Thursday, April 22, 2010

Morning Update/ Market Thread 4/22

Good Morning,

Equity futures are substantially lower this morning following yesterday’s mixed closed. The Dollar is stronger, the Euro is weaker continuing to break beneath short term support on Greek debt concerns. The IMF is fanning those concerns talking about contagion into other countries of Europe. The daily chart of the Euro is below:

According to Bloomberg, “The International Monetary Fund on April 20 called rising state debt the biggest threat to the global economy.”

Why do you suppose the IMF (group of central bankers) would say something like that? Keep in mind their goal is to produce debt obligations on their desktop PC (bonds) in order to indebt the nations of the world. They don’t really care how “risk filled” it may be, they simply want the power and control that comes via the use of the debt which they perform no productive effort in order to create.

Meanwhile, those who do spend their lives in the pursuit of productive effort, the workers in Greece, are going out on their fourth strike of the year in protest of being controlled with debt. First the people of Iceland saw through the debt game and now the people of Greece are not putting up with it either, that’s a most promising development for the world from my point of view. The people need to rise up, these debt issues are the key issues holding back progress of mankind.

The PPI came in smoking hot for the month of March, rising .7% for the month, but up a whopping 6.1% year over year. Yes, the year over year figure is in relation to the freeze up, but it is still significant. The PPI price tends to lead the CPI. Here’s Econoday talking about the weather again:
Producer price inflation unexpectedly surged as atypical winter freezes jacked up food prices and gasoline made a partial comeback. The overall PPI rebounded 0.7 percent after declining 0.6 percent in February. The boost in March was considerably above analysts' expectation for a 0.4 percent increase. At the core level, the PPI inflation rate was steady with a 0.1 percent gain that also matched market forecasts.

The jump in the headline PPI was led by a 2.4 percent spike in food prices, after a 0.4 percent rise in February. The March surge reflected the loss of some vegetables to atypically cold winter weather in key growing regions in the U.S. For the latest month the fresh and dried vegetables category surged a monthly 49.3 percent.

Turning to energy, this component rebounded 0.7 percent after dropping 2.9 percent the month before. Gasoline rose 2.1 percent after a 7.4 percent drop in February.

At the core level, inflation is almost nonexistent outside of commodities related gains. According to the BLS, 85 percent of the core rise came from higher jewelry prices due to higher gold and other metals costs.

For the overall PPI, the year-on-year rate jumped to 6.1 percent from 4.6 percent in February (seasonally adjusted). The core rate year-ago pace edged down to 0.8 percent from 0.9 percent the month before. On a not seasonally adjusted basis for March, the year-ago increase for the headline PPI was up 6.0 percent while the core was up 0.9 percent.

Inflation at the producer level jumped in the latest month but much of it is temporary as food price inflation will ease as crops from other regions come into play, adding to supply. And while high, oil prices have steadied.

Bond yields could firm on today's headline number, combined with a notable drop in initial jobless claims. But flight to safety may offset as Wall Street bashing appears to be today's sport and as worries about Greece have resurfaced.

Jobless claims fell back to “only” 456,000 for the prior week. Here’s some cheerleading:
Initial jobless claims fell back to trend in the April 17 week, coming in at a largely as-expected 456,000 and reversing two weeks of administrative delays that swelled claims to as high as 480,000 in the prior week (revised from 484,000). The 456,000 level compares with 445,000 in the March 20 period, offering a flat comparison at best to gauge monthly payroll change. Despite the distortions of the prior two weeks, the four-week average shows a similar comparison: at 460,250 vs. 454,000 at mid-March. Continuing claims for the April 10 week fell 40,000 to 4.646 million with the four-week average down slightly to 4.644 million.

Today's results are a relief that confirms administrative and not economic factors behind the earlier climb. But even so, the current comparison with March doesn't show the kind of positive momentum that was expected for April following March's big payroll gain. Stocks firmed slightly in initial reaction to the report.

The FHFA Home Price Index sunk further into negative territory. This index had worked its way back to zero but the year over year price change is accelerating downwards again, falling 3.4% year over year versus the prior month’s 3.2% price drop year over year.
Home prices for government sponsored mortgages remain under downward pressure despite improvement in sales. The FHFA purchase only home price index slipped 0.2 in February on a seasonally adjusted basis, following a 0.6 percent decline the month before. On a year-on-year basis, this index was down 3.4 percent, compared to down 3.2 percent in January.

For the nine Census Divisions, seasonally adjusted monthly price changes for month-ago February ranged from minus 1.7 percent in the South Atlantic Division to up 1.9 percent in the Middle Atlantic Division. Although the U.S. dip for February is a little disappointing, the fact that some portions of the country are seeing modest price increases is encouraging. Four of the nine Census Divisions showed gains for February. The big question is what is going to happen to prices after the end of the special homebuyer tax credits in April. Prices could temporarily soften further.

Is it just me, or does that chart seem to correspond pretty well with this chart? Look at the end of year climb back towards zero price decline, that corresponds pretty closely to the trough in the chart below. If they do correspond, we should see continued pressure on home prices moving forward.

Existing home sales jumped 6.8% in March. Year over year home sales jumped 16.1%, again keep in mind that comparible is against March '09 where there was a complete freeze occuring. In this case, it is spring time, so you expect the month over month increase, I think you'll find that by July of this year, these sales numbers will not look so good as the effect of the tax credit wears off:
Sales of existing homes rose as expected in March but still show a less-than-robust pace ahead of this month's expiration of second-round stimulus. Existing home sales rose 6.8 percent to an annual rate of 5.35 million with February revised slightly downward to 5.01 million. Details are solid including a 7.3 percent gain for the key single-family component and evenly distributed gains across regions.

Supply fell back to 8.0 months from February's 8.5, and the median price rose 3.7 percent to $170,700 with the year-on-year comparison once again positive at 0.4 percent. All cash sales remain very high, at 27 percent, reflecting tight credit and low home prices. Distress sales rose 3 percentage points to 36 percent with first-timers making up 44 percent of total sales, up 2 percentage points from February.

Though the housing market is still soft, the National Association of Realtors believes second-round stimulus "has done its job" and is not asking Congress for another extension. The NAR said foreclosures are being absorbed at a "manageable" rate. Stocks are edging lower following the report.

Zero Hedge has an article in which Richard Koo states exactly what I’ve been saying all along about the banks being insolvent should they be forced to mark their assets to market. The opening paragraph is a classic, and Koo is right, of course.
Richard Koo Says If Banks Marked Commercial Real Estate To Market,It Would "Trigger A Chain Of Bankruptcies"

Richard Koo's latest observations on the US economy are as always, a must read. The critical observation from the Nomura economist explains why the realists and the naive idealists are at greater odds than ever before: the government continues to perpetuate, endorse and legalize accounting fraud in the hope that covering everything up under the rug will rekindle animal spirits. The truth, as Koo points out, is that were the FASB to show the real sad state of affairs, the two core industries in the US - finance and real estate, would be bankrupt. "If US authorities were to require banks to mark their commercial real estate loans to market today, lending to this sector would be extinguished, triggering a chain of bankruptcies as borrowers became unable to roll over their debt." In other news Citi, Bank of America, and Wells just reported fantastic earnings beats on the heels of reduced credit loss provisions. Nothing on the conference call mentioned the fact that all would be bankrupt if there was an ounce of integrity left in financial reporting, and that every firm is committing FASB-complicit 10(b)-5 fraud. One day, just like Goldman's mortgage follies, all this will be the subject of epic lawsuits. But not yet. There is some more money to be stolen from the middle class first, by these very firms.

Koo is 100% correct, but commercial real estate is only one part of the cover-up. Residential real estate and other derivatives are the other two parts. Mark all of those assets to market and the largest banks in America fail – no if, ands, or buts. This will become evident over time, Ponzi schemes based on accounting fraud always come to an unfortuitous end.

Speaking of Ponzi schemes, the SEC just shut down a Florida man, accusing Mr. Shapiro of using new investors to pay prior investors while skimming millions from his grocery buying and distribution business. This will be an interesting one to see unfold as there appears to be some legitimate business occurring there on the surface, probably more legitimate than Goldman’s, so let’s see how this one plays out once his defense attorneys get into motion. The media has already hung him. The SEC had better make sure they go after the biggest Ponzi players too, the rule of law is only truly protected when it is applied equally to everyone.

Did you realize that our government is giving out money to prevent people from becoming homeless? It’s true, the following article tells the story of a mortgage broker turned hamburger flipper ($70k per year to $10 per hour, but hey, statistics count him as employed), who can no longer pay his rent and is in danger of being forced onto the streets. A tragedy of our economy and a victim of the Ponzi for sure. However, to step in and pay his rent for him is yet another “safety net” that when added to all the others certainly makes not working more attractive than flipping burgers. It’s a slippery slope and this article dives into some of the problems the government, with no set procedures, are having giving away the billions they possess. Here’s a link:

Handing Out Money to Stave Off Homelessness

Returning to the markets this morning, bonds are higher which shows money flowing away from more risk filled assets like oil and gold which are both down hard, oil is currently down 2%.

Qualcomm earnings report was not strong and their stock is down about 7%. This is a big deal as demand for their chips is not as strong as the pundits were expecting. Their chips go into almost all mobile devises. Then this morning Nokia got trounced for reporting bad earnings, they are down 15% this morning.

Yesterday’s see-saw action produced a small movement in the McClelland oscillator, so we can expect a large directional price move which is already occurring as I type this morning. When under these conditions, knowing that occurred will often make me hold onto a short term position longer than I might have otherwise.

The market is clearly overextended and wound up having great difficulty getting through strong overhead resistance. The DOW closed just below the 200 week moving average yesterday and is pulling back away from it this morning. Below is a 3 month chart with weekly bars showing how we pinned the 200 wma (red line) and are now pulling back:

The market is still sitting on a VIX market sell signal, following that signal the VIX spiked, then fell back and is now rising sharply again:

Below is a chart from showing the percent of mutual fund cash. On a percentage basis the amount of cash held by fund managers is at the lowest point in modern history. This is yet another bullish extreme, one that clearly shows the majority of institutional investors are long the market, another sign that a top is in or approaching:

A close in the markets below SPX 1,200 could mean that a meaningful correction is beginning. I would not, however, remain short should we exceed the highs put in last week.

Hey, talking about the IMF always gets me thinking about the pushers of debt, they do far more damage to the world than the pushers of drugs.

Steppenwolf – The Pusher: