Monday, May 3, 2010

Morning Update/ Market Thread 5/3

Good Morning,

Equity futures are higher in overnight action. Below is a 5 minute chart of the DOW futures on the left, and 15 minute chart of S&P futures on the right. Friday’s selloff did quite a bit of damage, but it did not make a new low. The key for the short term will be which direction the market moves out of the current small consolidation pattern. If it breaks to new lows below /ES 1,176, then it is bearish short term, however if it breaks higher as expected then it is equity bullish in the very short time frame:

McHugh has a wave count that requires one more move higher – that would fit the 90% odds of a Monday morning ramp. That wave, if his read is correct, may or may not go on to reach new highs. Regardless, the overall formation is bearish in the intermediate following this last wave higher.

Both the dollar and bonds are significantly higher over the weekend, despite Greece accepting $146 Billion in shameful and disgraceful indebtedness – chains created by the world’s central bankers for which the people of Greece will be eternally laboring on the banker’s behalf. The Euro is actually much lower and is forming a flag that looks bearish for the Euro. The direction of the dollar and bonds is not a positive for equities.

Meanwhile oil and gold continue to rise, yet other more industrial commodities, like steel, continue to look structurally weak. Gold, on the other hand, looks extremely bullish like it is going to challenge new all time highs.

I continue to think that the XLF will significantly impact market direction. Goldman is up as they attempt to regain the $150 level which is now overhead resistance. Should Goldman get beneath $140, it is quite bearish, above $150 becomes more bullish.

Citizen spending rose in March by .6%, the sixth consecutive increase and now up 2.9% year over year. Meanwhile income was reported up .3% for March. Obviously those figures are coming off the total freeze of last year, not very impressive compared to the backdrop of a nearly doubled stock market. With spending outpacing incomes again, what does that tell you about the savings rate? Down again…
NEW YORK ( -- Personal spending rose for the sixth month in a row during March, while income also increased, according to government data released Monday.

The Commerce Department said individual spending rose 0.6%, or $36 billion, last month after an upwardly revised 0.5% increase in February.

Personal income climbed 0.3%, or $32.3 billion, in April following a 0.1% rise the month before. Both figures matched estimates from economists surveyed by

The report also showed that personal savings as a percentage of disposable personal income, known as the savings rate, was 2.7% in March. That's down from 3% in February.

Motor vehicle sales will be reported throughout the day, Construction Spending and the Manufacturing ISM are released at 10 Eastern.

The oil spill in the Gulf is turning out to be a very significant disaster, I don’t think that people have fully grasped the significance. If they are not able to get it contained fairly soon, and if it is leaking at the higher rates being mentioned, then it very well could turn out to be very significant to the macro-economy, not to mention the environment, especially if it is not contained to the Gulf. Meanwhile BP and Transocean (RIG) are both plummeting as an army of lawyers are deployed.

Keep an eye on this as it develops as the costs are going to continue to elevate as it grows, many industries will be affected.

I find the following article to be very interesting regarding Australia imposing a “super” tax upon miners. This is going to have a huge impact on BHP and Rio Tinto along with other miners who do business Down Under:
BHP, Rio Shares Drop on Australian Mine ‘Super’ Tax

May 3 (Bloomberg) -- BHP Billiton Ltd. and Rio Tinto Group, led declines in mining stocks in Sydney trading on concern Australia’s plans to impose the world’s heaviest tax regime on resource companies will cut billions from profits.

BHP and Rio fell the most in 3 months after Australia announced the so-called super tax yesterday. The 40 percent tax on resource profits will start from 2012 and raise A$12 billion ($11 billion) in its first two years. BHP, with 51 percent of its assets in Australia, said taxes on its operations there will increase to 57 percent in 2013 from 43 percent now.

“These proposals seriously threaten Australia’s competitiveness, jeopardize future investments and will adversely impact the future wealth and standard of living of all Australians,” Marius Kloppers, chief executive officer of BHP, the world’s largest mining company, said in an e-mailed statement.

Australia, the world’s biggest iron ore and coal exporter, is now the most highly taxed mining nation, reducing its competitiveness, Citigroup Inc. said. The move may reduce BHP’s earnings by 17 percent and Rio’s by 21 percent in 2013, UBS AG said today in a report.

BHP traded 3 percent lower at A$39.53, its biggest decline since Feb. 5, at the 4:10 p.m. Sydney time close. Rio, the third-biggest, declined 4.3 percent to A$69.00., also its biggest fall since Feb. 5.

Credit Swaps
The cost of protecting Rio Tinto and BHP bonds against default surged to the highest in almost two months. Credit- default swaps on Rio Tinto jumped 7 basis points to 83 basis points as of 4:34 p.m. in Sydney, the highest since March 5, according to Nomura Holdings Inc. and CMA DataVision in New York. Swaps on BHP rose 4 basis points to 64 basis points, the highest since March 8, Nomura and CMA prices showed.

Australia, I’m sure, doesn’t want to just give away their natural resources for free, and of course that wouldn’t be appropriate. However, Australia has been much heralded lately as being in the sweet spot to feed Asia and has done relatively well compared to other nations that possess debt based money systems. Their debts are, however, very high and they need revenue to service their own never ending growth requirements which emanate from living inside of their own debt backed money box.

This is a clear example where higher taxes to service those debts will translate into lower corporate earnings. The productive capacity of those companies, and the productive capacity of those natural resources are being used to service debt… and just whose hands hold the debt? You guessed it – the very central bankers who created the debt based system with NO productive effort. If you can’t follow the money trail here, then you are a banker’s best buddy. It does not have to operate like that at all, each country should be producing their own sovereign, non debt-backed money.

This is what happens following high levels of debt and rising taxes are clearly a trend that is going to be impacting the future. Austerity in the form of dramatic cuts and higher taxes will hurt Greece greatly as well. They had a choice, and unlike Iceland they made the wrong one for their long term wellbeing. The pressures that are about to be forced upon the people of Greece will lead to “other” events. And we still have all the other already indebted countries to go. Curing debt with debt will not work in the long run, it will end in disaster.

I read several articles this weekend on the “miracle” that is China. More people are talking about the false statistics and unchecked growth. This weekend Marc Faber joined the ranks of those saying that it has gone too far:
China May ‘Crash’ in Next 9 to 12 Months, Faber Says

May 3 (Bloomberg) -- China’s economy will slow and possibly “crash” in the next nine to 12 months, Marc Faber, the publisher of the Gloom, Boom & Doom report, said.

“The signals are all there, the symptoms of a major bubble are all there,” Faber said in a Bloomberg Television interview from Hong Kong. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

The Shanghai Composite Index has plunged 12 percent this year, the fourth-worst performer among 92 gauges tracked by Bloomberg globally, as the government stepped up measures to cool the property market and ordered banks to set aside more deposits as reserves.

The latest increase of bank reserve ratios came yesterday after earlier moves failed to halt a record surge in real estate prices. In March, prices rose 11.7 percent across 70 cities from a year earlier, the most since data began in 2005.

The clampdown on property speculation may prompt investors to turn to the nation’s stock market, Faber said. Still, shares are “fully priced” and Chinese investors may instead become “big buyers” of gold, he said.

Faber is now seeing the signs of a bubble there, duh. However, his timing has been good and he is now braving a timeframe on a crash in China within the next year. Think the U.S. will avoid the fallout should that occur? I don’t.

On Friday the VIX closed back above the upper Bollinger bands. That followed the market buy signal that occurred Thursday when it closed inside of the Bollinger range:

It may close back inside that range again today, that would reconfirm the market buy signal. This conflicts with the wave count that McHugh is tracking and makes the intermediate term less certain for me. I still regard the market as extremely overextended, I see nothing but threats and continue to believe that debt, and who controls it, will continue to anchor the world’s economies – it will most definitely not set them free.

Deep Purple - Smoke On The Water