Wednesday, May 26, 2010

Morning Update/ Market Thread 5/26

Good Morning,

Equity futures are higher after yesterday’s wave 5 and immaculate recovery off the SPX 1,040 support area. Bonds are lower, oil is back above $70 a barrel, gold is climbing well above the $1,200 an ounce level again, but the dollar is higher and euro lower. Hey, the euro still looks sick – the crisis of debt is rippling, it has not been cured and cannot be cured as long as the debt far exceeds income.

The completely worthless MBA Purchase Applications Index which hit an all time record low with the last report descended another 3.3% over the past week – here’s Econoday:
Housing demand in May appears to have collapsed, the result of second-round stimulus which pulled sales into March and April. The Mortgage Bankers Association's purchase index fell another 3.3 percent in the May 21 week to sit at deeper 13-year lows. Ironically, the collapse is hitting at a time when mortgage rates are moving to record lows, the result of the safe-haven rush for U.S. Treasuries. More and more homeowners are refinancing their existing mortgages to lock in the low rates as the refinancing index jumped 17.0 percent. The average 30-year mortgage fell 3 basis points to 4.80
Yeah, how ‘bout that? Record low interest rates and yet historic low Purchase Index. Can you say, “debt saturation?” I thought you could!

So, what happens from here now that the government has lowered rates to zero and basically purchased every worthless mortgage in the country? We’re going to find out, it’s going to get real interesting. Obviously creating bounces by throwing trillions at the problem is a short term thing exacerbating the problem in the longer run. Change is coming and all the while the melt down in the upper end segment is scheduled to kick into high gear shortly with the ongoing wave of Option-ARM resets.

Durable Goods orders are reported up 2.9% month over month mostly due to an influx of aircraft orders. The year over year numbers look spectacular, up 18.9% now year over year, but keep in mind that’s compared to the standstill that occurred over the same timeframe the year prior. Here’s Econoday’s report:
The April durables report lived up to its reputation as a volatile series but this time it was not just in the new numbers but in revisions. Net, durables are still notably healthy. New factory orders for durable goods in April surged 2.9 percent after a revised no change the month before. The headline number topped analysts' projection for a 1.5 percent comeback. The jump in the headline number was led by huge boost in the transportation component.

Excluding the transportation component, new durables orders slipped 1.0 percent after a 4.8 percent spike in March. The swing was largely in civilian aircraft. However, taking into account the March strength in ex-transportation, the relatively small decline in ex-transportation leaves new orders at healthy levels.

Nondefense capital goods orders excluding aircraft fell back 2.4 percent in April after a sharp 6.5 percent boost the month before. Shipments for this category-and source data for equipment investment in GDP-edged up 0.2 percent in April, following a 2.3 percent increase the month before.

Year-on-year, overall new orders for durable goods in April were up a robust 18.9 percent, compared to 17.3 percent in March. Excluding transportation, new durables orders stood at up 18.0 percent, compared to 19.2 percent in March.

The bottom line is that after taking into account monthly volatility, durables orders are still strong at both the headline and core levels. If manufacturing growth is slowing, it is too early to tell from this report.
The overall level of activity is still way down from peak. I don’t think the upwards trend in Durable Goods continues as we head into the second half of the year, but it will be quite some time before we see the possibility of negative year over year numbers again. Once again I point to tax receipts which are still down year over year. As the stimulus in the housing industry runs out, we are going to see the indicators whipsawed as the government now manipulates nearly every segment of the economy.

New Home Sales for April are released at 10 Eastern this morning. The buyer’s credit expired at the end of April, and now in May we are seeing a collapse of Mortgage Applications. Thus, this morning’s number is expected to show improvement, and sales can take a couple of months to close, so in due time the sales figures are going to reflect a less supported reality, probably within the next couple of months. I would not be surprised if this month was stronger than expected due to the government manipulation within the market.

Yesterday, USA Today reported on BEA’s latest income figures:
Private pay shrinks to historic lows as gov't payouts rise

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

Those records reflect a long-term trend accelerated by the recession and the federal stimulus program to counteract the downturn. The result is a major shift in the source of personal income from private wages to government programs.

The trend is not sustainable, says University of Michigan economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. "This is really important," Grimes says.

The recession has erased 8 million private jobs. Even before the downturn, private wages were eroding because of the substitution of health and pension benefits for taxable salaries.

The Bureau of Economic Analysis reports that individuals received income from all sources — wages, investments, food stamps, etc. — at a $12.2 trillion annual rate in the first quarter.

Key shifts in income this year:
• Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

•Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

The shift in income shows that the federal government's stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

"It's the system working as it should," Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

Economist Veronique de Rugy of the free-market Mercatus Center at George Mason University says the riots in Greece over cutting benefits to close a huge budget deficit are a warning about unsustainable income programs.

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. "People are paid for being rather than for producing," he says.
Got to love the liberal viewpoint regarding money, “It’s the system working as it should!” LOL, boy, is he in for a bankrupt surprise. Yet more “economists” who do not see the forest and the raging fires that are headed this way. There is absolutely no reason why private wages should pick up anytime soon.

I can’t let this fact go by without mentioning it regarding the latest financial reform bill that recently slid by the Senate…
Senate Democrats Pass Bill Allowing Govt to Collect Addresses, ATM Records of Bank Customers

( – Senate Democrats united to pass a financial regulatory bill that allows the government to collect data on any person operating in financial markets at any level, including the collection of personal transaction records from local banks that list customers’ addresses and ATM receipts.

The Senate voted 59-39 on Thursday to pass the bill, the chief aim of which is to more-heavily regulate the financial industry. The bill now goes to a conference committee in the House of Representatives, where differences between the House and Senate versions will be ironed out.

The bill, if it becomes law, would create the Bureau of Consumer Financial Protection and empower it to “gather information and activities of persons operating in consumer financial markets,” including the names and addresses of account holders, ATM and other transaction records, and the amount of money kept in each customer’s account.

The new bureaucracy is then allowed to “use the data on branches and [individual and personal] deposit accounts … for any purpose” and may keep all records on file for at least three years and these can be made publicly available upon request.

So, instead of getting transparency at the Fed and the ability to audit them, they get to see every single transaction you make. Folks, this is exactly backwards and it is opposite of the rule of law. You are progressively living in a jail, one where your every movement is video taped, and every nickel of transaction is monitored and taxed. If someone in the government doesn’t like you, they can simply have you prosecuted and sent to jail claiming that you intentionally made errors on your tax return with the intent to evade paying taxes. Welcome to prison. Do you think your tax return is perfect with miles of tax code? Who interprets all that language? It’s nuts, and it’s going to evidently require drastic action to remove the people who are doing this to our country.

Yesterday I posted a video in the comments section of a guy who was threatened with 5 years in prison for video taping and posting on Youtube a video of a police officer who pulled him over for riding dangerously on his motorcycle. They are pressing charges, claiming that he doesn’t have the right to record without consent. Of course the police have the “right” to record you without consent, but not the other way around. Backwards! This is not freedom, it’s a police state – and police states always fail, just as micro-managed economies fail.

The down move yesterday was the large move that the prior day’s small movement in the McClelland Oscillator said was coming. The down up action, however, produced another small move in the McClelland which means we should see another large move in the next day or two.

The current downtrend line has broken to the upside and that gives us the appearance that wave 3 down is over, unless this is just a throw-over – now it gets interesting. The bounce yesterday did produce daily candles that look quite bullish and look like a bottom, however, wave 5 did not appear to have all of its subwaves – this does not look correct, although there are definitely 5 distinct waves and we know that wave 5s can truncate as this one may have. If it’s going to produce the rest of its waves, we would need to not advance significantly and would need to descend sometime today – we’ll see.

There’s another possibility that I see has potential for occurring. On the longer term charts there’s a potential Head & Shoulder Pattern setting up. On the one year chart of the SPX below, you can see that we created a left shoulder, a head, and that we just returned to a potential neckline:

If 1,040 is the neckline and we’re going to create a right shoulder, we should bounce over the next month or two, say into July. That actually fits with the June/July summer months which are typically more bullish months, and it fits with the two more months that will be required to work the government manipulated home sales through the system before they collapse as mortgage applications have done. This is very preliminary, I’m just pointing out that the pattern seems pretty obvious right now.

Yesterday's journey to the pin lows produced new bearish targets on the Point & Figure diagrams. Once these levels are breached and targets get produced, an intraday reversal does not undo them! In fact, most of the major indices produced breakdowns including the RUT. Below I've included the P&F charts for the S&P and Industrials:

S&P target = 920:

Industrials target = 8,600:

While it may take some time for those targets to play out, they will not be reversed easily at this point as new highs are a long ways up with a lot of resistance between here and there.

In the short term, getting above the 1,090 pivot is bullish, there is resistance again at 1,100 and then 1,110. Hey, 300 point plunges followed by 300 point advances in the same day are not a sign of health. This type of action is proof positive that our markets are whack. They are run almost entirely by computer trading and only a few large money interests. In other words, they do not reflect reality and the price discovery process is broken.

There certainly seems to be a kink in the machine from my perspective. It seems our leadership has forgotten what it takes to be a well respected man about town…

The Kinks – A Well Respected Man: