Tuesday, April 13, 2010

Morning Update/ Market Thread 4/13

Good Morning,

Equity futures are about flat this morning. The dollar is down, still beneath its 50dma, oil is down significantly and gold is slightly lower.

The Euro is higher as the “rescue” plan brought in buyers for a Greek bond offering yesterday:

Greece Sells $2.1 Billion of Debt After Rescue Plan

April 13 (Bloomberg) -- Greece’s auction of Treasury bills drew stronger demand than at a previous sale as yields more than doubled in the first offering of debt since the nation won a pledge of aid from the European Union.

The government sold 780 million euros ($1.06 billion) of 26-week bills at a yield of 4.55 percent, attracting bids for 7.67 times the securities offered, the nation’s Public Debt Management Agency said today in Athens. Greece also offered 780 million euros of 52-week securities at a yield of 4.85 percent, with a bid-to-cover ratio of 6.54 times. In January, the 52-week bills were sold to yield 2.2 percent.

Euro-region finance ministers and the International Monetary Fund offered the country as much as 45 billion euros in loans two days ago. The nation’s bonds rose for a third day today as the lifeline boosted confidence the government will honor its debt payments.

“The result confirms that the package which was put in place on Sunday has enabled Greece to fund itself in the near- term,” said David Owen, chief European financial economist at Jefferies International Ltd. in London. “But the longer-term fundamental issues in terms of where we go from here haven’t changed. Greece has to put its finances in order against the backdrop of an economy that currently is shrinking.”
Bid to cover of 6.5? Riiiiiggght… Guys, this piece is nothing but central banker spin and a marketing devise, it is complete bull. The central banks in the U.S. invented the game of producing “bids” to make debt auctions look like there is strong demand. However, I will note that central banks have literally nothing to lose in producing any and all debt – they now know they will be bailed out by taxpayers regardless of what the future brings. Curing debt with debt? That’s their plan, and it’s not for the benefit of the people of Greece.

The trade deficit for February widened to $39.7 billion. In our upside down world people think that’s a good thing and have for the past two decades. It means Americans are buying more than they export and more than they can afford. No problem, just charge it!

Today's trade report suggests that businesses are a little more optimistic about domestic demand. The U.S. trade gap widened in February on both oil and non-oil imports. The trade deficit for February expanded to $39.7 billion from a revised $37.0 billion the month before. February's gap came in a little larger than the market forecast for a $39.0 billion shortfall. Exports rebounded 0.2 percent while imports made a 1.7 percent comeback.

The worsening in the trade deficit was led by the nonpetroleum balance which widened to $27.2 billion from $25.6 billion in January. The petroleum deficit came in at $22.9 billion, compared to $22.5 billion in January.

The source of the gain in nonpetroleum goods should give comfort to those worrying about business confidence in the consumer sector. The boost in imports primarily was the result of a $1.1 billion jump in consumer goods, followed by a $1.0 billion gain in industrial supplies (largely oil). But imports of capital goods excluding autos posted a moderate gain of $0.4 billion. Overall, businesses appear to be in a restocking mood-which is favorable to the economy.

Exports were up only marginally with major components mixed. Capital goods excluding autos were up $0.4 billion in January despite a $0.8 billion drop in the aircraft component. The food, feeds & beverage component showed the biggest decline, dipping $0.5 billion. Taking into account the fall in civilian aircraft exports, overall exports were good.

On a year-on-year basis, growth in overall exports of goods and services in February slipped to 14.3 percent from 15.3 percent in January. Meanwhile import growth jumped to 23.3 percent in February from 13.7 percent the month before.
Half the increase in deficit was due to rising oil prices – that’s not reflective of demand, that’s reflective of the speculation – inventories are up and demand for oil is still down.

And what do you know; import prices are rising sharply on the back of speculation in oil. We went very quickly from deflationary prints to year over year numbers that are looking not very well contained – export prices up 4.7% yoy, and import prices up a mind numbing 11.4% yoy. Note that the things Americans are buying from overseas are rising way faster than things they sell to overseas. What does that tell you about YOUR purchasing power?

Import/export prices are offering an early but still mild signal of oil-related pressure. Import prices rose a sharp 0.7 percent in March and reflect a month-to-month 4.0 percent swing higher for petroleum prices. Fuel costs accounted for about 80 percent of the month's headline increase. Oil prices have continued to rise so far in April with gasoline costs for instance up roughly 2.5 percent from this time last month. Year-on-year, import petroleum prices are up 70.2 percent.

So far there's been no indication that businesses have the pricing power to pass through rising fuel costs to their customers. But today's report includes an unusually steep 0.3 percent rise in import prices of consumer goods (excluding autos). This is only a one-time gain at least so far and follows a 0.1 percent dip in the prior month, and the year-on-year rate for consumer prices is still only plus 0.8 percent. Also, there's no pressure evident for imported capital goods where prices fell a sharp 0.4 percent for a second straight decrease that follows two prior months of no change.

The export side also shows a 0.7 percent increase reflecting a month-to-month swing higher for agricultural prices, up 2.1 percent following February's 3.8 percent dip. Export prices of consumer goods fell 0.1 percent while export prices of capital goods reversed the prior month's decline with a 0.2 percent gain.

The price picture is still benign though any further increase in oil prices is certain to turn up the heat on FOMC policy makers who are focused on job growth, not on inflation. Consumer prices will be posted tomorrow with producer prices out next week.
There was a small movement in the McClelland Oscillator yesterday, expect a large directional move today or tomorrow most likely.

Yesterday the VIX closed beneath the bottom Bollinger Band. This sets up a market sell signal which will occur once the VIX closes back above the band. This is a rare event, one that has occurred exactly four times since August of '07. All of them have led to significant market declines. Below is a close in view of the VIX daily:

If we zoom out a little farther you will see the last time for this occurrence was back in mid-January. It closed below the Bollinger and immediately jumped back above. This led to an 8% market decline, one of the smallest declines of the past four signals:

This signal, when it occurs, may not cause an immediate market decline, it can continue to drift higher for a short time, or not. Do not ignore this significant market indicator, it has way too high of a success rate, and has even worked during this nutty ramp job of the past year.

Risk to the market is extremely high. Volumes are still nothing, and a large percentage of the volume is on trading of zombie financial institutions. The fact no one talks of them that way tells much of the story, extreme complacency. The truth is that nothing has been fixed. The banks are still toxic, they are still leveraged beyond belief, the only thing that has changed is accounting rules to sweep it under the carpet, and bailouts from the government which do nothing but produce sovereign risk.

Oh, and we’ll all pay for it – your productive efforts going to keep the banks and all the people who receive entitlements afloat. Say hello to the tax man, you know what he wants!