Friday, October 29, 2010

Morning Update/ Market Thread 10/29

Good Morning,

Equity futures are lower again this morning, the dollar is roughly flat, bonds are rising sharply, while oil is down slightly and gold is up.

Of course it’s pretty common knowledge that up trends typically end on good news, while downtrend end on bad news. These news events typically draw in the last rush for a given direction and produce capitulation volume. Such an event has still not happened and I think it’s very interesting how in the past couple of weeks or so the economic data has been read that if it’s bad it’s good because QE will save the world, and if it’s good it’s good. Then there are the numbers that come out EXACTLY on consensus, something that almost never happens yet there have been a string of these in the past week, this morning’s release of Q3 GDP is the latest.

Coming in exactly on consensus of 2.0% growth, look for quarter three GDP to be subsequently cut in half or more in future revisions. Q2 settled on 1.7%, and I can almost guarantee that Q3 was considerably slower than Q2. Keep in mind that GDP is measured in dollars and then “corrected” via the deflator for inflation. Again I’ll guarantee that the deflator comes nowhere near capturing the destruction that’s occurring to the dollar. Below is the entire report from the BEA:


What you will find inside that report is that inventory build resulted in the majority of the “growth,” 1.44%. Inventory builds are only good if there’s demand to buy the inventory once it’s produced. Forced inventory builds occur when goods are ordered due to miscalculations of demand. Demand is misjudged when economic data is artificial – thus bad tracking and reporting of data builds economic distortions, inventory building at this time is one.

You’ll also note in this report that almost every category tracked, while reported positive, is DECELERATING substantially from the prior report. Take exports for an example: “Real exports of goods and services increased 5.0 percent in the third quarter, compared with an increase of 9.1 percent in the second. Real imports of goods and services increased 17.4 percent, compared with an increase of 33.5 percent.” The numbers seem large, but are much smaller than the previous quarter. Again, they claim these numbers are “real,” that is adjusted for inflation, but again I have to raise the B.S. flag to full mast on those numbers. Shipping data and tax receipts do not substantiate their trade data that again are measured in dollars and corrected by flawed inflation data.

All the income figures show the same trend, that income is supposedly up by their measurements, but not at nearly the same rate as the prior quarter. For example: “Current-dollar personal income increased $65.7 billion (2.1 percent) in the third quarter, compared with an increase of $123.5 billion (4.1 percent) in the second.”

Remember, these are the first cut and we know that all these numbers will be revised downwards. The “Price Index” portion of the report supposedly rose 2.3%, this is an increase from 1.9%, and did come in above expectations of 2.0%.

Frankly, with the dollar index falling 8.4% during the quarter against a competitively devalued basket of currencies, you can see how under-reported the inflation effects are. Should they have used an 8%+ deflator, then real GDP would have been close to negative 6%! And that’s probably a lot closer to the truth. But reality is another matter entirely, as one would have to subtract out financial engineering which adds massively to “production,” yet in reality produces nothing but heartache.

Here’s Econoday’s take on the subject, it may read somewhat differently:

The recovery regained incremental strength in the third quarter, but the pace is still quite soft. Third quarter GDP expanded at a 2.0 percent annualized pace, following a 1.7 percent rise the prior quarter. The latest figure matched analysts' projections for a 2.0 percent gain.

The latest quarter was led by gains in inventory investment, consumer spending, equipment investment, and government purchases. On the negative side, housing investment fell back and net exports worsened on higher imports. Exports rose moderately.

How strong final sales are is still an important issue in terms of whether demand is picking up or not and it slowed by both key measures. Growth in real final sales to domestic purchasers slowed to 2.5 percent, following a 4.3 percent boost in the second quarter. Final sales of domestic product (adds in net exports) eased to 0.6 percent from 0.9 percent annualized in the second quarter. A big question is whether the boost in imports reflects optimism on the part of businesses that spending is going to pick up-and there is no certain answer. The surge in both imports and inventories at the same time implies optimism. But if demand does not pick up, the boost in inventories will be a negative in coming quarters.

Year-on-year, real GDP in the second quarter is up 3.1 percent, compared 3.0 percent in the second quarter.

Economy-wide inflation as measured by the GDP price index firmed to 2.3 percent in the third quarter, following a 1.9 percent increase the previous period. The median market forecast was for a 2.0 percent rise.

In a separate but related report on employment costs, we find that wages are not even close to keeping up. What does that tell you about inventory builds? This was a miss at .4%, the consensus was expecting .5%:

A slowdown in wages & salaries made for a slowdown in the third-quarter employment cost index, at plus 0.4 percent vs. the second-quarter's plus 0.5 percent. The on-year rate is plus 1.9 percent vs plus 1.8 percent in the second quarter. Wages & salaries rose only 0.3 percent in the third quarter, down from the second-quarter's 0.4 percent. The on-year rate slipped one tenth to plus 1.5 percent, a rate just above on-year consumer price inflation which has been trending slightly over 1.0 percent. Benefit costs were unchanged at 0.6 percent though the on-year rate rose two tenths from the second quarter to plus 2.7 percent. Employment costs remain very quiet, giving the Federal Reserve the leeway it needs for further accommodation.

Note the overall slope of that chart! The bottom line for me is that we are experiencing monetary growth, while at the same time the real economy is continuing to contract. Wages are not anywhere near keeping pace with the monetary growth, this is creating the huge gaps between the top people who benefit from inflation and the bottom wage earners who suffer from it – the vast majority of people.

There is NO REASON to have an inflationary system like this! It is literally insane. It is designed to benefit the people who push debt, plain and simple. Yet, it’s absolutely possible to have a system where the government controls the production of money yet keeps the total quantity under control in such a way as to create price stability. Within that system there can still be private lending and even fractional reserves, the key is in ensuring that special interests don’t corrupt the system, again something that is completely doable given the proper TRANSPARENCY and checks and balances. There is only one inflation target that will work in the long run, that is ZERO. Targeting any other number is again quite literally insane, it is like designing your house to only last a couple of years before it falls down when you can easily design a much more solid house – we have the means and the capability to do so, all we need is the WILL to unseat those who currently possess the power of money production.

Chicago PMI and Consumer Sentiment are released shortly after the market opens, these will be reported in the daily thread.

Market divergences continue to expand, the latest is watching the VIX rise while prices stagnate. The financials are going exactly nowhere, appropriately so. Reality for them, of course, is something far worse.

Yesterday was yet another day of prices going up and down but ultimately going nowhere. All the daily candles look like top indicators. Yesterday’s action produced a very small movement again in the McClellan Oscillator, thus we can expect a large directional price move soon. Although today is not a POMO day, if I owned an HFT computer, I would most certainly program it to ramp into today’s close to front run Monday morning’s HFT ramp which will be POMO fueled in the same manner as a nitro top fueled dragster! I can almost see the flames shooting out of the headers already – especially the day prior to the elections.

What I do know is that as long as the money changers who own the HFT machines get their way, then significant declines are not likely. Once pushback occurs, then they will pull out their guns and place them to our collective heads by taking down the markets. That’s the game, it’s how it’s played. So, those very debt pushers are actually insolvent, but they exchange their crap to the “Fed” who gives them new fuel on a regular basis. Keep it coming and everything’s okay. Allow the accounting FRAUD to continue, and everything’s okay. Interrupt their game in any manner, THEN we have trouble. Watch what I’m telling you, you know it’s the truth.

And just listen to all the pushback in the political ads! Everyone is against spending more and burdening our grandkids. Laugh out loud time ten trillion! Listen, these clowns are just like all the clowns before them. They do have a part to play, however, and that part is called austerity – listen to their words. A Republican controlled Congress, they claim, is going to reel in the stimulus and excessive spending that hasn’t worked. Well guess what? That won’t work either, it will produce wave C down. But of the options within our oligarch controlled debt money system, that is the better of the two options available! Again, I can live with lower stock prices, but I can’t live without food which is going to be a problem if we attempt to inflate our way out. That’s never worked. In fact, nothing inside of a debt backed money box works for the people, it only works for the few at the top. Want proof? Okay, here it is:

Top U.S. Incomes Grew Five-Fold in 2009

There you will find that in the top income bracket measured, there are 74 people who earned more than $50 million last year. Their average income jumped last year from $91.8 million to an unbelievable $518.8 million! How are they benefiting from a system of never ending inflation? That’s a little bit different than the slope of the chart above, and this is exactly the stuff seen at the end of empires, it is the root of inequity, and it is the root of revolution. When only they can afford to eat, then history says they will be overthrown – appropriately so.

And thus the economic and political system that can stand the test of time has yet to exist on this planet. If those 74 people were smart, they’d be buying beer, corn syrup, and cable T.V. for the masses. Oh wait, 40 million plus on food stamps, that’s right, they are.