Wednesday, January 5, 2011

Morning Update/ Market Thread 1/5

Good Morning,

Equity futures fell overnight and are struggling to get back to even on an overly optimistic ADP Private Payrolls report. The dollar is much stronger, bonds are weaker, oil and gold are both adding onto yesterday’s large losses.

I keep seeing and hearing how the economy is improving, the economy is improving! But if that’s truly the case, then when is the liquidity going to be pulled? When do we stop POMOing every single day? Not to mention when and what happens if interest rates return to even middle-run historic levels? Uh-huh. The patient, I’m sorry to report, is still in critical condition living only on life support. Pull the plug on the support and then we’ll see what condition the patient truly is in. Mark assets to market and the patient dies instantly. The rest is simply talking about what color the flowers are going to be at the funeral. When this patient dies, it will most certainly not be unexpected, so if you haven’t got your grieving out of the way, you are behind those who understand how this cancer has metastasized.

The hypocritical Mortgage Banker’s Association says that Purchase Applications fell .8% in the prior week. Remember, they no longer report base numbers but we know that applications are very near all-time historic lows… still. Here’s Econoday:
Purchase applications slipped 0.8 percent in the December 31 week, only slightly offsetting a 3.1 percent gain in the prior week. Despite the prior week's strong gain, purchase applications were mixed during December, offering no better than flat indications for home buying activity. Refinancing applications rose 3.9 percent in the latest week vs a 7.2 percent drop the week before. The composite index rose 2.3 percent vs a 3.9 percent decline in the prior week. The average 30-year mortgage is back near five percent, up nine basis points to 4.93 percent.

The Challenger Job-Cut Report came in at 32,004 for the month of December, this is down from November’s 48,711. Remember, this is for the month of December, and it is for corporate layoff announcements only, not governmental. The private sector has been slashing jobs for at least three years, the government stepped in and overextended themselves and now it is the government that is in must contract mode, and we’re seeing that in the jobs numbers. Here’s Econospin:
Fewer layoffs are being announced, in fact the fewest since June 2000 according to Challenger's count which fell to 32,004 in December vs November's 48,711. The drop confirms improvement underway in jobless claims where fewer are receiving benefits. Whether fewer layoffs, however, are corresponding to new hiring will be answered in Friday's employment report.

It is the ADP report that sets market expectations for Friday’s report. It is notoriously wrong, just flash back to the past couple of months where ADP was overly optimistic and it incorrectly set market expectations higher. For December ADP is claiming that 297,000 Private Jobs were created, a leap above the 93,000 that were supposedly created in November. This caused a huge ramp in the futures, a large rise in the dollar, and a large drop in the price of bonds. Here’s Econoday:
ADP is calling for a gigantic 297,000 surge for December private payrolls, a gain that is far outside high-end expectations. The dollar is moving higher as are interest rates in reaction to the estimate.

What no spin? No “the economy is saved?” Very disappointing, I know they can spin better than that! Personally, in years of watching these reports I have found that the ADP report just doesn’t equal what the government propagates so I’ve always been puzzled when the market reacts to this report. When guessing what the Bureau of Labor Statistics will do I find it more helpful to look at the size of the prior year’s Birth/Death Model adjustments for a guide – however, keep in mind that last month they announced changes to this model. But if this December is anything like last year’s, there will be a medium sized addition due to this very incorrect model that they used last year to add 25,000 phantom jobs. Last month was a negative month in which they made corrections, and note that the large corrective month comes next when the numbers for January are reported - January will likely disappoint:

Thus I would expect that December’s report will indeed show improvement and that the number may be fairly close to the consensus number which is looking to see 140,000 Private Payroll Jobs added. Of course that number is meaningless as well, but it’s what we have.

The Non-Manufacturing ISM is released at 10:00 Eastern this morning.

There were many hammer candlesticks created by yesterday’s market action including a large top-like hammer on the XLF and an inverted hammer on the VIX. In a non-POMO market those would need to be taken seriously as a possible reversal indicator, but in this holographic market I certainly wouldn’t bet the farm on one actually occurring. Prices are still rising in what appears to be a wave 5 formation, part of a large rising wedge, divergences aplenty.

RIP Gerry Rafferty, age 63: