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Market Wrap

June ISM Manufacturing Sparks Buying

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The major indexes surged higher to start the beginning of the third quarter after a stronger-than-expected June ISM manufacturing reading coupled with a spattering of M&A activity re-ignited enthusiasm among buyers.

U.S. Market Watch - 07/02/07 Close

One of this week's closely monitored economic reports had the Institute for Supply Management saying that its PMI Index rose to 56 in June, which was stronger than economists' forecast of 55. June's reading above 50 marked the fifth consecutive month of growth for the manufacturing sector and built on May's measure of 55.

June's reading above 50 also marked the 68th straight month of expansion.

The Institute added that in June, manufacturing expanded at its fastest pace since April 2006 when the PMI Index registered 56.9.

ISM Manufacturing Table (June and May)

As we can see, expansion among many categories was found, but inventories at the manufacturing level remain low.

With export and import having slowed from accelerated levels, it might make some sense that the 47.0 reading from "Customer's Inventories" is still a somewhat precautionary on just how strong the underlying economic trends are at the manufacturing level. Still, many that follow the ISM data see inventory level "too low," where a ramp in production will likely be found in the months to come, if not somewhat reflected in June's fast pace.

According to the ISM, the delivery performance of suppliers to manufacturing organizations was faster in June ending 47 consecutive months of slower deliveries.

The Institute said petroleum, coal products, chemical products, plastic and rubber products were among the top performing industries in June (listed in order).

While the ISM's manufacturing index showed expansion, prices for nearly all raw materials saw gains with the index for prices paid still rising at 68 in June, after May's robust 71 reading.

Of the various commodities tracked (aluminum, chemicals, copper, gasoline, natural Gas, polypropylene, soybean Oil, stainless sheet steel, stainless steel and steel), aluminum was the only commodity reported down in price for June.

Combined, the two readings (PMI and Prices) ignited an early 4th of July fireworks show that had my U.S. Market Watch glowing green, with a few spots of red.


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Among the many equity-based sectors/indexes followed, only the Dow Jones Home Construction Index (DJUSHB) 536.51 -0.47% finished red.

In this morning's Market Monitor, I noted that Citigroup was cutting it ratings on several homebuilders (TOL, PHM and RYL) to "hold" from "buy."

The abatement in June's ISM prices paid index had the U.S. Dollar Index (DXY) 81.40 notably weak as currency traders most likely see the Federal Open Market Committee on hold the next couple of meetings.

The 5, 10 and 30-year Treasury bonds found a strong round of buying (resulting in lower yields), and while a "day late," the benchmark 10-year Yield ($TNX.X) fell 3.5 basis points to close just under the 5.00% yield level at 4.998%.

I say a "day late" as last Monday, I had analyzed the 10-year Yield ($TNX.X) closing at a 5 handle, or 5.0% on Friday.

Still, today's action is so close to my prediction based on the observation of various Fed Fund futures contracts. This has me growing more convinced that the Treasury bond market sell-off in early June was indeed an adjustment by bond traders into last week's FOMC decision on interest rates.

Last week, the Federal Open Market Committee left rates unchanged at 5.25%.

At the time of this writing (07:10 PM EDT), December Fed Fund futures (ff07z) trade 94.80, suggesting a 20% chance/probability of a 25 basis point rate cut by the FOMC between now and December. (100 - 94.80 = 5.20%)

In essence.... a very small probability.

I should also disclose that I was cutting back on my longer-dated Treasury positions in today's OptionInvestor.com Market Monitor and raising some cash.

Merger Monday

There was a plethora of M&A announcements, which was somewhat surprising ahead of tomorrow's 1/2-day session and Wednesday's Independence Day celebration.

Today's buyout activity gave some relief to investors who were worried about higher rates signaling a slowdown in business activity.

Telecom stocks posted strong gains with two mergers announced in the sector.

Shares of BCE Inc. (NYSE:BCE) $39.45 4.39%, the parent company of Bell Canada, closed at an all-time high after the company said it received a $32.6 billion buyout offer over the weekend from a consortium let by the Ontario Teachers Pension Plan Board. Some analysts believe a bidding war may be found. Even though the OTP consortium beat out several other bidders including New York-based Cerberus Capital Management LP with billionaire Hong-Kong-based Canadian citizen Richard Li's Pacific Group, and the Canada Pension Plan Investment Board with backing from American buyout firm Kohlberg Kravis Roberts & Co, industry analysts didn't rule out further "hostile bids."

Shares of Dobson Communications (NASDAQ:DCEL) $12.42 11.79% were atop today's list of most actives after the wireless communications service provider said it agreed to be bought by Dow components AT&T (NYSE:T) $41.85 0.84% for $2.8 billion.

Healthcare service provider Manor Care (NYSE:HCR) $64.10 -1.82%, which surged from the $55 level in early April after the company said it was evaluating strategic alternatives, announced today that it had accepted an offer from the Carlyle Group of $67/share.

Euro, Yen, Pound Gain Against The Dollar!

While an equity bull's sky was colored in green today, there's a little "red" firework at the top of my U.S. Market Watch that I think traders need to keep an eye on.

Remember! Equity markets DISLIKE sharp moves not only in Treasury bond YIELDs, but CURRENCIES as well!

With the FOMC now out of the way for several weeks, and today's ISM data sheds some light on economic growth and a slight easing of inflation worries, which tends to bring dollar weakness (if Fed isn't raising rates, dollar tends to trade weak), then currency traders following other central bank movements around the globe, tend to move their focus to parts of the world where tightening persists.

Those movements, when done "in mass," can create sharp and sudden currency fluctuations.

Today was a perfect example, and dollar weakness may persist, as some notable weakness in the dollar against both the euro and pound was observed in today's trade.

The British Pound 2.0169 0.42% closed at a multi-year highs against the greenback, while the euro 1.3623 0.61% closed at a 7-week high against the dollar.

The "bottom line" here in my opinion is that the strength in the euro against not only the dollar, but Japan's yen, could bring some concern towards European exports.

Global Equity Benchmarks and Currencies Table

Today's gain in the Euro/US$ and the GBP/US$ have the #1 and #3 most-heavily weighted currencies in the U.S. Dollar Index (DXY) showing some meaningful gains since last Monday (06/25/07).

For example, the above table that I keep on a Monday closing benchmark has the Euro gaining 1.20% against the US% since last Monday's close, and 1.30% since the May 29th close (just over 1 month).

The British Pound (GBP) is up 0.97% since last Monday's closing benchmark, and up 1.82% since May 29th close (just over 1 month).

The #2-weighted Japanese yen, shows the dollar WEAKENING against the yen (US$/Yen) by 1.00% since last Monday's closing benchmark, but still holding a 0.62% gain since May 29th close (just over 1 month).

Also note the STRENGTH in the Euro versus the Yen! The euro has gained a fractional 0.17% since last Monday's benchmark, but a notable 1.94% since its May 29th close (just over 1 month).

While a 5/29 to 7/02 observation would not be deemed "long term," the somewhat "anemic" performance of the equity-based FTSE-100 and CAC-40 the past two weeks come into focus regarding the euros strength.

What can happen with YOUR currency becomes "too strong?" Your EXPORTS may be uncompetitive relative to your competitions!

In essence, the STRENGTH in the euro, could have EUROPEAN exports becoming less price competitive against products made elsewhere in the world.

I think U.S. equity traders need to keep an eye on the FTSE-100 and the CAC-40 in coming sessions.

If we (U.S. investors/traders) were to see declines in European bourses, that could bring weakness to U.S. equity markets!

For those of us here in the United States, that still buy things in U.S. dollars, we might say "European imports are 1.3% more expensive and Japanese products are 0.62% more expensive than they were a month ago."

For those of you in countries using the euro as your major currency, you might say, "U.S. imports are 1.3% less expensive than and Japanese goods are 1.94% less expensive than they were a month ago."

Do you see the give and take on the global inflation front?

Major Market Bullish % Show Some Weakness

I want to quickly update traders and investors that two (2) of the point and figure chartist's primary market bullish percent indicators reversed lower at the conclusion of Wednesday's trade and would suggest supply has been outstripping demand for both the VERY broad NYSE Bullish % (over 3,000 stocks listed on the NYSE) and the broad S&P 500 Bullish % (500 stocks).

These reversals come from the April reversals higher, and at this point would signify some profit taking among bull since early June.

For example, on June 1 and 4th, the S&P 500 Bullish % (BPSPX) from Dorsey/Wright and Associates rose as high as 78.96%! That means there were 395 of the 500 stocks showing a "buy signal" still intact with the point and figure chart.

At Wednesday's close, the S&P 500 Bullish % reversed lower by the needed 6.00% to a 70.54% measure. Thus, a fewer 353 stocks tracked in the S&P 500 were showing "buy signal" still intact.

Now, at tonight's close, we've seen a "rebuild" or gain to 72.14%, or 361 stocks showing a "buy signal" now intact.

While the recent gain is encouraging to a bull, it would take a more MEANINGFUL measure of 78% for the S&P 500 bullish % to reverse back up to "bull confirmed" status.

Bottom line here is that both the broad S&P 500 and NYSE are correcting, and account management should have bulls looking to protect gains.

S&P Depository Receipts (SPY) - Weekly Intervals

Just as Wednesday's action saw the S&P 500 Bullish % reverse back lower to "bull correction" status after reversing up to "bull confirmed" on April 9th, the above S&P Depository Receipts (AMEX:SPY) $151.79 0.90% chart tested the 19.1% retracement level of $148.07 on Wednesday.

Actually, the SPY traded a penny below that level at $148.06, thus giving the impression that market participants were eager to buy that level of retracement.

From the most recent highs of $154.40 to Wednesday's low of $148.06, the SPY has corrected 4.10%.

It doesn't hurt to be protective of gains in my opinion, and a 50% equity weighting still sufficient as the SPY meanders either side of its 5/11/07 doji close.

If "problems" are going to occur in relation to currencies, I think we'll see it in overseas markets first.

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