Monday, August 17, 2009

Morning Update/ Market Thread 8/17

Good Morning,

Equity futures are down hard this morning with the /ES back under the 990 support level:

The dollar is up sharply, gold is down sharply, and bonds are up.

The Empire State index rose into positive territory for the first time since January of ’08. I liken this to Japan’s headline this morning that recession there ended because they show GDP growth for one period. Yes, from one month to the next, or in this case for two months the index has risen, but industrial production and trade is in the basement and expecting it to fall and fall and fall forever and ever is just as wrong as expecting the stock market to rise forever and ever. It is at such a low pace that just the “cash for clunkers” stimulus insanity program is likely to raise it.

Of course Econoday overdoes the report and turns it into a pump:
The Empire State Report confirms what last week's industrial production report hinted strongly at, that is stability if not growth in the U.S. manufacturing sector. The Empire State index jumped to 12.08 from July's minus 0.55 for its best reading of the recession. New orders show a second month of actual month-to-month growth at 13.43 and a nice acceleration from July's 5.89. Shipments, at 14.11, also show a second month of growth. The pace of destocking is slowing with inventories at minus 22.34 vs. July's minus 36.46. The pace of layoffs is likewise slowing: minus 7.45 vs. minus 20.83. Note that deceleration in destocking and deceleration in layoffs are two key factors that are very likely to push the ISM's manufacturing index over 50, perhaps as soon as the August report.

Other August data from the Empire State report include a gain in prices paid, up more than 3 points to 13.83 to indicate rising demand for inputs likely centered in energy. But demand isn't by any stretch strong enough to create pricing power for finished goods as prices received fell more than 4 points to minus 12.77. Stocks and commodities got an instant but limited lift from today's report which points to strength in Thursday's more closely watched regional manufacturing report from the Philadelphia Fed.

Treasury International Flows (TIC) data was just released and was net NEGATIVE once again, this time by $31.2 billion dollars!

Note that although they claim that foreigners are still buying long dated securities, when all the positions are netted, they are negative, and tremendously so. Continued negative flows shows that capital is choosing to leave the United States. This is a vicious cycle to get started because the more that leaves, the more the Fed needs to print, the more they print, the more likely capital is to leave and so on. The way to make it all stop is to simply allow bankrupt companies to fail, cleanse the debt, cleanse the derivatives, balance the budget and start facing reality. Of course THAT won’t happen any time soon, so expect more of the same in regards to international flow of capital.

Amazingly, Econoday managed to turn a negative number into a positive one. I’ve been looking over foreign holdings of U.S. Treasuries and the reports from the Treasury Department are showing never ending growth in holdings. Those positions are not netted of SELLING, so when Econoday reports treasury buying, they are conveniently forgetting to net the SELLING. That is why we look at NET FLOWS – which is NEGATIVE.
Treasury International Capital data show a big jump in foreign buying of long-term U.S. financial assets in June, at a net plus $90.7 billion for the strongest reading of the year vs. a net minus $19.4 billion in May. Foreign demand was centered in Treasury coupons, at a net plus $100.5 billion despite a dip in Chinese holdings. Foreigners were also very big buyers of equities where the net gain was $19.1 billion. Even demand for agency debt improved to a net plus $5.1 billion. Demand for corporates was weak with the component showing a small net decline in the month.

The net gains do not reflect any entrenchment by U.S. investors who bought a comparatively sizable $32.9 billion in foreign securities. A key negative in the report shows an unwanted dip in Chinese Treasury holdings, at $776.4 billion vs. May's $801.5 billion. But Japan more than made up the difference, now at $711.8 billion vs. May's $677.2 billion. Total flows, which include short-term securities, show a third straight month of net outflows in what however reflects a movement away from risk aversion and toward higher returns. Total net flows came in at minus $31.2 billion in June vs. minus $65.7 billion in May and minus $39.9 billion in April. Markets aren't reacting to the report at least initially, but it does hint at a return to healthy, normal conditions in the global financial markets.

Barf! NEGATIVE NET FLOWS again, it’s a BIG DEAL! Oh, and this data is for the month of June. This shows that China was in fact selling Treasuries and pressuring the U.S. in that time frame. Is that continuing? Is that why Bernanke was forced to announce he is ending QE? Hmmm...

Let’s get to some technicals… Volume has been falling throughout the entire greenshoots rally. That trend continued last week. Obviously way overbought and up against the upper weekly Bollinger band, prices ran into very strong resistance in the 1,010 area and could not penetrate after two weeks of trying. Thus some retrenchment is expected. McHugh would call it wave 2 of c up of B up. We’ll see. Remember, last week was a turn window and we may have made at least a short term turn on Friday.

The working pivot points are now at 990 and then 961.

Thanks to all those who spread the word on my Week in Charts article, yesterday the traffic on the site tripled and it was receiving more than a thousand downloads an hour! That’s the goal, to get the word out that twisted thinking like Econoday’s spin above doesn’t further infect the masses with Economic Mass Psychosis!

Have a great day, I’ll be around most of the day, so will talk in the daily thread.

Tom Petty & the Heartbreakers - Free Fallin':