Weekly Analysis Blog July 8th

Weekly Fundamental and Technical Analysis

The first week of the month and third quarter was a good one for both the Dollar and Equities worldwide. Of the back of the market’s positive perception of the better than expected Non Farms headline numbers, which stirred consensus that the Fed’s tapering could be on its way, equities all over the world ended the week up. The Nikkei ended the strongest rallying better than 4% on the week, with the FTSE 100, AUS200 coming in at 2.57 and 2.32% respectively. The Hang Sang and the ESTX50 were the weakest nudging just above flat posting in turn .35% and .08%. It is interesting to note that equities did not sell off as expected off what appeared on the surface as good US fundamentals. US equities finished the Non Farms Friday up with the S&P gaining 1.02%. The Dow ran in second behind the S&P with a rally of .98% and the NASDAQ in third with a .74% run up for the Friday—dailies beat the more modest weekly moves up of S&P .7%, Dow .65% and NAS .98%.

World Stocks Percent Change Weekly

SPX500-Alternate-2-Jul-07-1815-PM-1-hour

US Stocks percent Change Weekly

SPX-Alternate-6-Jul-07-1817-PM-1-hour

After retreating a bit on Monday and Wednesday, the buck made nice gains on Tuesday, Thursday and Non Farm Friday to end the week up 1.61%. The USD beat all of the majors with the Pound, on the back of some dovish comments from Carney, taking the brunt of its strength losing better than 2.1%. The EUR took it bad too, ending down just over 1.5%. The Commodities Block did not fare as bad with the Aussie, Kiwi and Loonie all falling 1.26%, .73% and .62% respectively.

USD Index and Majors Percent Change Weekly

DX-A0-Alternate-1-Jul-07-1819-PM-1-hour

Bond market yields continued their relentless death march up surging 7.8% on the week, cooling off a bit at the beginning of the week to 2.45 before it made its move up to finish Non Farm Friday just 1 basis point off the high at 2.71%.

A smug media celebrated the US fundamentals with the VIX confirming by moving down for the week to 14.9 to finish off resting on the 10 period moving average—a very complacent move considering the risks that lurk.

Take note of the pervasive complacency regardless of the move up in yields again. I wrote last week that the media was fixated on the stock market, remember? However, I do not believe the Fed is that blind to the clear and present peril of rising yields. This week the Fed was mum. However, over in Europe and all over the world, central bankers appeased markets with their dovish talk—all ignoring the move up in oil, which is priced in USD. If this debasing continues it means that oil will be that more expensive for them. One cannot ague that consumers are still strapped. Rising oil and interest rates are not going to help spending one bit. On the contrary, it is going to make things much more difficult if both oil prices and oil do not come down soon. Even though commodities have been falling, oil has been on a steady march upwards since the April 7 low of USD 85.64 to its current price of 103.44.

And more, the Non Farms revision up and 195k plus workers added are not as good as most love to think. As a matter of fact, I would argue that the number is actually counterproductive to a healthy economy once one looks behind the headline facade.

Most of the jobs created were part time service sector jobs. As a matter of fact, more than 200k full time jobs were lost while 360k part time jobs were added. And to make matters worse, manufacturing lost better than 6,000 jobs. And while the unemployment rate held steady at 7.1% the U6, which measures the underemployed, rose from 13.8 to 14.3%. And even though US Manufacturing activity beat slightly expanding at 50.9 vs. 50.5 expected, under the hood, hiring fell to the lowest level since September of 2009. While New Orders and Production expanded registering 51.9, up 3.1 and 53.4, up 4.8 from May’s numbers respectively, the Employment sector sunk into contraction registering 48.7 – down 1.4 – a number not seen since the low of June of 2009.

I am starting to wonder if the Obama administration saw this coming. Just why are companies shedding full time jobs for part time jobs? Maybe they are trying to get ready for the Obama health care mandate by reducing employment. Could this be the very thing that motivated Obama to extend the mandate by one year? Maybe this will back fire on future employment numbers now that companies know they have one more year.

No one can argue that the US once again created nothing but low paying part time service sector jobs. And another crucial piece of Fundamental news to come out that the media not only missed but also misinterpreted as good news was the ballooning trade deficit along with the GDP that was revised down from 2.4 to 1.8%. Exports fell and imports surged to the second highest all time, posting a trade balance for May of -45.03B. This is proof that the US economy cannot support its paper inflated service sector. With the US producing less consumer goods, all these new, hotel and restaurant, secretaries, sales, nurses and temp employees are going to use their paper money to buy foreign consumer goods—hence an ever expanding trade deficit. People don’t realize that when a country is in massive debt that is financed by borrowing and monetary easing, and at the same time has a trade deficit, it literally exports its inflation to the more productive counties. The US papers over the world; and the world sops up that paper by debasing their own paper in order to keep the party going. It really does kill me that even the most educated cannot see this. There are many out there that think that this mechanism of debt and deficit is the engine of the world and that without it, it’s doomed.

I have been going back to the NY Times to see whether or not their take this week was on the still rising yield market; and to my surprise, there was no more mention of the dangers of governments having to pay higher interest rates for their much needed projects.

However, I did find an article written by one of Krugman’s pals Robert Frank entitled: Austerity Won’t Work if the Roof Is Leaking. In summary, the article is about how US governments should take advantage of the still low rates (before they go up) and cheap materials (before they go up too) and unemployed bodies, (like Germany did [?!]) by going into debt no matter how much (they hinted to 2 plus trillion) so that our children wouldn’t be in a bigger debt problem. Yes, you read right I said “wouldn’t.” According to the article, the US has a “leaky roof” that if not fixed, will cause bigger fixing down the road at much higher prices and interest rates. Now of course, there was no mention as to why the roof was leaking to begin with; though, Mr. Frank does mention that the “leaky roof” metaphor is in reference to a real problem that is twofold; weak demand and a crippling infrastructure—all of which can be taken care of by borrowing, monetizing and big government spending or better as he put it: “investment.” And I also must add that Mr. Frank only meant bridges, roads, schools and so forth as the “crippling infrastructure”—leaving out any mention of the crippling economic infrastructure debt has caused in the US economy.

Now if this is “trial balloon” for what’s to come; and, if—as I am more prone to believe, giving the other circumstances— the taper is defiantly off the table because at the rate at which yields are rising, the government better come to the rescue fast before things get more expensive.

However, something has to give for the Fed to come out and save us from these high rates. It’s either going to start with the housing market, the banks or Europe. And I say start because they are all going to suffer one way or another from the only justice there is in the market these days—yields.

As for next week I believe stocks will keep moving up a bit but could lose steam in the middle of the week. The Buck strong move appears to be for real and looks like it will be well bid.

Other economic news this week was:

  • According to the Commerce Department construction was down from April’s .1% to 0.0% in May. Nonresidential projects fell to 1.4%. However, Private residential construction rose 1.2%–the highest level since Oct. of 2008.
  • USD Manufacturing Market beat coming in at 51.9 vs. 50.6 but down from June’s 52.3. Construction spending was up by .4% but missed consensus printing .5% vs. .6%. ISM Manufacturing PMI was up from May’s 49.0 into expansion beating consensus at 50.9 vs. 50.5. Inflation expectations rose as ISM Prices paid rose and beat coming in at 52.5 vs. 51.5, up from May’s 49.0.
  • Tuesday’s USD Factory Orders ticked up and beat coming in at 2.1% vs. 2.0% while the ISM New York Index fell into contraction down from May’s 54.4 to 47.0. Consumer sentiment fell further into pessimism with the IBD/TIPP Economic Optimism dropping 1.9 to 47.1 vs. 49.3 consensuses. ADP beat coming in at 188K vs. 160k and moved up from May’s 134K. Initial Jobless Claims fell and beat also at 343K vs. 345K. ISM Non-Manufacturing PMI for June missed printing 52.2 vs. 54.0. Trade balance missed coming in at almost an all-time high of 45.03B vs. 40.10B.

Next week look for US retail sales and NZD CPI on Monday, with Tuesday the mover being USD, GBP and EUR CPIs. Wednesday we have the AUD RBA and GBP BOE Minutes and GBP Claimant Count Change. Also CAD Interest Rates and press conference is on tap. The rest of the week seems light except for CAD CPI due out on Friday. The week is heavy with Fundamentals and the way things are going one can’t really tell how the markets will react to it all. However, that is what Elliott Wave Analysis and stops are for. Good luck trading and have a great week.

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