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Market Wrap

Dollar, Treasuries Find Defensive Buying

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Buyers were hard to find on Tuesday unless you looked in the Treasury bond, currency, or energy pits, where despite some modestly upbeat economic data that helped give equity futures a pre-cash session bid, a disappointing outlook from retailing heavyweights Wal-Mart (NYSE:WMT) $43.82 -5.08% and words of caution from Home Depot (NYSE:HD) $33.52 -4.88% regarding a recently announced stock buyback program.

Wal-Mart (WMT) fell back to last August's lows after the retailing giant lowered its full-year estimate for earnings from continuing operations to a range of $3.05-$3.15 from $3.15-$3.23 a share. JP Morgan couldn't wait to plow its grocery cart full of stock into the Achillies tendon of any bull looking to buy the gap lower as the firm downgraded the stock to "neutral" from "overweight."

Wall Street wasn't looking for any bullish surprises out of Home Depot (HD). The building products retailer said profits fell 14.8% amid softer sales as Q2 profits dropped to $1.59 billion, or $0.81/share from $1.86 billion, or $0.90 a share in the year-ago quarter. Bottom-line figures beat expectations by $0.05 a share.

What wasn't necessarily "expected" was the company saying it may have to cut its previously announced $22.5 billion stock repurchase program and lower the sales price of its HD Supply unit, which it sold for $10.3 billion to a consortium group of private equity groups in June.

The company cited "current market conditions" in the credit markets as one reason that it may have to make "material changes to the terms and financing of the transaction."

Some analysts expected Home Depot to sell its HD Supply unit for more than $12 billion, the amount in sales it pulled in last year.

U.S. Market Watch - 8/14/07 Close

Just after I had written last night's Market Wrap, I turned on the news feed from Dow Jones to see that the Bank of Japan (BOJ) was DRAINING liquidity to the tune of 1.6 trillion yen ($13.6 billion) from the banking system in two portions (Y600 billion and Y1 trillion), reversing two days of cash injections that drove overnight call rates to near zero percent as global money markets appeared to have calmed.

The first thing I thought was ... "do they think the credit crunch is over?"

The BOJ said the pro-rata rate at the first selling operation was 0.22%, while the pro-rate rate at the second selling operation shot up to 0.52%, which is just above the BOJ's target of 0.50%.

"The BOJ's fund injections were not necessary in light of domestic market conditions, but it was done as part of a global cooperation," said a money market dealer at a Japanese bank.

With that said, the sun then rises in Europe, and then here in the U.S. when Sentinel Management Group Inc., which oversees $1.6 billion in assets, said it was seeking to halt investor redemptions.

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Yes! For the most part, $1.6 billion isn't "that much," but in the current market environment, any investment company saying "you can't have your money back right now," is somewhat analogous to a voice coming over the intercom at a crowded moving theater and saying, "please exit the theater in a quiet and orderly pace as the theater will burn to the ground in 30-seconds."

When that type of news hits the wire, don't expect Joe Bob to just sit there, finish off the rest of his Junior Mints before he slowly walks to the nearest exit sign.

Instead, you'd probably at least consider the possibility that "Joe Bob" pushed the little kid sitting next to him firmly to the floor and rush to an exit.

While the U.S. Dollar Index (DXY) shows the greenback having a rather bullish day, trading all the way up to its WEEKLY R2 (see last night's Market Wrap) the "giant sucking sound" that came out of the BOJ really brought a bid into the yen.

Global Equity Benchmarks / Currencies

I need to take a second and correct an error from last night's Market Wrap. The 8/13/2007 close of the euro/yen cross rate should have been 160.96 (not 163.97).

I don't want to focus too much on currencies, as that's another can of worms, however, from a global trade perspective, the STRENGTHENING of the yen against the euro could be negative for Japanese exports to the European block.

As I type, the Nikkei-225 is finding selling, down 267 points, or -1.59% at 15,577 for Wednesday's trade.

We did get a BIG round of global economic data today, which may also have had an impact on currency markets.

GGlobal Economic Calendar (08/14/2007) - ForexFactory

Some quick notes here. Red and orange "folders" are considered more important economic releases than yellow folders.

German and French gross domestic products came in a little shy of economists forecast. If anything, that might have the ECB holding off on further rate HIKES. That type of thought process among traders/investors could be bringing in some selling pressure on the euro.

Great Britain's consumer price index came in at 1.9% year-over year, which was likely a relief to inflation hawks. Core CPI (excluding volatile food/energy prices) at 1.7% also a bit shy of a 2.0% estimate..

Great Britain's Retail Price Index, which measures the rate of inflation experienced by consumers purchasing goods and services bought for consumptions by the majority of households was still elevated at 3.8% year-over-year, but again, not has high as the forecast.

Ah, now the U.S.

Producer prices (PPI) rose 0.6% month-to-month, and that was well above the 0.1% forecast.

OK ... the dollar finds a bid on that, but WHY NOT TREASURIES?

Folks, when we see some "inflation" and TREASURIES find BUYING, which drives YIELDS lower, that to me is DEFENSIVE buying by market participants.

The benchmark 10-year Treasury Yield ($TNX.X) fell a sharp 4.6 basis point to 4.732%.

TThe core rate, which removes the volatile food and energy components rose just 0.1%. That's NOT inflationary, but again... some of the declines in Treasury YIELDs today look defensive.

One "blurb" I did catch intra-day, and mentioned in the OptionInvestor.com Market Monitor was that Mexico's 10-year Yield actually ROSE 0.28 percentage points (fractional rise) to 7.90%.

I wouldn't argue with anyone that a U.S. Treasury bond is SAFER than a Mexican government bond, but the theme here would be "flight to safety."br>
Some good news! And we can probably tie it with the last few months of dollar weakness! (Weaker dollar can have U.S. goods and services less expensive to foreign partners with a stronger currency against the dollar)

The U.S. trade balance with its trade partners fell to a $58.1 billion deficit as strong export growth overcame the effects of higher auto imports and oil prices.

That will likely have economists ratcheting up their GDP growth forecasts. Some economists have already said the next Q2 GDP report should show growth in the 4% range, up from an advance estimate of 3.4%.

Imports were up 0.5%, or roughly $900 million. Auto imports alone were up $900 million, but were partly offset by a $200 million decline in imports of other consumer goods.

At $60.95/barrel, the average price of imported oil was the highest since September of last year, as was the total oil import bill. June crude imports were up 2.2%. Economists say oil now accounts for about 40% of the total US trade deficit.

Natural and liquefied gas imports, which have been contributing to the energy deficit in recent months, fell by $500 million.

EExports were up 1.5%, or $2 in June. It was various industrial supplies and raw materials, including the United States's own energy exports, which accounted for most of that increase.

But despite some of the "good news" on the trade front, which should bolster U.S. gross domestic product results, investors were tossing away their Junior Mints, and looking for the exits.br>
RRussell 2000 Index (RUT.X) - Daily Intervals

While the small caps of the Russell 2000 Index ($RUT.X) "outperformed to the downside" today, don't think they will go down without a fight.

They BENEFITED when the Fed added liquidity last week, and just as the "credit crunch" story doesn't seem to go away, don't rule out further Fed action.

As such, in last night's Wrap I had mentioned that I had profiled an iShares Russell 2000 Index IWM Sep $78 Put (IQQ-UZ) from 08/09/07. I've suggested that traders now LOWER their stop to $78.50. With volatility measures like the VIX.X jolting this way and that, it is nearly IMPOSSIBLE to predict an option price stop. I like to simply use the underlying securities PRICE to determine a stop/target. The TARGET I had established for a Sep $78 Put was $73.00.

Tonight, I do want to address some of the action in the S&P Retail Index ($RLX.X) 454.93 -3.62%, where a bearish session of trade was highly tied to WMT and HD, but I want traders and investors to be ALERT as to what may be in play should the RUT.X break further below the 3/05/07 low and upward trend.

I have NO knowledge of what there is yet to come regarding the "credit crunch." Some say the amount of "bad loans" is miniscule in the greater scheme of things.br>
All I do know, based on observation, is that each time a "new revelation" is found (even $1.6 billion) we see more selling than buying.

A "credit crunch" might not only tie in with a smaller sized company that may be finding it difficult to access credit markets right now, but even some consumers with VERY HIGH credit scores are finding "current market conditions" difficult to secure a loan at a reasonable interest rate.

SS&P Retail Index (RLX.X) - Daily Intervals

In this morning's Market Monitor, I took a quick look at the RLX.X based on the HD and WMT news. I quickly slapped on a retracement from a VERY similar 07/18/06 Low CLOSE to the recent highs.

What struck me as "this looks familiar" to the RUT.X is that while the other NARROW and BIG indexes were making new highs in July and August, the RLX.X wasn't. NEITHER WAS THE RUT.X.

What I think a trader/investor can do is use the RLX.X as the proverbial "canary in the coal mine" and perhaps use it as an additional indicator that can shed some insight as to the MARKET's pulse on what the IMPACT of a tight credit market is having on things. In the case of the RLX.X, it would be the consumer.

Dow Industrials (INDU) - Daily Intervals

What do you think about BIG and NARROW?br>
IIf you bought a December Dow Diamonds DIA Dec $144 Call within the last week, you're probably NOT liking it.

Do it ONCE, then DON'T do it AGAIN until the DIA PRICE action is ABOVE your initial entry point.

Do NOT over leverage.br>
Turn OFF the "black box" that may have you systematically buying EACH LEVEL LOWER.

However, don't be SHORT, or BEARISH strength, should markets suddenly strengthen.

At least one trader I know of was AGGRESSIVELY SHORTING Dow futures in early July.

What "would have been" the better short?

Just as bulls stick with what's working, bears are the same, and the more success they find they build on the trade until it NO LONGER is WORKING.

SS&P 500 Index (SPX) - 10-point box

CONVICTION will likely be tested here, and this is probably the INDEX of PRESSURE BUILDING.br>
Last night, a BEAR would have been ASSESSING RISK to 1,510, but today's 3-box reversal LOWER to 1,430, actually REDUCES the RISK to another "buy signal" (1,470) notably.

BULLS have the SAME "risk to a sell signal" of 1,420 that they had last night.

TToday's S&P 500 Bullish % (BPSPX) from Dorsey/Wright did show a net loss of 3.02%, so there was a net loss of roughly 15 stocks to reversing lower point and figure sell signals.

This market is still "bear confirmed" at 46.88%.br>
A break lower at 1,420 would be viewed as BEARISH.
 

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