Friday, August 27, 2010

Morning Update/ Market Thread 8/27

Good Morning,

Equity futures are higher overnight, trending up all night and then spiking higher on the second release of Q2 GDP data. Bonds are sharply lower on the release, the dollar is flat, oil is flat, and gold is higher.

The Q2 data originally came in at 2.4%, and expectations had been knocked down pretty hard, as I mentioned yesterday, to 1.3%. It came in at 1.6%, thus removing 33% of the supposed growth, yet “beating” expectations. What I can tell you is that our GDP number is one of the most watched and yet most manipulated numbers in the world. It is VASTLY overstated and is simply a psychological tool belonging to the central banks who want you to believe that their financial engineering is the same thing as engineering something real. It is not. At any rate, we unfortunately live inside of their debt backed money box for now. Here’s Econoday:
The Commerce Department confirmed the claim by many economists that second quarter growth was softer than initially believed. Second quarter GDP growth was revised down to 1.6 percent annualized from the advance estimate of 2.4 percent. The new figure was higher than analysts' expectation for 1.3 percent.

The downward revision was primarily due to a higher net export deficit and a smaller gain in inventories. Also getting downgrades were residential investment and government purchases. Partially offsetting were modest upward revisions to personal consumption and nonresidential fixed investment.

Many traders are focusing on final sales. Real final sales to domestic purchasers was revised up to 4.3 percent from the initial estimate of 4.1 percent while final sales of domestic product (adds in net exports) was revised down to 1.0 percent from the advance figure of 1.3 percent.

Year-on-year, real GDP is up 3.0 percent, compared to up 2.4 percent in the first quarter.

On the inflation front, the GDP price index was bumped up marginally to 1.9 percent annualized from the initial estimate of 1.8 percent. The median market forecast called for a 1.8 percent figure for the second estimate.

Even though overall economic growth slowed substantially from the first quarter's 3.7 percent pace, domestic demand was actually stronger-4.3 percent compared to 1.3 percent in the first quarter. Certainly, there will be some slowing in domestic demand growth in the second half but a rebound in exports could help support the overall growth rate. The bottom line is that the latest GDP revisions are more supportive of continued recovery-albeit modest-than a double dip.

On the news, equity futures gained, rates firmed marginally, and the dollar index edged up.

There will be one more revision of this number, oh boy, I wonder what they can cook up and what the deflator will be? Just a joke to me, there has been no real growth in this country for at least a decade if not longer.

Corporate Profits were also released for the second quarter, coming in almost exactly flat from the first quarter, but up a ridiculous 37.7% from the year prior. Keep in mind that’s almost all financial engineering there too, with the financials returning from a brief mark to reality back to mark to fantasy. Even with Enron accounting times a million, corporate profits plateaued.

Consumer Sentiment is released at 9:55 Eastern this morning.

There was no Hindenburg Omen yesterday due to the number of new lows contracting to only 38. That is a positive internal divergence against the market that declined yesterday. There is also a short term positive divergence on the Stochastic and RSI 30 and 60 minute charts that I pointed out yesterday.

Keep in mind that this is likely a small degree move, and that it can end at any point, most likely when we least expect it.

One more indication that made me go “hmmm” yesterday after the close was the positive close and long tail up on the Transports behind a hammer with the tail in the opposite direction. Such “dueling hammers” almost always resolve in the direction of the second tail, in this case higher, and sure enough it is opening higher this morning, but doesn't mean that it has to finish higher:

This rise in prices this morning overthrew the top of the descending channel of the past few days, but quickly fell back inside. Note that yesterday afternoon’s decline stopped short of making a new low, thus this move still looks very much like a part of a small subwave 2. The key level to watch is still SPX 1040, a break below that level will likely mean a quick trip to 1010.

Being Friday, I would expect some back and forth during the day, but the usual game of late is to HFT ramp into the close, then rocket higher Monday morning. The surprise will be when that doesn’t occur. What a market. Free it ain’t.

Don’t forget that the “consumer” still comprises the majority of real economic activity and their sentiment (released this morning) is more important from my perspective than an engineered GDP number.