The highlight statement of the Fed Beige Book was "Continued growth, but with widespread signs of deceleration."

Market Statistics

The most critical economic report for the week was the Federal Reserve's Beige Book, which covered the period from mid-July through the end of August. The report showed that most Fed districts were seeing continued growth but at a pace that was slowing.

On balance consumer spending was a bit stronger but most districts reported that most sales were for necessities or lower priced items. Tourism picked up in the northeast but declined in the Gulf coast areas because of oil spill concerns.

Manufacturing continued to expand but also at a slower pace. Residential real estate was very slow with most districts reporting a decline in prices. Commercial real estate remained depressed and showed little improvement over the prior period.

Lending either weakened or remained the same in most districts although lending to businesses declined even further on worries about the economic outlook. Several districts reported weaker demand for credit because of continued deleveraging. The exception was residential refinancing which continued to increase due to historic lower rates.

Wage and price pressures were virtually nonexistent other than increases in commodities and agricultural foods. The combination of fires, drought and floods overseas have reduced the availability of grain, increased demand for U.S. imports and driven up prices for U.S. farmers.

The report confirmed the slowdown in the U.S. economy in nearly every region of the country with the weakest conditions in the West and Midwest. This coincides with the dramatic downturn in employment in those same areas.

Analysts reviewing the Beige Book data believe the recovery will continue but also be a jobless recovery. The country is not expected to return to full employment for 3-5 years. Moody's said they don't believe it will result in a return to recession although the odds have risen from 20% to 35% over the last month. However, some regions may return to recession status but overall analysts still believe the country, as a whole will avoid a double dip.

That is a brave statement to say some regions will fall back into recession but overall the country will remain in growth mode. That suggests we will be walking a thin line between recession and growth over the next six months. That is not a very bullish outlook.

The market had declined from its opening highs in advance of the report and the conflicting data failed to produce a material rebound. There was a slight relief bounce that conditions were not worse but that was tempered by the "widespread deceleration" comments.

On the employment front the Job Openings and Labor Turnover Survey (JOLTS) reported a sharp increase in job openings to 3.042 million in July. That was an increase of 178,000 over the June period. However, this is a lagging report and the August non-farm payrolls have already been released. The JOLTS survey does precede actual hiring since the announcement of job openings can be 30-60 days before the actual hiring process is completed. The JOLTS data is encouraging but needs to post an increase in positions next month as well in order to actually indicate a new trend.

JOLTS Chart

Other economic reports included the Mortgage Applications at 880.0 compared to the prior week at 893.0. Weekly chain store sales fell -0.4%. Consumer credit for July fell by -$3.6 billion as consumers continue to pay down debt in fear of trouble ahead.

Reports due out on Thursday include Jobless Claims, International Trade, Oil and Gas Inventories.

The EIA crude oil inventories should be interesting after the API report after the bell tonight showed a drop in crude inventories of -7.1 million barrels compared to estimates for a gain of 900,000 barrels. If the EIA report comes in with a similar number we could see a major move in crude prices. There is a heavy short interest in crude because of the normal decline in demand in September. Prices did not move tonight because the API report is not widely disseminated or followed.

While on the topic of oil, the long awaited report from BP on their investigation into the Horizon disaster was released this morning. The 192-page report was accompanied by a 27-minute video with animations of the disaster as they believe it occurred. The report was amazing in the depth of detail and explanation of the various components and the pictures they provided on the scope of the recovery were amazing.

Unfortunately the report was an attempted whitewash of BP and an attempt to shift blame to everyone involved. The depth and detail of the report was an effort to show how hard BP worked and the obstacles and challenges they overcame. They are obviously hoping that showing the depth and expense of the effort will help buy them some considerations when the various agencies begin deliberating over the fines and penalties to be levied.

BP did overcome some serious challenges including things like operating 27 ROVs at the same time a mile underwater during the peak of the operations. Coordinating those operations with no less than five drillships on the surface plus more than 150 other vessels had to be on a scale that nobody other than a military operation had ever done before. Of course they would not have needed any of it had they paid attention to business on the well.

BP blamed Halliburton for a bad cement job that allowed the hydrocarbons to escape up the casing but they glossed over the fact that BP canceled the required test to determine if they had a good cement job because it would have taken another day to complete. BP glossed over the Halliburton recommendation for a minimum of 21 centralizers and the BP decision to use only a third of those because of the time it would have required to install them. A centralizer keeps the casing in the center of the well so concrete can be pumped up the sides of the casing to seal the casing from the rock.

BP blamed Transocean for a failing blow out preventer but did not acknowledge that BP would not allow Transocean the time required to perform maintenance on the device because it would have put BP farther behind schedule.

BP blamed its engineers and Transocean drillers on duty for not recognizing a flawed pressure test after the cement job by Halliburton. In hindsight the test clearly showed problems with the well but the conflicting readings prompted a decision by BP management to conclude there was a valve problem not a pressure problem and they accepted the results and told the crews to proceed with removing the drilling mud.

There were dozens of problems, short cuts and oversights that BP omitted from the 192-page report making it an obvious attempt to spread the blame and appear to the casual observer that all were equally guilty in the accident. You can read the report and view the video here: VIEW BP REPORT

Not surprisingly Transocean and Halliburton slammed BP for producing a "self serving" report that was full of errors and misrepresentations. Transocean immediately produced a press release that itemized five points that BP failed to mention that led directly to the disaster. Halliburton blasted the BP report saying it contained "substantial omissions and inaccuracies" and they would release their own analysis when it was completed.

Both Transocean and Halliburton reiterated that the existing contracts with BP fully indemnified them against any claims or damages. BP clearly can't claim gross negligence based on the flimsy accusations in their report because BP either approved or directed the work in advance. It appears that BP will be on the hook for the vast majority of the expenses. This was an excellent ploy by BP to gain public support and misdirect blame. 99% of the public will now believe it was a group problem not a BP problem.

BP shares rose +1.18 on the news and the public misconception that BP was not to blame. Unfortunately all future news after the relief well is completed will be negative for BP. Transocean shares rose $.69 and Cameron gained +$.67 because there was no smoking gun that pointed to their direct involvement. The big winner was Anadarko, a 25% owner in the well. APC gained +2.12 on the belief their risk for a share of the expenses had dwindled.

BP Chart

Goldman Sachs is about to be fined 20 million pounds ($30.9 Million) by the UK's financial regulator (FSA) for failing to disclose it was under investigation by the SEC. The FSA launched an investigation in April after the SEC surprised everyone with the fraud charges over the Abacus MBS. Specifically they claim Goldman failed to notify the FSA that Fabrice Tourre was under investigation. This follows a record fine of 33.2 million pounds against JP Morgan three months ago for failing to maintain client funds in segregated accounts. Goldman shares gained +2.33 for the day to $147.54.

Apple shares rallied +5 after UBS upped their price target to $350 from $340 and dramatically increased their earnings estimates for 2011. They raised the estimates from $16.62 to $18.09 claiming the iPad was gaining momentum and they saw no evidence it was impacting Mac demand. However, UBS said the iPad was adversely impacting the PC industry, specifically notebook PCs. UBS expects Apple to sell up to 26 million iPads in 2011. They said other vendors were scrambling to produce competing products but Apple had too big of a lead.

Barclay's Capital reiterated a buy rating with a price target of $340. Barclay's still expects a Verizon iPhone in the first quarter and a revised iPad with a front facing video camera for video-chat. Piper Jaffray reiterated its buy rating and $371 price target. The company said the biggest thing holding back iPhone sales was the "lack of availability on Verizon." In a recent survey of prospective buyers only 20% said they were reluctant because of the antenna issue. Four times as many people said they were reluctant because of AT&T and were waiting for a Verizon model. Piper Jaffray expects Apple to sell 11 million iPhones in Q3 and it would be more if they could make them faster.

Apple Chart

Costco (COST) caught an upgrade from Goldman Sachs to a buy from neutral saying the company's improving fundamentals and a likely increase in membership fees could boost results. Costco is currently on a hunt for cheap retail space in shopping malls compared to its standalone centers. The company is capitalizing on the 1.85 million square feet of vacancies created by the recession to open some additional storefront models. Costco could increase its stores to 480 by year-end, up from 408 at the end of 2009. Analysts believe this strategy could add to profits while reducing expenses. Costco shares have been on a rebound but they are heading into some strong resistance in the $60-$62 range.

