Monday, March 15, 2010

Morning Update/ Market Thread 3/15

Good Morning,

Welcome to the Ides of March, yet another Monday, another options expiration week, and yet the normal ramp job has not shown up… yet. Ahh, come on guys, you’re laying down on the job, we all know the market only goes up, right? In Roman times the Ides of March was a festive day to celebrate Mars, but famous today as the day that Julius Caesar was stabbed to death in the Roman Senate. Beware.

The futures are fairly close to flat after being down overnight. Below is a 60 minute chart of the DOW on the left, 5 minute S&P close-up on the right:

The dollar is up strongly, though, after bouncing perfectly right off the bottom of its current uptrend channel. Below is a daily chart of the dollar showing the trend, the question here is did we just finish wave 4 and are about to make a 5th wave higher, or was it an a,b,c correction and it’s going to break down? It’s an important question, another inflection point in the markets that happens to be coincident with the long term bond market sitting right on critical support, the neckline of a very large H&S pattern. Should the dollar break down, equities up, the bond market will have a hard time holding – yet again up against a rock and a hard place.

The Euro performed three perfect waves right into the target area I pointed out a long time ago, found support and now the question is the same as it is for the dollar.

Two more bank failure this weekend, bringing the year’s total so far to 30.

Senator Dodd is pressing for bank reform. The draft is supposed to come out today calling for higher capital requirements, creating exchanges for some derivatives, and limiting the size of big corporations. Baby steps in my opinion, can it happen against the will of the special interests? I doubt it, not from within the box they created and they own. They set the rules, not Dodd, even though he’s the illusion of the person who the people believe makes the rules. If it does come into being, and if it is not just another platitude to make people think meaningful change is occurring then once again the banks are way, overvalued. Heck, any value above zero is simply fantasy in my world of accounting.

Here’s a good one:
March 15 (Bloomberg) -- U.S. stock futures fell after Moody’s Investors Service said the nation has moved closer to losing its AAA credit rating and concern grew that China and India will restrict economic growth to curb inflation.

They also put Britain in the same camp as the U.S.. This from a ratings agency that can only change a rating AFTER failure has occurred. They are part and parcel a part of the problem, still. Nothing has changed. Let me ask you a simple question. Would you lend me your money if I told you that I earn $5,000 a month and yet I spend $15,000 a month, month after month? No? So why would anybody buy a U.S. Treasury bond? This is exactly the situation our country is in, it is no different other than the ability to print which, again, if you’re foolish enough to lend money to they will simply pay you back with money that is worth less because they devalued it for you. Deficits DO matter, it is very close to time where the debt situation comes home to roost. I know, people have been saying it for years, but the math is so far gone now that we are literally living on borrowed time.

The Empire State Manufacturing Index was released this morning and did show growth pretty much in line with expectations, here’s Econoday:
New orders, shipments, inventories, delivery times and employment are all posting month-to-month increases in New York state's manufacturing region, offering a convincing indication of building strength at the national level. The Empire State's general business conditions index did slow by more than 2 points to 22.86 in March, but the reading is still far over zero to indicate significant month-to-month expansion.

The headline reading masks wide strength in the individual indexes: new orders 25.43 in March vs. 8.78 in February, shipments 25.58 vs. 15.14, inventories 4.94 vs. 0.00, delivery time 2.47 vs. minus 6.94, employment 12.35 vs. 5.56. The rise in inventories is of special note, offering a new indication that the manufacturing restocking cycle is safely underway. The rise in delivery times is also of special note, indicating a slowing that supports the prospect for new capacity investment in the manufacturing supply chain.
Remember, these indexes are surveys, and it’s difficult as heck to survey a company that is no longer there. The premise that all these data are built upon is flawed because there is no accounting for survivorship bias.

The Treasury International Capital flows (TIC) for January went negative again, this time down $33.4 billion. The United States took in $107 billion in February and spent more than three times that amount, $328 billion. Insane, the whole bond market is now a rouse. Yet somehow Econoday finds a way to report it as positive number, the NET number was negative.
Foreign investment in long-term U.S. securities slowed in January, to a net $19.1 billion vs. $63.3 billion in December and an exceptionally strong $126.4 billion in November. Breaking the data down, U.S. investors bought a net $17.0 billion of foreign securities while foreigners bought a net $36.1 billion of U.S. securities for the weakest reading since May. Weakness in January was centered in corporate & other bonds where private foreign investors were heavy sellers. Foreigners were also heavy sellers of agency debt but, importantly, were heavy buyers of Treasuries and solid buyers of equities.

Country data shows Chinese Treasury holdings at $889.0 billion, down nearly $6 billion from December and compared against $938.3 billion as recently as October. Japanese holdings, in contrast, have been on the rise, at $765.4 billion. Note that benchmark revisions released earlier this month added significantly to Chinese holdings.
More “revisions?” Riiight, they mean more creative accounting, what normal people call fraud.

Note what’s happening in this line from the report, “Monthly net TIC flows were negative $33.4 billion. Of this amount, net foreign private flows were $0.6 billion, and net foreign official flows were negative $34.1 billion.”

Private flows have been running quite negative while “official” flows had remained slightly positive. Central banker games from my point of view, but this reading shows negative official flows. I actually don't trust these reports either, we’d all have to see the books and trace the flow of money. Of course it would be far easier just to replace the Fed and create a system that doesn’t rely on this type of fun and games that is controlled by private bankers who refuse to open the system up to the light of day.

For the curious, here’s the entire TIC report:
TiC for January 2010
Industrial Production figures came out for February, again, here’s Econoday:
Although overall industrial production managed to pull off a modest increase for February, it was mainly weather related from higher utilities output. The manufacturing component, however, dipped. Overall industrial production in February posted a small 0.1 percent rise after a 0.9 percent jump in January. The latest increase beat the market forecast for no change.

The manufacturing component, however, fell back 0.2 percent, following a 0.9 percent spike in January. Weakness was led by motor vehicles-other components were mixed. For the latest month, utilities output jumped 0.5 percent after rising 0.6 percent the month before. Mining output increased 2.0 percent after advancing 1.1 percent in January.

Indeed, the motor vehicles & parts component pulled down manufacturing as it fell 4.4 percent after jumping 4.7 percent in January. Excluding motor vehicles, manufacturing nudged up 0.1 percent, following a 0.7 percent boost in January.

On a year-on-year basis, industrial production rose to plus 1.7 percent from 0.8 percent in January.

Capacity utilization remains low as it edged up to 72.7 percent in February from 72.5 percent the month before. The latest number topped the market expectation for 72.4 percent.

Overall, today's report was marginally weaker than at face value as manufacturing slipped and the headline was basically boosted by cold weather raising utilities output. But manufacturing appears to still be trending upward with the February dip coming after a strong gain the month before. On the news, markets had little reaction. Also, earlier in the morning, the March Empire State index came in as expected.

Turning back to the markets, there was some funny activity just prior to the close on Friday that was noticeable in a few names, one being GE. It sure looked like front-running sparked by some insider type of activity. Funny, but just as I was typing this the market began to zoom higher, GE is headed straight up. Again, these markets look as wild as Juarez Mexico to me, lawless.

There are so many indicators at extreme overbought readings that it’s just sad because any rational person knows what’s coming. This move has been parabolic and it has been completely irrational, the money flows are lopsided, and once all the money is headed in the same direction then there is a change of direction afoot. The possibility of a DOW theory non-confirmation remains in place as the Industrial have yet to be gunned to new highs. I’ve been preaching patience, I still think this is extremely dangerous, a time where patience will eventually be rewarded, but that certainly does not mean buy and hold.

Just remember that the volatility and crazy things we see are an expression of the bad math at work. It corrupted everyone. The banks had to keep the growth going somehow or they would die. Thus they did anything and everything they could to continue to crank out debt backed money. It was destined to happen from the beginning because of WHO controlled the money.

Emerson, Lake & Palmer – From the Beginning: