Confusing comments from Europe today but at least nothing to crash the markets. Without a reason to sell the markets eased slightly higher.

Market Statistics

The markets squeezed out the first back to back gains in September thanks to calming words from Europe and positive comments from several corporate conferences. Italy appeared to move closer to getting its austerity program passed and it was able to sell some debt in the open market.

Greece continues to promise it will do whatever is necessary to meet the ECB/IMF guidelines. The talk appeared to calm nerves but nobody actually expects it to work.

Actually there was a lot more talk about an impending Greek default but the tone seemed to be assurances they were not going to let a Greek default crater the European Union. German chancellor Merkel sought to squash talk of a Greek default or an exit from the EU. She urged European officials to "weight their words carefully" to avoid creating further turmoil in the markets. She said in a radio interview the EU would do everything in its power and use all the tools at their disposal to prevent a Greek default because a "disorderly default" would lead to domino effects as other weak countries followed suit rather than tough it out.

It appears the level of severity is finally starting to be taken seriously. President Obama weigh in on the problem when he called for euro zone leaders to show the markets they were taking responsibility for the crisis. He warned that weakness in the global economy would persist until the problem was solved.

Treasury Secretary Geithner is making an unprecedented trip to attend the meeting of EU finance ministers in Poland on Friday in an effort to push for further decisive action and speed up changes to the bailout fund.

Europe's various officials have appeared to be in opposition to each other in the past on how to deal with the problems. With the crisis weighing on their banks, markets and economies it seems there is a sudden flurry of activity and a sharper focus on the problem. They are still not together on the solution but that could happen in the next couple weeks. Inside Germany the various officials and parties are not even on the same page so there is still a lot of work to be done. The fuse is burning on the Greek powder keg and they all know time is growing short.

There were new developments outside the EU. It was confirmed that China and Italy were in talks for China to invest in Italy. They already own about $100 billion or about 4% of the outstanding debt. Late Tuesday the Italian Economic Minister said the talks were not bonds but over potential investments inside Italy. China has offered verbal support of Greece in the past but so far there has not been any significant investment. Talk is cheap and serves as a way for China to insert itself into the EU affairs in an effort to broaden its economic reach and stature.

The bottom line, Greece did not self destruct today. Italy sold debt at a record high on Tuesday but at least they were able to sell it. A Brazilian official told Reuters the BRICS were in initial talks about increasing their holdings of euro-denominated bonds in an effort to help ease the crisis. The markets may not have cheered the minor points of progress but at least they did not crash.

On the U.S. economic front the Manpower Employment Survey showed the outlook for hiring was still positive although it had declined from the last reading. The outlook for Q4 was a 5, down from 12 in Q3. However, seasonally adjusted the Q4 number was a 7 compared to an 8 for Q3. Anything over zero represents expectations to add to payrolls and under zero indicates plans to cut positions.

The weekly chain store sales rose +1.3% compared to the -0.7% decline in the prior week. Analysts claim it was rebound sales from Irene and pent up demand left over from Labor Day. The ICSC is predicting sales for all of September to rise 4% to 5%.

Import prices declined by -0.4% in August and that was the second decline in the last three months. July rose +0.3% and June declined -0.7%. This suggests global inflation is moderating. Prices were rising from 2.6% to 3.0% per month back in Mar/Apr. Some of the decline was due to the drop in oil prices in August.

Lastly the Budget Deficit for August rose to -$134.2 billion. The government received $169.3 billion and spent $303.4 billion. Revenues were up +3% but spending rose +19% compared to August 2010. The deficit for this fiscal year which ends in September is now $1.305 trillion plus whatever deficit we have in September. That excludes Social Security and the Postal Service. The current deficit projection for 2012 is $1.2 trillion. That declines to $700 billion in 2013 assuming the payroll tax cut ends and the broader tax cuts extended in 2010 expire.

The reports for today were basically filler and none really attracted the attention of the market. For tomorrow the Producer Price index is the most important. On Thursday the Philly Fed and NY Empire Surveys are the highlight. All of these are leading up to the FOMC meeting next Tuesday, which will be the biggest event for the rest of the month.

Economic Calendar

This week is the start of the mid-quarter update cycle with several companies holding analyst meetings and updating guidance. Cummins Inc (CMI), a maker of diesel engines, said they expect 2011 to be a record year. The CEO said, "Despite the current uncertainty surrounding the economic growth of some global regions, 2011 will be a record year for Cummins. He said the demand for new trucks was strong and rising fuel prices was boosting demand for more fuel efficient engines. The CEO said Cummins expected year over year growth of 14% through 2015 with $30 billion in revenue in 2015. Thank you CMI for that breath of fresh air! CMI shares gained +6% on the news.

Cisco (CSCO) also held an analyst meeting where CEO John Chambers lowered revenue growth estimates slightly. Chambers said customers were either maintaining existing order levels or were increasing them slightly. Cisco lowered revenue growth targets from 12-17% to 5-7% but raised earnings growth rates to between 7% to 9% for the next three years. Cisco has been in the tank for several years and is finding competition very tough. However, after cutting 13,000 workers and slashing costs they are back in the competitive fight. Cisco expects 40% of its growth to come from emerging markets. Margins are expected to increase to 60-62% and that was better than analysts had projected. CSCO shares rose slightly on the news.

UPS is holding a two day analyst meeting on Wednesday and Thursday and their guidance could be critical to sustain this sudden upswing in sentiment. If UPS says business is good, not outstanding or improving but just good, then the positive sentiment could continue. There are plenty of analysts that believe UPS will spoil the party and cut its outlook after the weak August period. I asked my UPS driver this week how his loads had been and he said average. He said there was no big increase in packages but there had not been any decrease either.

I quiz him a lot because the UPS package traffic is a very valid indicator of economic activity. Analysts can theorize about sales at various retailers or numbers of truck engines but UPS package volumes are the common denominator for all retail sales. Consumers can buy stuff online from Amazon, Target, Harbor Freight, Neiman Marcus, Tiffany's and millions of other retailers. They range from the lowest price points to the highest but they all ship by UPS so package traffic is the number one metric for the economy at least in my book. Let's hope UPS does not stink up the place this week.

We have heard from several sources lately that August rail car loadings and truck shipments of goods had been good in August. Not strong but no slowdown as was expected.

Best Buy (BBY) shares declined -6% after reporting profits that declined -30% and revenue that missed estimates. The retailer said customers were "willing to trade service for price" and they were buying online, at discount stores and specialty chains. Best Buy should be reaping the benefits of being the largest electronics retailer since Circuit City shutdown but they are the victims of the economic slowdown and the proliferation of smaller niche retailers and the increasing reach of the discount stores.

Best Buy has lost the implied value in its name. It is no longer the best buy in electronics. For instance a hopper can buy the same 42 inch TV and a Blue Ray player at Costco for $650 that retails for $950 at Best Buy. You give up the vast selection at Costco but you gain significantly on price. This is the problem Best Buy related in their earnings call. Shoppers are willing to forego the service and variety to save on price. BBY said same store sales declined -2.8%. Earnings declined to 47-cents from 60-cents in the comparison quarter. Analyst estimates were 52-cents. They reaffirmed full year guidance at $51 billion and analysts were looking for $52 billion.

Intel and Google announced a new development partnership designed to accelerate Intel's entry into the Smartphone market. Intel will develop Atom processors to operate Android phones as a competitor to Microsoft's Windows phones. At the same time Microsoft and Qualcomm announced they were going to joint venture on Qualcomm's Snapdragon processor for the Window's 8 mobile hardware.

Microsoft also announced Windows 8 with a lengthy demo at the developers conference in Anaheim. Microsoft said it was giving away 5,000 tablets built by Samsung with the Window's 8 OS in an effort to generate a real buzz in the community. The tagline for Windows 8 is "Windows re-imagined" because it is supposed to be an entirely new release with major changes. Search is supposed to be integrated for both local and web content. Win-8 is more Cloud aware and it has a built in "App Store" similar to Apple's App Store in OS X Lion. Could Microsoft actually be coming back to life? Time will tell.

Amazon continues to power higher as additional secrets are revealed about its new website look and potentially a new shopping experience on the web and any mobile device. Amazon is expected to announce a tablet very soon that will be ready for shipment in Q4. Old news. However, the way it is redeveloping its website suggests a much stronger attack on mobile shoppers. One analyst thought it was going to be like the Home Shopping Network 24/7. With Amazon's new web design and product offerings you will be able to do anything from a tablet without ever leaving Amazon. You can read books, newspapers and magazines online. Watch live TV, movies and TV series. You can watch product videos before you buy and you can buy seamlessly from any device. One person familiar with the project said it should be called Amazon Everywhere. I just wish they would announce a stock split along with their tablet to put the stock price more in reach of the average investor. Long live options!

While on the topic of high dollar stock prices Apple (AAPL) may be about ready to do something with its cash hoard of nearly $100 billion by year end. Apple is generating $30-$40 billion in cash per year and there is nothing they can buy to consume all that cash. The analyst thought a special dividend was a growing possibility. Apple earnings could hit $50 a share in 2012. With the cash pile growing they will have to either issue a dividend, buyback stock or make acquisitions faster than Oracle to spend all that cash. None of that is conducive to a lower stock price so a stock split would be the only way to get the stock back to a reasonable level. Apple shares appear to be stuck in the $385 range thanks to the investor focus over Steve Jobs resignation.

Apple Chart

Stock funds saw outflows of $36 billion in August according to ICI. That was the largest outflow since late 2008. That means the herd left the building and a surprise rally leaves them on the sidelines watching the fun or chasing stock prices higher.

The Treasury Dept sold $21 billion in 10-year notes today at a record low yield of 2%. Demand was strong with a bid to cover at 3.03 compared to a normal BTC at 3.14.

With the Fed expected to introduce a new stimulus program at next Tuesday's FOMC meeting the outlook is for lower rates ahead. In theory the Fed will start buying farther out on the curve in the 5-10 year range to force longer term rates lower and force cash out of money markets and back into equities, real estate and businesses.

The S&P rallied +10 points on slightly less than average volume and it was the second consecutive gain. However, the pattern is still bearish with a lower low and a lower high. What we are seeing is a small oversold bounce from the touch of 1140 on Monday. Resistance remains 1175 as we approach the Philly Fed survey on Thursday and option expiration on Friday. Also, the Italian lower house of Parliament is set to vote on the austerity package on Wednesday. There are plenty of potholes in the road ahead and investors are not rushing to get long. They are nibbling at some longs ahead of the FOMC meeting but volume is only mediocre. The S&P needs to more over 1175 to attract attention and then over 1205 to break the curse. Initial support is 1140.

S&P Chart

The Dow was even more lackluster than the S&P. The rebound stalled at very light resistance at 11,100 and it is definitely a lower high and nowhere close to downtrend resistance. This is a bearish chart and the mediocre volume on the rebound is another negative sign. There are simply too many high profile events in the near future for cautious traders to load up on longs.

Dow Chart

The Nasdaq was the most bullish chart with numerous tech events to generate some positive tech sentiment. Cisco, Intel, Microsoft, Qualcomm, etc, were all making headlines and the chip sector benefitted. The SOX broke out to 366 and a five week high. Despite the bullishness the Nasdaq still has a lower high but unlike the Dow-SPX it did not make a lower low.

Nasdaq Chart

Semiconductor Index

Russell Chart

The most important even for Wednesday is the vote in the lower house of Parliament in Italy for the implementation of the austerity program. The upper house has already passed it.

We hear every day about a potential Greek default. That is no longer the real issue. They will probably default in some manner and the market will get over it. The real problem is Italy and Spain and avoiding a terminal problem in those countries. The vote on Wednesday is one key step in avoiding a Greek type event in Italy. The EFSF bailout fund is not nearly big enough to handle problems in Italy and Spain. This is another reason why the EU has to get its act together quickly to solve the smaller problem in Greece before the contagion spreads and one of the larger countries begins to head for the ICU.

I believe traders want to get long before next Tuesday's FOMC meeting but the various European events are holding them back. The charts are bearish, volume was mediocre and after two consecutive days in positive territory we are pressing our luck. The damage may have been done in August and that could limit any further selling but we need to at least hold over current support for the next week in order to build confidence that there is not a new low in our future.

Despite being oversold we were unable to generate a significant short covering rally today. That bothers me. I am neutral unless volume picks up and we move over initial resistance at 1175 on the S&P.

Jim Brown

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