Tuesday, August 18, 2009

Morning Update/ Market Thread 8/18

Good Morning,

Futures rebounded a bit overnight but are back under pressure again with the latest economic releases:

The PPI (Producer Price Index) came in with a month to month change of -.9%, much larger than expected, but the important number is the year over year number and it was down a stunning 6.8%!!! None of the articles I read this morning even mention the yoy figures:
Inflation at the producer level in July declined sharply on both declines in food and energy. And the core rate was nudged down by lower motor vehicle prices. The overall PPI dropped 0.9 percent after spiking 1.8 percent in June. The decline in July was greater the market forecast for a 0.3 percent dip in the headline PPI. The drop in the latest month was led by a 2.4 percent decrease in energy with food prices declining 1.5 percent. Meanwhile the core PPI rate eased sharply to 0.1 percent dip, following a 0.5 percent surge in June. The consensus had expected a 0.1 percent rise.

With energy prices rising in recent weeks and auto credits ending soon, the July PPI may be the best we see for a while.

Notice how seemingly benign the month over month chart is? It’s trending down, but look at the effect on the year over year chart

And, get a load of this… According to the BLS, “From July 2008 to July 2009, prices for finished goods fell 6.8 percent, the index for intermediate goods decreased 15.1 percent, and crude goods prices dropped 44.8 percent, all of which are record 12-month declines.”

Did you catch that? RECORD DECLINES. Yes, energy is a large reason for the decline, but those who exclude energy costs, a very important and underlying engine for the economy (and demand is way down), are simply deluding themselves if they try to eliminate it like the government and media does.

I believe these numbers do mean that we have entered a deflationary spiral. I need confirmation of that from Jim Shepherd’s model, but I should know more soon. I will also have the updated charts from the Fed soon and will post them when they are updated.

It’s important to know that a deflationary spiral does not necessarily mean that stocks are going to plunge immediately. It may take time for it to translate, but it most assuredly will. More later - this is a very big development, one that I’m sure the media will ignore and pretend is not happening.

Housing Starts are down more than forecast. This is actually a good thing from my perspective as there is still too much inventory. Of course bad is good and good is bad as far as the sheeple and twisted media are concerned. Here’s Econoday’s spin:
Homebuilding in July slipped from June's gain but remained above recent lows. Also, the single-family component continued its uptrend. Housing starts in July decreased 1.0 percent, following a 6.5 percent boost the month before. The July pace of 0.581 million units annualized was down 37.7 percent year-on-year and was lower than the market expectation for 0.605 million units. The decline in July was led by the multifamily component which dropped 13.3 percent after plunging 26.1 percent the month before. However, the single-family component rose another 1.7 percent after gaining 17.8 percent in June. Single-family starts have risen five months in a row.

By region, July weakness in starts was led by a monthly 16.3 percent drop in the Northeast. Starts in the West and South also slipped, by 1.6 percent and 1.4 percent, respectively. The Midwest posted a 12.9 percent gain.

Housing permits also slipped on the multifamily component while the single-family components rose further. Overall permits edged down 1.8 percent, following a 10.0 percent boost in June. Permits in July were issued at a pace of 0.560 million units annualized and were down 39.4 percent on a year-ago basis.

Today's starts report is better than suggested by the headline number. Multifamily starts are notably more volatile that the single-family component. It is good news for many homebuilders that the single-family component has been on a moderate uptrend for five months.

Hahaha, always a reason why it’s better than it appears in their eyes! What nonsense. Just look at that chart. Anybody see inflation there? Remember, consumers used to use never ending increases in home value to finance their spending via refinancing and second mortgages. That path to “wealth” is gone and is not coming back. This is one of the primary reasons that consumer credit is contracting, and that is going to get worse.

The Redbook same store sales decreased 4.5% yoy in the prior week. I believe that to be understated and I won’t even report Goldman’s delusional ICSC anymore.

Yesterday was a 90% down day – hey, I told everyone to buckle the heck up! It’s going to be a wild ride and I believe that we are entering or have entered a deflationary spiral that is going to grind the excesses out of the economy. It’s a GOOD THING. Nations can survive deflation, it is usually hyperinflation that kills currencies and nations. It will present a window of opportunity for REAL change, not just accelerated more of the same manipulation and twisting of the rule of law.

The short term stochastics are mostly now oversold. We are coming up on an area of support and I expect that it may take some time to work through it, but believe that we eventually will with the occasional attempt to manipulate the markets afloat. I believe that with deflation firmly in control that attempts to manipulate the market will fail as they are overwhelmed with deleveraging pressure and higher volumes.

990 is now the overhead pivot, 970 has support, 961 is the next lower pivot and after that it’s 935…

Have a great day, I’ll update more on the PPI and what I think is the beginning of a deflationary spiral later as I get more information.


Deflation is going to grind the economy back to reality. We as a nation are now faced with another choice… to accept reality and to let the cleansing process work, or to fight it tooth and nail which will be suicidal in the long run for our nation.

Donovan – Atlantis: