After spending the entire day in negative territory the Dow managed a last minute run to end the day and the week in positive territory.

Market Statistics

When I said Friday would most likely be range bound and devoid of volatility other than the open I certainly did not expect the Dow to trade in a 40-point range for most of the day. The expiration volatility at the open caused a -60 point decline but after the first hour the volatility disappeared and it was a very boring trading day. The volatility index declined to 18.04 to match a seven-month closing low. Volume was very light for an expiration Friday at only 6.5 billion shares.

The only economic report for Friday was the ECRI Weekly Leading Index, which came in at 124.3 and a new six-month high. This index moves at a snails pace and is mostly ignored unless there is a reversal of a trend. The WLI has been trending higher since early October and is projecting a slow recovery but at least a recovery. You may remember back in May when the index suddenly collapsed from year's high at 134.7 to hit a low of 120.6 in mid July. This reversal of fortunes had analysts glued to the index but now that the trend has solidified to the upside everyone has lost interest.

Next week's calendar is chock full of events as they cram five days of reports into only three days. The biggest event is the FOMC minutes on Tuesday. This is the minutes from the November 3rd meeting where they launched the QE2 program. It will be interesting to know what the Fed was thinking behind the scenes at that meeting. This release at 2:PM on Tuesday should be the end of the trading week. Once this is published there will be a brief period of volatility and then volume will die as everyone leaves for the holiday weekend.

The second most important report is the GDP on Tuesday morning. Expectations are for an upward revision to 2.4% growth from 2.0% in the first version. The upgrade is due to a string of increasingly positive weekly reports that suggest the economy is stronger now than in Q3 and conditions in September had improved over August. The August dip appears to have just been a blip in the process and not a change in direction.

There are several regional reports from Chicago, Kansas City and Richmond but I doubt they will get much play because it is a holiday week. If you had a company that needed to restate earnings or lower guidance this is the week to do it. The odds are good you could slip in under the radar because of the heavy economic calendar and most market watchers reading the Black Friday ads rather than the news feed.

Economic Calendar

Investors will not be the only ones scanning the Black Friday ads next week. Target (TGT) said it expects to post the best holiday sales in three years. Target said those consumers with jobs have started to feel more secure and they are opening their wallets. The company expects same store sales to grow by as much as 4% in Q4. Wal-Mart expects to break a six-quarter streak of same store sales declines. Retailers started early this year with sales labeled as Black Friday deals as early as November 1st. Apparently the traditional Black Friday sales push has turned into a Black November campaign.

Verizon is pushing hard on the holiday sales pitches. One that has been playing on TV for the last several days is the "Buy one Blackberry Curve, get three free." That has got to be piling up the subscribers for Research in Motion. I know the iPhone and Android models are the hottest smart phones but there is still a dedicated crowd that loves the Blackberry. Buy one, get three free is a killer holiday promotion for businesses to use for employees and for families. I am thinking RIMM should have a good quarter.

RIMM Chart

It was a slow news day on Friday but there were some highlights in a few stocks. rallied +21 after posting earnings with better than expected guidance on Thursday. CRM had been a heavily shorted stock and the good news produced a monster short squeeze.

Walter Energy surged another $9 to $106 after saying on Thursday they were in talks with Canadian miner Western Coal about a $3.3 billion acquisition. Apparently investors liked the deal because WLT spiked to new highs and the acquirer rarely rallies that strongly. Hedge fund Audley Capital had been an activist investor in Western Coal for the last three years and had built up a 25% stake at a cost of about $25 million. At the $11.50 per share offer by Walter that stake is worth about $600 million. That is a pretty good return on your investment.

There were several deals in the coal sector last week with a total value of more than $15 billion. It sure brings home the demand story on a global basis. I wrote about China's peak coal problem in the newsletter last week and pointed out they use 47% of global coal production but have only 14% of the global coal reserves. 78% of its electricity comes from coal-fired plants. Cut off coal shipments to China and you turn off their lights.

Peabody Energy (BTU) and Cliff's Natural Resources (CLF) are rumored to be on the hunt for acquisition targets. Massey Energy (MEE) and James River Coal (JRCC) are considered to be targets.

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Green Mountain Coffee Roasters (GMCR) said it would restate financials for 2007, 2008, 2009 and the first three quarters of 2010 due to errors found in those statements. The company said it found the errors during an audit triggered by an SEC investigation into its revenue recognition practices. The errors over the four years totaled about $12 million in income overstatements based on revised recognition parameters. The stock dropped sharply in the morning in anticipation of the announcement and was halted briefly after the announcement. When it reopened in after hours it spiked +10% because the amounts were less than expected.

GMCR Chart

Boeing is preparing to announce the seventh delay in the 787 Dreamliner production schedule. At least this is what several analysts are projecting after one of the planes caught fire during a test flight. One analyst claims this next delay is already baked into the price after the -$10 drop since the fire was reported. Boeing is currently $63 and critical support is $60.

Boeing Chart

Harrah's Entertainment officially canceled its planed IPO on Friday due to lack of interest in the offering. The expected price was $15 to $19 and they were offering 31 million shares for a target of $470 million from the sale. Initially they blamed it on GM sucking all the IPO money out of the market but I believe it was more lack of interest in Harrah's than GM. I warned about the IPO last week and suggested it was one I would avoid because of the $22 billion in debt. Apollo Management Group and Texas Pacific Group paid $17.1 billion and took on $12.4 billion in debt in 2007 to take Harrah's private. Since then they have added nearly $10 billion in debt and that does not suggest a positive cash flow. If the IPO had gone off at the $19 price it would have valued the company at $6 billion and only a third of what they paid.

The financial crisis killed the U.S. casino business and those private equity firms are in trouble on this deal. In the IPO they were only offering 19% of the company for sale and doing so to raise some money for remodeling and debt payments. Also, having a public stock would offer them advantages for raising additional funds in the future. Harrah's has lost $634 million in the first nine months of 2010 making the $470 million IPO questionable at best. Interest payments are now 22% of Harrah's revenue and roughly $1.47 billion over the last nine months. It is unknown if Harrah's will attempt to refile the IPO at a cheaper price later this month. Given the rate they are bleeding cash I would say the odds are good.

The Federal Reserve purchased just under $31 billion in securities last week under the new QE2 program. They will purchase more on Monday and Tuesday next week then resume the following week. The Treasury will sell $99 billion in 2s, 5s, and 7-year notes next week. What is wrong with this picture? With the Fed buying $30 billion for every $90 billion the Treasury sells it seems like a losing battle to me. That is probably why the first $1.7 trillion in QE1 did not rescue the economy. The government is printing debt faster than the Fed is printing money.

The Ireland story has cooled and it appears they will get a bailout somewhere in the range of 60 to 120 billion euros. This will help recapitalize their banks and provide some stability. The problem mushroomed recently when depositors began withdrawing money from the banks in anticipation of a collapse of the banking system. If Ireland had imploded Spain and Portugal would have been next in line. Banks in those countries have already seen some deposit flight but not like Ireland. The fix for Ireland will fix those other countries as well but probably only for a few months.

When Greece defaults in the second quarter of 2011 it will create an entirely new wave of fiscal instability in the EU. As each day passes the potential for a Greek default increases. Currently 90% of Greek bonds are covered by Greek law. That means they could officially default by passing a new law cutting the value of the bonds in half and effectively cut their debt in half with no recourse by the bondholders. It would be ugly but better than the other option. Greek bonds are only worth 50% of face value on the market today anyway. Currently they are accepting progress payments from the IMF and others under a deal worked out several months ago. These obligations are NOT restructurable. In other words they can't default on those obligations and they will never go away.

Since Greece will need additional funding in the years ahead they can't stiff the banker. (IMF) They have to chose who to stiff and it comes down to the current bond holders. If they continue to take IMF money and pay off the bondholders they are effectively taking the equivalent of money from a loan shark to pay off a loan from their mother. Loans from mothers can be restructured or simply ignored forever. Defaulting on loans from a loan shark will get you some broken limbs and hospital time. Greece can't pay its debts and has admitted it if you read between the lines. That means they have to default on the bonds to cut down on the amount of loans they need from the IMF. Sovereign debt lawyers are betting on a second quarter default. That gets them two more progress payments from the IMF and EU before they run out of options.

Ireland's problem and its impact on our markets will go away but there are bigger Eurozone problems in our future. An official default by Greece could be the first in a long line of dominos to fall.

China announced on Friday night it was raising the reserve rate for banks for the second time this month and the fifth time this year. Banks have until November 29th to transfer another 0.5% of their total assets to the central bank. That increases the reserve rate to 18% and Goldman Sachs economists expect this rate to rise again by year-end. U.S. banks have a reserve ratio of 10%. The central banks uses these reserves to buy about $1 billion a day worth of dollars, euros and other currencies to keep the Chinese renminbi from appreciating.

China has resisted pressure from the U.S. and others to halt this daily currency intervention and let the renminbi rise in value. Beijing is forcefully arguing today that the U.S. QE2 is a de facto devaluation of the dollar. Actually they are right. China expected Bernanke to mention China as a currency manipulator in his Friday speech so they took the action before he spoke. Bernanke did point a finger at China in his speech and blaming "persistent imbalances that represent a growing financial risk" and blamed "export countries with undervalued currencies" for retarding growth in developed countries. Economists actually believe China is taking the best course of action for China in holding down the value of the renminbi. There are other actions they could take but buying dollars is considered a less forceful move. Reportedly the central bank is prepared to do whatever necessary to fend off the impact of a cheaper dollar.

They had been expected to raise rates to slow the economy but that would also raise the value of the currency. This leaves them with a conflict. If they do nothing inflation will increase. If they raise rates the currency will rise. It appears they elected to buy dollars to keep the currency low and maintain exports. The relative weakness of the renminbi to the dollar has been crucial to China's multiyear export boom and the reason the country is growing at a 10% rate.

Friday's action did not irritate the U.S. markets because it was the lightest of the multiple alternatives China could have taken. Unless some new event causes China to ratchet up their anti inflation fight we should be free of the China cloud for the next couple of weeks. When the next CPI report comes out in three weeks this problem will escalate again unless inflation suddenly declined but that would be so surprising I would suspect a bogus report. That would allow them to "overlook" the problem until the QE2 program is out of the headlines and the holiday shopping season behind us.

Finance heads from all over the world accosted Bernanke in Frankfurt on Friday. He and the Fed are taking some serious heat on the QE2 program. Dozens of nations have complained that weakening the dollar will damage their economies. The German Finance Minister called the policy "clueless." Bernanke answered his critics at the beginning of his speech saying, "The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States."

He stressed that sluggish growth, declines in inflation and an unemployment rate that has hovered near 10% for months convinced the Fed to take aggressive action. Other Fed heads came to Bernanke's aid at home and a prior hawk switched sides to come to his defense. Minneapolis Fed President Narayana Kochertakota told a conference in Chicago "I believe that QE is a move in the right direction." Cleveland Fed chief Sandra Pianalto also defended the action. However, Philly Fed President Charles Plosser is not drinking the kool aid and continues to claim the costs and risks of the program outweigh the benefits. Fed governor Kevin Warsh said the economy faced problems that monetary policy could not fix. He believes businesses need a firm regulatory and tax environment that allows them to plan for years into the future. Overall the Bernanke speech had very little impact on the market.

Unemployed workers are facing a December 1st deadline for the end of unemployment benefits. Nearly two million unemployed workers will stop receiving unemployment checks as of Dec 1st. The federal extensions have given unemployed workers an additional 73 weeks of benefits in addition to the standard 26 weeks of coverage provided by the states. Prior extensions have been paid to 9.5 million households and injected around $7 billion a month into the economy. A bill to further extend benefits was passed in the House by a vote of 258-154 but lacked the 275 votes needed to move the bill forward under the fast track rules. Republicans did not vote for it because there was no provision for funding. It would have added to the deficit. Instead, they wanted to use unspent funds from the stimulus bill to fund the extension. The odds are extremely good that the bill will eventually pass but it could be later rather than sooner with benefits retroactive. Analysts believe it will be a three-month extension. While I disagree in principal to more than two years of unemployment benefits, (why work), I think cutting off two million people three weeks before Christmas is not a good economic plan.

There are currently 8,854,206 people collecting unemployment. That is declining by about 250,000 per month as people run out of benefits and drop off the list. At the same time the number of people on food stamps is increasing dramatically. At the end of August there were 42,389,619 people on food stamps. That was an increase of 553,379 from July. The number of people on food stamps has increased +17% since August 2009. John Vogel pointed out there were 19,720,255 households on food stamps, an increase of 284,877 from July. That is a 19% increase over August 2009. Another survey showed that 42% of Americans are on some kind of government welfare and the number is growing. Obviously those unemployed and on welfare are not paying any significant amount of taxes leaving those of us who are employed to foot an ever growing welfare bill. The American system is broken. If it does not recover soon we are going to be in serious trouble even worse than the 2008 recession.

Friday was the calmest expiration Friday we have had in a long time. Despite the dip at the open the indexes slowly recovered the lost ground and moved back to strong resistance levels ahead of the normally bullish holiday week. The S&P dipped to 1189 but ended with a minor +3 point gain and a close right at 1200. The Dow eked out a close just over 11,200.

I view this close at resistance as a perfect setup for next week's normally bullish activity. In normal years the Thanksgiving week tends to have a bullish bias on low volume. Consumers seem to be in a holiday spending mood and that carries over into their investments.

If there are no new external events like Ireland or China to weigh on the markets the odds are pretty good we will move over those resistance levels and trigger some additional short covering. For the S&P the range between 1200 and strong resistance at 1225 is congested but after last week's -4% decline the bulls may be getting ready to run again. Granted -4% is not much of a correction compared to the +18% rally since the August lows but it was close enough to a 25% retracement that we can call it a correction and hope nobody notices.

The dip at Friday's open reinforced support at 1190 and the close reinforced resistance at 1200. This narrowed range gives us a clear trading plan for next week. Long over 1200, short below 1190. Analysts who get paid a lot more than I do are still projecting 1315 to 1325 for the S&P by year-end. I would be thrilled to see it happen but I am not holding my breath. A decent more over 1200 next week could rekindle the buying but getting over 1225 is still going to be a challenge.

S&P Chart

The Dow chart is as close to perfect as you can get in giving you a clear trading signal. The rebound on Friday returned exactly to strong resistance at 11,200 and Wednesday's dip confirmed strong support at 11,000. For active traders you could play the inside range but cautious traders can hardly go wrong buying the breakout or shorting the support failure. Just remember volume should be light so expect some head fakes.

Dow Chart

Tech stocks could lead us higher next week. Tech stocks normally outperform other sectors around Thanksgiving. Why retail investors tend to favor techs at this time of year is unknown but it is a historical trend.

Resistance from April at 2520 has come back into play but with only a 2 point hedge from Friday's close, almost any positive move should push us over that level and trigger additional short covering. I seriously doubt we will see a retest of the 2592 high from November 9th but we could make significant progress if the news flow does not get in the way. Support is now 2500.

Nasdaq Chart

Russell Chart

The Dow Transports rebounded back through resistance at 4800 and are just one good day away from retesting the highs at 4950. A breakout by the transports could energize the Dow and stimulate bullish sentiment. Transports and copper are considered leading indicators for the economy. Copper futures also rebounded the last three days but this time that was related more to the dollar weakness and China than economic recovery.

Dow Transports Chart

The dollar rally may have run its course now that the Euro debt problems are easing and the Fed is on a $30 billion a week pace for securities purchases. If the dollar declines, stocks and commodities will go up. For us as traders we don't want to fight the Fed and even China with all its resources is having a tough time in that same battle for currency values.

Dollar Index Chart

In summary I believe the markets are poised to move higher during Thanksgiving week assuming there are no further surprises from overseas. This week normally has a bullish bias and the markets closed right at resistance. ANY further upward movement should trigger additional short covering.

Volume will be light and that could accentuate any moves. I continue to recommend buying dips to S&P 1190 and 1175.

Don't fight the Fed!

Jim Brown

It's a recession when your neighbor loses his job: it's a depression when you lose yours. Harry S Truman