Monday, November 16, 2009

Morning Update/ Market Thread 11/16

Good Morning,

Equity futures once again were run up in very thin weekend trading, this time pushing the S&P back up into the 1,100 range:

Of course the up moves in stocks were matched tick for tick with a down move in the dollar which now stands back at the 75 level. For equities to move higher, the dollar must be sacrificed and I’m not sure that move would be orderly. Oil is back up at $77 and gold, of course, pushed higher, this time reaching $1,133 dollars as a high… gold is very overbought at this level and is creating an expanding megaphone top (look on a one hour chart, you’ll see it), meaning that it could pull back for a rest anywhere in here, of course the dollar has to behave.

And don’t ignore the long bond here either. It is up strongly over the weekend, the direction usually not good for equities. If you remember, bonds made a rising wedge bottom, broke below the bottom of that wedge, and are now retesting the bottom trend line, so this may be all the higher they get for now unless they reenter, and again, that would be a sign that money is flowing from equities.

Retail sales numbers came in tricky for the month of October, so pay attention here. The headline number was 1.4% growth month over month, but was it really? No, let’s read what Econoday has to say about it:
Headline retail sales look good for October-but most of the strength was tied to autos partially rebounding from a post-clunkers drop off in September. Ex-autos rose but below expectations. Also, September was revised down sharply. Taking into account these factors, sales were sluggish. Overall retail sales in October rebounded 1.4 percent after a revised 2.3 percent fall in September. The October gain topped the market projection for a 0.9 percent increase. September had previously been estimated to be a 1.5 percent decline.

The October jump in overall sales was led by a 7.4 percent rebound in auto sales after a 14.3 percent plunge in September. Excluding motor vehicles, retail sales improved 0.2 percent, following a 0.4 percent rise in September. The latest number was lower than the consensus forecast for a 0.4 percent gain in October. Excluding motor vehicles and gasoline, retail sales increased 0.3 percent, matching September's gain.

Based on the core of total less autos and gasoline, sales are sluggish although the components were mixed. Today's report shows the consumer still cautious about spending and should weigh on equities-especially with a poor showing by the simultaneously release of Empire State manufacturing.

So, consensus was for a .9% gain, but September was revised downward .8% (!). So, when we combine the two months, it was actually still quite negative. These revisions play games with the headline numbers and unless people look behind the data, they can be easily fooled. Now then, the yoy numbers are still negative, this is against very easy comparisons, so keep in mind that we had a cliff dive and that 0% growth yoy would mean that we landed on a flat, not that things are getting better. But yoy sales are still negative by about 2%, even against very easy comparisons! Heck, gasoline has gone up tremendously yoy, and yet total sales are still down, that’s how bad it is. Guess what, this is a ledge after the cliff dive, the real bottom has not been hit yet. Always keep TOTAL sales activity in the back of your mind when evaluating graphs and charts that are expressed in percentages. Also, look at the charts carefully. The chart above, for example on yoy % change, note that zero is not on the black horizontal line… that is the zero line for month over month (a poorly designed chart).

The Empire State Manufacturing survey took a big drop backwards to 23.51 from 34.57 in October, the consensus was for 29, the low range was 26, so this was a miss completely below the range of the “expert’s” consensensus. Any reading above zero on this index is supposedly positive. Again, when you are dealing with an “INDEX,” you must really put on your thinking cap, they are not intuitive as they do not tell you what the base level of activity is. For example, you could have fallen from a level of say 100 to a level of only 2 last year when measuring real activity, but the index would show a series of negative readings to get you there. Then, a year later, a reading of 3 produces a positive index reading, but you are still 97% below the level of activity you were at slightly more than a year ago, get it? That’s basically what is happening here, but we aren’t privileged enough to see the raw data, we’re not “smart enough,” lol, so they will tell us what it means with their index. Here’s Econoday:
Month-to-month growth this month has slowed in the New York region, according to the Empire State index which fell back more than 11 points to 23.51. The 23.51 level is still well beyond the break-even point of zero, indicating strong growth but again growth that is a little less strong than October. The new orders component, at 16.66 in November vs. October's 34.57, points to continued slowing in the months ahead. Employment, at 1.32, indicates only the slightest positive bias for month-to-month hiring. Despite high fuel prices, gains in raw material prices slowed as prices paid fell back about 9 points to 10.53. Lower raw material prices are consistent with slowing demand. The 6-month outlook remains very positive, a contrast to the run of weak confidence reports on the consumer side. As far as manufacturing reports go, the Empire State report has been the strongest. The Philadelphia Fed's report, which has been much tamer, will be one of Thursday's highlights.

Business inventories are released at 10 Eastern, and Bernanke shows the world what he doesn’t know again by flapping his lips at noon. This is a busy week for data, PPI, CPI, TIC data, etc., stay nimble as the market attempts to put in a new high.

Watch the divergences, there are more and more everytime I look. The XLF is a glaring one, it is not anywhere near making a new high, GS, and JPM are big underperformers. Of course none of the “growth” has been real. This morning I’m going to write a short article about the different types of growth and how they are fooling everyone, too much to put in here. The current hurdle is the 1,107 pivot, 1,090 is support.

Here’s your Monday morning cheer - Who can take a rainbow…

The Government Can: