Monday, August 16, 2010

Morning Update/ Market Thread 8/16

Good Morning,

What, no Monday morning pump? That’s different… Equities are down mildly, bonds are higher, oil is roughly flat, gold is higher, and interestingly the dollar is down, but it’s down mostly against an appreciating Yen. Below is a daily chart of the Yen, down on this chart is a rising Yen, that reflects a deleveraging condition as their GDP came in significantly worse than expected, only rising .4% when 2.3% was expected:

That lower growth rate is signaling that the entire globe is slowing in concert with the United States. The media is touting China as overtaking Japan as the world’s number two economy – but I simply do not believe the statistics from China, and while they may be close, they are in bubble territory.

Economic data is fairly light this week, but today the Empire State Manufacturing report was released. Interestingly, it is one of those reports that could be read either way, bullish or bearish, but I note that the media is reading it bearishly – wave C mentality. It is bullish in that the headline index number rose from 5.08 to 7.10, but bearish in that it missed the 8.0 expectation and was in the low side of the range. So, you could trumpet the rise or despair about the miss, in this case I’m seeing Bloomberg at least focus the headline on the miss. Here’s Econoday, note the negative opening tone which is very unlike them:
The Empire State report poses bad news for the manufacturing outlook. Readings on new orders, unfilled orders, and shipments all show month-to-month deterioration in August. If these readings are repeated in Thursday's Philadelphia Fed report, expectations will look for a step lower in the monthly ISM manufacturing report.

The Empire State's headline index did show improvement, but this index is the sum of a single subjective question on general business activity. Again, questions on key specifics for orders and shipments are negative. Manufacturing has been a central positive for the nation's recovery and a loss of momentum for this sector would raise the odds of a double dip.
The TIC report (Treasury International Capital) for the month of June was released this morning showing a net negative outflow of $6.7 billion. This is not a good thing for our nation, it means that we are not externally financing our trade deficit. On this report Econoday likes to trumpet the demand for U.S. Treasuries (a game with the central banks) while usually ignoring the TOTAL NET which includes other bonds and instruments. However, in another noted change for them, at least they mention the negative net, something they have not been doing in the past:
Chinese disinvestment of U.S. Treasuries extended into June and at an aggressive rate. Chinese holdings of Treasuries fell 2.8 percent in June to $843.7 billion, only slightly less severe than the 3.6 percent month-to-month decline posted in May. Offsetting Chinese selling was aggressive buying by Japanese accounts which increased their Treasury holdings by 2.2 percent to $803.6 billion. Still, Chinese Treasury selling is a reminder of the political clout that nation has in setting its own currency policy in opposition to U.S. export interests.

Net inflow of long-term securities into the U.S. totaled a solid $44.4 billion, reflecting nearly $34 billion of net foreign purchases of U.S. securities and more than $10.4 billion of net selling of foreign securities by U.S. residents. Again apart from China, foreigners were big net buyers of long-term Treasuries and, once again, were also big net buyers of Federal agency paper. In a negative though, foreigners were sellers of U.S. equities and aggressive sellers of U.S. corporate & other bonds. Total flows, which include short-term securities, came in at negative $6.7 billion in June vs. a $17.1 billion inflow in May.

The lack of Chinese buying continues and is significant – there is a reason they don’t wish to add to their positions and we should not be at all surprised as we certainly have not maintained our own fiscal discipline. Frankly, looking at America from the outside, it would look like a bunch of gangster banker thugs have taken over power and control – I wouldn’t lend us money, that’s for certain. Yet, debt continues to do well with our central banker game – that will work until it doesn’t and the doesn’t part will come when confidence is broken. For those who are claiming that there is no bubble in U.S. debt, I fly my B.S. flag at full mast. Here is the entire TIC report below:

TIC June

I am seeing many advisors turn bearish on the markets, and for good reason. Last week broke the key support levels of 1100 and then 1090. SPX 1070 is now acting as support and the lower daily Bollinger band is just beneath that level. Importantly, prices closed the week beneath both the 200dma and the 50dma.

On the weekly charts, the major indices produced a bearish engulfing candle after clearly breaking down out of that rising wedge. The target on the wedge is the base of the wedge, which means that odds favor us testing that area in the near future:

When I look at the 5 minute chart, I see what appears to be a pretty clear new down channel. If the boundaries are correct, it appears set for further decline soon, and we did make a new lower low in the futures already that was followed by a lower high this morning. Being a Monday the odds favor at least some attempt to regain composure, but the obviously weakening global growth prospects are now pretty clear to everyone, and the mood is obviously changing as people begin to prepare for what they know is coming.

From a count perspective, we are either launching into a wave 3 of 3 lower, or we are producing wave 5 of 1 of 3 down. Either way, it could be painful, so hold on, and keep in mind that this week is options expiration week.

With one Hindenburg Omen now on the clock, the odds are high that we could receive a confirmatory Hindenburg today with further declines. Friday had both too few new 52 week lows, and the new highs were more than twice the lows number. Today and tomorrow will be interesting to watch.

It won’t be long before fall and the start of school. September is traditionally the worst month for stocks, you don’t want to be late to recognize that or it might be you who is doing the learning!

Supertramp – School (Crime of the Century)