Costco Chart

Companies are taking advantage of the downturn to do a little shopping on their own. They are shopping for cheap money in the form of long term paper. I reported on the century bonds in late August but the shorter term paper is also booming. Companies selling debt this week include HPQ, AXP, USB, GR, UNM, NBR and ATK. Even companies with less than prime credits are making good deals on debt sales. Alliant Tech Systems (ATK) sold $300 million in 10-year debt at 7%. That would have cost them 9% not too long ago. This cheap money is being used to pay off higher interest debt, fund expansion and make acquisitions. This will increase profits in the years ahead. The fact there is a flood of companies loading up on debt is bullish because it means they are no longer afraid of what the future holds. They are bullish on future prospects and this should be bullish for the market.

The volatility around the Beige Book release increased volume slightly to 6.39 billion shares but that is still very low. Without any significant economics on Thursday and Friday I expect volume to decline. We really won't see a return to normal volume until next week when traders return to work. This light volume will either accentuate volatility or flatline due to a lack of motivating news. This makes the rest of the week hard to predict.

The market appears poised for a sell off. However, that may be misleading. The Beige Book did say continued growth but only slower. Slow growth is market positive. The increase in job openings in the JOLTS survey is also mildly bullish. If analysts start focusing on the glass half full or maybe one third full in this case then we could see some money start heading back into the market. I believe this will happen in October but how much sooner it may occur remains to be seen.

We still have the normal September/October portfolio reshuffling cycle and we don't know how much the last four months of volatility has impacted that process. It may be behind us for all we know.

That leaves us with a purely technical view of the market as the only indicator worth watching for the next three weeks. This is September and it pays to be careful.

On a technical basis the S&P is failing at the 1100 level and the 100-day average at 1104. It is failing after a monster short squeeze last week and even in a bullish period it should pause here to consolidate its gains. Since September is not normally bullish that makes the pause even more appealing to new shorts. If I were bearish today the failure at 1104 would appear to be a perfect opportunity to enter new shorts. A break below 1090 would be even more bearish and a break over 1105 would be bullish.

S&P-500 Chart

The Dow is giving us the same picture as the S&P with strong horizontal resistance that matches the 200-day average at 10,450. This is proving to be a tough barrier for the Dow and we will need some additional news event to push us through that level. A breakout on decent volume would be bullish and could easily run to 10,700 on short covering and performance chasing by funds in cash and hoping for some additional weakness in September. Support is 10,350 followed by 10,260.

Dow Chart

The Nasdaq was the surprising out performer today with the NDX gaining +1.27%. However, even with the Nasdaq Composite adding +20 points it could not break over the resistance at 2235. Apple and Google were the star performers while Microsoft and Intel lost ground. Intel and HPQ were downgraded by UBS to neutral. UBS said weaker than expected PC demand would require a minimum of a 15% price cut on processors and deeper discounts on higher end chips. UBS cut its price target on HPQ from $54 to $44.

Even with the continued downgrades on the PC sector the Nasdaq has performed relatively well over the last week and I still attribute that to short covering. If every analyst is cutting estimates of PC and chip demand and cutting price targets you would expect tech stocks to go down. Everyone had loaded up with shorts the prior week and paid the price in last week's rally. However, today's multiple downgrades of the PC/chip sector failed to depress techs. There is no reasonable answer other than still too many shorts. I do not believe funds have suddenly decided to load up on tech stocks at the beginning of September. Maybe the beginning of October but not today.

Resistance is 2235 and a break over that level targets the 200-day at 2272 followed by stronger resistance at 2300. Support is 2200 and a break there targets 2100.

Nasdaq Chart

In summary the indexes have stalled at resistance only one week into historically the worst month of the year. Tech stocks and chip demand are being downgraded daily and the economy is still growing but slowing. There is no bullish case for the rest of the week but that never kept the bulls, or in this case the shorts, from buying stocks and covering positions. Volume should remain low and we would be better off if they just closed the markets until next Monday. Sentiment is mixed and traders are confused. I recommend following the market with small bullish positions over S&P 1105 and bearish positions under 1090. This is a trading market not a buy and hold market. Be prepared for extreme volatility or extreme boredom for the rest of the week.

Jim Brown