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Market Wrap

Valiant Effort

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The Dow rebounded +77 points off the opening low but still fell 3.9 points short of extending its record run. Monday's close tied a streak of positive days, 24 of the last 27, not seen since 1927. Tuesday's loss of -3.90 may have broken the streak but with the Dow rebounding to close only 4 points under a new high the rally is still intact. That rally has posted an average gain of only +30 points per day but it has been enough to stretch overbought to extreme levels. Today the Dow is +760 points over its 50-day average and +1200 points above its 200-day average. These are extreme levels but they don't necessarily mean a crash is near.

Dow Chart - 30 min

Nasdaq Chart - Daily

There were no material economic reports to rile the markets and the two we did have are seldom market movers. The Job Openings Labor Turnover Survey (JOLTS) showed that hiring and firing rates were unchanged from February levels at 3.4%. Construction lost a few more jobs but business and professional services offset that decline. The number of available jobs has increased by 4.4% over the last four quarters while the number of hires has declined by 1.9%. It appears there is a mismatch of skills needed and workers available. I mentioned a loss of jobs in construction and those jobs are normally blue-collar hourly workers. They are not likely to apply for professional office jobs where there are plenty of openings. The health services and education sectors both reported increased openings of 3.6% or better. The quit rate across all sectors continued to hold at 2.0% where it has been for the last year. This all points to a tight labor market and a stable economy.

March Wholesale Trade rose slightly by 0.3% but was less than the 0.4% expected. The most important component is sales and that rose from 1.0% to 1.8%. It had fallen to a -0.9% back in January. This suggests some firming but the inventory to sales ratio remains high at 1.14. The slight decline in wholesale inventories will cut -0.2% off the Q1 GDP taking it down to only 1.1% growth assuming there are no offsets from other GDP components.

The National Association of Realtors revised their estimates for existing home sales in 2007 to 6.3 million units, a drop of -2.9% from 2006. This is a reduction of 350,000 homes from their prior forecast.


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Texas Instruments is hosting a 2-day analyst event this week in New York and the SOX reacted by losing 2.7 points to close just over 501. Broadcom finished in the green after UBS issued bullish comments about the stock. According to the UBS analyst checks with both Cisco and Motorola indicated Broadcom was still the vendor of choice for their VOIP products. A Credit Suisse analyst called TXN one of the best long-term choices because of strong product cycles and high barriers to entry for competitors. TXN beat the street when they reported earnings for Q1.

Energy services company McDermott International (MDR) spiked +6.56 or +11% after reporting earnings of $1.38 that beat the street estimate of $1.27. Also powering the spike was news that they won a $250 million contract from American Electric Power to design and build a 600-megawatt coal-fired boiler and associated environmental control equipment.

Elsewhere in the energy sector ethanol maker VeraSun Energy (VSE) plunged -15% after reporting a loss of a penny when analysts were expecting a profit of 11 cents. The company blamed the loss on higher corn prices. Revenue was $144.5 million. Investors should get used to this kind of story. If it were not for Federal subsidies none of the ethanol makers would be posting much of a profit and most a sizeable loss. Corn ethanol is not the answer because it takes more energy to produce it than it produces when burned. It sounds like a good idea but instead it has caused prices to rise on nearly every food product from meat, bread and anything made with high fructose corn syrup, which is nearly everything but produce. There are 34 ethanol plants under construction in the US and the demand for corn is only going higher pushing food prices higher as well.

The transportation sector spiked +53 points after strong gains in Ryder (R) and CSX. Ryder Systems rose +2.5% after announcing a planned buyback of $200 million or about 6% of its outstanding shares. Railroader CSX gained after it announced a 25% increase in its dividend and an additional $1 billion buyback. This raises the current repurchase program to $3 billion by the end of 2008. This represents about 15% of outstanding CSX stock.

Dow Transports Chart - Daily

Tech stocks finished fractionally in the green after Hewlett-Packard (HPQ) raised its guidance for Q2 to 64-65 cents from 57-58 cents. HPQ was forced to rush the guidance update to the market after an "inadvertent disclosure" of financial information in an email to a "single outside party." That was a significant change in guidance and resulted in a +3% jump in the stock to $45. That is a six-year closing high.

Gateway (GTW) also reported earnings after the close and posted a loss of -2 cents and missed analyst estimates for a 2-cent profit. Revenue of $1.01B topped analyst estimates of $983M but investors were not excited. GTW fell slightly in after hours from its $2.08 close. Yawn.

After the close Cisco (CSCO) reported earnings of 34 cents that were +34% over the comparison quarter. Analysts had expected 33 cents. CEO John Chambers said demand showed no signs of slowing. That is different than saying demand is strong or demand is increasing. They guided analysts to revenue of $9.2-$9.3B for Q2 and analysts were already expecting $9.3B. Cisco fell over 5% in after hours on what many felt was weak guidance and the +50% rally in Cisco shares since last August.

Electronic Arts posted a larger then expected loss after the close and warned on 2008. ERTS posted a loss of -8 cents a share for Q1 but after items that rose to a profit of +6 cents. Analysts were expecting a profit of +2 cents. ERTS said full year results would now be in the range of .90 to $1.20 cents. Analysts were expecting $1.31. ERTS fell -$1.60 in after hours.

Disney (DIS) also reported earnings of 44 cents that beat the street estimates of 36 cents but revenue was weaker than expected. Shares fell -2% in after hours.

Oil prices recovered to close at $62.19 after Nigeria reported that production output would drop by -25% due to violence in the oil patch. The EIA also raised demand estimates for Q2 and Q3 by +20,000 bpd in the US and +100,000 bpd worldwide. These people are normally behind the curve and only embarrass themselves with their updates. For instance they also said gas prices would rise +18 cents this summer to $2.96 per gallon. This was on the same day that AAA said national prices were now $3.07 and expected to move higher. Prices on the West Coast are now in the $3.75 range with only the Midwest and Southeast still fractionally under $3.00.

As the markets set new records nearly every day it reminds us of the last time this happened back in March of 2000. There were forecasts of Nasdaq 10,000 and Dow 20,000. Instead a recession and a nasty bear market lay just over the horizon. With the major indexes hitting new highs and bullish runs like the Dow's 80 year positive day streak it is hard to convince anyone that the market could potentially crash.

If you factor in the record prices for gasoline and the economic impact of the subprime mortgage problem it becomes even more implausible that the market will just continue moving higher. Maybe that is exactly why it is moving higher. Bears continue to short it for all the obvious reasons but fund managers continue to reluctantly buy it to avoid missing out if it suddenly takes flight to loftier levels. One writer called the current small daily market gains in the indexes as "rational exuberance." Earnings are still decent despite the 13-quarter string of double-digit results. The economy refuses to sink and continues to grow. Commodity prices are rising pushing inflation into our daily lives but not at a pace that is fast enough to force Fed action. Market gains in the face of impending problems are not unknown. In six of the ten recessions since the 1940s the Dow continued to post gains even after the economy was clearly imploding.

S&P earnings for Q1 are now at 8.1% growth and more than double most estimates in the 3-4% range six weeks ago. Earnings for Q2 are now forecast at 11.5% with even higher levels for the remainder of 2007. Earnings are expected to grow by +11.5% or better for all of 2008. With earnings not expected to slow and global growth led by China, India and their neighbors literally exploding there is no reason to cry wolf and shift investments into bonds. Unfortunately the market rarely needs a reason to behave irrationally. The indexes may not be soaring like they did in 2000 but they have captured some serious gains. I showed a statistic earlier than the Dow is +720 points over its 50-day average and +1200 points over the 200-day average. This is an extreme swing in market terms. The last time the Dow had hit these extremes was January 2004 and while there was no crash we did wander lower for the next nine months as those gains were digested.

The Dow closed at the high for the day at 13314. This was -4 points below Monday's historic closing high. The dip was bought once again and a -77 point deficit was erased. We have only seen 5 dips since April 1st and all were bought very quickly. This is not necessarily a market to short but I am not sure it is one where I want to be 100% long.

The Nasdaq did manage to post a positive close but less than a point. This may have been a result of the HPQ earnings, the TXN analyst meeting and the impending Cisco/Gateway/Electronic Arts earnings after the close. Why enter new long positions ahead of those potential disasters? This makes Wednesday a challenge with all the after hours reporters trading lower overnight. Is this going to be another dip to buy or will the bulls finally decide to move to the sidelines to count their profits?

SS&P-500 Chart - Daily

The S&P-500 has established a strong line of resistance at 1510 that it has not been able to cross for three consecutive days. This is a temporary line in the sand with 1527 even stronger resistance if the S&P does manage to move higher. I would buy a breakout over 1510 but only for a short-term trade. I would look to short a touch of 1527 or a failure back under 1500.

To determine our direction I am still going to point you to the Russell-2000. 830 has been the decision point for several weeks and it closed at 830.62 today. That price magnet has seen action in 12 of the last 17 days and we are still stuck to 830 like glue. If you want to expand that range slightly to give yourself an easier go/no go signal I would look to be long over 835 and short under 827. That eliminates the constant indecision of multiple crosses of 830.

Russell-2000 Chart - Daily

Wednesday's trading will be held hostage to the FOMC meeting despite the lack of any material change in Fed posture. The economy continues to wander along the narrow path between growth and recession with only a +1.1% GDP but that has been enough to reduce inflation concerns as the Fed had hoped. At this point they are on cruise control and just waiting for a bend in the road to force them to make a change. According to the Fed Funds Futures there is no change in rates expected until late in Q4 if at all. Wednesday's meeting will be all smoke and no fire but at least it will give the TV commentators something to talk about. Remain focused on Russell 830 and don't get distracted by the sound bites.

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