Thursday, October 7, 2010

Morning Update/ Market Thread 10/7

Good Morning,

Equity futures are higher once again, lofted higher by a crashing dollar, a skyrocketing Yen, and yet another $2.1 billion POMO hot money injection yesterday. The dollar is down yet again, reaching just above the 77 mark. The Euro is zooming as the Germans and the British are only slightly less anxious to destroy their currencies. Bonds are flat, oil is zooming now above $84 a barrel, while gold reached yet another all-time high of $1,366 an ounce.

The Monster Employment Index rose from 136 to 138. “Gains in the month were evenly distributed with public administration and utilities showing special strength.”

Weekly Jobless claims fell from 453,000 to 445,000. Naturally, the prior week was revised higher to 456K. The market is using this data point to break out higher in the futures with the dollar breaking down further. This is yet another report in the same horrific range that we’ve been in forever. Month after month, the job losses mount as any number above 350k is nothing short of a disaster that shows continued job contraction. Here’s Econospin:
ADP or not, the jobs market appears to be improving based on incremental decreases in the number of jobless receiving unemployment benefits. Those receiving initial benefits fell 11,000 in the Oct. 2 week to a lower-than-expected 445,000 (prior week revised slightly higher to 456,000). The four-week average is at 455,750 for a sixth straight decrease and is down a convincing 25,000 or so from a month ago.

Those receiving continuing benefits fell for a fourth straight week, down 48,000 to 4.462 million. The four-week average of 4.511 million is slightly lower than a month ago. The unemployment rate for insured workers dipped one tenth to 3.5 percent.

There are no special factors in the data making for a clear view, a view that shows tangible improvement in the jobs market. These results will calm nerves following yesterday's disappointing ADP estimate.

Nice spin, whoever wrote that should be writing copy for Florida condo brochures. Again, check out the chart, you can see that it’s simply wiggling in the same old range. Meanwhile, the number of people claiming Emergency Unemployment Compensation jumped 157,735 from the prior week, with the total still above 4.1 million compared to “only” 3.3 million a year ago! Now there’s job growth only the mainstream can ignore.

Yesterday it was learned that the Fed has been conducting POMO operations since 2003! They POMO’ed on 203 of the last 1,334 trading days! Had you invested on those POMO days, you would have gained 51%, versus a loss had you only invested on non-pomo days! That sample is certainly statistically relevant, showing that the markets are only higher due to Fed intervention. Here’s a chart that ZH published showing this:

Meanwhile QE operations are also working to destroy our currency. The sole purpose of these operations is to BUY DOWN INTEREST RATES. It’s costing us trillions to keep rates low, MORE than we take in through taxes. Of course everyone expected our lack of fiscal discipline to eventually translate into higher rates… well IT HAS! This is exactly why the Fed has had to resort to buying up their own bonds – if they could sell them to someone else, THEY WOULD! And they can sell then to others, but NOT at these artificially low rates. I say again, we are spending MORE than we collect in taxes on INTEREST on our debt due to the forced buying down of interest rates. This cannot and will not last. It is causing disturbances the world over.

Below is a chart of the 10 year Treasuries, the TNX. You can see that we definitively broke below support of the H&S neckline. The target is now just above 2%:

The Yen is now breaking down below its descending wedge. This is ominous! Should it continue on this trajectory, Japan will not be able to export as their goods will become prohibitively expensive compared to weaker currencies. They will be forced to respond, and when people are cornered is when desperate actions get taken. Desperate actions can lead to those “other” events.

Below is a monthly chart of the Yen, lower equals a stronger Yen on this chart. You can see the descending wedge clearly – these are usually ending patterns where you expect price to rise up from it. However, sometimes prices come spilling out of descending wedges in a water-fall – that is exactly what happened to our markets as wave 3 down struck in 2008. Should the Yen cascade down and out of that descending wedge, it could be very ugly indeed:

Here’s a closer look at the daily chart. That lower trendline has perfectly stopped price every time until now. All the trillions spent to keep the Yen weak have FAILED, just as all currency intervention eventually does:

The DOW Industrials are now pushing on 11,000 with 11,258 the April high. Yesterday saw several of the second tier momo tech stocks break down hard on earnings warnings. This is eerily similar to what happened in early 2000 just prior to the tech bubble bursting. Then, like now, techs were clearly leading and were rising in near parabolic fashion. Then a set back, and then another week of nearly straight up parabolic into THE top. Collapse followed, and here we are 11 years later with the NASDAQ still down 58% from that peak:

And yet as I look around I see many of the same euphoric types of moves and bubble prices. I also see the same rotational moves that were occurring near the ’07 top. This time, the divergences are even larger. And like 1987, this time we have a dollar fading rapidly in the background.

Could we shoot higher into another ending parabolic move? We sure could, there are signs of that already occurring in places like oil, gold, silver, and some of the ridiculous momo tech stocks. If it does occur broader based from here it will likely mark the end, but you obviously don’t want to step in front of it if it does. Parabolic moves end suddenly, and picking their ending points is nearly impossible – again, this is exactly why front-running turns can prove costly.

The McClelland Oscillator is still positive, but just barely. I think one of the first signs we’ll see of a decline is that the McClelland turns negative and stays negative. People are already forgetting about the Hindenburg Omens on the clock that are valid until the end of the year. This entire move higher is not real, it is a falling dollar POMO fueled rally that left gaps every step of the way. All those gaps will be filled, and all that hot money fed into the machine will simply be shredded in the end, a complete and total waste. More money in the form of QE2 or TARP 13, or whatever, will also have no effect in the end if it’s simply squandered in the same exact manner. Money needs to get into the hands of the people, and it needs to be used to pay down debt. That’s the only way meaningful jobs are going to be created. I think I see the writing on the wall… Did you want non-fat, or whole milk with your latte, sir?