Tuesday, August 17, 2010

Morning Update/ Market Thread 8/17

Good Morning,

Equity futures are higher this morning, breaking above the range that we’ve been in for the past few trading days after making a new low yesterday. This action does bring into play the possibility that we created a wave 5 bottom yesterday to finish wave 1 of 3 down, and are now setting off on a wave 2 bounce. If that is true, keep in mind that it should be a sharp retrace that is meant to draw in as much money as possible.

Below is a 10 minute chart taken right after the open showing Fibonacci levels for a possible retrace. The 38.2% is just above 1090, and the 50% retrace (the most common) is at 1100. Note that a rise up to the 1090 level fills a large gap of which there are many from the wave 1 decline in many indices and issues:

Meanwhile, the dollar is slightly lower, bonds are slightly lower, oil is higher ($76), and gold is flat.

Housing Starts for July FELL from June, despite media headlines suggesting otherwise, and despite Econoday’s proclamations below. July came in at a paltry 546,000, down from June’s 549,000 (sorry, revising prior months down does not mean that a lower report than the previous month is an improvement "higher"! If this report is worse than the prior report, it is still worse, lol). Consensus was looking for 565k, making this yet another miss. New Home permits were also down, falling from 586k to 565k:
Housing improved in July – but well short of expectations. Housing starts in July posted a modest comeback, rising 1.7 percent after an 8.7 percent decrease in June. The July annualized pace of 0.546 million units came in below the median forecast for 0.565 million units and is down 7.0 percent on a year-ago basis. The July improvement was led by a 32.6 percent bounce back in multifamily starts, following a 33.3 percent drop in June. The single-family component-weighed down by inventories-declined 4.2 percent after dipping 1.7 percent in June.

By region, the gain in starts was led by a 3.9 percent rebound in the South. Other regions declined-the Northeast, down 25.9 percent; the West, down 4.9 percent; and the Midwest, down 1.1 percent.

Looking ahead, permits fell back 3.1 percent, following a 1.6 percent rebound in June. Overall permits stood at an annualized rate of 0.565 million units and are down 3.7 percent on a year-ago basis.

The housing sector improved modestly in July at the headline level. But it largely was a technical rebound in the multifamily component. Single-family construction is slipping as indicated by both starts and permits. Equity futures eased modestly on the news.

Housing improved in July? They must have gotten an arm twisting memo from the Administration or something… I’ll have to start checking Provda for better information.

The PPI data did rise somewhat in July, the overall number meeting expectations for a .2% rise, and the “core” rate exceeding .1% prediction by rising .3%. Here we are seeing hot money GAMES in both oil and food that are keeping these numbers higher than they would be otherwise. Oil had been run up despite rising inventories and falling demand – now we have food going parabolic on the back of manipulation and hot money. These large swings ripple through the supply chain making these readings swing. Keep in mind that government inflation numbers do not track housing well… actually they don’t track much of anything well, but here they are:
Inflation at the producer level was mixed as higher food prices caused a rebound at the headline level. The overall PPI increased 0.2 percent in July, following a 0.5 percent fall in June. The July boost matched analysts' forecast. At the core level, the PPI gained 0.3 percent, following a 0.1 percent uptick in June. The market median expectation called for a 0.1 percent rise.

For the latest month, energy posted a 0.9 percent decrease while food prices jumped 0.7 percent. Bumping the core rate up were light trucks, up 1.5 percent; autos, up 0.3 percent, and pharmaceuticals, up 0.7 percent.

The surge in food prices was fresh and dried vegetables, up 9.8 percent; fresh fruits, up 3.8 percent; and fresh eggs, up 19.4 percent. Within energy, home heating oil dropped 3.5 percent while gasoline declined 2.2 percent. Residential gas and electricity rose 3.1 percent and 1.2 percent, respectively.

For the overall PPI, the year-on-year rate increased to 4.1 percent from 2.7 percent in June (seasonally adjusted). The core rate rose to 1.5 percent from 1.0 percent the prior month. On a not seasonally adjusted basis for July, the year-ago the headline PPI was up 4.2 percent while the core was up 1.5 percent.

Manufacturers managed to get through isolated price increases to retailers but based on the CPI, costs generally are not being passed on to the consumer. That could change for food in coming months as margins are slim for retailers.

Here is where I point out that total consumer credit is down and still falling for the first time in modern history. Again, any price appreciation is not occurring due to American demand, it is occurring due to American financial engineering backed by government hot money injections into our insolvent financial system. John Williams at shadow stats produces a nice looking total consumer credit chart, note the shadowed portion of the chart and how it has rolled over:

He also just updated M3 which is now contracting at 5.4%, the second largest contraction in modern history (since WWII), only behind the 5.9% contraction recorded this June:

Industrial Production figures for July did rise from June, rising from .1% to 1.0%, beating expectations that were looking for a .6% rise (note the revision downward from positive to negative in June). Here’s Econoday:
Manufacturing - which has been a key source of strength for the recovery but faltered in June – showed significant resurgence in the latest month. Overall industrial production in July jumped 1.0 percent, following a revised 0.1 percent down tick in June. The July surge topped the consensus forecast for a 0.6 percent spike.

By components, manufacturing posted a 1.1 percent comeback, following a 0.5 percent decline in June. The boost was broad-based as manufacturing excluding motor vehicles increased 0.6 percent, following a 0.3 percent dip the month before. Rounding out industry group components for July, utilities output was up 0.1 percent while mining advanced 0.9 percent.

By market group, business equipment jumped 1.8 percent and consumer goods posted a 1.1 percent gain. Nonindustrial supplies advanced 0.4 percent and materials were up 0.9 percent.

On a year-on-year basis, overall industrial production slipped to 7.7 percent from 8.2 percent in June.

Capacity utilization jumped to 74.8 percent in July from 74.1 percent the prior month. Analysts had projected a 74.5 percent figure for July.

Today's manufacturing numbers should help offset some disappointment with today's earlier release of housing starts. With favorable earnings, equity futures remain up notably.

The traditional non-NAICS numbers for industrial production may differ marginally from the NAICS basis figures.

Look for this number to be revised downward as well. Manufacturing has been decimated in America in general, it is now a way less important component than it once was. And when demand for goods is down, actually manufacturing goods can lead to rising inventories if the citizens of the country don’t have access to jobs or credit. I would look for any rise here to be temporary until the nation’s debt saturated condition is markedly improved.

Friday produced a small change in the McClelland Oscillator that may not have been satisfied with yesterday’s action. That means you should be on guard for a significant bounce today, continuing the wave 2 bounce that evidently began yesterday morning. I don’t know how long to expect it to last, my suspicion would be that it should possibly finish sometime this week, but with options expiration on Friday, we may have to suffer through more fun and frustrating HFT hot money, dark pool fueled, adultless games.