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Market Wrap

Credit Markets Easing?

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The debt wreck may be showing signs of coming changes but that does not mean the problem is over. Leading bankers tried to calm the markets today by pointing out deals in progress, new loan programs and rising bids on distressed debt. This may be the beginning of the end but it will be months before things are back to any form of normal. These positive comments helped provide support to the market and several sell off attempts were thwarted. There was not a flood of buyers and sellers were still evident but the major indexes held their ground.

Dow Chart - Daily

Nasdaq Chart - Daily

There were no economic reports of note with the weekly chain store sales snapshot the only report on the calendar. The headline number came in at +0.2% and much better than the -0.9% we saw in the prior week. Year over year sales rose +2.7% to 482.0 on the index. 47% of consumers surveyed reported cutting back on discretionary spending due to high gasoline prices.

However this consumer sales news was of no interest to the market. The major focus today was layoffs at various financial institutions and the post hurricane implosion in the energy sector. Countrywide attracted attention with the first of what is expected to be a large number of layoffs as their profits turn into losses. Countrywide would not confirm how many were given notices today but the initial rumor was 500 or so but that is widely seen as just the first wave. The cuts today were in the Full Spectrum Lending division, which provided loans to less than prime credits. That is not subprime but alt-a credits that cannot provide all the documentation required or are self-employed. That division's sales force totaled 6,785 employees out of the total Countrywide sales force of 18,091. Countrywide hired nearly 7,000 people this year as competitors crumbled around them. Including all the support staff Countrywide employs more than 60,000 workers. With its drastically reduced loan originations until the debt wreck passes Countrywide is expected to layoff thousands to halt the current cash bleed. Countrywide is only expected to write as little as one-third the number of loans going forward as it did in the recent past. That would be a serious hit to revenue and profits and prevent Countrywide from continuing to employ that many people. CFC gained +1.98 on the layoff news. There was also a strong rumor that Warren Buffet, with $47 billion in cash, could step up and buy all or part of Countrywide. Warren loves to buy distressed companies with good business models.


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Capital One said they were closing their Greenpoint Mortgage unit, cut 1900 jobs and take a charge of $860 million. Three years ago that unit was worth $6.3 billion. Greenpoint had 31 offices in 19 states. Capital One said it was forced to sell due to unprecedented changes in the mortgage markets. Thornburg Mortgage and Luminent Mortgage Capital sold some assets to boost liquidity but neither were seen to be in trouble. Mortgage foreclosures jumped +9% in July and +93% year over year to 179,599. The top five states were Nevada, Georgia, Michigan, California and Colorado.

There was no real attempt to sell off the financial sector for the second consecutive day. Banks were making positive comments and it appeared the credit crunch might be easing. Some thought this was just a pause in the selling rather than a bottom. Others pointed to the talk of new deals and of returning bids as evidence confidence is improving. New vulture funds are being formed with an eye on buying up distressed debt at these historically low levels. That also gave retail buyers confidence that the crisis may be easing.

Contrary to the rebound in financial sentiment the energy sector is rapidly losing investor confidence. Once hurricane Dean turned west into the Yucatan peninsula and dropped to a category-1 storm the bottom fell out of the energy market. Funds with large long positions ahead of hurricane season begin dumping in heavy volume. This was also the last day of trading in the September contract so much of that dumping could have been expiring positions held till the last minute when Dean first appeared. Oil prices fell to $69.48 from last week's high of 74.23. Natural gas prices fell off the proverbial cliff to close at $5.80 after hitting $7.18 late last week. The Gulf produces 25% of our natural gas and prices had risen on the hot weather and the two storms that appeared early last week. With storage levels already high traders were hoping for a knockout punch in the Gulf to cause a depletion of those supplies. With no hurricanes in sight today and the peak of the season less than three-weeks away the patience of those funds just wore out. I believe we could easily see $65 oil if no hurricanes appear over the next three weeks.

Crude Oil Chart - Daily

Late today Petroleos Mexicanos, or (Pemex), the state owned oil company of Mexico, said it was operating on a skeleton crew basis on seven oil platforms directly in the path of Dean. Over 18,000 workers had already been evacuated from the big offshore field at Campeche Sound. Those remaining platforms with skeleton crews produce only a fraction of the 3.2 million bbls per day Mexico produces from all sources. There is not expected to be any material loss of production other than that time required to put the crews back on the platforms and check for damage before restarting.

The only real strength today came from the Nasdaq with Internet's and the network sector leading the charge. Apple, the heaviest weighted stock in the Nasdaq-100, gained +5.35 on positive comments from UBS on better than expected iPhone shipments for the quarter, possibly as many as 800,000. They also got a boost on news Apple has signed deals with three European cell phone operators, T-Mobile, Orange and O2, to handle the iPhone in Europe. The deal requires the operators to give Apple a 10% kickback on all revenue collected from calls and data transfers made through the iPhones. Obviously Apple is dealing from a position of strength but is not clear how much longer they can hold that position. MTV and RealNetworks announced a digital music joint venture to compete with Apple's iTunes. MTV will merge its Urge music service into the Rhapsody product from RealNetworks and then heavily market the service starting in September. The pair has teemed up with Verizon Wireless and Vodafone in exclusive and long-term agreements according to the companies. Verizon said it would market an 8-gigabyte phone, similar to the largest iPhone, by mid-2008 and said over the air download of songs would be a feature. Wal-Mart also announced DRM-Free downloads to further enhance the marketplace.

Google gained another $8 after announcing it acquired a stake in social networking site Tianya.cn in China. They announced this Monday and the good news continued to follow them today. Google is still trying to repair customer goodwill after botching the closing of its movie download service. It is now giving refunds and additional credit in its Google Checkout service.

The rumor continues that Microsoft is working on a buyout of Yahoo. Microsoft CEO Steve Ballmer was asked point blank in an interview on Monday and reviewers felt he ducked the question rather than just say no. Evidently traders don't believe it as Yahoo lost -.30 for the day.

Richmond Fed President, Jeffrey "Rate Hike" Lacker, lived up to his nickname in a speech today. He said market volatility was not a reason to change Fed policy. He said only a drastic change to the actual economy or a clear risk to the economy should instigate a change. He said inflation was still the chief cause for concern and the recent market volatility was not impacting the economy. The Fed meets again on Sept 18th and the Fed funds futures are showing a 100% chance for a rate cut at that meeting. After meeting with both Bernanke and Paulson this morning Senator Chris Dodd reported that Bernanke was ready to use "all the tools at his disposal" to help ease the liquidity issues currently impacting the market. However, Dodd admitted Bernanke did not say he was going to cut rates.

The bearish report on foreclosures was offset by the positive comments from some major banks and the markets treaded water for the second consecutive day. The major indexes traded on both sides of the flat line and never ventured far from level. We now have two days of consolidation trading under our belt since the monster short covering spike on Friday when the Fed lowered the discount rate. There are no economic reports of note on Wednesday other than the weekly mortgage applications survey and the oil and gas inventories. Those are not expected to move the market.

The Dow is holding just over 13000 and was the weakest index today led lower by United Technology and ExxonMobil. The drop in crude prices will continue to pressure XOM as we search for a bottom in crude. The lack of any material sell off from Friday's spike is encouraging but the lack of any continued move higher is also discouraging. That is exactly where we ended up today, in a draw with no direction. Initial support is 13000 followed by 12500 with resistance at 13150 and 13300.

The Nasdaq was the strongest index with a gain of +12 points mostly on the back of AAPL, GOOG and RIMM, which split 3:1 this morning. Dell was a drag on the Nasdaq on rumors it was having trouble getting components for its flat screens and paint problems on its new colored laptops. A Dell execute wrote in a company blog that Hewlett-Packard may have caused the shortage by making a "strategic purchase" and caused the shortfall in market inventory levels of key parts. Shame on them! (Big grin)

The Nasdaq at 2521 closed just below resistance at 2525 and above support at 2500. The Nasdaq should be in better shape because it has no housing, subprime or banking components. However there is a strong congestion range between 2500-2600 that may take some time to cross during the dog days of summer. The S&P has a similar congestion range between 1430-1485 and it closed at 1447.

Russell-2000 Chart - Daily

After Friday's short squeeze the Russell has traded almost perfectly flat with only a .93 gain today to 788.55. I am still convinced that longs should remain on the sidelines until the Russell moves over 800 or dips again to 740. There is risk here for the Russell and its trading pattern this week is not giving me any confidence that funds are returning to the market. I realize some individual stocks are seeing some nice gains but the broader market is still weak.

This is going to be short tonight since I am attending the energy conference all week. Of the two-dozen or so companies I have seen so far I like Ultra Petroleum (UPL), Apache (APA) and Canadian Natural Resources (CNQ) the best. I will update my top ten in the LEAPS newsletter this weekend.

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