Wednesday, December 15, 2010

Morning Update/ Market Thread 12/15

Good Morning,

Equity futures are lower this morning prior to the open with the dollar up, bonds up slightly, oil down, and gold down.

Yesterday’s price action looks contrived to me. The tape is definitely being painted by the players who own the HFT machines, the dark pools, the exchanges, the politicians, everything… of course I’m talking about the central banks – the “Fed.” With most of the market struggling to maintain flat, the DOW Industrials manage to pop up and close at a higher high than November’s to confirm DOW theory. All I can say is that it is most unusual to have a confirmation on a day when all the other indices are struggling. If it quacks like a duck, it’s a duck – contrived.

But in the process of manipulating technical data, the market showed internal stress by producing 113 new lows while also producing 179 new highs. With the McClellan Oscillator negative, this did produce another Hindenburg Observation. We need one more in order to get a cluster and to make the Observation official. Obviously the last cluster did not produce a meaningful decline, but the odds go way up that a meaningful decline is near when Hindenburgs begin to appear. Interesting that this is occurring very near the end of the effective window of the previous cluster. What it says is that the market is unhealthy – there are too many stocks in downtrends and making new yearly lows to support the current price level.

The still hypocritical Mortgage Banker’s Association released its still worthless Purchase Applications Index which fell 5% in the past week, with the Refinancing Index falling .7% - here’s Econoday:
Highlights
The jump in mortgage rates, now at their highest levels in six months, is crimping demand for mortgage applications, according to the Mortgage Bankers Association. MBA's purchase index fell 5.0 percent and its refinancing index fell 0.7 percent. The MBA describes the drop in purchase applications, the first in three weeks, as "sharp" though the level is still near six months highs. The average 30-year mortgage jumped 16 basis points to 4.84 percent. The housing market index will be posted today at 10:00 ET.

While these Indexes may be near six month highs, they are also in the gutter near all-time historic lows. Rising interest rates will punish the home market as debt saturated consumers cannot buy still bubble priced homes with higher interest rates. Thus something must give as rates rise, and that thing in this case is price which still has quite some way to fall to restore traditional relationships between income and debt.

The CPI, another phony statistic, came in at .1% month over month – more tame than yesterday’s PPI report. Remember that PPI leads, CPI follows:
Highlights
The CPI was a little tamer than expected for November as food and energy were not as strong as feared and prices were pervasively soft elsewhere. The overall CPI in November rose a modest 0.1 percent, following a 0.2 percent increase in October. Economists had expected a 0.2 percent rise for November. Excluding food and energy, CPI inflation firmed to up 0.1 percent from no change the month before. The median market forecast called for a 0.1 percent core rise for the latest month.

By major components, energy increased only 0.2 percent, following a 2.6 percent surge in October. Most of the November rise was from fuel oil which jumped 4.2 percent. Gasoline was up 0.7 percent while electricity rose 0.9 percent. Damping these was a 5.7 percent drop in natural gas. Food price inflation increased 0.2 percent after a 0.1 percent rise the prior month.

For the 0.1 percent gain in the core, increases in the indexes for shelter and airline fares accounted for most of the rise, while the indexes for new vehicles, used cars and trucks, and household furnishings and operations all declined. Softness was widespread within major expenditure components.

Year-on-year, overall CPI inflation rose to 1.1 (seasonally adjusted), down from 1.2 percent in November. The core rate in firmed to 0.7 percent from 0.6 percent in October. On an unadjusted year-ago basis, the headline number was up 1.1 percent in November while the core was up 0.8 percent.

The bottom line is that inflation at the consumer level is still quite subdued despite inflation pressure beginning to rise at the producer level and already high for commodities. The November CPI allows or rather calls for the Fed to continue with balance sheet expansion.

On the news, Treasury rates eased with a higher than expected Empire State manufacturing number partially offsetting. Equity futures are down moderately, largely over worries about European sovereign debt.

Any inflation is not sustainable for a money system over any longer length of time. Our CPI is dramatically underestimating Consumer Inflation which is skyrocketing while at the same time there has been deflation in things those same consumers hold as assets. It’s the worst of both worlds, with assets prices falling (except a temporarily trumped up stock market), while the cost of living jumps due to the intentional destruction of the value of our money.

The Empire State Manufacturing Index came in better than expected at +10.6. Here Econoday actually points to the weakness in this report:
Highlights
A solid headline masks softness in the Empire State manufacturing report for December. The index on general business conditions, which is a subjective assessment by respondents, rose to 10.57 to indicate meaningful month-to-month expansion vs October's minus 11.14 which indicated meaningful contraction. The report otherwise shows mild contraction in employment, significant contraction in unfilled orders and little better than a flat month-to-month reading of 2.60 for new orders which contracted severely in October.

Shipments are a plus showing meaningful month-to-month growth at 7.11 and reversing comparable contraction in the prior month. Another plus is a big draw in inventories pointing to inventory rebuilding which is a plus for the production and employment outlooks.

This report, especially the flat new orders reading, sends an uncertain signal for Thursday's Philadelphia Federal Reserve data for December.

The TIC Data for October came in barely net positive at +$7.5 billion. This data from the Treasury has also become unreliable due to all the quantitative easing and swaps that are occurring between central banks. The numbers don’t add up for me, my suspicion is that the Treasury is coving their tracks and that real International flows are quite negative. Without unfettered access to the central bank’s books, we simply cannot know for sure. Again, WHO controls the production of money is so important and we have let the Private banks subvert and take control of the entire system. The Treasury is the one agency that is supposed to be independent and is still a government agency. Yet we let the likes of former GS CEO Hank Paulson in to run it. This is a huge problem and once we got yet another taste of that problem yesterday:
Dec. 15 (Bloomberg) -- Theo Lubke, who headed the Federal Reserve Bank of New York’s efforts to reform the private derivatives market, joined Goldman Sachs Group Inc. to help Wall Street’s most profitable firm navigate the looming overhaul of financial regulations.

Lubke, 44, started this month as chief regulatory reform officer in Goldman Sachs’ securities division, according to a memo obtained by Bloomberg News. The newly-created role will allow Lubke to “work closely with divisional and firm-wide leadership to implement regulatory reform legislation,” the memo said.

Goldman Sachs is hiring Lubke five months after Congress mandated the regulation of the $583 trillion over-the-counter derivatives market, which complicated efforts to resolve the financial crisis. The reforms threaten to cut profits at dealers because they will make swaps prices known to the public. Lubke’s new firm employs a former New York Fed president and has an ex- Fed board chairman as a director. The current president of the New York Fed, William Dudley, also worked there.

“It’s a pattern,” said Charles Geisst, a finance professor at Manhattan College in Riverdale, New York, who has written about Wall Street’s history. “It’s troublesome stuff and there needs to be some regulation so people don’t do it and undermine public policy.”

This absolutely should be illegal. There needs to be a duration of time both coming and going into these positions. Now Lubke will take all his government knowledge and contacts with him into Goldman Sachs. Don’t be shocked to watch him climb the ladder inside of GS, and then later return to head the Treasury. Talk about corrupt… you can’t even call it corrupt since the government and the banks are now quite literally one in the same. All decisions are made on their behalf, the people of this country are simply labor units to feed this entanglement of private banks and “government.”

Industrial Production came in on consensus at .4% growth over the month of November. Again, I remind everyone that most of these figures are first measured in dollars, then converted into index values, and since the value of our money is being destroyed, manufacturing and services may APPEAR to be expanding, when in fact what is actually happening is that the value of the money is being destroyed. Here’s Econoday:
Highlights
Headline production improved on a rebound in utilities output. Also, manufacturing was stronger than expected. Overall production improved in November, rising 0.4 percent, following a revised 0.2 percent dip the month before (originally no change). The November rise equaled the consensus forecast for a 0.4 percent increase.

By major components, manufacturing gained 0.3 percent, matching the boost in October. For other major industry groups, utilities output rebounded 1.9 percent after dropping 3.7 percent in October. Mining edged down 0.1 percent, following a 0.2 percent decline the month before.

Within manufacturing, gains were broad based. The output of durable goods rose 0.4 percent, and with the exceptions of nonmetallic mineral products and motor vehicles and parts, output advanced in all of the major industries. The production of nondurable goods rose 0.2 percent.

On a year-on-year basis, overall industrial production edged down to 5.4 percent from 5.5 percent in October.

Capacity utilization firmed to 75.2 percent in November from 74.9 percent in October and topping market expectations for 75.1 percent. Capacity utilization is at its highest since a reading of 75.4 for October 2008.

The good news is that manufacturing is a little stronger than hinted at by production worker hours. There are at least two positives from this. Manufacturers still see demand as reasonably strong and productivity appears to be healthy. However, today's Empire State survey for December was a little more sluggish but New Year State is not necessarily representative of U.S. manufacturing.

The Housing Market Index is released at 10 Eastern this morning.

Stocks still appear to be struggling inside of wave 5 higher. The Hindenburg reappearance is very significant, betting against them is not wise. One all by itself does produce higher odds of a decline, but two significantly increases those odds. We know that the big players propped up by the Fed have been able to control the markets and send them higher despite 30 months of continuous real people’s money outflows. A bet long this market requires you to believe that the Fed will eventually be the sole owner of corporate stock in America. Really?