Morning Update: Market Thread 6-10-2009

Futures are up sharply this morning with the /ES just above the 950 level.

Yesterday’s action produced the third “spinner” in a row which actually looks like a bullish pennant on several of the indices. The targets of those pennants are pretty high, the one on the SPX is worth about 40 points, but the one that’s most interesting is on the Transports.

I haven’t talked about DOW theory lately, but when the DOW recently made a new minor high (about 20 days ago), the Transports did not. That set up the possibility of a non-confirmation of DOW theory. It looks like today we’ll get that confirmation, so don’t be surprised when you hear the bullish comments later. Neither the “Industrials” nor the Transports have made new significant highs.

Yesterday’s action netted a very small movement in the McClelland Oscillator, so I expect today’s price action to be big – and the futures are indicating that the direction will be up. I would not get in the way of it if you are short, even though there are unresolved negative divergences in the market and most historical breadth indicators are at least one standard deviation above the norm.

So yesterday the Supreme Court decided not to hear the bondholders and is going to allow Chrysler and Fiat to proceed outside of the rule of law. Guarantee you that this Obama Central Banker Administration was behind that, 100%. NO RULE OF LAW. We truly are becoming Zimbabwe.

So people in the equity markets, for now, see that the government is still willing to do anything and everything to launder money and get it into the hands of those who mistakenly hold way too much debt. This action subverts the bankruptcy process, the laws that are on the books, and the long term result will be that it will drive capital out of the country. They can print dollars and more dollars, but the holders of capital will not build factories in the U.S. and hire American workers, they will take their money and go elsewhere. As if they weren’t already, and that is a real problem for sustaining any REAL growth or even maintaining the level of economic activity we have.

Meanwhile we issue more and more debt… $150+ billion of it this week alone! That’s $7.8 TRILLION annualized. And how is the bond market responding? NEW LOWS on the long end, the collapse of the bond market continues and interest rates are going up.

And what effect does that have?

According to Econoday it has the following effect on MBA Purchase Applications:

Interest rates are soaring, offsetting low home prices and buyer incentives and making for little change in MBA’s purchase index which came in at 270.7 in the June 5 week. High rates have been turning back the refinance index which fell once again, down 12 percent to 2,605.7. The average 30-year fixed mortgage jumped 32 basis points to 5.57 percent. High interest rates, the result of investor concern over inflation, threaten to scuttle the housing recovery. Next week will see the housing market index on Monday and housing starts on Tuesday.

That’s nice.

But management at Home Depot is smoking the greenshoots that are clearly fertilized not with the natural gas based products they sell but with the more natural variety of fertilizer that comes from the bulls… that would be bullshit.

Since their sales the past couple of months momentarily stopped cliff diving, they took the liberty to raise their forecast. But get this… the previous forecast was for a decrease of 7% in ’09 and now they are saying level to -7%! Ha, ha, that’s really pinning it down, a 7% range! Now that spring is coming to an end and interest rates are rising my money would be betting they finish the year much closer to down 7 than to level. Stock way up pre-market.

And today we learn that both imports and exports CONTRACTED further in the month of April. This is a direct DIVERGENCE FROM THE EQUITY MARKETS which climbed nearly 10% that month. Here’s what Econoday says about International trade for April – the actual trade balance came in at $-29.2 billion:

The U.S. trade deficit in April worsened as exports fell faster than imports. However, there is a glimmer of hope in the import detail. The overall U.S. trade gap grew to $29.2 billion from a revised $28.5 billion deficit the prior month. The April deficit was worse than the market forecast for a $28.5 billion shortfall. Indeed, worldwide demand contracted further as exports fell 2.3 percent while imports slipped 1.4 percent. The widening in the trade gap was seen in both petroleum and nonpetroleum components. The petroleum deficit widened to $15.0 billion from $14.5 billion in March. Meanwhile, the goods excluding petroleum gap grew to $23.9 billion in April from $23.2 billion the month before.

The fall in exports was led by a $1.3 billion drop in industrial supplies, followed by a $1.2 billion decrease in capital goods excluding autos. Consumer goods exports slipped $0.5 billion while the foods, feeds & beverages component rose $0.3 billion.

Imports dropped largely on $0.9 billion less in capital goods excluding autos. Industrial supplies imports fell $0.7 billion despite a $1.0 billion jump in the crude oil subcomponent. The auto component and the foods, feeds & beverages component edged down marginally. The good news, ironically, is that consumer goods imports rose $0.4 billion after a $0.6 billion gain in March. While demand for capital goods and manufacturing inputs is down, the higher import levels for consumer goods suggests that businesses believe that the consumer sector will be rebounding in coming months.

Today’s report is not good news for equities as traders will likely focus on the drop in exports which will add to weakness in manufacturing. But the silver lining that many will likely miss was another gain in imports of consumer goods. In currency markets, the wider gap should weigh on the dollar. On the release, interest rates firmed.

No, we cannot continue to produce nothing and buy foreign goods with printed phony money forever. The day of reckoning is here. Printing will not forestall for a minute the inevitable outcome. To the contrary, it will hasten it.

This rally off the lows has been and still is SICK, SICK. No meaningful correction STILL. That is not normal, nor is it healthy. The further equities run from here, the worse the bond market gets, the higher interest rates go. Those buying into this rally are in for a world-class historical lesson – when the levee breaks.

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