Wednesday, August 12, 2009

Morning Update/ Market Thread 8/12

Good Morning,

Equity futures fell overnight along with Asian markets (Shenghai down 5%), but then recovered in the morning hours and are now about flat:

The dollar is down slightly and bonds are up slightly.

MBA Purchase Applications rose 1.1%, but the refinance index fell 7.2%...
MBA's purchase index rose 1.1 percent in the Aug. 7 week for the third straight small gain in a row (levels not provided). The refinance index fell 7.2 percent reflecting a 21 basis point jump in the 30-year fixed rate, at 5.38 percent in the week.

The International Trade figures showed a widening trade deficit with a small rise in exports and imports. Here’s Econoday’s report:
The U.S. trade deficit in June expanded moderately but largely due to higher oil prices and a larger oil deficit. But there is good news in the detail for U.S. manufacturers. The overall U.S. trade gap widened to $27.0 billion from a revised $26.0 billion deficit the previous month. The June shortfall was less than the market forecast for a $28.5 billion deficit. Exports advanced 2.0 percent while imports rebounded 2.3 percent.

The widening in the trade shortfall was due to a wider petroleum deficit which expanded to $17.2 billion from $13.3 billion in May. In contrast, the goods excluding petroleum gap shrank significantly to $20.0 billion from $22.6 billion in May.

Behind the boost in the petroleum gap were both higher oil prices and more barrels imported. Crude oil prices jumped to $59.17 per barrel from $51.21 the month before. The number of barrels that were imported in June rebounded 7.1 percent.

So which producers in the U.S. were happiest about the latest trade numbers? By end-use categories, the June advance in exports was led by industrial supplies (up $1.2 billion) and by capital goods ex autos (up $0.4 billion). Also posting gains were foods, feeds & beverages exports. Automotive was in the positive category but essentially was flat. Consumer goods exports edged down marginally.

Outside of oil, the import numbers show weak domestic demand. Imports were almost entirely boosted by the industrial supplies category which jumped $3.9 billion and includes oil imports. The foods, feeds & beverages component and automotive imports rose incrementally. Businesses are not adding to stockroom shelves-at least not from imports. Consumer goods imports dropped a sizeable $1.7 billion and capital goods imports were down but basically flat.

Year-on-year, overall exports slipped to minus 22.2 percent from minus 21.2 percent in May while imports were little changed in June at down 31.1 percent from minus 31.2 percent the previous month.

The best part of today's report was the rebound in exports-which is sweet music to manufacturers' ears. Also, today's trade number will help soften the second quarter decline in GDP. The negative news is that the lower imports indicate weak domestic demand. But overall, equities should like the trade report but company earnings have center stage.

Oh yeah, sweet music… LOL, knuckleheads. Did you note the year over year acceleration in falling exports? Uh huh. THAT would correspond with the recent relapse in the Baltic index which has accelerated sharply downwards since the time of this data.

And look at those charts. Imports down 31.1% and staying there! Exports down 22.2% and accelerating downward? That’s simply an amazing collapse, one that I would expect to rebound as being down yoy 30%+ is not sustainable for long as you would mathematically get close to zero pretty darn quickly. The truth is that number could go all the way back to zero right now and that would mean a year over year leveling off. It hasn’t leveled off on a year over year basis, and the fall off in exports is accelerating, not slowing. Ignore the month to month numbers, they are almost meaningless.

This is one of those numbers where it coming back to neutral is a necessity in the long run but painful in the short run. Our deficits DO MATTER and must be financed. There’s a reason that trade has collapsed and that has proven the keynsian knuckleheads incorrect as anyone with an ounce of common sense would know.

The big news today, of course, will be the FOMC announcement at 2:15 Eastern time. There, we will lean how Bernanke will manipulate the markets going forward… or not. What a game, one that our nation would be a lot better off not playing. Just remember that what Bernanke says and what he does are two different things. The numbers still do not add up for me. I know we now have a lot of smart people looking at auctions but what I’m telling you is that there are false bids from the primary dealers and there are surrogates of the PD’s who are providing false demand for our debt with the Fed’s printed backing. This is a house of cards that is highly likely to come crashing down around Bernake’s head at some point – Ponzi finance ALWAYS eventually does.

I won’t play the analyst game of what he will or should say and how the markets will or should react. That’s losing sight of the big picture. The big picture is that the Fed is manipulating the flow of capital and they are manipulating investor’s expectations. Your government has no right and no business doing so. There’s no doubt that the Fed is under pressure from the Chinese to knock off devaluing their dollar assets, thus I would simply expect the Fed to talk up how they are maintaining their BS strong dollar policy, but behind the scenes they will be covertly destroying it. If they do truly stop the nonsense then the dollar would instantly gain tremendously. Risky trade in here due to their manipulation that’s not worth the risk to anyone’s capital in my opinion.

Here's a chart showing China's purchases late last year into early this year. Remember that capital flow data is not released in a timely fashion. This chart was not made by me, the original source is unknown, but I'll confirm that the TIC data supports the trend (I'll find the source if I can and will post it in the comments below):

I’ll make a brief comment about their comments afterwards.

Here’s a chart of the SPX and the rising wedge. Note that we threw over, met heavy resistance and are now back inside. It’s going to be interesting going forward from here.

The 60 minute stochastic is oversold, and thus a bounce is possible, but the 10 minute is overbought, so there may be some back and forth. Can’t you feel the crescendo? Pretty soon there’s going to be an eruption!

Eddie Van Halen - Eruption