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Monday Morning Quarterback

By

Hit 'em where they ain't!

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Good morning and welcome back to the backwards pack. The start of '05 was rudely awaken and traders went home feeling suddenly shaken. The winners of yore all fell to the floor as Boo and his crew declared minxy war. "The bovine got smug as they cut up the rug," he said as he grabbed his group for a hug, "The Red Dye supply wiped the grin off their mug as they found out first hand how their grave would be dug." Will Hoofy bounce back to the Matador track or walk right into another bear smack? We'll know soon enough as we ready to thrill and hop on the bus for a roll through the 'Ville.

The simple explanation for bovine consternation was the lopsided lean in front of telegraphed seasonal inflows. It seems as if most folks were positioned for the "easy" trade and walked into extended averages and macro agendas. Be that as it may--and it may be all we need to know--the dependence on accommodative (real) rates shouldn't be entirely discounted. Between old school financials, the "stealth" financing arms of industrial America and a leveraged consumer, there has never been a greater dependence on easy money.

Is the market suddenly telling Elmer that higher rates will kill the economy? The ursine crosshairs have been focused on dollar devaluation (-31% since 2002) that, paradoxically, buoyed equities as a function of the attendant liquidity. But a few short FOMC minutes later, after the Beltway bulls bit the bullet, perception shifted to the potential for tighter coin and a more attractive greenback. While other rate harbingers (yields, fed fund futes, corporate spreads) didn't share the equity introspection, the seed to mislead seemed to spread through stocks.

While some will offer that an accommodative Fed is a thing of the past (as evidenced by the gradual hikage), the initial rate cuts found similar shrug on the other side of the cycle. Besides, Elmer's nudge has been more ceremonial than substantial, dancing between verbal reinforcement and assurances of a sustained economic recovery. The tide will turn, I believe, when perception embraces the dichotomy between genuine growth and debt induced consumption and spending. That psychological sea change remains the single most important metric as we wade our way through 2005.

This week will be chock full of earnings as 144 companies share their tale. Alcoa (AA:NYSE) and Genentech (DNA:NYSE) will get the party started today, Intel (INTC:NASD) will share the chip shtick tomorrow, Apple (AAPL:NASD) waves the flag Wednesday and the forgotten horse, Sun Micro (SUNW:NASD) plays ketchup on Thursday. We'll also get further flavor on the enigmatic economy as Beeks tweaks retail sales on Thursday (exp. 1.0), threads the PPI of the needle on Friday (exp. -0.1%) and talks to business inventories (exp. 0.6%), industrial production (exp. 0.5%) and capacity utilization ( exp. 78.9) shortly thereafter.

After the worst first week since '91 (S&P) and 2000 (NDX), traders should keep the following levels on their trading radar: Dow 10,600 (April, November & December resistance and current support), S&P 1183 (50-day) and 1175 (autumn support), S&P 1193 (initial resistance), BKX 102 (50-day), Russell 612 (November support), XBD 146 (50-day), Gold 410 (200-day), DXY 83.20 (intraday December high) and Crude $46.20ish (50-day and December high).

Good luck today.

R.P

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