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schaeffer's opening view

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    I thought a few might like to have a read of this.


    Wednesday's Opening View: Fall into the Trade Gap
    By Al Schwartz ([email protected]) and John Stewart ([email protected])
    3/10/2004 9:25:58 AM


    The two trading sessions under our belts this week have yielded two negatives. The S&P 500 Index continues to be the strongest of our triad, holding onto a 2.58-percent year-to-date gain. The Dow is clinging to a 0.03-percent gain, while the Nasdaq is now negative by 0.41 percent. So far this week, there has been little reason to be a buyer, as traders have been exposed to second-tier economic data and a not-so-star-filled earnings calendar. Maybe investors can be enticed back into the market with some positive news released by Proctor & Gamble after yesterday's close. The company said that it would beat third-quarter estimates, announced a 2:1 split, raised guidance, and raised its annual dividend to $2.00 per share. Now it just doesn't get any better than that!

    Equity option activity on the CBOE yesterday had 545,759 put contracts trade compared to 637,026 call contracts. The resultant 0.857 single-session put/call ratio has yanked the 21-day moving average higher to 0.606. The CBOE Market Volatility Index, SPX implied (VIX – 16.60) added 5.13 percent (OEX implied, VXO – 16.37, up 6.78 percent). The Nasdaq-100 Trust Volatility Index (QQV – 22.29) fell 0.54 percent and the CBOE Nasdaq Market Volatility Index (VXN – 24.70) rose 2.57 percent.
    Everyday I list these so called "fear gauges," with little to no explanation as to the potential market ramifications. Most of the time I view them as more of a measurement of the historical volatilities of the underlying index, and only on rare occasions is a comment worth throwing out. As far as I am concerned, the VXO is still the benchmark that holds my attention and " Bernie's Latest Commentary " on that index is worth taking your time to read. Keep those thoughts in the back of your mind as we move forward.

    Yesterday's internals showed a broad decline on strong volume. Volume on the NYSE came in at a "strong" 1.48 billion shares. The advance/decline ratio remained fragile at 0.60 (1,233 advancing issues to 2,044 declining issues). The 170 new annual highs slid past the eight new annual lows. Volume on the Nasdaq came in at a "strong" 983 million shares. The advance/decline ratio was a sickly 0.47 (1,005 advancing issues to 2,153 declining issues). New annual highs looked terrible at just 95, while new annual lows made it to 11.
    I've had numerous inquiries as to what constitutes strong or substantial volume. In the future, I'll use the 10-day and 20-day moving averages as the area of demarcation. Above both trendlines="strong," within these trendlines="average," and beneath both trendlines="anemic."

    As for today, the Mortgage Bankers Association (MBA) Refinancing Index for the week ending March 6 is scheduled for release at 7:00 a.m. In the prior week, the index rose by 5.1 percent. This index has been quite choppy over the past several months, failing to establish a trend or bias. As such it has had no impact on the market. The MBA refinancing index rose by 6.4 percent last week. Additionally, the purchase index rose by 2.9 percent, bolstering the composite MBA Index to a 4.9-percent rise.

    At 8:30 a.m., the January international trade deficit is expected to have narrowed ever so slightly to $42.0 billion versus December's $42.48 billion short fall. The U.S. deficit in international trade of goods and services in December was the largest since the March 2003 deficit of $42.95 billion. Serving as a wedge to widen the December gap, the nation's energy bill swelled to $10.97 billion from $9.95 billion in November. The quantity of foreign crude purchased was 317.38 million barrels, up from 290.21 million in November. In dollar value, the U.S. imported a total $8.62 billion of crude oil in January, up from $7.70 billion in November. I would tend to think that a much wider surprise in the deficit would be dollar negative. Just in: U.S. trade gap burgeoned to a record high $43.06 billion. Exports decline by 1.2 percent to $89.05 billion, while imports slipped 0.5 percent to $132.10 billion. The December trade gap was revised deeper to $42.69 billion from the initially stated $42.48 billion.

    At 10:00 a.m., January wholesale inventories is expected to show a rise of 0.4 percent, moderating somewhat from December's 0.6-percent growth. Bolstering the December figure, auto inventories advanced by 3.0 percent, marking the largest increase since December 1998. Sales grew at a faster pace than inventories, as the inventory-to-sales ratio dropped to 1.17 from 1.18 in November. Wholesalers (as well as retailers) have maintained inventories at bare bones levels, failing to build anticipatory backlogs in the face of an apparent economic recovery. This failure to accumulate inventories may well be one reason for the lack of increasing employment numbers.

    In futures trading, the March 2004 contracts on the SPX (1140.58, minus 0.58 percent). Due to technical difficulties, numbers for the DJIA and the NDX are unavailable this morning. At this point in time session lows and highs: SP/H4 (1135.90/1141.70).

