Dollar prices were under pressure after Russian President Dmitry Medvedev, speaking at a summit of the Shanghai Cooperation Organization, said the world needs new reserve currencies.  Wall Street futures point to a flat opening.  

On Monday, US stocks registered their worst slide in a month with the Dow Jones Industrial Average, which ended last week in a positive territory for 2009, went back in the red for the year. Among S&P 500 stocks, 95% registered losses. Commodities and basic material stocks declined, hurt by a rise in US dollar.  The morning session saw most of the declines and stocks traded sideways as the session advanced.  The NASDAQ, off 2.3%, and the S&P 500, down 2.4%, recorded their steepest declines since May 13.  Volume on the NYSE was light with only 1.1 billion shares trading.  Market breadth was negative with decliners outpacing advancing issues by a five-to-one margin.  The market's measure of volatility, the CBOE Vix, jumped the most since April 20, rising 9.5% to 30.81.

The National Association of Home Builders reported that confidence among U.S. home builders fell after rising for two months. A prime concern was the rise in mortgage rates that followed a recent selloff in U.S. Treasurys.  Meanwhile, US Treasuries moved higher for the third straight day, with the benchmark 10-year up 20/32 and the yield declining to 3.715%, falling back from their seven-month highs of last week.

A rising dollar reduced the luster of basic material and oil stocks as inflation hedges.  Positive comments at the G8 summit regarding the greenback's status as world's reserve currency helped the dollar, which rose 1.2% against a basket of currencies.  Copper prices declined 3.7% in New York trade and silver lost 5.7%.  Among DJIA components, only Microsoft (NASDAQ:MSFT) and American Express (NYSE:AXP) recorded gains.  Alcoa (NYSE:AA) led the decliners on the DJIA, dropping 6.5%.  Freeport-McMoRan (NYSE:FCX) fell 5.8% and US Steel (NYSE:X) shares declined 5.7%. Among energy stocks, ExxonMobil (NYSE:XOM) fell 1.3%, and Chevron (NYSE:CVX) declined 2.2%, with Schlumberger (NYSE:SLB) shares down 2.8%. Among S&P 500 components, only 22 advanced with all ten industry groups losing ground.    

The expected decline in industrial production of 1.0%, up from the drop of 0.5% prior, is largely attributed to the GM (NASDAQ:GMGMQ) and Chrysler bankruptcies. Capacity utilization rates are expected to have tightened to 68.4% from 69.1% prior, the lowest in 42 years since record-keeping began.

In overseas developments, ECB warned Eurozone banks on potential additional losses of over $283 billion this year and next.  In a report, the International Monetary Fund said exiting the fiscal stimulus programs will be challenging for the US.  The IMF Chief cautioned that the worst of the recession has yet to be felt. 

Pre-market futures suggest a higher opening on the Wall Street, following better-than-expected earnings from Home Depot (NYSE:HD), which reiterated full-year guidance and reported a 44% jump in profit despite lower sales.

On Monday, U.S. stocks rallied as Lowe's (NYSE:LOW) improved earnings outlook fueled optimism of a rebound in housing sector.  Chief Executive Robert Niblock advised, "Encouraging signs in recent weeks that suggest perhaps the worst is behind us."  Lowe's (NYSE:LOW) jumped 8.1%. Shares of Home Depot (NYSE:HD) also rallied on the news and ended the day with a 6.6% gain.  Lowe's results beat Street expectations and the firm's full-year guidance was ahead of consensus views. Goldman (NYSE:GS) added Macy's (NYSE:M) to "conviction buy" list, citing its $400 million cost savings plan and a likely recovery in profits as the economic situation rebounds.

On Monday, the S&P 500 gained 3% to 909.71 for its steepest gain in two weeks. The Dow Jones Industrial Average added 235.44 points, or 2.9%, to 8,504.8.  The NASDAQ led the indices with a 3.1% advance to 1,732.

The National Association of Home Builders' latest Housing Market Index which rose to 16 from 14 in April suggested home builders are growing increasingly confident. Citigroup (NYSE:C) raised its rating on Lennar (NYSE:LEN) from "hold" to "buy;" Lennar (NYSE:LEN) shares jumped 13.7%.  Taking the cue, DR Horton (NYSE:DHI) rose 8.8%; Centex (NYSE:CTX) 8.4%, and KB Home (NYSE:KBH) 8.2%.

