Wednesday, January 20, 2010

Morning Update/ Market Thread 1/20

Good Morning,

Equity futures are lower this morning following yesterday’s very suspicious looking ramp. Yet another save following a broken trend line. That was the 18th of the last 20 first day of the trading week ramp jobs. That is NOT a natural phenomenon. What was so sick and perverse about it to me is that the brokerage houses that I get updates from (you know, where the “professionals” hang out) sent out one drivel report after the other pinning the blame on this or that. Oh yeah, a republican wins a seat, shifts the balance of power on health care and that kicks off a rally to new highs. Give me a break. At any rate, the overnight action following the ramp job can be seen in the chart below (I did not capture the open, this is half an hour after the open, and it plummeted):

The dollar is rocketing higher, having broken upwards from its latest formation. This is largely against the Euro, but keep in mind that a rising dollar also likely means that deleveraging is occurring somewhere. This rises the demand for dollars in order to pay back debt. Where is this occurring? In Europe ignited by the happenings in Greece where their markets just broke beneath key support and where the costs of financing their debts is soaring. This has produced a breakdown out of the flag on the Euro that I previously forecasted would happen and the target on the break is about 1.33 to 1.34:

Bonds are also higher showing money flowing to safety. Both oil and gold are sharply lower. The action in oil is bizarre. Yesterday was a huge ramp and today most of it is gone.

We are now in the busiest part of earnings season. IBM had a good report yesterday, but just like Intel, it sold off on the report instead of jumping. This tells me that the market knows how overstretched it is. While nefarious activity may be occurring in the futures market, there is no way that the entire market can be supported forever, that is just not going to happen.

The rail company CSX had a terrible report yesterday and has broken support. It is a key component of the Transports index which has failed to confirm the latest new highs. Most of the large banks have reported, and most have reported large losses. Bank of America lost $5.2 billion blamed on paying back the TARP, they claim they “only” would have lost a couple hundred million. No, if they would have marked their assets to market value, they would be out of business. This is the same story with Citi and all the rest. There were high hopes for Morgan Stanley who did produce 14 cents a share profit, but missed the high expectations.

In the other manipulated realm, we head off to economic reporting. Oh joy, I love explaining every time how trumped and just flat out deceptive most of this data is. I would stop reporting on it, but it’s important for people to know how they are being deceived.

The worthless MBA purchase index rose 4.4% in the last week, measured how and against what base we do not know because they won’t tell us. The weekly swings have become WILD with 20% and even 30% moves in their “index” in just one week. Is that truly possible? NO. And this week we get a 10.7% jump in the Refinance portion of the index. Riiiiight. Again, totally worthless information you cannot compare this to anything in the past nor do you have any clue as to the overall level of activity, the complete opposite of transparent, yet places like Bloomberg and the rest of the media do not call BS on it, instead they go with the pump:
Low rates are giving a boost to mortgage demand. MBA's purchase index rose 4.4 percent in the Jan. 15 week while the refinance index jumped 10.7 percent. Thirty-year mortgages are averaging 5.00 percent, down 13 basis points in the week. These results are a badly needed positive for the housing outlook which has been clouded by recent data: a plunge in pending home sales and yesterday's dip in the home builders index. Housing starts will be posted today at 8:30 a.m. ET.

Whatever MBA... Please go away soon, can’t wait for you to be weeded out and sent into the dustbin of history where you will be found lying among the same pages that talk about Enron.

Housing starts, a number that is at least mostly real, continues to disappoint. The consensus was 579,000, and the actual number of new starts came in at 557,000, while the prior was 574,000. Keep in mind that at the peak we were talking 1.6 million! Despite the miss, Econopray tries to spin the positive:

Starts and permits are showing divergent movement in the latest housing starts report with starts down and permits pointing to growth. Housing starts in December fell back 4.0 percent after rebounding 10.7 percent in November. December's annualized pace of 0.557 million units fell short of the consensus projection for 0.579 million units and was up 0.2 percent on a year-ago basis. The December dip was led by a 6.9 percent drop in single-family starts, following a 4.0 percent rise in November. Meanwhile the multifamily component advanced 12.2 percent after a 69.8 percent surge the month before.

Despite weakness in starts in the latest month, homebuilders are a little optimistic based on permits. Housing permits continued last month's rebound rising 10.9 percent in December after a 6.9 percent comeback the month before. The December pace of 0.653 million units annualized was up 15.8 percent on a year-ago basis. Both single-family and multifamily permits were up monthly in December.

Today's report is mixed and basically points to the volatility of starts during winter months but also to moderate improvement in coming months. Housing is still in slow recovery. On the news, there was little reaction in the markets. Of course, markets have other news to digest-the loss of the supermajority by Democrats in the U.S. Senate in yesterday's loss of a Massachusetts' senate seat and also the impact of Bank of America's losses announced yesterday.

Again, look at that chart and how the numbers have fallen and they have stayed down. Staying down is actually positive because the very last thing that is needed is more inventory. There is far more inventory than people are being led to believe and there’s much more pain ahead for housing, especially in the upper end homes where a large percentage were financed with option-ARM loans that are increasing in resets as we speak.

The totally and completely worthless Redbook and Goldman ICSC showed their usual weekly advances. Here the data is so bad that it’s not even worth discussing for the 52nd time in the past year, so I won’t.

Prices in the PPI are now back into positive territory, year over year, as we are now comparing numbers against their lows in early ’09. This advance is largely due to the speculation that has re-inflated oil prices. The YoY rate has jumped to a very high 4.7%. Yes, this number swung from negative to positive quickly, however, I still fall squarely in the camp that we will see further deleveraging of debt and I do still expect another wave of deflation and am seeing signs of that already in the reports of credit, the money aggregates, in the debt markets, and in the world of derivatives.
Headline and core PPI inflation slowed sharply in December. The headline number did not improve as much as hoped while the core eased more than expected. The overall PPI rose 0.2 percent after spiking 1.8 percent in November. The latest gain was a somewhat warmer than the consensus forecast for no change in the index. At the core level, the PPI eased to a flat reading after jumping 0.5 percent in November. The market had expected a 0.1 percent up tick. The headline increase was led by a 1.4 percent jump in food prices as energy dipped 0.4 percent. The core was kept soft in part by a 1.2 percent drop in prices for light trucks.

For the overall PPI, the year-on-year rate increased to 4.7 percent from 2.7 percent in November (seasonally adjusted). The core rate year-ago pace edged down to 0.9 percent from 1.2 percent the previous month. On a not seasonally adjusted basis for December, the year-ago increase for the headline PPI was 4.4 percent while the core was up 0.9 percent.

Net, PPI was in line with expectations. The latest CPI and PPI reports let the Fed continue to characterize inflation as subdued and keep policy on hold. There was little market reaction to today's report but the PPI report had to compete with a lower than expected housing starts number, offset by higher permits.

Note once again that they focus on the month over month data instead of the more useful year over year presentation. Claims are that month over month figures remain low and subdued, while a 4.7% jump is working its way through the pipeline. When the citizens of America are saturated with debt, it really doesn’t matter whether inflation comes along and robs their purchasing power, or if deflation comes along and sends them into unemployment. The bottom line is that the debts are going to be repaid with interest in one way or the other and it’s going to be painful unless we can get on with clearing out the false nature of our economy and that means clearing out the debts. The debts have not been cleared and they are going to be one way or the other.

Meanwhile, outside the world of accounting gimmicks, paper shuffling, and phony accounting, rail traffic and sales taxes continue to ratchet lower. The disconnect between the real and the paper has never been larger. This disconnect is having a profound effect on investor psychology. Those who understand the disconnect are being disenfranchised while those who don’t are simply being led to their eventual slaughter… again. It is simply amazing how short people’s memories are.

Technically the divergences are simply historic and they are stunning. Even more divergences yesterday with the advance decline line declining against rising prices. This is BEARISH. I could go on and on about volume divergences, RSI, MACD, whatever, we have all heard it and know it’s there.

I’ll say that all the Elliott Wave experts I know seem to be saying the same thing – that THE top should be close at hand. When they are all on the same page, I listen and would NEVER bet against them. I may not take immediate action, but I would not bet against them. When they do not agree, I pull back and trade with less confidence. Here’s what Bob Prechter produced in terms of a chart… his target on the DOW 1,000. Now, you can accuse the man of being so early as to not be useful information for trading, but note that he has always gotten the direction correct and that he acknowledges the time aspect is the most difficult to pin down:

Note that he was 4 years early in 1978 predicting a powerful bull market. He was also 6 years early predicting a crash (in "Conquer the crash") in 2002. However, he was spot on with the March bottom and was early in calling a top this past November.

And while I’ve been typing all this out, the markets have given back the entire ramp from yesterday plus some. Amazing, what a rollercoaster.

This is not a market that is functional. It is a market that is broken and manipulated. The purpose of the equity markets is to provide capital so that real businesses can produce real goods and services, and then to provide a means of ongoing price discovery and a vehicle through which people can make exchanges. We are so far removed from that it’s not even funny. There is FAR MORE transparency in the Las Vegas casinos than there is here and than there was looking at the books of Enron or Bernie Madoff.

Supertramp – Crime of the Century: