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Market Wrap

GM To The Rescue

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With the indexes at session lows and the Dow down -150 points it was GM that came to the market's rescue with much better June sales than expected. The shorts ran for cover as a 10% spike in Dow component GM caused a lot of trailing stops to be hit on the ETFs. The first positive ISM in five months also helped improve investor sentiment.

Wilshire 5000 Broad Market Index Chart - Daily

The headline number on the ISM Index came in at 50.2 for June and well over the 48.7 analysts had expected. This was the first reading in expansion territory since January's 50.7. While it is not a huge spike over May's 49.6 it simply means that conditions are not getting worse. This was far from an endorsement of an improving economy but inch-by-inch life is a cinch. Traders would be perfectly happy with a slow improvement over the coming months. The fragile gain is another indication that the Fed will leave rates unchanged for the rest of the summer and that will allow a stronger base to be built for the next cycle. Clear weakness was still evident with new orders essentially unchanged at 49.6 and backlogs increasing only slightly to 47.5. The worst component was prices paid which rose to 91.5 and the highest level in 29 years. This is a clear sign inflation is rising and will eventually be a serious problem for consumers. Inventory levels are now at their highest point since 2005 indicating continued slow sales. During the 2001 recession the ISM headline number averaged 43.4 and well below our current levels.

The Case-Shiller Home Price Index came in at -14.14 for the first quarter. This was down from -8.9 in the prior reading. Nationally home prices are down -23% on an annualized basis but this is no surprise. There have been dozens of other surveys with the same information. This report was a non-event for traders. Construction spending for May fell -0.4% and that was also inline with estimates and no shock for traders.

GM Chart - 30 Min

The big shock for the day was better than expected GM sales. GM reported sales were down -18.1% in May but that was much better than expected. GM sales were also strong enough to keep GM in the top spot as number one in U.S. sales. Toyota reported a drop in U.S. sales of -21.4% and that was a shocker given the strong demand for the Prius. Chrysler sales were off -36% and Ford sales were down -28.1%. These numbers are almost unbelievable when you consider the numbers of vehicles left gathering dust on dealer lots. Plants have been shuttered and automakers are struggling with decisions on what kind of car to make next. Ford said sales fell to 174,091 vehicles from 242,029 in June of 2007. Ford truck sales fell -35.6% and SUV sales fell -40%. Chrysler vehicle sales fell to 117,457 from 183,347. Chrysler car sales fell -49% while trucks were slightly better with a drop of -30%. GM saw auto sales fall -21.1% with trucks falling -16%. Toyota auto sales fell -9.4%, truck sales -38.8% and Lexus sales fell -30%. Honda was the only manufacturer to post a gain with an increase of +1.1% helped by a +19.3% gain in autos but hurt by a -24% drop in truck sales. Their subcompact Honda Fit spiked +78.2% and the sales of the Accord rose +37.3%.

Bank of America finally swallowed Countrywide Financial and most analysts are expecting a bad case of indigestion. BAC initially invested $2 billion in CFC when the stock was about $20 only to see their investment disintegrate almost immediately. To keep from losing $2 billion they doubled down on their bet and agreed to buy Countrywide for $4 billion. BAC stock fell from $38.50 when the offer was made to $23.87 on Monday. That lowered the price BAC paid to about $2.5 billion. Now they have to digest this meal without suffering cardiac arrest. Last week BAC announced they would cut 7,500 jobs as part of the acquisition. In 2007 Countrywide was the largest mortgage lender. This now makes BAC the largest mortgage lender and catapults them over other major lenders like Wells Fargo. Analysts fear there is significant liability waiting for Bank America as the subprime crisis winds down. There are numerous class action suits along with suits by states and cities over lending practices. There are suits on stock fraud, insider trading, executive compensation and dozens of other nuisance actions. For instance Florida filed suit last week seeking a settlement on claims Countrywide practiced predatory lending. They claim they gave subprime loans to people who could have qualified for prime loans. They also claim they threatened to fire their underwriters if they attempted to verify income of the borrowers. Basically these states see a deep and healthy pocket in Bank America and they are fishing for handouts in the form of settlements. After the smoke clears the borrower is ultimately responsible for the loan they signed. If the housing market suddenly bottomed this would all work out but should the market continue to fall it could be a rocky marriage. Countrywide has the largest private loan portfolio in the country with a lot of it subprime. BAC said they would not originate any subprime loans in the future.


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It was a good day for Richard Grasso. A New York appeals court dismissed all the remaining claims against him regarding the $187.5 million pay package he received while CEO of the NYSE. Last week the state's Court of Appeals dismissed four common law claims against him. The appeals court ruling said the attorney general's (Eliot Spitzer) authority to pursue claims "lapsed" when the NYSE became a for-profit corporation. It is now up to the governor's office to decide if they want to pursue this decision at the Court of Appeals. With only one justice dissenting on the opinion the odds are slim the case will be resurrected. In late breaking news NY Attorney General Cuomo said he would not pursue Grasso and the case was over. Grasso can take his $187 million, less considerable attorney's fees, and start a new life now that four years of litigation and limelight are over.

Apple (AAPL) spiked +4% or $7.25 on news that AT&T would offer the iPhone without a service contract. This opens up the 3G iPhone to deals that were not previously possible. It will be expensive with the 8GB model $599 and 16GB model $699. The new 3G model has been heavily advertised at $199 but according to details released today that price will not be available to everyone. There is a long list of exceptions and AT&T is not going to pony up a $300 subsidy to just anyone that walks through the door. Monthly service fees will range from $70 to $130 per month. AAPL also rose on positive comments by Lehman. RIMM gained $6.40 or 5.5% in sympathy with Apple and on positive comments about BlackBerry sales. Both were up sharply mostly due to short covering on the good news.

Starbucks (SBUX) announced after the close they were going to close 600 company owned U.S. stores and open fewer than 200 in 2009. This represents a major change in direction for SBUX. The company had previously announced they were closing 100 stores and this is a clear indication SBUX is struggling with the U.S. economy and its own aggressive expansion plans. 600 stores represents 19% of all the U.S. stores opened in the last two years. 12,000 workers will be displaced with the closings starting in July. They will try to move employees to nearby stores to minimize layoffs. SBUX will take a $348 million charge for the closures. The additional 500 stores were not profitable and were not projected to be profitable any time soon. Many were within blocks of other company owned stores. In May SBUX warned that a 28% drop in profits was due to U.S. consumers feeling the pinch of higher food and gasoline prices.

Crude prices rose to $143.33 intraday before pulling back to still another record close at $141. There were various reasons given but none were material. The excuse given most often was a strike by 3,600 workers in Venezuela. The facilities covered by the strike produce 600,000 bpd of heavy oil. This oil is not in high demand and should have no material impact on supply. $140 is emerging as support this week and will no doubt be tested early and often. Thursday is a half-day in the energy pits so expect volatility after Wednesday's inventory report then into Thursday's close. Will traders want to go into the weekend short or long? I am guessing they will not want to be short given the potential for some major geopolitical event. That suggests we could see a ramp higher into Thursday assuming the inventory report does not show some monster build in crude. Estimates are for a decline of 1.2 million barrels.

August Crude Oil Chart - Daily

For the rest of the week the volume is going to be very light ahead of the non-farm payroll report on Thursday. Those still in the market are going to be very cautious ahead of the report on worries there could be a big surprise in either direction. This suggests the trading range will be small but volatility could be high given the low volume. I believe the dip today was caused by window undressing. Those funds that dressed up their portfolios for the end of the quarter were able to strip those positions off and go back to cash. The volume today of 10.1 billion shares, the third highest day since Jan-23rd and was confirmation of heavy fund activity. The Russell rebalance is now over and the ISM is history. The only material economic report is the jobs report on Thursday. The next two days could be like war, long periods of complete boredom interspersed by short periods of sheer terror. Estimates of job losses have risen slightly over the last couple days to a loss of 65,000 jobs, up from the -50K estimate last weekend.

The television reporters made a big deal out of the GM bounce and the gains in tech stocks. At its low today the Dow was down -150 and at oversold readings not seen since 2002. The proprietary S&P Oscillator was off the charts this morning. A typical buy signal occurs when the oscillator hits -4 and a sell signal at +4. An extreme oversold buy signal is triggered at -8. The reading this morning was -9.4 and a level not seen since July 2002. For the first day of a quarter and a half we should have seen a lot of retirement money coming into the market. With the oscillator so oversold this would have been a major buying opportunity for those funds. It did not happen.

What we saw today was a weak bout of short covering triggered by the GM and Apple news. The Dow ventured into bear market territory for the 3rd day but again managed to close just over that technical level. The market is having labor pains. Every contraction takes us lower but we are still seeing the relief bounce between the contractions. Until they come back to back and we get that continued capitulation push that gives birth to a bear market bottom there will not be any relief for traders. These intraday rallies and sell offs are just teasing traders wanting to go long. The VIX is dormant at 23.65. It has held in a range from 21-24 for four weeks despite the loss of more than 1200 Dow points. This is an orderly decline and has no fear attached. Until the fear appears the selling is not over. While we could easily see rebounds of 3-5% simply because of the oversold conditions I don't think they will stick. One institutional trader who handles multiple accounts worth tens of billions each was interviewed today and he said those investors were pulling back for the rest of the summer. He said they were afraid of the continuing financial crisis, economic conditions and the elections. In their view the more Obama appears to be headed for a win the worse it will be for the market.

Dow Chart - Daily

S&P-500 Chart - daily

The Dow traded under 11200 today before the GM rebound erased that -150 point drop. Current resistance is forming at 11400 and we closed at 11382. It was a +180 point rebound from the lows but it only shows as a blip on a very bearish chart. I believe the unofficial target is still 10700 and that is 700 points lower. The S&P dipped to 1260 before the rebound but we are back under strong resistance at 1285. The intraday dip was very close to the March intraday lows and after three days at this level you could make a case for a rebound but I would have to see it to believe it.

The Nasdaq was up because AAPL, RIMM and GOOG were up and that triggered some light short covering. Those three stocks were three of the top five point gainers for the day and yet the Nasdaq managed only an 11-point gain. Nasdaq support is currently 2200 and that is 100 points lower than today's close. Resistance is 2325.

Nasdaq Chart - Daily

Russell-2000 Chart - Daily

The Russell was very weak yesterday afternoon and this morning. Analysts claim it was due to traders unloading excess position on the new stocks added to the Russell indexes. When the Russell rebalance is announced traders rush to buy the new additions in hopes of selling them to the index funds on the day of the rebalance. Because there are so many traders using this strategy we sometimes find they overbought and when they can't unload them into the rebalance they end up dumping their positions the next day. This started on Monday afternoon and carried over into the open on Tuesday. The Russell hit 676 intraday and that is light support. Resistance is now 700 and the index closed at 691.

For the rest of the week I would be cautious about long positions for anything but a trade. Heading into a long holiday weekend we could see some short covering and a potential drift higher. The Jobs report on Thursday morning will be a pivotal event and could cause a huge market swing on low volume. The ECB is widely expected to raise rates on Thursday and that could also produce some volatility on this side of the pond, especially in oil. This is one of those weeks where you need to be quick on the trigger if you are watching stocks instead of preparing for the holiday. There may be fireworks in the market before there are fireworks in the sky.

Jim Brown


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