Friday, June 25, 2010

Morning Update/ Market Thread 6/25

Good Morning,

Equity futures are basically flat this morning. The dollar is up, euro down, bonds are lower for now, while oil and gold continue to bounce higher off up trending support.

The third revision of quarter 1 GDP was released today, well below expectations at 2.7% annualized growth. The consensus was for 3.0% and it was first reported at 3.2%. That’s a 16% downward revision from first announcement. It is also a very rapid deceleration from Q4’s 5.6% spike. I think it’s obvious that Q2 is going to be flat or even slightly negative, even with their misreporting. Here’s Econoday:
First quarter growth turned out to be notably less robust than expected. First quarter GDP was revised down to an annualized 2.7 pace from the prior estimate of 3.0 percent and initial estimate of 3.2 percent. The market forecast had called for an unrevised figure at 3.0 percent. The downward revision to GDP growth primarily reflected an upward revision to imports and a downward revision to personal consumption expenditures that were partly offset by upward revisions to exports and to private inventory investment. Real final sales to domestic purchasers was revised down to 1.6 percent from 2.0 percent. Final sales of domestic product was revised down to 0.8 percent from the prior estimate of 1.4 percent.

Economy-wide inflation was little revised at 1.1 percent annualized for the first quarter, compared to the prior estimate of 1.0 percent annualized. Analysts expected no net revision to the previous estimate of 1.0 percent. The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.7 percent in the first quarter, unrevised from the second estimate and down from 2.0 percent in the fourth quarter. Excluding food and energy prices, the price index for gross domestic purchases increased 1.2 percent in the first quarter, compared with an increase of 1.5 percent in the fourth.

The recovery slowed significantly in the first quarter from the strong pace of 5.6 percent in the fourth quarter of last year. Normally, markets do not pay much attention to final revisions to GDP but today may be an exception. There is much uncertainty about forward momentum given the expiration of tax credits for housing purchases. Equity futures slipped on the news. Focus will now be on the 9:55 release of consumer sentiment.

Tax subsidies end for housing, housing is back to record low sales. Today the politicians are voting on “financial reform.” Yet JPM and GS are going up on expectations that it’s been so gutted they will continue to operate as usual. We are tightening up, but we still can’t seem to go all the way yet – and thus more cleansing is needed, it will be until debt saturation is resolved.

But money certainly isn’t flowing as easily as it was, here is more proof that the psychology of wave C is vastly different than wave A:
Unemployment benefits extension nixed for nearly 1 million

NEW YORK ( -- Nearly a million people have lost their unemployment benefits because the Senate failed for the third time Thursday to extend the deadline to file for this safety net.

Hoping to overcome deficit concerns, the Senate trimmed down the bill yet again on Wednesday night so that it would only increase the deficit by $33.3 billion over 10 years, instead of $55.1 billion. The main changes were to scale back additional Medicaid funding for the states and to reallocate some stimulus and Defense Department spending.

The legislation failed by a 57-41 vote. Democrats needed 60 votes to overcome the GOP fillibuster of the bill.

The bill will now be pulled, according to two Democratic leadership aides. This leaves many groups in flux, including the jobless who have lost their safety net, companies who are waiting to learn what tax breaks are extended, and governors who were counting on the additional funds to balance their budgets.

The bill they just voted down would have also pushed back the deadline to close on home purchases until Sept. 30 and still qualify for a tax credit of up to $8,000. So you now have 1 million people going to fall off unemployment. This is exactly what happened in Germany prior to the rise of Hitler. This will cut approximately $22 billion out of the economy and likely will cause further damage as all income disappears for the long term unemployed. How many will become homeless, or fall into needing other forms of help? Different psychology, all of the sudden debt matters.

Yesterday’s further market decline caught many off guard – it even left me a little bit puzzled as I could clearly count 5 waves down, yet we were making more downward movements – now seven in all. This is rare, I expressed discomfort with it in the daily thread yesterday and McHugh picked up on it as well in his evening report. He thinks that it’s likely there was a very weak wave 2 bounce in the middle and that we may have just immediately pressed into wave 3 of 3 of 3 down. If this count is correct, we should descend hard over the next few days. Other indications lead one to expect a bounce – we stopped on support in the 1070 area, just below the 61.8% of the prior up wave:

Volume is coming up as we descend but is not heavy yet, certainly not even close to washing out. The 50dma and the 200dma are now moving together very rapidly – I calculate that unless we bounce immediately we will receive the death cross within the next two weeks. The emerging market death cross is now separated by more than 2%, this makes the odds very high that prices will be lower over time.

The bond market diverged yesterday as the TNX bounced off the bottom Bollinger Band. Keep an eye on bonds, they need to start rising in price and descending in rates again if equities are going to keep the downtrend rolling:

So, the waves are acting funny and not in a good manner if you are expecting a meaningful bounce. Hang ten if you’re going to ride them, it’s going to be a wild ride! And don’t forget the expectation is for everyone to jump on Friday ramp wave into Monday – when that doesn’t appear it’s going to toss a lot of surfers off their boards…