Despite the increased volatility over the last month the S&P posted the best quarterly gain since Q2-1998. This was led by a 35% gain in financials, +18% for technology and +17% for the consumer discretionary and industrial sectors.

Market Stats Table

The economic reports today offered a mixed picture with a major surprise in the Consumer Confidence report. Consumer Confidence fell sharply to 49.3 from the prior reading at 54.9. This was the first drop in confidence in five months. Given the rebound from the historic March low at 25.3 the blip in June was inconsequential. The biggest hit came from the expectations component, which fell from 71.5 to 65.5 but present conditions also fell from 29.7 to 24.8. The outlook on employment weighed on consumers. We are also seeing the fall out from the drop off in stimulus checks. Rising gasoline prices also weighed on confidence.

Consumer Confidence Chart

The Case-Shiller Home Price Index for April showed another improvement in prices nationwide although there were still some pockets of weakness. The index improved to -18.1% compared to -18.7% in March. This was the third consecutive month of improvement in prices ALTHOUGH it is only less bad. It is still representing a -18.1% decline in home prices over the last 12 months. However, with rates inching higher and the spring buying season nearly over there will be further pressure on home prices. One mortgage banker reported today that they were seeing 50-55 loans per week a couple months ago and that volume had now fallen to only 5 loans.

Another problem for home prices will be the new clean energy bill passed by the house last week. The bill has a provision that mandates all homes must be brought up to current energy standards before they can be sold. Basically, an energy inspector will survey your house and tell you which appliances including dishwasher, stove, furnace, air conditioner, water heater, lighting, etc will have to be upgraded before you can get a permit to sell your home. This also includes insulation and windows. All will have to be brought up to current standards before you can get approval to sell.

If you don't have storm windows or energy efficient windows you will be required to replace them before you can sell. From what I understand this must be done BEFORE you can sell. You can't deal with a buyer and negotiate a discounted price where the buyer takes the home "as is" for a reduced price. Too many homes needing repair are sold this way and the new owners either never do the repairs or do them in a substandard way. Now the inspector must approve your upgrades before you can sell. This is all hearsay since the full 1200 page bill as amended is not yet available to the public.

The bill is supposed to create 1.7 million new jobs. I guess inspecting millions of homes and businesses to bring them to a new clean energy threshold will employ quite a few inspectors. Building and installing millions of new appliances, home furnaces, storm windows, etc, for forced home upgrades will employ many more. The real loser here is the consumer. We will have to pay one way or another for those 1.7 million jobs and for the upgrades to businesses through higher prices. To sell an average home you had better plan on an extra $10,000 in upgrade costs. Plus your energy bill is going to rise as much as 200%-300% per month depending on where you live and who produces your electricity.

On Thursday President Obama announced a new lighting standard for the country saying "light bulbs may not seem sexy" but the idea of requiring lamps and lighting equipment that require less power "holds enormous promise." He claims his new efficiency standard will save consumers $4 billion annually.

All of this is going to crush home prices and force many people to remain in their homes simply because they can't afford to upgrade them to the new government standards. Fortunately the Senate still has to vote on the bill and resistance is growing. There is a huge backlash already building from consumers and businesses. Let's hope some common sense returns to Washington soon.

Back to today's economics the Chicago ISM report for June rose sharply to 39.9 from 34.9. This was about twice what was expected and points to a higher national ISM when it is released on Wednesday. Order backlogs spiked to 37.6 from 26.3 and new orders rose to 41.6 from 37.3. The National ISM on Wednesday is expected to rise from 42.8 to 44.5.

The volatile weekly chain store sales numbers spiked +1.6% for the last week with the index returning to 493.4 and the highest level since the week of April 11th. This suggests consumers are parting with their money ahead of the holiday weekend. Hot weather is here and summer activities are in full swing.

The two key reports for the rest of the week are still the ISM on Wednesday and the Non-Farm Payrolls on Thursday. Payrolls are officially expected to show a loss of -355,000. Whisper numbers are as low as -225,000. With volume expected to be near the low of the year the volatility could be huge if we get a number that misses -355K by a mile.

In stock news Microsoft (Nasdaq:MSFT) closed flat after a strong gain over the last month. The motive power for Microsoft has been the coming release of Windows 7 and strong pre-release orders. The $49 preorder edition of Windows 7 Home Premium is the top selling electronics item at Amazon. Best Buy is also reporting that advance orders are much stronger than earlier preorder programs. Windows 7 has received some strong reviews and is seen as the true successor to Windows XP. Vista is the nightmare that won't go away. It also does not hurt that Microsoft is heavily discounting the preorders at 50% of the listed retail price. The pre-release test versions of Windows 7 was very bug free and several large companies have already scheduled a migration path from Windows XP and that was the missing link with Vista. Very few companies moved to Vista because of many early bugs and then the lingering nightmare of Vista horror stories. For Microsoft it appears the nightmare of Vista is finally over and they should reap the benefit of a migration wave late in 2009 and early 2010.

Microsoft Chart

Nvidia (Nasdaq:NVDA) dropped slightly on rumors that Dell would be going with the AMD video chip instead of Nvidia on some future products. Personally I think Nvidia is the best chip/architecture by far and all my computers have Nvidia video cards. In reality whether Dell goes with AMD or not is not critical. Nvidia has some new technology now delivering that is light years ahead of AMD and will help Nvidia broaden its horizons. The technology is called a GPU. Originally a Graphics Processing Unit (GPU) Nvidia has taken the step, actually a leap, to adding processing to the central core of the computer.

Intel's current technology is for chips with 4, 6 or 8 cores in each chip. On a PC motherboard there are normally 2 of those chips but mass produced servers can have up to 4 chips. Taking this to the mass-produced max today that is 4 x 8 core chips or 32 cores. This would be for extremely strong servers with dozens to hundreds of users.

Nvidia has now created a GPU or plug in card with 240 cores and current production servers made my Supermicro (Nasdaq:SMCI) can take four of these cards. Bear with me here. A maxed out PC/Server could have 4x8 cores (32) in the Intel chips plus 960 cores in (4) Nvidia GPUs totaling 992 cores with processing capability of up to 4 teraflops in a 1U server or a desktop PC. A teraflop is a trillion operations per second. Think of having a desktop PC that can process four trillion operations per second for under $4,000. These are unheard of speeds reserved for only the largest supercomputers just a couple years ago. Now with Nvidia's technology it is available to the general public for pocket change in terms of a corporate budget. Researchers no longer have to wait weeks or months for dedicated time on the mainframe or wait patiently while programs take days to run on a normal office PC. Best of all there is no special power or cooling required. It plugs into the wall just like a normal PC.

Nvidia Explanation of GPU Computing
Supermicro GPU Capable Computers

I am shocked that Nvidia is not double or triple its current stock price. However, this is still new technology just announced publicly in the last couple of months. Supermicro was one of the first to market but new vendors including Hewlett Packard (HPQ) are now jumping on the wagon. Adobe announced yesterday a new plug-in for CS4 that takes advantage of the Nvidia GPU that makes video editing processing speed 11 times faster. I think once the public starts seeing these ultra fast desktops and servers with the Nvidia GPU the stock is going to take off. Unfortunately it did not help them today with the Dell news.

Nvidia Chart

Supermicro Chart

Deere (DE) said 800 salaried workers have decided to leave the farm machinery manufacturer under a voluntary separation program. This was four times as many as the company expected. Deere expects to save $75 million in savings after expenses for the terminations.

Oil prices rallied to the high of the year at $73.38 overnight but suffered yet another monster drop. After trading under $69 prior to the close the contract rebounded slightly to close at $69.86. The volatility is extreme at these levels suggesting traders are not real sure the $70 level is going to hold. Goldman said this morning they expect $85 by year-end and that is where OPEC would like it to be. The storm west of Cuba evaporated and the price of oil along with it. As usual in recent weeks the price of oil has reacted to the value of the dollar and the dollar index rose sharply to the highest level in the last three days. After the close another rebound began.

Oil Chart

Corn prices went limit down today after the planting report revealed that there were 87 million acres planted this year. Prior reports had speculated that only 85 million acres had been planted due to a very wet spring. An extra two million acres adds up to a lot of extra corn. This is good for the ethanol business because it means corn prices will be lower but bad for farmers who will be selling into an abundance of supply.

JP Morgan (JPM) upgraded their estimates for economic growth for Q3 to +2.5%. Deutsche Bank (DB) upgraded their growth for 2010 by another half percent to 2.5% for the year. This has been a trend in the last couple weeks of major banks and analysts raising their estimates. This should be confirmation that the worst is behind us but there are still some double dippers in the crowd looking for another decline in Q4.

This was a great quarter despite the drop on the closing day. The S&P gained 15% for the best quarterly gain since Sept 1998. The Nasdaq composite gained +20% and the best in more than 5 years. Unfortunately there was no quarter end window dressing. For many analysts that suggests fund managers are becoming more cautious as we approach the dog days of summer.

The first 2-3 days of July are normally higher due to retirement fund contributions. However, once past the early days of July the Q2 earnings cycle is not normally strong enough to keep stocks moving higher. According to the Stock Traders Almanac July is the best month of the quarter and most of the gains in the first two weeks. Once investors see what the Q2 earnings look like they normally take the rest of the summer off with plans on coming back to buy the dip in Sept/Oct.

Tech stocks are normally weak over the summer months and the next four months are the weakest for techs over the entire year. Bear in mind this is in normal years. The next four months are called Death Valley Days for tech stocks. The key question this year is will this be a normal summer or abnormal given the strength of the bear market decline.

The Dow gave up -82 points today with a low just under 8400 and 26 stocks closing in the red. CAT was the biggest loser at -1.70, followed by IBM -1.41 and PG -1.13. There was no follow through to Monday's gains and the volume was horrible. At this point the path of least resistance is down once the retirement funds have been put to work. Support is still 8200-8300 and I expect that to be tested again.

Dow Chart

The S&P may have posted the best quarter since 1998 but the momentum has died. The S&P has not made any gains since early May and is setting up for a perfect head and shoulders pattern if we get any bounce from retirement contributions. Initial support is 880 with strong resistance at 950.

SPX Chart

The Nasdaq is setting up for a lower high with today's failure at Monday's high of 1854. The trend is still up unless today's decline is confirmed with another drop back below 1800. Last week's 1760 low will be the line in the sand that the Nasdaq must not cross or traders will sell in volume. Resistance is 1870 and real support 1650.

Nasdaq Chart

Monday's rally was on horrific volume of only 7.6 billion shares. This was very close to the lowest volume day of the year and today was not much better. Volume today was 8.8 billion as stops were hit on Monday's gains. The volume for the rest of the week is only going to get worse as we approach the Friday holiday.

The only reason to stay in stocks over the summer is the earnings trend. The best earnings gains after a recession are normally in the first full quarter of the rebound. That would be Q3 assuming we really saw the bottom in Q2. Those strong earnings rebounds are met with corresponding gains in stock prices. However, how much of those gains are already priced into the stock prices with many stocks already up +100%? I would be cautious here and I believe the path of least resistance is down once we are into next week.

Jim Brown