Thursday, June 24, 2010

Morning Update/ Market Thread 6/24

Good Morning,

Equity futures are lower this morning. The dollar is up slightly, bonds are up once again running with an apparent breakout, while both oil and gold are flat trying to hold onto support.

Weekly Jobless Claims fell by 15,000 last week from 472,000 to 457,000. This was better than consensus that was looking for 465k. Note the revision upwards in the prior week from 472k to 476k. Here’s Econoday:
Jobless claims thankfully fell back in the June 19 week, down 19,000 to 457,000. But taking some of the shine off the numbers is a 4,000 upward revision to the prior week. Like the latest week, the four-week average also fell, though only by a very slight 1,500 to a 462,750 level that is still 5,000 higher than mid-May -- a reading that does not point to improvement for the June employment report.

Clearly good news is a 45,000 decline in continuing claims to 4.548 million. Here the four-week average is modestly lower than mid-May, at 4.667 million in a reading that points to improvement for June payrolls. The unemployment rate for insured workers, which has been see-sawing, slipped back one tenth to 3.5 percent.

The Labor Department is upbeat about this report, saying it re-establishes a downward trend for the series. The department says claims in the two preceding weeks were skewed higher by seasonal adjustment problems tied to the Memorial holiday. Even so, claims are not falling by very much and are showing no month-to-month improvement. Stocks are moving higher following the report and also following a solid ex-transportation headline for the durable goods report.

Hmmm… last time I checked one data point in the other direction does not a trend make. Take a look at that chart, it’s been nearly two years now with every single week above 400k. That’s a disaster, month after month, week after week the population is still growing yet there are fewer and fewer jobs while the government is deeper and deeper in debt.

Durable goods solid? Sure, ex-this and ex-that, they always find something positive to say. But the headline number was not positive, it was minus 1.1%! This was lower than consensus that was looking for a -.5% print:
The May durables report showed a headline number slipping from an April spike. But there was moderate strength in the details. New factory orders for durable goods in May declined 1.1 percent after jumping a revised 3.0 percent in April. Overall new orders for durables were worse than the market forecast for a 0.5 percent dip.

Excluding the transportation component, however, new durables orders rebounded 0.9 percent, following a 0.8 percent decrease in April. Capital goods orders continued to gain, rising 0.5 percent after a 0.7 percent boost in April.

The big negative in the report was the transportation component which dropped 6.9 percent in May. Nondefense aircraft swung down 29.6 percent after spiking 215.7 percent in April. Yes, you might call that category volatile. Defense aircraft slipped 7.1 percent in the latest month. But a very notable positive in transportation was a 0.7 percent boost in autos, continuing several monthly gains.

Advances were widespread in other components-including primary metals, machinery, computers & electronics, and other durables. Declines were seen in fabricated metals, communication equipment, and in electrical equipment. The last was negative but essentially flat

Nondefense capital goods orders excluding aircraft in May made a 2.1 percent comeback after falling 2.7 percent the month before. Shipments for this category fell 1.6 percent in May, following no change in April.

Year-on-year, overall new orders for durable goods in May were up 14.9 percent, compared to 19.1 percent in April. Excluding transportation, new durables orders came in at up 17.6 percent, compared to 18.5 percent in April.

On the release, equity futures rose, turning less negative. Also, initial jobless claims dropped more than expected. The good news is that manufacturing remains on an uptrend-a nice contrast to housing currently.

Well, if one data set makes a trend, then the trend is now down again. LOL, don’t you love the inconsistency? Manufacturing in the U.S. has been decimated! It is now such a small influence on the economy that it pales in comparison to the service industry and the consumer. Housing had become a bigger influence, and look at where it is.

Yesterday, New Home Sales were reported at just 300,000 units in May. This was down from April’s initially reported 504k, that was revised dramatically lower – March and April combined were revised 107k lower. That 300k print was the lowest new home sales total EVER recorded, with the data series tracked beginning in 1963. Note that the population of the United States has grown 64% since 1963:

Yet the number of new housing units sold has now plummeted to the lowest during that time, the result of simply creating too much supply:

Too much credit, too many government programs supporting home ownership. That report showed a 33% one month plummet, also the largest percentage drop ever. In the West, New Home Sales plummeted 53% in just one month:

The supply of homes measured in month’s supply has begun rising sharply again. Take a look at the home vacancy rate which continues to climb unabated, but you can't see it in the Fed data because they stopped reporting it in 2008, wonder why?

Are permits showing any sign of life? You tell me, here’s a current chart of housing starts:

There never was an economic “recovery,” there was only massive deficit spending to create the illusion of growth. Double-dip? Hardly.

I was reading yesterday how half of stock analysts believed the market was undervalued, leaving the obvious other half to think it was overvalued. Hard to believe that anyone thinks historically high P/E ratios is justified with the underlying economic and debt condition. Whatever, they have stocks to sell. This is exactly why you should listen to those who understand what real valuation is. Those who have been around the block a time or two, guys like Richard Russell who just said, “We’re now in the process of building one of the largest tops in stock market history. The result, I think, will be the most disastrous bear market since the ‘30s, and maybe worse.” Oh, and he has data to back it up. He also sees the destruction of our currency and sees the major change on the way.

I don’t often talk about geopolitical events, but I think we need to pay attention to those “other” events that are coming to usher in that change. Things are heating up with Iran, they are taunting the Israelis by moving to break the blockade of Palestine. The U.S. and Israel just moved more ships through the Suez Canal and Israeli jets have been seen positioning supplies in Saudi Arabia. Any actual engagement here would have a very significant impact and is a huge risk that should not be ignored or downplayed.

Politics is becoming more volatile too. Australia just removed their Prime Minister and installed their first woman, Julia Gillard. The main issue? Economics of course:
June 24 (Bloomberg) -- Julia Gillard will become Australia’s first female prime minister after ousting Kevin Rudd following a slump in his approval ratings and a clash with the resources industry over a plan to increase taxes.

Gillard, 48, will be sworn in at 12:30 p.m. after challenging Rudd for the leadership late last night. Welsh-born Gillard was elected unopposed by Labor party members this morning in Canberra after Rudd, who won office in 2007, withdrew from the ballot.

The change in leadership spurred gains in BHP Billiton Ltd. and Rio Tinto Group in Sydney trading on optimism the government will compromise on its mining profit tax. Rudd’s support started to crumble in April after he shelved his emissions trading plan. His approval rating fell further as the fight over the resources tax intensified, with the spat coming to a head over the past 24 hours as colleagues switched their support to Gillard.

“This is the most dramatic leadership change in Australian political history,” Nick Economou, a lecturer in politics at Monash University in Melbourne, said in a phone interview.

Higher taxes means businesses unhappy which leads to workers unhappy which brings about political change. That’s how it’s supposed to work. However, when you are debt saturated, you can swing from the left to the right, and back to the left, but you won’t change a thing until the underlying problem is fixed – namely DEBT. That's what brought about the need for higher taxes to begin with. The debt's still there, so removing the tax increase only returns them to their prior condition - one that structurally cannot be maintained.

Turning back to our markets, yesterday produced a small movement in the McClelland Oscillator, expect a large directional movement today or tomorrow. Yesterday’s sideways motion appeared to be a small degree wave 4, today should be wave 5. Below is a 30 minute chart of the SPX showing the Fibonacci levels. It’s pretty easy to see the waves in the current downtrend which may be the beginning wave of 3 of 3 down. We are now beneath the 1090 area and will likely find some support in the 1070 to 1080 area. After that there’s not much until we get back to the neckline in the 1040 region:

The bond market is signaling Trouble, note the capital T. Below is the TNX, breaking down to new lows after breaking out of a very bearish pennant – again the target on that break is 2.3%:

Don’t be surprised when we bounce, it’s going to happen. However, the daily stochastic is a long way from being oversold so we’ll just have to keep a close eye on it…

Doobie Brothers – Minute by Minute: