Market Stats:

Stocks were off to a poor start this morning as investors digested disappointing Fedex earnings and shockingly low housing starts. News that BP chose to cut its dividend and fund a $20 billion escrow account helped remove some uncertainty over the embattled oil giant and the market rebounded. Unfortunately the gains were short-lived and stocks closed virtually flat on the session following Tuesday's big rally. The market also sifted through the industrial output numbers, PPI report, and news that WPO triggered the new circuit breakers and Fannie Mae and Freddie Mac would be delisted from the NYSE.

Intraday Chart of the S&P 500 (5-minute):

Foreign markets were mostly higher with Japan leading the way in Asia. The Japanese NIKKEI index surged 1.8% to a one-month high on what looks like short covering. The Chinese Shanghai index closed up 0.29% and the Hong Kong Hang Seng rose just 0.05%. Gains were more even across Europe but stocks struggled on the disappointing housing start numbers in the U.S. Mobile phone maker Nokia (NOK) also disappointed the market with an earnings warning and shares of NOK plunged almost 9%. The economic data in the U.K. was mixed with consumer confidence falling to its lowest levels in almost a year. At the same time the number of initial jobless claims fell in May to a new one-year low. The England FTSE managed to keep the winning streak alive with its sixth gain in a row, up +0.39% for the session. The French CAC-40 gained +0.39% and the German DAX rose +0.26%.

After yesterday's big moves in the currency market the euro and the dollar both drifted sideways on Wednesday. The lack of action in currencies left commodities to trade on their own. The results were mixed. Gold futures slipped almost $4 to $1,230.50 an ounce. Copper prices hit some profit taking with a 1.3% drop following a six-day rebound. Crude oil futures ignored the bearish weekly oil inventory report in the U.S. and rose 0.9% to $77.67 a barrel. This is somewhat surprising and could be a reaction to the BP news or hope that global economic activity won't slow down too much. The inventory numbers this morning were certainly a surprise. Analysts were expecting a drop of 1.75 million barrels of oil and an increase of 640,000 barrels of gasoline. Instead the Energy Information Administration said oil inventories rose 1.7 million barrels and gasoline supplies sank by 600,000 barrels. U.S. refineries operations fell 1.2% to 87.9% of capacity.

The economic data flow for the U.S. economy continues to be mixed. The housing starts number was the biggest surprise. The Commerce Department said housing starts fell 10% in May to an annual pace of 593,000 from 659,000 in April. This was the biggest drop since March 2009. The single-family home starts component plunged 17%, which was the largest decline since 1991. The number of building permits also saw an decline to a new one-year low. Home builders have a right to be cautious. Unemployment remains high and the qualification window for the homebuyer tax credit expired on April 30th. Odds are good the sale of existing home and new homes will continue to underperform. More than one market pundit is expecting residential real estate to see another 10% to 20% decline before home prices finally hit bottom.

On a brighter note the industrial production numbers were good. Output for U.S. factories, mines, and utilities rose 1.2% in May. This was the largest improvement since August 2009 and followed a 0.7% gain in April. Economists were only expecting +0.9% growth in output. Thus far U.S. output is up 10 out of the last 11 months but we're still down 7.8% from the high in December 2007.

The big drop in energy prices in May (gasoline -7%) helped push the headline PPI number lower. The Producer Price Index helps measure inflation at the wholesale level. This morning the Labor Department reported that prices paid to farmers and factories fell 0.3%. The core-PPI, which excludes more volatile energy and food prices, rose +0.2%. Economists were looking for a -0.5% drop in the headline number and a +0.1% gain for the core number.

One of the biggest headlines today was the deal between oil giant BP and the White House. BP announced they would set up a $20 billion fund to help compensate victims of the Gulf oil spill. BP's management announced they would stop the upcoming June 21st quarterly dividend payment (about $2.6 billion) and all further quarterly dividends for the rest of the year. By ending their dividend payments, cutting back on spending, and selling some assets BP plans to put $10 billion into the fund by this time next year. President Obama pointed out that this $20 billion victim's compensation fund was not a limit on BP's potential exposure and it has no impact on what the final clean up cost totals might be. I found it interesting that BP plans a separate $100 million fund to help out of work oil rig workers following President Obama's moratorium on deep-water drilling.

The big question both short-term traders and long-term investors are asking a lot these days is whether or not BP is a buy at these levels (currently trading around $32). Shares did seem to find some support after falling 50% from the $60 level and it wouldn't surprise me to see BP produce a significant oversold bounce. The stock saw a 1.4% bounce today on hopes that the $20 billion victim fund helped, in a small way, define some of BP's risk. Yet long-term no one knows what BP's exposure to victim compensation, clean up costs, and penalties might be. This could end up being a black cloud over BP's stock price for a very long time. As long as you have a clearly defined stop loss to limit your risk you could always consider a speculative position on BP but it remains a very high-risk bet in my book.

Chart of BP:

Shares of FedEx (FDX) had an effect on the market today. The stock is a component in the Dow Jones Industrials, Dow Transportation average, S&P 100, and S&P 500 indices. Today shares were hammered for a 5.9% loss, completely erasing the last four days of gains. Prior to the opening bell FDX reported its Q4 earnings, which came in at $1.33 a share and a penny above estimates. Revenues soared +20% and came in better than expectations at $9.43 billion for the quarter. Management seemed to have good things to say. Internal volumes were at multi-year highs. International shipments roared with a +23% improvement thanks to strength in Asia, Latin America, India, China and Brazil. Yet investors were disappointed with the company's guidance when FDX offered 2011 guidance in the $4.40-5.00 range compared to Wall Street's estimates at $5.05. Many consider FDX to be a key bellwether company for the U.S. and global economy. Let's hope this isn't a sign of things to come for the second quarter earnings season that begins in July.

Chart of FDX:

Shares of Apple Inc. (AAPL) managed to outperform the market with a 2.9% gain to $267.25 a share. You may recall that after the company unveiled the new fourth generation iPhone this month there was a huge burst of sales for its rival, Google's Android phones. It almost seemed like the iPhone had lost its mojo and consumers were flocking to competing products. It seems that would have been a poor assumption. Yesterday AAPL and AT&T announced that the 4th generation iPhone set a record-breaking sales pace of more than 600,000 units - the highest ever for a single day of preorders. This was on top of an online ordering hiccup that prevented some consumers from actually getting their orders processed. The new iPhone is expected to hit stores on June 24th.

Washington Post made headlines on Wall Street today as the first stock to trigger the new SEC single-stock circuit breakers. The Security and Exchange Commission's new trading curbs began on June 11th and they're supposed to kick in whenever a stock rises or falls by more than 10% in less than five minutes. This afternoon shares of WPO jumped from $462 to $919-929, nearly doubling the stock price. There were three trades for a total of 766 shares, which were all cancelled.

Elsewhere in corporate news it was announced that shares of Fannie Mae (FNM) and Freddie Mac (FRE) would be delisted from the NYSE. These government-sponsored entities (GSEs) were bailed out by the U.S. government during the subprime crisis. The government now owns about 80% of these two companies. Shares of FRE fell 38% to $0.75 while FNM dropped 39% to 0.56 a share on this news. The move follows a directive by the Federal Housing Finance Agency telling both firms to delist their shares. The move from the NYSE to the pink sheets (OTC Bulletin Board) is expected to happen in the first half of July.

Technically the market looks a lot more bullish, at least on a short-term basis. The S&P 500 managed to hold Tuesday's close above the simple 200-dma in addition to short-term resistance near the 1,110 area. This certainly lends strength to the argument that the lows near 1,040 looks like a bullish double bottom. I would remain cautious since the S&P 500 has significant resistance near the 1,150 area. I also anticipate the 50-dma crossing under the 200-dma in the next two or three weeks, which is normally a very bearish development.

Chart of the S&P 500 index (daily):

The NASDAQ Composite failed under its simple 100-dma this afternoon and is hovering near the 2300 level, which was the top of its range for the last three weeks. While the NASDAQ also has a possible bullish double bottom the index looks a little short-term overbought, you could probably say the S&P 500 looks a little bit overbought with a six-day bounce from the June 8th lows.

Chart of the NASDAQ Composite:

The small cap Russell 2000 index ($RUT) has seen a very nice bounce off its June lows but the rally has stalled at resistance near the 670 level. The index may need to retrace a few steps and build up some steam before actually breaking out.

Chart of the Russell 2000 index:

On a short-term basis I am encouraged by the market's recent strength. There is still a chance we could see some volatility surrounding option expiration this Friday but normally summer Fridays are pretty boring, low-volume affairs. After Friday odds have improved that the market could see some end of quarter window dressing. However, I would not get seduced by any market rebound. You can trade it but I would hesitate to make any long-term bets. I'm concerned that we might be in the "eye of the storm". The economic data from the U.S. continues to be mixed. I am still in the double-dip camp. Although I will note that the American Bankers Association reported that their economic advisory committee believes the U.S. will avoid a double-dip. Instead the ABA believes the U.S. will grow by 3.2% in 2010 and 3.0% in 2011 but only half of the jobs lost during the recession will return.

Longer-term Europe remains a problem. Their debt challenges are still here and will remain an extremely heavy burden for years to come. You may not like him but George Soros shared his opinion that a double-dip recession in Europe is "inevitable". I happen to agree. The strict austerity measures being enforced in Europe will severely hamper growth but they have no choice since they have to deal with their debt problems. Mr. Soros went on to say that flaws in the euro would prevent the EU from being able to solve their problems and has the potential to "destroy" the EU. The region would probably see years of stagnation and there is a real risk of rampant civil unrest.

- James