think everyone was hoping for a normal rebound off the October lows and Monday was a refreshing relief compared to the threat of another potential break of Dow 10200. However, the Monday rebound and Tuesday hold at those higher levels has put a bullish spin on the charts. The Nasdaq has closed over 2100 for two consecutive days and is in breakout mode but it is the only index other than the companion NDX that is currently over short-term resistance. The Dow, NYSE Composite, SPX and SOX are improving but still have a hurdle to cross before they can claim a breakout. The Wilshire 5000 (DWC) is the closest to a break with a move over 12,000.

While my fundamental bias is turning bearish my calendar bias is turning bullish. I think the entire herd wanted a Q4 rally so bad that they are refusing to let the markets go lower. Fund managers are scratching to make those bonuses and painting the tape to stimulate buying is a legitimate tactic. That is a good thing in my book and I would love to see it happen. It will setup a serious crunch in January but that is still light years away in the time frame of a trader.

Using the SPX 1185 trigger point you should be cautiously long again from Monday morning's cross. Remember I warned that SPX 1200 was the real confirmation point and although we did pierce it today the resistance was too strong and we slipped back at the close. Were it not for the late day oil rally we would have probably come to rest back at 1190 but the last hour reclaimed +6 points to close at 1196.53. As I write this the S&P futures have rebounded and are chipping away on 1200 and it appears the lack of a sell off today is giving others hope as well. If we can get move convincingly over that 1200 level and the Wilshire over 12000 I think we are off to the races for Q4. Conversely a move back under 1185 could seriously undermine confidence.

Wilshire-5000 Chart - 30 min

Wednesday we should see a build in crude inventories but the focus should be on the Chicago Fed National Activity Index and the Kansas Fed Survey. Earnings of note will be CAH, COP, GLW, DO, KMG, LLL, LU, MGM, MNST, PHM, RCL, HOT and WLP along with more than 300 others. Needless to say it should be a news filled day. I am long the market and will add to my positions if we do move over 1200 tomorrow. That would be my recommendation to everyone. October volatility may be about over and hopefully a new trend will emerge. Until then, enter any position passively and be ready to exit aggressively if the trend you expected changes suddenly.

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