Fund managers are counting the minutes left in the third quarter in hopes of escaping with near record gains. Managers are hoping their window dressing holds up for at least one more day so they can book their Q3 profits and cement year end bonuses.

Market Stats Table

Fund managers had to overcome an opening dip this morning in their effort to keep stocks up through the end of the quarter. The dip came from an unexpected drop in Consumer Confidence. Confidence for September was expected to rise to 58.8 from 54.1 in August. Instead confidence fell in September to 53.1. This reversal of fortune was reportedly due to concerns about jobs, credit and the economy. Apparently consumers are not convinced the economy is in rebound mode according to Lynn Franco head of consumer research. The number of consumers viewing jobs as plentiful fell to its lowest level since 1983 at 3.4%. Those planning on buying a car fell from 5.3 to 4.4% and those planning on buying a home fell from 3.0% to 2.3%. The present conditions component fell from 25.4 to 22.7 while the 6-month expectations component remained relatively flat at 73.3.

In another survey consumers said they planned to spend significantly less for Halloween. Strangely consumers also expressed concerns that the stock market could face a rocky road for the rest of the year. Since the consumer herd is normally a trend following sentiment indicator the fact they are anticipating a decline is unusual.

Consumer Confidence Chart

In the seemingly never ending stream of Case Shiller home price reports the 20-city index improved again to ONLY a -13.3% decline over the last 12 months. This is up from better than a 19% decline back in January. Conditions are improving but remember this is a rolling 12-month period. As the backend of the 12 months approaches the Nov-08 to Jan-09 bottom the rate of improvement will accelerate in percentage terms even though the actual prices may not be moving higher. Basically prices in the comparison month from a year ago are still dropping sharply as we approach the bottom in the market around year-end 2008. The index released today was also a very lagging number covering the July 2009 period. At 60-90 days behind reality we should see the biggest gains reported in the Feb/Mar 2010 time frame when the numbers for Dec/Jan are reported. That period should show dramatic improvement just as we head into the 2010 buying season beginning in March. That should boost consumer confidence and stimulate consumers to turn loose of their wallets unless the economy takes another dip over the next couple months.

Wednesday is a big day for economics with the last revision of the Q2 GDP, the NAPM-NY and the ISM Chicago. The GDP is expected to finish at -1.10% but some estimates are now projecting as low as -1.5%. The ISM Chicago is expected to rise slightly into expansion territory to 52.0 from 50.0 in August. These reports could produce some market volatility but for the last day of the quarter the fund managers will try to overcome any opening dip one more time in hopes of a positive close for September.

The big report for the week is still the Non-Farm Payrolls on Friday. Expectations are for a loss of -188,000 jobs but that may change on Thursday. The Challenger employment report and the Monster Employment Index on Thursday will allow analysts to fine tune their projections for the non-farm payrolls.

Goldman Sachs and Vanguard Group went on record with public comments about the proposed SEC rules to limit short selling. The SEC is talking about bringing back the uptick rule even though the majority of analysts claim it has no value in today's widespread and diverse electronic market. It made sense when all the trades occurred on the NYSE floor but it does not make sense when there are a dozen electronic and private exchanges. The price on any exchange may not be the same price on the NYSE. It may be higher or lower by a few pennies and can up ticking up or down in relation to the NYSE price. There were multiple companies opposing the new SEC rules but there were some in agreement. T Rowe Price sent a letter supporting the proposed rules.

Also being discussed were rules on what funds could do with the funds received from loaning stock for short selling. When a fund owns shares they sometimes loan those shares in the market to traders wanting to sell them short. I think this is ludicrous that you would loan somebody bullets to use against you because these funds are ultimately long the stock as a long-term holding. Funds do receive a loan fee for loaning out their shares. It is trivial but if you own millions of shares of various companies I guess it could add up to some additional income. Now the government wants to restrict what these funds can do with the money they receive for loaning shares. Reportedly these funds were actually investing this money in speculative trades. I know you are as shocked as I was to learn that funds were trying to use their profits to make more profit. Since this was basically free money, they were investing in high risk ventures to try and spike returns. The government wants to restrict these funds from investing the money in a risky venture. The government wants to restrict them to safe investments like money market funds. Huh?

Ok, follow my train of thought. Say I own through a fund 1,000 shares each of 20 different stocks. If the fund loans my shares unbeknownst to me and collects $200 a month in loan fees then invests those fees in some speculative stock I really have not lost any money. This is free money. It is like playing with the house money in Vegas and I would want them to take some risks with the house money. If they put the $200 in a money market so I can earn an extra .5% then it is a waste of time. They will spend more time collecting and managing that money, which will then get eaten up in expenses.

Why is the government interfering in private enterprise? If I am unhappy with the returns I am getting from my mutual fund I will change funds. I don't need the government to "protect me" from a potential loss of money I did not know I had. This is probably a disguised move by regulators to make it unprofitable to loan stocks and therefore make it harder for people to sell short. I also assume this is a result of things like the Madoff scandal where funds did not do their homework and investors in those funds lost money. Life is tough and sometimes bad things happen but that does not mean the government needs to legislate every single detail in our lives. End of rant.

While I am on the topic of government the Senate Finance Committee voted down a public option to a health plan on two separate votes today. The last vote was 15-8 and the measure failed because of the cost of a public option more than a partisan objection to the concept. HMO stocks had been hammered for big losses this week after the public option came back into the discussion. For instance WLP was down -11% for the week. AET -9% and UNH -12%. These stocks spiked late in the afternoon after the public option defeat in committee. The public option is far from dead and I would avoid those stocks until an eventual bill is passed.

After the bell Nike (NKE) reported earnings of $1.04 compared to consensus estimates of 97-cents. This was the first expansion of earnings by Nike in four quarters. There was a huge range of estimates from 82-cents to as high as $1.16 per share. The earnings were the result of strong cost cutting and a lower tax rate. This offset the -12% decline in revenue. Nike is facing tough comparisons due to the Beijing Olympics spiking sporting goods sales a year ago. Futures orders for goods to be delivered from now through January fell -6%. Despite the decline in sales the stock spiked nearly $3 in after hours.

Nike Chart

Darden Restaurants (DRI) (Olive Garden, Red Lobster and others) reported quarterly profits that rose +15% despite a -5.3% drop in sales. Darden said the cost of food declined and improved margins. Profits came in at 67-cents compared to consensus estimates of 66-cents. Darden said consumers were eating out less and they lowered their forecast for the full year to $2.59-$2.85 and said the lower end of the range was more likely. DRI stock price was very volatile in after hours and ended the session down over $2.

Darden Chart

Also after the bell Toyota (TM) recalled 3.8 million Toyota and Lexus vehicles to fix a problem caused by the floor mats. Toyota said the floor mat can force the accelerator to stick in the down position and was responsible for the death of four in a Lexus crash in San Diego last month. The car was doing over 120 when it crashed due to a stuck accelerator. Toyota said all owners of the 3.8 million vehicles should immediately remove the driver's floor mats. The announcement came after post market trading ended so there was no change in the stock price.

The FDIC warned of a coming wave of bank failures that could top $100 billion. The FDIC said it would ask member banks to prepay their deposit insurance for the next three years in order to raise $45 billion to keep the FIDC afloat. The FDIC only had a little over $10 billion in the insurance fund at the end of the second quarter. As of Wednesday that fund will go negative after recent bank failures and higher than expected fund losses. The FDIC has a separate pool of $32 billion in reserve but needs to raise money to cover the future wave of failures. The FDIC said HUNDREDS of banks could fail over the coming months. The problem bank list was 416 as of the end of June and that is expected to have grown larger over the last quarter. So far in 2009 95 banks have failed and many more are on life support as the FDIC looks for potential buyers. Member banks already coughed up $5.6 billion in a special assessment to help the FDIC get through the second quarter. FDIC chair Shelia Bair is desperately trying to avoid the spectacle of a public bailout of the FDIC. By going back to the member banks for additional funding she hopes to avoid the horror show that would be a FDIC bailout. Also, by asking for a prepayment of three years of insurance fees the banking community can actually book it as a loan rather than a fee and not be hit with the expense all at once. Many banks spread thin in this economy dipped into the loss column after the Q2 special assessment sucked needed capital out of the banks loan funds and into the expense column.

The Fed is proposing more changes for Banks who issue credit cards. They are proposing lower interest, lower fees and new rules about when those fees can be charged. With credit card delinquencies a 7.58% at Bank America, 4.83% at Capital One and 4.2% at American Express we are rapidly approaching a point where it will only be profitable to extend credit to people if their credit score is over 800. If a bank is charging off 4-5% of its loans per month it is taking a huge capital hit every month. They have to make up that loss somewhere. I am not a fan of the high fees and rates but I understand the necessity.

In my continuing update of changes in the credit rules and credit line cancellations I have another one for you today. Don't call Bank America and complain about your interest rate. That will get your account cancelled whether you have a balance or not. Even people with credit scores over 800 are being cancelled for complaining. Seems they don't want complainers in their ranks. Keep quiet, pay your bill and maybe they will leave your credit line alone.

A year ago on Sept-29th 2008 the Dow fell -777.68 points when the House voted down the economic bailout. The S&P hit a high of 1209 and a low of 1106 on that fateful day. Those levels have not been seen since with the S&P touching a high of 1080 last week after hitting a low of 666 in March. That was a +62% rebound in the S&P in less than a year.

A month ago the S&P was just over 1000 and Doug Kass made a market moving call of a market top and a -10% decline by year-end. He said he was aggressively shorting equities in anticipation of that decline. So how is that working for you Doug?

The Dow rallied a record +1338.81 in Q4 1998 and is very close to breaking that record. As of Tuesday's close the Dow was up +1295 for the quarter. As we saw the market makers pin the Dow on 9/11/09 to the same exact level it was on 9/11/01 we know they can play games with the headline number. With fund managers still trying to dress up the quarter there should be an upside bias on Wednesday.

After Wednesday's close I remain skeptical of further market gains. When the S&P hit 1080 last week that was 20% over the 200-day moving average. The markets have gone from 20% under to 20% over the 200-day only three times in its history. 1932, 1938 and 1975. In all three cases it was followed by a correction that averaged a loss of -12%. Of course the 2008 recession was the worst recession since the great depression so predicting the future by looking at the past is a tough challenge.

Regardless of ancient history the current markets are still over bought and in danger once the quarter ends. I heard several more analysts on Tuesday calling for a 6-8% pullback sometime in October. All were suggesting we buy the dip. Another one was predicting Dow 10,000 this week so there is no consensus of opinion. I am in full agreement on buying the dip but I have no estimate for any potential pullback. We are entering uncharted territory with a myriad of factors that will weigh on and support the markets in Q4. I would simply suggest that we buy the dips only not as aggressively as you might have a month ago. Let's see what the market is going to do before taking out a loan on the kids to bet on equities.

The Dow rallied on Monday to 9820 and +140 points and did not even reach the initial resistance level of 9850 from the prior week. Volume on Monday was dismal at only 6.8 billion shares due to the Yom Kippur holiday. Tuesday barely broke 8.3 billion shares. These moves have occurred while nobody was home or at least nobody was trading. This is part of quarter end. Fund managers are holding what they want to hold over quarter end but what they do next week will be the key. End of quarter retirement contributions and the Friday jobs report will likely keep the markets relatively stable for the rest of the week but I would be careful the rest of the month.

Believe it or not the Q3 earnings cycle begins next Wednesday when Dow component Alcoa reports earnings. Since Q3 earnings are expected to be up significantly over Q3-08 this may keep some funds invested until the first big earnings week and options expiration. There are dozens of market factors to consider and the next few weeks could be very volatile. Tuesday's intraday spike failed at 9834 and we closed on the low for the day. Support on the Dow is 9650, 9500 and 9300.

Dow Chart

The S&P is a clone of the Dow with a slightly lower high and uptrend still intact. The 30-day average at 1035 should be initial support and a break there targets 978. This is a big cap market since scared or confused traders tend to bet on big caps rather than small caps. Watch 1035 for a signal for market direction.

S&P-500 Chart

The Nasdaq was pulled lower by a -1.4% decline in the chip stocks. However, the Nasdaq remained stubbornly over the 2100 level and held most of Monday's gains. RIMM recovered slightly with a $1 gain but the rest of the big cap techs ended in the red. I would watch for a break of support a 2100 as a signal to abandon tech positions until we see where the market is going to take us. There are numerous support levels down to about 1950 where the Nasdaq could rest without any serious harm.

Nasdaq Chart

Semiconductor Index Chart

The Russell is holding up far better than I would have expected. This suggests the fund managers are not yet fleeing to the safety of cash. Continued strength in the small caps suggests fund manager sentiment is still positive and we should continue buying the dips. If the Russell begins to break down it would be a signal the rats are about to flee the ship.

Russell 2000 Chart

In case I was not clear above I would still be in buy the dip mode until proven wrong by the failure of initial support. I would view that support as 600 on the Russell and 1040 on the S&P. If those levels break I would target a bigger decline to go long again with SPX 1000 the initial target. There are a lot of factors at work in addition to the end of quarter window dressing. Economics are becoming critical as well as Q3 earnings. Lots of potential potholes for the market to traverse but we know the bulls like to climb the wall of worry.

Sell too soon! Nobody ever went broke taking a profit.

Jim Brown