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Market Wrap

Overbought, Oversold, Undetermined

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After the 4th biggest Dow point loss ever we went from over bought to oversold in a single session. The +270 point Dow gain today was just enough to erase those oversold conditions without giving us a clue as to direction.

Market Stats Table
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Vehicle sales was the only material economic report today and the news was ugly. GM reported sales fell -41% in November. Autos were down -44.1% and trucks dropped -39.4%. Year to date GM has sold 2.8 million vehicles, down -22.1% from the first 11 months of 2007. The majority of those sales were early in 2008 before oil hit $147 in July and financing dried up in late summer. Top UAW leaders are telling officials GM may need to file chapter 11 bankruptcy before Christmas. Chrysler requested $7 billion in emergency funding by the end of December and GM asked for $12 billion. Both claim dire circumstances if they don't receive the funds.

Chrysler saw a -47% drop in sales, Ford suffered a -31% drop, Honda -31% and Toyota -33%. Chrysler saw fleet sales fall -63% as businesses slow purchasing until the see if the economy is going to improve. Overall the industry sold 400,000 fewer cars in November than in November 2007. That is a huge drop in economic value given all the businesses that supply the automakers and the dealer network on the sell side. I know of a small GM dealer that has been in business for 29 years. They normally sell 30-35 cars a month and now they are lucky to sell three cars. Their staff has fallen from 75 to 40 and the salesmen are starving. The maintenance department has been cut in half but is still providing the only cash flow to keep the doors open.

Ford (F) will offer up a major restructuring plan to Congress in hopes of getting $9 billion in low interest loans. Ford's CEO said they did not expect to need the money unless the economy worsened considerably. However, since its competitors were likely to get loans Ford also wanted the opportunity to get a government backstop if they needed it. Ford's CEO said they had plenty of liquidity to carry them over as long as conditions did not worsen.

In response to the prior criticism for taking their company jets to the last Congressional testimony, the CEO's drove their company cars to Washington this time around. GM said it was selling its four company jets.

GE announced today it was going to scale back its huge finance arm and cut jobs across its entire business spectrum. GE warned the Q4 profit would be at the low end of prior guidance. GE said it would cut back on its riskier finance businesses such as consumer mortgages and equipment finance. GE said the GE Capital business would not return to profitability until 2010. The finance business was instrumental in GE's 12% profit drop so far this year. GE plans to take a $1.0 to $1.4 billion charge for the restructuring. The company said it would cut $2 billion in costs next year. GE said unemployment would rise to 8.5% in 2009 and at least one airline would fail in 2009. In an effort to cheer up shareholders the company said it would continue to pay its $1.24 per share dividend through 2009 and maintain its AAA credit rating.

Citigroup said it would float a $5.5 billion debt offering through the FDIC loan guarantee program. The debt will be split in three offerings with one maturing in two years and the other two maturing in three years. Goldman Sachs and GE have also signed up for the FDIC program. Under the program the debt is temporarily guaranteed by the FDIC and qualifies for much lower interest rates. Citigroup is expected to post a fifth consecutive month of losses. Meredith Whitney, bank analyst at Oppenheimer, said she was more bearish on banks now than any time in the past. She expects the big banks like Citi, Goldman and JPM to continue to report tens of billions in quarterly losses. UBS said Goldman Sachs could lose $5.50 per share for the quarter compared to prior estimates for a loss of 40-cents per share. UBS said Goldman could write down as much as $4 billion for the quarter. On Monday Credit Suisse predicted a loss of $4 per share compared to their prior estimates for a profit of $2.47 per share. This would be Goldman's first losing quarter since going public in 1999. Obviously things have turned seriously negative for Goldman in a very short period of time. One of Goldman's major investments is China's ICBC bank. That stock has fallen -28% in the last month. Goldman received $10 billion from the TARP program last month. Citi received two chunks of bailout cash of $20 billion and $25 billion and a government guarantee of $306 billion in risky loans.

Yahoo spiked intraday as rumors broke that former AOL CEO Jonathan Miller was trying to raise money to buy all or part of Yahoo. The news came from the WSJ but it was almost immediately denied by various other news sources. The WSJ said he was trying to find enough money to buy Yahoo for $20-$22 per share. Since debt is nearly impossible to find it would mean he is looking for partners rather than debt. The odds of him finding that much capital interested in buying a sinking ship are slim. CNBC's David Faber said Miller is still under a non-compete from AOL and without a waiver there he would be unable to complete the deal. YHOO closed up 75-cents at $11.50.

RIMM Chart
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RIMM was crushed the last two days losing nearly 20% after an article in the NY Times skewered the new BlackBerry and analysts cut estimates on smart phone sales. Palm (PALM) helped accelerate the decline with a warning that sales in the current quarter would be half of what analysts were expecting. Piper Jaffray analysts said channel checks indicated a sharp decline in Centro sales at Sprint, Verizon and AT&T over the past month. Palm said it would try to cut $20 million from quarterly expenses by its fiscal fourth quarter. That seems like a drop in the bucket compared to the drop in sales. Meanwhile Nokia said it expected the economic recession to have little impact on its $700 N87 touch screen phone. Nokia said it was targeting 200-300 million technology leaders who buy the latest devices regardless of the economy. Great trick if you can pull it off. NOK gained +56-cents, PALM rebounded from a nearly 50% drop to close fractionally positive and AAPL gained +3.40 on thoughts they were stealing market share from RIMM and PALM.

Yield on the Ten-year note fell to 2.69% at the close and better than a 20-year low. If there were loans available today they would be very cheap. The yield has fallen more than a full percentage point since Nov-17th. These are record times in the bond markets as investors flee to relative safety.

Money Flow Chart
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Bank of America (BAC) said it was going to cut at least 10,000 investment banking jobs as it absorbs Merrill Lynch. The layoffs are scheduled to start as early as this week. Analysts believe the real number could be as high as 30,000 layoffs. The merged company would have 260,000 employees with 50,000 in investment banking. BAC has a very low cost model and you can bet they will move quickly to implement that model on the merged investment banking division. BAC rose +1.52 and MER +1.43. BAC and Merrill shareholders are expected to vote on Friday to approve the shotgun merger. For Merrill shareholders it was initially a $50 billion deal but the drop in share values has cut that more than half to $19 billion. At this point there is really no option for Merrill shareholders. If they voted no it would be a death sentence for Merrill. $19 billion is still better than the JPM acquisition of Washington Mutual for $1.9 billion and WFC acquisition of Wachovia for $10.1 billion. Merrill shareholders will own 25% of BAC once the deal is completed. The terms of the deal are 0.8595 BAC shares for each Merrill share. BAC picks up $72 billion in mortgage exposure when it completes the merger. That is miniscule compared to the trainload of bad debt they picked up when they acquired Countrywide and Merrill's are probably better credits. Time will tell.

BAC reported a loss in its credit card operations for last quarter and things are getting worse. Meredith Whitney said lenders are likely to withdraw more than $2 trillion in consumer credit over the next few months. With consumer balances rising and credit worthiness slipping the major banks are actively reducing credit lines. If you have a $10,000 credit line on your Visa and a $4,000 balance you can expect to receive a letter soon cutting your credit line back to something in the $5,000 range. Unused accounts could be closed and interest rates pushed higher. Most banks have a clause in your agreement where the interest rate on your card rises with the percentage of your credit line used. In the example above your 40% balance immediately spikes to an 80% balance when they cut your outstanding credit line in half. That could spike your interest rate at that card issuer as well as other issuers. Many of the credit agreements allow banks to reduce your credit and increase your rates if your overall balance percentage across all your accounts rises.

The banks periodically run scans of your balances and lines at the credit bureau. If your ratio rises above certain limits not only does your credit score drop but your interest rate can rise on your existing credit cards. I know people who lost their jobs, began living on their cards and suddenly found all their available credit withdrawn making them suddenly fully borrowed and paying the highest rate allowable. Their pristine credit rating began falling sharply and producing serious pressure on an already bad situation. Expect a letter from your bank soon informing you of your lowered status. American Express has already sent millions putting limits on their cards to prevent consumers from using the cards as a last ditch bailout vehicle. For homeowners in trouble big screen TVs, expensive stereos and laptops are being bought on credit cards and sold unopened on Ebay to provide cash and the credit cards are trashed once the limit is reached. If your house is going to be foreclosed your credit is going down the tubes anyway and card companies stung by these borrowers are trying to prevent future losses as other borrowers catch on to the plan.

In my weekend commentary I said:

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.

Monday's drop was a little worse than I expected. Various reasons were credited with the drop. They ranged from a drop in the ISM to 36.2 and better than a 20-year low. A drop in China's PMI to 38 indicating a sharp contraction. The U.S. National Bureau of Economic Research announcing the U.S. recession actually began in Dec-2007 and lastly a forecast for the Q4 GDP to be the worst since 1982. I am sure all of those things had an impact given the tremendous overbought conditions the five-day rally had produced. Remember, the Brokers had rallied +38% over the prior five days. The Housing sector +35% and banking +30%. The major indexes were up 10-16% in just a week. Month end buying had pushed the indexes to resistance and the markets were poised for a letdown. What a letdown we got! As we entered a new month those trailing stops and sell programs were all factors in the drop but I really think it had a lot to do with the market makers testing support. After a big gain in a volatile market they need to let the system flush to see where big money comes in to buy stock. They got their test and the markets rebounded on Tuesday. The news on Tuesday was not any better and in some cases it was worse.

The Dow found support on Monday at 8150 and that same level was tested again on Tuesday afternoon and held. This is a critical point that should not be ignored. They tried to flush the system again with several sell programs on Friday and buyers again showed up to defend 8150. That gives the Dow a two-day support level that we can use for future planning. As long as 8150 holds we are good to go. If it breaks it would be a clear indication we may retest 7500. Of course just holding over 8150 is not the answer. The Dow needs to continue to higher over 8800 and eventually 9000 to really attract buyers from the sidelines. Traders are so shell shocked the majority are afraid to move back into the market. A move over 9000 would help rebuild their confidence. I have heard a lot of negativity over the last couple days about a possible dip to 6000. It is entirely possible but the market will have to turn a lot more negative to do it. I said I was a dip buyer until proven wrong. Dow 8150 has now emerged as our long/short indicator. Buy the dip to 8150, go flat or short below that level.

Dow Chart
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If you look carefully at the market statistics table at the beginning of this commentary you will notice the advancing volume today was 8:1 over declining with nearly 5000 issues moving higher. Granted we were seriously oversold at Monday's close but buying interest did return in volume.

The Dow and S&P returned exactly to initial resistance at 8450 and 850. There were several attempts to move over those levels and those attempts failed. This is the cautionary sentence. Just because we rebounded on Tuesday we are not out of the woods yet. Both indexes need to overcome that initial resistance and begin moving higher before bullish sentiment can recover. The S&P did not quite equal its 815 low from Monday with a dip to 820 today but 850 was still a solid top.

S&P-500 Chart
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The Nasdaq was a carbon copy of the Dow and S&P with support appearing at 1400 and resistance at 1450. With RIMM's losses being offset by Apple's gains we saw fractional gains by the other big cap techs helping to push the Nasdaq to a +51 point gain. Techs are still under pressure from the daily downgrades and profit warnings and I expect them to continue to be the weakest link.

Nasdaq Chart
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Russell 2000 Chart
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The Russell was crushed on Monday with a -12% drop to support at 420. Today's +25 point rebound, like the other indexes, was right to resistance and no higher. The key levels are 420 and 450 on the Russell. Over 450 my bullishness would increase and under 420 I would be looking at shorts. Fund managers pushed the Russell higher going into month end and those stocks in favor before Thanksgiving were tossed with the remaining turkey scraps on Monday. Still, like the Dow it gives us a clear picture of where we want to exit any longs bought on the dip.

Critical levels for the rest of the week are Dow 8150, 8800 and Russell 420, 450. Stay long over the high bar and short under the low bar. Beware the Fed Beige book on Wednesday and Non-Farm Payrolls on Friday.

Jim Brown

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