We are off to one crazy start this morning!
The futures markets have gone wild, ostensibly led by China, which had a PMI of 53.1 for May and, even though that’s DOWN from 53.5 in April, it’s still positive enough to be called a "green shoot" and between that and a collapsing dollar, the futures are flying higher (priced in dollars). Since 2 am (now 7:30) the dollar has fallen 1.5% against the the Pound and the Euro and gold has rocketed as high as $990 while oil ran over $68 a barrel (2.5% rule), almost a clean double off the bottom (up 95% actually). Of course GM is going bankrupt and there is an Air France jet that is missing over the Atlantic (not looking good either) but none of that is phasing the pre-market bulls as our futures are up about 1.5%.
Yes the market is showing all the classic manic symptoms as it suddenly escalates over the past several days, completing a 5% move this morning off 8,200 (8,610 is the exact mark). Gone are the depressive negative views but whether the market is delusional or simply just no longer depressed remains to be seen. I’m amazed at this run-up ahead of 8:30’s Consumer Spending numbers – maybe "THEY" already know it’s going to be good or maybe "THEY" are squeezing everything they can out of last week’s momentum before we get some bad data that pushes the markets back into a depressive phase.
The action has been fast and furious early this morning. The Nikkei was at 9,600 at lunch, was jammed up to 9,677 at the close but then was jammed up to 9,740 AFTER the close. The dollar fell 1.5% since 2am (so far) as Geithner went to China, supposedly to support the dollar but he ended up supporting the Hang Seng, up 4% today which is interesting as it got a huge reaction but Chicago’s PMI at 34 (contraction) got NO reaction last week) and now we are back to SEPTEMBER levels in China.
Amazingly, what Geithner said this morning actually makes my case that this whole optimistic house of cards may collapse (see Thursday’s post) because every country cannot depend on every other country to pull them out of recession and Geithner warned this morning that China needs to recognize "That it can’t pull itself out of the slowdown by exporting even more goods to U.S. households, which are digging themselves out of debt. "The purchases of U.S. consumers cannot be as dominant a driver of growth as they have been in the past," he said. By contrast, Mr. Geithner argued, China needs to look for ways to unlock the spending power of its own consumers. "Strengthening domestic demand will strengthen China’s ability to weather future fluctuations in global supply and demand."
So China is saying "Buy our goods" and Geithner is saying "We have no money, you buy our goods…" What the hell kind of recovery is this? "U.S. pressure on China to boost its own domestic demand – and hopefully buy more U.S. goods – is not a new policy, but has taken on increased urgency as the damage from the financial crisis has left the world with fewer likely sources of future growth. Mr. Geithner urged China’s government to improve its health care and social security programs, which could reduce households’ need to save so much, and move to more market-based interest rates and prices."
Once again, the future’s are so bright, we’ve gotta wear shades as we’re looking at a 3% move (including the futures) on the Nikkei and our pre-market indexes are "only" up 1.5% so far so a lot more fun in stall and a real Free Money Day if the US markets try to catch up (that would take us to 8,750 on the Dow!). Oil is up 3% to $68.20, gold is $990 but the FTSE is "only" up 1.5% (8:15) and stuck at the May highs below 4,500. The CAC broke it’s May highs with a 2.5% gain this morning and the DAX is up 3% with a 150 point gap up and the strangest looking flatline under 5,100 since then that might make a rational person question the reality of the move, but there sure aren’t any of those skeptics trading in this market! Actually, now that I’m looking at it, the CAC is doing the same thing but just at 2.5% and, to a smaller extent, so it the FTSE, which is the biggest exchange of the 3.
It seems that a bear capitulation is being forced, triggering buy programs and a bull run but then someone is selling the crap out of the markets to form a top. Of course there could be simply older bulls cashing out at technical levels (this is FTSE 4,500, up 1,000 from the March low (28.5%)) and once they are gone, the market may take on a new level or this may be our friends at GS etc, cashing out now that they’ve finally forced the technicals and gotten their suckers rally. Presumably, Europe is waiting for the US to confirm an up move and then they can break higher (bullish presumption).
8:30 Update: As we expected going into the weekend (foolishly keeping us bearish), Personal Spending is down 0.1% and last month was revised 0.1% lower as well. PCE Core Prices came in up 0.3% (up 50% more than expected) and Personal Income was up 0.5% – WAY higher than the 0.2% DROP expected. That means that corporate cost-cutting is on the labor side is reaching its end (running out of cheap labor). The whisper number on Personal Spending was down 0.2% so the markets are in relief but all of the "gains" in consumer spending came from COMMODITY spending, which doesn’t do a damn thing for the real economy. It’s a seriously flawed metric when you can jam up the cost of necessities that people have to buy and then point to the increased spending on necessities as signs of a recovery. This is the EXACT same thing that happened last year as commodities spiked, just before the economy collapsed…
A lot of the Personal Income story is thanks to the stimulus plan, signed by President Obama in February, which drove up personal current transfer receipts and provided an extra payment for the unemployed. Taxes also fell as the stimulus included tax credits. Personal saving as a percentage of disposable personal income was 5.7% in April, the Commerce Department said. It was 4.5% in March and 4.1% in February. The 5.7% rate was the highest since 5.9% in February 1995; the personal savings level of $620.2 billion was the largest since records began in January 1959. While 1959 was not a great time year to be in the markets (flat over 2 years), 1995 was the beginning of the great bull run that ended (badly) in 2000. While I do not see anything in this data to be bullish about, I would caution against taking it as a bearish sign…
When in doubt, we watch our technicals and the biggest technicals we have at the moment are our 40% (off the highs) lines. Those target are (most recent level brackets): Dow 8,413 (8,500), Nasdaq 1,717 (1,774), S&P 946 (919), NYSE 6,232 (6,004), Russell 514 (501), SOX 329 (271) and Transports 1,868 (1,766). We noted a strange run in the transports on Friday, even as oil ran higher and higher and Dow theory says we need those transports to confirm a Dow move. The S&P needs more than 2.5% to hit it’s mark so we’ll be looking for the RUT and NYSE to cross first but a failure here for the broader indexes will make what the Dow and the Nasdaq are doing seem a little silly! Speaking of the Dow, TRV and CSCO are replacing GM and C, which makes no sense at all and now the Dow will be even more ridiculous than usual as an indicator of the true economy – Why was TM dissed here???
This is still a commodity rally and I hate commodity rallies for reasons I hope you have all come to appreciate over the past 2 years as they both ran up and then destroyed our markets as well as the broader economy. This is no way to rebuild this country and it makes it very hard to get enthusiastic about this bull run, whether manipulated or not. I would continue to urge caution and I have already indicated to members in a morning alert that we will be sticking with our short plays as it’s too early for us to join the capitulation crowd but Dow 8,600 makes an easy spot for us to go long on DIA calls as we can stop out below it and just take any upside momentum that is offered to cover our short side for now.
Be very careful out there – it’s a crazy day!