- A hint of better economic news on Tuesday trumped by overwhelming evidence Wednesday that the economic slide continues
- Stocks reverse Tuesday’s gain and more, racing toward the March lows.
- New York PMI marks the second region to show manufacturing contraction.
- Consumer prices showing the bleed from higher commodities prices.
- Chinese inflation, food issues, and slowing economy equal violent unrest, Brazil bond yield curve inverted. How does that export economy look now?
- Greece government opts to fold, start over again in the face of renewed violence.
- France put on review by Moody’s do to Greek exposure
- Many comparisons to the summer of 2010, but that was a bottom, not a top.

MARKET SUMMARY

The economic decline continues, picks up speed.

Tuesday the market gleaned hope and some upside from economic data that was not as bad as thought. The half life of that kind of news, however, proved again to be momentary in the face of the harsh reality that the economy continues to slow at an accelerating rate.

Specifically, the New York manufacturing index declined to -7.79 in June, an almost 18 point swing versus expectations and well below the 11.88 in May. New orders put in a negative showing. The CPI was hitter at 0.2% versus 0.1% but the core was worse at 0.3% versus 0.1% expected. Year over year the CPI rose 3.6%, the highest since October 2008. The core year/year rate was 1.5% versus 0.98% in June 2010. That was the largest since July 2008. The data clearly show that record high prices in some commodities and the overall spike in commodities prices are bleeding over into the consumer. It cannot be refuted as McDonald’s and others are forced to raise prices to maintain profit margins.

Industrial Production and Capacity Utilization were not bad, they just missed expectations and the prior numbers were revised lower. That is important: missing expectations show economists are behind the curve. Negative revisions show they are really behind the curve.

There was PLENTY of other news to prime the downside. China is a real problem. Its food inflation stands at 11%. India is close behind as its food prices spike. Inflation in China is rampant beyond just food prices. This is leading to violent unrest as migrant workers and farmers take to the streets in protest. The history of China shows that inflation equals regime change. Thus the ruling class’ desperation in trying to hike rates, lending requirements, etc. to stave off further price increases. Good luck!

Europe added its own issues. Rioting in Greece yet again as the government folds and will reorganize tomorrow. Moody’s puts France on review for a credit downgrade given its exposure to Greece.

Let’s not forget Brazil, the other leading growth economy. It is suffering some serious inflation issues as well and in trying to fight it has inverted its yield curve. Now you know that an inverted curve is a very good indication of a recession to come. During Greenspan’s twilight years the ‘conundrum’ arose, i.e. surging bonds and thus an inverted yield curve. Greenspan said it was different that time; it wasn’t. A recession followed.

Brazil recession to come, a slowing China as it tries to fight inflation and thus maintain the ruling class in power. That does not speak well for our new ‘export economy’ the President has openly and actively pursued, the one that feeds exports to growing economies while our economy is dominated by those growth-stagnant behemoths that, as discussed last night, continue to lose jobs versus create jobs.

Futures were modestly lower when all the news hit, and as you would expect, they responded by fall further. Falling hard. It was pretty clear the Tuesday ‘economic data that was not as bad as feared’ rally was over. Downside gaps, selloffs into lunch. Then a lateral move in the afternoon that tried to gain traction. It never did as each bounce attempt was sold. Classic, chronic weakness as the market factors in no more QE and an economic ‘recovery’ turning over faster than thought.

NASDAQ -1.75%; SP500 -1.75%; DJ30 -1.5%; SP600 -1.55%; SOX -2%

THURSDAY

The overall tone has been down and now after the failure of the Tuesday bounce, and a rather spectacular failure, the near term tone is down as well. That said, SP500 is close to its 200 day SMA and March low and NASDAQ is at the 200 day SMA already. A bounce of more than one session should ensue shortly, and the up and down action suggests it is getting closer.

When the bounce comes we are going to take a small amount of money and play some upside as has been the plan. You won’t know it is ‘the’ bounce but with the ongoing volatility after a strong selloff and the approach to support, when the market bounces off of or near this support it is worth putting the money to work for a run upside.

Again, we don’t anticipate anything but a relief rally. While many compare this market to the summer of 2010, it is wholly different. That period formed a base. The Fed came in with its QE2, and that set the strong surge upside. This is a top, not a base. The Fed is saying it is not going to replace QE2 with anything new. The economic data is in the toilet. Different scenario altogether. Perhaps if a budget deal is reached the Fed initiates another QE program given the other side of the government is supposedly embracing ‘austerity.’ Perhaps.

For now the drivers of the market rally are fading. QE2, some expansion in the economic data, rising confidence. All fading and with it the market is building a top. Use the bounces to close weaker stocks, play some upside for the rally, prepare to play more downside as the bounce runs out of gas.