Friday, December 10, 2010

Morning Update/ Market Thread 12/10

Good Morning,

I’m still getting caught up and am working from secondary computers, so I’ll keep this short and be back to normal posts on and off next week.

Equity markets are higher this morning, bonds are lower despite being below the lower Bollinger (interest rates higher), the dollar is higher, oil is about even, and gold is lower.

Not much has changed, obviously, from last week. The push to extend the Bush Tax cuts is not turning out to be the done deal that the markets assumed earlier this week. Should those cuts not be extended it would be negative for the markets in the short run, and should they be extended it will be negative for our deficits and thus negative in the long run. You can’t fool Mother Nature or mathematics.

Of course there’s been no real cure for Europe either. That’s because the central banks want to “cure” a debt problem with more debt – just debt of a different flavor. That will never work and is laughable not only because it’s like watching a child stand on a roof flapping his arms thinking he can fly, but mainly it’s ridiculous that the people still haven’t thrown the bankers out on their collective rears. Did I mention that the Euro is going to fail in its present form? It already has… Same goes for the dollar, same goes for the Yen.

Interest rates have shot higher over the past couple of weeks with the ten year rising from 2.3% in October to just a fraction under 3.3% today. That’s a very sizable move, and when you think about it, it means that the cost of borrowing in that time frame, which mortgage rates are tied to, just rose by a whopping 43%! What’ll happen to the housing market once higher rates shift into the market? Nothing good.

And speaking of nothing good, that’s pretty much what Bank of America is up to… let’s all pretend that the paperwork is legal and that the systems have been fixed… what a joke. Again, there are no adults, our regulators and political system are failing us in letting the banks walk all over state law as well as the people of the United States:
NEW YORK ( -- Bank of America said Friday it was ending its hiatus on foreclosure sales, and promised to get its act together after a series of sloppy home seizures prompted the bank to back off and re-examine its process.

"We have identified areas of our process that can be improved and while we make these improvements, it's important that we move ahead with efforts to reduce the number of abandoned properties across the country," said Barbara Desoer, president of Bank of America (BAC, Fortune 500) Home Loans, in a statement. "The properties can drag home values in neighborhoods and slow the eventual recovery of the housing market."

The bank said it plans to proceed with 16,000 foreclosures this month, though it will observe a "holiday suspension" of sales and evictions from Dec. 20 to Jan. 2. Freddie Mac (FMCC) and Fannie Mae (FNMA) have announced a similar holiday freeze.

It’s not that foreclosures are necessarily a bad thing, the housing market does need to clear, but simple fairness dictates that if people can fail and be forced out of their homes, then banks should also be allowed to fail and be kicked out of their homes! This is no small point, this is all about one of those pesky natural laws – when the people see the rule of law being applied inconsistently then eventually those abusing will pay the price. The problem with foreclosures currently is the legality of the way in which they are proceeding and how the rule of law has been subverted beginning with the creation of MERS.

Meanwhile the central banks have created massive bubbles in everything, not just housing. Now China is still attempting to cool their bubble:
Dec. 10 (Bloomberg) -- China ordered lenders to park more money with the central bank for the third time in five weeks to counter the threat from inflation after November’s lending and trade surplus topped analysts’ estimates.

Reserve requirements will increase 50 basis points starting Dec. 20, the People’s Bank of China said on its website today.

Policy makers refrained from adding to October’s interest- rate increase, ahead of data tomorrow that may show inflation accelerated to the fastest pace since July 2008. The People’s Bank of China has lagged behind counterparts from Malaysia to South Korea and Taiwan that boosted rates earlier in the year as capital flowed into the region leading the global recovery.

An interest-rate increase would be “a more potent weapon” and is likely this weekend, said Shen Jianguang, a Hong Kong- based economist at Mizuho Securities Asia Ltd.

Higher interest rates soon? The holders of debt are already reading this and moving – this is very significant to the markets and to the way in which capital moves.

Our International Trade Balance declined to “only” -$38.7 Billion in October. That is down from -$44 billion and below consensus. Of course Econoday never met a report they didn’t think was positive, and this is long term positive, but a contracting trade deficit for us means that the credit bubble is likely contracting and overall means an economy that is still pulling in. Keep in mind that when we talk trade, it is measured in DOLLARS, and thus reading import and export statistics and thinking, like Econoday and most economists, that goods and services are actually increasing or decreasing is a big mistake as what is likely a bigger mover of these numbers is the changing value of the currencies in which they are measured:
It is good news all around. The deficit is down as exports are up, oil imports are down, and nonoil imports rebounded moderately. The overall U.S. trade deficit in October shrank to $38.7 billion from a revised $44.6 billion shortfall the month before. The October gap was less negative than analysts' projection for a $44.0 billion deficit. Exports improved, jumping 3.2 percent, following a 0.5 percent rise in September. Imports declined 0.5 percent after slipping 0.7 percent the prior month.

The narrowing of the trade gap was primarily in the petroleum gap which dropped to $19.1 billion from 21.7 billion in September. On the boost in exports, the nonpetroleum shortfall also shrank-to $31.0 billion from $34.1 billion the prior month.

Nonoil goods imports in October rebounded 0.4 percent, following a 1.2 percent decrease the previous month. The comeback suggests businesses are expecting the consumer sector to remain relatively healthy.

By end-use categories, the increase in goods exports was broad based but was led by a $2.6 billion boost in industrial supplies with foods, feeds & beverages up $0.7 billion. Also rising were automotive, up $0.4 billion; capital goods ex autos, up $0.4 billion; and consumer goods, up $0.1 billion. The capital goods number was held back by a $0.4 billion drop in civilian aircraft exports.

The decrease in goods imports was led by a $1.7 billion drop in industrial supplies with the crude oil subcomponent down $2.3 billion. Also declining were capital goods ex autos, down $0.9 billion, and foods, feeds & beverages, down $0.1 billion. Consumer goods imports rebounded $1.3 billion. Automotive imports were flat.

The latest trade report is good news for manufacturers. Demand overseas is holding up nicely. And businesses may be giving the consumer sector an upgrade and vote of confidence with the rebound in imports of consumer goods. Businesses apparently expected these goods to not sit on stockroom shelves.

On the news, markets were little changed as equity futures remained up moderately.

Yes, a lowering trade deficit is good in the long run, but this report is not a good short term read on the economy. Oil, for example, is measured in dollars, not in barrels when counted as an import. Well, oil during the month of October was pretty steady, rising from $79 a barrel to $81. Thus, if the price of oil went up, but imports fell, what does that tell us about demand? Demand isn’t necessarily holding up, it only appears that way because you’re measuring things that have become more expensive priced in dollars! This report tells you exactly NOTHING about the real number of goods and services sold, especially when your measurement of inflation is broken.

And in this report you will find exactly what we are actually importing and exporting, it’s called Inflation! For the month of November, Export prices jumped 1.5%... in one month! And that’s by our broken measurements, what was it in reality? Year over year Export prices are up a whopping 6.5%! That’s the kind of math that can get away from you in a hurry, those numbers are far too big to be sustainable. Import prices also rose, up 1.3% in the month – here’s Econospin:
Import & export prices jumped sharply in November, pointing to pressure for next week's producer and consumer price reports. The headline import price increase of 1.3 percent is the largest since November last year. Pressure is centered in oil-related products with petroleum products up 4.1 percent in the month. Import prices for industrial supplies jumped 3.2 percent on top of a 3.0 percent jump in October. Excluding petroleum in the industrial supplies component, import prices rose 2.2 percent and show a third straight rise, at 2.8 percent, for durable products. Some of this pressure is appearing in finished goods, at least for consumer goods where import prices rose 0.3 percent, a gain offset in part by the prior month's 0.5 percent decline. Country data show price pressure coming from especially Latin America and Canada.

Higher food prices also pressured import prices and are the central source of pressure for export prices. Export prices jumped a very sharp 1.5 percent for the largest increase since July 2008. Export prices for foods/feeds/beverages jumped 6.6 percent in November -- that's a one-month increase following a run of low to mid single digit gains in prior months. U.S. exporters enjoyed a 0.4 percent price rise for finished consumer goods following a 0.6 percent gain in October. Prices of capital-goods exports rose 0.3 percent.

This report reflects inflation underway for oil and food prices. Oil prices, now near $90, have increased about $15 since the Federal Reserve first announced in late September its quantitative easing program, a program that has raised the floor for commodity prices.

And that’s exactly why “Quantitative Easing” (yes it IS money printing) only masks reality in the short run, but makes the problems FAR worse in the long run. The real problem is DEBT… our money system is based in it to the favor of the bankers and to the detriment of the people. Nothing is fixed until you fix that relationship and clear the debt saturated condition.

Consumer Sentiment for us non-insiders is released at 9:55 Eastern this morning.

Regarding the markets, it appears to me that the move in bonds is getting long in the tooth, as is the move up in equities. We are in a low volume environment and just drifting in wave 5 for now.

Thank you to all who kept the market thread alive over the past couple of days. As I settle in and we get past the holidays we’ll start to get a better handle on the markets.