Monday, December 13, 2010

The Week Ahead

All systems go as the global Ben Bernanke put continues to put the Greenspan put to shame.  After threatening to break some key supports in late November, the market has been back on the one way ride it enjoyed in September and October.  A wonderful illustration is the NASDAQ which has yet to suffer a negative session in December.   The S&P 500 has had 1 negative session, to the tune of roughly 0.2%, as have the small caps.

We've had "double top" breakouts in all 3 of these indexes, led by the small caps first - then NASDAQ - and finally the S&P 500.   This is a pattern you want to be buying, but one has to consider the fact that normal markets do go up and down, so going out on a limb I'll say the NASDAQ has a negative day one day this week!

Many short term sentiment readings are back to extreme levels just 2 weeks after being somewhat oversold, as Europe is an afterthought and Congress is ready to "buy more GDP" - pushing through a stimulus (don't call it that, Fox News would get upset) program that actually is going to be larger than the original early 2009 Obama stimulus.  Watching 60 Minutes last night I finally figures out the GOP way of thinking on why it is ok to slap on another $1T (surely the figure once all the pet projects are slapped on the Christmas tree) to the national debt:  "We don't have a revenue problem in Washington D.C., we have a spending problem."  Aha.  I'd argue we have problems in both arenas.  Last I checked if you reduced taxes you would need to reduce spending (rather than increasing it) just to keep the deficit flat, - but what do I know?  (Mark you idiot - don't you understand the multiplier effect!  Were you not around for the huge growth and non jobless recovery of the 2000s where low taxes led to massive economic growth.  It's right here in my textbook - trickle on baby!) We're back to the mantra of "we'll just grow our way out of the mess".  Either way, 2011 and 2012 are going to be 2 more steroid full years of data points that reflect little of the underlying organic economy; at which point we can prepare for the stimulus plan of 2013-2014.   But in markets where long term is 'tomorrow' those are issues for another generation.  As long as we keep shuffling a few trillion into the economy, banking system et al every 2 years, it's all good from a speculator standpoint.  The national 'Uncle Sam credit card as fiscal policy' plan is fantastico.

The 10 year bond continues to do some interesting things - again, this can be due to any combo of (a) improving economic prospects (b) heightened inflation pressures and/or (c) compensation for the risk involved in a country that has no credible plan to ever paying back its creditors - exclusive of devaluing its currency and making the debt easier to service.  Part of this might simply be a normalization to mean as the latest European crisis led to capital fleeing to a 'safer' asset the past few months; along with the QE2 anticipation.  This type of run in such a short period of time is quite intense, so let us see if it stalls out soon or continues at pace.  Whatever the case, yields are moving opposite to what Ben directed from his perch at central command.

Bigger picture, in a country now dependent on easy money from every pore - the 10 year rising (if it continues) will soon put pressure on housing prices as ultra low mortgage rates have been supporting stagnant house values.  At 5% thirty year mortgages, you are freezing out those who could get into the market at 4.3% - and for those who can purchase homes, you can afford a bit less house with the same payment term.   Oil is also a potential issue as it feeds into gasoline prices, but the 2% payroll tax holiday is a backdoor way to offset the gasoline price increases - the extra $20-30 a week the average family gets under this plan should dovetail nicely with the price increases at the pump and the grocery store.  In reality this is a tread water solution - cause inflation to kick in on one end, but hand the people money to offset it.  It works as long as you can continue to hand people money in unending fashion.  Considering almost $20 of every $100 a typical American brings home is now a blessing from government... again, I am sure it all works out well in the end.    [May 25, 2010: 1 in 5.5 Dollars of American Income Now Via Government; All time High]   

Chinese inflation came in hot at 5.1%* Friday night, but there was no interest rate hike signaled.  Doctor copper continues to surge, as JPMorgan apparently has cornered the LME inventories in London (following Goldman Sachs in doing "God's work").  Other than missing Lehman Brothers, Fannie & Freddie being wards of the state, and Europe bailing itself out every 6 months, it almost feels like it is 2007 again.  Not a worry in a world - Ben Bernanke will fix everything....same talk as October 2007.

*official 5.1% probably means 8-12%

Speaking of which we have a Fed meeting this week (1 day affair) but other than the meetings where Ben pledges to do more QE, these have become non events.  Ultra easy money forever and ever, and the rest is just details.

On the economic front, after last week when the reports were snoozers, there might be a few interesting items that could actually move the market, and heck even induce a selloff for more than 8 minutes.

Tuesday: Producer Price Index - this is inflation at the wholesale level: expectation 0.7% but if you exclude food and energy (which no one uses) it is 0.3%. (8:30 AM).  Retail sales - expectation 0.7%, I'd expect something closer to 1% due to deep discounting, 7M households with much more money since they don't pay the mortgage, et al. (8:30 AM)  FOMC Announcement (2:15 PM )

Wednesday: Consumer Price Index - this is inflation at the consumer level: expectation 0.2%, excluding food and energy 0.1%.  Remember, if you move down from eating NY Steak to ribeye or from turkey breast to spam, in American government calculation that is deflation.  Along with a host of other ways to keep this figure from ever reflecting reality.  Therefore, if the figure ever does rise by 0.4 to 0.5% you know real inflation is really surging.  (8:30 AM)  Empire State Mfg Survey (8:30 AM).  Industrial Production - expectation 0.3% with 75.1% industrial utilization.  Housing Market Index (10 AM).

Thursday: Housing Starts - this figure plunged by 11%+ last month so we can celebrate when they return to a more normal pace this month and scream 'housing recovery'... of course no one will mention the previous month. (8:30 AM)  Weekly Jobless claims - expectation 420K (8:30 AM).  Philly Fed (10 AM).

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