Wednesday, March 16, 2011

Morning Update/ Market Thread 3/16 – "It's Contained" Edition…

Good Morning,

Equity futures are moving sideways in a triangular formation overnight, indicating that some type of sideways wave is occurring, possibly wave 4 of 3… meaning that wave 5 of 3 may be next. The dollar is lower and very close to falling into new low territory as the Yen strengthens. Bonds are still rising overnight, oil is recovering some of yesterday’s loss, while gold and silver are higher as are most food commodities.

I keep hearing a lot of “it’s contained” type of rhetoric from the media, especially the financial media in regards to the radiation risk in Japan. Statements like, “30 times normal radiation is nothing – it’s not even a fraction of a chest x-ray,” are very misleading because constant exposure to radiation can build up over time versus a one-time instant exposure. Let me ask everyone a question… If you were informed that the town where you live has 30 times higher radiation, would you keep yourself and your family there? I sure as heck wouldn’t, I’d be long gone. Now imagine this happening to one of the largest cities in the world, and then imagine the economic fallout from that, knowing that this is exactly what’s occurring and that it could get much worse.

The captured news media is going way out of their way to calm the sheep. Just remember that GE, the company that built those plants also owns a large chunk of the media. Of course it’s always contained, just like subprime, remember that?

So when Black Swan events occur now, our trick is to talk smoothly (and unrealistically), ignore potential worse outcomes, and then paper it all over with freshly printed money to give the appearance that all’s okay within the totally captured markets – as if the markets have any real meaning to the average person who no longer can afford to participate in them even if they wanted to. Yen printing in response to this disaster now stands at 26.5 Trillion – that we know of.

And our “Fed” announced yesterday that all is improving in the economy and in this way the signal is being taken – by Bloomberg at least – that come June the “Fed” will end QE. Oh, and no mention of events in Japan, not even a warm “our hearts go out to those Japanese “consumers.” But if they do end QE, in my opinion it will be temporary, AND they will continue to add liquidity behind the scenes and in other ways, but it won’t be enough. Not with the math growing exponentially and the entire world saturated in debt. If they stop in earnest, markets will deflate, and thus expecting more QE or whatever their latest shell game is called will follow – just take a look at this nation’s deficits… impossible math is everywhere.

And just look at the results of all this printing. Energy and food to the moon, and even with trumped up numbers, this morning’s PPI is screaming hot at 1.6% just for the month of February – if you annualize that figure it equals 19.2% inflation! But not to worry, according to Bernanke it’s just a momentary blip – in other words, “it’s all contained.” Here’s Econoday:
Producer price inflation remains red hot at the headline level while the core eased from January's spike. Energy and food, of course, jacked up the headline number. The overall PPI inflation rate for February posted at a strong 1.6 percent increase, following the January jump of 0.8 percent. The February increase vastly topped analysts' estimate for a 0.7 percent gain. Both food and energy components were exceptionally strong. At the core level, the PPI slowed to a 0.2 percent rise after jumping 0.5 percent in January. The median market forecast was for a 0.2 percent rise.

By components, food prices surged 3.9 percent, after a 0.3 percent rise in January. The energy component remained under strong upward pressure, gaining 3.3 percent after jumping 1.8 percent in January. The core rate slowed on pharmaceuticals turning flat after a 1.4 percent spike in January and with computers dropping 1.1 percent.

For the overall PPI, the year-on-year rate jumped to 5.8 percent from 3.7 percent in January (seasonally adjusted). The core rate rose to 1.9 percent from 1.6 the month before. On a not seasonally adjusted basis for February, the year-ago the headline PPI was up 5.6 percent while the core was up 1.8 percent.

The headline number will likely raise expectations for tomorrow's headline CPI as both food and energy costs are red hot. The Fed sees these effects on long-term inflation as "likely transitory" based on yesterday's FOMC statement. But the numbers certainly raise the level of concern and may be nudging up the Fed's schedule for unwinding QE2.

This number is far above consensus, and don’t forget that the PPI leads. And food and energy also lead, and thus I do expect the “core” rate to follow in the coming months, despite the fact that incomes are not rising. Rising food and energy without the associated rise in incomes will prove to be costly to the lifestyle of Americans, especially those on the margins.

Meanwhile Housing Starts fell a record amount in February, down 22.5%, while permits, falling 8.2% are also at a record low annual rate. The 479,000 starts in February are far below both consensus and January’s 596,000 which was bad enough as it was:
Housing starts fell back in February after an unexpectedly strong showing in January. Mostly, it was a partial reversal of the earlier spike in the multifamily component but single-family starts weakened significantly. Housing starts in February dropped a monthly 22.5 percent after jumping 18.4 percent the prior month. The February annualized pace of 0.479 million units was sharply lower than the median forecast for 0.560 million units and is down 20.8 percent on a year-ago basis. The February reversal was led by a monthly 46.1 percent drop in multifamily starts, following an 87.4 percent surge in January. The single-family component fell 11.8 percent in February after edging up 1.4 percent the prior month.

January starts were revised up to a 0.618 million unit annualized pace from the initial estimate of 0.596 million.

By region, declines in starts in February were broad based. The Midwest was down 48.6 percent; the Northeast, down 37.5 percent; the West, down 28.0 percent; and the South, down 1.4 percent.

Housing permits declined 8.2 percent in February, following a 10.2 percent decrease in February. Overall permits printed at an annualized rate of 0.517 million units and are down 20.5 percent on a year-ago basis. The latest decline was led by the single-family component which was down 9.3 percent while multifamily permits fell 4.9 percent.

Several factors likely affected the latest starts number which is extremely low. First, January's jump was way above trend and some reversal should be expected. Second, winter months are notoriously volatile and starts may have been hampered by severe weather. Finally, housing demand is still soft and inventories of single-family houses are still high. The bottom line is that housing is still anemic but maybe not as bad as suggested by today's numbers.

Not that I trust these numbers, I do not. Note the wild swings in multi-family units (apartments) – swings like that are never real, they are an indication of a sick reporting system.

Just as a reminder, Option-ARM resets are beginning to ramp fast and furious from now through about October. Look for these resets to pressure upper-end home prices especially as many people will be forced to put their homes on the market this spring and through next year as their payments will simply become unaffordable for many:

Not only were Starts and Permits down, but even the corrupt, conflicted, and morally reprehensible Mortgage Banker’s Association reported that Purchase Applications took yet another header, falling another 4.0% in the prior week:
The purchase index was unable to add to a sharp jump in the prior week, slipping back a week-to-week 4.0 percent against the tough comparison. But the refinance index, due to low borrowing rates, was able to extend its gain, up 0.9 percent in the week. These are data for the March 11 week.

Mortgage rates are more and more favorable as safe-haven investment flows move into US Treasuries. The average 30-year mortgage fell more than 20 basis points in the week to 4.79 percent for a two-month low.

Just to reiterate, the bond market recently fell to major support while the stock market rose – this forced mortgage interest rates up nearly a full percent. Each percent rise in rates equals about 11% less house that a borrow can afford for the same payment. Now equities have put in a top, and money has begun to come back into bonds, temporarily lowering rates slightly. Again, the “Fed” is in a pickle as they have and are spending TRILLIONS in order to artificially buy down rates. If they stop, as some now think, then rates MUST eventually rise, OR stocks must fall – something is going to give.

So, there are still options – does the “Fed” keep up the pretense of THEIR markets? Or, do they sacrifice equities in order to save the debt markets? No, they are narcissists, they want it all, and thus printing will likely continue until all confidence in our money is gone – and thus we see even the trumped up PPI rising to the moon while they pretend that “it’s all contained.”

Just turn American Idol back on and don’t worry – whatever you do, don’t prepare (because if everyone does, the system collapses now instead of later).

The VIX closed well above the upper Bollinger Band yesterday and thus we are set up for a market buy signal once it returns within range on a closing basis:

And for the few who are paying attention to the historic humanitarian disaster in Japan, while you’re distracted with those events, atrocious events continue to occur in the Middle East, and our own politicians use this as cover to introduce new “copyright” laws that would make it okay to spy on anyone downloading copyright protected video on the internet. So, whatever you do, don’t turn off American Idol and take the time to actually read this White House white paper, and surely don’t think about the consequences and possible abuses therein. And absolutely whatever you do, don’t compare these tactics to actual history or tactics actually used by the NAZI administration, or you will certainly be labeled a flake:

White House White Paper

Not to worry, American Idol is on, and as far as I know the following copyrighted video is legal to download… or is it? No matter, it’s surely all contained.