Wednesday, July 21, 2010

Morning Update/ Market Thread 7/21

Good Morning,

Equity futures are higher this morning following yesterday morning’s about-face. The dollar, however, is higher. Bonds are down slightly, and both oil and gold are higher.

Yesterday Apple reported record earnings and iPad sales that exceeded their entire lineup of iPod sales. APPL stock is roughly $12 higher this morning or about 4.7%. Intel and Apple appear to be leading the tech sector at this point. Google’s stock, another tech bellwether, is not performing as well. Yahoo disappointed yesterday and is down more than 6% this morning. Wells Fargo profits are down year over year, but they beat expectations largely by lessoning their loan loss reserves – again taking more risk on the assumption that the worst is behind. Morgan Stanley also beat but mostly on trading profits. So far it seems to me that earnings have been largely disappointing with a few notable exceptions such as Apple. The second quarter, however, was only just starting to slow economically and thus I think the next two quarters will be important and will likely show more deterioration than is currently assumed.

Extended Emergency Unemployment benefits have now been reinstated. That will bring in an additional $10 billion per month into AAPL’s coffers – err, I mean into the economy. If you think about it, that’s a very substantial sum, nearly $120 billion a year. Of course it’s all additive to our deficit and in the end simply progresses us to the day that confidence in our money is lost.

Additionally it appears that we now have “financial reform” via the “Dodd-Frank” bill. I personally do not think this accomplishes anything for the economy – it consolidates power in the wrong hands while failing to address current debt levels, derivatives, and the GSEs. The market does not appear to know how to digest it – there are many discretionary powers and delayed timelines so it is difficult, if not impossible, to know all the ramifications in advance. I was recently interviewed by a European publication regarding this bill, below are their questions and my responses:

1 - Does the new Bill target the roots of the crisis engine?

Absolutely not! It fails to target the debt and it fails to target derivatives – thus leverage in general will still be far too high. The true root of the crisis was not financial in the first place! The root of the crisis is found in our money systems and most importantly WHO controls them. The same private organizations are in control today as were in control during America’s Great Depression. To truly address the roots of the problem, we must address debt, derivatives, and our monetary system along with who controls it and how.

2 - What do you think are the stronger points of the new financial reform?

It is very strong if you are a central banker and wish to keep your games rolling! It gives them more discretionary power while obscuring what is truly transpiring. This reform does not have any strong points for the average citizen. Placing “Consumer Protection” under the Fed, for example, is absolutely putting the fox in charge of the hen house! The “consumer” is saturated with debt as are our governments. This bill fails miserably once again at addressing this.

3 - What do you think are the weakest points of this Bill?

It gives discretionary power to those responsible for making the mess in the first place. It fails to address current debt, derivatives, or the GSE’s (Fannie Mae and Freddie Mac). It does nothing to bring government deficits under control or to right government programs that are insolvent. In general, it fails to change the equation of WHO produces the money and how.

Additionally, the Fed now has the authority to impose new capital standards, regulate, and/or even to divest certain portions of those financial companies! Keep in mind that the Fed is owned by the member banks! Who are the largest shareholders in the Fed? The largest banks, of course! This gives those forces the power to regulate competitors or to even force them into disadvantaged capital positions – ultimately they could even force them to divest entities that the larger member banks could then pick up! This is inexcusable and a total mess for our nation and the world. It centralizes power further into the very hands of the organizations responsible.

True and lasting solutions will only come when we begin to think and operate outside of the central banker debt backed money box. Inside of that box the only answers are continually growing deficits or austerity – neither is the correct solution. When neither of those work look for “other historical events,” like war, to follow and to distract.

4 - This Bill is comparable to the Blitzkrieg of the financial reform from FDR in the 1930s?

Absolutely not. The current problems now are far larger and far more complex than then – this addresses very little that is meaningful.

5 - One of the aspects that surprised is the expected delay between Obama signature and its application. For instance, the time to application of the so called Volcker rule goes from 15 month to more than 80 month, or even 9 years for certain aspects! A delay between 2012 and 2022! In pratical terms, that's almost a generation. What kind of reform is this?

It’s no reform at all. It is meant to look like the politicians are taking action while actually doing nothing but turning over more power and control the central banks. The Dodd-Frank bill has gaps you could fly a Boeing 747 through. The economy is far more fragile than anyone wants to admit, so they are purposely not taking any action now so that they can hopefully not have to address another steep downturn on their watch. They will fail in that regard as another steep downturn is rapidly approaching and in fact is already in progress.

A Debt saturation crisis moves in 3 waves – A, B, C. We have experienced A down (late ’07 to March ’09), B up, and now C down has likely begun as the debt has not been cleared. Wave C down is the wave that brings about real and meaningful change and will cleanse the debts restoring historical income to debt ratios. The Dodd-Frank bill is not it – I believe that meaningful reform will not come for some time still, but that time is approaching. As events continue to unfold the people will become more aware of how they have been deceived.

For those masochistic enough to dive into the entire 2,319 pages of diversionary Dodd-Frank language, here is a link: Dodd-Frank Bill

Maybe I’ll be proven wrong about the use of discretionary power and they will be used on behalf of the people – LOL, oh wait, that does sound laughable and completely implausible when looking at actions to date, does it not? The Fed in charge of consumer protection? LOL, and Dodd, of course, doesn’t believe a real watchdog like Elizabeth Warren is qualified for that job! More wool is all I see, real reform it is not.

Speaking of wool, this morning the worthless MBA Purchase Applications Index rose by 3.4% for the prior week. The refi index rose 8.6% in yet another completely unbelievable one week swing. This index is still sitting on historic lows and I maintain that the way in which it is reported should be completely banned. Regardless, here’s Econoday spinning it for all it’s worth:

Homeowners are trying to lock in record low mortgage rates. The Mortgage Bankers Association's refinancing index jumped 8.6 percent in the July 16 week, making for a nearly 30 percent gain over the past four weeks. The average 30-year mortgage fell 10 basis points in the week to 4.59 percent, the lowest ever in the survey. Low rates are one of the few positives for home sales. The badly depressed purchase index rose 3.4 percent driven by demand for government loans which have low down-payments. Today's report, along with yesterday's rise for housing permits, are rare bits of good news for the housing sector.

Good news for the housing sector? Tell us another good one, I love Science Fiction stories! Ohhh, too bad, that’s the only “economic report” for the day. Tomorrow we’ll get Jobless Claims, Existing Home Sales, and Leading Indicators.

Let’s take a look at a 3 month daily chart of the SPX with all my drawings turned off so that we can see the series of lower highs and lower lows. The most recent high appeared to be the end of wave 2 of 3. In fact, if we exceed the July 13th high, then it may turn out that was just wave A of wave 2 and that the recent decline was wave B with C started yesterday. That’s an alternate scenario if we go on to make a higher high – so far we’ve retraced roughly 61.8% of the downmove, so a turn right here would not be unexpected and if so then the climb yesterday was simply a smaller wave 2.

The only truly bullish case I can make is if we exceed the June 21st high with both the DOW Industrials and Transports, then you would produce a secondary DOW Theory buy signal. I don’t see that happening yet, but it’s a possibility. The VIX was down substantially yesterday, that simply looks complacent to me. For now the SPX 1090 area is acting as resistance, while the DOW’s magical and magnetically attractive 10,000 is acting as support.

With the dollar higher and bonds not far from making new highs, I still believe that the risk is squarely on the down side – that verified H&S pattern has a target of 860, the odds are very high that we will get there - it’s simply a matter of time.