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Market Wrap

Bulls Hold Ground

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Bulls held an exquisitely narrow range at the top of Thursday's rally, the second consecutive session of directionless trading on relatively light volume. Bonds retreated, retracing part of Thursday's gains.

Breadth was mixed, with the number of new lows exceeding new highs on the NYSE and new highs leading on the Nasdaq. Volume breadth was similarly mixed, with advancing shares leading decliners 1.3:1 on the Nasdaq while declining volume led 1.3:1 on the NYSE. Overall volume was weak, with QQQQ trading less than half of its average daily volume, and combined DJIA and Nasdaq volume just over 2.7B shares.

Daily Dow Chart

Despite its weaker breadth, the Dow was the only major index to close green, adding 11.13 to close at 10697.17. The 10710 high marked a new high for what is now a very toppy daily cycle upphase off the October low, testing resistance at the July-August highs. Despite the low volume, tight range and listless tape, today's gains tested upper rising Bollinger resistance, and while the move felt suspect due to its weak internals and lackluster action, it remains an impressive showing from the bulls. All of the Dow's losses from the past 4 months were reversed as of today. The current rise has been holding in a rough rising wedge pattern, but with key resistance now in play, bears will need a close below Friday's low to suggest any hint of weakness. The daily cycle upphase has been stop-and-go for several weeks, but the upward bias has yet to be challenged, let alone reversed.

Daily S&P 500 Chart

The SPX finished with a fractional loss, closing -.96 at 1233.76. The midday low saw a bounce from 1231.78, the high printing at 1237.20. Unlike the Dow, the SPX is not yet testing its summer highs, and continues to respect descending resistance connecting the highs. The daily cycle looks toppy and tired, and today's doji star is unhealthy at the highs of the move- but the light volume doesn't support a major reversal today, and as with the Dow, bears will need to see Friday's lows in the 1231-32 area broken on a closing basis to suggest weakness for the daily cycle.

Daily Nasdaq Chart

The Nasdaq lost 1.52 to close at 2200.95, 6 points off the high and 3 points off the low. As with its peers, the range remains very tight here at the highs, and the daily cycle appears exhausted. If this is a distribution top, it's allowing very little range from which to infer classic topping patterns. A head and shoulders top would require enough movement to trade the head and shoulders, but the price range has been too flat to suggest anything other than a bull flag at the top. Below 2197, next support is at 2175-2180, while a closing break of today's highs on a burst of volume would suggest the bull flag scenario.

Nasdaq announced its semi-annual re-ranking of its Biotech Index (NBI), to take effect at the market's open on November 21, 2005. The re-ranking will result in the removal of AEterna Zentaris, Inc. (AEZS), Corgentech Inc. (CGTK), Ciphergen Biosystems, Inc. (CIPH), GTx, Inc. (GTXI), La Jolla Pharmaceutical Company (LJPC), Novavax, Inc. (NVAX) and PRAECIS PHARMACEUTICALS INCORPORATED (PRCSD). The following companies will be added to the index: ALNY, ANDS, BCRX, CRXLF.PK, CTRX, DRRX, GPRO, HITK, IBB, KOSN, MNTA, NDAQ, NSTK, and PANC.

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Much ado was made last week, not just in the media but also in the debt and equity markets, of the Thursday's record indirect bid in the Treasury's $13 billion ten-year note auction. Indirect bidders are foreign central banks, and they bought more than 55% of the total auctioned. While the absolute number, while containing many zeroes, is not noteworthy for a market accustomed to $5 billion and $10 billion overnight repos from the Fed, it nevertheless caused a splash in the US markets, kicking off the vertical stage of last week's rally and contributing to a sharp move lower in ten-year note yields. The market seemed to be inferring that central banks, while stating that they are diversifying away from US debt, are at least willing to defend their very substantial holdings thereof.

Today, Japan's Ministry of Finance announced that Japan's current account surplus grew 6.5% in September y-o-y to 1.858 trillion yen, or approximated $US $15.8 billion. Estimates had been for US $14.5 billion. This news propelled the Nikkei to a new four-year high, although current account deficits have so far not been particularly bearish for US equity markets. Chairman Greenspan, in a speech to the Banco de Mexico's 80th Anniversary International Conference, noted this morning as follows:

"International finance presents us with a number of intriguing anomalies, but the one that seems to bedevil monetary policy makers the most as they seek stability and growth (the topic of this conference) is the seemingly endless ability of the United States to finance its current account deficit. [...] Of course, deficits that cumulate to ever-increasing net external debt, with its attendant rise in servicing costs, cannot persist indefinitely. At some point investors will balk at further financing. Such a development would be particularly likely should risk-adjusted rates of return on assets outside the United States rise relative to investment opportunities in the United States. Even if such returns on U.S. assets stay high, the rise of concentration risks in foreign official and private portfolios could still induce investors to slow their accumulation of dollar claims and thereby delimit the size of the financeable U.S. current account deficit." These comments were followed up with a statement to the effect that he doesn't see the US Dollar losing its status as the world's reserve currency, and it was that statement that made headlines, contributing to a small bounce within the morning's narrow range.

The Treasury announced at 11AM that it will auction $24 billion at the next auction of 4-week bills, which will refund $13 billion in maturing bills and raise an additional $11 billion. This is a substantial increase in new borrowing for those 4-week notes, but the markets more than easily weathered stepped up Treasury borrowing last week as well. From the time of the 11AM 4-week bill announcement, treasury yields rose to new session highs as equities traded sideways near the lows.

Other liquidity operations included a $4 billion overnight repo from the Fed, which resulted in a net add for the day against no expiries. That was followed up with a permanent market operation, a coupon pass in the amount of $1.096 billion deliverable tomorrow. The Treasury auctioned $34 billion in 13-week and 36-week bills, refunding $31.44 billion in maturing bills and raising $2.56 billion of new cash. This heightened demand was more than covered by the Fed's overnight repo alone, and the coupon pass covered almost half of that new borrowing on a permanent basis.

$9.3 billion of the $34 billion auctioned today was taken up by foreign central banks, a respectable but not exceptional showing. The 13-week bills sold for a 3.91% high-rate yielding 4.004% and drew 2.12 bids for each accepted. The 26-week bills sold for a 4.195% high-rate yielding 4.345% and set a bid to cover ratio of 2.38. The rates on these two auctions set new highs for the year.

Daily TNX Chart

Ten year note yields (TNX) settled back to just above 4.6%, finishing the day +4 bps at 4.604%. Lower rising support was violated in the morning, but the close was back within the rising channel. The daily cycle downphase has so far produced a minor pullback at the top of the rally from the September low, with 4.55% supporting the lows since late October. If this is a bull flag for the TNX, then a break above 4.63% on a closing basis could signal the next leg up.

Daily Chart of Crude oil

Overnight reports of a tropic depression and colder weather saw oil futures catching a bid in the early morning. Later in the morning, Reuters reported that OPEC is waiting for the arrival of winter before it sets oil supply policy for early next year. Kuwaiti oil minister Sheikh Ahmad al-Fahd al-Sabah said that he sees no need to cut output for now. Crude oil had been trading just off the 58.25 session high before that statement was released, but it returned quickly back below 58, proceeding to break the 57.40 overnight low by a nickel before bouncing to close +.10 at 57.625. On the daily chart, the move is tracing sideways beneath 59 confluence, with the daily cycle extended to the downside and the 10-day stochastic holding a bullish kiss.

In corporate news, Wal-Mart (WMT) dominated this morning's headlines, reporting earnings that rose from $2.29 billion or 54 cents in Q3 2004 to $2.37 billion or 57 cents on revenue of $76.25 billion, up from $69.28 billion. Estimates were for EPS of 57 cents and revenue of $76.25 billion. The stock broke 49 in premarket trading following the news, still down on the year as the company deals with labor lawsuits, competition from TGT, threats posed by the Chinese currency appreciation/US tariff issue, and rising energy and transportation costs. Bloomberg reported that this was the smallest profit gain in four years for the world's largest retailer. WMT gained .51% to close at 49.25.

Lowe's (LOW) reported Q3 earnings that rose from $516 million or 65 cents to $649 million or 81 cents in the current quarter, on revenue of $10.6 billion, up from $9.1 billion. The results beat estimates by cents. Same-store sales rose 6.2% in October. The company expects to earn 77-80 cents in Q4. LOW closed higher by 4.62% at 64.83, and HD gained 1.69% to close at 42.62.

The second-largest US private company, Koch Industries, announced yesterday afternoon its agreement to purchase Georgia-Pacific (GP) in a $21 billion deal pursuant to which Kock will assume $7.8 billion of GP debt and pay $13.2 billion in cash, paying $48 per GP share. This is a 39% premium to Friday's closing price. This deal will add Dixie cups, cardboard and lumber to Koch's existing fuel and chemical business, and make Koch the largest US private company. S&P wasn't impressed, placing GP on credit watch "negative" based on S&P's "...expectations that [GP] is likely to be very aggressively leveraged and financed on a stand-alone basis without guarantees from Koch Industries." GP rose 36.48% to close at 47.29.

Also merging are Host Marriott (HMT) and Starwood (HOT), with HMT announcing that it will acquire HOT for $4.1 billion, $2.33 billion of which in stock, $1.06 billion in cash and $704 million in debt assumption. HMT expects the deal to close in Q1 2006, and will change its name to "Host Hotels and Resorts." HMT closed lower by 4.47% at 16.66, while HOT gained 1.2% to close at 59.97.

Tyson Foods (TSN) reported a Q4 profit that rose from $66mm or 19 cents to $98 million or 28 cents on sales that fell from $7.1 billion to $6.5 billion from Q4 2004. The results missed expectations by 2 cents am came in light on the sales figure, missing by $60 million. The company cited difficulties with export market closures and Canadian beef import issues, and projected 2006 full-year EPS at $.095-$1.25, compared with First Call estimates of $1.33 per share. TSN got smoked for a 10.7% loss to close at 16.52.

Although there were no economic reports released today, it will be a relatively heavy week. Tomorrow will see the November Empire State Index, and the October Retail Sales and PPI figures released. On Wednesday, we get the CPI, Business Inventories for September, Net Foreign Purchases, and the weekly Petroleum Report and Mortgage Bankers Association update. On Thursday, we get Initial Claims, Housing Starts, Building Permits, Industrial Production and Capacity Utilization, and the Philadelphia Fed. Also of note for tomorrow will be the Senate Banking Committee's hearing on the nomination of Ben Bernanke as the new Fed chairman, in Washington. While this shouldn't be a market-moving event, analysts will be attentive to any indications of Bernanke's thinking on inflation, the current round of rate hikes, and Fed transparency, particularly in the wake of last week's announcement regarding the abandonment of the Fed's publication of its M3 figures. Senator Jack Reed of Rhode Island said that he expects the Bernanke nomination to go smoothly and be "non-controversial."

After the bell, Agilent (A) reported Q4 income that fell from 15 cents per share or $74 million to 5 cents or $26 million in the current quarter on restructuring charges related to the divestiture of its semiconductor business and other one-time items. Net of items, the company reported that earnings would have been $193 million. Revenue rose from $1.26 billion in the year-ago quarter to $1.42 billion. The company also announced a stock repurchase plan of up to $2.7 billion via modified "Dutch Auction," at prices of no less than $32 and no greater than $37 per share. The stock closed lower by 3 cents at 32.90 but traded +5.47% at 34.70 as of this writing.

For tomorrow, traders will be watching and hoping for a range break to resolve the narrow range of the past two sessions. The toppy daily cycle is at odds with the sideways/bull-flaggish pattern at the top of Thursday's rise. Day traders have been robbed of the majority of their intraday indicators by the flat, sideways action, and with so many bets placed in so narrow a range, a single buy or sell program can change the landscape very quickly. The fact that it's op-ex week for November contracts only adds to the confusion. I will be watching the highs and lows of the past two sessions, and will continue to avoid the middle of the range. We'll be following the action tick-by-tick in the live Market and Futures Monitors. See you there!
 

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