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SHOULD BE A DIFFICULT WEEK FOR STOCKS

Stock prices were under pressure most of the day, especially the big-cap shares in the Dow Industrial Index after four Dow components were hit with broker downgrades. Pfizer stumbled early when Merrill Lynch cut the shares from “buy” to “neutral,” saying the stock has only modest upside potential. Goldman Sachs downgraded Alcoa from “outperform” to “in-line” and lowered its earnings expectations for 2005 by 5% and for 2006 by 6%. Verizon Communications was cut from “buy” to “hold” and J.P. Morgan Securities cut Intel from “market outperform” to “market perform” citing market valuation as the reason. By the end of today’s trading session the Dow Jones Industrial Average fell 45 points to 10,547, the NASDAQ Composite held on for a three point gain to 2,151, and the S&P 500 shed one point to close at 1,190.

Stock prices were also under pressure with crude oil moving back above $43 a barrel due to increasing violence in Nigeria, production problems in Norway, and OPEC’s proposal of enforcing production quotas to raise the price since the recent decline from $55 a barrel. As the dollar declines in value, oil producing countries need to receive more of those same dollars just to break even. Since late October oil declined from $55 to $42, a drop of 24% in U.S. dollar terms, but in stronger currencies such as the euro and Swiss franc, the cost of crude has declined by closer to 30%. OPEC will meet on December 10^th to discuss quotas and the need to receive more dollars per barrel as those same dollars decline in value. Looks to me like we have seen the low end of the range for crude in the near future…oil prices below $40 a barrel are now a part of history not to be seen again.

Dollar and Treasuries

The currency and bond markets were most affected today with comments coming from Japanese Vice Finance Minister Koichi Hosokawa. He said, “Recent yen gains don’t necessarily reflect fundamentals of economies” and went on to say, “We will act aggressively on its rapid moves in a timely manner.” Treasuries and the dollar finished the day fractionally higher with the media spin saying the dollar and bonds are higher because of nothing more than SPECULATION Japan may move to intervene. Bonds caught a bid and moved higher because it is further speculated that after the Bank of Japan sells yen for dollars, they will then use the dollars to buy our Treasury debt. The line of reasoning seems pretty thin to me, especially since the Fed is holding the line for raising interest rates. If nothing else, today’s spin with the comments from Tokyo was enough to hold the gains in Treasuries from the big move up on Friday. Just when it looked like bond prices were breaking down late last week, we got that nasty employment report with about half the expected job creation. Nice rescue for bond prices.

It is widely expected the Fed will raise the target for the Fed Funds Rate another 25 basis points when they meet again on December 14^th. Traders are saying the yield on the two-year note is too low with the expected increases coming from the Fed, but investors continue piling into Treasuries. Normally when things get crowded on the short end of the Treasury curve it is a flight to safety because the smart money sees problems ahead. The refusal of bond prices going lower is a clear sign to me that all is not well and to proceed with caution. Today’s broker downgrades in the stock market could be sending the signal that the near-term correction for stocks will happen this week as the money moves into Treasuries. This set-up could also be needed to create more demand for Treasuries this week with the U.S. Treasury Department auctioning $15 billion of five-year notes on Wednesday and $9 billion of 10-year notes on Thursday. The way things are shaping up, it looks like stocks will have some competition for investment capital with the need for more Treasury funding.

This and That News Tid-bits

Without a lot of big economic headlines today, a few little news tidbits did catch my attention. Thanks to Jim Sinclair for the head’s-up on this article, “US Admits the War for ‘hearts and minds’ in Iraq is Now Lost.” The article opens with, “THE Pentagon has admitted that the war on terror and the invasion and occupation of Iraq have increased support for al-Qaeda, made ordinary Muslims hate the US and caused a global backlash against America because of the “self-serving hypocrisy” of George W Bush’s administration over the Middle East.” The article is only two pages, but gives a surprising amount of detail from the Pentagon about our failures in the Middle East and the subsequent problems we have created for ourselves and the rest of the world as a whole.

My favorite piece of news for today actually came out yesterday when Goldcorp said it has reached an agreement in principal to buy Wheaton River Minerals in an all-stock deal valued at roughly $2 billion. Under the terms of the deal, Goldcorp will offer one share for every four shares of Wheaton River. Goldcorp closed down seven cents today at $14.27 and Wheaton gained $.18 to $3.37. These are two excellent companies that anticipate combined 2005 production in excess of 1.1 million ounces of gold.

The National Association of Securities Dealers said today that it has sanctioned Morgan Stanley for disclosure violations related to municipal bond sales. The NASD is forcing Morgan Stanley to offer to buy back the bonds from their customers and fined MS $100,000 plus an additional $25,000 for failing to respond to the NASD’s request for information. It seems to me every week that goes by we find a NEW scandal of some kind with corporate executives on Wall Street lying and cheating. I wish they would put these people in jail instead of a fine and a slap on the hand.

A study released today by MessageLabs said the number one threat to individual and corporate users of the internet is online identity theft. The online identity attacks are known as “phishing,” where fraudulent e-mails are used to solicit confidential information by impersonating as banks or other institutions, as well as more sophisticated spying techniques. MessageLabs said it has intercepted over 18 million phishing e-mails so far this year.

The last little tid-bit comes from Circuit City with the announcement their third-quarter same-store sales fell 4.3% from a year ago. I’ve been expecting a weak retail shopping season and this helps to confirm my expectations. The retail trade organization ICSC said sales at U.S. chain stores open at least a year rose 1.7% in November, less than an initial forecast for a gain of 3-4%. Last week the Gap, Inc. reported a 4% drop in same-store sales while analysts expected to see an increase. Overall holiday sales have been weaker than expected and retailers now have to boost discounts to increase foot traffic and move inventory. Kurt Barnard, president of Retail Forecasting LLC said, “The Retailers are worried, but they’re not panicking to the point of lowering prices indiscriminately.” Last minute shoppers could be treated to some nice discounts if these retailers end up getting hung with all the seasonal merchandise!

For now, one thing is very certain…It’s beginning to look a lot like Christmas!!!

Have a Great Evening!

Mike Hartman

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