Tempting Tuesday – Economic Upgrade Edition

Wheee, everything is getting better!

How do I know?  Well Cramer told me not to pay attention to yesterday's "obvious technical correction" even though it wasn't obvious to him last week, when he told us to BUYBUYBUY 2.5% higher than we are now.  This weekend I asked the question "Is Cramer STILL Wrong?" so I intend to give him every possible chance to explain himself this week and last night Cramer blamed the charts, the same charts I blame for making me right.  Will a quick 2.5% pullback be enough to allow us to rocket back through resistance?  I don't think so, we were looking for an 8% correction and we'll settle for 5% if we have to but calling yesterday's 2.5% pullback a buying opportunity is pushing it just a bit I think.

Cramerica has a lot of help today as the IMF upgraded their view of the US economy.  Before you BUYBUYBUY based on that headline, let's do something Jimbo tells us never to do – think!  As part of my personal thinking process I like to read the article attached to the headline.  I know this simply goes against everything CNBC stands for but it's a quirk I have so indulge me:  You don't have to read very far so I'll just put up the exact first two paragraphs from the WSJ titled: "IMF Upgrades It's View of US Economy" and let you read for yourselves (Cramer fans may want to take this time to grab a quick snack):

WASHINGTON — The U.S. economy is healing faster than anticipated but still at an anemic pace that's unlikely to soon produce either jobs or inflation, according to the International Monetary Fund.  In its annual review of the U.S., the IMF forecast that the U.S. economy would contract by 2.5% this year, compared with the 2.8% decline the IMF predicted in April. For 2010, the IMF forecasts the U.S. will grow 0.75%, rather than the zero growth it predicted two months ago.

Only down 2.5% this year and growing 0.75% in 2010 (from the down 2.5% of course so that's still DOWN 1.75% from last year at the end of 2010).  Woo-hoo, where can I get some oil?  NYMEX Oil is actually up $2, back at $72 in a pre-market pump job despite the fact that Brent Crude, which is being ACTIVELY traded in Europe, is DOWN $1.50 to $69.39 at the same time.  This proves once and for all that no one can manipulate a market better than American traders – nice to know we're still number one at something so a big shout out to GS, MS and JPM, without them Americans would be spending $100M less on fuel today and that would be a real shame…

This is all fine with us as my 2:12 comment to members was: "Damn, oil shot up to $70.32 in the early pump job – we have go to start going long on  these!  If there is an oil pump then there is probably a stick save so be careful bears."  As the song goes, you have to know when to hold 'em and know when to fold 'em and we shorted at $72.50 on Friday and we'll take the $2 daily swings if they want to keep giving it to us – it's the damage to the economy I object to, not the movement itself.

Not to be outdone by the IMF, the BOJ upgraded their own assessment of Japan's economy for the second month in a row BUT decided to leave overnight rates at 0.1% in month 7 at that level.  Again, the secret society of readers may get a slightly different take if they dare to venture past the WSJ headline that says "Bank of Japan Upgrades Economy Forecasts":

"Japan's economic conditions, after deteriorating significantly, have begun to stop worsening," the central bank said in a statement released together with the rate decision.  In May, the BOJ said "exports and production are beginning to level out," though economic conditions have been deteriorating.

Wow, reading really is fundamental!  We have other fundamentals coming at 8:30 this morning, including Housing Starts, PPI and Industrial Production.  We also have earnings from BBY this morning but they were a bullish pick from last week so our lot is already cast with them…

Bond traders did a little reading over the weekend and sent the cost of protecting US bonds from default back to their highest levels in more than a month yesterday.  Credit-default swaps on Citigroup Inc. and Bank of America Corp. jumped to a one-month high, signaling a deterioration in the perception of credit quality, according to CMA DataVision in London. Benchmark credit derivative indexes in the U.S. and Europe jumped the most since May.  The cost of protecting European banks from default jumped as Moody’s Investors Service cut the ratings of 25 Spanish lenders because of the “speed and depth of the deterioration of the Spanish economy and the impact on banks’ balance sheets.”  Gee, must be time to buy more oil!

The failure of Spain (or another major country) is one of the three things I said could knock the markets down 20%.  The other two were a GM liquidation, which seems off the table, and the default of a major US bank, which also seems off the table.  That leaves us reasonably secure at our 8,650 Dow target zone (5% down is 8,200 and 5% up is 9,100) as long as Spain doesn't go over the edge.  We'd still like to see a proper retest of 8,200 so we can get a little more comfortable with the top half of our range but 8,650 had been holding up very well until yesterday, when we gave us 1/2 of June's gains in a single morning. 

Also falling through key technical "support" at 10,000 was the Nikkei, which gave up 2.9% this morning, dropping 286 points, also halway back to the June 1 open.  "Markets are reassessing the magnitude of the rally in Asian currencies and stocks against the background of a cautious outlook in the months ahead," said Mitul Kotecha, head of global FX Research at Calyon. "Take profit whenever you can, as the rally has been too quick, too fast, in too short a time," said Gabriel Yap, senior dealing director at DMG & Partners. It's "great now that the correction has kicked in."  The Hang Seng fell 333 points (1.8%) and the Shanghai dropped half a point and even Australia was pulled down 1.8% by the miners as metal prices fell.  "We are still positive on Asian currencies in the months ahead, but it appears that the rally has been overdone and economic data in Asia has not justified such a rally, suggesting some downside risks over the short term," said Calyon's Kotecha.

EU markets are up about half a point, making those mandatory 20% bounces off yesterday's drop but we'll see how their day goes with oil now hitting $72.40 in wild pre-market trading.  This is our stopping out point on longs and we're ready to go short here as it proved a good place to take a stand last week.  We'll be watching to see if the EU indexes can get back over yesterday's initial sell-offs.  For the FTSE that's 4,360, on the DAX it's 4,950 (with 5,000, of course, being critical) and on the CAC we'll be looking for 3,400 – anything less than this is pretty much "dead cat" territory. 

The good news in Europe is that German economists have raised their expectations to 44.8 from 31.1 a month earlier and expect a recovery will start by the year's end.  This was the highest reading since May of 2006 and blew expectations of a reading of 37 out of the water.  "The assessment of the experts indicates that the economic downturn dynamics are currently coming to rest. They further see tendencies for a recovery at the end of this year," said the president of ZEW, Wolfgang Franz, who also heads the council of economic advisers to the government.  Survey participants also revised their assessments of the current situation, which in June rose to -89.7 from -92.8 the month earlier, the center said.  ZEW's survey also showed that expectations rose across a number of industrial sectors. The more optimistic assessment was most prevalent in banking and investment products.

Hopefully, those economists didn't place those bets right after the survey as the ECB just announced that Euro-Zone banks will need to write down $283Bn more by the end of the year and warned that: "risks to euro-zone financial stability "remain high" despite some signs of stabilization in the economy, as well as in equity and money markets."  Among the central bank's worries: Sharper-than-anticipated falls in U.S. house prices, further winnowing of euro-zone banks' capital buffers and the possibility that economic upheavals across Central and Eastern Europe — where some euro-zone banks have big investments — could intensify.  Other sources of concern include rising corporate-default rates, falling property prices in some euro-zone countries, and the potential for the bloc's recession to be worse than expected. European central-bank staff last week forecast euro-zone output will shrink by about 4.6% this year and around ANOTHER 0.3% in 2010.  The solution is, of course, to buy more oil!

One company NOT buying more oil is Russian oil titan, Gazprom, who are cutting 20% of their 2009 capital spending program to offset LOWER DEMAND as sales and output volumes "have fallen considerably.  We are revisiting the startup of Bovanenkovo due to the lack of demand for gas in such volumes," Deputy CEO. Ananenkov said. "This will allow us to save up capital investments." Gazprom has been forced to lower output and shut down production at certain fields this year in response to a slump in demand in Europe and in Russia.

Also facing declining commodity demand is Australia's Newcastle Coal, who reported a 17% decline in demand last week and the number of ships waiting at port (an indication of coming demand) fell by 10%.  While this was happening, speculators pushed the price of non-demanded coal up 3.3% last week to $76.75 a ton, the highest level in 4 months.  Cotton has been on a tear as well lately but fell limit down (5%) in yesterday's session, the biggest decline since Jan 12th – and that was not a good time to be in the markets!    “Commodity traders are caught between a mindset of, ‘Do I play the inflation side or watch demand destruction?’” Peter Egli of Plexus Cotton said. “You have a lack of buyers.”

8:30 Update: May PPI was up 0.2% but DOWN 0.1% in the core.  So DEflation everywhere but commodities.  The non-core PPI was getting worse less quickly than April's 0.3% increase and this drop in PPI is the most since August of 1949.  On the other hand, May Housing Starts were up 17.6% and Building Permits are up 4%.  Building permits were expected to be 500,000 and came in at 518,000 so it's a solid beat but divide that by 50 states and we have 360 homes per state more being built than expected while housing starts are weather dependent more so than economic at this level.  The PPI is just amazing though as expectations were for a very inflationary 0.6% move up so this is 1/3 of what economists had forecast.  Do we celebrate the lack of inflationary pressure or bemoan the lack of growth?  That is the question….

Industrial Production for May was down 1.1% while Utilization came in at 68.3%, well below the 1972-20008 average of 80.9% and our friends at BBY missed so we are back to where we entered that one.  What is really driving the markets today is more dollar declines as the dollar is down 1% against all the major currencies as Russia once again flip-flops on the Dollar, this time with Medvedev himself dissing the Dollar as a BRIC conference discusses the possibility of moving away from dollar reserves.  Newly re-elected Iranian President Mahmoud Ahmadinejad was invited by Russia to speak at the rally so we can imagine where this is going…

Of course the housing numbers were driven by the $8,000 tax stimulus for new home buyers so this positive bit of economic data was paid for with our tax dollars so we may as well enjoy it.  As I pointed out yesterday in member chat, builder confidence faltered in June, after going up two straight months. The National Association of Home Builders index on builder confidence in sales of new, single-family houses fell to 15 from 16 in May. "The issues in the housing market are going to take some time to play out and won't reverse nearly as soon as some would like," Dan Greenhaus, a bond market analyst at Miller, Tabak & Co. in New York, said in reaction to the NAHB report.

Still the headline in the on-line WSJ is "Home Construction Surges in US" and that's what the MSM is running with so we'll be enjoying the rally (thank you oil, now $72.70!) and looking to see what levels hold.  Today I'm very concerned that 8,650 will be upside resistance for the Dow.  We will, of course, be keeping a very firm eye on our 40% lines of Dow 8,413, S&P 946, Nas 1,717 (notice support is above that line), NYSE 6,232, Russell 514, Sox 329 and Transports 1,868.  With only the Dow and Nasdaq now over their lines, it will be up to the Russell and S&P to really show us something today.  The Russell gave up 14 points yesterday and finished at 512 so we expect 515 to be the first point of resistance (20% retrace) followed by 520, which is 50% of the top (532) to bottom (508) drop from Thursday's high.  The Russell is heading into a rebalancing next week so anything can happen over there!

The S&P is a more reliable indicator and we'll be looking for them to make up 20% of yesterday's 20-point drop to 928 and then 50% of their fall from 956 on Thursday to 920 yesterday so 938 is about the spot where we may be willing to climb on board Cramers crazy train and look for a retest of our month highs.  Failing that, we prefer to wave from the platform with our cash safely placed at our sides – just being a little cautious is all….