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If you were riding the waves of today's market it was more like a white water rafting trip than a leisurely pleasure cruise. Seasick pills were definitely needed with the triple digit swings. The Dow opened up +155 points to 12505, dropped -108, rebounded back to 12475 and then plunged to close at 12337 after a 200-point range for the day. The drop was unsettling for the bulls given the relatively positive news of the day.

The good news to start the day came from the NAHB Housing Market Index. The index rose for the second consecutive month and there were positive comments from various officials in the housing sector. That was very positive for market sentiment at the open. The index rose to 20 in February, up from 19 in January. The cycle low was 18 set in December. Buyer traffic increased to 19 in February, up from 14 in January and the cycle low of 13 in December. The regional indicators all rose by multiple points except for the Midwest region. The Northeast spiked +3 points to 24 compared to a +2 point gain in the South to 24. The West also rose +2 points but only reached 15 and is still lagging the rest of the country. The last 5-months appears to have been a bottom on the index but the sector has a long way to go to reach the 2005 cycle high at 65. With interest rates low and the buying season about to start the odds are very good the sector will continue to improve for the next several months.

NAHB Chart

As a contrarian indicator the Risk of Recession report this morning was also bullish. However, it would be a stretch for traders to see it that way. The risk of recession rose to 60% at the end of January compared to 23% as recently as September. The index is the highest it has been since 2001. This may not seem bullish at first but it means the Fed is going to continue to be aggressive to fight this trend as long as inflation remains manageable. The market is normally very bullish coming out of recession lows and the higher the risk the faster the Fed will act and the quicker the recovery will appear. Factors pushing the risk higher are the falling job markets, declining consumer confidence, stock market weakness, housing market weakness, higher energy prices and the weaker dollar. The next Fed meeting is March 18th and we have a full slate of economic reports between now and then to convince the Fed that action is still needed.

Recession Probability Chart

The opening bounce in the market was also due to the resignation of Fidel Castro as president of Cuba. He was president for 49 years and the longest continuous term in the world. He has been ill for the last 2-years and his brother Raul Castro has been filling in for Fidel. Under Cuban law the newly chosen Parliament will choose a 31-member council of state on Sunday. That council will then choose a new president. Even though the process would appear to have a democratic tone most Cuba watchers expect power to remain in Castro's inner circle, many of whom hold positions in the cabinet. The resignation did not come as much of a shock since many have been expecting him to relinquish office or simply die for the last couple of years. There were celebrations in Cuban neighborhoods in the U.S. but life in Cuba went on pretty much as usual. Companies that would benefit from a change in the regime and a resumption of relations with the U.S. saw their shares move higher. The Herzfeld Caribbean Basin Fund (Nasdaq:CUBA) spiked 17% to $8.71. Unless the council surprises everyone with a pick out of left field the Cuban government and its policies should continue to be cutoff from American trade for some time. The news was positive for the market in a sentiment perspective but there was no immediate basis in fact for the gains.

Wal-Mart (WMT) reported earnings that rose +4% in Q4 after its holiday focus on low prices paid off. WMT executives said the company expects a sales bounce when the stimulus checks hit the mail in May. Wal-Mart has 127 million shoppers at its U.S. stores every week. While earnings and sales were good there was a depression when Wal-Mart guided lower for Q1 and full year. Wal-Mart now expects earnings to be in the range of $3.30-$3.43 and analysts were already expecting $3.43.

Wyeth (WYE) won a case in a Maryland court on whether the mercury based vaccination preservative Thimerosal causes autism. If you are a parent you probably have strong feelings about this topic. Wyeth may have won this battle but the war is far from over. The judge ruled it was "generally accepted in the scientific community that Thimerosal in vaccines does not cause or contribute to neurodevelopmental disorders such as autism." That finding cost Wyeth untold millions of dollars in legal fees and while it was a win in their favor there are plenty of other parents waiting to continue the war. In the U.S. the autism rate is 1 in 150 compared 1 in 5,000 just a couple of decades ago and 1 in 10,000 in other countries. The jump in Autism began as children born between 1987-1992 reached vaccination age. There may not be a link according to the Maryland court but autism rates are 27 times higher for children who have been vaccinated compared to those who have not received a Thimerosal vaccination. Reportedly other countries, which have banned Thimerosal have seen dramatic drops in their autism rates. Recent studies have found that senior citizens over 60 have a 900% greater chance of Alzheimer's if they have had more than 5 flu shots with Thimerosal since age 55. The statistics above should convince everyone to question whether you or anyone you know should risk any shot that includes Thimerosal despite the findings of the Maryland court. Wyeth gained +1.79 on the news.

Onyx Pharmaceuticals (ONXX) was crushed for a -26% drop or -$12 on news that a late stage lung cancer trial on Nexavar produced more deaths than those who took chemo alone. ONXX also reported earnings but declined to give any guidance and blamed dynamic market conditions. Earnings were actually a loss of 21 cents compared to analyst estimates for only 7 cents.

Hewlett-Packard (HPQ) reported earnings after the close of 86 cents and that was 5 cents better than the street expected. Revenue rose +13% to $28.5 billion and nearly a billion over the $27.6 billion analysts expected. HPQ also raised guidance for the current quarter to 86 cents compared to the 82 cents expected. HPQ also said full year profits could rise to $3.50-$3.54 compared to estimates of $3.36 by analysts. Shipments in the computer division rose 27% in Q4. Ink cartridges remain the most profitable division with a 7% rise to $1.15 billion in quarterly profits. HPQ said it expected to pay higher prices for components in Q1 and that suggests Dell could be hurting. The last several quarters HPQ has hogged the components and Dell has had to do with the crumbs and less desirable components in some cases. Dell used to beat HPQ like a rented mule earlier this decade but now the shoe is on the other foot and Dell is the one suffering from their declining market share. HPQ jumped more than $2 in after hours.

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Crocs (CROX) was not as fortunate despite an 84% jump in Q4 profits. CROX beat the street by a penny with earnings of 45 cents but reiterated 2008 guidance that was lower than analysts were expecting. CROX expects to earn $2.70 in 2008. Inventory accumulation was also an issue.

HD-DVD meet Sony Betamax. It is official and the winner is Blu-ray. Toshiba threw in the towel today and said it would halt production of the HD-DVD product after losing support from too many big players in the DVD arena. Toshiba had been cutting prices drastically and offering free DVDs to try and compensate for lower acceptance of the HD-DVD product. Globally 6.3 million Blu-ray boxes have been sold compared to only a million or so of the HD-DVD players.

Oil prices spiked +$4.51 today to close the afternoon session at $100.01 and a new record close. I don't have enough fingers to count all the reasons given for the spike but I did not hear even once that it was short covering ahead of futures expiration. The current March contract ceases trading on Wednesday and everyone expecting the normal Feb-Mar decline into spring was caught short. The fuel for this short squeeze was blamed on a refinery explosion in Texas that took a 67,000 bpd refinery offline for what could be months. The keywords there are "67,000 bpd." That is a drop in the bucket when U.S. refining capacity is already running 10% below normal at 85%. Refiners have taken capacity offline to compensate for weaker demand as we move into the seasonal spring decline. Heating oil demand drops to near zero and summer gasoline has yet to be in demand. The 67,000 bpd loss is just noise.

We also heard that Hugo Chavez said he was not serious when he said he would cut oil deliveries to the U.S. as a result of the Exxon squabble. We already knew he was all bark and no bite since the U.S. refineries are the only ones setup to process his specific grade of crude. If he cut us off he would have nowhere to go and he is too smart to cut his lifeline of oil dollars just to make a political statement. He would survive as Venezuelan dictator about as long as you and I would survive without food.

OPEC was also blamed for the spike after several spokesmen said there was little chance of a rise in production and any change would be a cut. There were an equal number of spokesmen saying they would likely leave production at its current level when they meet in two weeks and that would be enough excess capacity to rebuild global inventories.

There was a news report that Nigerian rebel leader Henry Okah had been killed or died in custody and the rebels threatened to attack every oil installation if it was true. Late in the day it was reported that Okah was alive and well and still in custody. The government said they would supply proof within 24 hours to diffuse the situation. The rebels have eased their attacks on oil facilities over the last few weeks and there were fears a dead Okah would produce an all out war on the energy sector.

Lukoil reported it had stopped deliveries to Germany because of a disagreement over price. It is the second delivery halt in the last twelve months to Germany. German refineries said they had access to other supplies and refineries were running at full production. This news about Lukoil is still a long-term problem even if the dispute is solved. The Russian oil companies are pursuing a government plan to systematically assert their dominion over Europe. Europe is dependent on Russian gas and oil and Russia is making sure they know it by hiking prices at will. When the various countries refuse to pay it Russia cuts off the supplies and calls it a pricing disagreement. This is only going to get worse as global supplies shrink and Europe has fewer energy supply choices. European states are less likely to take sides against any future Russian political position if they know their energy lifeline is at risk. Still, it had no impact on the price of crude today despite what you might have heard in the news. Expectations are for another 2 million barrel rise in crude inventories on Wednesday. That would be the 6th consecutive week of builds totaling more than 20 million barrels with demand slowing. It is hardly a reason to push prices higher. Subscribers to the LEAPS newsletter bought puts on a key oil equity at today's close.

Crude Oil Chart - March Futures - Daily

The high cost of feed grains prompted Smithfield Foods (SFD) to announce a cut in its sow herd by as much as 5%. That would equate to 50,000 animals but the impact to pig production would be more than 800,000 to 1 million per year as that breeding capacity is removed from the market. Smithfield said as long as U.S. policy favored corn ethanol over food the price of food for consumers would keep rising.

Dow Chart - Daily

The Dow was up +155 at the open and ended the day at -10. This is not a positive day given the recent history of the markets. More often than not the markets have been selling off into the close and traders are routinely shorting the rallies. This type of end of day sell off is damaging to market sentiment. Traders who bought the various dips are getting a bloody nose on every rally. Eventually they will decide it is less painful to wait on the sidelines rather than jump in the ring with Lennox Lewis whenever the opening bell rings. The Dow decline put it right back at initial support at 12300 and very close to critical support at 12125. There is an increasing expectation among analysts that the markets are setting up for a retest of the January lows. I have not bought into that scenario yet but the evidence is growing. A break under 12125 would have every bear in the market piling on for a potential 500-point drop. The Dow welcomed two new components today. Bank America (BAC) and Chevron (CVX) were added to the Dow-30 and Altria (MO) and Honeywell (HON) were removed.

List of Current Dow Components

The Nasdaq declined nearly 50 points off its opening high to close right on 2305 and right at initial support. Actually it is slightly under initial support and right on the verge of a critical breakdown. I can justify some of the decline as fear of Hewlett Packard earnings but that may have only be part of the problem. The severity of the afternoon decline was definitely related to a sell program and that could have been due to some option expiration residue. Of course that is sheer speculation but still a possibility. I am concerned that the lack of an after hours rebound in the Nasdaq futures even after the HPQ earnings suggests there is more downside ahead.

Nasdaq Chart - Daily

S&P-500 Chart - Daily

The S&P-500 was actually the tamest of the indexes with only a 16-point spike at the open that it held until the sell program hit at 2:30. Closing at 1348 for a loss of only one point put it right back in the middle of its recent range at 1350. The financial sector was also flat for the day and gave the S&P relief from that selling pressure. I would be mildly bullish based on just the S&P or the Russell but I am becoming increasingly cautious that current support at 1340 and again at 1320 may not hold.

The Russell has been our sentiment indicator for fund managers and it closed well off its highs but still positive for the day at 702. The Russell continues to maintain a minor uptrend but that trend may be weakening. Russell 720 remains initial resistance and 695 initial support. I would be concerned if the Russell breaks this support level. I would look for support at 685 to reappear but I would not be so eager to buy the next dip to that level. I am right on the verge of turning bearish and a drop under 695 would turn me neutral and a drop under 685 would be a short for me this week.

Russell Chart - Daily

The only positive in the market internals is the lack of volume. Across all exchanges today total volume was only 6.278 billion shares. Six of the last seven days have had less than 7 billion shares traded. That single day exception was just slightly over seven. Volume back in the December drop was over 10 billion shares for more than a week. Low volume now could be just a lack of conviction as we await the Fed and inflation data but it is a worry for the bulls. Of course low volume on down days is always seen as lack of conviction by the bears.

On Wednesday the market has a couple of headwinds in the CPI and the FOMC minutes. The CPI is expected to show that inflation is rising quickly and that could put the Fed on hold. China just reported that inflation rose at a record 7.1% level in January and that inflation is being passed through the system to us. Import prices from China have risen for nine consecutive months. Rising crude prices are pushing U.S. inflation higher and gasoline futures made a new high today. In a period where oil and gasoline prices should be falling this is going to pressure the normal seasonal inflation declines. Food inflation as a result of global demand and crops being diverted to corn ethanol has pushed food prices to multiyear highs. It would be a real surprise if the CPI showed anything but a large rise in inflation. That puts the focus back on the FOMC minutes at 2:PM and a look inside the Fed when they cut rates at the last meeting in January. Remember there was a dissenting vote at that meeting and any increase in inflation pressures will likely increase that dissention. I am afraid the market is at a crossroads and should the Fed be viewed as moving to the sidelines the market is NOT going to be pleased.

Jim Brown  


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