Yesterday we did not get that rebound up to those resistance levels and the trading day saw pressure throughout the session. It seems to no longer be about the recession slowing down, but more about the recovery. The concern is how fast the recovery will be, traditionally after a recession we see a 4 to 6% growth rate as credit and consumer spending picks up, drives an increase in revenue, that drives an increase in hiring, and at the end of the day profits for the company (and shareholders). But that is not what we are seeing and it really seems to boil down to the consumer level – when will they start spending - a lot of that has to do with credit and their propensity to spend when (and if) credit is available. There no doubt is some shell shock and while savings and paying down debt is a good thing, savings doesn’t grow an economy – which is what we need to see growth so the nation (our government) can start paying down their debt.
No doubt that the Fed and Treasury are concern and I have faith that they’ll have a plan to reel in the debt, but that plan is predicated on consumers, their spending, and jobs. So while the plan might be the best plan, we now need to wait to see if the consumer can get off the mat. The longer we wait for the recover – the more concern people will become.
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Housing (The good with the bad)
Some good news is that the housing starts and permits expanded in May by 17% to an annual rate of 532,000, up from 454,000 the prior month. Permits also rose to an annual pace of 485,000. But on the other hand builders continue to face a challenge from excess inventory and foreclosures and delinquencies are still rising. Additionally mortgage rates have been surging and is now up to 5.57 – matching the increasing rates in the treasury market.
The builders, while breaking new ground face lower revenue and higher margins (commodity prices). As they try to get off the mat – it is the competition in existing inventory and now higher rates that could make this a one-two month anomaly. One analyst on Bloomberg suggested the second quarter saw a rise in consumer confidence and possibly an early jump into picking a bottom in housing, but with the increase in rates and the excess inventory, those investors may not see the returns for some time. One real estate investor mentioned it was a hedge against inflation.
The good news about the starts being up – did send a small spike up into the futures in the pre-market
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BRIC looking into each other
The BRIC (Brazil, Russia, India, and China) had voiced their concerns, stepped into the IMF for bonds, and now are talking about buying each other’s debt to diversify out of the dollar. The question remains: 1. Do they continue to purchase dollars at the same amount, 2. How do they get out of U.S. bonds – let them expire or sell them. Those two questions will have a big impact on the interest rate, inflation curve, and dollar strength/weakness.
It is a story we much remain focused on: http://www.bloomberg.com/apps/news?pid=20601110&sid=a3VqQW.OiRqY
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Futures Pre-Market
We saw a small pop, up from flat, on the housing starts – but their remains questions. If the spread remains expect a positive opening.
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Support / Resistance
Last week was the fight at resistance and Monday the sellers won and we had a pull back. Is it a buying opportunity and a rally back, or a place to pause? Note all the indices are pretty much on that 20 day moving average.
INDU 8500 / 8750 (The opening doesn’t seem to be indicating either way – watch the close.)
NDX 1425 / 1500 (We almost filled the gap.)
SPX 900 / 950 (Right in the middle)
RUT 500 / 540 (Just off the bottom.)
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Conclusion
How long are we going to hear about “Green Shoots” – that can’t be “Green Shoots” forever – they need to grow into something – flowers or weeds? I wonder what the “green shoot” talk timeline is – when people become sick of hearing “Green Shoots” and want to know WHAT those plants are that are growing. It is rather silly – but there must be a psychological time line were we can only hear the talk so much before we need to see something. It’s like the “Strong dollar” talk – you hear it over and over, but then you just see the dollar continue to lose ground over time.
Perception and psychology is very important, no doubt. Obama has done a fantastic job selling hope and optimism, but that does need to turn into results. And all that recovery talk is not showing any results and not that it should. A recovery takes months if not years – we should expect to see it in weeks, but the market moves in a knee jerk fashion and expects results NOW. We live in an instantaneous society – and that creates short-term knee jerk reactions (both positive and negative). We are perception reactionary nation, rather than analytical.
Stay frosty.
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