It was a fight but the major big cap indexes shook off early morning weakness to end with very small gains. The Russell and the NYSE Composite were the exceptions with fractional losses.

Market Stats Table

There were multiple economic reports this morning and none of them were specifically bullish. The Producer Price Index (PPI) for October rose only +0.3% compared to estimates for a +0.7% gain. Core prices for finished goods FELL -0.6%. Core prices for intermediate goods fell -0.2%. The drop in core prices brought back fears of a possible deflationary cycle. One analyst at Moody's said the decline in finished goods prices was due to a decline in auto prices. However, even if you take out the auto component the core prices fell for the fourth time in the last six months.

Most analysts believe we have passed the point of worry about deflation. They believe the rise in food and energy prices is an indication that the economy is improving and we have dodged the deflation bullet. Prices for energy products rose sharply across all levels of products in October as oil hit $80. Prices for all food products also rose in October. Prices for components used in construction and durable goods also rose. However, only so much price inflation can occur with demand weak and unemployment high. This trend should continue through the middle of 2010. If unemployment continues to climb the impact on prices should be negative.

Industrial Production rose by +0.1% in October but this was much slower than the +0.7% rise in September. The consensus was for a gain of +0.4%. Unfortunately colder weather produced a boost in utility output that led to the small rise in production. It was not due to an increase in manufactured products. Manufacturing output actually fell by -0.1% and that was the first decline since June. Analysts still expect production in Q4 to rise by a +1.0% rate compared to the +8% growth rate in Q3. Motor vehicle parts production is credited with the expected gains as automakers ramp up production of 2010 models. Manufacturing output ex-autos fell -0.1% in October after a -0.4% drop in September. Wood products fell -0.4%, mineral products -2.1%, furniture -1.8%, computers and electronics -0.3% and business equipment fell -0.2%. Computer and peripheral equipment fell -1.2%. Production in this category has fallen at greater than a 1% monthly rate for the last 18 consecutive months. Capacity utilization rose only fractionally to 70.7% from 70.5%. There is no reason to fear inflation with that much excess capacity.

Industrial Production Chart

The November NAHB Housing Market Index declined one point to 17 from 18 in October. However, in this same report the October number was revised lower to 17 as well. Potential buyer traffic remained flat at 13. The low was 7 in November 2008. This hit a high of 17 in September as the original homebuyer tax credit was reaching its end. This should pickup in the spring and the six months sentiment component rose to 28 from 26 to prove this point. Builders are expecting business to improve significantly in the spring thanks to the extension and expansion of the homebuyer credit program. However, this survey was taken before the tax credit program was extended so it would probably be higher today. The headline number sank as low as 8 in November 2008 so it has more than doubled.

Builders are concerned that the large backlog of foreclosures will increase supply of homes on the market over the winter months and drive down prices before the buying cycle begins again in the spring. Where home sales slow over the winter the pace of foreclosures will not decline. Analysts are still expecting over two million more homes to be foreclosed in 2010 in addition to the 2.5 million in 2009. The rising unemployment is also a drag on the homebuilder sentiment numbers. This is going to be a very slow growth sector for at least the next couple years until unemployment declines appreciably and economic growth rises to support wage growth. As you can see in the chart below the recent gains in builder sentiment are negligible compared to sentiment in prior years.

NAHB Housing Market Index Chart

Economic reports on the schedule for Wednesday include the Mortgage Applications, Consumer Price Index, New Residential Construction, E-Commerce Sales, Risk of Recession and Oil & Gasoline Inventories. The CPI is the only report that could impact the market if it showed prices rising sharply but based on the PPI today that is not likely to have happened. The next major report for the week is the Philly Fed Survey on Thursday.

Weekly Chain Store Sales was also reported today but I don't normally cover that report. It fell by -0.1% compared to a -0.1% decline in the prior week. I mention it today because Target reported earnings today and warned that analysts were probably overly optimistic about the holiday season. Earnings for last quarter were 58-cents compared to consensus estimates of 50-cents. Target lowered guidance to $1.12 for Q4 and consensus estimates were $1.14. Target said November sales had shown weak consumer demand with the average ticket size smaller than normal. Target also said it was going to be a highly promotional season. That means lots of price cuts and lots of ads with loss leader promotions. For instance, several websites claim to have a copy of Targets black Friday circular. They claim Target will be selling coffee makers and slow cookers for $3 each. Target shares lost -4% on the news.

Saks also reported earnings of a penny. The CEO said this was the first profit in 18 months and it was due to introducing new products at a lower price point. He said, "I think there have been some changes in the luxury consumer. People are very much focused on value." Saks stock gained +4% on the surprise profit despite saying that same store sales could decline by 8-9% in Q4.

Wal-Mart is going after holiday shoppers with a vengeance. They are announcing new price reductions almost every week. Every time another chain announces a holiday program Wal-Mart comes out immediately with a new announcement. Target announced they were going to have a one-day sale on Target.com on Thanksgiving Day and open stores earlier on black Friday. Wal-Mart immediately followed on Tuesday afternoon saying it would cut prices up to 60% on popular toys and video games beginning this Saturday and lasting through black Friday. Amazon, Target and Wal-Mart are fighting a fierce battle over books and DVDs with each trying to outdo the other on lower prices. Wal-Mart will be the winner here eventually simply because of their buying power and much higher customer count.

TJX also reported profits on Tuesday and they rose +32%. They also said early holiday sales are strong BUT they issued conservative guidance. Obviously they are not that strong. TJX shares fell slightly on the news.

Home Depot also reported earnings that fell -8.9% and cautioned that Q4 estimates may be too high. Home Depot said it is seeing signs of improvement but there were qualifications. Sales of items over $900, which account for 20% of its revenue, were DECLINING SLOWER than in the prior quarter. That means they were less bad than in Q3 but still bad. They also said sales of items under $50 had increased slightly. The average customer sales ticket declined -7.1% to $51.89. Personally I wish I could go to HD and only spend $51.89. HD estimated that Q4 earnings would decline by 13% for the year but that was better than the prior prediction for a 15-20% decline. The implied estimate for Q4 was 13-cents in earnings compared to Wall Street's estimate of 16-cents. HD lost 2.4% on the news.

The worst retail earnings of the day came from Pacific Sunwear (PSUN) after they reported a loss of 17-cents per share. The loss was not the fatal blow. PSUN reported that same store sales in Q3 were down -18% and so far in Q4 they are down -20%. PSUN is now estimating a Q4 loss of up to 35-cents. PSUN lost 22% on the news.

PSUN Chart

Another factor influencing the market today besides weak retail sales was the news from TransUnion that Q3 mortgage delinquencies rose +58% to 6.25% of all loans. This is record.

Applied Materials (AMAT) said it was buying Semitool Inc for $364 million in cash. AMAT said it would position them to take advantage of the global recovery in the chip business. The buyout equals about $11 in SMTL stock and a 31% premium to Monday's closing price. SMTL traded under $2 back in March. Insiders holding 32% of SMTL stock have agreed to the deal. Duh! Did you think after seeing their stock at $2 and now they have the opportunity to be part of an industry leader they would say no?

SMTL Chart

AOL is rising from the grave on December 9th when Time Warner will spin off the shrinking Internet company to shareholders under the symbol AOL. When Time Warner and AOL merged AOL was the larger company. Now TWX is giving shareholders 1 AOL share for every 11 TWX shares they own even if shareholders don't want it. AOL is bleeding subscribers with revenue down -23% and earnings down -50% in Q3. Ad revenue fell 18% over the quarter and AOL's subscriber base shrank to 5.4 million. Don't forget Google paid $1 billion for 5% of AOL. They did this to get advertising rights to AOL customers. I wonder what that $1 billion investment is going to be worth on Dec-9th.

Time Warner Chart

You have heard about peak oil, how about peak gold. I have been meaning to write about this for sometime as gold broke over $1000 but time is always short. Today the CEO of Kinross gold said in an interview he does believe 2001 was the peak in gold production. Gold prices closed at $1141 today and he believes it will go higher. Global production peaked in 2001 and has been declining by roughly one million ounces per year ever since. He said in 2009 sales will exactly equal production. As prices continue to rise it will discourage the sales of gold jewelry but demand for gold in manufacturing is continually rising. Production in 2009 is estimated to be 83 million ounces.

The reason for the decline is the quality of the remaining deposits. Ore has fallen from 12 grams per ton in the 1950s to only 3 grams in 2009. Several miners have announced they were closing previously profitable mines because they were no longer profitable even at current prices. Since mankind began mining gold commercially there has been roughly 160,000 tonnes of total global production. That would only fill two Olympic size swimming pools.

With the population increasing and along with it demand for gold for jewelry, manufacturing and electronics and as a form of currency reserve the price of gold is going higher. This may turn into the ultimate buy the dip trading vehicle either though the GLD ETF, equities like Kinross, Barrick, Newmont, Goldcorp or simply storing away a few coins or bars whenever possible.

Gold Chart

The Dollar has taken us on a wild ride lately. The 75 level on the dollar index has been the difference between gains and losses in equities. Every plunge below 75 has produces strong gains in the markets but the dips in the dollar have been very short lived. Evidently somebody is defending that 75 level because the overnight dips are being instantly bought the following day. In theory the dollar is in a long-term decline and most economists believe it could decline another 25%. If that is true then the prices of gold, oil and equities are going a lot higher. I just wish this battle over 75 would end so we can develop a positive trend in the markets without all the constant reversals. Trying to maintain a long position with stops is nearly impossible.

Dollar Chart

Crude oil is chained to the price of the dollar with every dip to 75 on the dollar index taking oil back to $80 and every rebound in the dollar knocking oil back to support at $76. There is no demand picture at play rather just a hedge against the falling dollar.

Crude Oil Chart

The markets may have eked out a small gain today to new highs but it was on the lowest volume day since October 12th. There may not be any bullish conviction pushing stocks higher but there are plenty of bulls buying the dip. The Dow has clearly broken above downtrend resistance from 2007 and set a new closing high today at 10437. The next material resistance is over 11,000. Of course there will be plenty of intermediate resistance trends as the Dow moves higher but the target is now clear. Support on the Dow at 10200 is slowly disappearing out our rear window. The Dow closed today exactly on uptrend resistance (blue line) from the March lows.

Dow Chart

Both Nasdaq indexes are now clearly in breakout mode with the NDX finally succeeding in dragging the Nasdaq composite to new 13 months highs. Both charts have targets that are well above their current levels. This is a bullish event but new investors have got to be wondering if now is the time to go long. As you can see in the charts there have been plenty of decent pullbacks and investors have to be weighing the risks of jumping in now, waiting for a pullback or possibly being left behind.

Nasdaq Composite Chart

Nasdaq 100 Chart

The S&P has closed over 1100 twice this week but even at 1110 it is still not a decisive event. The extremely low volume of today and the small additional gain is telling us that investors are still concerned about the strength of the follow on rally. If we were adding 8-10 points per day I think investors would feel much more comfortable about putting new money to work. Today they are more concerned about the overnight direction of the dollar rather than the S&P hitting 1150 in November.

S&P-500 Chart

The Russell moved up +16 points on Monday but traded down fractionally today. The Russell is still the real sentiment indicator and I believe Monday's gains were short covering rather than new money. The real key to the overall market could be resistance at 623 on the Russell but the S&P could be at 1150 by then. The Russell remains a key indicator to watch but we don't want to miss any bigcap moves while waiting on the Russell.

Russell Chart

I would continue to be cautiously bullish simply because the low volume is a cause for concern along with the lagging small caps. The Philly Fed Survey is the biggest report left this week but I doubt anything economic is going to crash the market. We know things are less bad and hope remains that eventually less bad will turn into good. The negative retail guidance and worsening economics today could not keep the markets on its lows. The bad news bulls are in control with a rally cry of "buy the dips." Until that changes it should be our trading plan.

Jim Brown