Diamond Slice

Producers, Housing and Employment in Focus

Market movers will get their fair share of economic data in the November 30, 2009 week, following a shocking deferral by the Dubai World fund of $4 billion last week. The event shocked debt costs around the world in a momentary relapse to the terror which gripped markets and sent LIBOR rates to smothering magnitudes. While financing has become available for some large borrowers due to government backstops and interventions, the issue of American businesses ability to borrow has re-emerged under the spotlight. This week we will get a glimpse of the Nation's economic strength through the Chicago PMI, Motor Vehicle Sales, ISM Manufacturing Index, Construction Spending, Pending Home Sales, Productivity, Factory Orders, and October Employment reports, due out over the five day period.

Monday

While equity and commodity prices will likely pop on monday in U.S. trading, the release of real economic data will be slight. At 9:45 EST the Chicago PMI report will release its headline number, which Bloomberg analysts expect will drop to 53.0 from the 54.2 October level, the highest since September 2008.

Tuesday

Motor Vehicle sales will cross the ticker sometime during the day and will be hotly anticipated by auto analysts, looking for a trend in post-"cash for clunkers" sales. With October sales rebounded at a 7.9 million unit pace and expectations for a 7.75 million annual sales statistic in November, the street is expecting a cooling of the market leading into the holiday shopping months. ISM Manufacturing results hit 55.7 in October for the highest rate since mid 2006, but are expected to slow to 55.0 for the month on signs of less strong new orders when the report is released at 10:00 AM. Construction Spending and Pending Home Sales will also be released at ten o'clock, shedding some light on the hotly debated bottom in housing, claimed by some to have already formed. Expenditures made for construction is expected to fall from September's 0.8% monthly increase to a declining -0.4% rate. Pending Home Sales may see a decline from the drastic jumps over the past two months, where the back to back 6%+ monthly increases led to the year over year rate ballooning to 20%. Unfortunately pending contracts have been dying short of actual deals, due to obscure appraisals amidst the still uncertain price discovery process.

Wednesday

Wednesday will see the ever vague "Beige Book" released by the Federal Reserve but the report will likely be a whitewashing of rhetoric and supportive statements concerning the health of the U.S. economy, where any pessimism would certainly be against the Fed's Dual Mandate.

Thursday

The Productivity and Cost of Production report is expected to show 8.6% productivity growth in 2009 Q3, compared to 9.5% in Q2.The report, released at 8:30 AM, is also expected to cite average costs of businesses down by a -4.2% rate, less than the -5.2% in Q2. At 10:00 AM we'll hear from the Institute of Supply Management for the third time of the week, as the ISM Non-Manufacturing Report headline number comes through. Traders will be looking for a solid gain from nearly stagnant growth in October (50.2) to 52.0 on the November service sector report card. This gauge of business un-helped by inventory rebuilding, has struggled to show meaningful gains above the break even 50.0 mark.

Friday

While every day this week will birth crucial economic data, the irreplaceable November Employment Situation report will have the world glued to electronic displays at 8:30 AM EST on Friday. Jobless rates are claimed to be lagging indicators, but the constant buzz over the staying power of the current stimulus recovery has begged investors to keep a tab on the rising rate of unemployment. October saw 190,000 additional non-farm payrolls slashed, while the household survey showed a larger jump to 10.2% unemployed. This month the consensus is for 100,000 payrolls to be lost as the headline number remains at 10.2% without jobs. Later at 10:00 AM we will also see how Factory Orders have changed over November, where new orders are expected to decline to nearly even at 0.2%, yet markets will move mainly on sentiment derived from the Employment Situation.

Denis Gartman Preps U.S. Investors For Dubai Shock

Denis Gartman, of the well known "Gartman Letter", prepares investors for a shell shocked day on Wall Street as investors and traders catch up to the rest of the world by trading to levels congruent with the major U.S. equity futures that have been trading for the past 24 hours over seas...

   

Click here for standalone player

Source: http://www.Bloomberg.com

The S&P 500 Rally in Yen and Swiss Francs

The S&P 500 rally from the March 9, 2009 low has caught many off guard and left more wondering if now is the time to buy stocks. The smart money has already made their profits in the past eight months and reports from the FT now cite hedge funds beginning to take profits. In a tribute to those investors who feel like they've missed the boat, perhaps a quick step into the shoes of some international investors in U.S. firms will change their sentiment. 

The U.S. stock market appreciated by 55% from the lows to the end of October 2009 from a dollar perspective, yet foreign investors are nearly all seeing lessor returns in their native currencies. The graphic below was derived from the daily close prices of the S&P 500 in Dollars, Japanese Yen, and Swiss Francs, from the market bottom on March 9, 2009 to October 30, 2009.

The chart says it best...

 

Source: Diamond Slice, Yahoo Finance

Disclosure: Long SDS, (Short S&P 500)  

SPX Technicals Waning Ahead of Stacked Econ Data

The SPX (S&P 500 Large Cap Index) technicals are signalling weakness following the November 17th 52-week-high of 1110. Since that point the index has traded in a tight 20 point range ahead of a full stack of economic reports set for release this morning. Here we will address four key technical signals which could spell correction if the economic data comes out worse than expected

First is the bearish wedge forming as the gaps between new highs being set are proportionally less than the gaps between market troughs.

Second, the upper MACD band is nearing convergence with the lower band in what would be a bearish signal. The MACD histogram has also remained above zero since August 9th, which has every time since March 9th signaled a major rally in the SPX, yet we have instead seen volatile price movement at the top of a range.

Third, the slow stochastics show instability above the critically overbought level of 80 and two missed convergences. The stochastics also show lower highs and lower lows with each peak and trough cycle, confirming the bearish wedge.

Finally the 20 and 50 day SMAs (Simple Moving Averages) are nearing convergence and further selling the weakness of the market at these prices. A move below the 20 day may end up also being a move below the 50 day SMA once the market corrects, without a generous move to higher prices from here.

 

At Diamond Slice we don't make any calls based solely on technicals, but on a day where we will also get MBA Mortgage Applications, Durable Goods Orders, Personal Income and Outlays, Jobless Claims, Consumer Sentiment, New Home Sales, and the EIA Petroleum Report, it's worth taking a minute and checking the strength of charts.

With such a montage of crucial data today and the Thanksgiving weekend ahead, including the infamous "black Friday", we see the potential for a strong move lower if economic news comes out broadly bleak. A large move lower for the larger U.S. equity indexes would also spur a correction from the recent highs and call into question the strength of the U.S. consumer. 

Look to take profits from long equity and commodity positions ahead of the holiday weekend, should the economic data come out ugly. Market remains unsustainable at current price valuations and technical signals suggest a downward shift.

Disclosure: See DS Portfolio for Diamond Slice Positions

Nikkei Nose Dive: Signals From A Weak Japan

While the phenomenon hasn't received much attention, the Nikkei 225 headline Japanese stock index has diverted course from all other major economic player stock exchanges. The Nikkei turned negative on August 14, 2009 and hasn't been able to resume the congruent pattern that all other major stock market indexes seem to be following. One can notice the sharp downward shift of the red line, representing the Nikkei 225 index, amidst all other global stock markets rising to new highs.

In mid August, just as the Nikkei began to falter, the "old guard" LDP (Liberal Democratic Party) turned in the keys, having lost the general election by a landslide, and now the contending DPJ (Democratic Party of Japan) finally has the reigns. The LDP had been in control during every year but one since the beginning of Japan's post-war government, and the DPJ has inherited more than a few liabilities.

Japan is facing unemployment that peaked at 5.7% in August and has since receded to 5.3% in the latest October reading, still historically high by Japanese standards. But what's really hurting Japan is the deflation problem, only recently admitted by the BOJ (Bank of Japan), which sites consumer prices excluding food at -2.3% yoy (year over year). The debt of the nation sits just shy of 200% of GDP in an era where dwindling numbers of offspring forewarn of a mass scale government revenue shortage. The National Institute of Population and Social Security Research predicts that current trends will force Japan to contend with a 30% population decrease by 2055 (less than 90 million people and roughly equal to the 1955 tally) where the number of citizens under the age of 65 will fall in half.

So has Japan's stock market fallen because it's currency has declined since August, causing for the opposite effect that the dollar is having on U.S. equities? One of my favorite professors described it best saying, "as it turns out... maybe". In the chart below you'll see that the Japanese Yen turned more expensive relative to the dollar early in August, but so did every major currency included in the above chart citing national equity index performances. After all, the Japanese Yen was the big brother to the Dollar as a preferred carry trade currency and was used to fund a plethora of risky bets under previous LDP low interest rate policies.

The new JDP administration is walking into a shrinking population, deflationary currency environment, historically high unemployment, 200% x GDP debt, 3% GDP stimulus spending and only 1.2% growth in the third quarter to show for it thus far. It must be increasingly uncomfortable for Japanese Prime Minister Hatoyama and rightly excruciating for BOJ Governor Shirakawa. The prime minister is promising a boost of costly public services, handouts and tax cuts to the struggling consumer base while Shirakawa vows to keep rates low when speaking to the G20.

Investors are exiting Japanese stocks because as things stand the Japanese government won't make good on debts and the only reasonable outcome will be for Japanese stimulus to be withdrawn early. In the alternative situation, Japan default on debts and create extreme problems for the nation and Japanese corporations in the future. Some blame the threat of deflation amidst global asset appreciation for the Nikkei's recent misfortune, yet the truth of the matter shows an indebted nation spending more and making less in an environment where global recovery is not a strong enough sell to stay long firms headquartered therein.

While U.S. regulators see what is unfolding in Japan, a blind eye is turned and the wallet comes out. After all America is a nation of winners, and the adverse scenario to the stimulus not turning the economy around before our own debts come due is just too dark for a "#1 Nation" to acknowledge. 

Short Holiday Week Packs Punch of Crucial Economic Data

The Weekly Spectrum

The 2009 Thanksgiving holiday week will be brief, but crucial economic data to be released between Monday and Wednesday will leave marks on investors faced with the pivotal punches of where to put their money. With a spotlight on housing, economic data for the November 23 week will be highlighted by Existing Home Sales, the Case-Schiller HPI, and New Home Sales. All the while a GDP Revision, Consumer Confidence, Consumer Sentiment, Durable Goods, and Personal Income & Outlay results will beat the bell on Wednesday afternoon.

Monday

Kicking off the week at 10:00 AM, Existing Home Sales over the October period are expected to grow to an annual rate of 5.7 million from 5.57 million in September. Existing home sales bottomed in January at 4.49 million annual units from the peak in September 2005 above the 7.2 million unit rate, marking a drop of more than 37%. Housing reports last week in the new home market have foreshadowed potential disappointments from this week's data, as the Housing Market Index and New Home Starts came out weak.

Tuesday

The world will closely watch the 8:45 announcement of the first revised U.S. GDP report, which economists predict will drop 0.7% to 2.8% for Q3 2009. At 9:00 AM the S&P Case-Schiller HPI index will report the past month's change in median home prices, where the September index reported a 1% increase in the 10 and 20 largest U.S. city sample groups. Wrapping up Tuesday the 10:00 AM Consumer Confidence report, measuring the perceived economic strength and expectations of buyers in the current month, is expected to drop slightly following two previous monthly declines which were also consensus misses. 

Wednesday

Durable Goods orders are expected to have grown at a slower 0.5% pace in October, versus September's 1.0% improvement, when announced at 8:30 AM. The Personal Income and Outlays report released at the same time may show a 0.2% month to month (M/M) improvement in income, opposed to no change in September, while the consumer spending component is expected to bounce from September's -0.5% to 0.5% growth for October. Thirdly out at 8:30 AM, Jobless Claims are bumped a day early due to Thanksgiving and should be watched especially closely, since the consensus is for initial claims to drop below 500,000 for the first time since January. Next up the Consumer Sentiment report at 9:55 AM is expected to rise slightly to 67.0 in November, to break a two month decline. The results will accent the larger sampled Consumer Confidence number from Tuesday and should give a meaningful insight into the intended spending patterns for the holiday season to be kicked off on this "Black Friday". Finally New Home Sales will finish things off at 10:00 AM, expected to increase by 8000 to an annual rate of 410,000 units in October after a steep 38,000 unit miss in September dampened the spirits of bulls who had hoped for a housing market standing on it's own feet. A miss in New Home Sales will seriously call into question the rebound in home sales and stabilized prices, suggesting that it was nothing more than the last able consumers taking advantage of home-buying incentives via U.S. government stimulus.

The trading week will be comprised of normal Monday through Wednesday trading and an abbreviated Friday session ending at 1:00 PM. Economic data during the Thanksgiving week and preliminary results from store volumes and sales on "Black Friday" will not be overlooked, as global managers beg for guidance amidst bi-polar sentiment and haphazardly positioned market prices.

~100 Post Anniversary!~

Diamond Slice recently reached the 100 post mark in our first year of syndication and we would like to take this opportunity to say "thank you!" 

It has been an interestingly riveting year in global financial markets and it has been our foremost pleasure to bring you the objective and calculated slice, found only here at www.DiamondSlice.com!

For those of you who have been with us for some time, we thank you for your readership, and to those that are new to Diamond Slice, we sincerely hope that you will take a few moments to search our site using the Google Search widget at the top right side of the page or simply browse through the Category tabs under the Diamond Slice banner.

Happy Reading!

--Robert Eberenz--

(Founder & Chief Analyst)

Obama's China Visit Breakdown

The world has followed Obama's recent visit to Asia, especially his visit to China, with hopes that Asian currencies would be allowed to appreciate over the short term. China's Renminbi has been re-pegged to the U.S. dollar since mid 2009 and should be allowed to appreciate vs. the dollar, as every major currency has over the past six months.

The video below from Bloomberg dissects the U.S. president's visit in global financial market context with commentary from some of the most respected talking heads of the past two years.

   

Click here for standalone player

Having trouble with the video? Here's the link to the player on Bloomberg.com...

http://www.bloomberg.com/avp/avp.htm?N=av&T=Obama,%20Hu%20Own%20Words%20on%20Cooperative%20U.S.-China%20Relations&clipSRC=mms://media2.bloomberg.com/cache/vSkWd1AKW_gM.asf

Bernanke's Mandate, A Contradiction

Amidst all the hypotheses and strategies of guys like myself "probing for profits", the most recent security to have stolen the limelight must be currencies. It's no secret that the U.S. Dollar has been falling against nearly every major currency throughout the world over the past six months, however it's soon to become a bigger issue, having been publicly addressed by Fed Chairmen Ben Bernanke. In a speech on Monday, the Chairman explained that the Fed is "attentive to the implications of changes in the value of the dollar", in an attempt to "talk up" the value of the Greenback. 

Bernanke's Mandate

The Fed Chairman went one step further to assure the audience at the Economic Club of New York that his board of governors would "continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability." 

The Fed's Choices

While the Economic Club might have bought it, the mandate is nothing short of contradictory and insults the intelligence of the market. Regardless of the billions of dollars the Fed extends or withdraws from the GSE's, the passionate Bernanke yarns of dollar strength, and Obama-talk about the importance of jobs, the Fed has these simple two options... keep the Fed Funds at 0% or raise it.

0% Fed Funds Rate

If the Fed keeps the rate at 0% the U.S. economy may see a peak in the headline unemployment number sometime in mid 2010, thus addressing the jobs end of Bernanke's mandate, but not without triggering asset appreciation all across the world. This was a successful exit strategy to the prior recession in the U.S., allowing businesses to invest at cheap rates and create jobs for consumers to invest back in the appreciating assets (homes). However 0% rates are currently only allowing institutional investors and governments to borrow funds, who have then invested them in risky assets such as U.S. Equities, Commodities and Emerging Markets. This carry trade continues to devalue the U.S. dollar and decreases the purchasing power of strapped U.S. consumers.

This time businesses can't secure financing from banks because their balance sheets remain in shambles, prospects for earnings growth are dwindling, and consumers continue to lose their jobs. Data out this week showed Q3 2009 posted a record 6.25% of total U.S. mortgage holders in delinquency, proving that 0% Fed Funds rates offer no comfort to those who need it. 

Quantitative Tightening (QT)

QT is an option and should be realistically considered as the only alternative to severe long term inflation. Critics of this view will cite the PPI (Producers Price Index) core statistic's decline of -0.6% in October as evidence to support a deflationary or neutral environment, yet the true effects of artificially inflated commodity prices won't be felt by consumers for some time. Contrarily, the report showed crude goods prices increased by 5.4% over the same period. Should interest rates remain low long enough to increase already inflated asset prices and consumers remain jobless, the result will be a pinched supply chain. Input prices will continue to rise as output prices stagnate or fall and companies/workers go out of business.

The only responsible option for the Fed is to begin QT now and take whatever pain comes along with it. Australia has already begun raising its Fed Funds target and will soon be followed by others, yet Bernanke reaffirms and extends his window of 0% rates until mid next year or later. Meanwhile the charade of talking up the Dollar and failing efforts to lure China into de-pegging the Renminbi amidst a Sino-recovery founded on the cheap currency.

Talk is cheap Mr. Bernanke and so is the Dollar. Keep the USD from falling further by raising rates and weathering the potential short term pain. Many may hate you in the short run and equity markets may turn south, but we will avoid a decade of stagnation, emerging stronger and faster because of it.

The Weekly Spectrum

The five day trading week spanning November 16-20, 2009 will leave few stones unturned as the current economic strength is weighed and measured via the Retail Sales, Industrial Production, New Housing Starts, and Leading Indicator reports. 

Retail Sales

The September report showed negative growth in total sales on the back of a massive pullback from the C.A.R.S. program expiration, while ex-auto retail stayed positive. The auto market made a significant improvement from a 6.7 million to 7.9 million unit annual rate in October, leading economists to project positive headline growth for the month. Investors are also looking for a positive number out of the report and will hit the breaks on any negative headline numbers or perhaps a miss of the 0.9% growth estimate.

Industrial Production

Industrial production numbers on Tuesday will be foreshadowed by the "make" or "miss" of the consensus 29.0 in the Empire State Manufacturing Index report to be released Monday at 8:30 EST, which is consequently a decline from the 34.57 reading for the previous month of October. Industrial production was the first industry to nosedive twelve months ago and fights to recover amidst an anemic consumer base at the other end of the production pipeline.

New Housing Starts

The Commerce Department reported that new home sales declined in September by 3.6% to a 402,000 unit annual rate on October 29th, yet home builders have bottomed the slashing of production as the annual rate at which homes are produced now hovers near the 600,000 unit mark. While homebuilders seem to be making a heavy bet on the U.S. consumer recovering, it's possible that the bottoming in production has more to do with large scale debt reorganization from the major national players as financing has loosened from previous conditions. This Wednesday report is expected to show that the annual rate of new home construction started rose from 590,000 to 600,000 in October.

Leading Indicators

This Thursday report is expected to submit a 0.4% rate of improvement among the basket of leading economic indicators surveyed, down from the previous September reading of 1.0%, but may be altered as the above earlier economic reports may disappoint. 

Themes of USD weakening amidst Equity, commodity, Gold strength remain trade worthy themes, yet caution should be a virtue this week as macro stories out of China and Japan may take center stage. Surprises from U.S. economic reports should make for a volatile week as we watch the 1100 mark on the S&P 500 for guidance as the bulls push to prove their true grit at these lofty prices.