Thursday, December 16, 2010

Morning Update/ Market Thread 12/16

Good Morning,

Equity futures are roughly flat just prior to the open, the dollar is down, bonds are flat, oil is higher, and gold is lower.

Yesterday’s action did produce a second Hindenburg Omen and thus we now have a fresh new confirmed Hindenburg on the clock that is valid through Tax Day on April 15th. A Hindenburg has preceded ALL modern stock market crashes, the odds of a crash being a little more than 25%, but the odds of a significant decline are much higher.

While equities are struggling, the bond market has been really on the move with rates rising rapidly. The TNX (10 year) has risen from 2.35% to 3.51% in just the past two months.

While a 1.2% rise may not sound like much, it represents a 50% increase! Fixed rate housing mortgages are tied to the ten year and eventually they will have to rise to cover this increased borrowing cost. But rates are not just rising there, in the municipal bond market there is a blood bath occurring with rates rising significantly which brings down the value of the bonds. Many states and municipalities are struggling – here in Washington State we are facing a $4.2 billion shortfall, the Governor just released the upcoming budget and it contains severe cuts, but there is simply no way they can cover that entire amount without radically cutting back government. One of the State’s measures includes pay cuts for 90% of the State’s employees.

Just a reminder that there is a huge wave of Option Arm mortgages resetting next year - actually the wave has already begun but will peak by the end of 2011. This will further pressure upper end housing, the banks, and the government:

Housing Starts came in at another depression era print of 555,000. This is up from 519k, but it is on consensus and is one of the lowest prints in modern history:
Housing starts posted a nice comeback in November but off of a very weak level. Housing starts in November rebounded 3.9 percent, following a sharp 11.1 percent drop the prior month. The November annualized pace of 0.555 million units came in a little above the market median estimate for 0.550 million units and is down 5.8 percent on a year-ago basis. The gain in November was led by a monthly 6.9 percent boost in single-family starts, following a 2.7 percent dip the month before. The multifamily component actually pulled down on the overall number, falling 9.1 percent after plunging 35.7 percent in October.

By region, the November improvement in starts was led by a 15.8 percent increase for the Midwest with gains also seen in the South and West, up 2.3 percent and 2.1 percent, respectively. The Northeast dipped 2.5 percent.

Permits, however, fell back 4.0 percent in November after edging up 0.9 percent in October. Overall permits came in at an annualized rate of 0.530 million units and are down 14.7 percent on a year-ago basis. The latest decline was led by the multifamily component which was down a hefty 23.0 percent while single-family permits improved 3.0 percent.

Basically, housing is not getting worse-but there is not much improvement either. Looking ahead, not much can be read into the dip in housing permits as the multifamily component is lumpy and volatile on a monthly basis. Until home sales pick up along with household formation (which depends on job growth), starts are going to remain sluggish. But again, the good news is that at least housing appears to have stabilized.

Stabilized? LOL, it can’t get any worse once you’ve gone splat on the bottom. Same goes for Jobless claims where it’s been years now of job losses. This week’s number came in at 420,000 which is stubbornly above the 350k mark, which again shows that the economy continues to lose jobs versus make them – here’s Econoday:
Jobless claims improved slightly to an as-expected level of 420,000 in the December 11 week. This extends a run of improvement evidenced by the four-week average which has fallen for six weeks in a row. The average, at 422,750, is down more than 20,000 from a month ago in what is a positive signal for payroll growth. The four-week average for continuing claims, at 4.186 million, has been falling at 150,000 to 200,000 month-to-month clips to also signal payroll strength.

Note this is a tricky time of year for adjustments and the Bureau of Labor Statistics warns that unadjusted claims will, starting next week, begin to build to an annual peak in the second week of January. Still, claims data continue to signal improvement in the labor market.

First, note that the prior week’s numbers were revised higher by 7,000, and then also not mentioned is that with yet another extension of Emergency benefits (keep the revolution down), there were an additional 143,000 people added to this program in just the past week, although the number of people drawing emergency benefits has been slowly diminishing as many people have been on it so long that they simply fall off the back end and are no longer counted.

The Philly Fed Index came in higher at 24.3 versus November’s print of 22.5. This still shows supposed expansion, but most of recent expansion has been largely due to inventory building, and there are signs of margin compression within this report as input costs are soaring.

The Fed’s balance sheet will be released later today and tomorrow will be the supposed Leading Indicators. Don’t forget that tomorrow is Options Expiration.

Events in Europe have obviously not gone away. China may be on the verge of raising interest rates. North Korea is conducting more military exercises, and all I hear from the pundits regarding stocks and the economy is that there will be no double dip. Extreme bullishness while at the same time there were 89 new 52 week lows in the market that is supposedly roaring. That type of internal discord says that the market, despite being propped up with billions and billions every single day, is getting tired internally.