Prague Twin

Saturday, May 13, 2006

Profesional take on the Market

You may have read what I said below. Now hear what the profesionals had to say...

[BRIEFING.COM] Stocks tumbled for a second straight day as realization that interest rates are still going higher, perhaps much higher than what has been priced into the market so far, prompted broad-based consolidation which closed all three major averages down at least 1.0%. The absence of any notable leadership, as all ten economic sectors finished in negative territory, and above average volume to the downside lending even more conviction behind another dismal performance, kept buyers sidelined heading into the weekend.

Before the bell, investors found some comfort after the U.S. Trade Deficit unexpectedly narrowed for a second straight month in March to $62 bln. However, realizing that such a decline will leave an upward revision to Q1 GDP growth -- a red flag for inflation hawks -- and additional data that showed the largest jump in import prices since September, which will weigh heavily on the April Trade Deficit, continued to underpin a sense of nervousness throughout the Treasury market. As a result, stocks again took a bearish cue from rising interest rates and traded in sympathy with further deterioration in bonds which lifted the yield on the 10-yr note to another 4-year high (5.18%).

With no notable earnings reports on the docket and over 90% of the S&P 500 having already reported Q1 results, investors also turned their attention to further weakness in the dollar -- a concern that we're not buying into as a presumed bearish factor for the market. After all, a modestly weak dollar is actually good for U.S. equities since it increases demand for U.S. products and increases the value in dollars of overseas profits for U.S. companies. Nevertheless, the recent damage done on the commodity price front due in part to a weaker greenback making dollar-denominated assets like gold and oil more attractive, continued to act as an overhang even though crude prices fell 1.7% and gold lost 1.2%. In fact, modest consolidation throughout commodities merely prompted investors to lock in profits from this year's two best performing sectors. Energy and Materials plunged 2.9% and 2.1%, respectively. To wit, Alcoa (AA 34.79 -1.23) was the worst performing Dow component Friday with ExxonMobil (XOM 62.20 -1.26), ranking third on the price-weighted index with a 2.0% pullback, also contributed to the Dow snapping a five-week winning streak.

Speaking of Industrials, the sector has been the third best performer in 2006 and, as one might deduce from all of this year's leaders getting hit the hardest Friday, turned in the day's third worst performance. Caterpillar (CAT 77.81 -1.81), United Technologies (UTX 64.87 -0.95), and Honeywell (HON 42.91 -0.63) -- all recently at 52-week highs -- were also influential Dow components that weighed on blue chips throughout the session.

On a positive note, chip maker Analog Devices (ADI 36.03 +1.35) beat estimates by three cents and issued upside guidance, which plays into our Overweight rating on Technology; however, follow-through consolidation throughout the influential sector also took a toll on investors asking themselves if they should in fact "sell in May and go away."

Overall, not that bad, but some disturbing new signs that are probably long overdue. We could have stagflation right ahead of us.


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