Thursday, October 15, 2009

Morning Update/ Market Thread 10/15

Good Morning,

Equity futures are down hard this morning following the theft report from Goldman Sachs and more losses at Citi:

The dollar had fallen further overnight but ran back higher as the markets dove this morning. Overall the dollar is nearly flat from the close, currently sitting at 75.58 after failing to regain 76. Both gold and oil are down this morning, gold is currently sitting at $1,050 per ounce after peaking near $1,072.

Goldman reported earnings that “beat,” earning a shameful and disgraceful $3.2 billion in the past 3 months. Like JPM, their mark-to-fantasy “earnings” of $1+ billion per month come through the buying and placement of politicians, the buying of regulations, and the pillage of the taxpayer:
Oct. 15 (Bloomberg) -- Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, reported third-quarter earnings that exceeded analysts’ estimates on trading gains and investments with the company’s own money.

Net income more than doubled to $3.19 billion, or $5.25 a share, in the three months ended Sept. 25, from $845 million, or $1.81 a share, in last year’s third quarter, the New York-based company said today in a statement. The average estimate of 22 analysts surveyed by Bloomberg was for $4.18 a share, with forecasts ranging from $3.48 to $4.75.

Lloyd Blankfein, Goldman Sachs’s chairman and chief executive officer, stuck with the firm’s focus on advising, trading and investing after converting to a bank last year to win the Federal Reserve’s backing. Increased risk-taking paid off, and the company’s stock climbed 128 percent this year, the best performance among the 15 biggest U.S. banks.
“Fundamentally everything’s fine and is probably going to remain strong into next spring,” Jon Fisher, a fund manager at Fifth Third Asset Management in Minneapolis, which has more than $19 billion under management including Goldman Sachs stock, said before the results. “The risk really is just on the sentiment side: political fallout or just expectations getting too bullish in the short term.”

Yep, they better beware of not political fallout, but of the ire of the people. Someday enough will have figured out the game to rise up and take back what has been stolen from them. Don’t look for the politicians to do so, they have been bought and paid for.

Meanwhile, over at Citi, even with mark-to-fantasy they couldn’t turn a profit – except when they remove “special, one time items.” This is the other bullshit game that is being played. It’s like this… Let’s say you own an old junker of an automobile that is always breaking down. You have huge repair bills every month, like clockwork, YET, you refuse to budget in extra maintenance expense and fail to consider or report to your wife how much all those repairs cost. Meanwhile you are slowly going deeper into debt and don’t have money to spend on other things in life and can’t quite figure out why!

Well, the financials and most corporations in America are doing the same thing – and the analysts who review these companies buy into the B.S. by shoving artificial Price to Earnings ratios at you that ignore all these (forever recurring) write-offs. Simply more Enron-esk accounting.
Oct. 15 (Bloomberg) -- Citigroup Inc., the lender 34 percent owned by the U.S. government, posted a $101 million profit, defying expectations for a loss, as the company slowed the pace of building reserves for future loan defaults.

The third-quarter profit compared with a loss of $2.82 billion a year earlier, the New York-based bank said today in a statement. On a per-share basis, the company had a loss of 27 cents because of a charge related to the exchange of government- and privately held preferred shares into common stock. Eighteen analysts surveyed by Bloomberg News estimated a loss of 29 cents.

Chief Executive Officer Vikram Pandit, whose bank profited in the first half by booking gains on business sales, added $802 million to loan-loss reserves, 76 percent less than the amount expected by David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. Citigroup posted deficits every quarter last year and a record $28 billion annual loss.

How did all this work out for their share price? Here’s the overnight chart of both C and GS:

The CPI came in still with yoy decreases in overall price. Should the rally in energy end, you will see these numbers accelerate again to the downside. Here’s Econday’s report:
Consumer price inflation in September was mixed as the overall CPI slowed while the core rate firmed. The headline CPI rate eased to a 0.2 percent gain after jumping 0.4 percent in August. The consensus had expected a 0.1 percent uptick for the latest month. The slowing was due to a dip in food prices and a dramatically slower gain in energy costs. Core CPI inflation firmed slightly, rising 0.2 percent after a 0.1 percent increase in August. The latest number came in a little above the market forecast for a 0.1 percent rise.

Helping to soften the headline number, the food component declined 0.1 percent after a 0.1 percent rise the month before. The energy component slowed to a 0.6 percent boost in September, following a sharp 4.6 percent jump in August. Gasoline posted a modest 1.0 percent gain in the latest month after a 9.1 percent spike in August.

The moderately faster pace for the core rate was due to relatively strong gains in lodging away from home, medical care, new vehicles, used cars and trucks, and public transportation. The core rate firmed despite declines in rent and owners' equivalent rent, the first decreases in those indexes since 1992.

Year-on-year, headline inflation edged up to minus 1.3 percent (seasonally adjusted) from down 1.4 percent in August. The core rate was unchanged at up 1.5 percent in September. On an unadjusted year-ago basis, the headline number was down 1.3 percent in September while the core was up 1.5 percent.

Overall, inflation remains subdued despite slightly disappointing numbers in today's report. The weakening in housing costs especially points to a sluggish trend for inflation in the near term unless energy costs pick up.

The Empire Manufacturing index came in much stronger than expected. The trend is definitely positive, and while the reading is strongly above zero showing growth in that region, what the index does not show is at what level that activity is. Remember that overall activity fell off the proverbial cliff, therefore any uptick is likely to produce a positive number the way they index it – seeing the raw number chart would be much more meaningful here:
The month-to-month rate of increase is picking up steam quickly in the New York manufacturing region. The Empire State general business conditions index jumped to 34.57 in today's October report vs. 18.88 in September. The index first popped over the break-even level of zero in August and has since indicated, again, rising rates of month-to-month expansion.

New orders have been mirroring the overall index, now at 30.82 and pointing to extended gains for overall activity in the months ahead. Unfilled orders have finally popped over zero, now at 2.60 and reflecting the increasing level of activity that is backing up work. Shipments really jumped in the month to 35.08 vs. September's 5.34, helping to drive up employment to 10.39 in a reading that ends a long string of declines. The workweek also rose sharply, to 20.78 vs. 5.95.

An odd thing in the report is that manufacturers in the region continue to work down inventories aggressively, at -18.18 vs. -25.00 in a month-to-month comparison that only hints at a slowing rate of drawdown. The ISM manufacturing report, that samples firms from around the country, showed in its September data a pivotal slowing in destocking that is not confirmed here. And firms in the New York region expect to continue to draw inventories well into next year with the 6-month outlook for the component at -5.19, but still much less severe than the prior reading of -17.86.

Price readings are steady showing increasing month-to-month costs for inputs, at 19.48, but no pricing power for outputs (or finished goods), at -5.19. Today's data are definitely a positive, suggesting that the manufacturing sector, which was among the first sectors to contract, is poised to help lead the whole economy into recovery.

Weekly Jobless claims came in at a still horrid 514,000 which was once again “better than estimated.” Continuing claims fell, this is due to people falling off the backside of the roles and notably those on Emergency Extended unemployment is continuing to rise:
The rate of layoffs continues to ease as initial jobless fell 10,000 in the Oct. 10 week to 514,000 (prior week revised from 521,000). Continuing claims also fell, down 75,000 to a sub-6 million level at 5.992 million in data for the Sept. 26 week. The unemployment rate for insured workers, in contrast to the overall unemployment rate, continues to slip, down another tenth to 4.5 percent. Levels in this report are the lowest since the first quarter.

Special help for the unemployed is an important feature of economic policy. Emergency unemployment compensation rose a little more than 10,000 in the Sept. 26 week to 3.331 million. September's employment report proved to be a disappointment, showing greater weakness than August. But the early read on jobless claims offers a reason to be optimistic for this month's jobs report.

The Philly Fed Survey comes out at 10 Eastern.

Yesterday’s action was very interesting with DOW 10,000 acting as a magnet and actually closing over. We first reached DOW 10,000 in March of 1999, more than 10 years ago. At that time the dollar was at 100 and gold was at $300. That means that had a person kept $10,000 in the DOW and $10,000 in gold for the past decade that what they could purchase with their stock money would only buy about $7,500 worth of 1999 goods, but their gold would buy $35,000 worth of 1999 goods!

Notice the discrepancy between the fall of the dollar (25%) and the rise in gold (300%+). The disconnect is because the dollar is weighted against a basket of fiat currencies ALL OF WHICH are devaluing themselves in real terms. So, I hate to say it, but Harry Dent’s inflation adjusted call of DOW 35,000 is not that far off as the DOW would have to be at the 35,000 level today to have kept up with the rise in gold.

Below is a 10 year chart of gold from July of this year, courtesy of Kitco. Note the very obvious inverted Head & Shoulders, I don’t even need to draw the neckline in, do I? Target equals about $1,325 on that now confirmed pattern.

The daily candles yesterday are interesting. There were normal looking large candles produced on the indices, but on the ETF’s with their gap openings, they look more like topping hammers. And the NDX is very ugly looking as it has set itself up for an island reversal, and with this morning’s gap down open could verify that if prices were to stay below yesterday’s candle all day. That makes the price action today very important:

The XLF has the same set up.

Exxon Mobile (XOM) broke upwards out of a fairly large consolidation triangle yesterday. I am wary of that break out, but note that the oil P&F now has a bullish target on oil of $94 a barrel. This is pure dollar weakness and speculation with cheap money as demand is simply not there to justify that move, yet it bears watching for sure.

The Transports did a rocket shot on CSX’s earnings yesterday. No, that move was not justified. Rail traffic is way, way down and the price of the Transports is relatively much too high compared to traffic levels. Nonetheless, the Transports ran smack into the upper Bollinger Band stopping at a new rally closing high. It did not, however, break the prior intraday high. So, did that confirm the DOW Theory buy signal or is the non-confirmation still a possibility? This is a gray area for me… some technicians base everything on closing numbers and some on intraday numbers. I look at it like this; it’s possible either way and it needs to be watched. I am never convinced until both the intraday and closing high/low is exceeded.

Yesterday’s move obviously satisfied the large directional move the McClelland Oscillator was looking for. McHugh believes that was likely the beginning move of the final wave higher and that it’s likely to peak in the next couple of weeks, landing on the high about in time for his Fibonacci turn window at the end of the month or by the Bradley turn date on the 9th of November. We’ll see, again his count has been tracking very well and his count is in agreement with Tony Caldero’s count, something that when they are sync, I simply do not ignore.

We finished yesterday obviously WAY overbought on all time frames through daily and even the weekly and monthly are overbought as well. BIG, BIG divergences all over the place, namely on the advance decline lines, on volume (yesterday was higher volume than the past several days, but still very low), and interestingly in the segments of the markets. Last night I was looking at the big picture of the bear market over the past couple years to get a better perspective and something really jumped out at me. Here are some charts, pay attention to the percent Fibonacci retrace for the entire bear market to date:

NDX, right at the 61.8%, a very important point:

IYR, the Commercial Real Estate ETF has retraced 38.2% and is sitting right underneath:

The XLF, touted as being the strongest of the recovery is NO SUCH THING when looking at its rebound. Yes, from its pathetic bottom it has jumped the most in percentage terms, yet it has failed to even reach the 38.2% retrace level of its peak!!! Math is a bitch, pay attention! Also note the very clear volume pattern… that’s a huge, HUGE divergence:

The Transports have mysteriously risen way more strongly than traffic would dictate. They have retraced more than 50% of the bear market and are approaching the 61.8%. Note again the perfect rising wedge – that is NOT a channel, it is a rising wedge with volume tapering off, confirming the pattern:

Here are the DOW Industrials. Again, rising wedge, volume divergence, having retraced up to nearly the 50% level:

The SPX has also nearly reached the 50% retrace level which is at 1,125. Note the classic rising wedge, it’s volume is pattern confirming as well although not pictured, and you can also see the diverging RSI on this daily chart:

So, we have the NDX up against very powerful resistance at the 61.8%, and yet the financials, despite the resumption of mark-to-fantasy, not even back to the 38.2%. That’s a huge red flag to me, yet another split in the market. As the primary indices get into or above the 50% retrace level, the overhead resistance becomes much greater as the volume resistance at those levels is much more recent with much higher volume.

This morning’s decline is likely a subwave of the final wave higher. It will likely continue to move higher but can still end anywhere in here (watch the NDX and XLF today), or can overthrow those rising wedges. I’m still being patient and not playing the game in here. It looks like playing with nitro to me… we have major disconnects between what’s happening in the real economy and what’s happening in the technicals. And, we have major disconnects in the technicals as well. Personally I like to put the odds in my favor when investing, that means that the fundamentals, technical, and psychological all get in alignment. They are getting in alignment right now alright, and its extreme…

But, hey, in the meantime we might as well party like the DOW… in 1999!

Prince – Party Like It’s 1999: