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Market Wrap

Black Friday, Green Markets

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After months of worry over holiday spending several major retailers said Black Friday sales were stronger than their expectations. The markets rallied for the fifth straight day and became stronger as those retail reports hit the wires.

Market Statistics
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There were no economic reports of note on Friday but next week is packed full of important reports. Leading off the list is the national Institute of Supply Management Index or ISM. This is the best look at the health of the manufacturing sector for the month. Estimates for the ISM are for a drop to 38.4 and the lowest level since the early 1980s. Based on the negative news coming out of the manufacturing sector we could see a negative surprise on the ISM.

ISM Chart
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The next reports traders will be watching will be the ISM Services and Fed Beige book on Wednesday. The ISM Services will be anticlimactic after the ISM Manufacturing on Monday but still a possible trigger for market movement. The Fed Beige book is a look at business conditions across all 12 Fed regions. This report turned sharply negative in early October and it is expected to be substantially worse since it will cover changes in conditions over the last 45 days. This could be a real market mover.

The Factory Orders on Thursday have been in decline for the last three months but this is a severely lagging report. Everybody agrees the business conditions took a sharp turn downward in October and that is the period next week's report will cover. Expectations are for a drop of -2.8%.

Last but definitely not least is the Non-Farm Payrolls for November at 8:30 on Friday. Last month's report showed a loss of -240,000 jobs and a sharp revision lower to the prior two months numbers. Estimates for November are for job losses in the 300,000 to 375,000 range. A normal recession range would be monthly losses of 350,000 jobs. We have not gotten there yet but we are getting close.

Economic Calendar
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Initial reports from the war zone suggest holiday shopping on normally the busiest day of the year was not as bad as many expected. Several retailers reported sales and traffic were higher and this put a positive spin on the reports from the malls. Opening the doors to shoppers who had been in line for up to 36 hours was still a hazardous task. One Wal-Mart employee in New York was trampled and killed by the crush of customers. The crowd knocked the man to the ground and broke the doors out of their frame in the rush to get into the store. Two people were killed in a Toys "R" Us store after a gunfight broke out. It was not clear what started the argument.

While shopping was still frantic, store operators said the shoppers were being very picky about what the bought. Sale items were sold out very quickly but normal store merchandise was not moving at a rapid pace. Store operators said the crowds were at least as large as last year but total dollars sold may not match last year. Most agree they marked down more items and overall prices were lower than in 2007. That would require more shoppers buying more merchandise to equal 2007 dollar volume. Flat screen TVs were the leading seller and it was not surprising with the blowout prices being offered. Several chains were offering 50-inch Panasonic plasma HDTVs for under $1000. Smaller 24-30 inch LCDs were flying off dealer shelves. This is high dollar inventory the stores wanted to dump before the feeding frenzy faded.

A spokesman for Taubman, which operates 24 malls in 13 states, said home appliances like pots and pans and coffee makers were moving well in their malls. They saw this as shoppers staying close to home and buying necessities. Macy's reported 5,000 shoppers in line for the 5:AM opening at the New York store. Macy's also said small appliances were moving well along with heavily discounted winter clothing. Retailers needed a positive surprise after experiencing the worst October in 16 years.

Carl Icahn did some early holiday shopping as he added 6.8 million shares of Yahoo to his portfolio to bring his total to 76 million. This brought his total holdings to 5.5% of YHOO outstanding shares. This is essentially a bet that once Jerry Yang has left the building the next person coming through the doors will be Steve Ballmer with a deal in hand. It is also an average down play for Icahn since his other 4% of YHOO shares were bought at a significantly higher price. YHOO closed up +9% on Friday and +23% from last Friday's lows.

Despite the gain in Yahoo, tech stocks were the weak sector keeping the Nasdaq in negative territory for much of the day. There were two major tech warnings on Friday. Panasonic (PC) cut its prior sales forecast by 90% due to the weakening economy. This was really a shock since their last forecast was just a month ago. That means the outlook has changed drastically in just the last four weeks. Panasonic says profits will now be only 30 billion yen ($315 million). That is down from their prior forecast of 310 billion yen. The Panasonic CFO said, "We have been hit by an economic slump that we have never experienced before." Panasonic stock lost -18% for the day.

STMicroelectronics (STM) shares lost -8% on Friday after warning that Q4 revenue will come in significantly below prior estimates. STM said customer demand has dropped off sharply and it will have to cut back on manufacturing and sourcing from third parties to make up for the slowdown. STM is one of the largest contract manufacturers of chips and circuit boards in the world.

Computer makers traded down early after JP Morgan said global computer sales could be off more than 5% in 2009 with desktops off as much as 19%. Laptops could see an increase of up to 10% but revenue overall for computer companies would be down about 13%. Average selling prices were expected to continue to decline another 12% meaning manufacturers would have to sell substantially more product just to equal 2008 sales. It is a double gotcha for computer makers. Sales are slowing and prices are dropping. Asian computer makers Acer and Asus are expected to be pushing low cost notebooks aggressively and would likely capture a larger market share than Dell and Hewlett-Packard.

Ebay caught a downgrade from Argus Research to hold from buy on worries the auction site will see slowing sales as the economy slides lower into the recession. Argus expects Ebay sales to decline in Q4 and for at least the first half of 2009. I am not sure I agree with Argus. I do a lot of buying and selling on Ebay and I do see a lot more auctions on Ebay since they went to the fix priced "good to cancelled" listings on Nov 1st. A particular brand of computer equipment I buy has gone from 3-4 pages of listings to 15 pages just since Nov-1st. The reason for this is the move to add major retailers to the mix. Several months ago Ebay let Buy.com list their inventory on Ebay and today there are more than 766,000 active Buy.com listings. Buy.com's feedback ratings have rocketed from zero to more than 369,000 since they started listing on Ebay. Since less than 10% of buyers give feedback that means Buy.com has sold nearly four million items on Ebay over the last year. That is four million items they would not have sold without Ebay. Lately I have seen several other online stores begin to list their items on Ebay suggesting Ebay is moving to the Amazon model of selling for other retailers rather than just the mom and pop sellers growing their Ebay business. If this trend continues Ebay will be the winner since they get a listing fee on every auction and a final sale fee on everything that sells. I think Argus may have missed the boat on the Ebay downgrade although I can see Ebay revenue per auction declining. In order to get these big companies to start up an Ebay department they had to lower the listing fees. That helps me and other hobby sellers but it is too early to tell if the fee cut was offset by the increased number of auctions. Also, whenever times get tough many consumers turn to Ebay to turn unwanted items into cash as well as pickup things they want at a steeply discounted price.

Research from the Bespoke Group showed the last several weeks had been the most volatile market ever. They calculated the average absolute daily range of the S&P at 3.82% per day over the last 50 days. The only time this has happened in the past was 1933. The average for a "normal" market back in Feb-2008 was only 0.33% per day.

Absolute Daily Range Chart
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Friday was a throw-away day as far as determining market direction. Volume for the half day of trading was an extremely weak 4.1 billion shares compared to an average of 13.5 billion for the five days ending on Tuesday. I did not include the 9 billion from Wednesday because that was a quasi holiday as well. The Dow and S&P completed five consecutive days of gains for the first time since July-2007. The Dow & S&P also had their best 5-day percentage gain since 1933. Those gains came from a severely oversold market and daily announcements of various bailout programs. The leading sector for the week was the brokerage sector with a gain of 38% followed by Housing at +34% and Banking at +26%. Those were the sectors with the highest short interest and the worst outlook until last week. Today banks are rebounding after Treasury said they would not allow any further failures of a major bank. The housing sector rallied on a sharp drop in mortgage rates after the Treasury said they would buy billions in mortgage-backed securities. The 30-year rate fell under 6% and mortgage refi applications nearly tripled.

Last week's gains could have been short covering on the various news events but those same events are starting to have an impact on investor and consumer sentiment. With mortgage rates falling and loans actually getting made, home buying is likely to increase. Remember, very few people have been in the market to buy a home since the bubble began to burst. If it appears a price bottom has formed with mortgages nearing record low rates then now is the time to start shopping again. Citigroup hit a low of $3.05 on the 21st and closed at $8.32 on Friday. That is a +173% gain in a week. GM hit $1.70 on the 20th and closed at $5.29 on Friday for +211% gain. Goldman Sachs hit $47.41 the prior Friday and traded over $80 only a week later for a +67% gain. It would appear that the bottom is behind us. Those gains are well past simple short covering.

You could throw in the normal month end buying and the normal holiday cycle into the mix as reasons the markets rallied. I am sure there was some impact from those cycles but they would have had little effect if funds were still in liquidation mode. There has not been a material end of day sell program since the 20th. Of course a market in rally mode does not produce margin calls or trigger too many sell stops. I would bet those still exist and have been trailing us higher just in case. We are far from being out of the woods but we can see daylight from here. At least I hope that is daylight and not a truck headed our way.

The Dow traded firmly over initial resistance at 8500 and now appears to be targeting 9000 as the next major battle. There is plenty of congestive resistance and plenty of bears still in denial so any move higher may be a struggle. We have come a very long way and at nearly every pause point since early October there will be traders wanting to get out of their positions. They have prayed the trader's prayer over and over for the last two months. "Please let me out of this long trade without a loss and I will never be this stupid again." With every tick higher they are moving closer to their entry points and recovery of their lost capital. This is the way resistance points are formed. Short-term traders make bad bets and end up being long-term investors, not by choice but by making bad choices. The bears are watching those inflection points and will take any hesitation as a sign of weakness and a reason to go short again. I hope they do just that. Every short becomes a stepping-stone in a bull market. Every short covering rally adds excitement for the bulls and reinforces their conviction.

Dow Chart
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S&P-500 Chart
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The S&P has also moved into congestive resistance between 850-1000 and could find the road higher pitted with potholes. For the S&P the 1000-point level is a clear target and an even clearer breakout point. A move over 1000 would erase two months of the "most volatile market ever" and confirm a new bull market in progress. A move over 1000 will be a +35% rebound off the lows. That is far more than a normal bear market rebound. Of course there are still more than 100 points to be fought and gained before we reach that 1000 level. The S&P did gain over +150 since last Friday's lows so there is a track record to build on.

The Nasdaq is still the weakest link as it struggles to hold over 1500. The almost daily profit warnings from major tech companies and downgrades by analysts are truly creating a wall of worry for tech bulls to climb. The next major resistance is 1800 but that seems weeks away at the current two steps forward, one step backward rate. I would just appreciate the Nasdaq if it could just remain positive. Any actual gains would be a plus.

Nasdaq Chart
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Russell 2000 Chart
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The Russell has gained 101 points since its dip to 371 the prior Friday. That equates to a +27% gain in four days. It also means fund managers are buying small caps and that is a definite improvement in sentiment over the prior week. The Russell spiked +7 points in the closing minutes of trading on Friday. I attribute that to short covering and end of month portfolio shuffling. Either way I continue to view the Russell as the best indication that investor sentiment has changed. We may not be in full rally mode yet but I definitely believe the worst is behind us.

For next week the four biggest events will be the ISM on Monday, automakers begging for money on Tuesday, Beige Book on Wednesday and Non-Farm Payrolls on Friday. Of those, assuming the automakers don't get turned down, the payroll report on Friday is the biggest and followed closely by the Beige Book. However, is there anybody who has not heard we are in a recession and losing jobs? I think the bad news is priced into jobs unless there is a major miss of expectations. I do NOT think we are going to continue straight up. The Dow is up +1380 points from last Friday's lows. There is a profit-taking day in our future and it could be ugly as market makers try to find support. If we do get a sell off they can temporarily withhold their bids just to see where real support appears. That will then give them an idea of how aggressive to be on the next rebound. I am in buy the dip mode until proven wrong.

Jim Brown

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