Thursday, October 14, 2010

Morning Update/ Market Thread 10/14

Good Morning,

Equity futures are roughly flat this morning with the dollar sharply lower, bonds higher, oil higher, and gold reaching another all-time record at $1,388 an ounce.

Our International Trade deficit continued to widen in the month of August, up to $46.3 Billion from July’s $42.8 Billion. Trade gaps must be financed, they are not sustainable over time and we’ve run a historic gap for a historic time. Here’s Econoday:
The U.S. trade gap widened sharply in August, largely on nonoil imports but with oil imports also contributing. Exports continued to grow but only modestly. The overall U.S. trade deficit increased to $46.3 billion from $42.3 billion in July. The latest trade gap came in wider than the median market forecast for a $44.3 billion deficit. Exports edged up 0.2 percent, following a 2.0 percent gain in July. Imports rebounded 2.1 percent, following a 2.1 percent decline in July. Nonoil goods imports in August rebounded 2.2 percent, following a 3.0 percent decrease the month before.

The worsening in the trade gap was primarily in the nonpetroleum deficit which grew to $35.9 billion in August from $33.2 billion the previous month. The petroleum goods gap expanded to $21.9 billion from $20.8 billion in July.

You know, it’s funny because the latest Export and Import figures for September incorrectly pinned the movement on falling oil prices – yet they were up sharply in September. And here we have rising oil costs pinned for a deficit in a month in which oil prices actually fell. And this goes to show you that the people creating the data and assembling the reports are either incompetent or they are flat out making it up. I don’t know which, but what I do know is that I don’t trust the data coming from our own government. Yes, I believe the “Fed’s” influence is causing massive distortions in the reporting of our data.

Speaking of distortions, the PPI reportedly rose in the month of September by .4%, the same as in August but much greater than the consensus which was looking for .1%. Year over year PPI rose from 3.0% to 4.0%:
Producer price inflation was mixed for September as food prices kept upward pressure on the headline number with energy also contributing. The overall PPI growth rate remained elevated at 0.4 percent in September, matching the August rise and well topping the median forecast for a 0.1 percent increase. At the core level, the PPI remained sluggish with a 0.1 percent gain-the same as in August and equaling expectations.

For the latest month, food jumped 1.2 percent after dipping 0.3 percent in August. The energy component rose 0.5 percent, following a 2.2 percent jump in August.

Weekly Jobless Claims rose to 462,000 last week with the prior week revised higher yet again to 449,000. This number is yet another one in the same horrific range. Remember that we rallied last week on this report despite it being really no improvement at all and once again it’s proven to be no change in trend. Here’s Econoday justifying it for the masses:
After improving five of the last six weeks, initial jobless claims rose 13,000 in the October 9 week to a higher-than-expected 462,000 (prior week revised 4,000 higher to 449,000). The Labor Department had to use estimates for five states due to administrative delays tied to this week's Columbus Day. The four-week average, up 2,250 to 459,000, ended six straight weeks of improvement.

Continuing claims fell substantially in the October 2 week, down 112,000 to a recovery low 4.399 million. Yet improvement here reflects, to an uncertain but probably significant degree, the loss of benefits. Those on emergency and extended benefits both fell. The unemployment rate for insured workers is down one tenth to 3.5 percent.

Columbus Day clouds the initial claims results which will likely be expected to fall back in next week's report. The outlook for the jobs market remains uncertain.

The jobs market remains uncertain only for those who fail to recognize the structural debt saturation condition of our economy. I do note that the number of people drawing Emergency Unemployment claims fell below the 4 million mark, this is due to a large number of people running out of even those extended benefits. It is a tragedy, not a sign of improvement and it means less money coming into the economy.

This morning it was also reported that repossessions and foreclosures hit yet further record territory:
NEW YORK ( -- Bank repossessions and foreclosure auctions hit record levels in the third quarter, RealtyTrac said on Thursday.

372,445 foreclosure auctions were scheduled in July, August and September, while 288,345 properties were repossessed by lenders over the same time period.

Overall foreclosure filings edged up to 930,437 in the third quarter, a 4% increase from the previous quarter. One in every 139 homeowners received a foreclosure filing during those three months.

Bank repossessions, or REOs, also are on the rise. In September, a record 102,134 homes were taken back by banks. It's the first time repos have topped 100,000 in a single month.

Of course since foreclosures have now been widely halted, this figure will begin to come down but since they represent such a large segment of the market now sales will also have to come down. There was a ton of activity on the “foreclosuregate” front yesterday. The state of New York halted all foreclosures and subpoenas have been sent by the State of Florida. This is not just a foreclosure problem, the root ill lies in MERS and the way in which recording and title laws were subverted in order to expedite securitization. Fraud was a part of this process and it has HUGE ramifications for the real estate and banking industries going forward. If you are considering a real estate purchase, you have to ask yourself if the system has been fixed? Has it? The answer is NO.

Yesterday the word was fantasy as I discussed mark-to-model accounting and fraud perpetrated by the banks on the entire mortgage and investment industry. Corporate earnings are up solely due to fraud, none of the fundamentals have changed. Despite that fact, the psychology in favor of stocks is reaching unbelievably bullish extremes. People like me, who remain consistently bearish, are called out for not buying into the fraud. To me that’s simply another sign of the psychology extreme, it happens every time we rally and is yet another marker that we are very near a significant top as that sentiment has reached a crescendo.

It’s true that we are debasing the hell out of our currency. Yesterday the “Fed” released their current month’s POMO schedule and it is simply frightening. $32 Billion in just the next 3 weeks beginning tomorrow just in time for Options Expiration and the Friday afternoon front-running of the Monday morning HFT ramp job. You can see the schedule here: NY Fed POMO Schedule.

Simple question… if the economy is improving why do we need to POMO more than $10 Billion per week and why all the talk of QE2.0? The answer of course is that the economy is not improving, it’s getting worse. In fact the major banks are INSOLVENT, they are sitting on top of “assets” that are not worth anything near what they are being carried on the books, and they are guilty (in my opinion) of creating fraudulent mortgage paper and defrauding investors. Thus the “Fed,” who IS THOSE SAME BANKS, is creating money in an attempt to hide their fraud from you and the entire world. Fraud to cover fraud.

It’s not working and it will never work. The only thing they possibly can accomplish, if we’re stupid enough to leave them in power, is to further debase our money. The end result will be the same. Just look at what occurred in Zimbabwe. For a time – about a year – they had the world’s best performing stock market all the while the people literally were starving. So, how did the owners of Zimbabwe stock fare in the end? Uh, huh, that’s what I thought – their paper was worthless.

And what are the parallels between us and them? You say we are the world’s “reserve currency” and that it can’t happen here? Do you see gold priced in dollars zooming to $1,400 an ounce? Have you noticed the price of oats in dollars double in the past 5 months or the price of wheat or corn? Are you aware that there are over 40 million Americans on food stamps? Sure, the stock market is going higher, are you going to time your exit perfectly in a market built upon fraud and money printing?

Warren Buffet thinks stocks are a way better buy than bonds. Warren tells you that you must “know your business.” Of course he owns Wells Fargo and I’m wondering if he was aware that his bank was in the business of laundering drug money or falsifying foreclosure documents and very likely defrauding investors? And even bears like Marc Faber think that owning stocks might be better than owning other “assets.” That’s fair, but he bases that opinion on the fact he sees either continued monetary weakness or rising interest rates. And I would simply ask him how did that work out for stock holders in Zimbabwe, and if rates go up how will that affect a debt saturated economy and corporate earnings? So there is no easy answer and the “Fed” still unwisely is in control for now and thus gold continues to soar. Personally, I would rather own physical gold and silver than to own fraudulent based paper, but I do not believe higher stock prices are in the cards regardless. In fact I think stocks crumble, all the technical markers are there.

Those who believe the “Fed” can continue to hold it up will be mistaken, I believe, as the “Fed” is being pressured by forces not within their control. In fact there are signs that more capital flight is occurring – that is money is simply leaving the country. Printing more money will only make that problem worse. They can stop printing money, but then something somewhere has to give… and there in lies the rub. The currency markets are far more important than stock markets, and the bond market is also far more important than the stock market. So, if you’re a decision maker, which one are you going to sacrifice in the end? I know that everyone thinks it will be the dollar that is sacrificed, but I think we are already nearing the maximum amount that it can be without severe other side-effects. We’re already seeing oil in the economic danger zone, food is spiking, precious metals are zooming, and money is fleeing the country. No, the current trend is not sustainable.

Just last night the dollar continued its collapse and nearly reached the 76 level that represents the bottom of the up rising pennant trendline as well as the bottom of the current down channel. This is a highly likely place for the dollar to find support. Should it not hold, the target is 71/72ish:

Should that pennant line break, it will indicate that a storm is in progress:

The Yen continues to strengthen while it rolls out of a descending wedge. This is quite unfavorable to the Japanese and will be very unfavorable to the U.S. dollar if it continues:

Yesterday the market was touted all day long as being higher based upon the earnings of INTC, JPM, and CSX. Let’s look at the charts…

Intel opened higher and then collapsed producing a waterfall event and a very bearish engulfing candlestick – note the breakdown volume confirming the move lower (yet the supposed “breakout” in the indices was not on breakout volume):

JPMorgan also closed the day lower on very heavy volume, and is gapping lower this morning:

CSX was the only one to gain on the day, zooming higher on extreme volume that often marks turning points, while creating a potential shooting star way above the upper Bollinger band.

The price reaction to these earnings “beats” tell us a ton about what has been priced into the markets. We have more reports coming, it will be interesting to watch the price reaction as these reports come out. Remember, my opinion is that the financial earnings are nothing but fraud, and the non-financials are rife with game playing as well, to include reports based on operating earnings that exclude more and more “one time” write downs, and forward estimates designed to produce “beats” so that positive psychology is created even if earnings are lower.

Remember, there are three aspects to the markets that must be analyzed. They are the fundamentals (bad and based upon fraud), the technicals (over extended and divergent like mad), and then there is the psychological. Let’s talk about some of the extreme sentiment indicators…

For starters yesterday produced an extreme number of new 52 week highs that was above 400. Those numbers do not occur at bottoms or even in the middle of bull market runs – they occur at tops. Apple at $300 a share? Google at $550 a share? Come on… does that even pass the basic sanity test?

And at those levels insiders are selling like CRAZY – some of the highest insider selling in history is occurring at this time, as in right now.

Money continues to flow OUT of mutual funds, yet mutual fund managers are more bullish on stocks than ever!

Here’s a chart showing that sentiment in Europe, as measured by Sentix (a European composite), is at all-time bullish levels!

The Put/Call reached a very low level yesterday showing severe complacency:

The VIX:VXV ratio is coming off an all-time low, I showed you just yesterday how well low points in this indicator correlate to market peaks:

Yesterday the VIX did close back above the lower Bollinger band thus producing yet another market sell indication. This morning prices are back inside of the large pennant:

This VIX signal represents extreme complacency on the part of investors. The sell signal works because it reads the complacency and then sees a return to a more normal range. Two in one month is extremely rare, I personally do not ignore these signals, they are highly reliable indicators. Just because the last one did not produce instant results doesn’t mean that the second one isn’t going to work.

Sentiment extremes mark turning points because trades cannot mathematically continue once all the players are invested in the same direction. While I realize that I sound like a broken record and that prices have continued to rise, I can tell you that I have enough experience in the market place to know what’s real and what’s not. The markets are broken, our economy is broken, and yet sentiment is at an extreme. Don’t shoot the messenger, I would gladly fix it if given the chance. Beware the low spark of high heeled boys...