Mix signals in the data yesterday between inflation and housing starts – causing concern, not that we are coming to a bottom – but the ability for the nation to rebound quickly or get back on track as the more optimistic forecasts predict. Certainly we are seeing some selling pressure and the question on everyone’s lips is this a buying opportunity or has momentum lost steam. Certainly we have had a fantastic run, one to market down in the history books. The problem and ironically (as per the previous times we have seen a similar rally) is that the fundamentals look rather weak. It’s as if the market rallied without revenue’s in mind and now all of a sudden paused and said, oh yeah the consumers were not on board.
____________________________________
CPI – no inflation?
The CPI (consumer price index), crept up less than expected. While some may point to it and say “See – we need not worry about inflation.” It is not the past (which is what CPI reports), nor the present, but rather the future that one must prepare for. A small creep up or no creep up – doesn’t mean that it will not happen. You may also know that I wrote a essay on the CPI and government data – so I give the data a more critical, if not skeptical eye. No doubt that commodity prices are rallying – look at oil, or just go to the gas station. Same is true with food.
But it is the dollar and U.S. treasuries that cause the biggest concern – it is the faith in the currency that can strike at the very heart of inflation. That is the most important gauge of all – we earn dollars and we spend dollars – all true. But this nation is not self reliant. We consume the world’s resources – not just our own and thus we must convert our money to buy those resources.
Bloomberg: CPI Report http://www.bloomberg.com/apps/news?pid=20601087&sid=a7monBTRDAdQ
My Essay: http://marketpreview.blogspot.com/2008/01/governments-modest-proposal.html
Shadow Statistics: http://www.shadowstats.com/
_______________________________________
Fed confused?
What is the Fed to do? They have are printing money to buy treasuries (debt), trying to keep rates low via “quantitative easing”, made speeches about being “strong dollar” people, and have pretty much used every tool in their tool box. The problem is that bonds continue to slide and the rates go up. The trickledown effect has seen the 30 year mortgage rates rocket 100 bps in a few weeks. The Fed’s off balance sheet liabilities are guestimated by Bloomberg to exceed $8 trillion and Bernanke had just warned Congress to stop spending and get this deficit under control (he can’t continue to print money).
The problem is not finding a bottom – we all pretty much agree (bulls, bears, Democrats, and Republicans) – that a bottom will be at hand soon (that is the simple math – there are only so many jobs and so many people – so you can only fire a finite amount of people). The data has shown that it is slowing down and a bottom is coming. But that is not the problem – the problem is WHEN DO WE GROW and HOW FAST?
But the Fed has a bigger problem – how do they reign in all the money they injected? When they figure that out the second two questions is How Much and How Fast? It’s a bigger problem than the Fed can handle alone, because the Fed has lent our government (treasury) billions of dollars – so there is a little concern about how fast the government can pay back the Fed.
If we look at this very simply, the Fed is the Bank and the Treasury is a business that has just taken a massive loan. The Bank is now concern, because it gave them this loan predicated on their ability to pay it back. But the company is spending MORE money than it has and needs to borrow even MORE money. See the company is basing their futures on two things – current revenue (from the tax payer) to help pay off the loan and future growth expectations (GDP growth) that is rather optimistic. Now the bank is saying you got to STOP spending and need to start thinking (seriously) about how to pay back what you have already borrowed.
Now the bank is concerned, not just about the company it lent money too, but they too have creditors they rely on (foreign central banks) – who are saying – you are over extended and you are continuing to loan money to a company that is losing revenue and their growth expectations are not realistic. If you don’t stop we will pull our credit!
Of course my simple view is not the whole picture – there is some serious incestuous relationships between the Fed and Treasury, the foreign central banks have their own problems but also don’t want to be married to this ongoing problem either – but I think you get the picture.
So – it’s back to repeating their FOMC mantra, “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” – meaning – they are going to continue to print money as the government continues to spend.
I guess it is really in the hands of China and their brethren – rather than are Fed. I guess Bernanke and Geithner need to do another road show to China and they must keep Obama from making any negative remarks towards China (like “China’s currency manipulation”).
What else is there to do.
http://www.bloomberg.com/apps/news?pid=20601087&sid=arWqPRMOr14A
_____________________________________________
Futures Pre-market
The futures got off the mat a little with what seemed like inflation at bay – but gave that up quickly. Market looks flat to mix opening.
______________________________________________
Support / Resistance
As we fought for a week at Resistance we are very quickly back to short-term support.
INDU 8500 / 8750 (Is 8500 a buying area – today will be the day to see.)
NDX 1400 (1450) 1500 (I think 1450 is more of a pivot point – we could see action either way – it’s market perception today.)
SPX 900 / 950 (Just off the 900 level, is it a support buying opportunity ?)
RUT 500 / 540-550 (We are right there – a crack below 500 is not a good sign – watch the close.)
_______________________________________________
Conclusion
There is some political volatility in the air and when mixed with economic concerns – spells big concerns. Iran’s vote and instability, North Korea weapons testing (and China’s relationship with them), Healthcare reform looking to top 1 trillion, new regulations and new government agencies to enforce new regulations. I would say we are not going to see the summer doldrums we usually expect to see – something is going to heat up and if we recover from something quickly and favorably that will be positive for the market, if we waver and things get messy that will be negative.
VIX shot about 30 – that’s a clue to get your hedge on if you don’t have it on.
No comments:
Post a Comment