Tuesday, March 16, 2010

Morning Update/ Market Thread 3/16

Good Morning,

Equity futures are higher this morning in front of the FOMC meeting whose results are announced at 2:15 Eastern time. Below is a 60 minute chart of the DOW futures on the left and a 5 minute view of S&P futures on the right:

The dollar is down, bonds are higher, both oil and gold are shooting higher just prior to the open.

I think the scariest thing I read this morning is “Pelosi says that Democrats will have the votes to pass health bill in the House.” After having flown into the Soviet Union at the height of the cold war, I saw first hand how the socialist economy did not work for the people. Health care? They got to say they had it, but it was awful, like walking back in time to 1930. Heading down that slippery path is not a win for America, it is another step in the wrong direction.

From CNN:
Delinquency rates have hit historic highs. More than 7.4 million home loans nationwide are in some stage of delinquency or foreclosure, with another 1 million properties either bank-owned or sold out of foreclosure. An incredible 10% of all U.S. loans are delinquent.”

Ten percent are delinquent! Not just underwater, but delinquent as in behind on their payments, amazing. And what’s even more amazing is that the government has seemingly, for now, transferred all that risk onto itself yet a large percentage of the banks still hold enough bad debt to make them insolvent and the game of pretend and extend continues.

Housing starts fell in February, of course everyone blames the weather like there’s never any bad weather in February, so just ignore it… here’s Econoday talking about the weather, isn’t it a beautiful day outside?
Snow storms bumped down housing starts in February but from upwardly revised January numbers. Housing starts in February dropped 5.9 percent, following a 6.6 percent rebound the month before. February's annualized pace of 0.575 million units beat the market consensus for 0.565 million units and was up 0.2 percent on a year-ago basis. January was revised up to 0.611 million units from the original estimate of 0.591 million units. The decline in February was led by a 30.3 percent decrease in multifamily starts, following a 18.5 percent gain in January. The single-family component slipped 0.6 percent after a 4.4 percent rise the prior month.

By region, the February drop in starts was led by a 15.5 percent fall in the South with the Northeast decreasing by 9.6 percent. Both regions were hit by heavy snow storms during the month. Starts in the Midwest rose 10.6 percent while the West gained 7.9 percent.

Starts are under downward pressure in coming months as housing permits declined 1.6 percent, following a 4.7 percent fall in January. The February pace of 0.612 million units annualized was up 11.3 percent on a year-ago basis.

Starts clearly were hit by atypically adverse winter weather-most of the decline was in the South which was hit by unusual snow storms. But permits also fell which are not as susceptible to weather. Basically, inventories still need to be worked down as demand needs to pick up and homebuilders cannot afford to ignore these supply and demand facts.

“I know… now that the sun is out, the snow is away, the birds are singing, let’s head out and buy a house for twice what our incomes can support, shall we?”

“Oh sure, dear, let me pop another Prozac before we head out and indebt ourselves to servicing a loan that will be underwater six months from now.”

That interlude was brought to you by Eli Lilly, the makers of Prozac, and by the National Association of Realtors who say to America, “Go ahead and take the double plunge! Prozac and housing are the perfect combination, they go together hand in glove!” See you in the food stamp line!

Meanwhile, Import and Export Prices were released for February, data that is very close to the one year anniversary of the bottom in the markets. Year over year import prices are up an amazing 11.2%, while Export prices are up only 3.5% - only. Month over month there were price declines in both imports and exports, something to keep an eye on.
Inflation pressures from import prices, after building sharply in January, eased back in February, pointing to benign readings in tomorrow's producer price and Thursday's consumer price reports. Import prices fell 0.3 percent following January's 1.3 percent jump. The decline reflects a 2.2 percent fall back in petroleum prices which in January jumped 4.4 percent. But the key reading for this report excludes petroleum and here too pressures eased, at plus 0.2 percent following a four-month streak of 0.5 and 0.6 percent gains.

Import prices for industrial supplies fell 0.8 percent with capital goods down 0.1 percent in what will firm expectations for a 0.2 percent decline in tomorrow's producer prices. A 0.1 percent decline for imported consumer goods is in line with the marginal 0.1 percent gain expected for consumer prices.

Export prices also reversed in February, down 0.5 percent and show wide declines across agricultural and non-agricultural components. Agricultural export prices fell 3.8 percent in the month to end a long string of sharp gains.

Declines in today's report are the first in about six months and largely reflect a swing lower in oil and in agricultural products. The outlook for March so far is favorable with both oil and agricultural prices easing slightly. But the dollar has also eased this month, an offsetting factor that raises the cost of foreign imports. There is mild talk perking back up over deflationary risks, but these risks remain low as long as consumer spending remains solid and as long as oil, holding at $80, remains high.

I don’t like the chart above for a couple of reasons. It is hard to read and it doesn’t give you a feel for the real level of activity in relation to the past because it is expressed in percentage terms. In other words, zero percent is a lot better than -10%, but it simply means that price is level, not that activity has picked up to near where it was prior to the fall.

It will be interesting to see how prices behave after the FOMC announcement. While I’ve been typing the markets have turned negative, I would expect a pause until the announcement and then we’ll get a direction following the usual head fakes.

Yesterday’s slightly positive close was divergent with the internals that were negative on the day. That is a sign of weakness, of a market that is heavy and topping. The volume was pathetic, and there has been no relief of the severe overbought condition. Despite the rotation trade attempting to pump up the DOW, it has yet to make a new high and the non-confirmation remains in place. The longer it takes to confirm, the more tenuous the market is. Hey, take a Prozac and go long, you’re going to make it to the big time!

Peter Gabriel - Big Time: