Monday, August 30, 2010

Morning Update/ Market Thread 8/30

Good Morning,

Equity futures are roughly flat to slightly lower so far this Monday – hey, you know some HFT ramp attempt is coming, it will only take one knucklehead to get the ball rolling into ramp mode, the others computers will sniff out that transaction before it’s even executed and it’ll be game on! There’s an open gap in the charts up to 1067 that everyone is watching… normally I would expect that gap to fill before resuming the downtrend:

Meanwhile, bonds are higher, the dollar is roughly flat, while oil and gold are both slightly lower. The Yen, is making a fairly sizable move higher as Japan’s Central bankers said they will spend 920 billion yen on economic stimulus and the central bank added 10 trillion in “liquidity injections.” What’s another 11 trillion among friends, eh? Evidently not enough to really move the Yen lower like they want, so far they are getting the opposite reaction as the carry trade continues to unwind. While a trillion Yen is “only” the equivalent of about $11 billion (roughly $120B total), when talking injections in the multi-trillions like this, it is safe to say that the Yen is quickly on its way to a major restructuring, it’s just a matter of time before it’ll take a trillion yen just to buy a bowl of rice.

And here in the States, it’s also getting harder to buy a bowl of rice as Disposable Incomes dropped after adjusting for inflation. Yet on the surface, Personal Income rose .2% in July. That was, however, below the consensus of .3%. Consumer Spending, as they track it, supposedly rose .4%, not a good thing when your income only rises .2% (unless you like debt). Here’s Econoday’s spin:
The consumer made a comeback in July-in both income and spending. Personal income in July posted a 0.2 percent gain, following no change in June. The July figure was a little lower than the consensus expectation for a 0.3 percent rise. More importantly, the wages & salaries component rebounded 0.3 percent after slipping 0.1 percent in June. This component would have been even stronger had it not been for a dip in government payrolls from laying off temporary Census workers. Private industry wages and salaries gained 0.5 percent in July, following a 0.1 percent dip in June.

The Fed is depending on the consumer to counter a faltering housing sector and Bernanke & Company got its wish at least for July. Overall personal consumption increased 0.4 percent in July, following a flat number in June. The latest beat the market forecast for a 0.3 percent gain. By components, durables jumped 0.9 percent, nondurables rose 0.3 percent, and services gained 0.4 percent

Who would have thought that an uptick in inflation would be good? Given the deflation mongering in some sectors, a 0.2 percent rise in the headline PCE price index for July looks good, following two months of down 0.1 percent. The core rate edged up 0.1 percent after a flat reading in June. The median forecast for the core had called for a 0.1 percent uptick.

Year on year, personal income growth for July came in at up 3.0 percent, advancing from up 2.4 percent in June. PCEs growth improved to 3.4 percent in July, compared to 3.2 percent in June. Year-ago headline PCE inflation firmed to 1.5 percent from 1.4 percent in June. Year-ago core PCE inflation is unchanged at 1.4 percent.

Today's report is not stellar but it is welcome news that the consumer sector bounced back and should help support overall economic growth.

Yes, who would have thought that an uptick in inflation would be good? Give us a break, I’m not buying it. The Fed is trying to create the illusion of inflation as they jawbone and manipulate data, but there is no way I believe that wages are rising for more than a nanosecond in this current environment. Wages won’t make any progress until hiring picks up, and even this report shows that the consumer will be pressured as spending more than you earn is not a sustainable relationship no matter how much the Fed and the market pumpers would like it to be. How come we can’t cheer and strive for balance? Could it be that it doesn’t help the debt pushers?

Also keep in mind that the largest segment of the population, the Baby Boomers, are now past their peak earning years and that they are moving beyond it much faster than they are being replaced. This means that overall earnings in our nation will continue to be pressured as will outflows from the markets. The next significat demographic uptick in peak earners won’t influence our economy until the year 2022 (unless the debt pushers can pull all of their income forward in time too – which is not likely especially as the social mood changes).

There is a lot of economic data coming this week, culminating with the Employment Report on Friday. Should be interesting.

From a technical perspective, I’m still counting the August 25th low as the bottom of wave 1 of 3. It looks like an a,b,c for wave 2 has occurred since that time and that we are near the completion of wave c. If that is correct, we should see significant declines soon. The alternative is that we bottomed the larger degree wave 1 and this is a more significant wave 2 which I give lower odds.

Friday’s action was VERY interesting as the HFT machines all got on the long side all day long. On the surface it looked strong producing a 92% up day, the 12th 90%+ up day since the April top to go along with 13 90%+ down days! This is nutty action for sure, it shows great distress and internal conflict in the market – not something that is bullish. Amazingly, despite the 92% ramp, we still received yet another Hindenburg Omen, the 5th in this cluster as the number of new lows rose dramatically over Thursday’s count, despite the ramp. That is a sign of sickness, a strong internal divergence.

I have heard a lot of talk that it’s vacation time again in the Hamptons, so be careful as the trading volumes are likely to be low… yet as we exit the month of August and roll into September, keep in mind that September is statistically one of the weakest months of the year. And here we are poised with multiple layers of Head & Shoulders patterns, 5 Hindenburg Omens, and a wave count saying that 3 of 3 is soon up to bat in the rotation.

Beatles - You Never Give Me Your Money: