Wednesday, February 10, 2010

Morning Update/ Market Thread 2/10

Good Morning,

Equities are basically flat overnight, below is a 60 minute chart of the DOW and 5 minute chart of the S&P futures:

The dollar and bonds are up, oil and gold are down.

From the Asia Times we learn that China is telling all in their country to dump U.S. assets except U.S. Treasury bonds.
Dollar-denominated risk assets, including asset-backed securities and corporates, are no longer wanted at the State Administration of Foreign Exchange (SAFE), nor at China’s large commercial banks. The Chinese government has ordered its reserve managers to divest itself of riskier securities and hold only Treasuries and US agency debt with an implicit or explicit government guarantee. This already has been communicated to American securities dealers, according to market participants with direct knowledge of the events.

It is not clear whether China’s motive is simple risk aversion in the wake of a sharp widening of corporate and mortgage spreads during the past two weeks, or whether there also is a political dimension. With the expected termination of the Federal Reserve’s special facility to purchase mortgage-backed securities next month, some asset-backed spreads already have blown out, and the Chinese institutions may simply be trying to get out of the way of a widening. There is some speculation that China’s action has to do with the recent deterioration of US-Chinese relations over arm sales to Taiwan and other issues. That would be an unusual action for the Chinese to take–Beijing does not mix investment and strategic policy–and would be hard to substantiate in any event.

Clearly it was timed with our Administration sending arms support to Taiwan. In yet another snub to the U.S., the Chinese instead of allowing the Yuan to revalue have instead chosen to increase wages for workers significantly across the board. This will create more internal demand for their products and less external demand. Clearly, those who do business in China have forgotten that it is still Communist China and that they are going to dictate exactly what transpires. This central planning goes against natural forces and what I would consider to be the natural rule of law. How will these moves impact the U.S.? I think you are likely to see the cost of imports begin to rise and it’s obvious that our free spending days are over in regards to financing endless deficits.

The ripples in Europe are far from over... more like just beginning. Now we're being whipsawed in the markets on rumors of this bail out and that bail out. Same type of stuff that occured all through '08 over here. Bail outs simply shift the risk from one party to another.

Meanwhile the Senate is getting ready to spend another $85 Billion they don’t have on “job creation.” From Bloomberg:
The central feature of the 362-page bill is a payroll tax credit for businesses who hire and retain the unemployed. The measure, crafted by Sen. Charles Schumer, D-N.Y., and Sen. Orrin Hatch, R-Utah, spares businesses from paying Social Security taxes on new hires who had been unemployed for at least 60 days. The proposal is expected to garner bipartisan support.

The legislation would also extend the deadline to file for federal unemployment benefits and the 65% Cobra health insurance subsidy to May 31. They currently expire a month's end.

That’s it! Take the money from the Social Security program! LOL, where do I even begin? All I can do is shake my head and remind people that the further we go into debt, the fewer jobs we will have as the phase transition point of debt saturation has already occurred. Placing more debt into the system now, produces lower GDP and reduces jobs.

Is anyone starting to see a two-faced President? I know, most people have already figured that out. But remember all the harsh rhetoric about the bankers lately while standing in front of teleprompters? Well, when sitting down and just talking about bankers, this is what he says:
Feb. 10 (Bloomberg) -- President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”

Hmmm… does that sound anything like what he was saying before? Again, nothing will make sense until they begin to address the true roots of the problem, namely our money that is backed by debts that feed the owners of those businesses while hopelessly indebting the people of this country.

The Trade Deficit for the month of December came in at $40.2 Billion, larger than the $35.7 Billion that was expected. Here’s Econoday:
The U.S. trade deficit unexpectedly surged. But at first glance, it is all about higher oil prices and restocking oil inventories. The overall U.S. trade deficit ballooned to $40.2 billion from a revised $36.4 billion gap in November. The December shortfall came in much worse than the market forecast for a $35.7 billion differential. Exports, however, rose 3.3 percent while imports jumped 4.8 percent. The worsening in the trade deficit was largely due to a widening of the petroleum deficit, which came in at $23.5 billion and up sharply from a differential of $19.9 billion the previous month. This was due to both higher prices and increased barrels imported. The nonpetroleum gap actually shrank to $26.9 billion from $27.2 billion in November.

The widening of the trade gap is bad news for the dollar, but overall it is not as bad as at face value. The jump in oil imports likely will reverse next month. And exports are still on an uptrend.

The year over year import and export numbers are finally back above zero, but still at levels that are far from what was occurring back in ’07.

The worthless MBA Purchase Application Index is showing, once again, why it is worthless and needs to be scrapped:
Mortgage applications for purchases fell 7.0 percent in the Feb. 5 week extending a string of choppy week-to-week movements. Applications for refinancing rose 1.3 percent. The Mortgage Bankers Association has been warning that refinancing volume is likely to decline as the Federal Reserve winds down its purchases of mortgage-backed securities. Mortgage rates fell in the week with the average 30-year loan down 7 basis points at 4.94 percent.

Only a 7% weekly swing? That’s way calm compared to the +/- 30% swings we’ve seen since they went to only telling us weekly percentage changes… from what we don’t know, but by golly, it’s changing and they have something wild to tell us.

The markets are nearing the top of the downtrend channel in what still appears to be wave 2 of 3 of 1 of C. It appears that wave 2 is creating a rising wedge that is playing out in an a,b,c,d,e manner instead of a more simple a,b,c. If this is correct, we have one more rise to the top of the wedge coming. Below is a 30 minute chart of the SPX where you can see this:

It’s not uncommon for these to overthrow at the end, so do not be suckered if that occurs. 1,080 will offer stiff resistance and there’s a pivot at 1,090. A break of the larger channel may mean something else is occurring and I would not chase any trades outside of the channel, just me. All the other indices are inside that downtrend except for the NDX which is just outside and following it down. A break below the rising wedge probably means that wave 3 of 3 of 1 is underway.

Below is a chart of the NDX showing how it is peaking outside of it’s channel:

The Transports are right up against the top of the channel and need to descend immediately to stay inside. I note that so far they are down this morning:

The XLF is furthest from its channel and is creating what appears to be a bearish pennant. If so, the mast on that pennant is worth about a dollar. Watch the direction of break from that, it will tell you what the next move is doing:

Hey, no crystal ball, just trying to read the tea leaves. When I look at the tea leaves, all I see is debt saturation and wave 3 coming soon to a stock market near you. Just keep in mind that the waves do not forecast the future, they only eliminate certain possibilities. There are still bullish interpretations, I simply give those lower odds...

Styx – Crystal Ball: