Monday, December 28, 2009

Morning Update/ Market Thread 12/28

Good Morning,

Already severely overbought equities are even higher in the overnight action. Below is a chart of the DOW futures on the left and S&P futures on the right showing the overnight action:

The dollar is lower at 77.6, while bonds continue their huge moves downwards following last week’s nearly 3% plunge in price. Oil turned around last week and went on a tear, rising right back to the top of its previous channel, now right at the $78 per barrel range. Gold is also up this morning moving to $1,112 an ounce.

There are no economic data releases this morning, although we do get several reports out this week, coming on Tuesday through Thursday, the markets are closed on Friday, New Year’s Day.

Since I was gone for most of last week, let’s spend just a little time discussing some of the reports that we have not reported…

Third quarter GDP was an important one, what was initially reported as 3.5% growth became 2.8%, and finally settled at 2.2%, a 37% correction from the original figure. Nice try. Even their revised number is so far from reality as to be both shameful, funny, and pathetic all at the same time. These numbers would be HUGELY negative were it not for bad inflation data and mark to fantasy financial accounting. Below is a chart from John Williams showing the BEA data in red, expressed in actual yearly growth, not quarterly annualized growth. Then he subtracts out the bad inflation data to produce the blue line now at -5.8%. I would place one more line on that chart subtracting out mark to fantasy and I’d be willing to bet that it would be much more negative. In fact, I contend that the total size of our REAL economy is probably close to 40% overstated – of course I can’t prove that as access to the real books is not granted.

Looking back on 2009, I’m going to call it the “Year of the Great Deception.” This is the year that we took a giant leap in the reporting of statistics that simply do not match the real world. It is also the year that Bernanke and Geithner played the shell game with debt to the point that no one can follow the trail of money creation – it is simply impossible to determine and to follow through the Treasury, the Primary Dealers, the IMF, the shell corporations, etc. Thus it is the year in which free markets became totally not free. Money moves and flows from one asset class to another. Their multi-trillion dollar games with the debt markets, bonds and GSE’s, has completely distorted and disconnected the market place from the real and productive world.

Like anything else, it’s leadership by example. Should we be surprised that we now find cheating and stealing on a level the world has never before seen? The entire world seems to have degenerated into a numbers spinning game with China now leading the way. Just last week they went back and revised upwards their already sky high growth figures for previous years. Of course much of this growth is simply creating excess capacity and much of it is simply one politician fluffing up and promoting their own district – a job enhancing game that is played out over and over.

And now I’m reading about our own estimates for the fourth quarter of this year being as high as 5%!!! Riiigggghhht. Economic mass psychosis.

And speaking of trumped up data, the NAR is simply out of control. The way that they reported existing home sales is simply something from another planet, and it was completely shown to be a gamed number when new home sales came out showing a large movement in the completely opposite direction. Then to top off the housing data for the week, the completely worthless Purchase applications report showed a monstrous 11.6% plunge for the prior week.

Again, I read how housing is stabilizing, things are looking up and prices will be following upwards by the second half of the coming year, don’t you know? Have they not considered this?

Where are their brains? I know, when you work and live by Enron accounting, having a brain is not a prerequisite.

One analyst I read over the weekend was crowing about how he has been right and that the “bears” have been way overstating their case, that the fundamentals are not disconnected from reality, and that stocks will continue to climb that infamous “wall of worry.” Ah, where was he as the housing and equity (credit/debt) bubbles were just about to burst, and how have people like him fared in the second half of this decade? I just have to laugh hysterically at this disconnect, knowing, as I do, that there are always euphoric knuckleheads who think that we have entered some new “paradigm,” and that those who are pointing out historic valuations are simply Chicken Littles.

Of course the price movements in the markets simply are what they are. For me, when they are disconnected from reality then the RISK of playing in the markets moves up. I view the current risk as sky high, but I also see the price breakout above the 1,120 range and see how everyone, and their brother, now believes that we are headed for 1,200 on the SPX. Great, have a nice trip, see you next FALL!

Below is a 3 month daily chart of the DOW Industrials. You can see that it is poking its head above the current flag, same thing on the SPX, target is 1,200 on the SPX, or about 11,300 on the DOW. You can see the extremely light volume produced by last week’s holiday action and “breakout.” Obviously that is not a very convincing way to break out knowing that volume confirms price, or in this case doesn’t:

We are now positioned with short term stochastics all overbought. Everything – 5 minute, 10, 30, 60 minute, daily, weekly, and monthly. There are historic divergences that are only getting larger, noticeably price to volume. Short and longer term divergences are in place on the RSI, and the weekly MACD is rolling over and has produced a sell signal despite rising prices – something that happens rarely and usually leads major declines as it did in ’07.

The number of new 52 week highs hit nearly 400 last week with new lows at zero. This is clearly in extreme territory, again something that is seen only at major tops, again the latest time this type of number was seen was just prior to the ’07 top.

The Elliott Wave count still has not changed as price movement has not eliminated any options. This means that one final leg higher is still in accordance with the primary count for wave B up. So, for me, the risk of playing this last leg higher is simply not worth it, I prefer to play middle movements, not trying to catch the turns and not trying to eek out the last of a move either. Of course everyone is different in their “investment” timeframe, I view the entire markets as a rigged casino where those playing for the long haul will only get burned, while those playing in the short term had best be nimble.

I have assembled many charts over the weekend and will post those later today along with a discussion of asset classes with particular attention to the bond market, what’s happening there and the possible ramifications.

Yet another holiday week, light volume is expected to continue. Obviously every professional is content to let their portfolios go out with numbers that make them look good for the year – how do they look over the past decade? Much crowing will ensue, but in the New Year we are going to experience history yet again as the grand experiment in solving a debt problem with more debt reaches numbers that are so out of reach of incomes that the Great Deception of ’09 is very likely to once again echo the mistakes of history.

Fleetwood Mac-Little Lies: