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Market Wrap

FOMC Minutes Spike Volatility

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An otherwise lackluster day was awakened from its midday slumber when the FOMC minutes were released at 2:PM. The indexes had faded after Monday's rally with the Dow off -35 points before the announcement. Volume was extremely low with light profit taking and a general cautiousness ahead of the report. The indexes dipped sharply lower on the release with the Dow hitting 11299 and S&P 1295. As the data was digested the news appeared positive for the markets although not what traders were hoping would appear. However, the news was enough to bring buyers back into the market with a strong buy program at 2:10 lifting the indexes back into the green.

Dow Chart - 30 min

Nasdaq Chart - 30 min

The FOMC minutes were sprinkled with terms both negative and positive as Fed heads debated their mixed views at the Aug-8th meeting. The pause was a close call according to the minutes with most members agreeing more hikes would be needed. Balancing this view was the opinion that there would be little risk in deferring future hikes until more data could be analyzed. Most felt inflation would ease over time as energy prices and shelter costs weakened. There was still a strong debate over whether the recent rise in inflation was temporary or permanent. All felt the pause would not mark the end of the tightening cycle. The lone dissenter to the pause vote was Lacker and he felt the economy would not slow fast enough to lower core inflation as quickly as needed. The committee spent a lot of time debating inflation signs and the need for additional hikes resulting in a narrow win for a temporary pause. The Fed funds futures were showing only a 12% chance of a hike on Sept-20th before the minutes but those chances are now expected to rise to 30% to 40% according to one analyst.

Dallas Fed President Fisher also made headlines with comments in an afternoon speech. He said the Fed can't afford to let inflation build up a "head of steam" at which point it would be tougher to battle without a strong dose of monetary medicine. Fisher said he has lost confidence in the CPI as an inflation gauge and was moving to the trimmed PCE deflator as a guide. That "trimmed" indicator throws out any spikes in individual components producing more of an average. He also said the Fed must be wary of temporary inflation distortion. He felt the Fed was not behind the curve and doubted there was a recession brewing. He felt other areas of the economy were picking up the slack for the housing sector.

The morning report taking the market lower was a drop in the Consumer Confidence from 107.0 to 99.6. This was far below the consensus estimate for 103.0. This -7.4 drop was the sharpest drop since Katrina and took the index to its lowest level since December 2005. The present conditions component fell -10.8 points to 123.4 while the expectations component fell -5.1 points to 83.8. The impact of +$3 gasoline was seen as the primary factor for the drop with the London terror plot a contributing factor. Those were the factors in the news when the survey was taken two weeks ago. There was also a substantial drop in those seeing jobs as plentiful from 28.6% to 24.4%. This may be a leading indicator for the Jobs report on Friday. The sharp drop in jobs sentiment could be due to a sharp drop in new jobs, which will be reported on Friday. Rising interest rates and falling house prices were also seen as pressuring confidence.

Tomorrow we will get the revision to the Q2 GDP, which is expected to come in at +3.1% compared to the +2.5% in the prior release. A sharper than expected rise could be negative for rate hike expectations. A weaker than expected report could energize the market on hopes the Fed was right in taking a pass. The economic calendar accelerates sharply on Thursday and Friday with Personal Income, NAPM, PMI and the Help Wanted Index on Thursday and Jobs Report and ISM on Friday. Those reports will be critical to market sentiment and to Fed direction when they meet again in three weeks.

After the FOMC minutes bonds became the investment vehicle of choice for many with heavy buying pushing the yields to a new five month closing low at 4.783%. It appears many investors are concerned that the outlook for a slowing economy could be understated.

Ten Year Note index - 5 min

Ten Year Note Index - Daily

First Horizon (FHN) warned that Q3 earnings would be lower due to a tough mortgage market. The bank said earnings would be -$56 million lower than Q2. FHN said loan originations would be $1 billion lower in Q3 compared to the $7.5B seen in Q2. FHN said the secondary market where it sells most of its loans was seeing a sharp drop in demand causing a drop in spreads from 1.22% to 0.85%. More banks are attempting to sell loans to reduce risk as the economy slows.

BP made the news again today when the company confirmed US investigators are looking into reported manipulation of crude oil and gasoline markets. The CFTC has subpoenaed BP and several energy traders in its investigation. They are looking at the over the counter markets during 2003-2004. Investigators are examining whether BP used information about its own pipelines and storage tanks at a key oil delivery point in Cushing Oklahoma to influence oil price benchmarks that are set each day and influence billions of dollars in transactions. BP is also under attack by the US authorities for possible criminal implications in its pipeline leak problems. BP is also being sued by victims of the March 23rd 2005 explosion at a BP refinery in Texas. CEO John Browne has been subpoenaed to testify about the event that produced a record fine of $21.3 million for safety violations. 15 died and 180 were injured in the explosion. BP has also been under investigation for some time for manipulating the propane market.


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Oil prices fell nearly a buck in the second day of sharp declines after tropical storm Ernesto made an unscheduled turn away from the Gulf and towards the Florida keys. Oil closed at $69.75 for the first close under $70 since June-21st. This represents a sharp drop of -12% since the August high of $78.80 for the October contract. The drop is due to many factors with the biggest a reduction in hurricane fears. After last years Katrina event and the massive destruction in the Gulf the storm analysts were predicting another strong hurricane season in 2006. So far those storms have failed to show and the peak of the season normally occurs over the next two weeks. Once we pass Sept-10th the potential for storms will decrease. Oil inventories are already very high as is the inventory levels for natural gas. With the heat of summer fading along with the chance of disruption from hurricanes that leaves those traders with long positions way out on a limb.

Oil and natural gas prices are linked in various ways and the massive drop in gas prices this week helped kill speculation in oil. The September gas contract closes for trading tomorrow but speculation over Ernesto had resulted in a spike to $7.50 on Friday. Ernesto's change in direction prompted a direction change in gas prices as well. That $7.50 price plummeted to $6.05 for a -20% drop before a massive short covering spike at the close sent it back to $6.90. That spike held in the gas contract but the corresponding spike in oil was quickly erased. We could see the same type of gyrations as September heating oil and gasoline close for trading on Thursday.

With summer over and gasoline demand about to fall off a cliff all thoughts turn to winter heating oil supplies as refiners begin the conversion to winter products. Unfortunately the record warm winter last year left heating oil inventories fully stocked. Currently inventories are at their highest level since Nov-1999. This is going to be very bearish for oil prices assuming no hurricanes head for the Gulf. With today's close under $70 it is almost a sure bet we will see crude test $65 very soon.

The drop in oil prices has knocked about 20 cents off gasoline prices and further drops should lie ahead. This will help consumer sentiment ahead of the holiday season. However, the CEO of Daimler Chrysler said on Monday they are planning for $3-$4 gas for the rest of the decade. He said the US consumer will continue to demand 5-6 passenger vehicles with higher fuel economy and they were planning their future products on this trend. GM announced they would be offering a tried and true incentive of cash back on many of its 2006 and 2007 models.

After the bell today Cendant (CD) announced a 10:1 reverse split and a new name. Cendant will become Avis Budget Group with the new symbol of CAR. Cendant has recently been divesting many of its corporate assets with names like Coldwell Banker, Century 21, Cheap Tickets, Orbitz and numerous hotels being sold or split out of the parent. CD closed at $1.91 today and a far cry from its 1998 high of $41.68. Cendant will begin trading under the new symbol on Sept-5th.

Barnes and Noble (BKS) traded down after receiving a subpoena from the US Attorney's office regarding its stock option dating practices. Because this was from the attorney's office rather than the SEC it was seen as having higher potential for ending in criminal charges. According to analysts there are nearly 100 companies expected to be facing charges and hundreds more racing to clean up their act before the regulators find them first.

Intel announced a new Dual-Core Xeon 71-hundred series processor, which included lower power options to help cut energy costs. Codenamed Tulsa the chips offer nearly three times better performance per watt over previous Intel Xeon MP processors. This was another shot at AMD, which has been taking market share from Intel in the server area.

Brinker International (EAT) jumped +1.70 after announcing it would buy back up to 11.7 million shares or 14% of its stock in a Dutch auction for up to $38.50 per share. The auction will run from Aug-29th to Sept-26th. The buyback announcement overcame news that same store sales would decline from 2.5% to 3.5% for August.

SGX Pharmaceuticals (SGXP) fell -41% after announcing it would discontinue phase 2/3 trials of its acute myelogenous leukemia drug Troxatyl.

After the FOMC smoke cleared the Dow had rallied to a +17 point gain after a -50 point loss immediately after the release. This rebound brought the Dow right back to the strong 11375 resistance level we have seen for the last two weeks. The range has been very tight and even the +75 point romp on Monday failed to break this level. The Dow gains today were mostly on the back of IBM, MMM, UTX and HPQ. These are considered safe deposit boxes ahead of any potential fall weakness. It continues to suggest that some investors are remaining cautious ahead of the coming inflation results and the Sept-20th Fed meeting.

Contrary to the caution being displayed in the Dow the Nasdaq surged to a new two month high with a close at 2172. After two weeks of consolidating from the mid August gains we finally saw a return to the highs. There was a strong buy program at the close and that program overpowered sellers on what had been a low volume day until 2:30. When the buy program hit the volume picked up substantially as it triggered short covering at every increment along the way. Helping to power the Nasdaq was the SOX with a +7 point gain achieved entirely after the FOMC release. The SOX found support at 430 on the 24th and has risen slightly every day since. The SOX is typically seen as the leading indicator for techs.

The Russell also sprinted higher to a new three week high at 715 showing that while some investors were looking at the big caps of the Dow for safety there were still some willing to bet on the small caps. This is very bullish if the Russell can continue to post gains. It could mean more investors were avoiding safety in hopes of higher rewards in the eventual Q4 rally. The Russell closed right at its two-month high set on August 4th. The next resistance level would be 730 but we have to actually break 715 first.

SPX Chart - 30 min

The SPX has moved over 1300 and appears ready to mount a breakout that could attract some heavy buying. Each peek over 1300 since the first one on Aug-17th has resulted in a microscopically higher high with Tuesday's close a new three month closing high. The range continues to be very tight and today's gains did result from a closing buy program. Still it is definitely looking like a breakout is near. However, remember we have some serious economic reports later this week that could change the direction in a heartbeat. It appears some investors are positioning themselves for a series of reports that will be considered Fed friendly. If that occurs we could have a significant breakout and some traders are obviously expecting it. I have been advocating a move over 1300 as bullish and a break below 1290 as bearish. It appears that the upper level has been pushed to 1305 this week by the constant chipping away of investors jockeying for position. I would want to continue to be long over 1300 and hope for a break with seasonal trends and a true breakout above our current range. If that break does occur I believe the next resistance level at 1325 would be the next resting point. Once over that level it would be a rocket ride as those still in cash and waiting for an October dip race to go long.

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