The 3-month LIBOR declined 4 basis points to 0.79%, its steepest fall since March 19 and market's volatility index, the CBOE Vix, plunged 8.70% to 30.24.  On the NYSE, advancing issues outpaced declining stocks by a seven-to-one margin.  Volume was relatively moderate at 1.42 billion.

Of the thirty DJIA components, twenty-nine closed higher on Monday.  Financials were the leading gainers, up 6.7%, followed by a 4.8% jump in basic materials stocks, 3.9% in consumer services, and 3.4% surge in oil and gas and industrial sector shares.

Among financial components, Bank of America (NYSE:BAC) led the advancing issues with a 9.9% gain, followed by a 7.8% jump in American Express (NYSE:AXP), and a 6.7% advance in JP Morgan (NYSE:JPM) stocks.  Morgan Stanley (NYSE:MS) shares jumped 8.2%, Goldman Sachs (NYSE:GS) added 6.5%, and Wells Fargo (NYSE:WFC) surged 8.3%.  Financials got a boost after Goldman Sachs (NYSE:GS) added Bank of America (NYSE:BAC) to its "conviction buy" list, citing confidence in the banks' ability to come out of the current credit crisis, as well as expectations of improved second quarter results due to strength in refinancing and capital markets.  Citigroup (NYSE:C) raised its price target on Goldman Sachs (NYSE:GS) shares 10% to $160, citing improved debt and equity underwriting activity.

Goldman Sachs (NYSE:GS), JP Morgan (NYSE:JPM) and Morgan Stanley (NYSE:MS) applied for permission to repay TARP funds worth $45 billion.  State Street (NYSE:STT) shares jumped 8.5% in spite of news the firm would take a $3.7 billion loss putting conduits on its balance sheet.  The company said it will sell stocks to pay back funds borrowed under TARP.  However, after the markets' close, American Express (NYSE:AXP) announced plans to cut 6% of its global workforce, or 4000 jobs, citing increased defaults generated by the weak economy.

Today's economic posts include the 8:30 AM ET housing releases on building permits and housing starts. Both the posts are expected to show modest improvements.  April permits are expected to have risen to 530,000 from 516,000, and starts to 527,000 from 510,000. Minneapolis Fed President Gary Stern speaks at 1:15 PM ET on financial conditions. Crude prices hit $60 this morning, following yesterday's 4.8% increase, upon reports of a Sunoco (NYSE:SUN) refinery fire impacting Northeastern US supplies, and Nigerian militant threats to block waterways.

India's Sensex jumped 2,099.21 points, or 17%, to 14,272.63, before trading was halted for the day.     

Stock futures showed a higher opening on the Wall Street.        

On Friday, U.S. stocks declined as lack of a clear economic data suggesting economic recovery and General Motors' (NYSE:GM) announcement that it will drop 1,100 dealers in the U.S. weighed on sentiments.  The Dow Jones industrial average declined 63 points, or 0.8% and the S&P 500 index lost 10 points, or 1.1%. Tech-heavy Nasdaq declined 9 points or 0.5%.  The Nasdaq declined 3.4% during the week, ending a nine-week winning run.

On a weekly basis, the DJIA lost 306 points or 3.6%; the S&P 500 lost 46 points for a 5.0% drop.  However, the official close of the earnings season saw a silver lining: about two-thirds of the companies that reported their results beat earnings estimates.  The three month LIBOR eased to a record low of 0.83%, down from 0.94% just a week earlier.  Companies from Intel (NASDAQ:INTC) to Ford (NYSE:F) sounded optimistic, saying things are better than expected.

Among S&P industry grouping, financials were the leading decliners last week with a drop of 11.3%, followed by industrials, down 7.2%, basic materials, off 6.7%, and consumer services that ended the week 5.8% lower. Oil and gas shares last week fell 7.2% on demand-related concerns.  On Friday, 24 of the 30 Dow components ended in the red, led by Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM), Boeing (NYSE:BA), Caterpillar (NYSE:CAT), Merck (NYSE:MRK) and Wal-Mart Stores (NYSE:WMT).

The week lacks many market moving economic data. Nevertheless, several big names, including: Deere (NYSE:DE), Hewlett-Packard (NYSE:HPQ), Home Depot (NYSE:HD), and Target (NYSE:TGT) are due to report their earnings. Tuesday's April Building Permits and Housing Starts reports, which expected to show a gain in permits from 516,000 to 530,000 and in starts from 510,000 in March to 527,000 in April, may have a major impact on markets.  On Wednesday minutes from the April 28-29 FOMC meeting may indicate updated growth, inflation and unemployment expectations. On Thursday Leading Indicators are projected to show a gain of 0.6% in April from a decline of 0.3% the prior month.

In a Q&A at 1:00 PM ET today, Treasury Secretary Geithner is scheduled to answer questions regarding economic conditions. However, according to media reports, up to 500 more banks face possible closure as stress test criteria migrates to the smaller banks, which, the report says, could result in additional capital-raising needs of $24 billion among such banks. Today's 1:00 PM ET activity index from the National Association of Home Builders is expected to have risen from 14 in April to 16 in May.

Monday’s open interest numbers showed another substantial decrease in gold open interest…this time 4,551 contracts. But in silver, o.i. rose 1,191 contracts to 93,757. Was it short selling? I’ll let you know on Saturday morning.

Talking about silver, here’s a graph (courtesy of Gene Arensberg) showing Comex silver stocks from October…

Key Reports Due (WSJ):
8:30a.m. Sep Consumer Price Index: Expected: -0.6%. Previous: 0%.
8:30a.m. Sep CPI, Ex-Food&Energy: Expected: +0.2%. Previous: +0.1%.
8:30a.m. Sep Housing Starts: Expected: -2.7%. Previous: -6.3%.
10:35a.m. Nov 14 US Energy Dept Oil Inventories
11:00a.m. Nov 14 API Oil Industry Report
2:00p.m. Oct FOMC Minutes

Quotable
“The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd; indeed, in view of the silliness of the majority of mankind, a wide-spread belief is more likely to be foolish than sensible.”

     Bertrand Russel

FX Trading – Uninspired Moves in a Meandering Market 

Last week I touched on the potential end to the sideways US dollar correction. Then all of a sudden some unidentified reckless group came in to buy stocks and keep them from finishing at lows not seen since 2003. As I also mentioned, that effort gave traders enough reason to flood money into the euro and stop the buck’s breakout effort dead in its tracks.

But common to the market of the last couple weeks, no one’s really wanted to follow through on any of the bigger moves mixed in to relatively morose markets. The euro faded after its big day last Thursday – perhaps because there wasn’t much substance behind the move.

Then yesterday, an abysmal report on the US housing market by the National Association of Home Builders gave reason to expect that crisis will last still longer. The US dollar, seemingly perversely on negative US data, woke up and went into rally mode. Of course we know it was because stocks got knocked back down for a retest of recent lows. But that didn’t last either.

Now, overnight, minutes came out on the Bank of England’s most recent monetary policy meeting. Recall that they surprised the market and lopped off 150 basis points from their benchmark lending rate. Turns out, they talked about going a full 200 basis points. That means further rate cuts are surely in the pipeline for the BOE. And that should mean the British pound suffers versus the buck as the BOE converges on Federal Reserve interest rate levels.

But I guess nobody told the British pound the news. It’s now finding a way to rally sharply against the dollar. Of course, when I say sharply I don’t mean the several hundred-PIP moves we’ve become accustomed to on a daily basis. The currencies seem to have calmed down from that recent phase. The British pound is, however, currently leading the pack and holding on to roughly 100 PIPs of upside this morning.

If the British pound finds a way to break above current levels, it could carry that move quite a ways.

And the pound isn’t the only currency with pent-up momentum. The euro is showing a narrowing sideways pattern (similar to the US dollar chart I showed you last week) that could lead to a big breakout move.

Of course we’re going to need some conviction if these currencies go anywhere from here. At a time where the data continues to be poor from all corners of the globe, maybe technical levels become even more crucial than the fundamental morsels that typically excite this market.

Still ... it’ll probably make sense to keep an eye on stocks after economic data comes out in the US this morning!

Regards,

Jack & JR