Wednesday, February 17, 2010

Morning Update/ Market Thread 2/17

Good Morning,

Equity futures are up some more even after yesterday’s beginning of the week ramp job, now 21 of the past 24 weeks, and this one was a 90% NYSE volume up day, however, it came on diminishing volume once again. Below is a 60 minute chart of the DOW on the left and a 30 minute chart of the S&P on the right:

On the DOW chart, note that the current action has now exceeded the height of the top of the last wave – I’ll get to the wave count later, but while we’re here also look at the formation on the S&P futures, there was a rising wedge and now prices have overthrown the top which is pretty common for rising wedges.

The dollar is up strongly overnight and bonds are down strongly after having been higher yesterday. The flow there has been looking strange the past couple of days. Oil made a monster $4 move yesterday and is down slightly today, while gold is about flat overnight.

The worthless MBA Purchase Applications index fell 4.0% last week after falling 7% the week prior.
Mortgage applications for home purchases fell 4.0 percent in the Feb. 12 week, pulling down the four-week average to minus 1.2 percent. Applications for refinancing fell 1.2 percent with the four-week average up 1.8 percent. The refinance share of mortgage activity is 69.3 percent vs. 69.7 percent in the prior week. Mortgage rates were little changed in the week, averaging 4.94 percent for 30-year loans.

Yesterday the Treasury finally admitted they were concerned about coming foreclosures! No kidding? We’ve only been talking about the coming wave of Option-ARM resets for what, the past two years?

And yesterday TransUnion reported that mortgages in delinquency rose to the most in history, again, this time rising 10.2% on the quarter and 50% from a year ago! This sent the delinquency rate to nearly 7% of the nation’s loans.
TransUnion's quarterly analysis of trends in the mortgage industry found that mortgage loan delinquency (the ratio of borrowers 60 or more days past due) increased for the 12th straight quarter, hitting an all-time national average high of 6.89 percent for the fourth quarter of 2009. This quarter marks the first time the mortgage delinquency rate increase did not decelerate after doing so for three consecutive periods.

This statistic, which is traditionally seen as a precursor to foreclosure, increased 10.24 percent from the previous quarter's 6.25 percent average. Year-over-year, mortgage borrower delinquency is up approximately 50 percent (from 4.58 percent).

Housing starts for January were reported this morning as having risen from last month’s abysmal 557,000 to 591,000, while housing permits fell:
The recovery in housing is cloudy, according to the January starts report. Groundbreaking for new homes rebounded, but permits fell back. Housing starts in January rebounded 2.8 percent after dipping 0.7 percent in December. January's annualized pace of 0.591 million units was above the market forecast for 0.580 million units and was up 21.1 percent on a year-ago basis. Also, December starts were revised up notably from the previous estimate of 0.557 million units. The January comeback was led by a 9.2 percent increase in multifamily starts, following a 12.6 percent jump in December. The single-family component edged up percent after a 3.0 percent decline the prior month.

By region, the January boost in starts was led by a 10.0 percent rebound in the Northeast with gains also seen in the West, up 8.9 percent, and the South, up 1.0 percent. Starts in the Midwest slipped 3.2 percent.

Housing permits dropped 4.9 percent rise in January, following a 10.9 percent jump in December. The January pace of 0.621 million units annualized is up 16.9 percent on a year-ago basis.

Strong seasonal factors and huge shifts in weather make it difficult to find the direction of housing during winter months and this winter is not an exception. Although the latest level for starts is an improvement, the fact that recent gains have been so heavily weighted toward the multifamily component raises some red flags. The multifamily sector has significant vacancy rates and recent advances in starts are likely not sustainable. Single-family increases have been more modest and actually have been about flat on average in recent months-a more rational outcome on the part of homebuilders.

The Goldman ICSC store sales figures and the Redbook came out looking as retarded as ever. Is it okay if I use that word to describe incompetent statistical reporting? The Redbook showing a 1.8% gain in store sales year over year (completely not true when stores now out of business are considered), and Goldman flipped from last week showing a year over year gain of 1.8% to now a loss of .7% year over year and a week over week slump of -1.6%. None of their sales numbers are close to reality and now they contradict one another.

Industrial Production rose .9% in January, bringing capacity utilization up from a very low 72% to 72.6% which was the consensus number. These numbers are still near historic lows, yet Econoday pumps the crowd:
Industrial production posted another strong gain for January-but this time the strength was real and not weather related. Industrial production in January advanced 0.9 percent, following a 0.7 percent jump in December. The January was marginally better than the market projection for a 0.8 percent gain.

The manufacturing component made a robust comeback, jumping 1.0 percent after edging down 0.1 percent the month before. For the latest month, utilities output increased 0.7 percent after spiking 6.3 percent in December on atypically cold weather. Mining output rose 0.7 percent after dipping 0.2 percent in December.

Net, industrial production is stronger than the January headline number but also not as healthy as the December headline figure. Lesson-pay more attention to the manufacturing component than to the headline figure.

Despite the recent gains in production, the Fed yet has much to worry about bottlenecks in the industrial sector creating any inflation pressures. The overall capacity utilization rate is still low but rose to 72.6 percent from 71.9 percent in December. The latest number matched the market forecast.

Import and Export prices are heating up. Definitely surging from the deeply negative price environment that we were in. Import prices, of course, are climbing much faster than export. What does that tell you about what is going to happen to businesses and to consumers? Export prices rose 3.4% yoy, but import prices rose a tremendous 11.5% year over year! That is huge, but it is against very depressed year ago levels very near the bottom in the price of oil. Still, it shows the trend in general and this is a part of the underlying middle-class squeeze and it will be a part of a profit squeeze for businesses who must buy goods and materials from overseas.
Inflation isn't a concern right now but import/export prices are definitely heating up, at least at the input level. Import prices jumped 1.4 percent in January, driven by a 4.8 percent surge in the price of petroleum imports but also showing a 0.6 percent rise excluding petroleum. Though increases in the ex-petroleum reading have been steady and stubbornly high, the pressure is centered in raw materials and not in finished goods where capital goods prices, down 0.1 percent, slipped for a second month, and consumer goods prices rose 0.2 percent following no change in both December and November.

Year-on-year, import prices for capital goods are down 1.1 percent with consumer goods prices up only 0.1 percent, levels that contrast with the overall year-on-year import price reading of plus 11.5 percent and a petroleum reading of 95.5 percent that's the largest in 10 years. By country, the cost of Chinese goods came down in the month, at minus 0.3 percent for a minus 1.7 percent year-on-year rate. The cost of European goods rose 0.2 percent in the month and jumped 3.6 percent for Canadian goods.

Export prices, up 0.8 percent, rose for a third straight month. Agricultural prices show pressure, up 1.4 percent, as do industrial supplies, up 1.9 percent. But there's no pressure for finished goods where export prices rose only 0.2 percent on the capital goods side following a 0.1 percent decline in December and fell 0.3 percent for consumer goods.

Today's report doesn't point to trouble for consumer goods prices though it does indicate pressure for producer prices. But producers are absorbing higher input prices, lacking the power to pass through increases given that total demand remains soft. Producer prices will be posted on Thursday with consumer prices out on Friday.

FOMC minutes are released at 2 Eastern, as is the Treasury Budget. Tomorrow is PPI, Leading Indicators, and the Philly Fed.

Below is a 30 minute chart of the SPX. When we broke the primary down channel to the upside, I remarked that it was not usual for a small degree wave to do that and that I thought a larger degree wave 2 was probably occurring. Yesterday McHugh finally caught up to that and suggested it as a possibility. It is confirmed by the DOW price action today exceeding the prior wave’s high. That means that even though the legs within wave 1 are not proportional, they are within the rules and the confines of the channel and that means that wave 1 was longer than we had originally thought, bottoming on February 5th:

That means this is a larger degree wave 2 and the RUT has already retraced 61.8% of its entire decline with the NDX next while the SPX and DOW have retraced about 50%. Below is a chart of the NDX, you can see that it is producing a steep rising wedge:

All the indices are overbought on the short term time frames. Keep in mind that this Friday is Options Expirations and so it is a quant having fun type of week, as are almost all weeks nowadays. Today is McHugh’s best fit for a Fibonacci turn date, and there is often a turn in the middle of Opex week, last Thursday was an up day and statistically that means the following week is negative. In other words, there is a lot of evidence pointing to the fact that a turn should occur soon in the latest up trend.

Wave 2s are meant to fool, that’s what they do, and that’s why they are steeper than wave 4s. The psychology is still one where people are saying that the decline was only a correction, see, a new local high, we must be going onto new higher highs. While they’re saying that the market is overbought and starts to roll… We’ll see, I think the direction will be clear shortly.

One way or another, if you are trading against the quants in situations like this, you are probably just slowly (or quickly) donating your money so that the fat cats on Wall Street can afford to take a leisurely stroll and head on over for the latest show on Broadway…

George Benson – On Broadway: