Tuesday, July 20, 2010

Morning Update/ Market Thread 7/20

Good Morning,

Equity futures are down sharply this morning, the dollar is higher, bonds are higher, oil and gold are down.

Yesterday evening and this morning IBM, Johnson and Johnson, and TXN all reported sales that were below expectations and all are off significantly. Also this morning bad boy Goldman reported a very large miss with expectations for earning of $1.99 per share but coming in at only $.78 – an 82% drop in earnings for the quarter. What happened to their trading mojo? Hmm, why do I feel like I’m always being played by any report they release? JPM and BAC trading revenues fell as well but not as significantly.

Housing Starts came in lower than expected once again at a very anemic 549,000 units. Prior was 593k and the street was looking for 580k, that’s a 7.4% one month drop on the heels of May’s 10% drop and the largest plunge in history for New Home Sales. Here’s Econoday:
Housing is still suffering from the end of expired tax incentives as starts fell sharply in June. But the good news is that housing permits rebounded, perhaps indicating a bottom for starts. Homebuilders again slowed the pace of ground breaking as housing starts in June declined 5.0 percent after a 14.9 percent plunge in May. The June annualized pace of 0.540 million units fell well short of analysts' expectations for 0.580 million units and is down 5.8 percent on a year-ago basis. The latest fall was primarily due to a 21.5 percent plummet in multifamily starts, following a 4.3 percent gain in May. The single-family component only slipped 0.7 percent after an 18.8 percent decrease the prior month.

By region, the decline in starts was led by an 11.3 percent drop in the Northeast Census region. Decreases also were seen in other regions with the Midwest down 6.9 percent; West, down 5.9 percent; and the South, down 2.4 percent.

The near term outlook is less gloomy as permits rebounded 2.1 percent in June, following a 5.9 percent drop in May. Permits in June came in at an annualized rate of 0.586 million units and are down 2.3 percent on a year-ago basis.

Clearly, the starts and permit levels are weak. But June's starts numbers are not as bad as at face value as the multifamily component is very volatile and led the drop. And the comeback in permits suggests that the post-tax credits decline is leveling off.

Oh yeah, it’s a great report – lol. Check out that chart, in 2007 housing starts were only three times what they are now! Is this the bottom, the time to buy? Uh, not yet… Here’s a reminder where we are, 2012 and after is the time to be thinking about real estate again, but have plenty of cash at the ready to take advantage.

Fundamentally also keep in mind that our population of peak earners has peaked and is in the process of crashing. The peak earnings and thus peak spending statistically occurs at age 46.5 in the United States and the Baby Boomers aggregate peak is now beyond peak! They also pulled future income forward in time, shifting that peak sooner via the massive use of debt. So, with peak earners/spenders in steep decline, and the Fed targeting 2 or 3% growth, what does that tell you? It tells me that the only way to create “growth” is via more paper. It’s a completely ridiculous notion that a government would attempt to create growth with a shrinking population of peak earners (this is far more important than overall population size). This is just another example of how unsophisticated the Fed and our government is in understanding the economy – intentionally so, I might add.

Speaking of population size, the U.S. has 308 million people. China has 1.324 billion people, four times as many! Yes, it is significant that their total energy consumption just exceeded that of the U.S. – our energy consumption has declined the past two years which fits with the shift beyond the Boomer’s peak. Harry Dent has done a ton of good research regarding demographics all over the world, if you are after more demographics information, his site is where you will find it - www.hsdent.com.

Below is his chart showing the Boomer’s generational wave. Note the peak in the spending wave that has already occurred:

Next is a chart of his spending wave with the S&P 500 overlaid in front of it. Dent’s spending wave was created by taking the immigrant adjusted births in the United States and moving them forward by 46.5 years to adjust to peak earnings/ spending. Again, you can see that the following generation does not produce positive growth in peak earnings until after the year 2022! Do not expect any fundamentally strong economic growth until after that time frame:

The markets appear to be continuing wave 3 of 3 of 3 down, yesterday appeared to be a small wave 2 and this wave should be a strong part of wave 3. Remember, this wave 3 is likely a part of the larger wave 1 which I expect will conclude somewhere near the H&S target of 860ish. This wave will also have subwaves within it, so don’t expect a straight line down – the markets never move in a straight line!

Today the NDX is producing its Death Cross with the 50dma moving below the 200dma. The RUT and Transports are the holdouts for now, but even the Major Market Index (basically the entire market) has crossed:

Demographics – debt – housing - earnings – markets – politics… under pressure:

Queen and David Bowie – Under Pressure: