Market Week in Review

S&P 500 1,186.57 -.78%



Click here for the Weekly Wrap by Briefing.com.

BOTTOM LINE: Overall, last week's market performance was negative considering the rise in long-term rates, mixed economic data and mostly lower energy prices. The advance/decline line fell, almost every sector declined and volume was above average on the week. Measures of investor anxiety were mostly higher. Moreover, the AAII % Bulls fell sharply for the week and is now below average levels, which is a big positive. One more short period of weakness for equities is possible, however stocks have likely seen their lows for the year. I continue to believe the major averages will finish the year strongly. The average 30-year mortgage rate rose to 6.03%, but is still only 82 basis points above all-time lows set in June 2003 and slightly lower than 2005 highs of 6.04% set in April. The benchmark 10-year T-note yield rose 11 basis points on the week as investors worried high energy prices would eventually lead to higher inflation. I continue to believe it is very reckless for the Fed to speak incessantly about inflation considering it is only near average levels by historic standards and a large component of inflation is expectations. There is little evidence that companies are able to pass along higher raw materials prices to consumers at this point. The US dollar rose on the week, spurred by expectations of higher interest rates. The strength in the dollar led to profit-taking in gold. Unleaded Gas futures have now plunged almost 45% since September highs even as refinery utilization remains well below normal. Moreover, natural gas saw another inventory build this week even as a substantial amount of daily Gulf of Mexico production remains shut-in. Natural Gas supplies are now about 2% above the five-year average for this time of the year heading into the winter. I continue to believe global energy demand destruction, which began a number of months ago, has accelerated meaningfully over the last few weeks and will send energy prices substantially lower over the intermediate-term.

*5-day % Change

Weekly Scoreboard*

Indices
S&P 500 1,186.57 -.78%
DJIA 10,287.34 -.05%
NASDAQ 2,064.83 -1.22%
Russell 2000 633.15 -1.73%
DJ Wilshire 5000 11,823.35 -.99%
S&P Equity Long/Short Index 1,060.16 -1.19%
S&P Barra Growth 571.57 -.15%
S&P Barra Value 610.78 -1.38%
Morgan Stanley Consumer 579.30 +.14%
Morgan Stanley Cyclical 690.69 -2.14%
Morgan Stanley Technology 489.63 -1.10%
Transports 3,638.61 -1.09%
Utilities 394.06 -4.77%
S&P 500 Cum A/D Line 6,198.00 -8.84%
Bloomberg Crude Oil % Bulls 47.0 +75.37%
Put/Call 1.05 +12.90%
NYSE Arms .67 -41.23%
Volatility(VIX) 14.87 -.60%
ISE Sentiment 159.0 -.63%
AAII % Bulls 38.96 -22.08%
US Dollar 89.46 +.44%
CRB 327.64 +.75%

Futures Spot Prices
Crude Oil 62.63 +1.34%
Unleaded Gasoline 174.86 -4.19%
Natural Gas 13.22 -.08%
Heating Oil 195.00 -.76%
Gold 471.90 -1.25%
Base Metals 131.68 -1.44%
Copper 176.30 -2.35%
10-year US Treasury Yield 4.48% +2.52%
Average 30-year Mortgage Rate 6.03% +.84%

Leading Sectors
Airlines +1.13%
Restaurants +.50%
Software +.45%

Lagging Sectors
Utilities -4.77%
Gold & Silver -5.24%
Alternative Energy -6.57%

One-Week High-Volume Gainers
One-Week High-Volume Losers

*5-Day % Change

***Alert***

Due to market volatility, I am unable to post the Mid-day Scoreboard. I will post the Weekly Scoreboard this evening. I am 75% net long and expect stocks to maintain gains into the close. Have a great weekend.

Today's Headlines

Bloomberg:
- A global effort to stem the spread of the deadly bird flu virus may help prevent an influenza pandemic, the World Health Organization said.
- Saddam Hussein’s trial on charges of crimes against humanity will start on time next week after his lawyers failed to get the proceedings delayed.
- GE’s third-quarter earnings climbed 15%, bolstered by higher demand for products ranging from credit cards to jet engines and the sale of a stake in a mortgage- and life-insurance company.
- Genentech’s Avastin, a drug intended for colon, lung and other cancers, may become more widely used as a treatment for a common cause of blindness.
- Electronic Arts signed film director Steven Spielberg to help create three games as the company tries to revive sales.
- Occidental Petroleum’s agreement to buy Vintage Petroleum values Vintage’s oil and gas fields between $8.50 and $9 a barrel versus $10.15 a barrel that Chevron paid for Unocal and $10.66 that China National Petroleum plans to spend for PetroKazakhstan, according to analysts.
- Bill Dudley said today that he is stepping down as chief US economist for Goldman Sachs at the end of next month.
- Crude oil is falling and gasoline is plunging to a 12-week low on indications that near-record prices are reducing fuel consumption in the US.

Wall Street Journal:
- EMC and other data storage companies are reaping a bonanza as large amounts of data overwhelm computers.
- Verizon Communications has been under pressure from cable companies’ Internet-based phone services, and if a joint venture of Google and Comcast acquires a minority stake in AOL, it will make matters worse.

ABC News:
- Saudi Arabia is pumping more than 10 million barrels of crude oil a day this month versus 9.58 million barrels/day during September, citing the nation’s leader King Abdullah.

NY Times:
- Five robots completed a 132-mile course in the Nevada desert in a milestone for artificial-intelligence research.
- Anadarko Petroleum is leading a number of companies that are seeking to find more oil and natural gas in the deep waters of the Gulf of Mexico.

Reuters:
- The Chicago Board of Trade still plans to proceed with its IPO next week even as futures brokerage Refco faces greater scrutiny and customers defect.

Inflation Tame Ex Energy, Retail Sales Remain Firm, Industrial Production Falls and Confidence Stays Low

- The Consumer Price Index for September rose 1.2% versus estimates of a .9% increase and a .5% gain in August.
- The CPI Ex Food and Energy for September rose .1% versus estimates of a .2% gain and a .1% rise in August.
- Advance Retail Sales for September rose .2% versus estimates of a .5% gain and a 1.9% decline in August.
- Retail Sales Less Autos for September rose 1.1% versus estimates of a .8% gain and a 1.0% increase in August.
- Industrial Production for September fell 1.3% versus estimates of a .4% decline and a .2% increase in August.
- Capacity Utilization for September fell to 78.6% versus estimates of 79.4% and 79.8% in August.
- Preliminary Univ. of Mich. Consumer Confidence for October fell to 75.4 versus estimates of 80.0 and a reading of 76.9 in September.

BOTTOM LINE: US consumer prices jumped last month after Hurricanes Katrina and Rita, Bloomberg reported. The core inflation rate hasn’t accelerated since March, suggesting companies can’t pass along higher raw materials price to consumers. Computer prices declined .8% after a 3.1% fall in the prior month. They are 18% cheaper than at this time last year. The cost of clothing also fell .1%, airfares fell 1.4% and used cars prices declined .4%. I expect the CPI to decelerate meaningfully over the intermediate-term as unit labor costs decelerate and commodity prices fall.

Sales at US retailers rose .2% last month as consumers spent more to fill up their gas tanks and bought furniture and electronics for their homes, Bloomberg said. Rising incomes and home equity have given Americans the means to increase spending even as gas prices rose. Sales at electronics and appliance stores rose .8%, furniture sales rose 1.2%, restaurant sales rose .2% and general merchandise sales rose .9%. September was the fourth warmest in 111 years which led to a .2% decline in clothing sales. I expect retail sales to accelerate into year-end on colder weather, lower energy prices and better consumer confidence.

US industrial production plunged 1.3% in September, the biggest drop in 23 years. However, excluding the effects of the hurricanes and lost production due to the Boeing strike, industrial production rose about .90%, according top economists. Capacity Utilization fell which suggests inflation will decelerate going forward. I expect industrial production to bounce back as the effects of the hurricanes diminish.

US consumer confidence unexpectedly fell for a third month to the lowest in more than 13 years as concerns persisted about high energy prices and hurricane-related economic disruption. The current conditions component of the index fell to 95.7 from 98.1 in September and the expectations component fell to 62.4 from 63.3. Consumers forecast inflation will accelerate to 3.1%, the fastest since 1997. However, unleaded gas futures have plunged 42.0% since September highs. I continue to believe sentiment will rebound strongly into year-end as energy prices fall, job growth bounces, interest rates remain low and the economy strengthens.

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