Reflation

I wanted to discuss a topic that continues to be occurring in the worldwide markets again. “reflation.”  Reflation is defined as the intentional reversal of deflation through a monetary action by a government.

In the global economy, the U.S. government has been the primary instrument of reflation.  Through a combination of tax cuts, heavy war expenditures and easy money, the U.S. has provided a strong catalyst to world economic growth, particularly in Asia.  In the process, the U.S. has both monetized and fiscalized the world’s reflation.

Interestingly, the one major stock market index worldwide that has not benefited fully from this reflation has been the SP500.  The accompanying chart illustrates how it is lagging deeply behind the rest of the world’s markets.  The question of investors is whether the SP will catch up or whether the rest of the world will fall back – as such divergences are difficult to sustain in asset markets.

As for the U.S. markets, we got the first shot of long suppressed volatility across the bow two weeks ago when the US indices tanked. However, this week we had an extremely bullish Advance/Decline number with the Advancers outpacing the Decliners at over 2 to 1 all week. Very bullish indeed.

While Friday’s GDP and Housing numbers were very weak, the market didn’t blink and kept right on trucking. That said, the writing is clearly weakening for much upside.  My speculation is that we should expect a big 10% downswing at some point following the 1^st quarter of 06. 

1) Technicals remain strong, and continue to be the driving force short term. But economics look weak, and continue to be a major source of concern long term.

2) Last Friday's market actions was the market's early warning sign. Very heavy volume to the downside on a big selloff is never a good thing. I interpret that day as a foundational crack of the cyclical Bull market. Again, we are not looking for a 1987 situation, but rather a Q1 topping out, and an ugly rest of the year.

3) Gold also looks toppy -- it's well overdue for a 10% correction. We are short here, but would re-establish a long position in the 480-510 range.

4) A 500 point day in Japan is too exuberant -- it's a sign of very emotional trading. Historically, these sort of buying frenzies tend to end badly.

 

 

  The futures got hit pretty nicely post GDP numbers, SP hit for 4, ND down about 8, let's see if the bulls can recover.

• GDP annualized for Q4 came in at 1.1% vs 2.8% exp
• Personal consumption for Q4 came in at 1.1% vs 0.4% exp
• GDP price index for Q4 came in at 3.0% vs 2.7% exp

Billionaire investor George Soros said yesterday the U.S. economy could fall into recession next year because of a cooling housing market, according to the Goa Herald.

In the U.S., the boom in housing prices helped mitigate the effect, Soros said. It almost “exactly outweighed the negative effect of the higher price of oil.  Going forward, the tight market will continue unless the economies slow down, and a fall in oil prices will actually be one of the factors that will help bring about a soft landing.”

Soros, who said he was “no longer actively involved in the markets,” declined to comment on specific markets or currencies.

Monster Move today afterhours on BRCM, and a monster size take down on SNDK post earnings. This market is taking apart stocks and taking em up really no rhyme or reason. That's why sometimes it pays to step aside during earnings, let the dust settle and look in a week or so to what is moving.  Tommorrow we have some important GDP numbers so it should be another exciting Friday.   Interesting GOOG was down today on a powerful up rally across all sectors and rotations today. It was also down last Thursday as the market rallied. We all know what happened last Friday. I don't expect to see a down day again tomorrow with End of the month shenanigans in full effect and they do want to close the market above the December lows so they are pushing hard to mark up higher into the end of the month per usual. Today was T+3, so we could get some profit taking tomorrow, but that's why we play the game and show up after practice day in and day out. Tomorrow's another day to place your wagers and name your risk factors. 

 

• When was the last time GOOG finished down on a day when the NDX finished higher?  Last Thursday.  Food for thought?
• The iShares Lehman 20+-year Treasury Fund (TLT) today gave a new sell signal at 90.5;
• The Amex Natural Gas Index (XNG) and the Natural Gas futures parted ways and decoupled in late December, just before Christmas.  Since December 23, the XNG is up 4.2%, compared to Nat. Gas futures, which are down 31%.  Today the XNG gave its first sell signal on a PnF chart since December 23.  There is an opportunity in this somewhere.

Well this is where it gets interesting. The 10 year note is now above the 2 year note yields by a whopping 3.36 basis points (now that's a steep curve!), and at 4.52% is 2 basis points above where Fed funds will likely be with Greenspan's last rate rise next week. Now Big Ben won't have the inversion we talked about.

It gets interesting becuase of the following. we noted the double top in 10's at 4.62% and those sorts of levels usually are so obvious they attract the market there. In addition, we have $50,000,000,000 of new Treasury supply coming soon, so higher yields make 'em easier to sell, only to have yields fall afterwards, making the dealer community profits. Plus the last two auctions have been met with tepid demand.

We mentioned yesterday that a falling bond market can feed on itself due to mortgage originator selling. I just wanted to explain briefly. Basically, when rates rise, prepayments on mortgages slow, increasing the duration of mortgage backed securities. Originators then have to sell treasuries to get their duration back in line. It is what exacerbates the moves in the market-if only for a brief time. That move would really only occur through 4.62%, as rates really have not moved that much yet.

 Condo sales, the driving force behind Chicago's housing market throughout the fall, went flat in December, the latest sign that the torrid housing market has eased to tepid, the Chicago Tribune reported.

The Illinois Association of Realtors reported Wednesday that existing-condo sales in the Chicago area rose just one-tenth of 1 percent last month from December 2004, though year-over-year sales last fall had spiked 7 to 15 percent a month.

A report Wednesday from Goldman Sachs said the December existing-home sales report suggests that "U.S. housing market conditions are deteriorating rapidly," because inventories of both single-family homes and condos "appear to be surging."

 Looking at the charts of the building stock (Ryland down almost 5 today) and reading the news about housing, I have to think that the housing boom is slowly fading. Since 2002 it's been the home-building boom that has accounted for about 90% of the increase in GDP and in job creation.

The Fed obviously sees the deterioration in the real estate picture which may be why they are in an all-out money-printing mode.

In turn, gold and silver see what the Fed is doing. And the precious metals are "adjusting" accordingly. Of course, that isn't the only reason gold is rising. Gold is under accumulation around the world. It's now the fourth major currency, and even the central banks know it.

Let's review the list of revenue misses, earnings shortfalls, and lowered guidance:

Alcoa
Dupont
eBay
Apple
Yahoo
Intel
IBM
Citibank
GE
JNJ

And I'm sure I'm missing a few.

What say you bulls, how are these "bellweathers" missing good for future earnings?

We fire out of the gate with the 3rd day in a row gap up on the futures markets. Earnings continue to grind out with mostly inline, beat by the .01 type numbers across the board. I don't see too much to be hand waving about and nor do I see much too get too concerned about at this point in the earnings front.  We are approaching the next Fed meeting a week from yesterday and we are recovering nicely from Friday's spanking. I also see a solid bearish wedge forming on the SPX with lots of resistance @ 1275-77 are coming most likely today.  GOOG is back trading above 450 so all is good with the world again as the stock has nearly recoverd 60% of its fall from grace last week. Let's see if the market has the ammo as the media pundits say that Friday was an anomoly and the green light is flashing wildly green now and we will never see prices like we saw again as we saw last friday. I think we at least need to test Friday's lows before we can sound the sirens and back up the trucks on the upside.  Big breaks like this whether sooner or later, usually signal further breaks in the market to come. We will just have to watch and see, but I think 1275-77 will be strong resistance today for the bullish contingent!!

 

 

 The weekly Investor's Intelligence survey shows a drop in bullish sentiment to 53.7% from 57.3% and an increase in bearish sentiment to 25.3% from 22.9%.

 The ABC Consumer Comfort Index rose to -9 in the week to Jan. 22 from -13 the prior week, Reuters reported.

All three components of the index rose. The percentage of consumers who had a positive view of the U.S. economy rose to 41 percent from 38 percent and the number with a positive view of the buying climate rose 2 percentage points to 40 percent. The number of consumers who had a positive view of their personal finances rose to 56 percent from 54 percent.

Fourth-quarter earnings for companies in the S&P 500 are on track to come in somewhere between 13% and 14% ahead of the year-earlier period. That's the 10th quarter in a row of double-digit percentage gains -- the longest such run in over 30 years, the Wall Street Journal's Ahead of the Tape column said this morning.

The string may be nearing an end, the article suggested.  According to Reuters Estimates, earnings at 21% of the S&P 500 companies that reported so far fell short of analysts' marks, compared with a historical 17% or 18%.

The weakness comes as a surprise. Neither corporate-profit warnings nor analyst-estimate revisions suggested anything was amiss, the article said.

A "throw-over" in the SOX could precede a "throw-over" on the Nasdaq...

If the S&P 500 is any guide, the "throw-over" will complete, which could precipitate a more serious decline.   

 As the charts below show, has oil not only traded higher but futures contract looking several years ahead are also appreciably higher. In the recent past, nearby future contract were higher but distant futures contract contemplated lower oil prices. That has begun to change over the past quarter.

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Oil Futures and the Markets

What happens in the past when this occurs?

 

 Average drop on this cross has been 10.7% further fall at some point in the year.