Dwight’s Dailies


Welcome to Dwight’s Dailies! Here we have in-depth analysis on the stock market and the economy in general.

dwightanderson.blogspot.com

August 26,2014

The dust has settled on Jackson Hole and although Janet and Mario tried to act “balanced” in their speech language between hawkish and dovish, the market knows that the “between the lines” language was actually uber-dovish.  Janet in particular had extreme contradictions in her statements such as:“More jobs have now been created in the recovery than were lost in the downturn

followed by

“it speaks to the depth of the damage that, five years after the end of the recession, the labor market has yet to fully recover

 
and more fedspeak

As an accounting matter, the drop in the participation rate since 2008 can be attributed to increases in four factors: retirement, disability, school enrollment, and other reasons, including worker discouragement. Of these, greater worker discouragement is most directly the result of a weak labor market, so we could reasonably expect further increases in labor demand to pull a sizable share of discouraged workers back into the workforce.

Indeed, the flattening out of the labor force participation rate since late last year could partly reflect discouraged workers rejoining the labor force in response to the significant improvements that we have seen in labor market conditions. If so, the cyclical shortfall in labor force participation may have diminished.

Yellen (once again) is basically admitting that we’re not getting clean numbers from the BLS.  So she resorts to excusing why those numbers aren’t clean…I have to admit, I’m aghast that Yellen would say that one of the reasons people aren’t working in this country is because many have decided to just drop out of the workforce and go back to school.  Even the most uninitiated economist knows that during recessions people go back to school because they lost their jobs and are trying to make themselves more employable.  In addition, she has as much access to baby boomer retirement data as anyone.  I have already shown that older Americans are actually working longer, not retiring sooner.  And I have done extensive research on the rate of baby boomer retirement which shows that we are NOT in the midst of a big surge in age-related retirment.  It is also disconcerting that she would state “other” reasons as a factor without telling us what those are.  Her entire speech was littered with purposeful ambiguity and contradicting statements…which immediately sent up signal flares to the more astute Big Money investors that she really didn’t have concrete indications of economic recovery and escape velocity, therefore ZIRP is NOT going to end “sooner rather than later” and even POMO could be brought back if we have a worst case scenario.  This is all the same hints and intimations that we have gotten from the Fed for years.

In fact, (switching over to the ECB for a moment to solidify the market view of central bank policy), Mario’s “balanced” speech was so balanced that JP Morgan just released a statement that they believe the ECB will ease next week, and that there is a 30% chance they ramp up QE next week, with a 50% chance of QE by year-end.
So much for the Janet and Mario balancing act…no one believes it.  The real data is too bad, and the administrations they have to support stand to lose too much if they don’t keep stimulating the markets.
Speaking of bad data…
Durable Orders printed a record-smashing 22.6% today.  I’ve noted before that DO needs to be taken with a grain of salt, because it’s so volatile month to month, and this month is an extreme example of why.  If we back out Boeing’s big aircraft orders, and look at DO ex-transportation, we actually get a drop of -0.8%, well under the 3.0% expectations.  This is the biggest drop of 2014, and the biggest miss in 8 months.
The Case-Shiller Home Price Index dropped to 8.1% (8.07%), missing expectations.  For the first time since February 2008, all cities showed lower annual rates than the previous month…
The Government (here we go again…) Consumer Confidence Survey printed an astonishing 92.4, which is the biggest, most positive, glorious number since October 2007 – otherwise known as the peak moment of economic and consumer confidence in the past 13 years…The government report IS IN DIRECT AND EXTREME CONTRADICTION WITH THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT SURVEY, which fell to 79.2 and missed expectations when it printed several weeks ago.  Soooooo….based on all that we know about the manipulation by the government NFB (Numbers Fudging Brigade), which consumer confidence number should we believe?  Hmmm, tough call…decisions, decisions…
What’s the point of all this analysis of fudged data and fedspeak?  Well, it confirms that nothing has changed.  That the prediction for SPX 2000 was well-founded.  And that the probability for a Fedamental, Fed-driven, Fed-protected record SPX earnings aggregate in Q4 (over 32 and about 2 points higher than Q2) is still as intact as it was before Jackson Hole, and will very likely continue intact because of ongoing bad economic data and bad policies that will perpetuate the bad economic data through the end of the year.  This means my probability for SPX 2100 before year-end is still on the table.
Today’s chart of the SPX (see chart) is shows what is likely the near-term completion of yet another dramatic, Fed-driven V-Bottom.  We continue to get much higher occurrences of extreme bullish price behavior like V-Bottoms, bullish turns-in-space after key support breaks, bullish Broadening Patterns combining short-term patterns of both V’s and turns-in-space, and other lower lows to higher highs variants.  The long-term QE3 channel is still intact, and the SPX is well above it’s momentum moving averages (20dma, 50dma).  The round number of 2000 is a natural consolidating area, so a near-term digesting could go on a little in this area.  Since the V-bottom put the nearest swing low so far away (yet again, thank you Fed), we have to look at the 50dma and 50% retracement of the V as the key pivotal zone.  That is currently around the 1965 area.  And once again, I have a hard time believing we will get a big bearish breakdown so long as the Fed keeps the market stimulated.  So the probability of a significant bearish move is pretty low right now.  It’s more likely that a consolidation will be only slightly to moderately bearish, with the SPX likely channeling sideways or at worst, in an orderly diagonal back to the QE3 trendline.
The market continues to be Code Green (intermediate-term bullish), and also long-term bullish.  Onward and upward…
Dwight
8-26-14

August 14, 2014

The market is Code Green (intermediate-term bullish).  Specifically, the SPX is Code Green, the Naz is Code Blue, and the Dow and RUT have a little catching up to do…The SPX has made a higher high and is now coming up on critical resistance at the 50dma (see chart).  A solid close above the 50dma and it’s time to start looking for SPX 2000 and beyond.How was this all accomplished without an actual Fed goosing statement?  Well, our new normal, Fedamentals-driven, put on your beer goggles and buy stocks market has conditioned enough traders that we all know what happens when you get terrible economic news…you buy stocks with both hands!  Because the Fed is NOT going to “sooner rather than later” interest rates…they just can’t.  And as long as they keep ZIRPing the market, you have to buy stocks.  There are way too many corporations that have been able to borrow cheap money to buyback shares, buy out companies and leverage earnings.  Borrow a billion dollars at 2%, buy back a billion dollars worth of shares, your stock goes up 10%, you just netted 8%…lather, rinse repeat because the 2% will always be there to borrow again and retire the current debt while piling up new debt.

Now to the horrible economic news of the past two days that has driven the market UP, not down, as it would at any other time in our lifetimes:

Yesterday:

1. Retail Sales printed 0.0% for July, missing expectations for the 3rd month in a row…yep, that consumer is just roaring along…must be all those jobs the BLS keeps telling us are out there (JOLTS report), or the dropping unemployment rate the BLS keeps claiming month after month (Jobs report), or the dropping weekly claims, or, or, or…

2. Mortgage Apps printed -2.7% for the week, missing expectations and continuing a sharp, 9-month downtrend.  Mortgage Apps are now at the lowest level since September 2000.

 
3. Japan’s GDP printed -6.8% annualized, missing expectations.  Consumer spending collapsed -5.2% QoQ, the worst print ever…
Oh, and the market went up because…Fed
Today:
1. Initial Jobless Claims missed expectations, which is bad news…but remember, this report is telling us nothing about real hiring anyway.
2. Wal-Mart, the biggest retailer in the world, met earnings, but on only 2.8% revenues YoY.  In addition, Wal-Mart guided down full-year earnings by 4.7% to the $5.03 area.  Oh, and Wal-Mart’s CAPEX spending cratered 16% YoY.  The company indirectly blamed some of the problem on the increased tax burden of Obamacare.  Also remember, a few months ago, Wal-Mart’s CEO BIll Simon had the audacity to question the June Employment Report (released in July) where the BLS / administration claimed Non-Farm Payrolls increased 298K and the Unemployment Rate decreased from 6.3% to 6.1%.  He basically intimated the report was bogus (which we all know is true), and the numbers didn’t add up because Wal-Mart wasn’t seeing any expansion in consumer spending, but rather the exact opposite.  Of course Bill was absolutely correct and courageous to actually speak the truth about the current administration to the media, which fervently carries the water for this administration.  His reward…he was fired 2 weeks later…and now Wal-Mart is guiding down earnings…
3. CSCO, the biggest networking gear company in the world, (last night) beat earnings by .02 cents…yayyy…on -0.5% YoY revenues…ooohhhh…hello, consumer, are you out there anywhere?  CSCO will also be firing another 6,000 employees, or 8% of its workforce (remember that one year ago they laid off 4,000 employees).  So that answers the question about where the consumer is…Now the only question is, where are they getting their earnings from?  Oh, I see now, CSCO said that for the quarter they spent $1.5b to repurchase 61 million shares of stock…which brings their total to $5.7b for the year.  Nothing like firing people to print money, and then borrowing even more money on the cheap to buy back shares.  Well, at least the stock is up 11% on the year…
4. Germany and France, two of the biggest economies in Europe, both missed GDP expectations.  Germany actually printed -0.2%…The entire eurozone GDP was flat…and remember that’s AFTER including prostitution and drugs in the GDP calculation now…
Oh, and the stock market is up because…Fed
So here we are at Code Green bullish on the SPX.  We’ll see if it holds up by blasting through the 50dma and confirming, or if we get more consolidation.  Either way, as I keep noting, there aren’t alot of bears in this market.  How can there be in the new normal.  The economic news is a disaster, which means the Fed will ZIRP forever.  And ZIRP will protect corporate buybacks and buyouts, which will protect record SPX earnings.
Dwight
8-14-14

August 12, 2014

The early fade in U.S. market price action is mostly due to shock in Europe over terrible investor confidence.  Germany’s ZEW Economic Sentiment (survey) imploded to 8.6 from 27.1, and the Eurozone ZEW Economic Sentiment (survey) plummeted to 23.7 from 48.1.  As expected, the EUR/USD pair is plunging, the dollar is shooting up, and because oil and commodities are priced in dollars, they are both dropping.  Europe’s pain is our gain…Sigh, I would normally say something here about the horrific impact of ultra-socialist policies but that’s just beating a dead horse…or a dead Europe…
Speaking of socialist policies…
Janet Yellen and the Fed have basically distanced themselves from the BLS jobs data in the past 6 months or so.  She is on record stating the “real unemployment situation” in this country is more like 11% and not 6%.  And the Fed has admitted the Non-Farm payroll data and Unemployment Rate are too “noisy” to get a read on because of the record number of people dropping out of the labor force.  The Fed, of course, is being politically correct and administration-supportive in how they are calling out the BLS data, because the the data could be truly reflective of the current economic situation if it wasn’t being fudged from every angle.  Anyhow, onward to my point:  The most recent employment-related data that was supposedly maintaining some sort of credibility in the Fed’s eyes was the Employment Cost Index (ECI), which showed a big spike for last quarter and started all the recent selling and turned the market Code Red bearish.  I discredited that data immediately, and then it was discredited again two more times with conflicting employment data in the past week and a half.  So by my count, we can toss out the following jobs related data as unreliable or manipulated (or do deeper research and analysis for the “real” numbers and real economic situation in this country):
1. The BLS Employment Report (fudging with the Labor Participation Rate, with what constitutes “employed”, and flat out making up “employed people” in the household survey)
2. The Weekly Jobless Claims (so many people have given up looking for jobs that this number is meaningless now)
3. The ADP Employment Report (they have been goal-seeking the BLS report the past 2 years in order to (at best) gain credibility by mimicking the government numbers, or (at worst) willingly supporting the administration in misleading or flat out lies…this shows up in the extremely tight statistical coupling of the 2 reports that did not exist several years ago)
4. The ECI Report (the latest round of data has been completely discredited by a full year of Hourly Wages and by the most recent Unit Labor Costs number)
So what does that leave us with if we want to get an idea of the real job situation in the country from a headline number?  How about the BLS’s JOLTS – Job Openings data (Job Openings and Labor Turnover) which was released this morning.  That number printed 4.671m for June, up from 4.577m from May, and well above expectations.  This was the highest job openings print since February 2001, and above the highs in 2006 when the economy was nearing its bubble peak.  Great news, right?  Well, what I find most interesting is that in 2012 – 2013 the BLS was putting out contradicting data between the Non-farm Payrolls survey job gains and JOLTS implied job gains (see chart of Non-Farm vs. JOLTS).  It appears someone at the BLS’s JOLTS department didn’t get the memo…It got so bad towards the end of last year that Bill Gross himself tweeted this:

Gross: JOLTS data do NOT validate 200K #payroll prints. More like 125K. #Taper may be delayed if #Yellen has a big vote.

— PIMCO (@PIMCO) August 6, 2013

If we view a chart of the JOLTS data (see JOLTS Job Openings chart), it shows a statistically improbable spike in job openings that began at the end of last year, shortly after the Bill Bross tweet, that went parabolic this year.  It seems that the BLS’s JOLTS department employees had some massive catching up to do in order to get in line with the rest of the regime…oops.
The JOLTS data would have us believe the huge spike in opening was due to “quits”…in other words “voluntary layoffs”…Ummmm, really?  Is this gonna be another one of those baby boomers retiring at record levels reports, because that’s already been shot out of the water.  And if there were so many job openings, why haven’t they been filled?  Why is consumer spending in the midst of a big malaise?  Where is all the hiring and wage pressure?  The answer, of course, is that there hasn’t been a big uptick in real hiring for high quality, full-time jobs.  It appears that another “jobs report” is about to go on my list of manipulated, goal-seeked, lied about data.
Why do I bring this up?  Well, aside from the obvious detest I have for lying and manipulating that does genuine harm to the lives of so many individuals and families in this country…The market-related reason I’m bringing this up is because traders have seen the JOLTS data and many are probably thinking Janet Yellen will have to be more hawkish on rates now that the slack in the labor markets could get “tighter.”  This is the exact same type of scenario that happened after the ECI printed a week and a half ago indicating “wage pressure.”  Traders assumed the Fed would have to raise rates “sooner rather than later.”  Well, once again, I’m here to tell you that it ain’t so.  Once traders dig into the real numbers, the real economy and the real jobs situation in this country, they will realize that the Fed IS NOT going to tighten “sooner rather than later.”  The JOLTS data is obviously coupling with the Non-Farm data as the BLS scrambles to get all its departments in line with the correct incorrect numbers.

For today, the SPX is reacting a bit to Europe and probably getting some bearish creep from the worry over the JOLTS “sooner rather than later” data.  This means the SPX has moved back from the attempt at going Code Green bullish, which it did not accomplish (see chart).  The relatively equal high at least moved us from Code Red bearish to Code Purple bearish to neutral, which is where we stand right now: intermediate-term bearish to neutral and long-term bullish.  A move above 1945-50 would be a higher high and take us Code Green bullish.  A close above the 50dma at 1955 would open the door for a move back to the record highs and beyond.  For now, the long-term QE3 channel is holding, but as I noted yesterday, the bulls recently have only gained a slight edge.  We really need a Fed goosing statement to get a Long Day and eventual move towards 2100.  But the Fed, of course, is hoping the ECI and JOLTS data will get investors “pumped” about the market without them having to step in and goose and print.  However, traders are becoming harder and harder to fool because the data manipulation is getting more and more obvious.  Perhaps this, in and of itself, will be bullish.  Because if traders can’t be fooled by manipulated jobs data and economic reports, then they will be inclined to buy the Fed and not sell it, knowing that the Fed has to stay in the game because the real numbers are much worse than the reported numbers.

Dwight

 image001 image001 SPX 8-12-14-1

August 11, 2014

Today is quiet for economic and earnings reports.  Geopolitical news is also somewhat subdued.  This means the market can settle, digest all that it collectively knows, and have more of a technical move based on traders speculating what things will look like several weeks or several months from now.

The SPX is very close to making a higher high and going Code Green (see chart).  None of the other indices are in the same technical construction, but the Naz is leveling out into a neutral-ish Code Blue, and the RUT broke it’s downtrending channel and is closing in on Code Green.
The TNX is actually down today (see chart) and not up as is normal when stocks are rallying.  In other words, traders are buying stocks AND bonds today, there is no rotation out of bonds and into stocks.  Also, the TNX is not getting bought by the Fed today (see the attached POMO chart for August).  The next Fed POMO will come tomorrow when they buy about a billion dollars in treasuries.  So the bond buying is regular old buying today.
I speculate that this move today has everything to do with traders believing that economic reports DO NOT justify the Fed raising interest rates any time soon, just as my analysis has predicted.  The chorus of media voices celebrating escape velocity have been wrong once again.  Big Money is buying stocks because the Fed will protect earnings with low rates (ZIRP) and continued POMO.  And Big Money believes the Fed will “stand ready to do whatever…blah, blah, blah.”  They’re acting without a Fed goosing statement.  It’s not a Long Day and explosive move that would key the technicals towards a year-end SPX 2100, but it’s still a quiet, bullish move towards Code Green.  No one wants to be short this market with the Fed bear-hunters lurking in the woods armed with big guns and big ambitions.

However, my year-end target is still on the shelf until we get some more confirmation from the Fed.  And the market is moving towards Code Green (intermediate-term bullish), but it’s not quite there yet.  Nevertheless, the SPX has once again bounced off the long-term QE3 channel and is holding the long-term trend.  This is exactly why I have said it’s best to take only some long-term positions off the table, but don’t attenuate back 1/3 until we actually breach the channel and head for the 200dma.  For now, the battle for the long-term trend continues, with the slight advantage to the bulls…with a move over the 50dma confirming the bulls won, if it happens.

Dwight

8-11-14 18-11-14 2

August 8, 2014

The market continues to be Code Red, which is intermediate-term bearish and in an intermediate-term downtrend.  The long-term trend is still bullish, but the SPX is fighting underneath the trendline right now, rather than on top of it (see chart).  This is usually not a good sign, but rather a sign of weakness.  However, if the index can reclaim the top side of the line and close back above 1920, it would at least shore things up a little.  We are still day to day with the battle for the QE3 channel, and we are still waiting for a Fed statement to bail out the market.

The TNX legged down again today, and is now in the 2.38% area from the 2.61% area last week when the market began to sell off.  This is my tin foil hat indicator, I know…but it’s interesting just how far the rates have dropped in a week, and the Fed didn’t even have to do a lot of heavy lifting to get it there…it just had to say nothing and let Big Money rotate out of stocks and into bonds a little…Janet Yellen even greased the ride a little with her now famous “small-caps are overpriced” intimation from several weeks ago.

Speaking of the Numbers Fudging Brigade (NFB or Fed/BLS/Administration):

Unit Labor Costs (ULC) printed at just 0.2% this morning, way under expectations.  Remember, it was the ECI (Employment Cost Index) last Thursday that started this big sell-off.  That was when the media celebrated the big jump in ECI and “wage inflation” as a clear signal we have reached escape velocity and jobs are back.  And when analysts stated that the Fed would now have to raise rates sooner rather than later…And remember when I shot that all down on Thursday as pure nonsense and more NFB manipulation because we haven’t seen significant growth in Hourly Earnings all year?  And the next day the Jobs Report came out an we printed 0.0% for Hourly Earnings…Well, the ULC number showed the annual change in real hourly earnings actually decreased, not increased.  In addition, there was a big spike in productivity, which is exactly what you would expect when employers are trying to squeeze more out of less people…which is exactly what has been going in since Winter 2008 – Summer 2009 when companies fired employees at the fastest pace in modern history.

It’s interesting to note that when the ECI came out, the Fed, as part of the NFB, had access to all the real data about hourly earnings and real wages, and they knew perfectly well that we are experiencing wage deflation in this country and not wage inflation.  What I find most interesting is that when all the ECI storm hit the fan, there was nothing but crickets from the Fed as stocks sold off and money rotated into bonds, thus dropping the very target of POMO, the TNX from over 2.6% to now in the 2.3’s.  In fact, there continues to be nothing but crickets from the Fed…
Another note about another economic report today:
Wholesale Inventories printed a very disappointing 0.3% today.  Let me give you some backstory on this one, especially as it pertains to GDP.  According to the U.S. Bureau of Economic Analysis (BEA), over 60% of GDP in 2013 came from inventory stockpiling, and over 50% of GDP in 2014 is also coming from inventory stockpiling.  How does this factor into GDP when 2/3rd’s of GDP is supposed to be consumer spending?  The answer is that the BEA figures that when companies pile up inventory, it’s because they see real consumer demand, and the inventory will all be sold to real consumers, doing real consuming at nice healthy levels – and that a lot of inventory won’t be written down because some of it wasn’t really consumed…So the BEA has a big inventory component in GDP.
So, when initial GDP estimates have come out, especially the past several years, they factor in big inventory stockpiling.  Why the big inventory stockpiling by companies you ask?  Well, when credit is dirt-cheapier than any time in history thanks to the Fed and ZIRP, and a company can build up current assets with much cheaper current liabilities, it looks great on the balance sheet.  The problem comes on the back end, when companies have to start writing down inventory.  Now, I’m sure that all companies are being perfectly honest and writing down obsolete inventory as an expense and thereby reducing net income.  And no one is writing down obsolete inventory to contingency reserves, thereby evening out the balance sheet and eliminating depreciation, reducing cost of goods sold and increasing earnings.  So base on a normal amount of inventory write-downs from a lack of real consumer spending, Wholesale Inventories start shrinking the further we get into a quarter.  Welcome to the new normal.
As wholesale inventories get written off and shrink, the inventory component of GDP has to be written down as well.  Thus the major explanation as to why we keep starting quarters with analysts looking purely at the front-end inventory buildup and dreaming of real consumption and escape velocity on the back end – and thereby putting out absurd estimates of 3% – 4% GDP each quarter – only to have GDP ratchet down and ratchet down, and ratchet down again until it hits 1% – 2% or even a big negative number like last quarter.  And blaming GDP on winter weather is getting really old.  It’s just bad analysis (or worse).  We have been printing poor GDP numbers for years, especially when the comps weren’t so easy (any GDP number will comp well against a negative number).  So Wholesale Inventories printed 0.3% today and I’m still holding to my 1% – 2% real GDP number for this Q.  Also, don’t forget that the GDP we have now has been goosed up by over $500b when the BLS (King of the Numbers Fudging Brigade), with a wave of the pen, decided in March 2013 to simply call corporate research and development an “investment” and not an expense.  At least we’re not counting prostitution and drugs as GDP like Italy, Spain and Britain…of course, our administration is following the European Model of Economic Brilliance, so maybe if GDP needs more goosing…
Everything from today’s reports confirms my analysis of the markets and the economy.  This is very simple.  Either the Fed continues to protect earnings with ZIRP and POMO, and saber-rattles the bears out of the market with goosing statements like they have for years, or they don’t.  If they do, then the long-term trend is intact, the intermediate-term trend reacquires itself, the market goes Code Green, the S&P aggregate earnings for Q4 top out above 32, and the SPX hits something close to 2100 before the end of the year.  If they don’t…well…you can say goodbye to the long-term trend.
 
Dwight
8-8-14

August 7, 2014

Another quiet-ish day as traders digest last week’s selling.  The ECB left rates unchanged, noted economic risks, and saber-rattled the bears with a “we reaffirm that we will consider unconventional moves such as buying asset backed securities” – all as expected.  The euro is dropping again, the dollar is up on the even weaker euro, and oil and commodities are down on the rising dollar – again all as expected.  So the good news is that an imploding euro is helping food and energy inflation…

The bad news is the Fed is playing with fire by not offering a goosing statement of their own…

The SPX is barely clinging to a critical long-term support level (see chart) and could drop off a cliff at any time – perhaps today as traders toss in the risk towel ahead of the weekend.  A close below the trendline / 100dma opens the door for a move of another 50 points down to the 200dma.  If the market does hold on and reverses back above 1930, then a test of 1950 is probable.

The risk-off trade is stronger on the RUT (small caps) than anywhere else.  The RUT has been firmly in a downtrend (channel) and Code Red for almost a month.  It is currently in a textbook Bear Flag pattern (see chart) similar to the Bear Flag in the 3rd week of July that led to the most recent leg down on the index.  If the current Bear Flag plays out, then the 1090 area becomes the next target.  Right now, small-caps are not the place for bulls to play.  It’s no coincidence that we are also firmly in the heart of the small-cap portion of earnings season.  And as expected, smaller companies are not able to take as much advantage of ZIRP as larger companies, which means borrowing for buybacks and buyouts is not a game they can play as well.  The results show in earnings, which are tracking a little poorer for small caps right now.  My analysis is showing a slightly higher ratio of misses to beats on earnings, and higher volatility in YoY revenues (big hits or big misses).  So overall, traders want more reassurance from the Fed before they go plowing into small caps at higher multiples like they have been for years.

There’s not much else to report or say.  As I have noted numerous times in the past week, this all comes down to whether the Fed makes their own goosing statement, just like the ECB attempted this morning (our time).  But they don’t have a lot of time left if they want to preserve their 2-year long QE3 uptrend.

One other note on investments and positioning:
If the Fed remains silent, and If we do break the QE3 channel, and we do sell off to the 200dma or worse…it could be a buying opportunity.  In other words, attenuate positions on a breach of the 100dma, but stand ready if the Fed comes in to stop the bears some time before or after the 200dma.  Because if Q4 SPX earnings aggregates remain at 32+, and we get a Fed statement in the mid to upper 1800’s, then the SPX could very well have over 200 points of upside (close to the 2100 area) by the end of the year.  As I noted before, fall mid-term elections would only add to the urgency for the administration / Fed, making it even more likely that a goosing statement comes out and the Fed protects those Q4 earnings.
 

Dwight

8-7-14 18-7-14 2

August 6, 2014
There hasn’t been much in the way of key economic reports today, and earnings season has moved into the mid-cap / small-cap phase.  So a relatively quiet day on the market.  Here are a few takeaways:

1. The RUT is in a bear flag, the Dow has almost reached its 200dma, the Naz is barely holding horizontal support and fighting along the underside of its 50dma (note that the Naz is the strongest of all the major indices, which is reflected in tech earnings and YoY revs being stronger than other sectors).  The SPX is still holding its 100dma and the long-term QE3 channel.  There hasn’t been much of a counter move since last week’s selling, only aimless drift.  As I have noted already, the Fed window for a goosing statement is closing fast.

2. Earnings continue to roll in with the same amount of beats, and about the same story with YoY revs (which is that consumer discretionary spending is weak, but ZIRP is still allowing companies to boost earnings via buybacks and buyouts).  Many tech and energy stocks are hitting their numbers for the most part, which is not surprising.  Media, manufacturing, retail and specialty retail are not, which is also not a surprise.  Media stocks like DISH, TWX, TIME and VIAB (DIS at least managed 7.7% revs) are examples of reports in the past 2 days that indicate a struggling consumer.  Ditto for specialty retail stocks like COH and RL (although KORS managed strong revs).  Regular retail has been reporting modest to poor revenues all throughout earnings season, as it has the past several years of earnings seasons.  NEVERTHELESS, most large-cap companies have been able to take advantage of ZIRP and hit record earnings targets.  The Thomson Reuters aggregate SPX estimates for Q2 have jumped from 29.56 to 29.99 in the past 8 days.  I reported a week and a half ago that I thought the probability was very high that we would beat Q4 2013’s record aggregate of 28.62 by over a dollar, and now we are virtually assured of doing so.  Now I think we will pass 30.00 on the aggregate for the first time in history…I know the economy and jobs don’t reflect this, but remember this isn’t about the real economy, and never has been…this has always been about the Fed and ZIRP and POMO.  Share buybacks, earnings accretion through buyouts, and other financial engineering programs have been a smashing success for corporate America.

Also,

Q3 aggregate estimates have come down slightly from 30.16 to 29.91, in other words BELOW Q2.  And Q4 estimates have come down slightly from 32.25 to 32.19.  This of course DIRECTLY FLIES IN THE FACE of all the recent government (BLS) economic reports indicating strengthening employment, wage inflation (ECI report), better than expected ISM reports, better than expected Orders reports, and on and on.  If we are really seeing grass shoots, if we are really seeing a revving economic engine getting ready for lift-off and escape velocity, If GDP is really coming around and getting ready to crank up and go, THEN WE SHOULD SEE Q3 ESTIMATES GROWING AND NOT DECLINING.  The exact opposite is happening, and here is the very likely reason why:
In the minds of many analysts, the big boost to SPX earnings from ZIRP is being threatened by the thought that the Fed will have to “tighten” now and raise interest rates because of all these “positive” economic reports.  It’s the only plausible explanation when all other logical reasons have to be eliminated.  In other words, it’s yet again confirmation that the Fed and ZIRP and POMO, and corporate financial engineering have gotten us to these massive record earnings and stratospheric market levels, and NOT real consumer spending off of real job growth (and energy / food deflation or lower taxes).
Thus, today continues the market drift, looking for help from the Fed before traders toss in the towel, knowing that real consumer discretionary spending is not the answer.  If the SPX drops sharply through the 100dma, where it is now, then it is highly likely to go another 50 points and smack the 200dma.  This is the most likely scenario if we don’t get the goosing statement.  Conversely, if the Fed gooses, then analysts will see Q3 earnings as protected and start raising estimates so long as companies can continue to buy back shares and engage in other financial engineering from cheap money.  This would also mean they see Q4 earnings as protected, and that number would stick well above 32, which would support an SPX 2100 before the end of the year, which is exactly what I predict if the Fed steps in like they have so many times the past 6 years.  There is an added catalyst for the Fed stepping in that we should all be aware of and take very seriously in our market projections and earnings estimates, and that is the mid-term elections.  We’ll see how this all plays out…
Dwight
8-6-14

August 5, 2014

The SPX failed to close above 1940 at the end of the day yesterday (closed at 1938).  This opens the door for a Bear Flag continuation pattern rather than a Spinning Bottom candlestick pattern with a reversal of the trend.  This is simply a technical way of saying that what we’re getting right now is more likely to be a short-term counter move and then a drop and continuation of the downtrend.

I’ve annotated an SPX chart (see chart) that effectively shows what the market is likely to do with and without the Fed.  Without the Fed we will likely just have a short-term counter or pause in the downtrend before resuming selling (pink annotation).  This would lead to a breach of the long-term QE3 channel and a move down to the 200dma in the 1860 area.  It would also mean that the long-term trend is over and it would be prudent to cull back long positions.

With the Fed, the shorts lose their…well…shorts (or lunch) and start panic covering.  This, along with the SPX earnings bulls will lead to a long day and a reversal of the current downtrend.  The Long Day will likely launch a move that takes the SPX through 2000 before the end of the summer as traders start thinking about the record earnings slated for Q3 and Q4.

As I stated, the Fed window for one of their “goosing” statements is closing rapidly…

Also, a note on the two economic reports today:

1. Factory Orders beat expectations.  This report, along with Durable Orders, are two of the most volatile from month to month, and I usually take them with a big grain of salt unless they are confirming everything we’re seeing in all the other data – which Factory Orders did not today…

2. ISM Services beat handily, and made 9-year highs printing at 58.7.  This, of course, is absurd when viewed in light of all the other data.  So when I see something that is deviating significantly from what I know to be true, I dig a little deeper.  As it turns out, the ISM was “seasonally adjusted” about as hard as you can seasonally adjust data (see: data fudging).  For instance, the new orders component (perhaps the second most important component after employment) was actually 61.5, but was “seasonally adjusted” up to 65.  If I apply a rough “seasonal fudging” factor of about 3.5 (or even 3.0) to the overall data, we get a number in the 55’s, which would be about where I would expect ISM Services to print in our current economy.  Note that ISM Services is usually about 5 points above ISM (manufacturing) each month.  And the ISM is right on the cusp of contraction (real numbers), especially in light of the big negative GDP in Q1 and the lack of significant pickup in real consumer spending in Q2.

So the Numbers Fudging Brigade (NFB) continues their grand illusion…

The good news is the Fed knows it’s an illusion, and they have proven it over and over again.  For instance, numerous times this year Janet Yellen has stated (in fedspeak) that real unemployment is higher than the BLS number and that the employment situation in this country warrants ongoing low interest rates.  So the NFB is putting out data for media headlines and public consumption, but the Fed knows better.  This means that there is still a better than a 60% chance (what I noted last week) that the Fed steps in some time soon with one of their goosing statements.  Perhaps they wait until the market collapses a bit, or they preemptively strike…either way, I’m waiting for the statement and the short-covering…in other words, business as usual.  We shall see…

Dwight

8-5-14

August 4, 2014

This is a quiet Monday morning in the middle of summer after a wild week of news and market reactions last week.  There are no key economic reports, no new global meltdowns and only a smattering of earnings reports.  All those newsy things will pick up as the week rolls along and as some clinically insane despot or morally malfunctioning zealot decides it’s time to right the wrongs of his diminishing power/bank account/influence/popularity/cause.  That means the price action today is going to be mostly technical.

The market (SPX) is having a predictable volatility contraction day after the expansion days of last week.  The combination of no news and “it’s time for a technical move” is causing the SPX to Doji right now (see chart).  The price contraction and Doji are coming exactly on my long-term trendline, which was also a fairly predictable landing point after the sell-off.  This is the critical long-term tipping area I mentioned last week.  If this 1920 area doesn’t hold (QE3 channel/long-term trendline and 100dma), then the next support zone is the 1860 area (horizontal price, 200dma), give or take 15-20 points.  If the market bounces from here, then old support becomes new resistance, so resistance is the 1950-55 area (horizontal price, 50dma).  I’ve annotated each of the technical elements on the chart.

A couple final note on the intermarkets today:

1. The TNX has round-tripped this morning, back to the pre-breakout area of 2.47% I noted last week, and it’s back at a rate that once again associates with 3 7/8% on 30-year mortgages.  I know I wear a tin foil hat sometimes, but everything that the Fed could possibly want from the long bond happened, and they had to spend a lot less in POMO to get there…what is there to say other than it is what it is…

2. Banco Espirito Santo was upside down 5b euros as I noted last week, and presto, they just got bailed out by the Central Bank of Portugal to the tune of 5b euros (6.5b dollars).  Now if you’re wondering where a practically bankrupt European nation is going to get $6.5b dollars, look no further than the EUR/USD pair, which is predictably down this morning, indicating that Big Money believes the ECB will print more euros on top of the more euros, on top of the other more euros, and send some to back the CBP, thus devaluing the euro even further.  That’s how the central banking system works nowadays…I included a fun chart of the eurozone debt to GDP ratio since the wild money printing began in 2008.  The summary is that eurozone debt has risen, in aggregate, from 67% of GDP to 93% of GDP in 6 years (it’s currently settled at 92.5% of GDP).  These, of course, like everywhere else in the world (U.S., China, Japan, etc., etc. etc.), are record levels of debt.

 
3. Oil prices have dropped from the $107 per barrel area to the $97 per barrel area in the past 6 weeks, with a drop of about $6 per barrel in the past week and a half.  This is good news for consumer spending if gas prices will drop .50 – .60 cents per gallon on a nationwide average in August.  That could stabilize GDP at least a little, especially if mortgage rates and lending rates remain low.
Ideally, the government reduces social engineering spending (vote-buying), reduces healthcare uncertainty,  reduces tax burdens on individuals and corporations, and increases opportunities for oil production (rather than obstructing and shutting down production) – and gas prices drop several dollars rather than .50 cents, then a global economic collapse can be avoided.  If the only thing we get out of our government is an opportunity to drop oil prices several dollars a gallon, that alone would stimulate a lot of hiring and a big jump in consumer spending – both from jobs and from savings.  I continue to monitor energy policy and oil prices as a critical key to strengthening the U.S. and global economy.  It’s our saving grace, (along with some grace due to technology/communication, which has led to huge increases in efficiency and production in the past 20 years) that could really allow us to say “it’s different this time” – when every other time in history that a nation has piled up huge debt and devalued it’s currency it has ended in disaster.  No other time in the history of imploding a national economy has there been such an immediate bailout like our current ability to drop gas prices $2.00 per gallon in one year.  This is real.  It’s not the imaginary printing of money out of thin air and monetizing debt to create the illusion of saving the economy.  It’s the difference between sugar for a quick brain hit, and a full, healthy meal for the whole body.
For now, the market is Code Red (bearish short and intermediate term), but the long-term trendline is still holding.  The price action this week and next will be critical to long-term positions.  If we hold and bounce, then we breathe a sigh of relief and monitor positions.  If we breach and collapse, then long-term positions must be reduced and we wait out the storm.  As I noted last week, the Fed’s window for manipulating the market via one of their statements about “we see no data to support a rate hike right now and we stand ready to do whatever” is closing rapidly.  We are right on the tipping area and watching day to day for a bounce or breach.  We shall see…
 
Dwight
August 1, 2014
 I’m recruiting for my Tin Foil Hat Club today, anyone want to join?

Remember I said that this morning was going to be a huge data day?  I was thinking about yesterday and what the Fed / BLS / Administration accomplished with the ECI (there’s always an angle with these people), and it finally hit me.  This has all been about the Ten-year Yield (TNX).

Question: what do you do when you’re becoming more and more afraid of printing new money, but you still have to keep long-term interest rates down in order to stimulate the economy and support every mechanism in America that is fighting for survival using those rates?  (The entire housing, mortgage and real estate industry, i.e. the largest market in the world, corporations using 2-3 year and longer bonds in order to buy back shares and buy other company’s earnings, etc., and other industries, banks and financial institutions and mechanisms taking advantage of the same).  BUT, you have to accomplish it without a huge rotation out of stocks and into bonds because you can’t implode the stock market and cause headline panic.

Answer: you announce the end of POMO (printing and buying treasuries and securities), which starts a strengthening of the dollar and a reversal of huge, multi-billion dollar carry trades in China, Japan and Europe, and capital starts fleeing those regions and back to the U.S., where many of those same financial institutions need to park their money and get at least some return.  Voila, the long-bond market goes up and the TNX drops into the very target zones the Fed wants.  Only now the burden is being shared by all the hot money fleeing carry trades and rotating onshore and into treasuries.  So, for instance, hundreds of billions of dollars in carry trades (probably an aggregate number over a trillion) was created by ultra-cheap dollars being borrowed and converted to yuan, which had a much higher rate, and then from there into Chinese real estate, companies and commodity schemes.  A big reversal of that trade started last year after Ben announced the taper.Note: the Japanese yen carry trade has gone on for years as the perpetually stagnant Japanese economy tried to ZIRP its way to escape velocity, which never came and never will come with that type of policy.  You can’t escape runaway government spending and enormous piles of debt.  If you want to have a healthy, growing economy, consumers have to consume with real money from real work and real productivity…period.  They cannot be burdened with heavy taxes, wealth redistribution, and devaluing of their money and savings because a government is trying to buy votes and stay in power (see: the entire history of our civilized world).  Our U.S. central planners have been trying to emulate Japan (and Europe) with runaway social spending, social engineering, and increasing market manipulation for the past 6 years…and guess what?  We have the same result?  And guess what part deux?  We created an enormous carry trade too.  So the Fed, through planning or luck, has been able to get a huge lift in treasury spending from China devaluing its currency for the first time (to slow the absurd level of capital inflows into Chinese real estate, etc.), while the dollar strengthened on the Fed’s taper announcement.  Hence the big unwinding and search for return in treasuries.

That brings me to the past three days when I noted that the TNX had broken out and might start a new uptrend (see chart), and that the Fed would try to POMO it back down.  Well, what if the Fed decided it would whack the mole with money from the stock market instead of trying to print its own new money?  Remember, they are growing increasingly afraid of, or perhaps even powerless to print as much because we are getting to the point where the repercussions from new money are being felt more and more immediately.  In other words, the can is getting bigger, heavier, and there’s a bomb inside, so the Fed is trying to kick lightly, and each kick isn’t going as far as the last even though it’s taking more effort with each kick…

So the TNX broke out and went from 2.45% all the way to 2.61% in about 2 days.  Then BLS announces an ECI yesterday that makes NO SENSE at all and continues to make no sense based on today’s Jobs Report.  Thus, the stock market is roiled to the max.  Stocks sell off and a big chunk of that money rotates into bonds…and…presto, the TNX breakout is halted in its tracks and the rate drops all the way back to 2.55 by the end of the day yesterday.  And off of today’s news (I’ll get to that in a minute), the TNX drops ALL THE WAY BACK DOWN to 2.48% (again, see the chart).

Now, that brings me to today’s reports.  Since the ECI and the threat of the Fed ending ZIRP (wink wink) caused stocks to implode yesterday.  That had to be fixed today, of course.  So once again I was thinking, today would be the perfect day for a whole slew of Goldilocks reports that would bring back Fed stimulus into trader’s minds while at the same time creating the illusion of grass roots.

Therefore (whew, breathe because here we go with this morning’s latest BLS offering)…

Here is the Goldilocks checklist with explanation of impact:

1. The Nonfarm Payrolls number printed 209k vs. 220k, slightly worse than expected and down from last month, which was actually revised UP from 288k to 298k.  So a little worse, and a disappointment in part of the report, but “grass roots” in other parts.  The takeaway is the Fed is still in play, but there are some positive headlines.  Goldilocks? Check.

2. The Unemployment Rate printed 6.2% vs. 6.1%, slightly worse than expected and up from last month’s 6.1%.  Just enough to keep the Fed in play.  Goldilocks? Check.

3. Hourly Earnings printed 0.0%, which is a DIRECT COUNTER to the ECI report…remember my statement yesterday about the BLS speaking out of both sides of their mouth?  So massive employer inflation in one report but the exact opposite in another.  Goldilocks? Check.

4. Personal Income and Spending were both exactly in line with estimates, with spending on energy up 1.67% month over month – which was the largest jump of any spending component all year.  So spending up, but much of it due to inflation.  Goldilocks? Check?

5. ISM printed 57.1 vs. 55.9, better than expected, and the employment component was up.  This was a counter to the poor-ish employment report and a grass roots and hope report.  Goldilocks?  Check.  Also note: Manufacturing PMI came out today as well (the more reliable, truthful manufacturing report these days) and printed the biggest miss in 11 months, with employment slowing to the lowest levels in 13 months.  So that’s more likely what’s really happening in manufacturing…but no one pays attention to this report and it usually doesn’t make headlines, so out of sight, out of mind.

The slew of Goldilocks reports today keeps the Fed in play and has, predictably, slowed down the stock market selling.  It also caused the dollar to drop, which is exactly what you would expect from financial institutions reacting to what they think is likely to be continuing ZIRP and POMO, or as I like to call it, business as usual.  The SPX drifted down to almost exactly my long-term trendline and is trying to hold and bounce a little this morning (see chart).  Everything I stated yesterday about the market being Code Red, changing from bullish to bearish on the short and intermediate-term, and being ready to attenuate long-term positions on a breach of the long-term trendline stands.  The charts are the charts and I take them as they are.  Also, the Fed window for putting out a “reassuring” statement is closing.  If they don’t say something soon then the SPX will breach the trendline and head to the 200dma / horizontal support at 1860.  Perhaps the Fed wants more rotation into treasuries.  Perhaps their boss doesn’t want apocalyptic headlines.  Perhaps I’m done recruiting for my Tin Foil Hat Club today.  We’ll see how this all plays out…
One final note.  I want to dispel this media explanation for the plummeting labor force participation rate once and for all.  By now we all know, much to the chagrin of the supporters of the current policies, that the unemployment rate is not representational of the real employment situation in this country.  The media would try to convince us that the reason we have record numbers of Americans not working, and the reason the labor force participation rate is at 62.9% and not 66.4% (the 2007 highs), is because vast numbers of baby boomers are retiring.  If we applied a 66.4% LFPR to the current Civilian Non-institutional Population (248,023,000 in the latest BLS report) then we get almost 9m more people that should be working.  This would effectively DOUBLE the unemployment rate (and don’t get me started about underemployment and the BLS survey of what constitues “employment”).  I’ve already thoroughly analyzed the population, ages and retirement levels going back to World War II and based on that alone I know the claim of massive baby boomer retirements is false.  However, another witness for the truth is in the following data:
Today’s report (BLS survey) shows that Americans aged 25-54 actually LOST 142k jobs last month…AND…Americans aged 55 and older GAINED jobs.  In fact, we have a record number of Americans over the age of 55 working.  Thanks to ZIRP and the implosion of real savings with the explosion in real food and energy costs, older Americans are being forced to work longer.  We have never had this many Americans over the age of 55 working…ever.  See the attached charts for the eye-opening divergence since 2008 between the 16-54 working group and the over 55 group.  The media explanation for a plummeting LFPR is once again, absolutely false.
Despite the “shocking” ECI report yesterday, the real labor situation in this country continues to be very supportive of ongoing Fed stimulus.  Time to get out POMO and ZIRP, the pink and blue unicorn, and cuddle with them, because the Fed is going to have a very hard time taking away the market’s warm and fuzzies without major, major damage.  And they know it.  And their bosses know it.  Know it’s just a matter of whether they still have any bullets left or not…
Dwight

July 31, 2014

Weekly Jobless Claims were better than expectations, but that data continues to tell us nothing about the real economy.  Also, Chicago PMI (manufacturing) had its biggest miss ever.  However, tomorrow is a much bigger data day with both the Employment Report and the ISM (national manufacturing).

The big news, and reason traders are selling off the market is as follows (in order of importance in trader’s eyes):

1. The Employment Cost Index (ECI) had its biggest jump in 6 years to 0.7%.  This little followed, C-grade indicator only creates headlines because the Fed has long used it as a barometer for wage inflation and therefore policy decisions…as in tightening.  Now, here is the problem I have with the BLS report…Well, I guess I have a problem with the BLS fudging data in just about every report in order to create the illusion of economic growth and job prosperity…However, they seem to cherry pick with some reports and times (ISM’s, regional ISM’s, CPI’s, GDP’s, etc.), whereas they have been pretty consistently manipulating the Jobs and Claims reports on a regular basis.  The ECI seems to have been cherry picked this month for some reason.  Let me explain.  The big spike in wages has supposedly come mostly from 2 industries – Information and Healthcare.  It was not across the board and that alone makes me somewhat skeptical of what is being reported, especially since no real hiring (the real, truthful, non-BLS employment situation) means no real reason for employers to engage in wage wars.  If that wasn’t enough, consider that the ECI is for last quarter.  You know, the quarter where for 3 straight months the BLS reported that average hourly earnings was 0.0%, 0.2%, and 0.2%, which came of a Q1 of similar readings…So out of one side of their mouth the BLS is trying to convince us that employer costs (wages and benefits) are spiking, and out of the other side of their mouth they are telling us that wage inflation doesn’t exist (exactly what you would expect in the real employment environment in this country).  That leaves benefits as the only possible culprit, and that in just a couple industries…So are healthcare costs spiking for employers?  And if so, then the FED WILL ACTUALLY BE INCENTIVIZED TO ZIRP AND POMO EVEN LONGER and not the opposite reaction that traders are having today, which is that the Fed will be forced to raise rates because labor conditions are “just getting so tight out there” – which, of course, is a ludicrous assessment, even for the Fed.  On this, as always, we shall see if I am correct.  We’ll know in the next week or so if we get that special language from the Fed with hints and warnings in it about “accommodation” and “stand ready to do whatever is necessary” just as we have so often the past 6 years.  Then it will be back to the races.

2. The Fed just released its FOMC statement (yesterday) confirming that they will taper another $10b.  They also stated “that a range of labor market indicators suggests that there remains significant under-utilization of labor resources.”  I have a hard time believing that, in just one month, the labor markets went from “significant under-utilization” to “significant wage inflation” or “cost pressure” in just one month…This is either all on a spike in healthcare costs for a couple of industries, or…well…you do the math…At the end of the day, I will believe that ZIRP and POMO are dead when they have reasonable, plausible data to support it AND a Fed / Administration that no longer has anything to gain from continuing to pump up the markets…OR when the world starts collapsing under the strain of runaway printing, debt, and government spending…speaking of which:
3. Argentina defaulted on its debt, which will trigger bondholder claims of $29b, or the equivalent of all its foreign currency reserves…surprise…>makes little gesture with his hands to sarcastically show how utterly un-surprising this really is<…Now, remember that Argentina is not entirely indicative of the rest of the globe since president Cristina Fernandez is a hard-core socialist, and as Maggie famously said, she has officially run out of other peoples money.  Think of Cristina Fernandez as a modern day Eva Peron because, well, she does…As of this writing, Argentina has tried to cut some deals and is only “officially” defaulting on $13b of the triggered debt…so far…oh, and JP Morgan is discussing, buying the defaulted bonds…mmm hmmm…
4. Portuguese mega-bank, Banco Espirito Santo (BES), which first warned of insolvency a month ago, is now spiraling towards bankruptcy after announcing a massive, $5b loss.  Once again, these are countries on the margins of huge economies (much like Greece), so I don’t believe we are seeing signs of contagion, or systemic catastrophe.  So far, these are isolated cases that aren’t telling us that some major geographic region is about to collapse financially.  I would have to see something bigger and more central to Europe, South America, China or Japan to say that system collapse is imminent.
However,
 
The market is firmly Code Red now (intermediate-term bearish) as the SPX breached 1950 this morning and just tapped 1938.  This means that bullish short-term and intermediate-term trades are at risk, but long-term trades are not yet (although it would be ok to reduce long-term positions by about 10% or more).  I will be trading puts on any short-term positions, or simply staying out until the market re-acquires itself.  Note that the long-term channel, created by the Fed with QE3 (in 2012), is the next support area around 1920 (see chart).  This becomes the next critical tipping point.  A breach of that trendline and it’s time to reduce long-term positions by at least 1/3, and even consider 1/2 sizing depending on what the Fed is or isn’t saying, and depending on if we start to see systemic damage in some other parts of the globe.
For now, I will wait and watch to see if the Fed does indeed come in “to the rescue” as they have so often the past 6 years.  I would give that scenario a better than 60% chance based on what I know about this Fed and Administration, and what they have been doing over and over again for years.  I have included a weekly chart of the SPX as well (see chart) showing the significance of the long-term QE3 channel, and why a drop below 1920 would be very significant to the long-term trend, and a close below 1900 would be the first big bearish breach of the channel in 2 years and a warning that long-term positions were now at critical risk.
So it’s back on the Fed and the Administration after the latest data and investor jitters.  Remember, I’m not advocating Fed policy, nor am I stating that it has done any good, I’m just analyzing how we are where we are, and declaring what I think is likely to be.  Earnings are earnings, regardless of how much financial engineering goes into manufacturing them.  And the Fed will either protect those earnings or not…
Oh yeah, and speaking of which, earnings season is still in full gear and numbers (earnings beats and YoY revs) continue to track about the same as I have been reporting for the past several weeks.  But none of that will be on the headlines because tomorrow there will be aftertaste from today, and then we get a whole new mouthful of data with the Jobs and ISM reports.  And then it’s either an immediate Fed reaction or waiting until next week for a Fed “rescue statement.”  We shall see…
 
Dwight
7-31-14 17-31-14 2
 

July 30, 2014

The market (SPX) is firmly Code Blue (neutral to bullish) and the SPX is very likely to go and tag the 50dma around 1950 – 1955 in the next day or so – perhaps even today (see chart).

The government continues it’s numbers game, this time with GDP, which went through an annual revision for the period of 1999 – 2014.  This magically improved 5 out of the last 6 quarters with the mere wave of a pen.  We all wish we could just write numbers we want, especially in our bank accounts…

The initial Q2 GDP print today was 4.0%…I look forward to seeing how that was humanly possible, and as always will have to dig through numerous other data to get to the truth.  I will go ahead and state that this number is highly likely to be revised down numerous times over the next several months.

Earnings continue to pace in about how they have for the past several quarters.  In other words, about the same amount of beats, and about the same YoY revenues, which means the earnings will support a record aggregate number, and revenues overall will be modest and indicative of a tight consumer.  We are now up to 29.59 on the SPX aggregate and closing in on exactly a dollar above the old record of 28.62 from Q4 2013.  There is a high probability that the number ends up close to 29.70 when the season is over.

The dollar is skyrocketing today as the euro just completely implodes on runaway printing by the ECB.  Japan just printed its worst industrial production number since 2011, and that on top of terrible employment data, so the yen joined the imploding today with and sharp, sharp drop of its own.  This is truly a race to the bottom as the dollar is only up because everyone else is printing faster than us.  Even the Chinese, where good data is almost impossible to find, appear to be “stimulating” via easy money (cheap borrowing), which will continue to devalue the yuan.  It may not show as much simply because Europe and Japan are printing faster…

The continues uptrend in the dollar based on everyone else printing more furiously than us has some near-term positives.  It’s keeping oil and commodities from inflating away the rest of America’s middle-class spending power.  And it’s attracting some money onshore, with some of that going to treasuries, which is keeping the TNX in an area that continues to support a 3 7/8% 30-year mortgage.  Speaking of which, mortgage apps were down, but I speculate they would have been down a lot more if not for the drop in the TNX the past month.  Note that the TNX is bouncing sharply today, but was down yesterday and will likely be down tomorrow.  Why you ask?  Well, because yesterday and tomorrow were/are scheduled POMO days for the Fed (permanent open market operations).  We’ll see if today’s jump is a trend break, or if the Fed brings the rate right back down tomorrow.

For now, as always, just keep your eye on the only two things that matter in the stock market investing world:

1. The Fed

2. Record Corporate Earnings because of the Fed (ZIRP and POMO)

…If I was a CFO, I think I would name my kids ZIRP and POMO and ask Ben and Janet to be their Godparents.  At the very least I would buy them pink and blue unicorns and name them ZIRP and POMO…I attached a picture of POMO the pink unicorn and her bestest friend in the whole world, ZIRP the blue unicorn so all the corporate accounting departments in America can adopt them as their mascots.

Dwight

7-30-14

July 28, 2014

The SPX is dropping back into a more neutral price action this morning.  Last week I noted that the breakout was tepid and the SPX would probably not make 2000 on that thrust.  The market topped out at 1991 and has cycled back to Code Blue (neutral to bullish) – after moving towards Code Green (more bullish) on that tepid upswing.  The major index postures are as follows:

1. Dow (mega-caps): neutral to bearish

2. SPX (large-caps): neutral to bullish

3. Nasdaq (mixed tech): bullish

4. RUT (small caps): bearish and a “no touch”

Earnings continue to report as expected, which is an average to a little above average number of beats.  I noted that YoY revenues were tracking better than expected the first 10 days or so.  Since then, more retail, manufacturing and retail-upstream stocks have reported and revenues have fallen back in line with the new normal, which is flat, slightly positive and even negative.  The best revenues are coming from tech and the worst revenues are coming from retail, all as expected.  This is because the consumer is hunkered down and riding out the storm of high unemployment / underemployment (as reported by me and not the BLS, which has been fudging numbers for years).  You can see the spending implosion reflected in Q1 GDP and my prediction for a 1% – 2% Q2 GDP (with an outside chance of printing a negative number) last month.  When Q2 started, many financial institutions were predicting an escape velocity, capex-driven, grass-shoots, hallelujah we are on our way, delusional 3% – 4% GDP.  This morning, Gary Shilling stated that “Q2 GDP is closer to 1%, and there is even a chance of printing a negative number.”

Remember, none of this matters because of the Fed.  Companies have been borrowing to create earnings for several years (share buybacks, M&A, etc.), which has propelled the SPX to record highs.  In fact, M&A Monday continues with DLTR agreeing to buy FDO for $8.5b or a 22.8% premium (which the media is promptly reporting as too low a sale price…because…well…bubbles are good…right?).  In fact part deux: The Thompson Reuters SPX earnings aggregates just jumped AGAIN, this time from 29.18 (last week) all the way to 29.56.  The earnings estimates have now escalated over half a point since the beginning of earnings season and we are set to blow away the previous record high earnings from Q4 2013 of 28.62.  That’s what you call a BIG PRINT!  And Q3 is projected to be another record, and Q4 is projected to blow them all away with a print of over 32!  So if you’re a corporation, chant with me “ZIRP, ZIRP ZIRP, borrow and slurp…up as many shares as you can buy back…we thank you almighty Fed, and please don’t stop.”  If you’re an investor, you have to be aware of earnings and their impact on the bullishness of the market.

The SPX has mostly priced in the record earnings, which means the 2000 area could be a lid for a little while.  This means we could see consolidation for several more weeks or even a couple months.  I have updated the likely consolidation channel on the SPX, which could start to shape up very similar to the March – May rectangle (see chart).  Note in that consolidation that there were a couple outliers (highlighted in yellow), but overall the market just based along with much, much more neutral to bullish price action than neutral to bearish price action.  Eventually it broke out to record highs as traders started to price in the anticipation of record earnings (which are going on right now).  Sound like a familiar scenario for later this year?  Ramping up for October’s earnings season could be the catalyst for the next record highs on the SPX if traders are through buying for now.  However, there is still an outside chance that traders want to price in a little more of the current record earnings (because estimates keep coming up), so the SPX punching through 2000 is not that unrealistic in the near-term.  So whether we stay neutral to bullish or push a little higher, I don’t see anything in the earnings, economic reports or Fed behavior that leads me to believe that we are anything but business as usual – which means it’s really hard to see a major sell-off on the SPX yet.  The big tell will be a high volume collapse through 1950, which is a major tipping area on the SPX chart right now.  Until then, it’s as I said, business as usual.

One other note:  Two weeks ago, Goldy noted that the market was 30% – 45% overvalued compared to the past 85 years of market data.  They also noted that “returns (earnings) have been created out of heavy borrowing.”  Nevertheless, they lifted their year-end price target on the SPX to 2050 (from 1900), and their 12m target to 2075 (these are 4% and 6% projected returns, respectively).  On Friday, however, they issued a caution for market “neutrality” for the next 3 months.  These calls are all roughly in-line with what I have been saying for a couple months.  We almost hit SPX 2000, and we are now getting neutral in that area as traders decide whether the current season warrants a little more push or not.  But traders are going to have a hard time selling off this market knowing that Q3 and Q4 project to be new, bigger, and the awesome bestest ever record earnings…And knowing the Fed will do every ZIRPY – POMO-ish thing they can to preserve those earnings.

Until the SPX crosses 1950, I can’t go intermediate-term bearish.  And until the Fed really, truly pulls the plug on all forms of stimulus, I can’t go long-term bearish.  We shall see…

Dwight

7-28-14

July 22, 2014

Here’s a summary of the good news:

1.  Tech (TXN, RMBS) and Media (CMCSA, NFLX) stocks are reporting good earnings and revenues, and have done so this earnings season.

2.  Existing Home Sales beat expectations slightly, which is not surprising given that the TNX has been dropping for the past month and is now in the territory supportive of 3 7/8% on a 30-year mortgage – as mentioned yesterday.

Here is a summary of the “we’ll see” news:

1.  A Federal Appeals Court ruled that the Federal Government cannot subsidize healthcare premiums for States that did not set up State Exchanges.  Many are calling this a potentially crippling blow to Obamacare.  There are multiple ways this can still play out, but if insurance premiums go down for most Americans and businesses, then hiring will go up and consumer spending will go up.

Here is a summary of the bad news:

1. Retail and materials for retail earnings are getting crushed on the revenue side.  MO, KMB, MCD, KO, LXK, DD and others all barely met or missed their earnings, but more importantly, they all reported around 1% to negative revenues YoY.  This is exactly in line with my speculation that GDP will print between 1% – 2% for Q2 and not the 3% – 4% that many sell-side brokers and financial institutions were predicting at the beginning of the Q.

2.  Real wages (adjusted for inflation) came down for the 2nd month in a row, which underscores my analysis that the BLS is simply playing with the Jobs data, and the real unemployment rate in this country is over 11%, while the underemployment rate (remember the BLS counts a person who has worked 1 hour in the month as “employed”) is closer to 20%.  Average Hourly Earnings are at 2010 levels.

3.  Gas and food prices kept inflation (CPI report) tracking at 2.1% YoY.  There is some good news however, as I noted yesterday that the drop in real demand and the rise in the dollar via the ECB’s furious printing and devaluation of the euro is causing the price of oil and commodities to drop the past several weeks.  In fact, the dollar is jumping again sharply today as the Euro/USD pair implodes again.  The euro broke key support at $1.35 this morning and is likely headed to $1.33.

Here is a summary of the only news that matters for stocks:

1.  The Fed

2.  Companies taking advantage of the Fed’s ZIRP and POMO to manufacture record earnings.

Therefore:

The SPX has broken out of the near-term consolidation channel I drew last week (see chart).  You can see from the intra-day charts that traders are following that same channel (see SPX ID chart) – because after the initial thrust this morning, the first test came at the top of my channel resistance line (old resistance becomes new support), and then it was off to a new record high of 1986.  We are less than 14 points away from my 2000 target for end-of-July or beginning-of-August.  I speculated that we could make the move out of the channel sooner, rather than later after a test of the 50dma.  Perhaps this is still a little too soon as the breakout is a bit tepid.  It would not surprise me if the market fluttered a little for a few days because of that.  However, eventually (within a week or two, or within a month or so) I expect the test of 2000.  As always, we shall see…

 
Dwight
7-22-14 17-22-14 2

July 21,2014

The SPX is settling into the channel I drew on Friday (see chart).  Technically the market has made a slightly lower high and slightly higher low.  This is what I would call a code blue market posture, or neutral to bullish.  It’s not as strong as code green, which is bullish and making higher highs and higher lows (uptrending), but it’s plenty strong enough to maintain bullish positions and look for solid stocks to take new bullish positions.  You should not open up the barn doors like a code green, but the market is healthy enough to selectively trade bullish.

Fed POMO (permanent open market operations) and geopolitical fears continue to flow money into treasuries, so the TNX is down again in territory that is supportive of mortgage rates dropping into the 3 7/8% area.  In other words, the real estate market should at least stabilize a little, which is supportive of stocks.

Commodities are coming down sharply, and oil has come down a bit as well – although it may not show up until next months PPI and CPI reports (current CPI is due tomorrow).  The combination of worse than expected demand and a rising dollar are the major contributors.

The dollar is coming down, not because the Fed isn’t continuing to weaken it at record pace…it’s because the Europeans are even worse off and the ECB is aggressively printing and devaluing the euro faster than the dollar.  So the euro / dollar pair is dropping like a rock as the U.S. dollar basket shores up a bit and helps drop commodity and oil prices.

This earnings season is going exactly as expected.  Estimates were for 29.01 on the SPX aggregate 10 days ago (5% of companies reported).  After a week and a half, and the first wave of heavier earnings (17% of companies reported), the SPX estimated are up to 29.18 and Q3 and Q4 estimates are being raised.  Everything I speculated about earnings is happening, except that revenues appear to be tracking better than expected – so companies are being smarter about their financial sheets and not making the share buybacks and M&A accretion so obvious.  Regardless of what tricks companies are using to get there, the point that I have always made is that they ARE getting there and big financial investors HAVE to price that in.  So onward and upward we go – with a price channel that is likely building up pressure for an eventual breakout and run to 2000.  We shall see…

Dwight

Note: for your info, Thomson Reuters has over 900 contributors (sell side firms, etc.) and over 13,000 analysts that they cull data from and weight according to the track records of those analysts.  They have been extremely accurate with their estimates, especially when within a month of earnings season.  Here is a link to how they collect their data and how widely followed it is:

July 18, 2014

The past several days I talked about the SPX (market) probably getting ready to flatten out of the near-term uptrending channel I have tracked for the past month.  That began yesterday with the first close below my support line in 2 months.  I also speculated that the consolidation had a very good chance to be “orderly” because the SPX is very likely to generate record earnings again (over 29 in aggregate for Q2).  Today’s price action is beginning to confirm that very thought.  I have drawn what I think is the preliminary trajectory of the consolidation channel.  I would not be surprised to see the 50dma eventually catch up with the channel in the next week and then that becomes the launching point for SPX 2000.  I also wouldn’t be surprised to see the channel break early for 2000 since traders now know the Fed is fully in play, and that corporations are doing an exquisite job of using the Fed’s cheap money policy for share buybacks, M&A, one-time charges and other accounting tricks to generate earnings (see IBM’s buyback program article from Zero Hedge as an example of what many SPX companies are doing to generate earnings).

So far this earnings season, to my eye, earnings beats are tracking even higher than last earnings season (April).  This adds additional support to the probability that we will see record earnings in July / August and print a final number above 29.  I also find it interesting that revenues are tracking significantly higher than last season, which means that companies are finding creative ways to boost their income statements to make up for the dearth of consumer spending (I’m still predicting a real, non-fudged, non-adjusted GDP number of between 1-2% this Q, with an outside chance of printing a negative number for the second Q in a row).  Regardless of how we get to the record SPX earnings number, the fact remains that I see absolutely nothing in the economic reports and Fed reports to change my thinking that the Fed will fully bolster and support earnings with ongoing ZIRP accommodation (and even stand ready to crank up QE if necessary).  The fact that corporations are cranking out earnings beat after earnings beat, along with better “revenues” (regardless of how they are achieving them), tells me that my speculation for SPX 2000 by the end of July or beginning of August is very doable.

I thought we would hit SPX 1980 before earnings season and we hit 1985.  And now, the more orderly we stay in the current channel and build up pressure, the more likely we break out and shoot for 2000 sometime in the coming weeks.  We shall see…

Dwight

July 16, 2014

Every expected major earnings, economic report and Fed announcement went
as expected (based on our analysis of very tight consumer spending) –
except the Empire Manufacturing…that one was like hope on steroids.
Just to get the anomaly out of the way first so we can focus on real
market projecting:

1. The Empire Survey printed WAY above expectations, mostly driven by
new orders and shipments.  I’m not sure what the temporary surge was in
NY, but the forward outlook of the survey is more in-line with the rest
of the economy as manufacturers are the most pessimistic they have been
in over a year.

2. Retail Sales missed bad, as expected.

3. Import and Export prices missed as expected.

4. Business Inventories missed as expected.

5. Goldman Sachs BLEW AWAY earnings as expected and showed 10.8% YoY
earnings growth – but as per the new normal they only grew revenues by
6%.

6. JPM also blew away earnings as expected and revenues actually shrank
-3.0% as per the new normal.

7. Janet Yellen, in her testimony before Congress this morning,
basically said, “everything looks good, so we’re cool (thumbs up
Fonzerelli), BUT this all bears watching closely SOOO there’s no
projection or timetable for a rate increase…AAANNDD I know I keep
saying there aren’t any bubbles out there but small caps are in a
bubble, but we’re still great, so carry on and we’re all cool” (another
thumbs up and she rode off on her Harley).

I will interject that I find it extremely fascinating and very tin foil
hat-ish that I’ve been pointing out for a week that all indexes are in
intermediate uptrends and bullish EXCEPT the RUT (small caps) which are
in a bearish downtrend…and lo and behold a week later Janet throws
them under the bus so she can say she “warned about a bubble” to
Congress.  Can you say Primary Dealers and other Big Financial
Institutions working with the Fed?…..Ok, I’m removing my tin foil hat
and going back to time out…

Anyhoooooo….

It’s all on INTC now as all eyes focus back on earnings.  The SPX
pulled back temporarily on the Retail Sales number shock, but after a
few hours traders realized it’s actually good news because once again it
reinforces the Fed and underscores Janet’s statement today that
basically said that ZIRP is here so long as the world shall stand.

What this means is that the SPX is going to go where earnings take it,
and so INTC is the first heavyweight to give us a clue where that is.
Note that the SPX once again bounced off my near-term trendline (see
chart).  For today, I want to project a possible scenario if INTC
misses earnings or gives very poor forward guidance (remember that it’s
all about earnings and revenues don’t matter).  I drew a potential near
term consolidation channel down to the 1930 – 1950 area if INTC
misses.  I really don’t think this is the projection, but I wanted to
present it as a possibility.  Note that I’m not projecting a big
sell-off in this scenario because there would still need to be another
week to week and a half of earnings to confirm an INTC miss.

Now, what I really think is the Thomson Reuters projections will hold up
and the SPX will get record earnings with a number at or above 29 in
aggregate.  That’s what I really think.  I also think that traders
will be confident in a Fed supporting those earnings with ZIRP and even
QE if necessary.  And I think that everything that happened today
(including the forward outlook for the Empire Manufacturing) supports
the ongoing Fed stimulus scenario in every way.  So my best projection
is business as usual, but I thought it wise to show a what if scenario
just in case.

Dwight

7-18-14


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