Thursday, June 3, 2010

Morning Update/ Market Thread 6/3

Good Morning,

Equity futures are higher this morning following yesterday’s no volume melt-up. The dollar is close to flat, the Euro is following its downtrend line but is also close to even, bonds are down significantly, while oil and gold are both down.

Yesterday’s move was yet another 90%+ move, this time a huge 94.7% of the volume was on the up side. Of course there was very little volume, coming in at only 80% of its ten day average. The frequency of these 90% days is quite alarming, I don’t think there’s any precedent for it; although there was a slug of them at the ’07 top, there were not this many. They are most definitely not a sign of health, and when they do occur, they tend to occur at major turning points. What this cluster says to me is that there are far fewer real market participants and that High Frequency Trading (HFT) computers have taken over the market.

That’s not a good thing, the market is very fragile because of it. Yesterday when we broke the most recent downtrend line you could just see the price shoot up in response. That’s computers all taking the same cue at the same time. How can a market that functions like that be performing a role of price discovery? It can’t, and the real value of the market isn’t anywhere near where it is.

Accounting fraud and failure to take losses on debt that can never be repaid is the foundation of why the market is mispriced. Want to see a symptom?

Banks’ Overnight Deposits With ECB Increase to Record

By Gabi Thesing

June 3 (Bloomberg) -- Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other.

Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.

Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.

“The banking crisis is back,” said Norbert Aul, an interest-rate strategist at Commerzbank AG in London. “The news flow over the past few weeks has spooked banks and since nobody knows how exposed individual financial institutions are, it’s deemed safer to park cash with the ECB rather than lend it on.”

Money market tensions are resurfacing even after the ECB started buying government bonds and said it would offer banks as much cash as they want for up to six months. The measures accompanied the European Union rescue package, agreed on May 10, to counter the worsening debt crisis and promises by Greece, Spain and Portugal to rein in their budget gaps.

Money market rates are rising, with the euro interbank offered rate, or Euribor, for three-month loans yesterday increasing to 0.704 percent, the highest this year. Banks borrowed 9 million euros from the ECB at the marginal rate of 1.75 percent, the central bank said today.

The efforts by the EU and the ECB failed to allay investor concerns. Fitch Ratings lowered the credit grade of Spain, the euro area’s fourth largest economy, to AA+ from AAA on May 28. Standard & Poor’s in April cut Greece’s debt to junk and lowered the ratings on Portugal and Spain.

Portuguese 10-year government bonds fell today, increasing the premium investors demand to hold the debt instead of benchmark German bunds.

The yield on the Portuguese security rose five basis points to 5.08 percent as of 8:56 a.m. in London. The spread over bunds widened six basis points to 231 basis points, according to Bloomberg generic data. Spain’s yield over Germany was unchanged at 177 basis points.

Seriously, if you’re not in fear mode, then there is something wrong with you – those who don’t understand math and history are the ones who would exhibit no fear in the face of the debt and the fraud. Until the debt problem is resolved, and really until the monetary system that created that debt is fundamentally fixed by changing WHO controls the creation of money, fear is the appropriate response. “Market psychology” in this case is rooted in the math of debt.

The Monster Employment Index released this morning for May came in at 134, up from April’s 133. ADP says May’s employment added 55,000 jobs, this compares to April’s report of a 32,000. Both would indicate that we can expect more jobs added in tomorrow’s employment situation report than last month’s 290,000 jobs added report – which, if you remember, was built upon the “Birth/Death” model and temporary jobs.

Separately, the weekly jobless claims came in at 453,000 for the week, higher than the consensus figure of 450k, but lower than the previous 460k report. Here’s Econoday:
Unemployment claims continue to come in at a steady rate and indicate no improvement in the labor market. Initial claims totaled 453,000 in the May 29 week, right in the middle of a three month trend. The four-week average, up slightly for a third straight week to 459,000, is unchanged from four weeks prior. The continuing-claims side is similar, up 31,000 in the May 22 week to 4.666 million. Here the four-week average, at 4.654 million, has been almost motionless since late March. Today's report won't heighten expectations for strong data in tomorrow's employment report. Markets are showing limited and mixed reaction.

According to the DOL, there are more than 5 million people claiming Emergency Unemployment:
States reported 5,081,015 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending May 15, an increase of 21,172 from the prior week. There were 2,347,218 claimants in the comparable week in 2009. EUC weekly claims include first, second, third, and fourth tier activity.

Still nearly 3 million more than the year prior while politicians are playing the short term financing game with never ending votes to extend benefits a now never ending part of the debt money framework.

Productivity and Costs for Quarter 1 of this year were revised downward on this morning’s release. The prior report was 3.6% productivity growth, they were expecting 3.4%, and it came in at 2.8%. Quarterly labor costs fell 1.3%, that was on consensus. Here’s Econoday:
Productivity growth was revised down but is still healthy-just not as robust as in recent quarters. First quarter productivity was revised to an annualized increase of 2.8 percent, compared to the initial estimate of 3.6 percent and the consensus forecast for 3.4 percent. Growth in unit labor costs was nudged up to a 1.3 percent annualized decrease from the initial estimate of 1.6 percent decline for the first quarter. The latest number matched analysts' projection for a 1.3 percent decline in costs.

The less strong productivity number for the latest period was due to a downward revision in output growth from 4.4 percent annualized to 4.0 percent and due to hours worked nudged up to 1.1 percent from 0.8 percent.

Year-on-year, productivity advanced 6.1 percent in the first quarter-up from 5.6 percent in the prior quarter. Year-ago unit labor costs came in at minus 4.2 percent, compared to minus 5.1 percent the previous quarter.

There was little market reaction to the numbers. But looking ahead, it seems that firms do not have much room for boosting productivity further by cutting labor. Basically, improved business will mean hiring and expanded hours-good news for the recovery.

What’s there’s really little room for is claims of huge productivity increases when we don’t actually produce anything! What we produce is financial engineering and accounting fraud. And we’re excellent exporters of those products!

Our “productivity” in this regard fluffs our GDP to levels unrecognizable from reality. Falling labor costs? Once again proof that adding debt based paper into a debt saturated economy will not make anyone wealthy besides those who produce the paper.

Factory Orders and Non-Manufacturing ISM are released at 10 Eastern.

If McHugh’s Elliott Wave count is correct, you are near your last chance to escape the markets with any semblance of what you think you may have in terms of equities. His count shows this to be wave c up of wave 2 up of wave 3 down. Wave 2s are your exit point and they are the point at which it pays to get short the market as it nears completion as wave 3 of 3 will follow if that count is correct.

In an ideal world, we would rise up into the SPX 1,140 to 1,150 area and then roll over finishing a proportional right shoulder of the large Head & Shoulders pattern that’s developing. That area is coincident with the downtrend line from the April 26th top:

Wave ‘a’ of the current a,b,c lasted for three days, proportionality says that wave c should take about the same, and that means wave 'c' could be finishing up as early as tomorrow or into next week. I would suspect this count is incorrect if we exceed 1,173 on the SPX.

Hey, I think those who don’t recognize what’s occurring to our markets, our financial system, and to the monetary system of the world are close to a major league spanking. The debt that underlies the world’s monetary systems is poison, it is producing appropriate fear and that is the underlying tension that leads to other “events” like we are beginning to see all over the world. Those who believe the propaganda of the debt pushers have simply taken one too many tokes… Don’t believe them, there are real solutions, but they reside outside of their debt-backed money box.

Brewer and Shipley – One Toke Over the Line: