Friday, March 26, 2010

Morning Update/ Market Thread 3/26

Good Morning,

Equity futures are up with a typical no volume overnight ramp job that followed yesterday afternoon’s daylight high volume sell-off. Below is a chart showing 30 minute DOW futures on the left and 5 minute S&P futures on the right:

The Dollar is down slightly, while the Euro is up. Bonds are down yet again, oil and gold are back up a little.

The final revision to 4th quarter GDP came in revised downward to an annualized rate of 5.6%. The consensus and prior report was 5.9%. Econoday’s report follows:
Fourth quarter economic growth was up but not quite as much as previously believed. The good news is that we have moved well beyond the final quarter of last year and forward momentum is now probably a little better than seen in GDP. Real GDP growth for the fourth quarter was revised downward to an annualized 5.6 percent from the prior estimate of 5.9 percent. The consensus expectation was for no change from the previous estimate. Both final sales and inventory investment were revised down. Final sales grew a meager 1.7 percent, following a 1.9 percent rise in the third quarter.

The 0.3 percentage point cut in the GDP growth rate primarily reflected downward revisions to nonresidential fixed investment, to private inventory investment, and to personal consumption expenditures.

Year-on-year, real GDP held on to its return to positive territory, improving to up 0.1 percent from minus 2.6 percent in the third quarter.

Inflation is still barely noticeable as the GDP price index was revised down to a 0.5 percent gain, compared to the prior estimate of an annualized 0.4 percent. Analysts expected no net revision to the prior estimate of 0.4 percent.

Were today's report the initial estimate for the fourth quarter, it would be upsetting how weak final sales were. But more recent monthly data show a gradual improvement in consumer spending, business investment in equipment, and an uptrend in exports. Basically, there should be little reaction to today's GDP revision.

All I can really say is that I believe the entire GDP report and associated growth to be as false as the bank’s mark to fantasy accounting. This is an annualized number, measured in dollars and it contains all the false inflation data errors, plus it reports financial engineered and government engineered “productivity.” Wake me up when we stop lying to ourselves.

Citizen Sentiment is released at 9:55 Eastern.

Yesterday’s zoom to the moon followed by dive into the close is a typical intraday reversal that is often seen near major tops. These types of reversal signals, however, have been manipulated away during this past year’s rally, but one day one of them will be for real, it certainly could be this one as the market internals are now badly diverging and the oscillators have all issued sell warning. Breadth is deteriorating as seen in the Advance Decline line.

Most important is what’s occurring in the bond and currency markets. Bonds are selling off hard as supply is overwhelming and the Fed is talking like they are going to really, truly, cross their hearts, mean it when they say they are going to end their nonsense. Right… right up to the moment that the markets begin to roll over again and it turns the pressure back on.

The pressure, however, is already on. The middle and long end of the bond market is signaling that higher rates are coming. Below are 2 year charts of TLT (20 year bond fund) and the TNX (10 year Treasury), both have broken smaller H&S patterns that target higher rates than here, and the TNX has broken, although not yet convincingly, the very large 2 year (inverted) Head & Shoulders pattern neckline. This portends higher rates are coming and targets may well be achieved within the next 6 month to a year.

Now, they still are not yet convincingly below the neckline, so there is still time to come in and continue to manipulate the bond market again, but in the end the manipulations can only last so long, otherwise the government winds up being the only players in the market.

The TNX is currently just under 4%, that was a doubling of rates from 2%. The target on a break is 6%. While that may not sound like much, it is a tripling of the borrowing costs from a little over a year ago. And while it is closer to historic norms in terms of rates, what’s different is that the level of debt in the system has grown exponentially and there is a ton of supply still coming on. Most of it was financed short term and that presents a problem going forward. Also, if those targets are achieved, interest rates will break a 28 year downtrend line, portending the possibility of even higher rates. So, it’s crunch time again. They either try to stop it here again, or they let the markets do what they are going to do.

Keep an eye on the VIX here as well, it broke above the most recent downtrend line yesterday as seen on this 3 month chart:

Hey, it looks to me like the bond market (DEBT) has got them under a little pressure:

Billy Joel – Pressure: