Wait Till You See This
While I will indeed get to Bernanke and the FOMC meeting they wrapped up today, I have to start with something that I think all of you need to be fully aware of. Why? Because it is going to drive you insane.
Over the years, they have manipulated virtually everything you see so that they can carry on the chant of "USA Strong" and how wonderful our economy is, and how we lead the world and all that other blather they spew. Consider the DOW and the S&P. Whenever a company begins to fade, and "look bad" on the index, what do they do? The "reconfigure" the index. They toss out the losers and add in the new winners, so that it always looks like the index is strong. One of the leading arguments for the economy and the "market" always going up is that we supposedly always grow. Yet it's baloney. There's only 1 company that has continued to be in the DOW for more than 50 years. All the others went by the wayside. If you can rejigger who is in the index, it's easy to make it look like it always goes up. But since they're really only replacing laggards with "hot stocks", does it mean "strength?" Of course not.
Likewise our employment numbers are of a fiction envied by the best SciFi writers. Over the years, especially the Clinton years, if the President and current administration didn't like the rising unemployment rate, they'd simply change the way it was calculated. That is why we have the 6 separate measures of unemployment, U1 - U6. Back in the early 80's we reported unemployment using the guidelines of U6, meaning it included those that couldn't find work, those that were frustrated for lack of work, those that were woefully underemployed, etc. etc.
But as the economy faded, they decided that those "real" numbers were too ugly. Thus, they changed the rules of how the unemployed were counted. They started issuing official statements based on U3 readings. Those readings don't include the discouraged. Those that have given up looking for work. The part timers desperate for a real full time job. Etc etc. Yet it wasn't "just" rearranging the index's. It wasn't "just" fiddling with the unemployment numbers. No, they had much more manipulation in mind.
Enter the inflation readings. Any "real person" that has to buy groceries, gasoline, education, medical treatments, medical insurance, house insurance, an automobile, a pass to a water park, a movie ticket and a THOUSAND other items knows full well that inflation is soaring. Yet inflation makes administrations and our Criminal Federal Reserve look bad. So, they twist and contort the computation of that too. They have to keep the official readings of inflation below 2%. How? Oh boy I could write a book on that alone. Just understand that they "exclude" from the equation food and energy. Right there two major household expenses don't even get figured in. Then try a little hedonic adjustment.
What's that? The hedonic index is any price index which uses information from hedonic regression, which describes how product price could be explained by the product's characteristics. In other words, a products Characteristics can be price measured up or down to suit. For instance. A new computer might cost 100 dollars more than the one it replaces. BUT..because it is twice as fast, they figure it can produce more in a given time, thus increasing productivity and lowering cost. So, despite the thing costing 100 dollars more to buy, after hedonic indexing, it is reported as "cheaper" than last year. Try that one on for size folks. Then there's the substitution models. They say that if steak costs too much this month, people will eat dog food. Thus the price of food for the month FELL, not raised. Good stuff eh? Well this is the kind of crap that gets reported to the main stream media.
The point of this little remembrance tour is because we are now seeing them introduce a new way of measuring GDP. This is going to have one of the most profound impacts on the readings in the last 75 years. What they're going to do is include and try and estimate the "value" of some pretty "tough to measure" items into the mix. For instance, they are now going to include and recognize expenditures by business, government, and nonprofit institutions serving households (NPISH) on research and development as fixed investment. This has never been done before, and frankly for good reason. Just as an example, let us suppose a company spends 50 million dollars in research and development for a new drug. But after they launch it, they find that there's a massive time delay reaction to it and everyone that takes it grows arms out of their head. Obviously this isn't good, and costs the company billions in law suits, litigation's, product recalls, damage control, etc etc.
Next up, they will recognize expenditures by business and NPISH on entertainment, literary, and other artistic originals as fixed investment. So, art which may have cost someone 17 dollars worth of canvas and paint to produce, that is sold to a corporation for 2 million dollars for their lobby...now becomes a fixed investment? Yes. Yet in the past fixed investment was always tied to a somewhat measurable return on the investment. In other words if you invested in a new building or machine, you can extrapolate out the benefits to the company from that investment. What return does the company get for buying artwork for the lobby? Nice thoughts? A loving gaze? Is any of that measurable?? They will also be adding pension deficits into the equation, and even copyrights. Anything they can get their hands on to make things look better than they are.
Depending on whose work you read, this change in the GDP equation could very well increase the reading by over 3% in a year. If this happens, are the talking heads in the media going to explain that the increase in GDP is because we're including fantasy numbers in the equation of which the benefits can't be measured? Of course not. They'll tell us that the economy is absolutely on fire, the USA is stronger than ever, and the average person in the street is going to look around and say "huh? Then Why am I so broke?"
Thousands of years ago, Roman emperors Nero and before him the Julio-Claudian dynasty had a problem with their economic situation. The numbers were horrible and getting worse. They had to come up with a way to keep the illusion that things were just fine. Thus in "secret" they began to "shave" the size of their coins and the amount of silver contained in the denarius. Now in 2013 since our coins have no value to start with, they simply change the way we report our economy. If things stink, change the way you measure things and make them better. Who cares if the man in the street is dying a slow economic death? Just tell him all is well, and hopefully he'll spend himself to absolute death. We are well on our way.
The market...
During the last couple days we learned a lot of things. I think you all have to make value judgments on whether they were good or bad. For instance, we saw mortgage applications fall 3.7% for the week. That sounds pretty bad, but it is nothing really. Not when you realize that in ONE YEAR mortgage applications are now down 58.8%. Now that's bad.
Maybe learning that home ownership is at an 18 year low isn't as bad as it sounds? Actually it is worse than it sounds. Rental people don't buy the type of local "improvements" that keep communities humming. They don't rush down to the garden center and put in new lawns and flower gardens and yard statues. They don't go to Home depot and buy new appointments for the home. The economy takes the hit.
Maybe learning that if you add up all the companies that have reported globally, and finding that 60% of them were negative, is a "bad" thing. I assure you it is. Maybe learning that Blackstone and Deutsche bank plan on offering bundled investments back on Rental incomes is "bad". Well, considering they did that with poor grade mortgages and almost blew up the world, just remember, a lot of renters are only renters because they don't have the ability to have a mortgage. I'd consider that...bad.
We learned from Obama that he thinks Corporations should pay a 28% tax rate, but small business should suffer at 40%. Is that bad? No, bad doesn't deserve a seat at that table. Consider horrible, absurd, lunatic, evil, disgusting and sadistic. We learned that the Chicago PMI missed, as employment and orders and production all dropped. It might not be "bad" but I struggle to consider it "okay".
We learned that the first quarter GDP was revised from 1.9, to just 1.1%. Then we learned that with the biggest rejiggering of the methodology to measure GDP, the best they could come up with was a 1.7 read for Q2. Are you kidding me? 1.7 was the best they could do, even after revising all the numbers from 1929?
Okay, so the news sort of stunk, but the big news was that it was Fed day and everyone waited with the so called baited breath to see what they were going to do about tapering, etc. As expected, they said absolutely nothing. They said if the data got worse, they'd do more, if the data improved they'd do less. That's the same garbage they've shoveled for months.
The market first dipped, but then popped big, at one point up 74 points. But the air came back out. By 3:45, we had a red DOW.
So what's it all mean? Well, we're past the Fed speak. Even if they were going to do some ridiculous tapering, it wouldn't hit until September. So now it is all about Friday's non farm payroll number. If the number is really strong, will they instantly fear the Fed will taper? If the number is poor, is that still good news? We'll find out soon enough.
Next up, the "levels". The S&P has had a hard time with the 1690 - 1700 level. Until that is taken out, we can consider that area a pretty strong resistance level. But, if they get past that, there's really nothing that can stop them from jamming us higher. If they accept the jobs report Friday AND we get over S&P 1700.. I have to figure we're heading for the next leg higher. No we shouldn't be...but I could say that for the last 9 months too.
So watch that level, and don't let it headfake you. A one day close over 1700 won't make it. It has to be a few days. Else you might be jumping into a failed breakout, and that's not good trading.
Have a great day, we'll see you all Sunday.
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