Wednesday, September 30, 2009

Morning Update/ Market Thread 9/30

Good Morning,

Equity futures are higher this morning, below is a chart of the /ES & /YM (S&P and DOW futures:

NOTE: UPDATED CHART, the plunge followed the Chicago PMI report - The Chicago PMI fell back to 46.1, showing contraction when estimates were for growth and a number closer to 52.

The Dollar is down, bonds are down, oil and gold are both up.

First a big thank you to Davos who worked tirelessly to bring people updates on the economy – Thank You, your updates will be missed! I still have some projects myself and will be back into the full swing of writing hopefully by next week.

MBA purchase applications fell 6.5% for the prior week. That follows a rise of 5.6% the week prior. Interest rates are at historic lows, and yet Econoday is left to wonder why applications would be so low. Remember that this statistic was ruined when they stopped providing the raw data and now only give percentage moves. You will have no way to know what the real level of activity is here – by design:
MBA's purchase application index fell back 6.2 percent in the Sept. 25 week while the refinance application index slipped 0.8 percent. The dips come despite rock bottom loan rates including a 4.94 percent rate for 30-year mortgages, the lowest rate since mid-May. At 65.3 percent, refinancings are making up a larger share of total applications as homeowners scramble to lock in low rates and pay down higher rate loans. But the dip in the purchase index, if extended in coming weeks, would point to a slowing for home sales which, though bumpy, are just beginning to recover.

The ADP employment guess of the week is saying that we lost another 254,000 jobs in September. This is a report that I give little to no credence, we’ll get the government’s employment spin on Friday.

The third revision of 2nd quarter GDP came in higher than expected. Again, the GDP figures are grossly overstated as the deflator is understated plus we are counting mark to fantasy financial engineering, “growth,” as growth to our economy. Here’s Econoday’s report:
Yes, we are very much looking in the rear view mirror at this point. But the third estimate for second quarter GDP clearly shows the economy at recession bottom-with the weight of the evidence of more recent data arguing that the recession technically is over. And the component mix for second quarter GDP adds to the argument that the third quarter will be moderately positive. For the second revision to second quarter GDP, the Commerce Department nudged up its estimate to an annualized 0.7 percent decrease from the previous estimate of a 1.0 percent decline. The market forecast was for a 1.2 percent decrease. The upward revision was primarily due to higher estimates for business spending on software and nonresidential construction. Net, final sales are now more positive at an annualized 0.7 percent in the second quarter, compared to the second estimate of a 0.4 percent gain.

Year-on-year, real GDP decreased by 3.8 percent, after falling 3.3 percent in the first quarter.

On the inflation front, the GDP price index was unrevised at no change. The consensus had no revision at flat for the GDP price index.

The latest GDP numbers show the economy at recession bottom with increased likelihood that there will be an inventory boost in the third quarter, resulting in a moderately positive number for overall GDP. Equities should like today's report while bond yields should firm.

A part of that GDP report, corporate profits were revised downwards for Q2. We’re talking about a historic year over year decrease in profits of 19.2% which was revised downward from -17.7%. Of course the media spins the story to emphasize the short term bounce. Those who are “looking forward” are going to get burned again as the bounce is on the back of unsustainable government money pumping, not growth in the real economy:
Corporate profits in the second quarter were revised down slightly to an annualized $1.031 trillion from the original estimate of $1.050 trillion and in comparison to the first quarter's $0.976 trillion. Profits in the second quarter were up an annualized 24.5 percent, following an 85.1 percent surge the previous quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits are down 19.2 percent on a year-on-year basis, compared to down 24.8 percent in the first quarter.

From a technical perspective, we are still forming a very nasty looking rising wedge. Rising wedges are bearish and the minimum target for those wedges is the base of the wedge. Below is a 9 month chart of the SPX:

The NDX is making an even more perfect rising wedge. The angle of ascent is steeper, you can expect that the correction will be steeper as well:

Regarding wave count, McHugh was in agreement that Monday’s advance was likely wave 1 up of wave 5 up (of c up of B up). That means that yesterday’s and this morning’s decline are likely wave 2. Wave 3 up of 5 up should begin fairly soon unless wave 5 truncates which it certainly can do. If this count is correct, the next wave up will be strong and it will finish very near to the top of this rally.

Notice that prices once again failed to get over the 1,061 pivot point. Your clue that wave 3 of 5 is underway is when that pivot point gives way. The next higher pivot is at 1,090, and current support is at 1,041.

How about that Indonesian earthquake? Another tsunami and now well over 100 killed… my sympathies, I’ve been to Pago Pago several times, it’s a tropical paradise but nature can certainly be brutal.

Donovan – Atlantis: