Monday, May 17, 2010

Morning Update/ Market Thread 5/17

Good Morning,

Equity futures are toying with breakeven this morning after being down more than 120 Dow points overnight and then zooming 160 points (on low volume of course) into positive territory only to fall again. Below is a 5 minute chart of the DOW and S&P futures showing the overnight activity:

That’s a very volatile session, the Euro fell further from its channel setting a new low at 1.22 and the Dollar rose above 87 before correcting. As you can see in the daily chart below, the move has clearly entered a parabolic stage. The initial target area for the dollar is about 88 to 89 and for the Euro is around 1.2:

Bonds are higher after doing the same sort of seesaw, oil is lower, and gold is down appearing to consolidate near its prior highs.

The Empire State Manufacturing Index came in this morning much lower than expected at 19.1 when 30.0 was the expectation following last month's 31.9 reading. With this index, any reading over zero supposedly indicates expansion. Both Bloomberg’s and Econoday’s reports put the positive spin to the max, here’s Econoday:
Manufacturing activity remains very strong in the New York region though it did slow from April's exceptionally strong pace. The Empire State index for May came in at 19.11, well above break-even zero to signal significant growth compared to April. The April index was 31.86, to indicate vast acceleration from March.

The key here is that May's numbers may be lower than those in April -- but that doesn't mean May is weak. New orders came in at 14.3 on top of April's 29.49 to extend a long run of monthly gains. Shipments, at 11.29, increased compared to April though the monthly rate of growth slowed. Hiring did not slow with the employment index up more than 2 points to a very strong 22.37. Negatives in the report include continued acceleration in input prices and continued draw down in backlog orders, the latter pointing to still abundant excess capacity.

A slowing in manufacturing activity would be no surprise given the strong rate of acceleration so far this year, a rate that reflects a base effect with the depth of the sector's prior decline. The Philadelphia Fed will issue its manufacturing report on Thursday.

What spin, nice try. Manufacturing has collapsed. It came to a near stand still in late ’08 and early ’09. In the past several months it has turned positive from stand still levels. This is another example of people who don’t understand math. When something falls 50%, a 50% rise doesn’t get you even close to even. But yes, it is positive, but it is also slowing substantially and that is consistent with the removal of some of the .gov life support. Going forward there’s a severe challenge without that support and with debt levels having not been cleared.

March’s net TIC flows (Treasury International Capital) came in slightly positive with a $10.5 billion gain. This is another very weak number, we need inflows to at least match our trade deficit numbers, near $40 billion a month at this time.

How bad are some of the states hurting? Well, at least Illinois doesn’t issue I.O.U.s, they simply don’t pay their bills:
Illinois deep in debt, doesn’t pay bills

Paralyzed by the worst deficit in its history, the state has fallen months behind in paying what it owes to businesses and organizations, pushing some of them to the edge of bankruptcy.

Illinois isn't bothering with the formality of issuing IOUs, as California did last year. It simply doesn't pay.

Plenty of states face major deficits as the recession continues. They're cutting services or raising taxes or expanding gambling to close the gap. But Illinois is taking the extra step of ignoring bills.

Right now, $4.4 billion worth of bills, some dating back to October, are sitting in the Illinois comptroller's office waiting to be paid someday.

Shawnee Development, for instance, is waiting on about $380,000 in back payments, officials say. That amounts to one-quarter of the council's budget for senior care in seven southern counties. "It makes me mad as heck," said Georgia Smith, a 66-year-old volunteer at the agency. Seniors, she said, "are used to paying our bills, paying our way."

Prisons refused bullets
Illinois' deadbeat reputation has created some embarrassing situations.

A supplier refused to sell bullets to the Department of Corrections unless it got paid in advance. Legislators have gotten eviction notices for their district offices because the state wasn't paying rent. One legislator said he had to use campaign funds to pay the telephone bill after service was cut off at his office.

The practice of simply putting off payments became commonplace under ex-Gov. Rod Blagojevich , who liked to spend but adamantly opposed a tax increase to help cover costs. Before he was arrested and kicked out of office, Blagojevich's toxic relationship with legislators essentially paralyzed government, so bills just piled up.

I wouldn’t lend the Governor a bottle of Coke without payment in advance, that’s just me.

Tax collections are way down and that’s putting even more pressure on states - here's one from the WSJ:

States' Tax Collections Falter, Widening Budget Gaps


April tax collections are falling short of forecasts and even dropping below last year's depressed levels in a number of states, complicating budget troubles and prompting some governors to dip into rainy-day funds.

Following several months of modest improvement, the weak April revenue numbers are disappointing for states that hoped for economic recovery soon.

Based on reports from more than a dozen states, the figures suggest the recession may have taken a heavier-than-expected toll on employment last year, cutting into income taxes.

The shortfalls also are punching fresh holes in state budgets. Widening state deficits could in turn put pressure on the federal government to issue new stimulus funding; a 2009 cash injection from Washington has helped shore up battered state finances, but much of that will dry up by the end of this year.

April is the biggest revenue month for many states because it is when they collect a large portion of income taxes. The month's collections came up short of expectations in California by 26.4%, or $3.6 billion; in Pennsylvania by 11.8%, or $390.1 million; and in Kansas by 10.2%, or $65.3 million. More states will report in the next few weeks.

A drop in income taxes collected by the federal government last month may have foreshadowed the state-level declines. Through April 30, federal income taxes not withheld from workers' paychecks fell 17.6% from the same month a year earlier, the Rockefeller Institute reported May 4.

Kind of puts the lie to the other massaged statistics, doesn’t it?

And if you can stand the truth about how messed up our Federal Government is, their current budget numbers forecast a nearly 8% growth rate in revenues from now through 2020 just to come up with disastrous forecast they currently have. Have we ever grown revenues at near that rate for near that long? Not even close, and the reality of tax receipts so far this year is showing just the opposite. How bad is it? Take a look at this article written by Doug Casey, he spells out the debt picture pretty clearly. Bottom line is that their “math” is somewhat flawed, and to say that it doesn’t work is the understatement of the year:

The U.S. Government Is About To Get Hit With 'The Perfect Storm' Of Debt

Doug produces some great charts and this is a great article, I hope you take the time to read it.

It looks like BP is at least siphoning off some of the oil from the leak, that’s good and I sincerely hope it continues to work.

This week is options expiration, expect more games and more volatility. Being Monday I was expecting at least a good attempt at putting in a bounce following Friday’s 95% down day. The internals were much worse than the decline indicated once again. The SPX 1,120 area is very strong support. A break beneath there is bearish, and a break beneath 1,100 is very bearish.

Oil broke beneath support Friday and triggered a new bearish target on the Point & Figure diagram of $62 a barrel:

At this rate of fall it will be there quickly... gold is shown on the right:

There's no other way to spin that action in oil other than deflation. Take a look at the monthly oil chart, it has clearly broken support, a very bearish development for the medium term:

Eyes, of course, will be on the currency markets this week, but also on key stocks like Goldman which is barely holding onto support and appears to have developed a bearish pennant.

Sam Cooke – One More Time: