Wednesday, August 25, 2010

Morning Update/ Market Thread 8/25

Good Morning,

Equity futures are continuing lower this morning following more “worse than expected” data. The dollar is roughly flat, bonds are sharply higher, oil is down some more (down 13 of last 15 sessions), and gold is higher.

Yesterday S&P downgraded the debt of Ireland which is sending yields upwards. Of course this is well after the horse has left the barn, grown old, and has already passed away from old age. Still, it again raises the specter of national risk in the Euro zone area, and the likes of Ireland and Spain are far more significant than Greece. Greece, of course, was foolish enough to take loans and austerity measures from the IMF gangsters and thus are suffering accordingly. Once the reality begins to permeate the psyche of investors again, the potential for meaningful trouble is high (where isn’t it?).

The still worthless MBA Purchase Applications Index rose .6% in the past week, with the Refinance Index rising 5.7%. Again, their methodology is simply trash, what we do know is that we are just off historic lows in their index. Here’s Econoday:
Record low mortgage rates fed a 5.7 percent surge in refinancing applications during the August 20 week. On a four-week basis, the volume of refinancing applications is up 26 percent. Low rates, the lowest in the 20-year history of the Mortgage Bankers' survey, are making it pay for borrowers to refinance loans that they had already refinanced within the last two years. Refinancing made up 82 percent of total applications, a reminder of how dormant purchase activity is. Purchase applications did rise 0.6 percent in the week. The average 30-year fixed mortgage fell five basis points in the week to 4.55 percent.

All the spin and yet homes sales are at record lows with record inventory (12.5 months worth), and hidden inventory to boot. Below is a good chart showing yesterday’s Existing Home Sales versus recent history:

Robert Schiller was on Bloomberg yesterday trying to mitigate the numbers… he called them “an anomaly” due to the end of the tax credit. No, Robert, it was the numbers with the tax credit that were the anomaly, yesterday’s report was showing more realistic demand, if you call 97% of mortgages backed by the government reality. Just imagine what true demand would be without the government behind nearly every mortgage, that would be reality and it would be very ugly indeed. On that point Bill Gross is right. But the ugliness he insinuates is coming without more intervention (to prop up his investments), in my opinion, is coming one way or the other.

I’ve been paying attention to real estate lately, in fact I have been actively looking for opportunities to take advantage of. Early, I know, but I was hoping the right distressed situation would present itself. I can say that I’m not finding those deals that I think will mark a bottom as they are still not penciling out. Those who are distressed are so underwater that they are controlled by the banks who are still not willing to take a loss on their balance sheets, and so I wait and hunt the deals. I am looking at both residential and commercial type properties. Anecdotally, I have also been watching the bubble world of boating in the Northwest and have long kept one eye on boat slip pricing. I am finally seeing some movement down in prices there, but it’s still so far from penciling that it’s not even funny. For example, a 45 foot slip sold at the peak for about $250k. I saw one advertised yesterday for $128k – it is leased for $410 per month. Drop the pencil to that and it is still two times more expensive, even at today’s historically low rates, than it can earn in rents. Not even close to a bottom, not even close to historic rent ratios.

Durable Goods came in worse than expected for July, but better than June’s -1.0% reading. Coming in at a .3% month over month rise, the consensus was looking for a wildly optimistic 2.5% rise. Ex-transportation was an even larger disappointment:
Manufacturing is not as strong as hoped-based on July durables. New factory orders for durable goods in July rebounded 0.3 percent, following a 0.1 percent decline the prior month. The July rebound came in significantly below the consensus forecast for a 2.5 percent comeback.

The bounce back in July was led by the transportation component. Most other components slipped. Excluding transportation, new durables orders dropped 3.8 percent, following a 0.2 percent rise in June. While durables orders are a volatile series and some month-to-month dips are to be expected, the latest news is disappointing.

Most of new orders strength came from transportation which jumped 13.1 percent, following a 1.0 percent decrease in June. Nondefense aircraft spiked 75.9 percent after falling 25.3 percent in June. Defense aircraft orders declined 8.3 percent in the latest month. Analysts often focus on the ex-transportation component to see the underlying trend without the sharp monthly swings from aircraft. But excluding transportation also excludes one of the other few big positives in the report. Looking for a silver lining, the ex-transportation series may actually overstate weakness a bit. Within transportation, motor vehicles continued to post healthy gains, rising 5.3 percent in July after increasing 4.0 percent in June.

Other components were mostly down for the latest period. Declines were seen in fabricated metals, machinery, computers & electronics, and electrical equipment. Advances were seen in primary metals and in "all other."

Businesses may be hitting the pause button on equipment investment. Nondefense capital goods orders excluding aircraft in July fell 8.0 percent, following a 3.6 percent jump the month before. Shipments slipped 1.5 percent in July, following a 1.0 percent rise in June. However, orders and shipments for this series have shown strength for several months.

Year-on-year, overall new orders for durable goods in July were up 9.3 percent, compared to 17.1 percent in June. Excluding transportation, new durables orders came in at up 9.5 percent, compared to 16.1 percent the prior month.

Equity futures fell on the release.

New Home Sales are released at 10 Eastern.

Yesterday did produce yet another confirmed Hindenburg Omen, the third clean one with one more that was on the line. This cluster is very similar to the cluster that preceded the declines in 2008, and about in the same place in the decline – during and just after a wave 2 bounce, these are telling you that the market is very divided and that wave 3 is poised. We have already declined significantly since receiving the first Hindenburg, now nearly 400 DOW points. Those who did not take them seriously already are taking on water, it will get worse, and I hope that what follows takes Jim Cramer and CNBS completely off the air. When that happens, it may actually be time to go long.

On the very small wave scale, it is possible that we are close to finishing a subwave 5 down as the action over the past two days has produced what could be considered wave 4 of 1 of 3 of 3. That means that we could encounter a small degree wave 2 up soon. Below is a 30 minute chart, you can count those wave down from the previous larger degree wave 2 double top. Note that there are three sets of necklines on this chart:

Breaking support again below 1040 is the next step, we have targets at 1025ish, at 1010ish, and all the way down at 860ish.

Bonds are absolutely on a tear. The TNX is rapidly moving through support and is approaching its initial 2.3% target. If it were to break below that, then the target becomes the prior low at a minimum. Can rates possibly go lower than that? I don’t think so, not with all the middle-men who take cuts in the banking world. One wild idea I’m hearing bandied about is for the government to make mortgage loans directly to the public, thus cutting out all the middle rate steps. While ultra-low mortgages sounds nice if you work in the real estate industry, from my position that would be a complete disaster for our nation and for the world – but let’s face it, a disaster is unfolding now regardless, and structural change is coming:

The other day I pointed out a very classic Head & Shoulders pattern on Wells Fargo. Those who took that trade on a break of the neckline are doing well. This chart belongs in a textbook, pretty for technical analysis, not so pretty if you bought into the wave B manure that the debt pushers were marketing:

There are a lot of chart that look like that, and there are a lot of charts that look like the DIA daily chart below. Here you can see that prices have been pushing the lower Bollinger down and out of the way. The down move is coming on higher volume, but not yet panic type of levels – meaning the decline is likely not over despite reaching oversold levels on the daily charts (the weekly and month charts are not oversold). These charts have the same look and feel as the roll over during 2008:

The VIX is making an orderly turn higher out of the very large pennant it created. This is bearish in that there has been no panic days to send the VIX to a close over the upper Bollinger. Instead it has been slowly turning the Bollinger up:

The bulls can twist and shout all they want, but the cleansing is not over and I feel fine…