Real Housing Data
Who would expect the market to make a strong rally off the supports after Putin did exactly what the US warned that there would be “consequences” against? I think we all know that the US and Europe can offer only hot air. I am not going to debate the merits of Diplomacy or what the US should or should not do, but I am pointing out the reality on the ground and the expectations that will drive the market higher or lower. We sold off into the fear that there would be something; we rallied when the news came out and we came to terms we would not really do anything. This morning Putin is broadcasting his victory in what amounts to his version of the State of the Union. While the Ukraine moves to the back-burner, we now focus on the Fed.
Real Housing Data
This week will be Janet Yellen’s first FOMC meeting in which see is solely in charge. The last meeting (January 28-29th) was more a Bernanke hand-holding affair and she remained the taper course. The economic data is mixed enough to give Yellen room to change monetary policy or stay the course; however, it is almost certain that any rate hikes or accelerated taper is off the table. So, there are three most likely possible outcomes.
1. Continue with the Bernanke Taper rate (reducing again by $10 billion per month) to $55 billion a month.
2. Slow down the Taper rate (reducing by less than $10 billion per month) to between $55-$65 billion a month.
3. Halt the taper rate (holding steady at $65 billion per month).
There are other two other options I am giving a low probability.
1. Reverse the taper and increase money printing and asset purchases above $65 billion per month.
2. Increase the taper rate more than $10 billion per month, to below $55 billion per month.
These last two options are extreme. I feel the reverse course option is her “ace in the hole” if the economy slows down or there is need for more government deficit spending. The option to increase the taper rate is almost assuredly off the table. Not only does the math not add up to do it (need to continue to cover the bond market and MBS buying), but it also goes against every bone in her body.
That leaves the first three options. If we look at the headline numbers only and cherry pick economic data, we could make the argument that the economy is making a solid recovery; however, to do that we must be fairly narrowly focused. We have seen volatility in the weekly jobless claims, the “Seasonal Adjustment” in retail sales masked a rather sharp drop, the U3 rate has moved lower on lower participation while the U6 has increased, the total receiving unemployment (“not adjusted”) has increased by almost 100,000, consumer confidence has dropped, earnings top line revenue was weaker than expected, and there are a host of other economic data that is not all roses. Now I am certainly not saying things are getting worse, they are not. The point is that any recovery is marginal, at best, and much of it continues to be government stimulus dependent and reliant upon emerging market top-line growth. The market rally has been strong, but it has also been coupled with the fastest and largest expansion of margin. As I pointed out the NYSE margin index has broken into an all-time high, to get back that fast in a couple of years means that leverage margin needed to accelerate rapidly.
This morning housing starts fell for the third straight month, according to the Commerce Department, but let’s take a closer look at the data. Notice the “seasonal adjustments” vs. non-adjustments. I decided to do the math, but the Commerce Department doesn’t like to make it easy through reporting some numbers as annual (their “adjustments”) and some actual data as monthly. So to keep the data consistent, they are all annualized figures. There is no doubt some good news, but some of the adjustments are just massive and can easily obscure the reality on the ground. Get a good look at the data, make your own conclusions. I find it amazing they can “seasonally adjust” or juice these numbers in some cases over 20%. While they do show signs of improvements, it is totally disingenuous because they are not nearly as STRONG as we are lead to believe.
Here is the Commerce Departments “Explanatory Notes” on their adjustments. Again – they offer no math, models, or details on HOW:
In interpreting changes in the statistics in this release, note that month-to-month changes in seasonally adjusted statistics often show movements which may be irregular. It may take 2 months to establish an underlying trend for building permit authorizations, 4 months for total starts, and 6 months for total completions. The statistics in this release are estimated from sample surveys and are subject to sampling variability as well as nonsampling error including bias and variance from response, nonreporting, and undercoverage. Estimated relative standard errors of the most recent data are shown in the tables. Whenever a statement such as “2.5 percent (±3.2%) above” appears in the text, this indicates the range (-0.7 to +5.7 percent) in which the actual percent change is likely to have occurred. All ranges given for percent changes are 90-percent confidence intervals and account only for sampling variability. If a range does not contain zero, the change is statistically significant. If it does contain zero, the change is not statistically significant; that is, it is uncertain whether there was an increase or decrease. The same policies apply to the confidence intervals for percent changes shown in the tables. On average, the preliminary seasonally adjusted estimates of total building permits, housing starts and housing completions are revised about three percent or less.
The data is not great, but not totally bad either. This is just another data point that will certainly be monitored and factored into any Fed decision, or used for justification. The Market this morning came under some pressure in the pre-market futures when it was released, but it looks like we will still open higher.
Support & Resistance
Are we back above that 16,250 range which had been initial support? Can we close above it and get a leg up? I will watch the 16,250 level closely. We know that 16,000 – 16,100 level is short-term support and 16,500 is short-term resistance.
We are getting a good bouncing the pre-market futures, but still far short of the 3,700 level. I would look at 3600 as short-term support on any pull back with 3,700 as a short-term resistance area.
The 1840 level looks like we put in a short-term support and have a good bounce from yesterday. The VIX came off and in the 15′s, but we could see the VIX shoot back up on a pull back. I would look at 1880 as resistance.
This seems more like a straddle strike, we could move quickly to 1200 or back down to the 1160 level. Continue to watch the RUT for general market order flow.
Dead Cat Bounce?
Could we be in a reprieve rally setting up for a dead-cat bounce? There is no solid news out there that gives indication for a solid market rally. Sure, the Chinese economic data was better than expected, but I don’t think that solely gave the market a rally yesterday. There are too many uncertainties in Europe, Ukraine, and the US to offer any real explanation other than a knee jerk reaction. We now have a short-term support and we know were some selling pressure will come in.
The FOMC meeting should set the tone going forward and how they taper will play into the market. The market wants to go higher and because bonds are so unattractive they remain the best option. However, how much more can we borrow to continue to push higher? Will the NYSE margin index break $500 billion or $600 billion, how much more can we leverage up this rally? So far the Fed remains the lender of last resort and has been instrumental in the equity and bond rally. In a way, a government market rally subsidizes. It feels good, but let’s not get too addicted to government money printing.