    Overseas markets are painting a rather glum picture, as none of the 15 market that we tracks are currently positive. The cumulative average return on the group stands at a negative 0.695 percent.

    The U.S. Dollar Index (DX/Y – 88.29) gained 0.29 points yesterday, due mostly to strong gains versus the British pound. The weak domestic labor report put a cap on recent dollar gains. But weaker-than-expected foreign economic reports helped balance out the currency, as the U.S. dollar advanced versus all but the yen, peso, and the franc in our collection of currencies. Before the release of the U.S. trade deficit, the DX/Y was positive and the U.S. dollar was higher versus the euro, pound, real, and franc:
    Currency/ Last/ Change
    U.S. Dollar Index (DX/Y)/ 88.5100/ 0.22000
    euro ($/€)/ 1.2298/ -0.00740
    British pound ($/BP)/ 1.8206/ -0.01280
    Japanese yen (¥/$)/ 110.8647/ 0.00220
    Brazilian real (R/$)/ 2.8840/ -0.00024
    Mexican peso (P/$)/ 10.9135/ 0.00034
    Canadian dollar (CD/$)/ 1.3214/ 0.00120
    Swiss Franc (F/$)/ 1.2812/ -0.00360

    The April future contract on gold (GC/J4 – 404.50) gained $3.60 per ounce on the regular trading session yesterday after trading as high as $406.40. An agreement between European central banks that limited gold sales helped to support the rally in gold prices. Nevertheless, the direction of the euro remains the primary driver of the direction of gold prices. A weaker dollar versus the euro yesterday was one of the factors for gold's gains, as its investment value is seen as inversely related to the relative value of the dollar. The gold contract is currently lower by $2.00 to $402.50, while London spot was quoted at $401.00/401.80.

    The March future contract on the 30-year bond (US/H4 – 116'27) was up 20/32 in yesterday's trading and moved above the 117 level for the first time since last June. Treasuries were higher for the fourth consecutive session, as traders are now forming a consensus that the Federal Reserve will be holding short-term target interest rates low for a longer period of time than originally expected. Bond prices move inversely with interest rate movements. The market is now pricing in that it will be at least September before the Fed considers raising its federal funds target rate above one percent. A weak job market is one of the Fed's main concerns and the biggest reason why many people believe that it will still be some time before the Fed will raise rates. The yields on the two-year and 10-year notes stood at 1.488 percent and 3.719 percent, respectively, dropping as the notes rose. The 2-30 year yield spread stood 318 basis points.

    With yield dropping to eight-month lows, there appeared to be a little profit taking in both Tokyo and London trading. Additionally, traders may be a little cautious ahead of today's $16 billion U.S. treasury auction of five-year notes and the release of the U.S. Trade deficit figure. I think that I would watch the response of the U.S. dollar in reaction to the announcement of the trade deficit more so than the actual figure. That will be a better gauge as to what treasurys will do. A falling U.S. dollar would seem to indicate a rise in treasurys:
    Two-year note was at 100-8/32 down 1/32 to yield 1.50 percent
    Five-year note was at 101-16/32 down 2/32 to yield 2.67 percent
    10-year note was at 102-6/32 down 2/32 to yield 3.73 percent
    30-year bond was at 110-18/32 down 3/32 to yield 4.68 percent
    The yield curve, as measured by the 2-30-year yield spread, held at 318 basis points.

    The April contract on sweet crude oil (CL/J4 – 36.28) fell by 29 cents yesterday, as some resistance was felt from oil prices in 52-week high territory. Today's release of the weekly reports on domestic petroleum supplies should be a driver for oil prices in the near term. Crude prices have been moving higher mainly due to a supply crunch caused by increased demand and anticipated cuts in production from OPEC. Any sign that supply is stabilizing should help push the price of oil back down, at least for the short term.

    The EIA raised its U.S. retail gasoline price forecasts for spring and summer yesterday, projecting that national monthly average regular gasoline prices will peak this spring at a record high of about $1.83 a gallon. Retail gasoline prices are now seen averaging about $1.74 a gallon this summer, a record in nominal dollar terms and the highest inflation-adjusted summer average since 1985. For all of 2004, the U.S. Department of Energy's statistics arm sees gasoline prices averaging $1.67 a gallon, 10 cents higher than its previous forecast. The agency still expects average U.S. crude oil prices for 2004 to be centered near $30 a barrel, but it warned that "potential spikes" remain a danger given the uncertainty over OPEC production decisions and the unrest in Venezuela. The crude contract is lower by nine cents in early trading today.

    Today's Economic Calendar :
    7:00 a.m.: MBA Refinancing Index for the week ending March 6 (last plus 5.1 percent).
    8:30 a.m.: January International Trade Deficit (last $42.48 billion).
    10:00 a.m.: January Wholesale Inventories (last, plus 0.6 percent).
 
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