All the major averages are breaking out to new highs with the exception of the Dow and the NYSE Composite.

Market Statistics

The major indexes continued their two-week rally although the trading range narrowed as the weekend approached. The weight on the market was the 800lb gorilla nobody on stock TV was talking about. That is the Fed meeting next Tuesday. The tone of the Fed member's comments in their individual speaking engagements has changed slightly and it appears they are growing more hawkish.

The official policy remains low for an extended period but analysts are starting to worry that the official post meeting statement will change soon. Nobody is expecting the interest rate to change but they may start changing the statement to prepare the market for a rate hike later this year. Analysts had been targeting Q4 or early 2011 for the first rate change but now they are starting to move those dates closer to Q3 or early Q4.

The markets rallied last week on better than expected economics and some improved earnings and guidance from some big names. The surprising economics on Friday came from the Retail Sales report for February. Sales increased +0.3% in February despite the multiple snowstorms. If you exclude autos those sales rose +0.8%. Core sales excluding autos and gas stations rose +0.9%. Obviously auto sales and gasoline sales were severely impacted by the heavy snow. We have already heard from dealers that auto sales in March are exploding and could hit 12.5 million. Shortages are being reported in some vehicles.

The biggest growth in sales came from electronics and appliance stores, sporting goods and hobby stores and general merchandise. March is shaping up as a blowout month as pent up demand is released. Considering consumers are still constrained by unemployment and lack of credit this surge in buying is even more unexpected. This suggests the consumer is starting to relax after two years of a hoarding mentality.

iPhone sales are running 100% over last year and BlackBerry sales are up 50%. Flat screen sales were up +37% as 2009 ended. Electronics sales were up +3.7% in February alone. The February retail sales report will be very bullish for market sentiment once we get past the Fed meeting.

In contrast to the sharp increase in sales the initial consumer sentiment report for March showed a decline to 72.5% from 73.6%. This was the second consecutive decline but the drops were minimal unlike the huge decline in consumer confidence. Both the internal components declined. Present conditions declined from 81.8 to 80.8 and the expectations component fell to 67.2 from 68.4. These are small moves and probably related to the weather instead of economic conditions.

There was also a drop in sentiment from the rebirth of the healthcare bill. Depending on what survey you read 57% to 63% of consumers do not want this bill to pass. Only 33% to 36% are currently in favor with the rest undecided. To hear that lawmakers are going to use a parliamentary trick to get it passed is a weight on consumer confidence. Consumers don't really understand what is in it, how it will impact them and how much their taxes are going to rise so the majority sees this as a negative event.

Consumer Sentiment

After last week's lackluster schedule the economic calendar for next week has some major events. The price indexes, PPI and CPI, are out on Wednesday and Thursday. Those will show how much inflation may be filtering through the system. The Philly Fed survey on Friday is the first major manufacturing report for the month. The NY Empire survey on Monday does not have the clout as the Philly Fed Survey.

The biggest event is of course the FOMC meeting on Tuesday. This meeting is fraught with negative possibilities. The biggest worry is for a change in the "considerable period" language. We know it is coming but we don't know when. Just changing the language does not mean the rate is going to change. It just means the Fed is preparing for the next step in changing their bias from loose to neutral. They have to move from an accommodative bias to neutral before they can change to a tightening bias. Even if they changed the language at this meeting it would still be months before they would actually change the rate.

The next meeting is April 27/28th and the two-day meeting is more than likely when they will change the statement. They almost need to keep the language next week just to offset the hawkish comments being made by some past and present Fed members. There was also an editorial last week suggesting the Fed would need to remain in the current mode for several more months to offset the uncertainty about the different financial regulation bills in Congress and the potential impact to business sentiment if the healthcare bill passes.

Analysts are already saying several million currently employed workers will find their status changed from full time to part time or from employee to contractor to keep businesses from having to pay the sharply higher health insurance premiums. That means many of those employees will lose their current employer paid insurance coverage. There are always unintended consequences to every new law.

Virginia has already passed a new law making it illegal for the Federal government to require Virginia residents to have health insurance or be forced to pay a tax for not having insurance. Virginia's Health Care Personal Liberty Law, SB417, passed the Virginia House by a vote of 90 to 3 and the Senate 25 to 15. Eighteen other states are already considering the same kind of law to exempt their citizens from the new healthcare rules.

The Fed has already affirmed the timetable for ending numerous stimulus programs so we should continue to see further affirmations in this statement. The risk of Fed statement changes should keep the markets on hold until after the announcement.

Economic Calendar

In stock news Potash (POT) spiked +$8.34 after raising guidance. POT said a sharp increase in demand would push it to record first quarter sales in North America and generate strong offshore shipments. CEO Bill Doyle said, "Strong farmer returns, a depleted distributor pipeline and the agronomic need to replace soil nutrients have kick-started a potash rebound from the 2009 lows." Doyle said POT now expects to earn between $1.30 to $1.50 per share compared to the $.70 to $1.00 previously predicted. Analysts were expecting 87 cents per share.

The drastically improved guidance sent POT to resistance at $125 but once analysts begin raising their estimates next week POT should go much higher. The upgrade also propelled Mosaic (MOS) and Agrium (AGU).

Chart of POT

Chares of CF Industries (CF) and Terra Industries (TRA) declined after Yara International announced it would not raise its bid for Terra. Yara had offered $4.1 billion for Terra but CF sweetened its prior offer to $4.7 billion and Terra accepted the deal. CF had been chasing Terra for over a year but was continually rebuffed. Apparently after being in the clutches of Yara for about a month now they decided being acquired by CF was better than the foreign company Yara. Yara will get a $123 million breakup fee.

CF not only got Terra but they escaped from being acquired themselves by Agrium (AGU). Agrium had been pursuing CF for a year in a hostile takeover of their own. When the final CF/TRA deal was announced on Thursday Agrium said it was withdrawing their offer for CF. The mating dance by the fertilizer foursome has finally come to an end.

The revelation that Lehman used a complicated form of off balance sheet accounting involving phony asset sales to boost its balance sheet is not a revelation inside the banking community. Apparently many banks use this practice.

Essentially Lehman would transfer high quality assets to its London unit. At the end of the quarter Lehman would sell the assets for cash to a third party with an agreement to buy them back the following week. Lehman used the cash to pay down debt making its quarterly earnings statement stronger. Once the quarter ended they would borrow money again and buy back the assets. Lehman reportedly started out small in 2001 but by the second quarter in 2008 they were moving $50 billion a quarter and that reduced their book leverage ratio by about 2 points to 14.7 compared to 20.8 for Goldman Sachs.

Freddie Mac (FRE) admitted it regularly hid $8 billion in mortgage-backed securities using Credit Suisse as their investment partner. Regulators caught on to this trick several years ago at commercial banks and they are now required to report average assets during the month, not just the end of the quarter. With the spotlight on this Lehman process it is going to produce a lot of questions when financial companies report their next quarter. Where there is one cockroach there are normally others.

Banking analysts are now on the hunt for anyone else who may be cooking their books to produce end of quarter window dressing. Goldman, JP Morgan both said they did not use repurchase transactions. Morgan Stanley said they did but did not report them as sales. Bank America and Citigroup refused to comment.

Apple (AAPL) hit a new 52-week high after saying that iPad sales on the Internet were running about 25,000 per hour. Friday was the first day you could place an order for April 3rd delivery. Apple was limiting sales to two per person starting at $499 for the Wi-Fi model. The AT&T 3G version will not be out until closer to May 1st. New details about the 3G model were released. The $15 monthly AT&T plan has a data limit of 250 megabytes. As you near your limit you will get a warning on the screen and the option for purchasing additional megabytes for that month. The $30 a month plan is unlimited and requires no contract. Apple also reported there are only 16,700 iPad apps compared to the more than 140,000 for the iPhone. That number will obviously grow.

The iPad is also drawing an increasing number of detractors who claim it will be just another gadget a year from now and the other tablet computers will be selling like hotcakes. The Hewlett Packard device will run Windows 7 and support flash as well as multiple programs running at the same time. The iPad does not support flash or multiple programs. Other companies with tablet computers in the works include Google, Dell, Motorola, Nvidia, Archos, Pegatron and others. Time will tell but with millions of Apple faithful I find it hard to believe the iPad won't succeed.

Citigroup successfully sold $2 billion in 30-year trust preferred securities on Wednesday and the stock jumped to trade over $4.20 on tha news plus some positive comments from Pandit. CEO Vikram Pandit said Citi could be back to earning $20 billion a year in core profits by the end of 2012. Citigroup has $1.3 trillion in assets and those are expected to grow by 5% per year. The government still owns 27% of Citigroup and there are rumors the stock is about to be sold. The moratorium on government sales expires March 16th.

If Citi's share price can absorb a 27% dillution to the stock in private hands I will start believing in flying pigs. Surely there will be a significant drop BUT everyone who owns shares today knows that stock is outstanding and about to come to market. That is roughly 7.7 billion shares with the cost to the Treasury at $3.25 each. Once it is out of government hands I expect a major reverse split to reduce the 23 billion shares outstanding to something a little more manageable. That will be a major event. If Pandit is right and Citi can grow profits to $20 billion a year in 2012. Those shareholders will be well rewarded.

Citigroup Chart

Google is reportedly 99.9% certain it is going to shutdown Google China. The Google.cn search platform has 30% market share in China but after the recent fight with the Chinese government over hacking and censorship it appears Google is going to leave the country rather than give in. Google is said to be planning an expeditious exit for those workers still in China before announcing the shutdown. Google fears reprisals against the workers. On Friday, Li Yizhong, minister for industry and information technology said, "If Google takes steps that violate Chinese laws, that would be unfriendly, that would be irresponsible, and they would have to bear the consequences. If you don't leave, China will welcome that, if you don't leave, it will be beneficial for the development of the internet in China." That sounds only slightly better than "don't let the door hit you on the way out."

Google lost ground on Friday to $579 but garnered another upgrade from Oppenheimer. The analyst raised his earnings estimates, revenue and price target. He is now targeting $715.

Chart of Google

President Obama is going to nominate Janet Yellen as the Vice Chairman of the Fed. Yellen is the president of the San Francisco Fed and former UC Berkley professor. She headed President Clinton's Council of Economic Advisors in the 1990s. She would replace the 40-year Fed veteran Donald Kohn when he steps down in June. Everybody I have read believes Yellen is the best pick for the job. Yellen, currently 63, would compliment Bernanke in his role as Chairman and keeper of the public trust.

Yellen is normally seen as dovish when it comes to raising rates but as an economics professor with history of being a macroeconomist she would not hesitate to make the changes when needed. She is known for favoring Main Street and high employment rather than Wall Street and inflation worries. Her husband is Nobel Prize winning economist George Akerlof. Former Fed governor Lawrence Meyers was the offsetting hawk to Yellen's dovish vote in the 1990s when both were on the FOMC. Meyers said, "I jumped up and down shouting hurray" when he heard she was going to be nominated.

Janet Yellen

There is rumored to be a rescue package for Greece that will be announced on Monday. The Guardian, a U.K. paper citing anonymous sources, said it would be for €25 billion and will require rewriting some of the EU rules to enforce more fiscal discipline. Reportedly the €25 billion will come from various European capitals in the form of debt guarantees. Greece is expected to need another €55 billion by year-end. The guarantees are being offered in hopes of strengthening the Euro and ending the Greek debt crisis.

Reportedly talks are being held on creating a European Monetary Fund (EMF), which would act like the IMF and loan money to EU nations with strong conditions attached. This can't be formed in time to help Greece but EU officials are well aware that Portugal, Italy and Spain may follow Greece down the crisis path.

Forrester Research raised their estimates for computer sales in 2010 by seven million PCs. They believe business tech spending will grow by 6.6% in 2010 compared to an 8.2% decline in 2009. Forrester also raised their estimates for online sales in 2010 to $172.9 billion from $155.2B in 2009.

China reported their exports exploded with a +46% jump in February. However, China said it could take a couple years before exports returned to the 2008 highs. Analysts believe the February numbers were inflated by shipments rushed in order to complete them before the Chinese New Year and March could show a sharp drop.

China's growth does appear to be increasing and a recent report is predicting sales of 15 million cars in China in 2010. That would be 2.5 million more than what is expected in the USA. That suggests demand for oil will also rise more than currently expected. On Friday the IEA said oil demand in China surged by 28% in January and they raised their estimates for 2010 demand to 86.6 million barrels per day. This was 100,000 bpd more than their last forecast. Demand in developing nations is expected to rise +4.3% in 2010 compared to a decline of -0.3% in developed nations. Oil prices spiked to $83.16 on the report but quickly faded.

Crude Oil Chart

TrimTabs.com reported that the economy appeared to be really improving today and much better off than just six weeks ago. TrimTabs said wages were up +3% year over year. Online job postings were up +9% year-over-year and +18% year to date. This is a strong leading indicator of economic activity. They said investors were still pouring $1.5 billion per day into bond funds rather than favoring equities. That is a strange statistic given the continued rise in equities.

Friday was a neutral day for the markets. The Nasdaq, S&P and Russell all ended fractionally negative, which means only fractionally away from a new high. The Dow, the laggard in the group in terms of recent gains actually closed positive by 12 points thanks to Caterpillar, American Express and General Electric. All had gains for the day of 2-3%.

Volume over the last four days was decent at an average of 8.7 billion shares. That was the strongest average since the first week of February. However, trading volumes were boosted by the billion plus shares a day in Citigroup so removing Citi gives us a 7.6 million share average and relatively low volume.

For the week before option expiration this was pretty anemic volume. Normally the week before an expiration is pretty busy. This is also a triple witching expiration so it should have been even busier. The lack of volume is thought to be from the lack of sellers. Everybody has picked up on the sudden buying spurt among fund managers and the race for quarterly performance. It appears sellers have elected to sit out until after the FOMC meeting or even until the quarter is over.

With just over two weeks left in the quarter and fund managers in a shopping frenzy, shorts have figured out it does not pay to jump in front of the trend. With volume weak there is little conviction but with economic news seemingly improving by the day it may not be long before that conviction arrives.

We are three weeks away from the March nonfarm payroll report and Goldman, JP Morgan and Morgan Stanley analysts are now predicting a gain of 100,000 to 300,000 jobs in March. Goldman expects 275,000 and David Greenlaw at Morgan Stanley as many as 300,000. That total is made up of roughly 50,000 normal jobs, +100,000 attributable to a weather rebound and 125,000 or more to the census.

In this environment of improving economics the potential for a sudden spike of +300,000 jobs is a monster gain in sentiment for the market. For those of us that understand the census impact over the next three months it is not as big a deal but for John and Mary Doe hearing the +300,000 headline on TV it will be a very large sentiment builder. We should get those numbers for the next three months due primarily to the census. Three months of 300,000+ headlines will bring even the most skeptical consumer out of their mental cave and give the administration a serious publicity boost.

If you are a fund manager you probably want to be 100% long when those first jobs are announced on April 2nd. Even though the rising estimates are building expectations into the market there should still be a sentiment spike because 90% of retail traders have no clue about economics until they hear the actual headlines.

This is a serious convergence of factors for fund managers. Triple witching, end of the quarter window dressing and the potential for a monster sentiment spike into earnings. I would not want to be a bear for the next three weeks. Of course that does not mean we are going straight up. It just means there is an underlying bullish trend once we get past the FOMC announcement on Tuesday. That also assumes they don't screw something up in the announcement.

The Dow and the NYSE Composite are the only major indexes that have not broken out to new highs. However, the Dow is starting to show some relative strength and the uptrend resistance from the prior month is now acting as support. The Dow is now only 100 points from the January resistance and 125 points from a new high. If fund managers are starting to become concerned about the over extended gains in the small caps they may want to start putting some extra cash back into the big caps for safety. Dow 10600 emerged as support intraday on Friday with 10550 stronger support if there is a bout of profit taking.

Dow Chart

The S&P has closed twice at 1150. Although refusing to break through that level it the S&P is also refusing to pull back below 1150. Most analysts now believe that we will break through despite the over extended rally. There have only been two days since late February with strong S&P gains. The majority of gains have been slow gains with a small range. This allows for minor profiting taking as we move higher and every intraday dip is bought. Nobody is chasing prices higher but they are definitely buying the dips. Once we get a real breakout over 1150 I expect a pullback to 1150 as support before we begin to move much higher. Current support is 1140. The S&P futures posted 10 consecutive days of gains with the streak ending on Friday. You have to go back to 1987 for an 11-day streak.

S&P-500 Chart

The Nasdaq is now officially in nosebleed territory. The +267 point gain since the February lows is very over extended and could drop on profit taking at any time. Support should be prior resistance at 2325. Monday would be the perfect day for this to happen so the bulls could reload for a post FOMC continuation move higher. The big cap techs appear to be weakening but so far it is more of a lack of conviction for a higher move rather than the arrival of profit taking.

Nasdaq Chart

The Russell is extremely overbought. Since Feb 8th the Russell has closed negative only three times out of 23 days. That equates to overbought in any language. This is better than the 4 losses in 18 days back in July and 4 out of 24 days in May-2005. You have to go back to April 2003 to find 6 losses in 34 days to best the current run. It is time for a rest. These strings don't go on forever even in the best of conditions. For this to continue we need a decent dip to buy. Ideally a pullback to 665 before the FOMC announcement would give everyone a new entry point.

Russell 2000 Chart

In summary, dip buying is alive and well and we need a decent dip. Preferably that dip would come on Mon/Tue and a positive Fed statement would be bought. However, this is a triple witching week so volatility all week is a possibility with the end of quarter rally starting over the following week. I believe funds will want to be long into month end for quarterly window dressing and then long over the April 2nd jobs report for a sentiment bounce into earnings. Just remember once the earnings cycle starts and the closer we get to May the greater the potential for a correction. The current rally is a temporary event that should begin to fade in mid April if not before.

This is daylight savings time weekend. Don't forget to set your clocks forward or you will be late for church.

Jim Brown