Friday, January 14, 2011

Morning Update/ Market Thread 1/14

Good Morning,

Another lower open this morning with the dollar and bonds roughly level, oil and gold are both lower. It was interesting yesterday to see the dollar plunge and to have oil and gold both move lower as well, something to keep an eye on. I believe this was due to the high inflation read with the PPI yesterday, meaning that high inflation will pressure the “Fed” and their continued QE.

The PPI (producer prices) leads the CPI (consumer prices). This morning the CPI also came in hotter than expected, rising .5% in December, up from .1% in November. Of course a lot of the increase has to do with the hot money pushing up the price of oil, and thus when you remove energy from the equation the “core” rate rose “only” .1%. Keep in mind that this number is one of the most highly manipulated numbers our government produces, failing to capture true inflation:
Headline and core CPI inflation seemed to be on different tracks in December as energy jacked up the overall number while core inflation remains modest. The CPI in December jumped 0.5 percent, following a modest 0.1 percent rise the month before. Analysts had projected a 0.4 percent boost for the latest month. Excluding food and energy, CPI inflation came in at 0.1 percent, equaling the rise for November and matching expectations.

By major components, energy jumped 4.6 percent, following a 0.2 percent rise in November. Gasoline spiked a monthly 8.5 percent, following a 0.7 percent increase the prior month. Food price inflation actually slowed to 0.1 percent from 0.2 percent in November.

As in recent months, shelter helped keep the core rate soft. The index for shelter rose 0.1 percent for the third month in a row. The rent index rose 0.2 percent while the index for owners' equivalent rent increased 0.1 percent. Motor vehicles also helped the core. The index for new vehicles was unchanged in December while the used cars and trucks index fell 0.1 percent, its fourth consecutive decline. Also falling in December were the indexes for recreation, communication, and household furnishings and operations.

Year-on-year, overall CPI inflation rose to 1.4 (seasonally adjusted) from 1.1 percent in November. The core rate, however, eased 0.6 percent from 0.7 percent. On an unadjusted year-ago basis, the headline number was up 1.5 percent in December while the core was up 0.8 percent.

Essentially, headline inflation is seeing upward pressure from higher oil prices. While there has been no consistent upward pattern for food prices, there could be higher numbers in coming months from stronger transportation and production costs. Commodities prices have been notably higher recently.

But core inflation is soft due to weak housing and heavy competition among retailers. In coming months, the Fed likely is going to have to address this issue of two track inflation between headline and core numbers.

Right, this report fails to capture food inflation. Bad government data only extinguishes confidence, it is imperative that our system of reporting economic data be overhauled as I outlined in Freedom’s Vision.

Retail Sales is another data series that is riddled with error. They are measured in dollars and thus in error due to the errors in measuring the CPI, even when “corrected.” They are also subject to substitution bias, that is when businesses close, it fails to account for the lost sales and instead measures only sales at stores that have been open for one year or longer. It would be easy to simply capture total sales from all stores, but that’s not how it’s measured… therefore in times of economic contraction this error is large, as it is now. In this report, Retail Sales supposedly grew by .6% in December, that is down from November’s .8% and it is less than consensus for another miss. For what it’s worth, here’s Econoday:
Retail sales looked good at the headline level for December but there were signs of fatigue by consumers after ringing up the cash registers so loudly in November. Overall retail sales in December rose 0.6 percent after jumping 0.8 percent the month before. Although healthy, the December figure fell short of the consensus forecast for a 0.8 percent boost. Excluding autos, sales were not quite as strong, rising 0.5 percent, following a 1.0 percent surge in November. Analysts had called for a 0.7 percent gain. However, higher gasoline prices played a role behind face value strength. Sales excluding autos and gasoline rose a moderate 0.4 percent after a 0.6 percent increase in November.

Notable components include motor vehicles, up 1.1 percent after a 0.2 percent rise in November. There was a significant swing in general merchandise (which includes department stores). This component fell 0.7 percent in December after jumping 1.1 percent the month before.

