After the prior weeks rally the bull looks a little faint this week and was barely able to keep the indexes in the green. Maybe it is time to apply the electric shock paddles and restart the old bull's ticker.

Market Statistics

It fell like a down week despite the minor gains. However when you look at the charts it was just another week of consolidation in place after a week of strong gains. In fact just holding its gains from the prior week was a major accomplishment.

Friday was another slow news day with one major exception, which I will get to later. On the economic front the final reading on Consumer Sentiment for August came in at 65.7 and +2.5 points higher than the first August reading 10 days ago. That is still a four-month low but still well off the winter lows. The drag is still the current conditions component, which fell -4 points to 66.6. The expectations component rose +2 points to 65.0. Canceled credit cards and reduced credit lines were given as the main reason for the current consumer depression. I still believe the health care furor in the local news is causing consumer worry.

Consumer Sentiment Chart

We also got the Personal Income report for July on Friday and it came in unchanged. The savings rate fell to 4.2% while wage income rose slightly after eight consecutive monthly declines. As a lagging number for July this report had little impact on the markets.

Next week has several economic events that could be market movers in a low volume holiday week. The first important release is the ISM Manufacturing report on Tuesday. This is expected to show a headline number of 50.5 and the first time in expansion territory since June-2008. If we do get a number over 50 this could provide some bullish fuel for the markets.

ISM Chart with August Estimate

Next most important is the FOMC minutes on Wednesday. This will give analysts an inside look at the Fed's thought process during the August meeting. This could be highly flammable if they say anything about inflation, removing rate stimulus or hint that there are still problems in the banking sector.

The ISM Services on Thursday is rumored to show a big increase well over the consensus estimate for 48.0, which is still in contraction territory. If the ISM services also goes positive it could be a market mover except that Friday has the big report that everyone will fear.

You could not have planned a more volatile Friday if you had tried. The Non-Farm Payrolls on the last summer Friday and the Labor Day weekend. Without this report the volume would have been nonexistent. With whisper numbers as high as a small gain in jobs to a loss of as much as 350,000 there is plenty of room for surprises. The official consensus estimate is for a loss of -225,000 compared to a loss of -247,000 in July.

Jobs are seen as the primary reading on the economy. A decline in job losses will continue to be favorable but even a slight gain would be very bullish as confirmation that the rebound is underway. We know it is from the other reports but jobs are the most visible indicator for consumers. Everybody can relate to a jobs number but few consumers and investors can relate to an ISM or PMI report. If we had a positive ISM Manufacturing, ISM Services Factory Orders and Non-Farm Payrolls all in the same week the current overhead resistance would be blown away with short covering. With the jobs report being the punctuation mark on the week's worth of reports and a holiday Friday the volatility could be huge.

Economic Calendar

The major news for Friday was a surprise guidance upgrade from Intel (Nasdaq:INTC). The chipmaker quit giving mid-quarter guidance several quarters ago but Intel said business had improved so strongly from their July earnings guidance that they had to update investors. An earnings surprise from a chipmaker was just what tech stocks needed. Intel said top line revenue would now be in the range of $8.8B to $9.2B. That is up from their prior guidance of $8.1B to $8.9B just five weeks ago, which was also better than analysts expected. Intel also said gross margins would be in the upper half of the prior range.

Intel said PC makers were ordering new chips at a breakneck pace. PC makers had let inventory decline to very low levels as the recession took retail customers out of the market for new computers. PC makers are anticipating a strong upgrade cycle in October when the new Windows operating system is released. Orders from PC makers for Intel processors are very strong but that does not mean they are selling those PCs yet but probably just rebuilding inventory for the October upgrade cycle. The PC sector is on track for its worst year in nearly a decade so the surprise guidance upgrade from Intel is definitely good news. Intel share jumped +4% on the news.

Intel Chart

Also helping the Nasdaq early was a sharp spike in (Nasdaq:DELL) shares after beating the street with earnings on Thursday night. This was another example of the bar being set so low that a snake could cross it. Dell reported a -23% drop in earnings but beat estimates by +2 cents. Dell has warned repeatedly about the poor health in the PC sector but their guidance, although far from bullish, did improve. Shorts were expecting another earnings disappointment and got a short squeeze for their efforts. The chart does not show it well but Dell was trading at $14.50 just before Thursday's close and then opened at $17.26. Investors were quick to take profits at the benefit of the shorts.

Dell Chart

Apple (Nasdaq:AAPL) also helped the Nasdaq after it announced it was teaming up with China Unicom (Nyse:CHU) to sell iPhones in China. That gives Apple access to the nearly 690 million cell phone users in China. However, Apple will have to fight for market share since Nokia, Sony Erickson and Samsung already have a large portion of the smart phone market in China. Apple shares spiked early on the news then faded with the market to close only fractionally positive for the day.

Apple has an unscheduled event tentatively scheduled for Sept-9th and it appears the current iPod is going to be discontinued or at least replaced with another model. Supplies of the current iPod models are dwindling and the SKUs (stock keeping units) are being discontinued. That suggests they are being replaced with something else. It is about time for the nearly forgotten iPod to get a new lease on life with some new models.

Apple Chart

It appears the chip stocks are pointing the way to the recovery. Marvell (Nasdaq:MRVL) also reported earnings on Thursday and blew past estimates on a +23% increase in sales. Marvell was rewarded with an 8% gain on Friday. The company said they saw improvement through the quarter and were encouraged by order stabilization.

ST Microelectronics (Nyse:STM) also reported earnings and guidance and they also said they were encouraged by the increase in bookings and expected to post solid sequential revenue growth in all market segments and geographies. STM shares exploded for a +12% gain.

Not all the news was good. News broke late in the afternoon that Cerberus was closing two major funds after 71% of investors demanded their money back. That equates to $5.5 billion in investor funds. Cerberus lost 24.5% on investments in 2008 and so far this year the funds are up only +3%. It should be no surprise that investors wanted to bail when given the chance. Cerberus sent a letter to investors saying they wanted to restructure the two funds and gave investors the option to invest in the newly restructured funds with a longer lockup period or withdraw their money. Duh, tough choice. The WSJ said Cerberus expected more than 50% of investors to remain with the fund. Somebody was living in a serious state of denial.

Because so many investors asked for their money back Cerberus said they would have to create a liquidation vehicle to orderly dispose of the assets and they would charge a $28 million fee to liquidate the assets. Cerberus took a serious hit in the credibility department after they took Chrysler private and then had to take government money to survive. They also took another credibility hit then they locked up redemptions in 2008 and refused to let anyone out. Many of the investors in Cerberus are funds of funds. That means they are hedge funds themselves and they were faced with withdrawal requests and they could not get their money back from Cerberus. Frankly I am surprised that 100% of Cerberus investors did not ask for their money back.

The loss of income to Cerberus on $5.5 billion will be a major hit. However, they were probably already in trouble because of the high water mark clause. Most hedge funds have a clause that says something to the effect that they won't take commissions on fund income after a big decline until the value of the fund is back over the previous high water mark. That could have been the reason Cerberus was trying to shift investors into a new fund to get around that high water mark rule. There could be some market impact from the fund liquidation but nobody really knows what assets they are holding. Most of it is said to be investments that are not highly liquid and will take some time to sell. That suggests it is not stocks but it could be futures, currency contracts or even tankers full of oil. Nobody really knows so you can bet there will be some cautious markets next week as traders look for a sudden dumping of positions. Since they are going to create a liquidation vehicle that suggests to me that it will take some time to sell and we won't see a wholesale dumping of stocks as a result. Part of the reason the fund was only up +3% this year was that there was no cash to invest in the market. All the cash was already tied up in whatever the fund owned last year.

For those not lucky enough to have millions locked up in the Cerberus funds you may be happy to hear that Kmart has started taking layaways again. Most retailers canceled their layaway programs a couple years ago when anyone with a pulse could get a credit card. Now that you actually have to be gainfully employed with a reasonable credit score the availability of a card is much harder. To deal with the declining sales Kmart and Sears (Nasdaq:SHLD) have restarted the layaway program. You put down a deposit and you have 8-weeks to pay it off or you lose your deposit.

If you liked that one you will love this. For those of you near my age you may remember your mother using her Christmas Club account at the local bank or credit union. Those disappeared decades ago but have returned at Kmart/Sears. A Christmas Club account "was" a savings account where consumers could deposit $5-$10 a week all year and earn interest on their money until they withdrew it to spend for the holidays. The Kmart/Sears version today is a debit card where Sears will pay you 3% on your deposits made before November 14th. The 3% will be in the form of a gift card so no hard money paid out on Sears behalf. The Sears store in Grandville Michigan opened 60 new CC account in the first week they were offered. There is also a $100 limit on the 3% interest gift card. While I seriously doubt anyone will actually deposit more than $3,333 and hit that $100 gift card limit I guess they had to draw the line somewhere. Otherwise people with money market accounts paying less than 1% might transfer large sums just to get the 3% interest. Maybe it is time to teach your kids the value of saving for holiday gifts with a Christmas Club account. Oh, your kids don't buy gifts unless you give them a couple hundred bucks and drive them to the mall? How times changed.

On the subject of credit cards Credit Suisse analyst said last week that available credit lines will be cut by about 20% or -$1.2 trillion in the coming months and warned that further cuts could result from the provisions in the new credit card law. Meredith Whitney predicted that unused credit lines would be cut by 50% or around $2.7 trillion by the end of 2010. A KBW analyst said recent cuts had been in inactive accounts but that future cuts would come from customer purges. He said banks will purge customers with lower credit scores to prevent higher losses later. Also subject to be cut are those who routinely jump from bank to bank to benefit from teaser rates. Banks will want to favor loyal customers who carry reasonable balances and always pay their bills.

Starting in February the new credit card law signed by President Obama will force banks to follow new rules regarding interest rates, late charges and fees. Faced with not being able to change rates or fees on customers who are late the banks are purging those customers now to avoid being locked in when February comes. This is a prime example of the law of unintended consequences. The idea was to keep banks from charging higher fees to those that could not pay on time. Now those accounts and accounts in danger of falling into that category are being eliminated rather than risk being carried on the books for a loss. Credit lines at (Nyse:AXP), (Nyse:BAC), (Nyse:COF), (Nyse:C), (Nyse:JPM) declined by a combined $32.1 billion last month. American Express canceled 2.7 million cards that had not been used in 24 months and had no outstanding balance. Those were NOT subprime borrowers.

Along the same line retail analyst Howard Davidowitz said last week that despite positive economic signs the consumer is dying. He said the retail sector is seeing declining trends, which are almost all negative. He expects retailers will close "hundreds of thousands of stores." Also, "The consumer is over leveraged, losing their jobs and their credit is being cut almost daily." He said the country is in a death spiral and out of control. He said the only stores that might do ok are Family Dollar (Nyse:FDO), Dollar Tree (Nasdaq:DLTR), 99 Cents Only Stores and Kohls (Nyse:KSS). Kohls is in the list only because of their extreme cost controls. Davidowitz has a retail consulting firm. Wonder what he is telling his clients to do?

Evidently Sears shoppers are not buying enough appliances because Whirlpool (Nyse:WHR) announced on Friday it was closing an Evansville plant and cutting 1,100 jobs. Whirlpool is the world's biggest maker of appliances and the company said it was moving some of the jobs to its newer plants in Mexico. Thank you NAFTA.

Bradford Bank in Baltimore MD, Mainstreet Bank of Forest Lake MN and Affinity Bank of Ventura CA were closed on Friday pushing the total for the year to 84. That is three times the 2008 total for the year but still well under the last major wave of 181 banks in 1992. Richard Bove said last week he expects over 300 banks to be closed in 2009. The FDIC said last week that the number of banks on their problem bank list rose to 416 at the end of Q2 and the highest level in 15 years. That is up from 305 at the end of March. The FDIC fund declined by $2.6 billion in Q2 to close the quarter at only $10.4 billion. The FDIC has an untapped $30 billion credit line at the Fed and a similar $500 billion credit line at the Treasury. The FDIC said it expects to lose $70 billion over the next several years due to the failure of insured banks.

The Federal Reserve went back to court on Wednesday to try and prevent the names of banks from being published that have asked for and received emergency Federal funding. The Fed does not want the names and amounts made public for obvious reasons. Bloomberg sued the Fed under the Freedom of Information Act and a federal judge in New York ruled in favor of Bloomberg. The Fed filed a motion with the court on Wednesday asking the judge to not enforce her ruling saying, "Immediate release of these documents will cause irreparable harm to the institutions and to the boards ability to effectively manage the current and future financial crisis." The Fed added that public interest favors a delay, citing the potential for "significant harm that could befall not only private companies but the economy as a whole" if the information is disclosed. I don't know about you but the "harm the economy as a whole" sounds ominous coming from the Fed. Obviously they are protecting a large bank or a group of banks from failure and they don't want us to know who. Since the FDIC has shutdown 84 banks already this year including the 6th and 9th biggest bank failures ever, it makes me wonder who the Fed is protecting that the FDIC can't handle?

I am getting a lot of email recently on the commodity ETFs. Actually on the energy ETFs consisting of the (Nyse:DXO), (Nyse:UNG), (Nyse:USO), etc. The problem with the commodity ETFs is the witch-hunt going on in the administration to find somebody responsible for the spike in energy prices in 2008. The evil speculators were blamed for a while but they were eventually ruled out as not having enough skin in the game to manipulate the prices significantly. Since lawmakers want someone to get the blame in order to prove they are working in your best interests the CFTC has been told to find somebody to blame. That somebody is apparently retail investors through the commodity ETFs.

The commodity ETFs hold large quantities of futures contract in "PASSIVE" accounts. That means they don't trade them. They buy the contract when a month rolls over and they hold it until it expires. The problem in the eyes of the CFTC is the quantity they own. For instance the natural gas ETF (UNG) reportedly holds 20% of the open interest in natural gas futures contracts. As new investors buy additional shares of the UNG they issue more shares and buy more futures contracts. It is totally passive and has minimal impact on the future markets. It is a buy and hold strategy. For instance the gold ETF (Nyse:GLD) owns more than $32 billion in gold bullion. That is more gold than most central banks but they are not trading it.

During this witch-hunt the investigation into the market spikes and the trading records of the ETFs showed that the funds were actually SELLING futures contracts into the price spike as investors took profits in their ETF holdings. They also proved that the funds were BUYING futures when the prices were falling because investors were buying the dips on the ETFs. This is completely contrary to what the CFTC expected to find. In fact, if the ETFs had not existed last summer the volatility would have been greater not lower.

That puts the CFTC in a bind and a regulator in a bind is not a happy camper. The CFTC has to assign blame and come up with a magic fix that satisfies lawmakers and does not disrupt the markets. The apparent solution they are considering is position limits on the evil energy ETFs. Actually on every commodity ETF. The ETF managers are trying to dodge this bullet in advance by limiting the number of shares in the market. Several of the top energy ETF managers have ceased issuing new shares. Basically they are in liquidation mode until the CFTC issues a ruling. This has caused the ETFs in question to actually trade higher rather than lower because of the shrinking supply. The UNG is trading at 12-15% over its net asset value as some investors continue to buy the dip in natural gas by using the ETF. At the same time the ETF is not buying more gas futures. Some of the ETFs have tried to alter their strategy by purchasing swaps from third parties but this is a limited strategy because those third parties will eventually have to hedge themselves against the long-term risk.

Here is the problem. If the CFTC suddenly say the position limit per ETF is X% it is a good bet that X% will be less than the futures they currently own. That means the funds will have to do a tender offering for their own shares and sell the futures to compensate. Prices on the ETFs will drop sharply once it becomes common knowledge that the fund is selling futures. Current owners will be caught in the downdraft.

If the CFTC finds a backbone and stands up to the administration and lawmakers and says something to the effect that the markets are functioning perfectly and imposing position limits would be dangerous then ETF prices will fall. The managers will immediately issue more shares to keep up with demand and equalize to their current futures holdings and that will depress the price of the ETF.

If the CFTC does not impose position limits then I would buy the dip. Today I would probably be a holder with a tight stop on ETFs like the DXO. If a sudden announcement crushes the ETF price I want to get out at the top so I can get back in once the smoke clears. The UNG is a victim of its own success in a thin market. I suspect the price of natural gas has fallen from the $4.30 high in early August simply because the UNG was one of the first ETFs to quit issuing new shares. Without the UNG providing liquidity to the gas futures market and actually trying to redeem its shares and close futures positions the price of nat gas has fallen to new multiyear lows. Gas closed on Friday at $3. However, nat gas futures rolled over on Thursday so there were some expiration pressures as well that were probably heightened by the lack of UNG in the market.

Bottom line, hold them if you own them but keep a tight stop and don't be afraid to exit. There is always plenty of time to get back into a position once the smoke clears.

Natural Gas Futures Chart

Doug Kass made news this week with his "market has topped" declaration. Kass said that the market has more than likely peaked for 2009. Voters in an online survey voted 2:1 in agreement with his prediction. Kass believes the consumer is dry and can't afford to spend money on anything but necessities. The retail consumer is the primary driver of the economy and responsible for some 72% of the GDP. With summer over and the home buying season over that will mean the consumer is going into hibernation for the winter. He also worries that taxes are going sharply higher despite campaign promises simply because of the rapidly rising Federal deficit.

Kass is not the only one looking for a decline. Nearly every analyst/trader I heard on stock TV this week was looking for a correction. However, nearly every one of them were hoping for the correction so they could go long again. It is a question of talking their own book. They are not long and are probably short or at best flat. It is in their best interest to talk down the market. They made a lot of money buying the dips and they are looking for another payday.

However, this is where the guidance turns ugly. On Friday we had five major Nasdaq stocks all announce positive news before Friday's open. All saw a big spike in their stock prices but all shrank significantly as the day drug on. The Nasdaq opened with a spike to 2059 and closed up only +1 point at 2029. That is a -30 point decline from the highs on good news.

Granted this is month end and some people needed to take profits for the month. The entire week was a profit-taking week if you really analyze it. The S&P rebounded +55 points last week and was due for a rest. You may remember that for the prior two weeks the big challenge was watching the S&P for a breakout over 1012-1014. We got a two-day dip back to support at 980 and then a +55 point rebound well over that prior 1012-1014 resistance level. Support is now 1020 with resistance 1040. I agree that the market looks heavy but it refuses to lay down and die. Unfortunately we are coming into the worst month of the year for the markets.

Historically Aug/Sep are the two worst months with the average decline from the Aug/Sep highs to the Q4 lows of 9.3%. The Q4 lows normally occur in October. In the last 33 years the Nasdaq has been down in September 16 times, the S&P 21 times and the Dow 24 times. The wild card here is that this is not a normal year. This was the year of the great recession and we don't know how the normal trends will play out.

September is not always a loser but 66% of the time the direction is down. This is probably weighing on the mind of every professional investor this week. Once past Labor Day everyone will be walking on eggshells in hopes of getting through September alive with their portfolio intact.

September Table

If professional investors are so smart and September is going to be so bad then why is John Paulson loading up on banks now instead of a couple weeks from now? Paulson has $17 billion under management and is recognized as one of the smartest investors around. He made billions betting against the housing market in 2007-2008. He just announced a 2% purchase in Citigroup along with 168 million shares of Bank America and 2 million shares of Goldman Sachs. Paulson is supposedly who the hedge funds and institutions are watching. What does that say about the next few weeks? Of course nobody had a lock on market direction and we don't know if he is holding back some cash in hopes of averaging down. He is just an investor with a lot more money than us but also somebody the market follows.

To narrow our focus a little I checked on the days before and after Labor Day for the last 30 years. Historically the market is down two of the last three days before and is up two of the first three days after. This year we have the benefit of month end coming a week before Labor Day so any month end retirement contributions will probably be put to work before the holiday, not after. This is also a very active week for economic events and that is going to keep traders in the game instead of checking out completely for a long week off. JP Morgan is predicting the S&P will trade between 1043-1053 by Labor Day. It hit 1039.47 on Friday. I would like to see the S&P move over 1040 because that is current resistance.

In the S&P chart below the rectangles are consolidations in an uptrend. These tend to resolve in the direction of the prior trend. Volume slows in the rectangles as traders formulate a plan for the future and consolidate positions. These are perfect sucker plays for shorts. Every rectangle appears to weaken just before the next event spurs the index higher. The breakdown to support on the 17th was event driven not market driven. That was the day the China market fell -5%. Eventually the consolidation patterns will fail but you can see every dip to support was met with a strong rebound.

S&P Chart - 60 Min

The Dow topped out twice this week at the 9625 resistance high from November. It is too soon to know if this is going to be a solid top or just one more rectangle continuation pattern. Support is now 9475 and the range is pressing upward on that 9625 resistance. The Dow is a story index. Breaking news on only one stock can push the index around and 20 Dow stocks were negative on Friday. That is contrary to the broader market statistics where advancers and decliners were roughly even. Also, up volume on the S&P was 4:1 over down volume. The Dow loss on Friday was not inline with the market internals.

Dow Chart - 60 Min

The Nasdaq had every reason to rally on Friday and the rally died. The -30 point drop from the highs put it back under the 2037 resistance level. The intraday spike pushed it to nearly 2063, which is the 50% retracement from the March lows. This could be a significant resistance barrier. When you realize that Intel, Dell and Apple all had good news on Friday and the Nasdaq only kept 1 point of that spike it makes you wonder what event could power a short squeeze long enough to get over 2063? Support is now 2015 and short-term resistance 2037.

Nasdaq Chart - 60 Min

I have seriously mixed emotions for next week. We have some economic reports that could provide some significant motive power if they come in as expected. We will have thin holiday volume, which could accelerate the volatility or dampen it depending on how good the data is. We also have fear of the Non-Farm Payrolls on Friday. Do investors buy in advance of expected good news or sell in fear of bad news?

Will investors worry about September or will they hold their ground? Once past Labor Day we will be into earnings guidance season. You may remember we did not have any negative guidance in June and earnings were better than expected. Intel has already guided higher twice this quarter. Is that going to translate into better guidance from other tech stocks? We already got that from MRVL and STM on Friday.

I think as an investor we should continue to buy the dips but be increasingly more selective on those dips because the law of averages suggests we will get a significant drop eventually. As traders I would look to be short term short under S&P-1020 and look to buy a bounce at 1000 and 980. Until a dip appears I would want to be cautiously long over 1020. If the majority of traders are flat or short next week and looking for a decline into September that means any rally should be met with additional buying as those traders chase the market higher. This is going to be a confusing week so watch SPX 1020 for market direction.

Jim Brown