Tuesday, January 12, 2010

Morning Update/ Market Thread 1/12

Good Morning,

Equity futures are down sharply this morning following two big misses in earnings reports to kick off earnings season. Below is a chart of the overnight action in DOW and S&P futures:

The Dollar is up slightly, bonds are breaking upwards showing the flow of money back away from stocks, both oil and gold are down.

Below is a chart showing the results of two bad misses, Alcoa on the left and Electronic Arts on the right. Alcoa was expecting 6 cents per share profit and lost 28 cents, claiming that the loss was only due to one time write-offs and that otherwise they had an “operating” profit. This is the game they all play, and one of the reasons that P/E based on “operating” profits looks healthier. Funny, but those one time write offs seem to occur every time, and again, when total losses are accounted valuations are at all time historic highs for the entire market. ERTS just plain old fashioned missed offering no excuses really, they simply did not sell the games they were expecting over the holiday season. Below is a chart with AA on the left and ERTS on the right showing how their reports were received:

Both the worthless Goldman ICSC and Redbook showed declines in store sales in the past week over the week prior. ICSC was down 3% wow, but they claim up 1.7% yoy. Remember, their statistics are FALSE. They do not capture substitution bias, that is stores who go out of business are not captured and they do not measure overall sales. If you want to know what’s happening in the overall real market, then you need only look at this chart from the Rockefeller Institute showing the compilation of sales, income, and property tax data for all 50 states through quarter 3:

The International Trade data came out with a wider than expected trade deficit of $36.4 Billion, -$35 Billion was consensus. Here’s econoday’s report:
The international trade deficit ballooned in November due to sharply higher petroleum imports and to a lesser degree nonpetroleum imports. But U.S. manufacturers will be happy that exports continued their uptrend. The overall U.S. trade gap widened to $36.4 billion from a revised $33.2 billion shortfall in October. The deficit was larger than the consensus projection for a $35.0 billion shortfall. Exports gained another 0.9 percent while imports surged 2.6 percent. The worsening in the trade deficit was largely due to an expansion of the petroleum deficit, which came in at $19.9 billion compared to a differential of $17.8 billion the previous month. The nonpetroleum gap grew to $27.1 billion from $25.6 billion in October.

Exports were led by foods, feeds & beverages which jumped $1.2 billion in November, followed by automotive and capital goods excluding autos. Consumer goods and industrial supplies exports declined.

Imports were up mainly on a $2.1 billion jump in industrial supplies of which just over half was crude oil. Imports of consumer goods and capital equipment also were strong. Imports of autos and foods, feeds & beverages edged down.

The widening in the petroleum deficit was due to sharply higher prices as the number of barrels imported declined. Physical barrels imported fell 5.2 percent, following a 9.6 drop in October. The price of imported oil jumped to $72.54 per barrel from $67.39 in October.

Year-on-year, overall exports in November improved to minus 5.5 percent from minus 18.6 percent in October while imports increased to down 2.3 percent from down 8.5 percent the prior month.

Today's trade report technically cuts into fourth quarter GDP growth. But looking further out, other than the higher oil prices, the news may actually be good. Exports are boosting U.S. manufacturing. And higher imports indicate some improved optimism on the part of businesses that domestic demand is picking up. The report should be favorable for equities based on this apparent optimism but some may focus on lower fourth quarter GDP growth and higher oil prices. Also, earnings season is a key concern and Alcoa disappointed after yesterday's close. Bond traders should be concerned about the spike in oil prices and its implication for near-term, if not long-term, inflation. The wider trade will be weighing on the dollar.

Just over half of the jump in imports was oil. Keep in mind that this is NOT because we imported more oil, but instead it is because oil is measured in dollars and the cost went up. Thus, this means that the import and export statistics do not really track trade of stuff as much as they report changes in currencies! If they measured and reported changes in actual units you would have a far more meaningful report. Note that the chart above is a Year over Year chart… it would appear that recovery is well underway, but that is not true! The numbers are still negative year over year, this means that imports and exports are still FALLING compared to the disastrous 2008, and that’s measuring with a falling dollar. Again, count the number of idle ships.

Chinese imports up 46%? Riiight. Here’s the latest Baltic Dry Shipping Index, wake me up when it has made a new high:

Tomorrow the worthless MBA Purchase Index is the only economic report, if one can even elevate it to “report” status. I call it selfish children playing with statistics.

There was yet another small movement in the McClelland Oscillator yesterday. That was the 5th one in a row, something that I have never seen before. There were a couple of instances in the past few years with 4 and most of those were followed with large down days. There is another rare occurrence that just transpired… the VIX fell dramatically yesterday, well below the bottom Bollinger Band. Once it returns back above the line, it is a RELIABLE market sell signal, and as of right now, it is well above the line. Do not ignore this signal! In the past 4 years it has only been triggered 3 other times, and all of them led to significant sell offs in the market, the last one worth more than 1,000 DOW points. I’m going to go out on a limb here and state that should we not see a noteworthy decline start within the next few days, that the markets are being tampered with – a very dangerous thing, they need to relieve their far out of balance pressure.

The divergence in the advance decline lines is growing stronger, you may remember the charts I showed a couple weeks ago. This is also telling us that fewer and fewer stocks are rising compared to the market, something else we have seen at all major tops.

Below is a 60 minute chart of the DOW. You can see the very clean rising wedge pattern. This is the small one, it is climbing the lower boundary of the much larger one:

There are several charts that simply do not look healthy. The XLF jumped up in parabolic fashion to fill a gap in the $15.40 area, produced a hammer yesterday and is down today.

Here’s yesterday’s chart of Alcoa. Gap higher into a black hung man. When you see these, they are shouting “SHORT ME!”

Here’s the chart today, that is a CLASSIC shooting star:

Don’t look now, but many charts are getting way ahead of themselves. Alcoa, this song is dedicated to you:

Bad Company – Shooting Star: