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Market Wrap

Saved By The Deal

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The holiday markets shook off last weeks sub prime slime and Fed fears to rally strongly ahead of the July 4th holiday. A flurry of new deal announcements including the largest on record at $48.5 billion restored bullish sentiment and sent the markets back to their recent highs. The Nasdaq completed a two-day spike that looked like an early 4th of July rocket taking to the skies and Tuesday's close was a new 6.5 year high.

Nasdaq Chart - Daily

Dow Chart - Daily

There was very little news on Tuesday with most traders and reporters already away for the holiday. The two economic reports making waves were the Factory Orders and weekly Chain Store Sales. Factory Orders fell only -0.5% and much better than analyst expectations for a -1.4% drop. Nondurable goods rose 1.6% and a much larger than expected increase. This was a very bullish report for the economy even though it was lighter than in previous months. When coupled with the rise in the ISM on Monday this is further confirmation that the economy is rebounding out of the Q1 dip.

The weekly Chain Store Sales rose an anemic 0.1% after a -0.7% fall in the prior week. A lack of hot weather in the North East was cited as a problem in the lack of demand. The last three weeks have seen numbers below estimates and this prompted the ICSC (International Council of Shopping Centers) to lower their estimates for June sales growth to 1.5% from 2.0%. The tone of their revised estimate was decidedly negative despite the minimal drop in estimates. The ICSC said sales were "slow, sloppy and uncertain." The rise in gasoline prices does appear to be having a negative impact on consumer spending trends.


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Gasoline prices appear to be headed higher as geopolitical fears continue to push crude prices higher. Crude closed at $71.35 on Tuesday and fears of another drop in inventory levels in the weekly report due out Thursday is keeping support under gasoline prices. A 108,000 bpd refinery in Coffeyville Kansas was shutdown as a result of the floods and there is no estimate for when it may be restarted. That refinery can produce 2.1 million gallons of gasoline per day. Oil inventory levels are expected to show a drop of -1.2 million barrels and a drop in gasoline levels of an equal -1.2 mb on Thursday. There are still no hurricanes on the horizon although harsh weather continues to hit the south.

Gasoline prices continue to hammer auto sales as well. Market share of U.S. branded vehicles sold in June fell to 50.7% and its lowest share ever. Individual results continued to show the shift away from U.S. cars. Toyota sales rose 10.2%, Honda 11.5% and Nissan 22.7% while GM sales fell -21.3%, Ford -8.1% and Chrysler -1.4% compared to June of 2006. GM said it sold only 320,668 vehicles in June compared with 407,513 in June of 2006. GM pickups fell -20% while the Toyota Tundra soared 146%.

Despite the holiday shortened trading session there were some big moves in numerous stocks. This extreme volatility was due to reactions to news events in a light volume market. Caterpillar (CAT) fell -2.46 after a UBS analyst downgraded shares to "reduce" from "neutral." Apple Inc. (AAPL) spiked 5.91 on short covering after an iSuppli report that suggested profit margins on the iPhone could be over 55%. ISuppli took a phone apart and priced each component by maker. This is the same margin range for the iPod.

Goldman Sachs spiked 5.37 after news broke that first half merger and acquisition activity hit a record of $2.88 trillion dollars. Goldman participated in 299 of those deals with a value of $838 billion. Goldman received $1.2 billion in fees for their efforts.

Aluminum Corp of China (ACH), commonly known as Chalco, spiked $5.14 after announcing it would acquire a sister company, Baotou Aluminum for $1.9 billion. This will add 10% to capacity for ACH as it continues its plan to become the largest aluminum company in the world. ACH bought Lanzhou Aluminum and Shandong Aluminum Industry earlier this year.

Siemens (SI) spiked 4.88 after Lehman upgraded them to overweight after Siemens landed a $900 million Indian network deal.

The Chinese oil companies all sprinted higher on the high oil prices and news of accelerated demand in China. The big three, CEO 3.64, PTR 3.60 and SNP 2.91, have all reported recent new discoveries and business is booming. The Chinese markets continue to move higher with the iShares FXI up another 2.75 today. Chinese portals SINA and SOHU and game maker SNDA continue move higher despite strong gains over the last few weeks.

On the downside RIMM fell -6.30 on profit taking. Don't feel sorry for RIMM holders since the closing price at $208 today is still $33 for the last three days. BIDU fell -5.42 on profit taking but is still up $25 over the last 4 days.

Morgan Stanley recovered slightly with a 1.89 rebound from a -$13 drop on Monday after the spinoff of its discover card unit. Discover Financial Services (DFS) is down about $3 from its Monday IPO high.

Amazon was flat at $69.50 after disclosing their largest distribution center, which happens to be in Coffeyville Kansas, had been closed due to the same flooding that closed the Kansas refinery. Amazon said there was no damage to the building but said there was no target date for reopening. Flooding has hit roughly 20% of Kansas and water levels are not yet receding. Storms continue to pound Kansas, Oklahoma and Texas. My wife returned from a Texas trip yesterday and said lakes around Dallas were at flood stages not seen in over a decade. Linda Piazza, staff analyst and writer of Traders Corners and Thursday night commentary, is moving from Dallas to Houston and her move has been delayed for three weeks because of the heavy rains preventing construction at the Houston location. Why are se seeing all this extreme weather and yet no hurricanes? This could be a warm-up for what could be a late summer blast of storms. Time will tell.

The markets shook off their end of week bearishness and blasted off on this week's deal news. The Nasdaq closed today at a new 6.5 year high and the Dow is only about 100 points below its recent high. Surprise, surprise as Gomer Pyle would say. There are quite a few surprised money managers as well. Greenwich Alternative Investments has been surveying hedge fund managers for several years and their survey results for July was the most bearish on record. Only 12% of fund managers expect the S&P to rise in July. Extreme bearishness is always good for the markets since it is normally accompanied by high levels of short interest. That is true today as well. Short interest remains at record levels and every bounce forces those shorts to cover.

In the weekend commentary I mentioned the Nasdaq was the most bullish chart and continued bullishness in techs could rub off on the rest of the indexes. That was definitely the case with big cap techs pushing the Nasdaq to a new multiyear high. That high close at 2645 is only a handful of points below the 38% Fibonacci retracement level from the tech bear market loss at roughly 2650. This should be a significant technical resistance point but the Nasdaq appears to be unconcerned.

Nasdaq Retracement Chart - Monthly

Holiday volume was very light but we did manage 2.5 billion shares on a very short day. When the market reopens on Thursday the highlight will be the ISM Services report but it will likely be overshadowed by the worries over the Nonfarm Payroll report due out on Friday. Estimates for the ISM call for a slight decline to 58.1 from May's 59.7. However, the manufacturing ISM on Monday was also expected to decline and it showed a rise instead. The jobs report is expected to show a decline in job gains of 130,000 compared to May's gains of 157,000. Volume is expected to remain light for the rest of the week but could spike significantly if that jobs report comes in much differently than expected. With July 4th in the middle of the week it takes too many traders out of the market on extended holidays. Trading should not resume its normal pace until next week and the beginning of the Q2 earnings cycle. The low volume will magnify any news event so be prepared.

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