Market

Wednesday, the market opened lower and it continued to decline throughout the day. A number of negative events this week are creating selling pressure. The PPI came in “hotter” than expected and food and energy are to blame. Food producers have not been able to raise prices enough to offset rising costs and profit margins are down. Wednesday, FedEx substantially lowered guidance for the entire year. They have passed on higher fuel costs by adding surcharges; however, the price increases have softened shipping demand. They have forecasted a struggling economy. A spike in the PPI without a corresponding move in the CPI translates into lower profits. Around the globe, central bankers are tightening monetary policy and interest rates are headed higher. Next week, the FOMC will meet for a two day session and they will make an announcement on Wednesday. Many of the Fed officials have hinted that rates will be going up. I am not expecting a hike this month, but I believe the comments will suggest future increases. The market has priced in a quarter point hike in August. For the time being, the Fed needs to digest weak economic data. The unemployment rate made its biggest jump in 22 years last week. Today, initial jobless claims rose and continuing claims are still above 3 million. The NY Empire State index, housing starts, industrial production and the Philly Fed index were all below expectations this week. Another huge round of mortgage resets is taking place over the next few weeks. The interest rate on mortgage loans rose 33 basis points last week and that will weigh on homeowners. I believe the Fed is concerned about inflation, but they want to see the ripple effect from these mortgage resets before they raise rates. The no-action decision might generate a rally, but as long as oil maintains its current level, it will be short lived. Food and energy prices will remain high this year. Floods in the Midwest and a late planting season will push grain prices through the roof. Currently, the global demand for oil is 86.5 million barrels per day and 85 million barrels are being produced. As long as the demand outstrips the supply, prices will stay high. “Saber rattling” over Iran’s nuclear facilities is also adding a risk premium to energy prices. We are in a La Nina weather pattern and an active hurricane season has been forecasted by meteorologists. That is also keeping oil prices high. One good piece of news is that China announced Thursday that they will stop subsidizing oil prices. They are the second largest consumer of oil in the world and rising prices will decrease consumption. This move was not expected until after the Olympics. This news generated a one-day decline in oil and it bounced right back on Friday. Long-term, the fundamentals are in place for high oil prices. Financial stocks are still weighing on the market. Goldman Sachs posted solid results, but they are the exception, not the rule. Morgan Stanley announced dismal results and the next day they revealed that a “rogue trader” will cost them another $120 million as they marked down those positions. FITB will need to raise $2 billion and they are cutting their dividend by over 60%. The regional banks continue to get pounded. Friday, Moody’s downgraded MBIA and Ambac. Next week the market will digest consumer confidence and durable goods before the FOMC statement. Later in the week GDP, initial jobless claims, personal income and the PCE inflation index will be released. The earnings releases are very light and in all likelihood, it will be “dead till the Fed”. The remainder of the week, the market will trade off of the Fed’s statements. On a technical basis, the market is in trouble. Since trying to break through heavy resistance at SPY 144, we have been in a steady decline. The number of big down days is increasing and we broke below horizontal support at SPY 138. Today, the market broke below SPY 132 and it might test the lows from March in the next few months. As you can see in the 5-year chart, the market has formed a head and shoulders pattern. That is VERY significant if it shows up on a long term chart. It is not a perfect formation, but it is close enough. My bias is shifting to bearish.

Bearish	DB
Stock	Deutsche Bank Aktiengesellschaft provides investment banking products and services. It operates in three divisions; Corporate and Investment Bank, Private Clients and Asset Management, and Corporate Investments.
Rationale	In April, the company announced that it wrote down $4.2 billion during the first quarter, pushing Germany's biggest bank to its first quarterly loss since 2003 amid trading losses, lower revenue and global market jitters. Earlier in the month, Deutsche Bank had given fair warning to markets, saying it expected at least 2.5 billion euros in write-downs in the first quarter, slightly less than what it reported. To date, Deutsche Bank has had to write down approximately 5 billion euros ($7.8 billion). The bank lost 141 million euros ($220.4 million) in the first quarter compared with a 2.1 billion euros profit a year earlier. That was better than the net loss of 235 million euros ($367.3 million) that analysts polled by Dow Jones Newswires were expecting. "In the first quarter of this year, financial market conditions were the most difficult in recent memory. In the month of March, pressure on the banking sector was more intense than at any time since the current credit downturn began," he said in a statement. "Inevitably, this left its mark on Deutsche Bank's results. Nevertheless, relative to the environment and the industry, this is a solid performance." The bank's result was cushioned by its decision to sell off investments in automaker Daimler AG, insurer Allianz SE and gas company Linde AG, which let the bank book a capital gain of 854 million euros ($1.33 billion). However the capital gains were offset by some mark downs, the biggest of which was a reevaluation of its option to buy more shares in China's Hua Xia Bank Co. Ltd. The stock trades at a forward P/E of 8.
Strategy	Europe is starting to weaken and tight monetary policy by the ECB will weigh on European banks. While this is a global financial firm, it does a great deal of business in Europe. This stock is in an accelerated decline and the breakdown below $96 was significant. The volume is increasing and this move should have legs. The stock is a bit oversold and we are going to scale in.
Entry	Buy 5 DB July 95 puts (DBSS) @ $6.80 - Day filled 6/23/08
Target	Sell 5 DB July 95 puts (DBSS) @ $6.80 - Day. Filled 6/26/08
Stop	None
Tracking	6/23/08 - Bought 5 DB July 95 puts (DBSS) @ $6.75. The options traded between $6.70 ad $6.80 for the first half hour after the alert and I will use the average. 6/26/08 - Sold 5 DB July 95 puts (DBSS) @ $6.80. The stock was oversold and it just did not have any gas in the tank after we got in. The market plunged and the stock was flat. I decided to bail and look for another short. We made $5 (5 x $.05 less commissions 2 x $10).

Bearish	MLM
Stock	Martin Marietta Materials, Inc. engages in the production and sale of aggregates for the construction industry in the United States, Canada, the Bahamas, and the Caribbean Islands.
Rationale	In April, the company reported a 37 percent decline in first-quarter profit to $20.9 million, or 50 cents per share. The result missed analyst expectations according to a Thomson Financial survey. The company said its diesel fuel costs rose by $6.2 million, reducing profit by 9 cents per share. Sales fell 3 percent to $399 million. Martin Marietta said it plans to accelerate the rate of price increases for its materials in an attempt to shore up earnings for the year. That prompted it to reiterate its expectation for profit between $6.25 to $7 per share in 2008. Citi analyst Clyde Lewis said his estimates are at the low end of that range. In a note to investors, he added he is "nervous about the extent of the nonresidential slowdown and the level of state spending in the face of weaker tax revenues." Martin Marietta relies on infrastructure projects and homebuilders for much of its revenue. Builders have notably curbed construction as the housing market swoons, and municipalities are starting to cut back on spending as the economy slows. The stock trades at a forward P/E of 15.
Strategy	Construction spending has hit rock bottom and that condition will continue as the economy slows. Residential construction is declining as new home inventories remain high. States/municipalities are also tightening their belts as tax revenues decline. Interest rates are poised to move higher and that will also pressure new construction. The stock is trending lower and today's gap down tells me investors are heading for the exit. I like this short.
Entry	Buy 5 MLM July 110 puts (MLMSB) @ $7.20 - Day Filled 6/20/08
Target	Sell 5 MLM July 110 puts (MLMSB) @ $7.30 - Day. filled 6/26/08
Stop	None
Tracking	6/20/08 - Bought 5 MLM July 110 puts (MLMSB) @ $7.20. 6/26/08 - Sold 5 MLM July 110 puts (MLMSB) @ $7.30. The stock did not decline even though the market tanked. This was very frustrating. I don't like the stock, but we need to be in something that is going to behave. We made $30 (5 x $.10 less commissions 2 x $10).