Wednesday, November 3, 2010

Morning Update/ Market Thread 11/3

Good Morning,

Equity futures are mute following yesterday’s elections where we of course simply switched flavors of the exact same ice cream. It will obviously mean more difficulty for Obama and it may mean more difficulty for the bankers to push through their stimulus and spending – time will tell, they’re pretty darn good at corrupting so I wouldn’t bet the farm on it. The dollar is slightly lower, bonds are higher, oil is poking through $85 a barrel, and gold is flat this morning.

The break higher in oil is significant as it’s coming out of a bullish flag targeting $95 a barrel:

There is resistance at $87, but beyond that it’s gunning higher. That is real trouble for our economy, more central banker induced folly. Thinking that you can generate inflation in the manner they are attempting will only result in a higher cost of living which acts as a tax on our citizens whose wages are failing to keep pace.

The FOMC announcement today will likely influence the markets more in the short term than the elections. I’m not certain what is priced in or what the reaction will be. What I am certain of is that there will be volatility and that there will likely be fake moves designed to take anyone’s money who is foolish enough to think they can outplay the HFT machines on a regular basis. Paramutual gambling is kinder.

The still worthless MBA Purchase Applications Index rose by 1.4% in the week prior, but refinancing activity fell a supposed 6.4%, pushing the overall index lower by 5.0%. Here’s Econoday:
The purchase index rose 1.4 percent in the October 29 week, a second straight gain yet still well behind two steep declines in the prior two weeks. The refinance index fell 6.4 percent for its third straight decline. Rates remain at record lows, at 4.28 percent for 30-year loans.

The Challenger Job Cut report came in very close to last month showing 37,986 mass layoff notices.

ADP estimates that for the month of October there were 43,000 jobs created, this is a large increase over September when they estimated a loss of 39,000 private payroll jobs. They also revised that figure higher to only a -2,000 loss figure. Personally I give the ADP report little credence as it rarely reflects what is reported by the BLS. Still, this report is used by the market to set expectations for the Employment Situation Summary that will be released this Friday. My take is that expectations are again too high for this report, largely due to the fact that October is not a month that the BLS typically adds large quantities of Birth/ Death model faux jobs.

It will be interesting to see what happens with the data after the election and QE announcement is behind us. Yesterday it was learned that the Social Security Administration erred in their calculations of income levels across the nation. They claim this overstatement error was the result of adding $32.3 BILLION onto just TWO of the top 74 wage earners in the nation! This supposedly takes that group’s average earnings down from the widely reported $500 million plus, all the way down to “only” $84 million per. Okay… so how do you make a multi-billion mistake on just two people’s incomes? How accurate is the rest of their data? What effect on supposed economic reports will this error have? Did you note that the error came just in front of the elections? How convenient. And so I am left to ponder what is the angle? Would wages have plummeted even further and that was not acceptable to report? Will it influence other data? You bet it will, and so we’ll have to be patient and see what comes out in the wash now that the election is behind us. My bet would be that the data will mysteriously begin to sour.

The market has been moving at the mercy of the currency markets. Dollar down, stocks up. We’re at a juncture at this time, for sure. The question is which direction in the short term? Again dollar down promotes increases in commodity prices, that is sending oil well beyond the danger mark of $80 per barrel. The economy is backed into a corner from which there is no escape within our debt backed money box system. If they QE the economy will be in trouble from rising price and wages that can’t possibly keep up, and if they don’t QE, then the forces of deflation will work their magic at restoring balance as they just did with the elections. Thus I think the most likely outcome from today’s meeting is to QE smaller than expected or in increments, but it will contain MUCH jawboning about how they will monitor and ACT IF NECESSARY. This is nothing but lip flapping, the proof will be in the actual quantity and I’ll bet they will make it difficult to determine how much QE they are actually doing or are going to do (and I believe they are doing FAR more QE behind the scenes that they are not admitting to).

The SPX finished yesterday right on its 200 Week moving average. The McClellan Oscillator moved back to a positive reading, however all the divergences are large and continue to grow. Over the past couple of days I’ve read a couple of good articles on equity valuations. The best comes from Doug Short on how The Q Ratio Indicates a Significantly Overvalued Market.

As you look at the charts in that article note how valuations calculated by this means are approximately in the same area as valuations were prior to the market decline in the year 1929! And it shows you just how out of whack valuations were in the year 2000.

Other market pundits discuss the “positive” earnings of late and they theorize that the market will continue to climb as the earnings remain in positive territory. These are the same people who didn’t see the overvaluations in 2007 and they also thought that subprime would be contained! What they fail to see is that the reported earnings are based upon accounting fraud across the entire spectrum. When the fraud is called out, as it was in 2007 when FASB demanded mark-to-market, then the market tanked.

So, where we are now is simply waiting for the day that the fraud is called out again. And it’s coming because nothing was ever solved in the first place.