We thought that things were getting better, we had seen consumer confidence was going up and a bottom and “Green shoots” were forming, then we get nailed with more home foreclosure risk and Consumer Confidence falls. The market fell after the news, but we did come off the lows going into the close. The market is now in a range between the support and resistance level as more questions need to be resolved.
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Green Shoots?
Just after it seemed that things were getting better (we had a couple of good months of growing consumer confidence and the housing starts were up), it would seem that the Green Shoots were sprouting. However, I remained skeptical because the U.S. consumer story was not reflecting a positive note (regardless of confidence), jobless rates were still climbing, no new jobs on the horizon, earned income down, and no access to credit. That means that while a stimulus check (or two or three) and a feeling of optimism will not carry the consumer into the End Zone.
Yesterday’s two news stories revisited that issue:
1. Delinquencies Double on the LEAST-RISKY loans: http://www.bloomberg.com/apps/news?pid=20601087&sid=aDkTqrdlECCo
This clearly indicates that the housing mortgage problems is not over yet and equity values continue to decline. AIG also stated that they had increased risk on half of their CDS’s (credit default swaps) just shy of $100 billion on mortgage related securities.
2. Consumer Confidence slips back down to 49.3: http://www.bloomberg.com/apps/news?pid=20601110&sid=aL2GQmLUajv4
I was never totally a believer as to the Consumer Confidence as the sole indicator of market recovery. Sure a poll tracks consumers are confident and that might reflect that their appetite for risk might increase or their fear declining. And I would even go as far as it could help buoy equity values, but it does NOT translate to economic recovery. Earned income, jobs, and credit move the economy – not confidence (which is a measure of perception at best)
So what has become of these Green Shoots? I am still very skeptical until I see the bottom line change, not just confidence or stock prices (which have been living on a momentum rally and optimistic perception on Green Shoots). So far the math is not reflecting the perception – as far as the economic data is concerned.
How do we translate this into trading strategies? Simple, VIX is getting cheap and fear has left the market predicated on perceived Green Shoots! That means if you don’t own some downside protection, it is CHEAP and you better through some on to hedge out those long equity positions. The data is certainly not supporting the perception.
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ADP Payrolls
ADP reported that companies cut more jobs than forecasted in the month of June of a 473,00 drop (economist predicted 395,000), followed by a revised reduction in May of 485,000. Estimates are that job losses will mount with the bankruptcies of General Motors and Chrysler, additionally we saw today the first bankruptcy of the smaller auto-parts suppliers and more are to follow.
Now all eyes are on the Labor Department report, which is coming out early tomorrow (because of the holiday). Expectations are for 363,000 losses.
Talking heads and those spinning the “green shoot” talk are still saying “Employment usually trails overall economic activity.” Let’s keep telling our self that – because seeing more layoffs and no growth doesn’t bode well for the recovery.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aKrjCwnY23L4
Tomorrows Labor number can inject some volatility tomorrow.
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The move to a New Reserve currency begins.
China, Russia, and others have demanded a new reserve currency, controlled by the IMF (International Monetary Fund). They have even offered to purchase IMF debt as an alternative to purchasing U.S. treasuries. The BRIC nations (Brazil, Russia, India, and China) recently meet to discuss this issue and have had several meeting with the IMF. It was only a matter of time before we saw the IMF make the bold move to issue large bond debt to accommodate this demand.
The IMF board looks to approve the authorization of as much as $150 billion of bonds for the first time. The spin of course is that THEY are seeking new sources of funds, but behind closed doors we know the BRIC has been pushing for this. Today they meet and vote on interest rate, maturity and other factors. The BRIC have already pledged to purchase the majority of the debt.
So how does this affect the U.S.? Not good, the deficit is $3.5 trillion and we have seen the Fed monetize (print money) at an alarming rate to purchase Treasury bonds. The IMF new debt product is seen as competition and if this new IMF debt is successful we could lose a vast amount of our credit supply from China and others. Than would seriously put the dollar and U.S. debt under stress. This is certainly not something that we need as we are trying to get out of a economic recession. We could see bonds continue to remain weak and rates go up, something our government cannot afford and means that the FED will have to print even more than it had initially intended.
Keep an eye on the dollar – this could be the catalyst event.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aICtTde_qKVA
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Futures Pre-market
The futures are getting off the mat and are showing a positive gain, following Europe. The ADP report did send a downward jolt when released be it seems to have quickly recovered. Expect a higher opening as the spread is in.
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Support / Resistance
INDU 8250 (8500) 8750 (We fell below that pivot point of 8500 and it looks like we could get back to it at the opening. Tomorrow could prove some serious volatility if we get a surprise in the Labor data. A move to 8250 or 8750 is in the cards – but couple that with the holiday weekend could also mean a wait and see.)
NDX 1400 / 1500 (A wider more volatile band than the narrow based indices. Expect a few of the heavy weights to continue to drive the index.)
SPX 900 / 950 (We did slip, but not below that 900 level, a small pop this morning could get us up to 920 or 925.)
RUT 500! (We came off a little, but still above the 500 level – futures point to a 510 opening.)
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Conclusion
The push of the massive energy bill, with that 300 page amendment dropped in at 3am the morning of the vote, makes me ill. Let’s hope the Senate doesn’t take such action. Healthcare is now on the table and could get a similar push. Why are these large pieces of legislation so concerning to the market and why would I care – simple – it has really nothing to do with saving the environment or healthcare (I am all for those things) – what companies, foreign central bank, and investment firms are watching are the following: Taxes, Tariffs, Fair-trade issues, and most importantly how much will it cost. Ironically several Obama supporters including Buffet are now speaking out against several issues that have been drafted into the legislation. Paul Allen of Microsoft has gone as far as to say that some tax proposals would be such a determent to the corporate earnings that they have seriously considered to relocate the company outside of the U.S. And a story I shared – showed a massive drop in revenue for a state when taxes were raised significantly on the top 10% - who decided to exit the state in droves.
The issues are no doubt important and need to be addressed, but it seems that costs are NOT an issue even worth discussing and that could sink this nation further into debt and push of a recovery even further. Ironically it is obvious as to the deficit and the debt problem (the increasing printing of money and spending) that foreign nations are concerned and have moved to alternative forums of investments (not dollars) and have called for a new reserve currency. But it seems that Congress, Senate, Administration, Media, and the Sheeple of this nation have not woken up to that fact.
We are seriously facing that fork in the road and while government moves slowly and we might not see anything happen quickly, it is the policies today that will outline the future of this nation and the future recovery.
Take heed.
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