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Market Wrap

Alcoa Can't Wait!

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In the mid 1970's, Dow Industrial's component Alcoa (NYSE:AA) $38.63 +8.32% commissioned a theme song for radio and TV advertising titled "We Can't Wait for Tomorrow." The song's lyrics told a story of a brighter future for America.

Today, shareholders of Alcoa (AA) cheered, but not as loud as shareholders of Canadian-based Alcan Aluminum (NYSE:AL) $82.11 +34.54%, whose shares surged higher by $21.08 after Alcoa made a hostile bid of nearly $27 billion.

After nearly two years of private talks between the two companies, which failed to reach a negotiated deal, Alcoa's hostile bid comes as both companies try to keep pace with growing Russian rival Rusal.

"The reality is that commodities businesses are consolidating globally," Morningstar analyst Scott Burns said. "When foreign countries like Russia allow their two largest aluminum producers to merge and really dominate that market, and you've got a company called Chalco in China where the Chinese government has made no secret that they want this to be a national champion, I think it really gives a company like Alcoa a nice leg to stand on in terms of regulatory objection."

Alcoa, which founded Alcan in 1902, split it off as a separate company in 1928, and retained largely common ownership until 1951 when major shareholders were divested by U.S. court order because of antitrust issues.

As Alcoa looks to reunite, the company offered Alcan shareholders a combination of cash and stock that values Alcan at $73.25/share.

The bid includes $58.60 a share in cash and 0.4108 of an Alcoa (AA) share for each share of Alcan (AL).

Including Alcan debt, Alcoa said the deal is valued at $33 billion.

In today's Market Monitor at OptionInvestor.com, I noted that shares of Alcan (AL) $82.11 +34.54% had exceeded their point and figure chart's bullish vertical count of $78.00 and suggested those long the shares, look to take profits, or at least protect gains as U.S. antitrust regulation may not be as "receptive" as Chinese and Russian regulators.

While not a "heavyweight" in the price-weighted Dow 30, today's gains for Alcoa (AA) helped the very narrow Dow Industrials (INDU) 13,312.97 +0.36% close at another all-time high, and posting a gain for the 16th-time in 18 sessions!

At tonight's close, Alcoa looks to finish as the S&P 100's (OEX.X) 692.79 +0.26% 63rd-largest market cap component.

U.S. Market Watch - 04/07/07 Close

Financials put in a mixed session on Monday, but broader strength in the regional S&P Banks Index (BIX.X) 404.35 +0.52% and KBW Bank Index (BKX.X) 117.78 +0.34% into Wednesday's FOMC decision on interest rates helped offset weakness in the brokers as depicted by the XBD.X 257.28 -0.73%.

Today's economic calendar was light.

At 02:00 PM EDT, Federal Reserve figures showed March consumer credit, or non-mortgage loans to individuals, increased to $13.5 billion. The Federal Reserve said March's gain was the most in four months and has consumer credit growing at a 6.7% annual rate to $2.425 trillion. In February, consumer debt rose by $5.65 billion.

The increase in March consumer credit was the largest since a $20.1 billion gain in November according to Fed statistics.

Credit watchers saw today's figures as sign that recent credit-tightening standards among mortgage refinancing lenders had consumers turning toward revolving credit and other financial avenues for larger ticket items like automobiles and durable goods.

In geopolitical news, French voters elected Conservative Nicolas Sarkozy in their presidential election. The CAC-40 (France's blue chip index) edged up 0.04% to 1,594.61. Trading volumes were lighter than usual due to a holiday in Britain.

The news of Sarkozy's victory may well have been felt here at home. Earlier this month, President Sarkozy told reporters the he would like to arm 100,000 of the country's police cruisers with stun guns.

Shares of TASER International (NASDAQ:TASR) $9.92 +4.09% jolted as high as $10.25 intra-day, closing just below their 5/11/06 close of $10.14.

It is notable that shares of TASR have risen from the $8.00 level in late April, suggesting some market participants may have had insight into France's election outcome.


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Energy prices were weak again today. Last week, the US Oil Fund (AMEX:USO) $48.06 -0.49% broke below the $49.00 level and triggered my 1/4 bullish position stop at $48.90 after the Energy Information Association (EIA) data showed continued builds in crude oil inventories (+1.169 million barrels), and draws in unleaded stockpiles (-1.12 million barrels).

Today, Energy Secretary Bodman said that U.S. crude oil supplies as being stable, but said a bottleneck at the refining end has had unleaded fuel prices rising at the pump.

Hopefully, Mr. Bodman's comments do not come as a surprise to trader's and investors.

June Crude Oil futures (cl07m) at the Nymex settled down $0.46, or -0.74% at $61.47, it sixth-straight session loss.

June Unleaded futures (rb07m) settled down $0.0268, or -1.21% at $2.1896.

On April 30th, I turned notably more cautious the refiners, with my fundamental thinking surmising that we would begin to see refiners get the bulk of their facilities back online, thus seeing draws in crude oil stockpiles, and refined products (like unleaded and jet fuel) inventory builds.

That certainly didn't come to fruition by last Wednesday's EIA report.

On 04/30/07 I turned bearish on shares of Valero Energy (VLO) $72.48 -1.18% at the $70.70 level with the VLO May $70 Put (ZPY-QN) at $1.45. Perhaps my convictions too great, but on Friday, 05/04/07 I felt an additional ZPY-QN still attractive at $0.55, with a pre-May expiration (5/18/07) target of $68.05 in the underlying.

Valero is the nation's largest independent refiner.

In order to get such a meaningful decline in shares of Valero (VLO), which remain technically strong, I think this Wednesday's EIA data needs to show a MINIMUM draw of 3 million barrels oil, and at least a 1.5 million build of unleaded stockpiles.

EIA's Weekly Crude Oil and Unleaded Stockpiles Table

The "bottleneck" I've noted, and Energy Secretary Bodman notes again today is more evident at the bottom of the EIA table I keep track of.

Each week that passes, where damage from fires, and shut-down refining production due to extended maintenance has had on the supply/demand relationship, has kept crude oil supplies building, but unleaded supplies falling.

The "bottleneck" has been a HUGE positive for refiners as their costs (oil) have fallen, but their refined product (unleaded) has risen due to the lack of supply!

Each week's EIA report should have trader's on their toes.

Shares of Valero Energy (VLO) $72.48 -1.18% closed at $55.62 on 02/09/07, and have surged higher from their Wednesday 02/14/07 (day that 02/09/07 inventory was released) close of $55.91.

Weather long, or short the refiners, I would have to think that once (if ever) we see a build in unleaded inventories begin, there should be some profit taking among bulls.

Valero Energy (VLO) - Daily Intervals

Refiners have been VERY STRONG and have been one of the more BULLISH oil-related groups.

The energy sector as a whole has also helped lift the S&P 500 (SPX.X) 1,509.48 +0.25% to new multi-year highs.

My "fundamental" thoughts that we'd have started to see seasonal draws for crude oil, and builds in unleaded have NOT played out to this point.

As recently as 4/23/07, shares of VLO surged higher still on "bad news" that its St. Charles gasoline refinery was going to experience delays due to extended repairs.

That "bad news" was actually "good news" as it delayed supply of refined products.

Oil Service HOLDRs (AMEX:OIH) - Daily Intervals

The Oil Service HOLDRs (AMEX:OIH) $160.34 -0.59%, does not contain any "refining" stocks, but contains names like Schlumberger (NYSE:SLB) $75.00 +0.52%, Halliburton (NYSE:HAL) $32.26 -0.06% and Baker Hughes (NYSE:BHI) $81.70 -0.69%. Companies where profits depend more on the prices of the underlying commodities like oil and natural gas, where higher prices there stimulate demand for drilling and work-over of existing wells in production.

Last week the Department of Minerals Management Services (MMS) approved a major federal initiative to boost oil and natural gas production on the U.S. Outer Continental Shelf in the Gulf of Mexico and offshore Alaska, which could produce 10 billion barrels of oil and 45 trillion cubic feet of natural gas over 40 years.

The interiors Minerals Management Service developed the initiative, known as the Five Year Outer Continental Shelf Oil and Gas Leasing Program, to guide domestic energy leasing on the Outer Continental Shelf (OCS) from 2007 to 2012. The program proposes 21 lease sales in 8 planning areas. Twelve sales are slated for the Gulf of Mexico, 8 off of Alaska and, at the request of the Commonwealth of Virginia, one in the Mid-Atlantic Planning Area, about 50 miles off the coast of southern Virginia.

S&P Depository Receipts (AMEX:SPY) - 60-minute intervals

Last week I was monitoring internals closely, and to a bear's chagrin, internals steadied and resumed strength, confirming price action for the broad S&P 500 Depository Receipts.

Volumes have been light the past couple of sessions at both the NYSE and NASDAQ, and with volume turned on for the SPY, volume a bit light here too.

There has been comment regarding the "narrow bullish breadth" as the SPY reversed last week's early losses to go on to trade new multi-year highs.

There was some option action Friday that suggests the SPY is about to trade WEEKLY R1 and $152.14. One thing I do think bulls want to see is for at least 81 S&P 500 Components to trade new 52-week highs. On April 25th, my records show 81 S&P 500 components traded a new 52-week high.

What happened to Mike Burke's "buying climax," and this "topping" pattern discussed in last Monday's Market Wrap?

AT&T (NYSE:T) - Daily Intervals

I added shares of AT&T (NYSE:T) $39.60 +0.30% to my OptionInvestor.com's Market Monitor "Watch List" as one way to monitor at least one stock that exhibited the "buying climax" pattern. In last Monday's Market Wrap, we noted Mike Burke's alertness to a growing number of stocks that were exhibiting this action.

While I would be hard pressed to "call a market top" based solely on AT&T's action, T may be a closely monitored stock in comings sessions.

For instance, what if T were to surge to $41.00 this week? That may give an observation that other "buying climax" stocks still have room to the upside.

Conversely, should T fall sharply back below $38.64, and we see a lack of bullish leadership (new highs at NYSE), or S&P 500, then we would still be very alert that Mike Burke is onto something.

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