Tuesday, May 19, 2009

Morning Update/ Market Thread 5/19

Good Morning,

Futures climbed into the 912 pivot overnight but then sold off this morning and are now down slightly:

Yesterday was a very bullish day price wise, but it was on lower volume which begs the question, was it wave 2, or was it the beginning of leg three up? You’ll know by seeing whether we exceed the previous high…

The short term stochastics indicate that at least some downside is possible today.

The trade during this rally has been one where the dollar declines while energy and some other commodities climb. This is people getting in front of the inflation trade. Will they be right? I believe that they will, but only in the LONG run. I do not believe that deflation has run its course fully as of yet.

Of course we know that the government is trying as hard as they can to devalue the purchasing power of your money, so what we see in the markets at this time reflects that understanding and again is front running because the only data that shows growth in anything is the money supply (which does not capture what is happening to velocity or to the shadow banking system).
Reflecting the current trend, here’s a Point & Figure chart of the U.S. Dollar. Last week it went from a bullish stance to a bearish one with a target of 77. That’s quite a ways down from current levels and would suggest that this current trend could go on for a while longer (no, these charts are not always correct, but betting against them isn’t wise):

Looking at a P&F chart of oil, you can see that we tagged $60 a barrel but it tripped a target of $87 a barrel, consistent with the dollar chart:

But is the inflation trade for real here and now? Let’s take a look at a chart of S&P 500 earnings (chartoftheday.com):

Can you say “waterfall collapse?” I thought you could!

So, you have the collapse of transportation, the collapse of corporate earnings, oil inventories are at record highs as consumption falls, and yet people are buying the inflation trade? Boy, they really are looking out into the future!

NO, real and lasting inflation requires a few things that are missing. First is that wages need to rise for inflation to take hold. That may happen, but it’s hasn’t begun to happen yet, and I believe it won’t as competition from overseas will keep wages in check. Also, the money we print does two things that are NOT inflationary here in the U.S., namely that is that our capital (“printed money”) is free to leave this country, it is NOT a closed system. And secondly, our entire economy is saturated with debt – people who get their hands on new money will use that money to pay down or to simply service DEBT and so the VELOCITY of money will stay low.

That’s why you won’t be seeing the freshly minted money going to the bottom line of corporations.

And here’s a piece of evidence of what is happening in the derivative world – note that the BIS does NOT track all derivatives, only a portion of them:

Derivatives Market Declines for First Time on Record

May 19 (Bloomberg) -- The derivatives market shrank for the first time in the second half of 2008 as the global financial crisis curbed trading, the Bank for International Settlements said in a report.

The amount of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates fell 13.4 percent to $592 trillion, the Basel, Switzerland-based bank said yesterday. That’s the first decline in 10 years of compiling the data. The amount of credit-default swaps protecting investors against losses on bonds and loans fell 27 percent to cover a notional $41.9 trillion of debt.

This is important to see that the derivatives that are tracked are contracting – first time in history. Look at the size of those figures. So, if the derivatives they track fell by 13%, that means that more than $80 TRILLION worth of derivatives have gone bye bye. And THAT means that leverage in the system is decreasing which is most definitely NOT inflationary. This is the part of the system that most do not see nor understand so they ignore it or acknowledge it but then look away. NO, derivatives DO NOT all “net each other out.” That is partially true, but most definitely not true overall. You will have uneven distribution and not all players are protected to neutrality. That is impossible. Decreasing derivates means deleveraging.

And just this morning we learn that housing starts defied the greenshoot crowd and fell to another record low:
U.S. Housing Starts Drop to Record-Low 458,000 Pace

By Bob Willis

May 19 (Bloomberg) -- Builders broke ground on the fewest homes on record in April as a plunge in work on condominiums and apartment buildings overwhelmed the second straight gain in starts on single-family properties.

The 13 percent decrease to an annual rate of 458,000 was led by a 46 percent decline in multifamily starts and followed a 525,000 pace the prior month, the Commerce Department said today in Washington. Building permits, a sign of future construction, fell 3.3 percent to a record low pace of 494,000.

Despite this, yesterday Lowe’s beat estimates primarily by lowering charge offs and by keeping expenses down, and today Home Depot did basically the same thing beating estimates, but that was largely due to them taking fewer write offs than last year.

People thinking that it’s possible to re-inflate a burst bubble are just mistaken. Housing will not lead us into another bubble, THAT is IMPOSSIBLE. People are animals and they have the heard mentality embedded in our DNA. Once the heard runs from a bubble, the heard will not come back. It will take at least until the next generation who did not experience the pain experienced with that bubble bursting. NEW HOUSING BUBBLE IS NOT GOING TO HAPPEN. Yes, eventually prices will find a bottom, but they will NOT immediately turn around and skyrocket.

And today we also learn that the ICSC store sales decreased substantially last week by falling 1.3% week over week, and by falling .3% year over year. The Redbook chain store sales also fell by losing .3% week over week. Again, not seeing inflationary pressures EXCEPT in people’s imaginations and in the Fed’s money supply charts which fuels that imagination, incorrectly for now.

So, the markets are doing their bear market rally thing as the sheeple are herded into believing that the fed is actually going to make it all better – all the math will magically change and the credit card fairy will slip into your room at night and pay off all your debts too!

Sorry, but the housing bubble is never coming back again – at least for you. But, there is another bubble occurring right now, that is a bubble of fools who believes and has confidence in all the guarantees, stimulus, and bailouts of our government. When that last bubble of unjust confidence breaks, and it will, hopefully we’ll be smart enough to never come back to Marxism and Keynesianism again!

Fleetwood Mac - Never Going Back Again: