Morning Update/ Market Thread 7/12 – All in Edition…

Good Morning,

Equity futures are down just slightly after being down deeper overnight. The dollar is higher after breaking out of the triangle I’ve been showing, the yen is becoming an issue again, bonds are higher, oil is lower, gold & silver are down a little, and food commodities are also lower.

The Small Business Index fell once again, this time just slipping a tenth to 90.8 from the prior 90.9. The people who publish this report are sounding militantly upset over the lack of economic progress, I think rightly so. Of course they will talk politics within the box created and manipulated for them, unfortunately they don’t call the impossible math what it is and they fail to see that their only salvation is to think and operate outside of the central banker box.

This mantra is going to be repeated by me – small businesses have taken the shaft while large corporations have received nothing but trillions in aid and in the form of favorable rule making. I am personally shifting my investment strategy to avoid all things large corporate and am starting a new business that receives funding not from large banks, but from investors like us – while returning a good, but conservative and fully collateralized return. In this way, we cut out the bankers, create jobs right here in the U.S. and are secure knowing that we aren’t participating/ contributing to their wild casino that formerly were free markets. I’ll be talking more about this later. In the mean time here’s Econoday staying well within the box as usual:
The political drumbeat continues from the National Federation of Independent Business whose text for June declares: "Small-business owners are registering a vote of 'no confidence' in the federal government." It uses the word "grave" to describe small-business concern over the federal budget and asks: "Who can blame the prevalence of pessimism when administration officials are telling Congress that small businesses need to pay more in taxes to support government spending programs?"

Now their numbers. Their index slipped one tenth in June to 90.8 in what the text describes as recession territory. The weakest readings concern the outlook for the economy and the outlook for sales. Interestingly, strength appears in employment plans. Also there's evidence of pricing power with a net 10 percent of the sample raising their selling prices over the last three months. It also notes that access to credit is only a limited problem.

The group who writes the Small Business Optimism Index report are pretty pointed, one of the few groups who understands that the country never really “recovered.” Here’s their entire report, as usual it’s a pretty good read:

Small Business Optimism Index July 2011

The International Trade numbers came in with a much larger deficit than expected at -$50.2 billion, much greater than April’s -$43.7 billion. A lot of this deficit is a result of importing more expensive energy, but it should be clear to everyone that while we’re printing money here, much of it is leaving the country. In this way we are exporting inflation, in fact causing the price of energy to rise, and this sets in motion a negative feedback loop that makes it impossible to escape the impossible math. This is just another reason why in the end the money printing “stimulus” crowd will be proven wrong, just as they always have when viewed through the lens of history. So why do they do it? Why does a thief rob a bank? Here’s Econobox supporting the thieves’ perspective:
The trade deficit unexpectedly worsened in May and sharply. Higher oil prices that month played a key role in the increased red ink. The May trade gap ballooned to $50.2 billion from a revised $43.6 billion in April (originally $46.7 billion). The May deficit was much larger than analysts' estimate for $42.7 billion. Exports slipped 0.5 percent after improving 1.4 percent in April. Imports jumped 2.6 percent after edging down 0.3 percent the month before.

The widening in the trade deficit was led by the petroleum gap which expanded to $30.4 billion from $26.1 billion in April. For May, the price of imported oil jumped $5.52 per barrel to $108.70-the highest level since August 2008. Also, the physical quantity of oil imports jumped 9.1 percent to 275.3 million barrels for the month after plunging 14.5 percent in April. The prior month's imports were atypically soft. The nonpetroleum goods shortfall worsened to $33.3 billion from $31.1 billion the prior month. The services surplus advanced to $14.7 billion from $14.5 billion in April.

Looking at end use categories for goods, exports fell 1.1 percent while imports jumped 2.9 percent in the latest month. The dip in exports was led by a $1.8 billion decrease in industrial supplies, with a decline also seen in consumer goods (down $0.4 billion). Foods, feeds & beverages were down fractionally. On the plus side were capital goods excluding autos (up $0.4 billion) and automotive (up $0.6 billion).

The surge in imports by end use categories was led by a $4.3 billion jump in industrial supplies (mostly crude oil) with gains also seen in capital goods excluding autos (up $1.2 billion), and automotive (up $0.6 billion). The foods, feeds & beverages component was up marginally.

On a not seasonally adjusted basis, the May figures show surpluses, in billions of dollars, with Hong Kong $2.1 ($2.6 for April), and Australia $1.2 ($1.1). Deficits were recorded, in billions of dollars, with China $25.0 ($21.6), OPEC $11.3 ($9.6), European Union $8.8 ($7.5), Mexico $6.3 ($5.5), Germany $3.8 ($3.8), Venezuela $3.1 ($2.8), Canada $2.7 ($2.4), and Japan $2.6 ($3.6).

The trade deficit is draining funds from the U.S. economy faster than earlier believed. This will lead most economists to lower their forecast for second quarter GDP. However, oil prices have come down significantly since May and we likely will see improvement in at least the petroleum gap next month. Looking for the silver lining, the boost is capital equipment imports may be a subtraction in GDP accounting, but it suggests some optimism on the part of businesses. The dip in consumer goods imports is disappointing but not so much after a $2.1 billion jump in April. The decline in goods exports also is disappointing but follows a jump in April and combined with a still low (though not as low as some weeks ago) dollar, exports likely are still on an uptrend.

There’s always a silver lining in Wonderland.

Well outside of Wonderland, our president and Congress are playing games with the debt ceiling. Yesterday Obama went all in when stating that any deal had to be large and that he would not sign off on something that simply kicks the can. Yeah, right. The math is so impossible that they aren’t even in the ballpark of slowing down the can. Everything feeds the central banks, and until we get out of their box the impossible math is going to rule supreme. Of course within the box a large dose of austerity will instantly cause the economy to suffer. Doing nothing will also cause the economy to suffer. Continuing on the path we’re currently on – printing/ stimulus – will make the economy suffer even more in the end. Impossible math just is, you cannot trick it nor fool it.