Wednesday, March 17, 2010

Morning Update/ Market Thread 3/17

Good Morning,

Equity futures are higher once again this morning following the S&P 500 breaking out after the dovish FOMC meeting release. Below is a 60 minute chart of the DOW on the left and 5 minute chart of the S&P on the right showing the overnight action:

The dollar is roughly flat but has broken its uptrend that began late last November. Bonds are up again, once again moving in a direction that is generally not friendly to stocks as they have done for the past three days. Oil is higher, gold is down.

The worthless MBA Purchase Index, reported only in percentage moves, fell again this week, but did not present the completely impossible mathematic moves that have been reported recently:
The Mortgage Bankers Association's purchase index fell 2.3 percent in the March 12 week. Despite the fall, two prior weeks of strong gains still hint at month-to-month strength for home sales. The refinance index also fell, down 1.7 percent. The declines weren't due to high mortgage rates which fell sharply in the week with 30-year loans down 10 basis points to an average 4.91 percent. The MBA has been warning that low rates are no longer boosting refinancing demand.

Low mortgage rates cannot get any lower, the Federal Funds rate is at zero. The central bankers spent $1.7 Trillion last year buying down these rates. They have now saturated the world with debt and that debt will be an anchor around the economy until it is cleared. The bankers will continue to siphon off money – the productive capacity of YOUR labor – until they are stopped.

It’s easier to see what they are doing to Iceland to gain control over the people – they try to take their infrastructure in exchange for issuing DEBT. They also want the future productivity of the people for decades in exchange for DEBT. The people of Iceland told the central bankers to “pound sand!” If you can see that’s what happened there, then you should be able to understand that’s EXACTLY what is happening here.

The PPI inflation number came in negative for the month of February and the yoy number eased somewhat as well, but is still at 4.6% which is very elevated. Here’s Econoday:
PPI inflation reversed course in February, coming off strong numbers the month before. The overall PPI dropped 0.6 percent after spiking 1.4 percent in January. The February fall was more negative than the consensus expectation for a 0.2 percent decline. At the core level, the PPI inflation rate eased to a 0.1 percent rise from a 0.3 percent gain in January. The latest core number matched expectations.

The drop in the headline PPI was led by a 2.9 percent decrease in energy costs after 5.1 percent surge in January. Gasoline fell 7.4 percent, following an 11.5 percent spike in January. Food cost inflation held steady at 0.4 percent. Within the core, tobacco prices dipped 0.1 percent as did light trucks.

For the overall PPI, the year-on-year rate declined to 4.6 percent from 5.0 percent in January (seasonally adjusted). The core rate year-ago pace slipped to 0.9 percent from 1.0 percent the month before. On a not seasonally adjusted basis for February, the year-ago increase for the headline PPI was up 4.4 percent while the core was up 1.0 percent.

The bond market was little changed on the news despite a weak headline number. That was due to the core being on target and with traders discounting the February drop in gasoline prices, given the sharp jump seen at the pump in March.

No, it won’t take long for those numbers to translate into more expense for Americans. Wages will not keep up.

More warnings on the bubble in China:
March 17 (Bloomberg) -- China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.

The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”

Rickards joins hedge fund manager Jim Chanos, Gloom, Boom & Doom publisher Marc Faber and Harvard University professor Kenneth Rogoff in warning of a potential crash in China’s economy. The government has raised banks’ reserve requirements twice this year after economic growth accelerated and property prices rallied.

The bubble in China goes right alongside the bond bubble in the United States that is based upon nothing but financial engineering fluff.

Speaking of financial engineering, it seems the people in Italy have had enough of being abused:
March 17 (Bloomberg) -- Deutsche Bank AG, JPMorgan Chase & Co., UBS AG and Hypo Real Estate Holding AG’s Depfa Bank Plc unit were charged with fraud linked to the sale of derivatives to the City of Milan.

Judge Simone Luerti scheduled the trial of the four firms, 11 bankers and two former city officials for May 6, Prosecutor Alfredo Robledo said after a hearing in Milan today. The banks allegedly misled the city on swaps that adjusted interest payments on 1.7 billion euros ($2.3 billion) of borrowings.

Prosecutors across Italy are probing banks as local and national government agencies face potential losses of 2.5 billion euros on derivatives, lawyers say. The Milan probe may also affect cases as far away as the U.S., where securities firms have faced charges for price-fixing and bid-rigging in the sale of derivatives to municipalities, though not for fraud, according to former regulator Christopher “Kit” Taylor.

There are now a string of lawsuits cropping up regarding derivatives around the world. People are figuring it out more and more.

Here’s someone who has figured out the impossible math of Greece:
March 17 (Bloomberg) -- Harvard University Professor Martin Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said Greece’s austerity plan will fail and the country may quit the single currency to fix its fiscal crisis.

Under pressure from investors and fellow policy makers, Prime Minister George Papandreou’s government is striving to knock four percentage points off its budget gap this year from 12.7 percent of gross domestic product and has vowed to meet the EU’s 3 percent limit in 2012 for the first time since 2006.

“The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy,” Feldstein, an adviser to U.S. presidents since Ronald Reagan, said in a March 13 interview in Geneva. “The alternatives are to default in some way or to leave, or both.”

His diagnosis clashes with that of European Central Bank President Jean-Claude Trichet, who calls Greece’s strategy “convincing” and rejects as “absurd” any speculation it might leave the euro zone. Investors nevertheless aren’t ruling out Feldstein’s analysis. Billionaire George Soros said last month that the euro “may not survive,” and credit default swaps indicate a 22 percent chance Greece will default within five years, up from 16 percent a year ago.

Once the math has gone exponential like it has in Greece and in the United States, there is no turning it around on a dime without literally crashing the economy. That is what austerity means. Feldstein is talking default or leave the Euro. Yes, there is a way out that does not include austerity or becoming a forever debt slave to the central banks. Of course the right answer is that all countries need to do exactly what Freedom’s Vision does – produce their own sovereign money, clear out the debts, and put methods in place to keep the quantity of money under control for the very long term.

Turning to the markets, it has been longer than a week since the Transports made a new high, the Industrials have still not confirmed but are getting close. The markets were pumped overnight in the futures, the entire rally of the past year is on lower and lower volume. Even the breakouts to new highs have not been followed with volume increases a sign of a bear market rally. Bull markets have increasing volume as prices rise.

Below is a 10 minute chart of the DOW showing a rising wedge. Today’s open is creating an overthrow of that wedge, typical of the final wave higher:

Many technicians are looking for a run up to 1,220 on the S&P. That and a new high on the Industrials will suck in the remaining die hard bears, as many of the holdouts who are short will be forced to cover with that type of a move and breakout. It is extremely dangerous, the market is historically overbought on many indicators. Today the percent of stocks above their short term moving averages is at a place where turns occur. Money flows are at an extreme as are several other indicators that have already issued warnings.

Now, let me tell you what I just witnessed while I was typing this report this morning - I got the first sentence typed and then…

I hear a bullhorn but it is unintelligible. I hear a couple of loud explosions, I crack my window open so I can hear and hear the police on a bullhorn yelling panic instructions and I see blue lights one block from my home. More explosions, BOOM, BOOM, BOOM, then what sounded like 30 to 40 rapid fire shots from small arms, then BOOM, BOOM, then silence and blue/red lights!

I am not joking, this happened right in front of me, across the block only about 3 houses away. NUTS! I moved last year to a small and “quaint” town to ensure that I wasn’t around anything remotely like that. It only occurred about 40 minutes ago now, I have no idea what happened, but it certainly wasn’t good. Once I find out, I’ll let you know.

Bruce Springsteen – Badlands: