The War On Credit

In 1940 America the War had been felt only in reminiscent ripples, by “tweets” on telegraph receivers and two week old newspapers.  Pearl harbor still stood strong and broad on O’ahu’s South Face, while mothers and wives hung close to those on which they’d grown to depend.

Not so dissimilar from those days, we now face threats that only quietly whisper their motives from Asia and Europe. Constructed by years of fiscal white lies and monetary insanity, the body bags have yet to be filled. Municipal governments in China still depend on increasing real estate values, while European banks holding large debts of failing Southeastern states still stand. The United States Economy has “recovered faster than anyone could have imagined” and the S&P 500 at one time had nearly doubled from it’s lows. But still the whispers; 10 year U.S. Treasuries nearing 3% yields, LIBOR trending higher, market technicals showing a shift towards negative confidence, and this weeks economic data hanging in the balance…

Quintessential Indicators

This week is a pivotal moment for the global economy for many reasons, not the least of which are the developing technicals of the S&P 500 (SPX).  Take a look at the QUINTESSENTIAL CHART, THE MEANING OF LIFE, THE TRUTH OF YOUR VERY EXISTANCE below…

Economic Data

In economic news this week we have an immense block of information set to hit the street. Monday we saw that incomes rose by 0.4% in May and consumer spending turned higher by 0.2%. The consumer spending portion was an upside surprise, but it was mostly in the auto sector which tends to be volatile.

Tuesday we’ll get consumer confidence which is expected to stay constant at 63.3, while Wednesday will focus on Chicago PMI, the EIA Petroleum Report, and MBA Mortgage Applications. We’ll be watching the PMI for signs from Midwest manufacturers and the EIA report for signs of further dry storage supply increases. EIA may be fighting tropical depression Alex over traction in the Crude Oil space.

Look for a volatile morning session on Thursday as the Initial Claims , ISM Manufacturing, Construction Spending, and Pending Home Sales reports cross tickers. ISM is expected to drop to 67.0 in the June reading and Construction Spending projected to fall from a 2.7% gain to 0.5% loss in May. Initial claims will be closely watched for signals on the heels of the ADP report from Wednesday; all in preparation for the May Employment situation report on Friday. Also due on the final day of trading this week, will be the Factory Orders report at 10:00 am, which should set the tone for the final hours of trading ahead of the weekend.

Remember it’s all about the S&P 500 (SPX) until we say so! Stay vigilant and nimble. We see this market on the edge of further downward momentum. There is a battle just over the horizon and bombs may well fall when we least expect it. To those prepared and those forewarned…

“Good night and good luck.”

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It’s no secret that the entire China Renminbi “de-peg” issue, as defined by the U.S. White House, Obama, and “Tiny Tim” Geithner, was a complete sideshow to draw attention from domestic financial policy that has carved a handsome crevasse into the foundation of our country, formerly referred to with common adjectives such as “strong”, “unwavering”, and “solvent”. The currency was pegged to our currency and if it were un-pegged it would effectively levy a major tax on all of the American families who have traded down from Whole Foods to Wall Mart as we learn to live on fewer incomes and more humiliating job titles. Why is that Rob? Well sports fans the equation is simple: Cheaper goods = Chinese goods. The single and solitary reason that President Obama and Treasury Secretary Geithner had any stance on the issue, was due to European pressure to hard-line China into a gentle revaluation to make German goods more able to compete. And now that the Euro is nearing 1 to 1 parity with the USD, it seems that all is well in Whoville…

Well not quite, because now that no one cares China has played it’s middle child syndrome role to a “t” and obeyed the oldest son’s sustained pleas. Sure the Yuan will revalue, but apparently it will be capped around +1.5% in 2010, and still managed by central China. So is a managed float really a float? Well is a bear Catholic? Not really… in fact they don’t really belong in the same sentence. Exactly.

So sure the second largest economy in the world suddenly feels the need to float it’s currency because it runs a major current account surplus and is ending it’s stimulus fueled domestic spending; which would force it’s currency higher, or in the case of a pegged currency, keep exports competitive but cause inflation to run rampant as prices increase and wages stay stagnant. Make no mistake, China may be a middle child but they made the de-peg decision for themselves and it means nothing to the economic recovery there or anywhere in the World. Still, we’ll probably see some self proclaimed credit groping out of Washington in the near future by idiots who have no idea how to spell current account surplus, much less the name of the intern who wrote the speech they delivered on the subject. (Of course, that’s only after they zip up from railing the heads of global Petroleum giants.) This is why markets rallied early as bulls shot blanks, meant to be live rounds, over the bow of U.S.S. Permabear but ended in negative territory.

This week we’re going to see some serious pain from the housing reports on Tuesday and Wednesday where economists expect a rise to 6.2 million and a fall to 400,000 annual units in the Existing and New Home sales reports, respectively.

We’re getting towards the middle of 2010, and eventually we’re going to have to hear something from Bernanke to prep markets for the inevitable day when the U.S. economy has to sell the xbox, leave the parents’ basement, and in the words of a wise man, “get a job sir!” Many of us forget what it means for the large financial institutions that manage our cash to actually pay interest on borrowed money, but the day will soon arrive. The same folks who approved all of the crappy mortgages that you didn’t pay, because you didn’t actually make what you wrote on the application, are going to have to start paying their own rent as well. Yes, the event I’m so jovially alluding to is the Fed Funds Rate announcement from the Federal Reserve, and we’ll hear it on Wednesday.

Otherwise this week is going to be in the hands of the traders. Lucky for you, you’re reading this so you’ll have a jump on that as well. Check out the chart below for a look at the S&P 500 (SPX)… THE ONE AND ONLY QUINTESSENTIAL CHART NECESSARY FOR ANY EQUITY TRADES UNTIL WE SAY SO!

As regular readers know, we endorsed “short” positions relative to the S&P 500 and Crude Oil and a “long” call on the VIX following our proprietary trades to open said positions on Friday, May 28. As you can tell from the chart above, we called the next leg down to new six month lows correctly, but sentiment reversed and we called for investors to exit positions before the next big leg up on June 10.

I’m going back on the line now to call a true and magnanimous move lower on the S&P 500. Sentiment is waning as the truly negative effects of a floating Renminbi are becoming realized ahead of two sure to be nasty reports this week on the U.S. housing market. The MACD histogram (blue bar chart below main chart) has peaked, RSI is back above 50 and out of “oversold” territory for the first time since May 1st, and the SPX has followed a string of anemic trading sessions with a hugely volatile Monday session that ultimately ended lower.

Normally, we like to use the “simple moving average” (SMA) to chart trendlines for resistance and support of prices, but due to a drastic sentiment shift we’re more comfortable with the “exponential moving average” (EMA) trendlines, as seen in Green (200 day) and Red (50 day) above. The 200 EMA and 50 EMA have both served as resistance  and are nearing a bearish cross amid the slew of other red flags facing the U.S. equity market.

Take 5 minutes and look into SDS (UltraShort S&P 500), DTO (UltraShort Crude Oil), and VXX (Short Term VIX). We like using www.stockcharts.com to chart these vehicles and suggest our readers use it as well. It’s free and has a lot of technical indicators for your convenience. (And no we’re not even getting a cut for that plug, it’s just a solid chart service…)

Stay vigilant and keep stops tight if you want to dabble at these levels… For the record, we are most certainly dabbling in those very names as of this morning. Be sure to stay current on all of our positions and trading moves with our free Twitter service that tracks DS Lead Analyst Robert Eberenz’s trades in real time by clicking on the follow button under the DS_Shoutbox tweets in the right sidebar…

Fingers on the trigger boys!

As announced in our DS_Shoutbox live updates, through Twitter on June 10, we have temporarily closed positions in DTO, SDS, and VXX as short term upside risks have presented themselves in the form of higher than expected China production and U.S. Consumer Sentiment. We will resume short positions in Oil & the S&P 500, and long positions in the Vix, if we see strong resistance for a third time at the 200 day MA of the S&P 500.

Economic Data

The week will contain little economic data, further adding to market momentum on the basis of technical indicators. Monday we will see only 3-month and 6-month Treasury Bill auctions, which should show continued strong demand, given the uncertain sovereign bond yields in Europe.

Tuesday will focus on the Empire State Manufacturing Index, which is expected to show an increase in New York state manufacturing from 19.1 to 21.0 in June, following a decline in May. Also released, the Housing Market Index (HMI) will give a snapshot of U.S. residential building, from the view of the NAHB (National Association of Home Builders). The report will contrast the closely watched Case/Shiller Price Index’s plateau effect, where home prices have stagnated since their bottom, and the New & Existing Home Sales and Housing Starts reports that are widely expected to fall, due to expired stimulus, in June.

Wednesday we’ll get the main slew of weekly economic indicator reports, first starting with the weekly MBA Mortgage Applications that last week fell in both the purchase and refinance departments, combining for a composite decline of 12.2%. Later, we’ll get the Housing Starts report to accent the HMI, which Bloomberg economists expect to show a decline in May, from 672 to 650 million annual units. Next the Producer Price Index (PPI) will report prices paid for goods at the top of the value added cycle, where estimates suggest a monthly “Headline” decline of 0.5% in May and a change in “Core” PPI near even, at

Industrial Production should report a continued ascent in May, at 1.0% compared to 0.8% in April, to continue a long string of mostly positive changes since July 2009. Then after lunch, the EIA Petroleum Report will demand U.S. markets attention, as the past two weeks have charted declines in U.S. Dry Crude inventory in Cushing, OK and year over year crude oil demand turned negative (-1.0%) for the first time since February 2010.

On Thursday the Consumer Price Index will compliment Wednesday’s PPI, where Headline is expected at -0.2% and Core at 0.1%, for a dismally insignificant inflation reading. Then we’ll watch the Initial Claims numbers for any new signs of trajectory from the past 6-months’ range bound announcements between 450k and 490k. Leading Indicators are forecast to impress in May, despite Global woes set in Europe, as this “composite of all economic data” reading may jump from -0.1% to 0.6%. Finishing the day, the Philadelphia Fed Survey is set to show the acceleration of growth moderating, as the statistic is predicted to fall from 21.4 to 20.0.

Friday will be a day absent of economic data reporting due to the “Quadruple Witching” even to occur. Review our explanation of quadruple witching to get a better understanding of the events set to occur Friday, and you will understand the increased volatility and volume that are sure to present themselves on the final day of trading this week.

Stay vigilant… Markets have calmed as EU fears of drying demand for exports have been resolved through signs of strength from China. Don’t expect these short term feelings to sustain. Look to make moves when the S&P signals trajectory from the 200 day MA (current resistance level) at 1107.

Happy Trading

But first, a quick view at Friday’s S&P 500 trading….

S&P 500 - Friday June 4, 2010 (intra-day)

Yes sports fans, that’s what “missing the boat” on an Employment Situation report looks like… (S&P 500: -3.44% @ 1064.88)

Friday, the world listened as non-farm private sector payrolls increased by only 41,000 jobs. Census hiring added 411,000, manufacturing 29,000, mining 10,000 and other temporary service jobs 31,000, while construction and financial services  lost 35,000 and 12,000. The headline came in at 431,000 non-farm payrolls added, while April was revised down by 20,000. For those of you unconscious last Friday and visually impaired, markets sold the news.

THE BOND KING SPEAKS

Take a moment to listen to the stance of Bill Gross, the head of PIMCO, the world’s largest bond fund, on the anemic jobs report last week and his strategy for navigating a sustainable path through the “new normal” economy, in the United States and abroad.

Following Gross’ comments on Friday, the manager of the PIMCO “Total Return Fund”, Mohammed El-Erian, weighed the outcome at the G20 in Sunday’s Financial Times.

In El-Erian’s words:

I fear that all this may continue to catch off guard at least three dimensions that are still significant in today’s marketplace:

• Mindsets that have difficulties recognizing regime shifts, preferring instead the illusionary comfort of the more familiar cyclical frameworks;

• Approaches that focus excessively on rates of change and inadequately on levels; and

• Investment portfolios that are over-exposed to equity and credit risk, and that maintain insufficiently hard interest rate duration.

Clearly the boys over at PIMCO have their doubts on the sustainability of the World Economy, but what’s more disconcerting is that G20 leaders are beginning to publicly admit similar fears.

ECONOMIC DATA

This week starts slow from a U.S. Economic Data viewpoint, where Monday will bring only the U.S. Consumer Credit report. Revolving Credit declined in March by $3.2 billion, while car loans kept the headline number positive, at $2.0 billion in March. On the heels of weak jobs data, traders will be quick to write off the consumer on Monday if it seems that revolving credit continued to decline in April.

Tuesday traders will watch the ICSC Goldman Store Sales and Redbook Sales, to get a gauge on weekly spending patterns. But the focus will shift to the bond auctions in the afternoon, when 4-wk and 3-yr Treasury debt is set to be offered. U.S. Treasuries appreciated 1.51% on Friday as markets sold off and we expect to see a strong auction on Tuesday.

Wednesday will focus primarily on normal weekly readings, as the MBA Mortgage Applications and EIA Petroleum Status reports come in. The MBA report should show continued weakness from the mortgage purchase category, which -4.1% and -3.1% over the past two reporting periods, securing a new 13 year low for purchase applications. The headline MBA Applications number held up at 0.9% and 11.3% last week and the week prior, due to refinancing founded on low mortgage rates.

The EIA report showed a net decline of -1.9 million barrels in crude inventories, marking a short term peak in inventory near 365 million barrels and weak yearly gasoline demand growth at 0.5%.

On Thursday it’s all about jobless claims. If claims come in higher than the 448,000 consensus or if the 4-week  average rises for a fourth consecutive week, we’re likely to see downward pressure on Thursday.

Friday will bring Retail Sales, Consumer Sentiment and Business Inventories reports. Retail Sales are expected to maintain last months 0.4% rise, while Sentiment will most likely maintain the six month plateau around the 73 reading.

Business Inventories have been a solidly healthy portion of the recovery in the U.S., because vicious slashing of inventories “on the way down” has allowed for a sustained inventory replenishment during the recovery of retail sales. We saw 0.4% and 0.5% growth in March and February and expect to see 0.5% growth reported in April, as the ratio of Inventory/Sales has trended lower to 1.24, symptomatic of quality sales growth. (If retail sales come in soft, we’ll expect to see some nervous reaction to the inventory report, as a higher I/S means unsustainable growth.)

ALLOCATING CAPITAL

It has been our stance for some time and will remain our stance that U.S. Government debt will benefit from increased risk throughout the world in the short-term, but will ultimately fail as a long term investment when the outlook for government revenues fails to meet a sustainable level, given the current liabilities of the Treasury and an unsustainable recovery.

We are recommending that clients dollar cost average over the next 12 months into vehicles that allow short exposure to U.S. long term debt, such as TYO (Direxion 10 yr Treasury 3x Bear fund), while maintaining overweight short positions in U.S. equities (SDS), short Crude Oil (DTO), and long CBOE volatility (VXX), as explained in our recent “trade flash” trade strategy report.

This week will likely begin with some relief for the Euro, on G20 plans to cut costs in Euro states, while the hangover from Friday’s U.S. Jobs data could continue into a “no news” Monday trading session. Look for pops to add to shorts early in the week, but keep stops tight leading into Jobless claims and Friday’s data.

Happy Trading

Red Flags

In Spain we’re seeing a consolidation of major banks, crudely organized as quickly as possible, to stem debt holders from fleeing the scene and indirectly drying out the local credit market. In France and the U.S., bond holders are demanding higher yields on new debt issued by BNP Paribas and Goldman Sachs, both of which are strong industry leaders in finance. GS 10 year bonds will be offered this week at 280 basis points above 10 year Treasury notes, where they were sold for only 190 bps above the 10 yr two months ago on March 1, 2010. In China the debt of a major Chinese developer, Kaisa Group Holdings, Inc., has been shunned by investors who won’t back any more bond issues at this time. The 12.8 percent rise in real estate prices across mainland China is beginning to stymie government support of lax loan requirements, forcing big name players like Kaisa to cut off future projects without buyers of their bonds.

All of these factors are symptomatic of a global trend which has only just begun, where higher interest rates are demanded and risk is becomes more expensive. Evidence of this trend lies with the LIBOR inter-bank 3-month lending rate, which has crossed the 0.50 percent threshold just last week, and now sits at 0.54 percent. LIBOR was the bellwether rate that ballooned during the Fall 2009 crisis, and gauges the willingness of banks to lend among themselves. Some will incorrectly call the rising yields of debt a phenomena that is “natural” given the fears in Europe. By contrast, we instead hear these rising rates as ominous whispers on the dark fates of those failing to heed their summons.

Economies in Europe are sure to stall in the next year given cost cutting and tax hikes from Germany to Greece, while the lone firing piston of global growth that is China, will soon feel the weary dragging weight of foreign consumers, crippled by unsustainable sovereign balance sheets and post-climax stimuli in decline.

Economic Data

Monday is the Memorial Day holiday in the United States, so we’ll turn to foreign data to get a jump on the weeks trading. Housing Starts in Japan, Private Loan Growth in Europe, GDP in Canada, and Manufacturing, Building Approvals and Retail sales in Australia can all be analyzed at our new Global Economic Calendar in the navigation bar tab at the top of this page.

Tuesday is set to be a busy day for data, when U.S. markets open for the week. Motor Vehicle Sales are predicted to rise from 8.5  to 8.9 million annual units, which would be the highest rate since the expiration of the CARS U.S. stimulus program in August 2009. The ISM Manufacturing Report should maintain a level near last month’s 60.4, since new orders have remained positive for a solid 10 months. Wrapping up Tuesday we’ll see data from the Construction Spending Report, which is predicted to stall from the meager 0.2 percent reading in March to 0.10 percent in April.

On Wednesday the first report will be the weekly Mortgage Applications, which have surged up to the end of the U.S. new and existing home purchase tax rebate. Last week purchase applications dropped by 3.3 percent, but were offset by a 17.0 percent increase in refinancing applications, to bring the headline composite to a positive 11.3%. We see mortgage rates rising in the next six months as lending risks become priced much higher, but for now many are taking advantage of the still attractive rates near 5 percent. Later the Pending Home Sales report is forecast to ease from 5.3 to 3.5 percent, also due to the expired housing stimulus. Watch for a disappointment here, as less consumers look to buy homes void of government sponsored tax breaks.

There’s a lot on the menu Thursday in terms of economic data in the U.S, beginning with a May unemployment preview via the ADP Employment Report. This month analysts forecast a rise in ADP employment by 56,000 jobs in May, where for April the report cited 32,000 additional jobs. Initial Jobless claims are an important figure to watch this week, since last week the report cited 456,000 job seekers made initial unemployment claims against a forecast for 440,000. This week Initial Claims are gauged to report at 455,000, but it should be noted that the past 6 reports have surprised unfavorably. Q1 2010 Non-Farm Productivity and Costs data will also be released, and is expected to show 3.4% and -1.6% growth rates respectively.

From an industrial angle, we will find crucial information in the Factory Orders and Crude Oil Inventory reports on Thursday. Factory Orders have been rising for 10 straight months and are the leading component of manufacturing growth. This report is expected to show 1.7% growth in orders during April 2010, compared to 1.3% in March. Crude Oil Inventories have ironically risen parallel to increased industrial activity in the U.S. for much of the year, and for sixteen of the past seventeen weeks. The report from the EIA will surely effect the price of the WTI continuous spot price for crude oil, which is traded on the NYMEX and represents the cost of crude in the U.S. market. We’re looking for any shift in demand or inventories of gasoline and distillates as well.

On Friday the story will be all about the May Employment Situation Report. While estimates do vary, it looks like the average among analysts expect the jobs added in May to come in near 500,000, compared to 290,000 in April (including 66,000 temporary 2010 U.S. Census jobs, April). Low end estimates for the headline statistic come in at 290,000 while the upper range targets jobs added at 635,000. Downward surprises from the past four initial claims reports suggest to us that there were more individuals looking for work in May, perhaps causing the unemployment rate to pop above 10% again due to the larger workforce. Any number below 300,000 from this report on Friday will leave markets extremely anxious, while readings above 500,000 will be interpreted as optimistic.

We will avoid holding positions into this report unless geopolitical risks develop throughout the week, possibly overriding the fundamentals.  Watch the DS_Shoutbox Twitter Feed for updates on where we’re putting our money and links to market moving news EVERY DAY!

What Else to Watch This Week:  LIBOR, specific reports of bond issuing problems, the U.S. 10 -year note yield, EU sovereign yields, China monetary policy announcements, and the developing risks on the Korea peninsula. Look for opportunities which will benefit from financing and risk becoming more expensive for individuals and institutions.

Happy Hunting

Remember you can refer back the Weekly Spectrum throughout the week and use the Economic Calendar to track specific economic reports, reference historical data of economic indicators, and get updates on revised data of past reports for FREE.

What we know so far is that Merkel and Sarkozy have rounded up the kids and sought refuge in the family station wagon just before the CDS Grizzly Bear mauled the young sickly kid with a limp. All that we have in ink is that the ECB is planning to contribute 60 billion Euros, the Eurozone states are commiting 440 billion Euros, and the IMF is on the hook for 250 billion Euros; summing a total package at a nice round 750 billion Euros. The squarely trimmed package is so arbitrarilly gigantic that the issue was immediately branded as an “all in” poker bet.  To us it looks more like a re-raise. An “all in” move wouldn’t be such a handsome dividend… we digress.

Alas, we know that EU states’ individual fates are now wound closer together, but we’re not sure if this is better or worse for the group. Simple reasoning would suggest that the strongest of the Eurozone (Germany and France) are worse off, while the weakest (Portugal, Italy, Ireland, Greece, and Spain) are better. Talk to the SPX, DAX, or CAC 40 last week and they’ll tell you how they feel about the plan.

While we got some stabilization in markets on Friday, we are expecting to see some more gains early in the week as bulls have had a chance to lick their wounds and venture back for some “opportunities”. They are of course lunatics, since nothing has changed in Europe and the jobless claims reports have run out of seasonal excuses.

Econ Data

On to the U.S. Economic Data… Econ data this week should be watched and only traded on if reports come in worse than expected. The trend towards negative sentiment with respect to econ data, that began two weeks ago, is strengthening, and will allow for only temporary pops in equities and energy prices.

Monday we’ll see a really strong Existing Home Sales report, which will probably help to add relief to U.S. equities. The report focuses on the data from April, when first time buyer tax rebates expired, but the weekly mortgage purchases index has discounted most of the news into shares. Economists expect the annual rate to jump from 5.35 million units in March to 5.6 million in April.

Tuesday will start with more housing news from the April Case Shiller HPI, which has showed prices plateauing despite increasing sales. A decrease in the HPI argues against a sustainable housing recovery, and suggests that sellers are focused on liquidating inventory before stimulus supported buyers disappear. Later in the day we’ll get the Consumer Confidence Report, which is expected to report an increase from 57.9 t0 59.0 from April to May. We’re expecting this report to disappoint badly, as geopolitical factors out of the EU effected global economic sentiment.

Durable Goods Orders will kick off Wednesday’s data, and will most likely continue reverse the -1.3% drop in March, as economists at Bloomberg expect orders rose by +1.5% in April. The March drop was explained by a drop in the volatile transportation portion of the series, where the non-transportation orders actually rose by a revised +3.7%. Later in the day, New Home Sales are expected to add to the 26.9% gain in March. The annual sales  rate is expected to rise from 411,000 to 425,000 in April on continued strength tied to the housing stimulus that is now expired.

Keep an eye on the EIA Petroleum report for further gains in Crude dry inventory, and also for a reversal in the recent trend of dwindling gasoline supplies.

Thursday morning, we’ll get a revision of Q1 GDP, which is expected to rise from the previous reading of 3.2% to 3.5%. However, the main focus of the day, and quite possibly the week, will be the Jobless Claims Report. Last week initial claims jumped to 470,000 without any special factors, yet this week analysts expect the figure to revert the mean, near 450,000. If jobless claims continue higher above 470,000, we will see markets in the U.S. sell-off aggressively into the weekend.

The beginning to the end of the week on Friday will be Personal Income, expected to rise from 0.3% to 0.5% from March to April, while consumer spending cools from 0.6% to 0.2% over the period. Later we’ll hear from the Chicago PMI, which has been targeted to drop from 63.8 to 62.0 from April to May. Most importantly, the mindset of consumers in the Consumer Sentiment Report will help investors better understand the degree to which recent market turmoil has effected sentiment. The statistic is expected to stay constant at 73.3 for the final reading of the May report, so look for negative response to anything at or below that figure.

We’re looking for entry points to short U.S. equities and Crude Oil, while waiting for a drop in the VIX to go long. Stay vigilant and watch LIBOR this week, as it’s just crossed .50 for the first time since July 16, 2010.

The options expiration on Friday will allow for increased volatility on a day where no significant U.S. Economic data will be released. Furthermore, the week’s U.S. Economic data is focused on Inflation (CPI & PPI), Housing (HMI & Housing Starts), and Manufacturing (Empire State Mfg), all of which have been discounted for bullish trends over the past few reports and can only surprise to the downside. Meanwhile the risks of sovereign default measured by the CDS, LIBOR, and Bond spreads are mixing with all time highs for Gold/Euro prices per ounce, and are beaconing prudence amidst a still frothy expectations of a return to normalcy in the second half of 2010.

Econ Data

Let’s get this out of the way quick, because it won’t effect anything this week. But for the macro readers out there, we’ve got you covered…

Monday we’ll see the Empire State Manufacturing Survey from New York, which is expected to cool from 31.8 to 30.0 for May’s reading, and the Housing Market Index (a survey of home builders on the conditions of the market), which rose from 15 to 19 in the last report (April 2010).

Tuesday starts and ends at 8:30 am with Housing Starts, expected to firm from 626,000 to 650,000 yearly, and Producer’s Price Index (PPI) which is projected to show virtually no change (+o.1%) in prices producers pay for goods.

Wednesday the MBA Purchase Applications will give a better reading of the mortgage market, following the expiration of government supported housing stimulus, after last weeks -9.5% drop in purchase applications. The Consumer Price Index (CPI) will compliment PPI the day prior, and is expected to show 0% change in both the headline and core sections of the report. And finally, the EIA will put out their findings in the weekly Petroleum Report, which last week showed a stabilization in gasoline demand matched by rising inventories of Crude and Distillates.

Perhaps the most crucial yet subtle event to keep an eye on Wednesday will be the 10 Year Treasury auction (1:00 pm). With all of the fears of contagion risk spreading through Europe, one would expect the benchmark U.S. bond, the 10 yr note, to attract increased investment. We believe there will come a day where Treasuries are shunned along with every other kind of paper, and the only thing worth holding is gold, however before that happens markets must first fall much farther in the U.S. Watch this auction in context with moves in equities and commodities on Wednesday for signals from market makers (the primary dealers who run the Treasury casino).

Thursday begins with Jobless Claims data, where 440,000 initial claims are expected, down from 444,000 last week. We’ll also get the Leading Indicators report, where economists are either too scared or too dumfounded to make a call more bold than 0.1%. Finally, we’ll get the Philly Fed Report, which should show a slight improvement from 20.2 to 21.5 in the metric that measures the economic conditions in the Philly Fed zone.

Friday we’ll be expecting increased volatility, due to options expirations, and will also look for geopolitical factors from the EU to jar markets ahead of the weekend.

EU Break-Up

As the header above suggests, the true risk surrounding financial markets as a whole is the uncertainty of the European Union’s future, where there seems to be no outcome that could calm financial markets. There is really no example within the bounds of modern history, where an economic union of separate sovereign states came together to share a common currency and then broke apart, which is partly adding fuel to the fire under EU leadership.

The effects on individual Eurozone states’ in an EU loan situation are clearly negative, where austerity measures are sure to send the domestic economies into recession. Contrarily, for a state to actually exit the 7 year young currency union, the bank would have to assume the previous currency (in the case of Greece, the Drachma) and then print enough of that currency, letting it devalue in order for the economy to recover and reorganize its debt.

Either outcome is unfavorable and the discombobulated leadership within the EU, is enough to assure us here at Diamond Slice that there will at least be no resolution until this time next week. As a result we are recommending that all readers with market long positions go 100% into cash, purchase exposure to precious metals, and even consider going short “western” equities (e.g. the S&P 500, German DAX, and French CAC 40). We had set a target on Crude Oil at $70 for the WTI NYMEX Contract, so we can’t recommend shorting crude at levels so close to our target, but would recommend adding shorts near $75/barrel on a pop.

Stay diligent and informed as markets send signals this week from the CDS, LIBOR, USD/EURO and other “truth telling” securities. DON’T TRUST THE EQUITIES FOR A PROPER DISCOUNT OF THE MARKET!

Happy Trading

The big boys from NYMEX, NADSAQ, and the CME all had a meeting with the SEC over cascade selling effects, because the one scapegoat that’s always good for a few rib punches is the computer. “Uhh I dunno why the market fell 10% in 5 days… oh wait never mind, it was the computers!” This week we should initially see a firming of liquid assets like stocks and commodities, as the EU’s sovereign default backstop fund (“TARP 2.0: Birth of the European CDS Monster”), which happens to boast nearly $1 trillion USD worth of Euros, is discounted by market movers. Conveniently enough, leadership in Europe is changing by the day and creating an absolutely muddled picture, despite the default backstop pledged this past weekend. Friday we’ll get some U.S. Econ data that may turn heads, when Sentiment, Retail Sales, and Industrial Production all report, but trader’s shouldn’t expect much else other than Europe to keep the focus throughout the first half of the week.

The Fund: Tarp 2.0 (EUROPE)

The only non volatile trend in Europe these days seems to be the increasing readiness of Eurozone State leaders to reach for their checkbooks. The bailout has grown from a meager 45 billion Euro Greek loan at 5% interest, to a behemoth commitment of 750 billion Euros ($963 billion) aimed at stemming the panicked selling of EU states’ sovereign bonds. The action came after a 4.1% drop in the value of the Euro currency in trading last week. The fund is in essence identical to the Term Asset Relief Program (TARP) used in America to stem bankruptcies in the largest U.S. banks, only this time the asset’s aren’t mortgages, they’re government bonds, and instead of banks, the failing institutions are whole countries. While it would be easy and amusing to criticize the rationale behind forming this fund, I understand why EU leaders had no choice but to make this wager, no different than an “all in bet” in a game of Texas Holdem’. Whether market’s and debt holders will be impressed… this week will be our compass.

EU Power Struggle

In the UK the election race has come to a Close, voting has been concluded, and for the first time in 30 years, the UK has found itself with no clear majority for any of the three competing Prime Minister Candidates. Incumbent PM Gordon Brown looks to be the losing party as David Cameron has begun negotiations with Liberal Democratic Candidate Nick Clegg for a Lib Dem. / Conservative party alliance. Chances for a so called Lib/Lab coalition between Clegg and Brown seem more unlikely, despite rumors that Clegg’s crew will be offered positions in the Cabinet and that Brown may relinquish the PM position entirely, in order to secure a deal. Regardless, debt aren’t liking the uncertainty as Cameron’s pledge to cut the 163 billion Pound ($241 billion) budget hangs in the balance amidst the EU default contagion and a UK Debt/GDP figure estimated to reach 100% by 2011.

In Germany, the dust is settling in the aftermath of the election for German Bundesrat positions, and it looks as if Chancellor Angela Merkel’s allied party, consisting of the Christian Democrats (CDU) and Free Democrats (FDP), has slipped from power. Exit Polls in the economically and politically crucial North Rhine-Westphalia region have foreshadowed an official transition of power from Merkel’s party to the alliance of Social Democrat (SPD) and Green parties, when all ballots are tallied. Merkel’s recent decision to offer financial assistance to Greece was referenced as voters “rebuked” the Chancellor. The SPD/Green majority in the Bundesrat, Germany’s upper house of parliament, will stymie policies in development to reduce taxes and reform health services, aimed at lowering cutting costs and spurring growth.

Econ Data

Jumping ahead to Wednesday in a slow week for Econ data, we’ll first be watching the Crude Oil supply numbers from the EIA Petroleum Status report at 10:30 am. Changes from current refinery capacity, now near 89%, Cushing Crude inventory changes, distillate stocks, and gasoline demand are all important to the price of WTI crude, which fell to $75/brl on Friday in NYMEX trading.

Jobs are already positive on the heels of Friday’s Employment Situation report, leaving Thursday’s Jobless Claims results in the uncomfortable position of following a strong act.

Friday we’ll be more attentive to U.S. econ data, as the Retail Sales report will give a gauge of consumers’ purchasing power in April. Chain Store sales and Motor Vehicle sales are supporting the consensus among Bloomberg economists for nearly no gain in the month, or a 0.2% increase. Industrial Production is expected to show an additional 0.6% of output, as economists see Consumer Sentiment rising from 72.2 to 73.8 for the first May reading. Finally, Business Inventory levels were assumed to continue the rising trend at +0.4% in March, compared with +0.5% in February, as the month behind report yields it’s data.

Asia traded higher in Monday action, as the EU deal has initially calmed the panicked selling from equities, where U.S. and EU equity futures are pointing higher, and hard hit crude oil futures are gaining traction. We are looking for clear signals out of the EU default contagion issue for medium term alpha as markets tell how they feel about this new Bazooka backstop, which may even make one Hank Paulson a bit jealous.

Happy Trading

Chances are you have answers to these questions, and a few extra cents to contribute to the discussion. Frankly, that’s what the comment box is for, so we won’t waste time on the issue beyond these next few words.

Greece will be bailed out by the European Union because the Euro is has been threatened too greatly, however by fusing the balance sheets of the weakest and strongest Euro-Zone states, the long term effect on Euro strength won’t be improved and the negative externalities that go along with a weak Euro will present themselves, only in a more civilized/deceptive manner.

The Goldman situation now has Warren Buffet speaking out in favor of the bank. I don’t suppose it has anything to do with his 43 million warrants for GS stock.

In Economic news, we’ll actually be caring whether a few things do or don’t develop. Mainly it’s a week where Manufacturing must keep selling the recovery in the ISM Manufacturing and Motor Vehicles reports, Housing will have to convince in the Construction Spending report, and Jobs need to gleam in the midst of an expected 100k+ temp jobs as a result of the 2010 U.S. Census.

Monday we’ll crack it open with an ISM Manufacturing headline number looking for inches up to 61.0. The March figure surprised, and April is expected to remain elevated due to strong new orders. Income and outlays are expected to rise by 0.4% and 0.6% respectively in the March report, yet incomes have averaged only 1% yearly gains since the rally began in 2009. The biggest number of the day will be Construction Spending, where the -1.3% change in February is planned to ease towards -0.3% expenditure growth in March. It’s really tough to get much clarity from housing as the tax credits to buyers are expiring as we speak.

Judging from the past, we’ll get the 10 am Factory Orders report before the Motor Vehicle sales on Tuesday. The unfixed announcement of motor vehicles is expected to show an unchanged SAAR annual rate of motor vehicle sales in the U.S., holding the 8.8 million unit pace. Factory orders, on a year over year basis, have peaked at 11% while shipments also look “toppy” around 6% yoy. The weekly change in orders is expected to dip by -0.1% in March, which should be interesting to compare to Monday’s ISM report.

Mortgage applications are expected to be positive Wednesday and will be closely watched, as the last week for buyers to sign purchase agreements came to a close. The April ISM Non-Manufacturing index, which has lagged it’s Manufacturing focused sister report, is expected to post a headline 56.4, up from 55.4 in March. We’re going to pay particularly close attention to the EIA Petroleum report on Wednesday as well, where oil inventories continue to rise as gasoline demand looks more firm amidst pump price hikes. Cushing Oklahoma, the delivery point for NYMEX crude oil and the WTI price futures, has only 16 million barrel land storage facility and oil tankers sit off the coast full to the brim.

Thursday brings last weeks jobless claims, the Fed Balance Sheet, Money Supply, and the Cost and Productivity report, none of which will affect markets. Instead take some chips off of the table ahead of a ringer report from the Employment Situation on Friday.

Friday is all about the jobs numbers. Bloomberg’s economists say we’ll pick up 200k jobs in April’s report, Goldman Sachs says the economy added 175k, but that 115k of those are Census temps, while the range of other analysts’ estimates gap 110k to 500k. The past two reports for February and March have come at the end of rally weeks for equities, and have had favorable results. This time, the S&P 500 has entered a volatile bout of trading and technicals show stocks overbought. The non farm payrolls number will have to beat Goldman and Bloomberg with +200k jobs added in April to keep bulls satisfied and bears at bay.

Also of note this week, China is tightening the reigns on it’s banks, in an effort to stem real estate linked bubbles as a result of lax monetary policy. The minimum reserve requirement for the nations largest banks has been raised 50 basis points from 16.5% to 17%. This development is likely to fight the calming Aegean waters for sentiment as trading kicks off Monday morning.

The stagnant housing market and uncertainty over a viable path to solvency in Greece, which have been weighing heavily on global markets, seem to be less threatening if Friday’s data were judge. Following these developments equities pushed to new highs, as the S&P 500 closed at 1218 and NYMEX Crude splurged to close above $85 / barrel.

Given this news we closed all of our short positions and are currently 100% vested in cash. Technicals remain extremely overbought in commodities and equities, yet upside risks from economic data and/or corporate earnings could push prices higher over the next few sessions.

On Tuesday we’ll be waiting for the Case Schiller Home Price Index to confirm or dis-confirm the confusing price drop in the otherwise positive new home sales report last Friday. The composite of the top 10 and 20 largest housing markets in the country dropped in the last report, suggesting existing home prices are still falling. The Consumer Confidence report will also be released today, where economists expect a 1 point gain to 53.5 for April. The jobs portion of the survey may hold greater weight this month as seasonal irregularities have tainted the unemployment statistics.

Perhaps the main news this week will cross tickers on Wednesday as the Fed’s FOMC meeting adjourns and Bernanke announces new policy decisions… or lack thereof. While a Federal Funds Rate hike is unlikely, language concerning the timing of a rate hike sometime this year is becoming more probable, especially given the positive housing results released last week. The EIA Petroleum Status report will also grab our attention, due to the 1.9 million barrel surprise in inventories last week, where total reserves rose closer to 360 million, and the inventory of motor fuel distillates rose 3.6 million barrels, far beyond analysts expectations.

Jobless claims on Thursday morning will be crucial this week, as seasonal abnormalities have now ended, where analysts expect 447,000 initial claims, down by 9,000 from last week. The 7-year note auction in the afternoon is also worth following, so that demand for longer term Treasury debt can be compared with the announcement from the Fed just one day prior.

Friday will be a big day for fundamental data this week, starting with a bang as U.S. 2010 Q1 GDP data is absorbed at 8:30 AM. The consensus is for 3.4% annualized economic growth, where specific line items concerning inventory rebuilding, housing, and government related projects should beg dissecting. The employment cost index is expected to show that annually the costs of labor will trend around 0.4% for Q1, virtually unchanged from the 0.5% in Q4 and virtually insignificant unless the results surprise. Chicago PMI will draw a lot of attention, given the fact that last month’s report for March showed a sharp drop and thus a peak in the index in February. The ISM Manufacturing numbers trend along this figure and markets would find little security in another decline from March’s 58.8 when April numbers cross tickers at 9:45 AM. Lastly the Consumer Sentiment Index for the second half of April is expected to reverse the first half’s drop from 73.6 to 69.5, due to poor responses in the future expectations category, as economists look for a result of 71.0 from this leading economic indicator.

Over the next few sessions we are very uncertain about the movements of markets, and we see markets trading on momentum from the Greek bailout and U.S. Housing strength mentioned above. This momentum will likely bring stocks and commodities to levels which should prove difficult to impress by the Jobless Claims and GDP data later in the week.

We’ll be watching Wednesday’s EIA report, and deploy some cash back into DTO (Powershares DB Double Short Crude Oil ETN), our favorite oil bear vehicle, if headline and distillate supplies continue to bulge. We’ll also be watching the SDS (Pro Shares Ultra Short S&P 500 ETF) and VXX (iPath S&P 500 VIX Short-Term Futures ETN) for attractive entry points in the event that employment and/or GDP fail to encourage.

Happy Hunting