Overall retail sales on a year-ago basis in December improved to 7.9 percent from 7.5 percent the previous month. Excluding motor vehicles, sales rose to a year-ago 6.7 percent from 6.4 percent in November.

The bottom line is that consumers front loaded holiday purchases (broadly defined core sales) in November and some softening in December is not surprising. But the softness was modest as sales were still healthy in December even after discounting some price effects. Consumers with jobs are now pulling their weight keeping the recovery going.

On the news, equities were little changed.
In this report it is obvious how destroying the value of our money creates the ILLUSION of growth… gasoline sales, that are measured in dollars and not gallons, rose to help this index gain. If, however, you were to remove that cost that ripples through the entire system, then sales measured in dollars would not show the apparent growth that’s there. Again, by incorrectly measuring statistics, we are only fooling ourselves and creating a false market and false economy. This report is weak even with the induced errors, I guarantee you that it would be negative if you removed them.

Industrial Production is another data series affected by inflation as output is again falsely measured in dollars instead of actual output. In this report it is again energy, but in the form of utilities, that makes it appear stronger than it actually is. The headline number “grew” .8%, this is an increase from November’s .4%, and is above the .5% consensuses. The utilization figure is more reliable and is still at depression era levels, coming in up, but only at 76%. That is a horrid level, a healthy number should be 85% or more, and it’s quite obvious that we won’t be anywhere near that level for years:
The manufacturing sector continues to lead the recovery based on December data-but not quite as strongly as suggested by the headline for industrial production. Industrial production posted a healthy 0.8 percent gain, following a 0.3 percent rebound in November. The December figure came in higher than analysts' estimate for 0.5 percent. However, the boost was led by a monthly 4.3 percent surge in utilities output, following a 1.5 percent increase in November. Utilities were up on atypically cold weather.

Nonetheless, manufacturing increased a healthy 0.4 percent after a 0.3 percent rise in November. The latest was softened by a 0.2 percent dip in motor vehicle output. Excluding autos, manufacturing advanced 0.5 percent after a 0.6 percent boost in November. So, manufacturing is still on a significant uptrend. With motor vehicle sales somewhat strong, auto assemblies are likely to pick back up soon.

For the remaining major industry group, mining rebounded 0.4 percent after declining 0.7 percent in November.

Overall capacity utilization continued to improve, rising to 76.0 percent in December from 75.0 percent in November. December's figure beat expectations for 75.6 percent.

The bottom line is that while the utilities component has been volatile and led to swings in the headline production number, manufacturing is on a moderately healthy uptrend.

Is auto production strong or not? We keep hearing how well sales are going yet report after report is mentioning that autos are not as strong as expected. Autos, in my opinion, are still in bubble price territory, risen there by creative financing in the very same manner that housing was fluffed into a bubble. Car prices need to come down and financing for them needs to be better matched to income with more substantial down payments and shorter financing periods. Regarding overall production, let’s face it… we simply do not produce much of anything anymore, and that will bite us hard in the end. Our manufacturing capital continues to flee overseas leaving our labor market gutted and doomed to produce only financially engineered paper products. But it’s nice to have our children with college degrees making our coffee for us, isn’t it?

Consumer Sentiment came in much weaker than expected… again. Last month it was at a pathetic 74.5 reading, and for this month it fell to 72.7 against a consensus that was looking for it to rise to 75.0. Hey, you can’t fool all of the people all of the time… especially when they are unemployed or flipping burgers with their $40,000 a year education. Stocks are higher on the release... Welcome to Walmart, would you like fries with that?

Business Inventories are released at 10 Eastern.

The momentum indicators in the market continue to look tired. Divergences are again growing in the daily RSI and Stochastic indicators, producing lower highs while price goes on to produce higher highs:

There’s a large degree correction coming, but it may take a while longer to get rolling.