Wednesday, November 25, 2009

Morning Update/ Market Thread 11/25

Good Morning,

Equity futures are up this morning while the dollar is breaking below support and making new lows for the year. DOW and S&P overnight action is below:

Bonds are down slightly while the Dollar, which has been flirting with Disaster, has broken beneath recent support and hit an overnight low of 74.40.

Gold, of course is going ballistic and is now pushing the $1,200 mark with an overnight high of $1,184 an ounce. Oil is up only slightly after breaking below support and triggering a new bearish Point & Figure target of $71 a barrel:

The MBA purchase applications “data” was first out this morning showing a whopping 9.6% advance over the week prior! This is amazing, especially in light of the recent many large negative prints in the past 6 weeks or so. Here’s what Econoday has to say about it:
Two prior weeks of big declines in the purchase index raised talk that however good October may have been good for home sales, November was likely to mark a reversal. But not so fast! The purchase index surged 9.6 percent in the Nov. 20 week, biting into mid single digit and low double digit declines in the prior two weeks (note MBA said the prior week was revised slightly lower but offered no further details). The sequence suggests that let down with the end of first-time buyer credits was limited to the beginning of November. Refinancing applications fell 9.5 percent in the week but still make up more than 70 percent of all applications, a reflection of extremely low mortgage rates including an average 4.82 percent for 30-year fixed loans.

So, the MBA revised the prior week DOWN, thus making this week look like a larger increase than had the revision not happened. But we can’t see the raw data, much less how it’s compiled, so we really don’t know ANYTHING about what’s happening besides the fact that there is no transparency and that we are being manipulated right along with the presentation of the data. Other sites, by the way, that attempt to track this data will be thrown off by revisions… it is completely IMPOSSIBLE to track when all that is reported are percentage changes and revisions are made without telling how large they are. This is the type of stuff that will bring down confidence in the entire system.

Next up is Durable Goods orders. It was expected to produce a month over month POSITIVE .5% change, instead it was a NEGATIVE .6% change. The year over year figures are coming up on easier comparables. Overall, this report is worse than expected:
The outlook for manufacturing cooled a bit in October. New orders for durable goods in October fell 0.6 percent, after a revised 2.0 percent rebound in September. The drop in October was well below the market forecast for a 0.5 percent boost. Excluding the transportation component, new durables orders fell 1.3 percent, following a 1.8 percent jump in September.

The drop in new orders was led by machinery which fell a monthly 8.0 percent, followed by a 2.1 percent decrease in computers & electronics. Also declining were communications equipment and "other" durables. Partially offsetting were gains in primary metals, fabricated metals, electrical equipment, and transportation.

New orders for capital equipment continued to rebound from a drop in August. New orders for nondefense capital goods rose 1.2 percent in October after an increase of 3.2 percent the month before. These orders had dropped 7.8 percent in August.

Year-on-year, overall new orders for durable goods improved to minus 11.9 percent in October from minus 18.8 percent in September. Excluding transportation, new durables orders rose to minus 11.3 percent from down 16.3 percent the previous month.

Today's durables orders report indicate that recovery in manufacturing is not a smooth one. Of course, new durables orders are one of the most volatile market moving indicators published by the government and no one month makes a trend. But at face value, the recovery in manufacturing cooled just a little in October. Equities will not like the orders numbers but jobless claims dropped more than expected and some see the personal income report as healthy (though the details suggest not so much).

Keep in mind that just because the yearly line is pointing up does NOT mean that it is actually rising, just that yoy comparisons are getting better… this yoy number is still significantly negative which means that the economy is still getting worse than it at this time last year, at least in this regard.

Next up is Personal Income and Outlays… This came in almost exactly as expected with wages basically flat but core inflation readings firming slightly:
Personal income was mildly positive in October and spending was up as auto sales rebounded. Personal income in October edged up 0.2 percent, following a revised 0.2 percent rise in September. October's gain matched the consensus forecast. The important wages and salaries component, however, was flat after a 0.1 percent dip in September, indicating that consumer spending power is not improving.

We are seeing probably the final impact of cash-for-clunkers on personal spending in October. Motor vehicle sales fell sharply in September with the ending of incentives in August. In October, auto sales rebounded and returned to normal-at least for the recovery trend. Personal consumption expenditures jumped 0.7 percent after a 0.6 percent drop in September. The market had forecast a 0.5 percent boost in PCEs. The boost in October was led by durables, which rebounded 2.0 percent after an 8.8 percent plunge in September. In the latest month, nondurables rose 0.2 percent while services advanced 0.3 percent.

Inflation firmed in October. Headline PCE price inflation rose to 0.3 percent from a 0.1 percent rise in September. Core PCE inflation edged up to 0.2 percent in October from 0.1 percent the month before. The consensus had expected a 0.2 percent core gain for the latest month.

Year on year, personal income growth for October came in at minus 1.0 percent, improved from minus 1.6 percent in September. Year-ago headline PCE inflation rose to plus 0.2 percent from minus 0.6 percent in September. Year-ago core PCE inflation firmed to up 1.4 percent in October from up 1.3 percent the month before.

On initial blush, the October personal income report looks moderately good. But after taking into account weakness in wages and salaries and that the spending gain was a partial rebound from clunkers, it is indicative of a soft consumer sector. Markets have much to sort through this morning. Some will focus on headline numbers for personal income and see good news. A nice drop in jobless claims this morning may add to that temptation. On the other hand, durables orders were weak. Most likely, the good news on jobless claims will likely tip the balance, boosting equities and firming interest rates.

Weekly jobless claims fell below the 500,000 mark for the first time in a year, with a headline number of “only” 466,000 which was below the 495k consensus. This produced a euphoric spike in the futures:
Improvement in initial claims is picking up steam in what points to lower payroll losses for November's employment report. First time claims fell 35,000 in the Nov. 21 week to 466,000 (prior week revised 4,000 lower). The four-week average also broke below 500,000, down 16,5000 to 496,500. Continuing claims are also falling, down 190,000 to 5.423 million in data for the Nov. 14 week, but here the change also reflects the expiration of benefits. Those receiving extended benefits fell 34,600 to 539,500. Continuing claims may be clouded but initial claims offer perhaps more reason for optimism than any other piece of economic data.

What’s there to say? The economy needs to produce 150,000 jobs a month to break even and we’re still stacking on newly unemployed workers while others simply run out of benefits. Meanwhile the politicians are clueless that the more debt they inject into the system, the higher unemployment goes. Debt leads to unemployment, they are tied together once debt saturation occurs, and it’s here. Having a money system backed by debt, then only worsens the situation when one attempts to spend their way out. It is quite literally impossible to do so.

The spike up may be just the thing to top off the current up move. The VIX diverged bearishly yesterday, again showing signs of severe complacency to me. This is setting up a very dangerous situation with the dollar falling in the background. This trend is simply not sustainable and it’s going to end in tears. Funny, and as I type those words, the entire spike caused by this report melted away.

Consumer Sentiment and New Home sales come out at 10 Eastern, the petroleum report at 10:30.

McHugh believes we are making a small rising wedge which is a terminal pattern. If so, this may be the pattern that ends the final wave up of B up. This pattern could have another zig-zag or two left in it.

The move below support in the dollar is the real news of the day. The next support area is down around 71/72. Breaking support was largely caused by the British GDP report coming in stronger than expected with a -.3% reading in their 3rd quarter. Those who think that the U.S. can artificially keep rates at zero forever while monetizing just don’t realize how international capital flows work. We will be punished, and the government’s attempts to keep everything under control will fail in time.

So, we are now right on the 1,107 SPX pivot point. 1,111/ 1,113 is rejecting advances so far. A run up to the 1,121 area would be the next stop, then comes the 1,133 pivot. If we break below 1,107, support will be 1,101, then the 1,091 pivot.

We are putting in a top, that much I know. A break below support in the dollar might be exactly what’s needed to suck in the last of the dollar short people to make a reversal possible. If the dollar continues down, I am going to get REALLY nervous, as in that’s the stuff where crashes are eventually born. Those thinking the dollar rising will make a crash haven’t seen anything compared to the dollar going down hard in the background. The best outcome from here is that the dollar goes up, equities descend. The worst possible outcome will be found by further devaluing the dollar. That, my friends, is what is called, “Flirtin’ with Disaster!”

Molly Hatchet - "Flirtin' With Disaster"