Wednesday, April 14, 2010

Morning Update/ Market Thread 4/14

Good Morning,

Equity futures are zooming overnight following good earnings reports from INTC, CSX, and JPM. The dollar is down, bonds are up, and both oil and gold are up as well. Watch the bond flow, you would normally expect bonds to be headed the other direction with rising equities.

JPM earned $3.3 Billion in one quarter ($13.2 billion annualized) based largely upon trading revenues. They are taking lower provisions for loan losses as well, but I would say that this one company is probably the most highly leveraged company on the planet, they are certainly the world’s largest holder of derivatives by far, and they would be totally insolvent were it not for their mark-to-fantasy models, toxic debt shell games, and control of the government and her supposed watchdog agencies. Enron times a million. Yet, Jamie Dimon announces they are going to hire 9,000 people over time. There’s an economy to be proud of right there.

Of course when you own and control the markets, manipulating your gains to steal from all other participants, life is good. Dang, I’m proud of JPM, way to go!

Speaking of being proud, the worthless MBA Purchase Applications Index produced another wild swing last week, plummeting 10.5%, with refinancing applications also dropping 9%. Here’s Econoday:

An increase in FHA mortgage premiums led to a big drop in applications for government mortgages while applications for conventional mortgages also dropped during the April 9 week. The combination made for a 10.5 percent setback for the Mortgage Bankers' purchase index, raising new questions over what should be a strong month for housing demand given the pending expiration of second-round stimulus. Applications for refinancing also fell, down 9.0 percent.

About half of the prior week's spike in mortgage rates reversed with 30-year mortgages averaging 5.17 percent, down 14 basis points. But rates, following the end of the Fed's direct purchases of mortgage-backed securities, are still much higher than they were just last month and are now a drag on housing demand. Next data on the housing sector will be tomorrow afternoon with the housing market index.
Oh yeah, roaring recovery there, and 10 year rates are still near the neckline, wonder what the housing market will look like with rates that are 2% higher than here?

The CPI for March came in with a .1% rise month over month, but a 2.4% rise year over year. Remember, the Import inflation is much higher, the PPI has been elevated and those are leading. Hey, 2.4% inflation is bad enough, that seemingly benign number will destroy your purchasing power in very short order, but keep in mind that these numbers are some of the most inaccurate numbers produced by our government and they affect almost all the other statistics. Here’s Econoday’s report:

Fed inflation hawks got no help this morning as consumer price inflation was essentially nonexistent for March. Overall CPI inflation for March nudged up to 0.1 percent from no change the prior month. The March rise matched the consensus forecast for a 0.1 percent increase. Core CPI inflation, however, eased to no change from up 0.1 percent in March and coming in just under expectations for a 0.1 percent gain. At the headline level, food prices rose moderately while energy costs were flat. The core was held down in part by declines in apparel and recreation and flat housing costs.

Looking at detail, the energy component of the CPI was flat after declining 0.5 percent in February after jumping 2.8 percent the month before. Gasoline dipped another 0.8 percent, following a 1.4 percent decline in February. Food inflation rose 0.2 percent after a 0.1 percent gain the month before.

Keeping the core soft in March were a 0.4 percent drop in apparel prices, a 0.1 percent dip in recreation, and no change in housing costs. Housing has been flat or negative for an unheard of four months in a row.

Year-on-year, overall CPI inflation firmed to 2.4 percent (seasonally adjusted) from 2.2 percent in February. The core rate edged down in March to 1.2 percent from 1.3 percent the month before. On an unadjusted year-ago basis, the headline number was up 2.3 percent in March while the core was up 1.1 percent.

Overall, inflation remains quite subdued-matching Fed expectations. Today's news is good for bonds.
The media is all ga-ga over the March Retail Sales figures – up 1.6% month over month, and year over year the figure is up 7.6%. Supposedly this report is adjusted for seasonality, but March contained Easter shopping week this year, so look for April to possibly show relative weakness. Secondly, the retail sales numbers fail to capture the effects of survivor bias. That is, companies who have failed, their lack of sales are not figured into the equation just like stock market indices. This is why sales tax receipts are a far better indication of what is truly happening, but even those are measured in dollars and not in actual goods sold:

The consumer sector is starting to pull its weight in the recovery and may even turning into an engine of growth. Overall retail sales in March jumped 1.6 percent after gaining 0.5 percent in February. The March boost topped market projections for a 1.2 percent spike. Motor vehicles provided a huge contribution, spiking 6.7 percent after dipping 1.9 percent in February. But even excluding autos, sales in March posted another healthy gain, rising 0.6 percent which came after a 1.0 percent surge in February. The boost was not related to changes in gasoline prices as sales excluding autos and gasoline improved by 0.7 percent, following a 1.1 percent increase in February.

The boost in March sales was based on widespread gains by components. In addition to motor vehicles, notable increases were seen in building material & garden supply, up 3.1 percent; clothing, up 2.3 percent; and furniture & home furnishing, up 1.5 percent. Apparently, the stabilization in housing is starting to spill over into retail sales.

The only component declines were seen in electronics & appliances and in gasoline. The first came off a spike in sales in February while gasoline was nudged down by lower prices, seasonally adjusted.

Overall retail sales on a year-ago basis in March improved to up 7.6 percent from 4.4 percent the month before. Excluding motor vehicles, the year-on-year rate jumped to 6.4 percent from 4.5 percent in February.

Apparently consumers with jobs are more confident that companies are not likely to hand out more pink slips and are willing to spend. Sales strength in March was broad based. After today's retail sales report, you won't be hearing too many arguments that we are in for a double dip recession. Equities should like today's report-especially in tandem with mostly favorable earnings reports since yesterday's close.

Yesterday produced another small change in the McClelland oscillator, thus a large change is expected for today or tomorrow. The SPX managed to get over the 1,200 hump overnight, so I would expect that it could run up to 1,220 or even 1,250, but there is heavy resistance as we get close to the 61.8% retrace level.

The VIX sell signal is valid regardless of what occurs over the next few days, it is often early, one of the few signals to actually lead. It’s also possible that a blowoff occurs and sends the VIX back below the lower Bollinger, or it could even push it down for awhile. Again, that will not negate the signal should that occur.

Here’s some more mood music for those still struggling with their 1040s. Want to really see special interest influence? Turn off the Turbo Tax and start doing it yourself manually, there’s an eye opener, especially if you’re a business owner...

George Harrison and Eric Clapton - Taxman: