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Market Wrap

So Far So Good

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After Monday's dip to support the bulls rallied again but it took all day to find some traction. The Citigroup write down news continued to make waves with fears that other financials would be forced to confess even further losses. It was rumored that Goldman Sachs would announce new write downs after the close even after Goldman said there would be no announcement and no new write downs. Fear of the financials was the predominant drag on the markets early in the day but after the Goldman statement the money center banks started finding buyers as the afternoon progressed. Financials along with techs and energy stocks finally got their act together and the day ended with a big gain.

Dow Chart - 60 min

Nasdaq Composite Chart - 120 min

The only economic report out today was the Job Openings Labor Turnover Survey or JOLTS. The survey showed the hiring rate slowed slightly for the second consecutive month but separations remained flat. This allowed the job market to remain relatively stable despite the minor slowing in hiring. The job openings declined -0.7% to 4,148 in September compared to 4,168 in August. The job openings rate declined -0.1% to 2.9 but the hiring level declined -4.9%. This may sound negative but the rate of decline across all the components was very light. There were 4.677 million people hired in September with 4.355 million separations. This was the lowest rate of separations since late 2004 and was instrumental in keeping the hiring rate positive. The JOLTS report is a calendar month report as opposed to the government non-farm payroll report, which is 15th to 15th. This data suggests continued strength in hiring but no holiday surge. It was neutral for the markets.

Wednesday reports include Mortgage Applications, Productivity and Costs, Wholesale Trade and Consumer Credit. None are expected to be market movers. Crude inventories are likely to be a moving force for crude with expectations for another drop. The official consensus is for a drop of one million barrels but the last couple weeks have produced big surprises and big inventory declines. The problem this week combines delays for tankers due to hurricane Noel and the shutdown of Mexican production due to torrential rains and severe storms. There is no way to quantify the tanker traffic delay but the 2-3 day passing time for Noel to move out of the Caribbean theoretically stalled any tankers headed towards the gulf by 2-3 days. That could produce a timing shortage of 2-4 million barrels. Mexico saw their production and ports shut in for 3-4 days last week due to severe storms and torrential rains. The U.S. imports 1.4 mbpd from Mexico and that shutdown could have caused another 4-6 mb drop in deliveries. This suggests tomorrow's inventory report could see a 3rd week of massive inventory declines. Last week saw a decline of 3.9 mb and the prior week lost 5.3 mb. Another massive decline could easily spike crude another $2-$3 and target that $100 price level.

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On Tuesday crude climbed to $97.10 and another new high on rising geopolitical concerns. A pipeline in Yemen was bombed by terrorists and shut down. The pipeline transports 155,000 bpd. The saboteurs were not identified. The Pakistan problem, while not specifically an oil issue, still caused a rise in tensions. The month long rise in oil prices finally pushed gasoline prices nationwide to more than $3.02 per gallon. Analysts claim if oil does not crash soon we could easily have $4 gasoline by Thanksgiving. We are currently in a low usage period for gasoline but that expires when the travel for Thanksgiving accelerates and then carries over until year-end on holiday travel and shopping. That surge in gasoline demand at the same time heating oil demand soars could put profits back in the refining business but push prices higher. Heating Oil futures surged to a new all time high at $2.61 per gallon today and analysts claim it could hit $3 before winter. The EIA said today that home heating bills this winter would rise +26% to an average of $1841 for those homes heated with oil. Those homes heated with gas would rise only 11% to $900. The EIA also raised its estimates for crude in 2008 to an average of $80 for the entire year. That should be a reality check for those expecting oil to return to $60 in the near future. The EIA said demand could rise 2.1% in the coming year but the global impact of high prices could be the biggest risk. As prices continue to rise we could see the beginning of a global recession triggered by the end of cheap oil prices. Oil accounts for 90% of the world's transportation needs and high prices directly impact the amount of fuel used. Historically every major price spike has been followed by a period of recession as the world adjusted to the higher prices. Once acclimatized world growth continued. This is the worst spike in modern times and common sense suggests it will eventually be followed by an equally painful recession. However, forecasters are not giving that possibility a serious chance until 2009 to 2011. On the surface it appears oil prices are not impacting the economy unless you happen to be running an airline. All the majors carriers have been down big over the last week since every dollar in crude gains costs each airline an average of a million dollars a day. With crude rising $2-$3 a day this has got to be painful for the transportation sector and gasoline/diesel prices have yet to really factor in the spikes in crude.

Gold prices spiked again to $827 and another 28 year high due to the falling dollar. Gold has been soaring since the subprime problem began and accelerated by the falling dollar. Gold has typically been an inflation hedge and a place of safety in volatile markets. Crude is also being seen as a dollar play and an inflation hedge in an expanding global economy. Oil, since it is a shrinking commodity used in vast quantities daily has turned into a better hedge than gold but you could not tell it by looking at the gold chart below. The dollar hit another historic low under 76 intraday. With other countries raising rates and the Fed cutting rates this is not likely to change soon. Analysts do expect an oversold bounce any day now.

US Dollar Index Chart - Daily

Gold Chart - Daily

December Crude Futures Chart - Daily

Beazer rocked the homebuilder sector again with news that sales fell -53% for the quarter and cancellations rose to 68%. The lack of sales that actually close was blamed on the current mortgage disaster. According to some analysts the mortgage market is not functioning. Mortgages are reportedly the hardest to get since record keeping was started 18 years ago. Realtors are claiming better than a 50% default rate from either the inability to get a mortgage on the new home or from the inability for buyers to sell and fund the home they are leaving. Beazer is specifically under the gun because of the multiple current investigations of impropriety in handling loans on homes they sold. Shareholders as well as several analysts are calling for Beazer to boot CEO Ian McCarthy for various operational crimes. Beazer also warned this week they would be taking an additional $230 million in charges for write downs of home prices, land and defaulted land contracts. Beazer suspended its dividend and laid off 25% of its staff (150 workers) in October. Hovnanian (HOV) said their sales cancellation rate was -40% with net contracts down only -10% and deliveries down -19%. They also had some positive points in their outlook. Ironically HOV was down on the day while Beazer was up a buck.

The Citigroup write-downs haunted Goldman Sachs all day. Rumors continued to circulate that they would announce more write-downs after the close. Goldman finally responded saying there were no write-downs and there would be no announcement. GS stock rebounded +$5 after their announcement. Citigroup continued to sink, losing another buck, on worries that new management would want to really clean house and write-down anything even remotely questionable before building their own legacy. That makes sense to me. Write off everything and clean all the skeletons out of the closet so any future news will only be good. If those skeletons begin to show signs of life after being written off the new life will add to future profits. Sounds like a plan to me and odds are good there will be at least one more round of major losses to report. I would be a buyer of Citigroup once the next group of charges have been announced. The FASB board has a new rule, number 157, which will go into effect on Nov-15th. The new rule defines how "Fair Value" is determined for balance sheet assets. With the advent of the subprime problem and the lockup in the credit markets there was no real way to value the CDOs, SIVs, etc, held by financial institutions. Historically fair value was the result of an arms length transaction between two willing parties. With nobody willing to trade those assets the banks were able to continue to carry them on their books for full value. They actually went to great lengths to avoid having one trade that would have determined fair value for all the rest. After Nov-15th there will be a new rule that will force them to value at market even if a trade has not occurred. This could cause a complete new round of write-downs of subprime debt instruments.

Google rose another $16 after Monday's announcement of the Android open source operating system for mobile phones. It remains to be seen how the phones will be accepted by customers but investors are continuing to push the stock price higher. Sanford Bernstein raised their target price to $850 but that appears to be just another bump in the road for Google rather than a stopping point. $1000 is already being discussed and there are no visible potholes ahead. Google closed today at $742.

Elsewhere in the Internet sector the Alibaba Group sold 17% of Alibaba.com in an IPO that spiked +193% higher on the first day of trading. That catapulted the $9 billion company to $25 billion in market cap overnight. Baidu.com, the former favorite only has a $14 billion market cap. Yahoo, a major owner of Alibaba Group fell -1.43 on the news in a classic sell the news event. Yahoo has a 39% stake in Alibaba.com's parent, which kept a 75% stake in the IPO. Yahoo also had a 1.2% direct stake in the IPO. With the newly IPOed Alibaba.com valued at $25 billion Alibaba Group holds 75% worth roughly $18 billion. Yahoo owns 39% of Alibaba Group with that stake worth roughly $7 billion. The 1.2% directly owned stake in Alibaba.com is now worth $300 million. The total valuation of Yahoo's Alibaba investments is about $7.3 billion. Yahoo's valuation before the IPO was about $42 billion. In theory that should put Yahoo closer to $50 billion but in practice we saw YHOO sold on the news. Yahoo has been rising from $22 back in August to its recent high of $34 on expectations of the IPO. That was basically a +50% gain on Alibaba expectations. Remember I said Yahoo's market cap was $42B last week. That gain on expectations was roughly $20 billion. With the IPO value known now at $7.3 billion to Yahoo it means that the $20 billion gain in expectations was $13 billion too much. It also suggests Yahoo still has downside ahead. Yahoo CEO Jerry Yang was under fire during his appearance before the House Committee on Foreign Affairs today. He admitted being a "willing participant" in political witch-hunts in China. Yahoo gave Chinese authorities contact information on a couple web journalists leading them to be arrested. One individual is now serving a 10-year prison term for his published comments. Yang admitted that Yahoo initially denied providing the information. In his defense the Yahoo general counsel blamed China saying the investigation involved "state secrets" and produced an order demanding the info. Yahoo promised to be more thoughtful in future negotiations with countries where information access is restricted.

Under Armour (UA) came under fire from analysts and investors alike as the top three executives announced sudden large sales of stock for roughly $125 million. CEO Kevin Plank said he sold 1.5 million shares at $59 and the first sale since June 2006. SVP of Retail Scott Plank sold 765,000 shares at $59 for $45 million. SVP of Outdoor Kip Fulks sold 150,000 shares at $59. Analysts thought it was odd that all three made unannounced sales in large quantities all at the same time and exactly the same price. The stock fell -8% on Monday and another 4% today. Shares are down -19% since Halloween on analyst worries about a 100% rise in inventory and falling sales. Could it be that those top three executives saw the writing on the wall and decided to bail ahead of retail investors? UA is one of the heaviest shorted stocks with a float of only 21 million shares. Having the officers dumping 2.5 million shares or more than 10% of the float was deadly to the stock price and probably the credibility of the company officers.

Under Armour Chart - Daily

The Caterpillar CEO who painted an ugly forecast about a month ago on CNBC changed his tune today. In an interview today on CNBC he said conditions had changed and we could see a soft landing in Q4 (just slower growth but no recession) and then a recovery in 2008 that could see an accelerated growth rate. The sound bite was played over and over and was credited with some of the positive sentiment moving the market higher.

It was a bright and sunny day for solar stocks SunPower (SPWR) and First Solar (FSLR). First Solar was up +14% or $21 on news it had signed some key supply agreements with Babcock and Brown and Ecostream Switzerland worth up to $1 billion. Panel backlog rose by 557 megawatts for delivery between 2008-2012. In order to meet rising demand they are going to increase manufacturing lines in Malaysia to 16 from the current 12. SunPower spiked +16% or $20 on the SPWR news and some sector upgrades. The solar sector is finally getting the volume it needs to bring prices down and the respect it deserves from analysts. JA Solar (JASO) rose +$5 to $61 and Trina Solar (TSL) also gained +$5 to $64.

After the bell the Nasdaq announced it would acquire the oldest stock exchange in the country, the Philadelphia Stock Exchange, for as much as $700 million. The PHLX was founded in 1790. This will give the Nasdaq an entry into the options market. The PHLX controls about 15% of the options market and a takeover by the Nasdaq is sure to expand that market share.

The big news for Wednesday will be the Cisco earnings after the close. Cisco gained $1 on the day and closed at a new multiyear high not seen since Feb-06 2001. With video use on the Internet growing at light speed the demand for faster communications gear is accelerating worldwide. Cisco's CEO John Chambers continues to claim business around the globe is very strong and he is expected to confirm this one more time on Wednesday. The entire tech sector's health is riding on the Cisco earnings. With Intel, Apple and Microsoft all saying bullish things about PC sales it is almost a guarantee that they will beat earnings estimates and guide higher. If they don't it could get ugly very quickly.

The markets rebounded today because of multiple events. One was the CAT CEO reversing his prior recession call. Another was the flat denial by Goldman Sachs of any further write-downs. This helped power the money center banks to nice gains and provided a lift to the entire financial sector. Even Bear Stearns, the recipient of some new downgrades, managed to gain +$2. Tech stocks continued to lead and that helped pull the broader market higher. Lastly the energy sector rallied on the new high in crude and the prospects for $100 oil on Wednesday. Crude is $97.50 as I type this paragraph.

On Sunday I disclosed my bullish bias for the week and by Monday afternoon I was questioning that stance. Fortunately support held as expected and I will not be forced to eat my words from Sunday. The Dow retested 13500 one more time before rebounding off the lows for a +117 point gain. While this is bullish there are still several hurdles to overcome. The first will the lower high at 13925 set right after the FED rate announcement last Wednesday. That will be the first place the bears could set up a credible defense and we should return to that level by the weekend. This will be a crucial test of bullish and bearish conviction. A breakout there almost guarantees a new high before Thanksgiving.

The year-end fund selling appears to be over and even the Russell saw buying. The Nasdaq pulled back to support at 2780 on Monday and again today. The rebound was strong tacking on +30 points for the day, +45 points from the intraday low to close at 2825 and very close to the prior resistance at 2835 and the recent high at 2860. The Nasdaq is still leading the charge and with great expectations over Cisco's earnings it should continue to move higher. The Nasdaq-100 (NDX) is acting even more bullish and is only 18 points away from a new high breakout. Options on the NDX using the QQQQ ETF are cheap and plentiful.

The S&P-500 tested support at 1490 four times since Oct 19th and each dip was met with strong buying but there was no follow through on all but one dip. Today the S&P rebounded to initial resistance at 1520 and appeared poised to take on the next resistance level at 1550. A strong continued performance by the financial sector on Wednesday will be a big supporting push. The risk to the S&P will be energy stocks. If crude inventories come in negative again on Wednesday it is almost guaranteed we will see $100 oil. That number has been quoted so often as the target there is a strong possibility we could see a sell the news event. I for one will be waiting with mouse finger poised to short crude if that level is reached. Ah, but here is the challenge. Because $100 has been mentioned so much there are probable tens of thousands of other retail traders ready do the same thing. There are probably several hundred institutional traders poised to buy that dip in order to produce another monstrous short squeeze that targets $110. You really can't play this game on crude with a directional bias. The volatility has been so strong that both sides are living Maalox moments almost daily. Getting back to the point it is very possible that energy stocks will anticipate this $100 battle and begin to take profits as crude nears that level. With energy the second largest component of the S&P it could produce a drag on the market once $100 is hit. This is pure speculation but it is something you should watch as the drama unfolds. Heck, since crude is not trading on fundamentals but pure speculation we could just blow through $100 and never look back.

S&P-500 Chart - Daily

Russell Chart - 10 min

I was really encouraged by the action on the Russell late this afternoon. The +17 point rebound back over 800 suggested fund managers were becoming more bullish about a potential year-end rally. The +1.4% gain was the second strongest index behind the NYSE Composite +1.44%, which coincidentally contains a lot of small caps as well. I view this as partial confirmation of my bullish stance from Sunday. If this rally continues past Cisco's earnings I think we are bullet proof until Thanksgiving. After we choke down our fill of turkey and dressing it will be time to reevaluate the market direction for the rest of the year. Continue to buy the dips unless support at Nasdaq 2780 fails.
 

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