Friday, July 30, 2010

Morning Update/ Market Thread 7/30

Good Morning,

Equity futures are down this morning following the release of second quarter GDP. The dollar is up slightly, bonds are higher, oil is down, and gold is higher.

The GDP number came in at 2.4% while the consensus called for 2.5%. Q1 was revised upward a full percentage point, however, to 3.7%! Not only that, but the past 3 years growth numbers were revised! Hey, if you can’t stand the truth, just make something up – it is now a time honored tradition in money, politics, and economic statistics.

As if the GDP numbers weren’t already grossly overstated enough via manipulations with inflation and the “deflator,” and by including financial engineering as productivity. The bottom line is that even with their manipulations, the trend is down and I think by the 3rd quarter it is likely to turn negative again – the ECRI has not been wrong yet with readings such as are occurring now. Here’s Econoday attempting to convince you otherwise:
Despite all of the doomsayers, the recovery continued in the second quarter but at a moderate pace. Yes, the recovery is still below par but it's not a double dip so far. Second quarter GDP came in at an annualized 2.4 percent growth, following a revised first quarter gain of 3.7 percent. Today's release includes annual revisions going back three years. The second quarter advance estimate is just barely below analysts' projections for a 2.5 percent increase. But the first quarter upward revision of a full percentage point from the prior estimate of 2.7 percent is a positive surprise.

The latest quarter was led by a rebound in residential investment, a jump in investment in equipment & software, and by inventories. PCEs also posted a moderate gain along with government purchases. The big negative is a worsening in net exports.

Real final sales to domestic purchasers rose 1.3 percent, compared to up 1.1 percent in the first quarter.

Final sales of domestic product gained an annualized 4.1 percent in the second quarter, following a 1.3 percent rise the prior quarter. Final sales to domestic purchasers exclude inventory investment but include sales to consumers in the U.S., business fixed investment, residential investment, and government purchases. Final sales of domestic product include final sales to domestic purchasers and add in net exports (GDP less inventory investment).

Economy-wide inflation accelerated in the second quarter as the GDP price index rose an annualized 1.8 percent, following a 1.0 percent in the first quarter. The market forecast called for a 1.0 percent gain.

Overall, the recovery is stronger than believed but markets reacted adversely to the headline number for the latest quarter being soft.
A part of the revised data shows that the “recession” of 2007 to 2009 was worse than previously reported, with growth revised downward for that period – part of the trend is to under report weakness, then revise it lower later.

The price index rising much stronger than expected I think reflects the recent bounce higher in oil prices. Still, that reading needs to be watched as it can pressure interest rates. Overall this report is about what I expected, a manipulated and heavily massaged attempt to placate the public.

Chicago PMI and Consumer Sentiment come out just prior to 10 Eastern.

And the world just gets even more bizarre by the day. Yesterday an idea surfaced from a MS analyst that the GSEs should simply reset every prime mortgage held to the lowest possible market rate! This would lower monthly payments and stimulate the economy according to his theory. And actually it would put more money into the hands of a few consumers, it would help the banks on one hand, but it may hurt the holders of bond and derivative holders. It would be yet another moral hazard that ultimately keeps real estate overpriced for longer, and thus it’s an idea that I certainly hope does not come to pass.

Moody’s says that Spain will likely lose their triple-A rating and that it’s time for the U.S. to develop a clear plan regarding our deficits. This warning is pressuring equities.

Additionally, the IMF says that it completed its mini stress test on U.S. banks and that our banks will likely need to raise additional capital. Here’s a snippet from Bloomberg:
July 30 (Bloomberg) -- The U.S. financial system remains fragile and banks subjected to additional economic stress might need as much as $76 billion in capital, according to the results of International Monetary Fund stress tests.

The findings, released today as part of a broader IMF report on the U.S. financial system, suggested that while the nation’s banking system is stable, it remains vulnerable. Home prices, commercial real estate loans and economic growth have the potential to cause shocks that could expose banks to more losses.

Under one scenario, small and regional banks as well as subsidiaries of foreign banks would need $40.5 billion in additional capital to meet a benchmark capital ratio of 6 percent Tier 1 common equity from 2010 to 2014. Under the adverse scenario, those needs rise to $76.3 billion, according to the report.

“Pockets of vulnerabilities linger,” the fund said in the report. The U.S. is recovering from what the IMF called “one of the most devastating financial crises in a century.”

Because the economic recovery is proceeding slowly, regulators must be especially vigilant in guarding against risks and weak spots, the report said.

The IMF also renewed its call for the Obama administration to push ahead with changes to Fannie Mae and Freddie Mac, the government-sponsored enterprise housing companies. The report suggested a partial privatization strategy, in which the government would take over the GSEs’ public housing mission while privatizing investment operations.
Since the IMF is comprised of the same central banks that they are “stress testing,” isn’t this the kettle calling itself black? So what’s their game this time? Let’s revisit that last paragraph… they want the government to “take over the GSEs’ public housing mission while privatizing investment operations.” Uh, huh. In other words, they want the taxpayer to pick up the tab while they run their high leverage games all backstopped by you and me… that’s their game, and they absolutely need to be stopped. Again, with no adult supervision to be found, the criminals continue to run their Ponzi schemes.

The up, down, up action yesterday broke what I was tracking as the wave c channel, but did not break beneath the larger wave 2 channel. The 30 minute chart below shows these, note that the opening print fell exactly on the bottom of the larger channel, so be careful:

McHugh still believes yesterday was a part of a wave 4 movement, and that should prices fall beneath 10,300 on the DOW that it’s his clue that wave 3 has begun. I personally don’t see how we could still be in wave 4 as the smaller channel break means that we have likely turned into the next wave. For me, a break below the larger channel means that wave 2 is likely done and that we have entered wave 3. Regardless, it appears that the 1115 area and the 50% retrace stopped the advance without making new intraday highs and now we are likely turning.

The VIX is attempting to break above its descending upper trendline, a clean break above that line is very bearish for the market:

Bonds are substantially higher showing that money is once again flowing to “safety.” Keep in mind that today is Friday and that the HFT machines are programmed to Pavlov the market prior to the close in anticipation of the coming Monday ramp job. At some point the dog is going to run out of treats, I hope that comes sooner than later as that trend is definitely tiresome.