Wednesday, June 16, 2010

Morning Update/ Market Thread 6/16

Good Morning,

Equity futures are down this morning following yesterday’s completely lopsided computer driven jump. Yet another extreme, 95.6% of the volume was on the upside – the 90%+ score card since mid-April now stands at 8 down and 6 up, 14 total. Unprecedented, and again is a warning about the character of the markets – not good.

Immediately upon the close the RUT proceeded to lose nearly 1%. Best Buy (BBY) reported a flat out miss, blaming poor television sales, and is down 10% this morning. Then Fedex (FDX) lowered earnings estimates and is down this morning as well.

So far prices remain inside of the rising wedges I showed yesterday. Obviously a break below those rising trendlines is the indication that this movement is over:

The Euro is down on debt driven concerns again with the dollar up slightly. Bonds have taken back all of yesterday’s losses, and both oil and gold are down slightly after rising strongly yesterday. Oil broke back into its prior channel, a bullish development.

The Gulf oil well crisis is a mess with far more going on than the public is being told. Please follow this link to read the most lucid explanation of events and what is likely occurring in that well -

In yet another example of how stocks go down in the long run but indices go up due to substitution bias, the NYSE announced that both Fannie and Freddie are going to be delisted from the exchange.

With yet more proof of how whack the MBA Purchas Index is, here’s Econoday:
The purchase index rose 7.3 percent in the June 11 week for its first increase in six weeks, its first increase since the end of second-round stimulus. The report said it is unclear whether the gain is a one-time gain or whether a rebound is underway. The refinance index, up 21.1 percent, has been on the rise, the result of low mortgage rates. Mortgage rates were mixed in the week with 30-year loans little changed at 4.82 percent.

Riiiiggght… the refinance index rose 21% in one week’s time with no change in interest rates. This type of nonsense can only leave one to shake their head and know that you cannot trust hardly anyone to do the right thing at this point in time. The right thing to do, by the way, is to prohibit special interests from reporting their own statistics, if you can even call these that.

Meanwhile housing starts in May collapsed by 10% in one month, falling to 593,000 from April’s 672,000. Consensus was looking for 650k, making this another very large miss:
Homebuilders are playing it cautiously after the close of the special tax credits program. Housing starts in May fell back 10.0 percent, following a 3.9 percent boost in April. May's annualized pace of 0.593 million units came in well below the market projection for 0.650 million units and was up 7.8 percent on a year-ago basis. The decline in the latest month was led by a 17.2 percent decrease in single-family starts, following a 5.6 percent gain in April. The multifamily component actually rebounded 33.0 percent after a 5.1 percent drop the prior month.

By region, the drop in May starts was led by a 21.3 percent plunge in the South Census region with the Northeast declining 6.3 percent. The West and Midwest posted gains of 10.8 percent and 4.9 percent, respectively.

Permits declined 5.9 percent, following a 10.9 percent fall in April. The May rate of 0.574 million units annualized was up 4.4 percent on a year-ago basis.

Today's numbers are disappointing-showing more weakness than expected. We could get some bottoming in starts soon if more homes close from the special tax incentives program and eat into new home inventory. The deadline for signing a contract was April 30 but the deadline for closing is now the end of June. Equity futures and Treasury yields declined on the news.

Did you note that home starts in the south region collapsed 21.3% in May? The BP oil well blowout had been occurring all month… could the drop be oil spill related? Of course it is.

In contrast to housing, the Industrial Production numbers came in stronger, rising 1.2%, while the consensus was expecting 1.0%:
Although this morning's earlier housing starts report disappointed, industrial production certainly did not-coming in hotter than expected. Overall industrial production in May surged 1.2 percent, following a 0.7 percent boost the month before. The latest number was stronger than the consensus forecast for 1.0 percent.

Manufacturing has been robust over the last three months with this component gaining 0.9 percent in the two latest months and jumping 1.2 percent in March. For other sectors in May, utilities output was up 4.8 percent and mining slipped 0.2 percent.

A jump in motor vehicle production added significantly to May's overall production boost. Motor vehicle production jumped 5.5 percent, following a 1.4 percent dip in April. Nonetheless, gains were widespread in other industries.

On a year-on-year basis, industrial production improved to 7.6 percent from 5.2 percent in April.

Capacity utilization continues its upward trend, reaching the 74.7 percent mark in May from 73.7 percent the prior month. May's figure topped analysts' forecasts for 74.5 percent.

Clearly, manufacturing continues to lead the economy despite concern that exports could slow to Europe. Apparently, demand for U.S. goods remains strong domestically and in many overseas markets. On the news, equities futures and interest rates firmed. The earlier news on weak housing starts had weighed on both.

No, manufacturing will not lead this economy to recovery – it is far too small a percentage to have a short term effect. We allowed our manufacturing to be done overseas and that’s the price we pay for being complacent. Best Buy’s report shows that the consumer is not strong. Auto and home sales are way, way down from peak and are barely off the bottom. Ramping production at this time will prove to be a mistake in the near future. And don’t let Apple igadget sales fool you… an iphone sale does not equal a car or a house – and yet the service plans for those gadgets commit the holders effectively to not so little “loan” payments. $148 a month to maintain your phone? That’s how much my first new car payment was and it was paid for at the end of 3 years!

The PPI decreased .3% in May, this is an acceleration downward from the .1% drop in April. It’s less, however, than consensus that was looking for a .5% drop. Here’s Econoday:
Gasoline prices pulled down the PPI but not as much as expected due to sharp gains in some narrow components of the core. Overall PPI inflation weakened even further to a 0.3 percent drop in May after dipping 0.1 percent in April. May's decline was less negative than analysts' projection for a 0.5 percent decrease. At the core level, the PPI gained 0.2 percent, matching the rate in April. The consensus had called for a 0.1 percent uptick. The core was boosted largely by jumps in prices for tobacco products and for light trucks.

The decline in the headline PPI was led by a 1.5 percent drop in energy costs, following a 0.8 percent dip in April. Gasoline fell 7.0 percent in May after slipping 2.7 percent the prior month. Also adding to weakness in the headline number was a 0.6 percent decrease in food prices after a 0.2 percent decline in April.

At the core level, the mild acceleration in May was led by a 2.2 percent spike in tobacco prices and a 0.8 percent boost in light truck prices.

For the overall PPI, the year-on-year rate eased to 5.1 percent from 5.4 percent in April (seasonally adjusted). The core rate rose to 1.3 percent from 1.0 percent the month before. On a not seasonally adjusted basis for May, the year-ago increase for the headline PPI was up 5.3 percent while the core was up 1.3 percent.

Despite some firming in the core, inflation at the producer level remains subdued.

Obviously oil is playing the largest role with prices on the producer level. I do think this is a positive report for the markets because it does not show as much deflationary pressure as was expected. CPI will be released tomorrow.

The Baltic Dry Shipping index recently broke support and should be watched for signs of further deterioration. Below is a longer term chart followed by a shorter term perspective:

Below is a 3 month chart of the SPX to give some perspective. All the indices closed above the 200dma, if they hold that is obviously a bullish indication. You can see the outer downtrend line and upper Bollinger band are coincident at the 1120ish area. The short term and daily stochastic are now overbought:

The charts look overall bullish and the internals looked strong on the surface. However, the working count is still the same. A rise above about 1120 would open up the possibility of 1140 or 1150 for the right shoulder of the larger H&S pattern that too many people see. A rise above that area means that the working count is wrong and that new highs are possible. For now we’re still inside the rising wedge and its still wave 2 of 3 until proven otherwise by breaking through those resistance levels.

Yesterday’s 90%+ up day came on the third trading day following the last one. This is the outer limits time wise, but it is confirmation and follow through of the first. Of course it came on lower volume and is on the heels of confirmed multiple 90%+ down days and so it is a very suspect bottom indicator but must be respected. We are in-between levels for now, a place to be cautious. The last time we had two positive 90% plus up days it was in March of ’09, and did cement a long term bottom. However, those moves were not a part of a historic cluster of them as is occurring now, and they were based on a change in fundamentals, namely the resumption of mark-to-fantasy accounting and TARP. Here you have a deteriorating situation in Europe, a disaster in the Gulf, a housing market that is still in a state of collapse, and a financial system that despite mark-to-fantasy is as insolvent as the day is long. The market will NOT go racing off without the financials and without housing.

Did you see that lightning struck and shut down the ship collecting oil from the BP well head? Did you see that the "King of King's" statue of Jesus Christ standing outside of Solid Rock Church in Monroe, Ohio, was struck by lighting the same day and burned to the frame? Hey, I may never get another intro like that to a good tune again…

Doobie Brothers – Jesus is just Alright: