Friday, March 11, 2011

Morning Update/ Market Thread 3/11– Tsunami Edition

Good Morning,

Again, my compassion for those in Japan. Nature is amazing and every once in awhile shows us humans who it is that is really in charge. It reminds me of the fact that we can build houses and buildings near shorelines in earthquake zones while ignoring the negative possibilities, but then those black swan events come along and teach us how foolish it is to ignore those possibilities.

The same thing is coming for global markets. We have ignored the math of nature and are building very flimsy paper money markets the world over. Unfortunately, those living the fantasy of paper markets are going to experience such a tsunami, it is just a matter of time in my opinion.

Equity markets are actually close to even at the open, the dollar is down, the Yen is higher, oil is down, gold and silver are down, and food commodities are also lower.

It’s likely that the earthquake initially damages the Japanese economy, but that later on there will be a rebuilding effort that will actually act to stimulate it. This is the pattern that we saw after the Kobe earthquake for example. I also think the initial reaction to commodities may be short lived, and may prove to be the exact opposite reaction as commodities from oil, to rice, and seafood may be very impacted.

Turning back to the U.S., Retail Sales were reported on consensus, rising 1.0% in February which is up from .3% in January. As you read the non-thinking report from Econoday, keep in mind that Retail Sales are measured in dollars. If real inflation is 12%, then it would take a 1% monthly rise to mean that REAL sales are even. Also remember that this report contains huge errors due to substitution bias – that is that it only measures sales at stores that have been open for 12 months or more, those that have gone out of business are simply tossed aside. This is the same exact error that causes people to think that STOCKS rise over the long haul when in fact stocks on a whole do not rise in the long run – they live through a life cycle and eventually die. It is only the indices that rise, and that rise over the long haul is ONLY due to substitution bias. Here’s Econoday:
Retail sales spiked in February on higher auto sales and on higher gasoline sales. But other components were mostly robust. And we got a large upward revision to January. Overall retail sales surged 1.0 percent, following a revised 0.7 percent boost in January and a revised 0.6 percent increase in December. The February posting matched analysts' expectation for a 1.0 percent jump. January and December had previously been estimated to be up 0.3 percent and 0.5 percent, respectively. Excluding autos, sales advanced 0.7 percent, following a 0.6 percent gain in January. A notable part of this increase was price related on higher gasoline prices. The median market forecast called for a 0.7 percent increase. Nonetheless, sales excluding autos and gasoline improved a strong 0.6 percent, following a 0.5 percent rise in January.

The February boost in sales was led by a 2.3 percent jump in sales of motor vehicles & parts with gasoline sales up 1.4 percent. Nearly all other major components were quite robust. Other notably strong components were sporting goods, hobby, book & music stores, up 1.3 percent, and food services & drinking places, up 1.2 percent. The latter is especially encouraging as it is a very discretionary category. Even the price depressed electronics component made a 0.9 percent comeback. The weakest major category was the housing-depressed furniture & home furnishings category, down a monthly 0.8 percent.

Overall retail sales on a year-ago basis in February rose to 8.9 percent from 8.1 percent the month before. Excluding motor vehicles, sales were up a year-ago 6.0 percent, compared to 6.4 percent in January.

Despite price effects, the latest retail sales numbers reflect a strong showing by the consumer. The February numbers plus upward revisions will have economists revising their estimates for first quarter GDP but his time it will be upward. Equity markets firmed a bit on the upward revisions but remained negative over concern about the economic impact of the earthquake in Japan and ensuing tsunami.

Strong showing from consumers? No, what you have are consumers who have no choice but to buy more expensive everything – gas, food, clothing. When the cost of things consumers buy goes up without a corresponding increase in income, then the added expense works as a tax, taking discretionary spending away from consumers. In that circumstance, it will result in an APPARENT surge, followed by collapse. That is what I expect to see given the fullness of time.

Meanwhile, the markets have already broken below support with all the major indices closing below their respective 50 day moving averages. They closed right at, or slightly below, their lower Bollinger bands, so it may take some time to turn those down and out of the way:

The reaction to the tsunami is important – will world central bankers “stimulate” out of fear? If they do, they will mistakenly add fuel to the already raging inflationary fire.

The McClellan Oscillator is very negative – we are still under a Hindenburg Omen and new 52 week lows are beginning to rise. The VIX has broken out higher and now has a point & figure target of 38:

My thoughts on the market are admittedly turning dark. I no longer value technical analysis because I know how subverted the markets have become with the “Fed” and large banks directly playing with them – they ARE the markets as they comprise the vast majority of transactions. Thus the markets are not real, they are simulated and manipulated devises run by the powers who create money from nothing. I think it’s flat out foolish to support such insanity with your own money and efforts. It’s all fraud, all the time. I see no instrument that I consider SAFE. I see a tsunami coming, and it’s going to wash all that false paper away – unfortunately, I can’t tell you when and believe that you should ignore those who think they can. All I know is that the math is impossible, and thus in the big picture it won’t be too long.

I wish I could drag those players out of OUR markets, if I could I would. I know that it’s fruitless to shout GET THE HELL OUT, but that’s exactly how I feel. Collectively we all need to act, and some point there’s going to be a triggering event that stirs us all into action. In the mean time, this tsunami and the interference in the markets has me feeling…