Friday, May 14, 2010

Morning Update/ Market Thread 5/14

Good Morning,

Equity futures are down this morning with the dollar up and Euro down. The dollar has risen above its up channel while the Euro broke beneath its bottom trendline but immediately bounced back just above it – the Euro currently sits in the 1.25 area. Below is a daily chart of the dollar on the left and Euro on the right:

Bonds are rising, oil is down and very close to breaking support while gold continues on to reach a new higher high, now just a couple of dimes beneath $1,250 an ounce.

Driving those moves, of course, is DEBT. The entire world is permeated with it, Europe is definitely in crisis and the latest bailout has not worked because it has not changed the underlying structure of debt saturation. Spain just announced a second dip into negative price inflation, a deflation that is trying to re-exert itself. There is more talk of a possible Euro breakup and rumors are circulating that Germany may return to the Deutschmark. Currency changes are something that I’ve been saying are coming for several years. How did I know? Simple… the math of the underlying debt puts strains on the system – debts are growing faster than income’s ability to service them, changes ARE coming and not just to Europe.

Back here in America, Retail Sales were just released as climbing .4% month over month for April. This follows March’s 1.6% rise but is above the forecast which called for .2%. Guess what? I put NO CREDENCE in the official Retail Sales report – are you surprised? This report suffers from survivor bias, measuring sales only at stores that are still in existence. This data does not square with overall tax collections.

For those who have wondered, here’s how the Retail Sales numbers are generated:
The retail sales report is released by the U.S. Census Bureau every month on the 13th day, or on the nearest date if the 13th is a holiday. The report covers the previous month’s developments, and is anticipated eagerly by both economists and traders.

The data included in the release is calculated from the dollar-value of merchandise sold by a sampling of point-of-sale businesses, and other non-store retailers such mail catalogues and vending machines. The Census Bureau sends out questionnaires to approximately 5000 firms across the U.S. in order to measure the retail sales volume which corresponds to about 65 percent of the total sales estimate. The data is not adjusted for those firms which do not respond to the questionnaire. Also, due to the small sampling size, there is a significant sampling error involved in the numbers released with the report.

This is a very inaccurate way to measure overall sales, and it should be taken in more of a context of being “surviving store sales.” A way more meaningful macro statistic is sales tax receipts, something that unfortunately is not reported in a timely fashion. That’s a shame because it would be very easy to do quickly in this day and age. The fact that it’s not leaves one to assume that leaving the public less than fully informed is what the power structure desires.

Industrial Production and Consumer Sentiment are to be released shortly.

I find this fact interesting… the day before yesterday the Puget Sound Business Journal reported that the Seattle area had the nation’s “best economy:”
Study: Seattle has nation’s best economy

According to Policom Corp., an independent economic research firm that specializes in analyzing local and state economies, out of the nation’s 366 metropolitan statistical areas, Seattle-Tacoma Bellevue rates No. 1, moving up from last year’s No. 12 ranking. In 2006, Seattle-Tacoma-Bellevue ranked No. 51 in the country. The company uses 23 different economic factors to create its rankings.

According to Policom, the highest-ranked areas have had rapid, consistent growth in both size and quality for an extended period of time. The lowest ranked areas have been in volatile decline for an extended period of time and Policom has created economic strength rankings since 1996.

Note that their study is based upon “rapid, consistent growth…”

Then yesterday the Business Journal publishes a separate report:
Seattle: No. 1 in U.S. for consumer debt

According to data from information services firm Experian, Seattle has the highest level of average personal consumer debt at $26,646. Right behind are Dallas ($26,599) and Denver ($26,428).

The study calculated debt using all credit cards, auto loans and personal loans. It did not include mortgages.

Rounding out the top 10 are Atlanta ($26,063), Phoenix ($26,035), Houston ($25,790), Washington, D.C. ($25,702), Tampa ($25,603), Philadelphia ($25,544), and Orlando, Fla., ($25,316). Los Angeles had the lowest debt ($24,009).

My, that’s interesting. “Best performing city” and “No. 1 for Consumer debt.” Hmmm. What to make of that?

I won’t try to guess which drives what as there are other factors involved like incomes. However, I would say that in general it says that growth in the area is on the back of debt. Are there incomes to support that debt moving forward? Since I live here I can tell you this; there are a lot of expensive homes in the Puget Sound area that ran up to very high bubble prices and this is the center of where WaMu (remember them?) ran amok with Option-Arm home loans. Those resets are coming quickly and it will be interesting to see if incomes and assets are going to remain able to support all that consumer debt. My bet is that there is pain coming.

BP has been saying the gulf leak is 5,000 barrels a day… now a Purdue University scientist says he can measure the flow and it’s really 70,000 barrels a day, +/- 20%. Yowzaa, that’s a serious difference.

I must admit, however, that after hearing him allow Anderson Cooper to sucker him into talking gallons instead of barrels, I have less faith, but I’m sure that his estimate is probably a lot closer than BP’s. Another thing they didn’t address is that this is just one of two leaks…

Currency moves and fears are driving the market at this stage. If the Euro breaks down in earnest below that channel line, all heck is going to break out and we could see large moves happen quickly. The fact that the market is down to the 1,150 area is bearish, but breaking below 1,140 means that a move to 1,100 is probably in the cards. Be careful going into the weekend, who knows what could happen in Europe. Keep in mind WHO is in control of the markets and play carefully!

Jimmy Buffett – Volcano: