This is a thought for a daytrade for our readers who have experience daytrading.  It’s Smith International (SII ).  Oil is hot right now, but this could go either way.  On the 60 minute chart, there was a gap down (on earnings) on 1/29.  Price has now filled the gap with first resistance around 64.71.   Second resistance around 67.95.  Use those for a possible long position, if support of 60.61 holds.  If it goes the other way, keep an eye on it if it falls back into the gap area around 60.61, with support around 58.65.  The price has been advancing on decreasing volume, as well.

In my pre market report I discussed that the futures were up with no solid reason to substantiate the advance. And we expected to see the rally fade, and fade it did. The markets inability to hold on to gains reinforces the bear market mentally that is so prevalent in the market. In bear markets rallies are sold, in other words "sell on strength".

One of the reasons we saw the gap open higher this morning was on the thought that Wal-Marts earnings were perhaps showing that the consumer still had a pulse and was on the road to recovery (as how the media reported it). As I pointed out in my pre market report Wal-Marts earnings were nothing great, only in line with their already lowered forecast and they went as far as to provide forward guidance on the lower end of the scale of their previous guidance. Absolutely nothing to get excited about, however the media jumped all over it. The Associated Press reported:

Wal-Mart Expects More Profitable Year After Low-Price Focus Boosts 4th-Qtr Earnings

Defying the gloom that many retailers are feeling, Wal-Mart Stores Inc. expects a more profitable year selling to penny-pinching shoppers after its renewed focus on low prices paid off over the holidays with a 4 percent rise in fourth-quarter profit.

 

But when you dig into the numbers from this morning there was nothing to get excited about. Wal-Mart, just like so many other retailers that have been lowering their forward earnings guidance. So when Wal-Mart came in with earnings ‘in line’ people got excited over nothing more than a company confirming that earnings were just as bad as the company had predicted when they issued guidance last quarter. The media seems to have a very short memory. After the market opened the retail sector (RTH) gapped up at the same time the media was reporting that "all the bad news is now baked into the stocks". "Baked in", a common term you hear on Wall Street which simply means that the price of a stock is already priced at a worst case scenario and not even bad news can keep it down any longer. Well I guess someone took the pie out of the oven too soon because the retail stocks still went lower, even when everyone was saying it was done. The retail sector sold off throughout the day and ended down 1.2%. So much for all the bad news being baked in.. Whenever you hear someone tell you that you need to buy a stock because "the bad news is already baked into the price" you should run, and run fast in the other direction.

The chart below is an intra-day chart of the Retail Holders Index (RTH) for today.

Financial stocks are another sector that has been touted as having all the bad news baked into the prices now. But, just like the retail sector today the financial sector also sold off. I have become very displeased with CNBC for their blatant ‘pumping’ of stocks by bringing on people who have positions in various stocks and/or sectors and they say how great a bargain they are now. Then to only see them continue lower in the following weeks. Except for a few smart and intelligent reporters on CNBC they have turned into the TV version of the Yahoo message boards. CNBC… shame on you!

As I said this morning we are holding our short position on the Dow Jones Industrial Average and that has not changed. That trade has worked well and we are going to keep it until the price stops us out (at break even) or we reach the lows reached back in the middle of last month. If we reach those lows on the Dow we are likely to see a battle of greed and fear and thus we will form some support at that region which would be a great time for us to take our profits from the trade. At that time we will determine our next play on the market. But even if the Dow reaches those previous lows again and it bounces we will still be in a bear market. As a matter of fact until further notice… we are still in a bear market.

Oil hit $100 dollars again. It really does not matter if oil is at $85, $90, or if it surges past $100. What matters is the average cost of oil, and the average has been rising over the past year and it is the average that plays an impact on our gasoline costs and heating bills. The longer the average oil price remains high the greater the impact will be on inflationary data. And inflation is what will continue to weaken the US economy even further.

Tomorrow we will get the Consumer Price Index and the FOMC minutes from their last meeting on January 29-30. Both of these events will likely have some wild impacts on the market tomorrow. Everybody is back to talking about more rate cuts from the Feds, the increasing inflation data (which does not even include the recent rise in oil) is going to impact the Feds even further.

In the after hours trading on Hewlett-Packard (HPQ) I saw a lot of selling on the strength. If we see HPQ pull back after their good earnings report we will know that nothing matters at all, good or bad earnings people just want to cash out. We will watch to see how they trade tomorrow.

Buy now before we can’t afford that, either.  Throw a ham in the freezer.  Geesh, this is getting ridiculous.  Smithfield Foods (SFD) is reducing the U.S. sow herd by 4-5%, or 40,000 to 50,000 sows, citing rising grain costs!  This will result in production of 800,000 to 1 million fewer market hogs annually.  They currently raise 18 million hogs annually.  The CEO says: "Grain costs continue at record levels, with the potential of escalating, given the current U.S. government policy favoring corn for ethanol. Today the economics are very challenging and we believe that these increased costs will translate eventually into still higher food costs for the American consumer. In the meantime, Smithfield is taking immediate action to improve the efficiencies of our live production operations."

I know farmers who are getting rid of their cows, too, for the same reason.  Can’t afford the grain costs.  Last year I wrote about the shrinking dairy farms.  The situation is not getting any better in this country

At this rate, we’ll be able to drive to the grocery store, but not afford to buy the food!

Yep, listening to Eric Clapton’s "Layla" will certainly  take away some of that stress the market brings every day!  Except, I think I hurt my hand playing air guitar.

Hewlett-Packard (HPQ) reports earnings of Q1 $0.86 EPS with revenue of $28.5B.  They guided in line with Q2 estimates, and above estimates for the year 2008!  Good for them!  Good job Hewlett-Packard. 

The market started positive and held it most of the day on weak volume.  As the pattern has been, however, volume picked up to the downside into the close.  Oil settled at around 99.55 and Gold just wants to go higher.  I’m not saying these two won’t continue their upward trend, just be careful with them because of their volatility (remember the crowded trade). 

I’m sure everyone has heard that Fidel Castro is stepping down as the President (ruler, head honcho, whatever) of Cuba.  This is good, but before I get too excited, let’s see who steps in.  I’ve seen pictures of Cuba, absolutely gorgeous, and I would really love to visit someday.  Let’s hope for everyone’s sake they decide to join the rest of the world and open themselves to trading with the US.

We’ll have more for you later.  Now, go turn up the volume and dance!

Treasury Secretary Paulson on CNBC right now speaking about Hope Now Alliance.  Says the participants are putting a 30-day freeze on foreclosures.  They are trying to work with homeowners to keep them in their homes.  The homebuilders sentiment number came in at 20, that’s up from 19.  Big deal.  Today, Paulson and others have talked about restoring confidence to the housing market.  We are past the confidence issue, this is about home prices being too high and our citizenry being strapped for cash.  And let’s not forget that pesky little CREDIT CRUNCH.  Geesh!

Paulson is also talking about whether he sees a problem with sovereign wealth funds buying big stakes in our major financial institutions.  He doesn’t see a problem, but welcomes it.  I wonder why we need these SWF buying into our financial institutions?  With all the money being “loaned” from the Fed through the TAF (term auction facility), why did Citigroup (C) need a SWF to help it?  Hmm…..

The announcement that FGIC is looking to break itself into 2 separate businesses isn’t being greeted with joy.  There are problems with doing this and some believe the lawsuits will be abundant.  Just add those lawsuits to the subprime lawsuits that are growing by the day.   Need more troubling news?  This article in MarketWatch concerns auction-rate securities :   

J.P. Morgan analysts said Thursday they anticipated the costs from some of these funds, which had issued auction-rate securities as a source of cheap financing, could increase after the market for these securities nearly dried up.

"The cost of leverage will rise for closed-end funds," J.P. Morgan analysts Kenneth Worthington and Timothy Shea wrote in a report, noting that these higher costs "should weigh on returns."

Closed-end funds are different from their cousins, mutual funds, because they do not continuously offer shares for sale. Firms such as Eaton Vance Corp. (EV), Nuveen Investments, Calamos Advisors and BlackRock Inc. (BLK)  manage closed-end funds that have used the auction-rate market for a source of funding. They’ve done this by issuing what’s known as auction-rate preferred shares.

"Auction failures means this preferred market may go away," the analysts said

Citgroup (C) is said to be selling or closing some Asian, European and Latin American operations, according the the WSJ.

And just one more happy note:  Canada’s December wholesale sales: M/M -2.9% v prior 0.2%.  I’m not reading that as a good thing.

Office of the Comptroller of the Currency
Lowers Assessment Fees for National Banks

WASHINGTON — The Office of the Comptroller of the Currency today announced that it was recalibrating its assessment structure with the result that all national banks will pay modestly lower assessment fees, effective March 31, 2008.

“The new assessment fees will modestly reduce costs for all national banks while ensuring that the OCC has sufficient revenue to meet its supervisory responsibilities,” said Comptroller of the Currency John C. Dugan.  “Our objectives were to update our assessment framework to recognize changes in industry structure and to recalibrate fees to better align revenue with expenses.  I’m pleased that we were able to accomplish these objectives in a way that will modestly reduce the burden on national banks at a time in which they are dealing with difficult economic conditions, while at the same time preserving the resources the agency needs to carry out its mission.”

Changes include a reduction in rates for each of the current assessment brackets, plus the addition of two new brackets for the largest banks in recognition of substantial structural change in the banking system since the OCC last revised the structure in 1992.  Taken together, these changes will reduce overall assessment income by about 2.5 percent.

Assessment brackets have always been established on a sliding scale by asset size, and the banking sector has simply outgrown the old structure.  The new framework replaces the existing top bracket, which applies to the portion of assets held by a national bank that exceeds $40 billion, with two new brackets:  one for assets between $40 billion and $250 billion, and one for assets exceeding $250 billion.  An interim rule creating the new brackets was published in the Federal Register on February 19, 2008.

The interim rule has an immediate effective date to allow all national banks to benefit from the lower fees in the March 31, 2008 semiannual assessment.

The OCC invites public comment and will review those comments before issuing its final rule.  The interim rule is available for review and comment at www.regulations.gov.  The change in the OCC’s Notice of Fees, which implements the rate reduction, is available from the OCC Web site at http://www.occ.gov.

Indices gapped up at the open and have stayed positive so far.  This rally is weak.  Financials and retail are weak.  Oil and gold are strong.  Be careful of those "crowded" (everybody wants to jump in) trades on oil, it is volatile, so if you are going to play them, keep a close eye on them.  The dollar continues to lose ground.  We’ll have more on the bond insurers later, what a mess all that is.

I’m posting this simply to show you what I’m trying to find an explanation for.  This is a monthly chart, and I’ve certainly looked at plenty of those (!), and I still can’t make this one "compute".  I’ve read the explanation from the Fed’s website about the arithmetic, but something isn’t right.  I’ll find the answer eventually.

Pre Market futures are up, but from what I am seeing thus far is that the advance in the futures is on weak volume. Not seeing a bullish rally here based on what I see so far and I would not be surprised to see the rally, if this is what it turns into to be faded quickly.

We are still short on the DOW by being in the Ultrashort symbol: DXD. See our post from February 13th for details of our trade. We are sticking with this plan and are using our entry price as our stop loss should any rally attempt try to take out that resistance level. However, this does not change our longer term view and we will quickly re-enter this short position of the DOW by taking a stand at the next resistance level.

There is not much of any substance this morning to justify the advance in the pre market futures. Wal-Mart had reported earnings this morning and were basically in-line with what they said they would have last quarter, no big surprise. And more importantly nothing great with respect to forward guidance. Wal-Mart earnings shown below…

REPORTS Q4 $1.04 (EX CHARGES) V $1.02E, R $106.3B V $106.8BE; GUIDES AT THE LOW END OF ESTIMATES
- Guides Q1 EPS $0.70-0.74 v $0.74e.
- Guides FY09 EPS $3.30-3.43 v $3.43e.
- Reports Q4 SSS ex-fuel +1.6%
- EPS items (+0.02 net add) included charges of $0.03 for approximately $70M in after-tax expenses for dropped U.S. real estate projects and an after-tax restructuring charge of $32M in the Company’s Japan operations, and a $0.01 benefit from the recognition of approximately $38M in after-tax gains from the sale of certain real estate properties.
- Customers more cautious in January spending

Anyone who views these numbers as being bullish may be in for a surprise down the road. Some say that if you build a better mouse trap customers will come, perhaps retails establishments are finding a way to create a better "bull trap". We shall see.

Bond insurers are yet again the topic De Jour. The CEO of MBIA has quit his position over the weekend and replaced with a former CEO, NY Insurance Commissioner Eric Dinallo is making statements that he hopes a resolution will be implemented soon. And on the rumor mill MBIA is believed to be working on a plan to divide the company into two parts, the good stuff, and the poison. Will this satisfy the ratings agencies? Can’t say… But if I were working at Moody’s or S&P it would not impress me.

So at this moment we are anticipating a higher open out of the gate. Lisa and I will be watching volume levels on the upside and downside throughout the day for clues into the strength, or lack thereof in today’s actions.

Oil is now approaching near $100 US dollars yet again and Gold is on another bullish rally upwards. A bit if a strange combination but with oil rising again this will only add to fuel costs in the near term and we will shortly be seeing higher gas prices yet again. Oil breaking $100 a barrel will send bulls into a slight shock as they reevaluate their positions given the circumstances of increasing commodity prices. Inflation is alive and well in the United States.