Intra-day reversal

by Larry Levin

Although the S&P and Dow were up nicely from yesterday's body-slam, stocks staged a sharp reversal in late morning trading. March S&P futures reversed nearly 30-points, while the Dow swooned over 200-points from their respective highs.

The early trade saw a nice bounce from yesterday's close, in part due to Disney's earnings, but it proved to be little more than a dead-cat bounce. Disney, however, managed a +4.8% rally after it reported first-quarter profits fell 27% from the year-ago period. Oh, but the lower profits topped expectations. I suppose if analysts "lower the bar" enough, perhaps all corporations will beat expectations, even if they lose 27%...or say...even 67% of their profits. Wouldn't that be convenient?

The Disney news was about as good as it got today. The markets were dragged lower yet again by a multitude of offenders; productivity, Fed speak, and more downgrades.

The Labor Department reported that productivity, the amount of output per hour of work, increased at an annual rate of 1.8% in the 4th-quarter of '07, down from a 6.0% performance in the 3rd-quarter. The slowdown reflected the fact that overall economic activity weakened considerably in the final three months of last year. For the year, productivity rose by 1.6%, a slight rebound from a 1% gain in 2006 but both years were well below the average annual increases of 3.2% turned in from 2000 through 2004.

General Motors was sold-off 2.9% after it was downgraded by Bear Stearns. BSC also lowered its rating of Ford, which sent its anemic share price another 1.9% lower. The reason for the downgrades was said to be over worries of the consumer's ability to buy cars and trucks in the current slowdown.

A downgrade of a different kind came from Standard & Poor's: it said Merrill Lynch is at risk of a downgrade due to troubles at bond insurers and collateralized debt obligations. Merrill stock fell 3.2%.

Finally, and perhaps most devastating to the market, were the comments from Philadelphia Federal Reserve President Charles Plosser. Mr. Plosser spoke (gasp) against overly aggressive rate cuts since that could/would lead to higher inflation.

"There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible," Plosser said, calling this a "damn the torpedoes, full speed ahead" approach to policy. Ignoring inflation during times of economic weakness "risks undermining our ability to achieve economic growth over the long run," he added.

He should have added that this approach is a carbon copy of Easy-Al's tenure. We know this all too well, but Mr. Plosser went on to say something that would have been unthinkable during the Age of Greenspin.

In another breath of fresh air from a Fed official, Mr. Plosser went on to tell his audience the shocking truth: "It [monetary policy] cannot solve the bad debt problems in the mortgage market. It cannot reprice the risks of securities backed by subprime loans. It cannot solve the problems faced by those financial firms at risk of being given lower ratings by rating agencies, because some of their assets are now worth much less than previously thought. The markets will have to solve these problems, as indeed they will. But it will take some time."

Mr. Plosser voted for the most recent 50-basis point cut; however, it doesn't sound like he will be voting for more.

Real Time Trading Signals*for

Trade Date: 2/6/07

E-Mini S&P Trades*
(before fees and commissions):
9:11 VA Buy 45.00 = -1.50 all

9:20 VA Sell 45.50 = +.75, +3.50, +2.50

10:01 FT Buy 46.50 = +.75, +2.25, +3.00

10:20 ID VA Sell 49.25 = -1.25 all

10:52 ENG Buy 49.25 = +.75, +.25, +.25

12:51 ENG Buy 41.25 = +.75, -1.25, -1.25

1:20 FT Sell 34.75 = +.75, b/e

E-Mini Russell Trades*
(before fees and commissions):



1) Buy @ 11:08am at 711.0 = -1.4 & -1.4

2) Sell @ 12:04pm at 707.1 = +.5 & +1.1

3) Sell @ 12:51pm at 704.8 = +.5 & +3.0

4) Buy @ 1:51pm at 701.0 = -.2 & -.2

5) Buy @ 1:58pm at 701.2 = +.5 & b/e

6) Sell @ 2:25pm at 699.4 = -1.1 & -1.1...+$20.00


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