We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.

The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.

These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.

When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?

Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.

Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.

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Wednesday, July 23, 2008

Comtex SmarTrend(R) Morning Call -- July 23, 2008

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Jul 23, 2008 (SmarTrend� via COMTEX) ----The uptrend pause ended mid-day yesterday, and the market indices resumed the near-term uptrend as investors became convinced Congress would pass housing mortgage relief legislation. The indicators continue to move north, and the road to DJIA 11,700 appears to be clear. More good news could send the DJIA higher; bad news could induce the expected topping out early next week.

The uptrends got hot again yesterday, registering the third day in a row of the daily SmarTrend(R) uptrends to downtrends being polarized to the upside, coming in at 164 to 13. That three-day run provided the impetus needed for the IBDI to break through the top of its oversold zone. That could happen by the end of this week. The Trend Ratio climbed another 3 points to 38; its ascent is cooling off slightly, but the indicator appears poised to rise fairly smoothly until it climbs above 40 where it is likely to pause when the DJIA runs into resistance at 11,700. These indicator movements lent credence to the notion that the intermediate-term trend has bottomed out; but in light of the continuing long-term downtrend, it is still too early to confirm that the intermediate-term trend will enter an uptrend and extend this near-term uptrend rotation.

The only near-term trend indicator showing signs of exhaustion is the SmarTrend(R) Ratio, which is well into its overbought zone. The other three near-term trend indicators followed in this report, the NBDX, NBDI, and NBDV, continue to climb through their positive zones, and are not expected to top out for several more days. In short, the near-term indicators and market indices are performing in a manner consistent with expectations enunciated here last week.

Just as it was forecast yesterday in this report that surprising good news could trigger a resumption in the ongoing near-term uptrend rotation, the market is becoming ripe for unexpected bad news to catalyze another uptrend pause at the end of this week, to be led by a correcting downward overbought trade-term trend. However, first look today for the DJIA to extend yesterday's resumption of the near-term uptrend rotation. There are a number of economic and earnings reports on the immediate horizon, discussed below, and they can influence the movement of capital from one economic sector to another. Overall if signals from the government continue that real estate and credit relief is happening, mild bad news will lead only to uptrend pauses, not corrections. Many stocks in the news are listed in the table below. It can be seen that there is an ongoing steady rotation from predominating downtrends to uptrends over the past week; all stocks changing trends recently may be examined by clicking on http://www.mysmartrend.com.

Wall Street took cheer from the declining price of oil amid hopes that credit market woes may be moderating. Crude prices moved $3.09 lower yesterday, for a 2.4% decline to $127.25, representing a drop of more than 13% from July highs, on the easing of any threat to the Gulf from Hurricane Dolly. Moreover, an analyst report suggested lessening write downs are likely from Wall Street. After a day of moderate trading activity, a late-day surge resulted in a 135-point advance on the DJIA, for a 1.2% gain. Nasdaq shares rose 1.1%, while the S&P tacked on gains of 1.4%. Philadelphia Fed President Plosser's tough inflation talk and prospects of additional supply pressures sent the price of Treasuries lower, with the 2-year yielding 2.720%, off 7/32 before Wednesday's record $31 billion sale of new notes, and the 10-year down 16/32 to a 4.105% yield. The combination of remarks from US Treasury Secretary Paulson and Philadelphia Fed President Plosser sent the euro to nearly a two-week low against the greenback, and the dollar to almost a two-week high against the yen. The Vix volatility measure sank to 21.18, its lowest since June 5, as NYSE volume sank to a modest 2.52 billion shares, and advances on the NYSE outpaced declining shares by a 2-to-1 margin.

Prospects for a strengthening dollar has helped bring down oil prices, as the odds of a Fed interest rate hike by year end have increased to 81% currently from last week's 50%, due to second quarter corporate earnings numbers posting better-than-feared and the threat of a systemic poisoning from the GSE's collapse failing to materialize, even with its $25 billion estimated cost in 2009 and 2010. Plosser advised "To prevent recent inflation from continuing to plague the economy...I believe the current very accommodative stance of monetary policy will need to be reversed." Weak industrial numbers emanating from Europe may limit the threat of a string of increases in rates there. And Paulson reiterated his strong dollar stance. The decline in oil also reflects an increased appetite for risk among traders who previously viewed the Treasuries and commodities as safe havens for their positions, but are now cautiously nibbling along the bottom of credit market victims. And demand factors continue to place downward pressure on oil, with today's inventory status report expected to reveal another increase in gasoline stocks due to reduced consumer demand in the US. The lower oil prices sent energy shares 3.3% lower, but resulted in a 2.7% advance in consumer discretionary shares, with General Motors (NYSE:GM) up 9.4%, KB Home (NYSE:KBH) up 9.1% and Starbucks (NYSE:SBUX) up 7.4%. And the Amex Airline Index soared 22%, marking its greatest-ever advance. JetBlue Airways (NASDAQ:JBLU) and US Airways (NYSE:LCC) both topped earnings expectations, advising no plans afoot to cut capacity. Nevertheless, concerns over consumer health weighed on tech shares, which ended off 0.5% on clouded guidance from Apple (NASDAQ:AAPL), Texas Instruments (NYSE:TXN), Microsoft (NASDAQ:MSFT), and Google (NASDAQ:GOOG). Yahoo's (NASDAQ:YHOO) results missed by a cent; however, the company's prospects as a takeover candidate from Microsoft (NASDAQ:MSFT) brightened on the inline returns and its failure to lower guidance. However, industrial sector shares gained 1.2% as emerging market strength remained a source of demand for such companies as Caterpillar (NYSE:CAT), which reported better-than-expected quarterly results of $1.74 versus $1.24, well above estimates for $1.54, on emerging market demand from Asia and the Mideast, however, the stock received a JP Morgan (NYSE:JPM) downgrade.

Nonetheless, it was the financial sector that spurred the rally in the averages. An analyst at Deutsch Bank (NYSE:DB) opined Wall Street's capital market write downs appear to be moderating and margins appear to be improving, leading to a recovery in profits. Among sector performances, financials again led on the upside, with a gain of 8.4%, spurred by a 27.4% advance in Wachovia (NYSE:WB), 16.2% in First Horizon National (NYSE:FHN) and SunTrust (NYSE:STI), and 13.7% in Legg Mason (NYSE:LM). Wachovia (NYSE:WB) announced a greater-than-expected, record loss and sliced its dividend for the second time in three months, but reported a stock sale is not planned and plans to reduce $2 billion in expenses by the end of 2009. Its shares also reflected its consideration as a takeover candidate. Largest US S&L, Washington Mutual (NYSE:WM) posted a $3.3 billion loss and a $3.74 billion add to loan loss reserves with a Moody's (NYSE:MCO) downgrade warned as its results exceeded estimates at a loss of $3.34, excluding $3.24 on its April capital issuance, versus 92 cents a year earlier and estimates of a $1.05 loss. But SunTrust (NYSE:STI) announced better-than-expected results and advised no dividend cut plan, although sale of $2 billion in its long-held Coca-Cola (NYSE:KO) was completed. Both KeyCorp (NYSE:KO) and Regions Financial (NYSE:RF) upped loan loss set-asides, but so far the dreaded land mine among the regionals has yet to materialize.

In the corporate arena, the outpouring of corporate results continues apace... Boeing (NYSE:BA) topped estimates by three cents, reporting $1.38 ex-items versus $1.35 a year earlier; the company maintained full year guidance and cited a record backlog...... According to the NYT, Apple (NASDAQ:AAPL) CEO Steve Jobs is cancer-free, with recent gaunt appearance attributed to recent surgery... AT&T (NYSE:T) reported inline results of 76 cents versus 70 cents a year ago... Pfizer (NYSE:PFE) reported inline results of 54 cents versus 42 cents last year... Costco (NASDAQ:COST) warned its fourth quarter likely to print below Street estimates of $1.00 due to higher energy costs and lower margins; the company also approved additional share buybacks of up to $1 billion.

By Chip Brian, Editor-in-Chief -- editor@mysmartrend.com

The following equities mentioned above include:

 Comtex SmarTrend Alert ---------------------------------------------- Ticker Last Close
   Trend Direction Trend Price Trend Date ---------------------------------------------------------------------- AAPL 162.02
   Downtrend 169.74 6/13/2008 BA 69.26 Uptrend 68.63 7/22/2008 CAT 74.98 Uptrend 74.81 7/22/2008 COST 72.00 Uptrend 73.39 7/18/2008
   DB 93.00 Uptrend 88.80 7/18/2008 FHN 9.25 Uptrend 8.21 7/18/2008 JBLU 4.50 Uptrend 4.23 7/18/2008 JPM 40.86 Uptrend 39.40
   7/17/2008 KBH 19.39 Uptrend 17.93 7/18/2008 KEY 11.99 Uptrend 11.28 7/18/2008 KO 51.35 Downtrend 58.69 4/29/2008 GM 14.32
   Uptrend 13.13 7/18/2008 GOOG 477.11 Downtrend 527.13 6/27/2008 LCC 4.27 Downtrend 7.18 5/8/2008 LM 36.72 Downtrend 56.88 5/7/2008
   MCO 35.71 Uptrend 35.21 7/18/2008 MSFT 25.80 Downtrend 28.45 5/22/2008 RF 11.40 Uptrend 10.01 7/18/2008 SBUX 15.13 Downtrend
   26.20 10/12/2007 STI 39.66 Uptrend 34.40 7/18/2008 T 31.82 Downtrend 37.08 6/10/2008 TXN 24.35 Downtrend 30.14 6/11/2008 WB
   16.79 Uptrend 13.56 7/18/2008 WM 5.82 Uptrend 6.21 7/21/2008 YHOO 21.40 Downtrend 22.34 6/13/2008 PFE 18.35 Downtrend 22.87
   1/2/2008

INX -- S&P 500: 1,277 Lo: 1,249 Hi: 1,277 Change: +17.00

http://www.mysmartrend.com/images/INX20080723.jpg

INDU -- DOW JONES: 11,603 Lo: 11,387 Hi: 11,617 Change: +135.16

http://www.mysmartrend.com/images/INDU20080723.jpg

QQQQ -- NASDAQ: 2,304 Lo: 2,253 Hi: 2,304 Change: +24.43

http://www.mysmartrend.com/images/QQQQ20080723.jpg

This report is divided into three sections. The first deals with our 5 proprietary market indicators, the second section examines important economic and business happenings which are expected to affect U.S. Stock market movements and the third section describes specific company announcement and earnings releases. Experience demonstrates that when these 5 indicators reach extremes they can shortly be expected to change direction and move in the opposite direction. When such happens in all or most of the 5 indicators, on or about the same time, followed by a move from below an extreme (oversold) to above that extreme (or vice versa for overbought), a change in market direction is very probable. The near term market moves are measured to identify the best possible returns for traders/investors. Daily price/volume examinations provide the best data upon which to base such forecasts. In this report though, intraday indicators are examined to improve the point of entry timing for the expected move.

Comtex News Network, Inc. is not a registered investment advisor and does not provide investment advice. Investors bear complete responsibility for their own investment research and decisions and should seek the advice of a qualified investment professional prior to making investment decisions. SmarTrend is a registered trademark of Comtex News Network, Inc. Copyright, Comtex News Network, Inc. 2008

Comtex News Network, Inc. ("Comtex") obtains information from sources deemed to be reliable; however, Comtex does not guarantee the accuracy of any of the information or commentary provided. Comtex makes no warranties, expressed or implied, as to the fitness of the information for any purpose, or to results obtained by individuals using the information. In no event shall Comtex be liable for direct, indirect, or incidental damages resulting from the use of the information. Comtex shall be indemnified and held harmless from any actions, claims, proceedings, or liabilities with respect to the information and its use. Comtex does not make specific trading recommendations or provide individualized market advice. The information contained in the Morning Call product is provided as an information service only.

To subscribe to this newsletter, please visit http://www.mysmartrend.com/newsletter . To learn more about SmarTrend, go to http://www.mysmartrend.com or call Comtex sales at (212) 688-6240.

Copyright, Comtex News Network, Inc. 2008 **********************************************************************
   As of Saturday, 07-19-2008 23:59, the latest Comtex SmarTrend� Alert, an automated pattern recognition system, indicated a
   DOWNTREND on 06-13-2008 for AAPL @ $169.74. As of Saturday, 07-19-2008 23:59, the latest Comtex SmarTrend Alert, an automated
   pattern recognition system, indicated a DOWNTREND on 06-03-2008 for BA @ $80.09. As of Saturday, 07-19-2008 23:59, the latest
   Comtex SmarTrend Alert, an automated pattern recognition system, indicated a DOWNTREND on 06-11-2008 for CAT @ $79.32. For
   more information on SmarTrend, contact your market data provider or go to www.mysmartrend.com SmarTrend is a registered trademark
   of Comtex News Network, Inc. Copyright � 2004-2008 Comtex News Network, Inc. All rights reserved.