Chicago PMI Drops

From the Chicago Purchasing Managers Website:

The Chicago Purchasing Managers reported the Chicago Business Barometer fell below neutral, ending 43 months ofpositive readings.

- Production advanced while New Orders retreated;

- Prices Paid continued to slump toward neutral;

- Employment fell to the lowest level in four years;

Buying Policy: 3 month average lead-times were longer, but January bucked the trend.

The various indexes within the report showed areas of concern. New orders have been dropping for a few months. Employment is at its lowest level in almost four years. One of the industry representative comments said overall demand was down almost 30% with high sales incentives. The new orders and overall production levels have been trending down for about 2 years, only now falling into contraction levels.

The comments section called the report "worrisome".

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FOMC Statement

From the Fed:

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

I have no idea why the markets were so excited about this statement. The Fed gave themselves ample wiggle room to raise rates if they need to. While the inflation number from the GDP report was encouraging, oil is creeping back up. There's still something to be concerned about for the Fed.

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Globalization Barreling Down the Highway Toward America's Middle Class

When Muhammad Yunus accepted the Nobel Peace Prize last month, the Bangladeshi banker who invented the practice of making small, unsecured loans to the poor, said the globalized economy was becoming a dangerous “free-for-all highway.” According to The New York Times:

Its lanes will be taken over by the giant trucks from powerful economies… Bangladeshi rickshaws will be thrown off the highway.

Further, as The Times paraphrased Yunus as saying:

While international companies motivated by profit may be crucial in addressing global poverty…nations must also cultivate grassroots enterprises and the human impulse to do good.

Yunus has accomplished untold good for his nation’s impoverished citizens, even as he and others for years have sounded the alarm about the negative impact of globalization on the world’s most impoverished. But more and more, it’s not only the poor who are being run off the road. America’s middle class increasingly finds itself faced with the effects of globalization—and seemingly no way to stop the collision. And white-collar professionals are among those now in the headlights.

The United States always has traded with other nations—but until the 1970s, the international share of the U.S. economy was modest, and exports and imports were generally in balance or showed a small surplus. As Economic Policy Institute (EPI) economist Jeff Faux notes:

...in the last 25 years, foreign trade has risen 700 percent, more than doubling as a share of gross domestic product to 28 percent. In 2006, the excess of imports over exports will reach some $900 billion—7 percent of GDP [gross domestic product].

Faux’s briefing paper, “Globalization That Works for Working Americans,” was released Jan. 11 at the launch of a new network of progressive economists, the Agenda for Shared Prosperity. In it, he continues:

This dramatic shift reflects more than simply an increased movement of goods and services between the United States and other nations. It reflects an unprecedented economic integration with the rest of the world that is blurring the very definition of the "American" economy.

American business is steadily moving finance, technology, production, and marketing beyond our borders. Some 50 percent of all U.S.-owned manufacturing production is now located in foreign countries, and 25 percent of the profits of U.S. multinational corporations are generated overseas—and the shares are rapidly growing.

As EPI economist Larry Mishel puts it, more trade, regardless of its terms, is not better for all of us. For many working Americans, the huge growth in foreign trade has resulted in the loss of family-supporting jobs, downward pressure on wages and increased inequality: From 2000 to 2005 alone, 3 million manufacturing jobs disappeared, at least one-third because of our trade deficit. But the greatest damage has been to wages— Mishel estimates as much as a loss of $2,000–$6,000 annually for the typical household. The doubling of trade as a share of our economy over the past 25 years has been accompanied by a massive trade deficit, directly displacing several million jobs.

Mishel, who testified Tuesday before the House Committee on Ways and Means, told lawmakers:

That trade will make the distribution of income worse is embedded in fundamental economic logic. When American workers are thrown into competition with production originating from low-wage nations, both those workers employed directly in import-competing sectors and all workers economy-wide who have similar skills and credentials will have their wages squeezed. In fact, at the same time as trade flows with low-wage nations have increased, the distribution of income and wealth in the U.S. has grown more and more unequal.

Such a view is not confined to progressive think tanks. David Autor, an economist at the Massachusetts Institute of Technology The New York Times yesterday:

The consensus until recently was that trade was not a major cause of the earnings inequality in this country. That consensus is now being revisited.

After years of thinking the nation’s economic gains were passing primarily by manufacturing workers, middle-class professional and technical workers are recognizing the oncoming car wreck is headed in their direction as well.

Discussing a recent Center for American Progress study, White Collar Perspectives on Workplace Issues, Jim Grossfeld and Celinda Lake wrote on The America Prospect online that “many young, white collar workers are now as bewildered by the ‘new economy’ as manufacturing workers have been for a generation.”

As a 20-something techie in the once bustling Silicon Valley told us: "I think a lot of people, you know, 30 years ago, could get a job that was relatively stable, but, here I am, five years out of school, and I've had four jobs. It's not because I'm not good because I've gotten praise from every single job I've been at. It's just that the fact that the companies don't seem stable."

But it's not just that these workers' future career prospects look murkier. The quality of their work lives is tanking, too. It is difficult to overstate the importance of this decline. Technical and professional employees share a profound conviction that their work ought to be intellectually satisfying—even an expression of their values. However, when employers press for cost savings and workloads soar, psychic wages take a plunge. Echoing the sentiments of many of the workers we spoke to, when asked to describe her office, one San Jose woman answered: "Busy, overworked, under staffed, not enough people in the group to do all the work we need to do so everyone's doing a lot of work and just running around like a chicken with a head cut off."

In fact, new data compiled by EPI show employment growth in the past five-year post-recessionary period has been subpar due to a weak economy. This conclusion is supported by the fact that employment rates, which some thought were at the demographically set peaks, have risen sharply in response to job growth and falling unemployment in 2006.

The union movement doesn’t oppose trade and globalization. In fact, it’s precisely because we recognize we live in a global economy that we see a lot of policy changes that should be made at the federal level to enhance the quality and stability of jobs in this nation. And when trade deals are negotiated, they need to do more than line corporate pockets—they need to ensure workers don’t get run off the road.

Faux offers many solutions in his issue paper on globalization, one of many the Agenda for Shared Prosperity will issue in coming months in advance of the 2008 elections on topics such as pension, health care and more. One solution he offers: Eliminate perverse tax incentives.

By law, corporations that invest in the United States pay taxes when they are earned. But corporations that invest overseas can delay the payment of taxes until they repatriate their profits—which can take a long time. In 2005, in order to get some short-term relief to the fiscal deficit, the Congress voted to offer corporations that brought their money back that year a 5.25 percent tax rate, a much lower rate than they would pay on profits made in the United States.

This loophole might have been justified after World War II as a way of helping Europe and others get back on their feet. But it has long outlived its rationale and should be eliminated.

Indeed, U.S. integration into the global economy requires us to rethink our whole approach to taxation. Other nations, for example, use "border-adjustable" value-added taxes (VATs) to favor exports over imports. A progressive VAT is some-thing that ought to be considered as an instrument to level the playing field.

In contrast to the Hamilton Project, which supports unfettered globalization, Faux offers many other options to making globalization work for working people. It’s all here.

As AFL-CIO President John Sweeney wrote recently in a USA Today op-ed:

Without dramatic changes in trade policy, we will continue to hemorrhage good jobs, while corporations take advantage of workers whose basic human rights are violated daily.

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4th Quarter GDP Up 3.5%

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the fourth quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent.

The Bureau emphasized that the fourth-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The fourth-quarter "preliminary" estimates, based on more comprehensive data, will be released on February 28, 2007.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, and federal government spending that were partly offset by negative contributions from residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The acceleration in real GDP growth in the fourth quarter primarily reflected a downturn in imports and accelerations in PCE for nondurable goods, in exports, in federal government spending, and in state and local government spending that were partly offset by downturns in private inventory investment and in equipment and software and a deceleration in nonresidential structures.

First, this number caught me by surprise. I predicted a recession in Q4 '06 or Q1 '07. It doesn't look like that's going to happen anytime soon.

So, let's look at the numbers to see where the US is growing.

Real personal consumption expenditures increased 4.4 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. Durable goods increased 6.0 percent, compared with an increase of 6.4 percent. Nondurable goods increased 6.9 percent, compared with an increase of 1.5 percent. Services expenditures increased 2.9 percent, compared with an increase of 2.8 percent.

Looking at the numbers, we see something a bit odd. In the 3rd quarter, purchases of food subtracted .07 from the overall numbers. In the 4th quarter, food added .69 to the number. In two previous quarters, we saw very slow growth in food purchases, but no negative numbers. It seems odd that purchases of food would somehow subtract from overall growth.

Overall, personal consumption expenditures added 3.05 to the overall number. Furniture and household equipment added .43 to the overall GDP number while residential investment subtracted 1.16 from overall GDP? That seems a bit off, especially when the same expenditure added .1 an .2 to 2Q and 3Q respectively. Some of those purchases might have been end of the year presents to the house -- sprucing up the place etc.. But a doubling in the number?

National defense spending added .53 to the numbers, whereas this spending had subtracted from growth in the previous 4 quarters. Overall federal spending added .31 to the numbers, whereas federal spending had subtracted from growth in the previous 2 quarters.

Exports of services added .4 to the overall number. This is the third highest amount services have added to the GDP number in the last 12 quarters. More importantly, this number is abnormally high. I wonder if there was a mega-deal that is responsible for this.

Disposable personal income increased 1.1% from the 3Q. I will caution -- this is a macro level number disproportionately affected by upper-income levels. However, rich people spend as well so it's important to include them in the calculation. This is probably the biggest reason for the increase in GDP.

Residential investment subtracted 1.16 from the overall number. That's a huge hit; it's also the third quarter where housing has impacted GDP in a big way. What's interesting is how housing's damage is contained in housing (at least so far).

I'm nitpicking with some of the above comments. This is obviously a good number. And again, my prediction of a recession doesn't look to be that good.

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Housing Bottom? Highly Doubtful

From Safehaven:

New home sales rose by 4.8% in December, registering a fall of 17.3% on the year with 1.0631 million units sold in 2006, the largest drop in 16 years. Note that to sell these homes, an average of $47K in incentives was included. Also, unit sales are reported at contract signing, so these numbers do not include contracts broken where delivery was not taken by the buyers. Existing home sales fell by the largest amount in 17 years, with 6.48 million units sold for 2006, which is down 8.4% year over year.

All of the "soft-landing" economists are overlooking the fact that new and existing home markets retreated the most in over 15 years. That should put a chill down everybody's spine. That's more than a "simple correction"; that's a rout.

In addition, note builder incentives are not included in the purchase price of new homes. While the article uses an average amount for incentives, it is illustrative that builders are essentially bribing buyers to close the deal. Even with all of those incentives, buyers are canceling orders at high levels; all builders have reported large cancellation rates in their latest earnings reports. Also note that cancellations are not included in new home sales, meaning those numbers are overstated.

A simple "correction" is a decline of say 5%. A year-over-year decline 10%+ is an indication of a serious supply/demand problem.

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India Growth Rate Increases

From Bloomberg:

India revised the economic growth rate for the year ended March 31, 2006, to 9 percent, the fastest pace on record, the government said.

The pace was faster than the 8.4 percent forecast earlier because of greater expansion in agriculture and manufacturing, the government said in a statement in New Delhi today.

``It augurs well for the gross domestic product for 2006- 2007,'' Finance Minister Palaniappan Chidambaram said in New Delhi today. ``Although, I must caution that since the base has now increased, we will have to wait and see how it reflects statistically on the growth in 2006-2007.'

This is really important news. For all the talk of China's growth, the emerging growth story for the next few years is likely to be India.

Food for thought.

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Migrants Better Than Natives

The Institute of Directors (IoD) has conducted a survey that concludes that migrant workers to the UK are seen as harder working, more reliable and better skilled than natives.

The survey found that employers believe immigrants outperform UK employees by “a large margin”.

Workers who have come here from abroad are believed to have better skills, education, work ethics and reliability.

Miles Templeman, director-general of the IoD, is quoted in the FT as saying:

"The UK workforce has got to raise its game on skills and performance."

This means that UK workers are going to find their current terms and conditions of employment under a strong downward pressure, as shortages and skill gaps are made up by employing in migrant labour.

The socio economic consequences of this to Britain will be serious, as to whether our current government has the abilitdesirere to manage this issue is another question.

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Oil Has a Big Day; Another Nail in the Rate Cut Coffin

From Bloomberg:

Crude oil surged to its biggest gain in 16 months on speculation that colder weather and an improving economy will spur U.S. fuel consumption.

The National Weather Service predicted that below-normal temperatures will persist in the eastern U.S. for the next two weeks, and the price of natural gas, the country's most common home-heating fuel, jumped 11 percent. Consumer confidence in the U.S., where 25 percent of the world's oil is consumed, neared a five-year high, a report today showed.

``It's finally gotten cold, which will boost demand for natural gas and heating oil,'' said Bill O'Grady, director of fundamental futures research at A.G. Edwards & Sons in St. Louis. ``There's been a steady stream of good economic news in the U.S.,'' he said. ``The energy markets can no longer shrug off the economic numbers.''

As this daily chart of oil below shows, the market was probably a bit oversold at current levels. That means traders were looking for a reason to buy:



However, cold weather can't last forever to provide a floor for the oil market. But that wasn't the only reason mentioned for today's rally:

Oil is also getting support from the prospect that the Organization of Petroleum Exporting Countries will follow through on its pledges to cut production. The group, which pumps 40 percent of the world's crude, agreed in December to cut output by 500,000 barrels a day as of Feb. 1. That's on top of a reduction of 1.2 million barrels a day that went into effect in November.

OPEC's production cuts are finally having an impact on trader psychology.

But, that's not the only reason either. As mentioned above, all of the good economic news coming from the US us finally sinking in. A faster economy = more oil consumption by the US. In other words, the Goldilocks crowd hasn't counted on increasing oil prices.

To take this one step further, what does this mean for interest rates? All of the recent Fed statements have said inflation is still too high. This does not bode well for future rate cuts. In fact, I would guess that if oil continues rallying for the foreseeable future, rate cut talk will be declared dead on arrival.

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UPS Issues Lower 2007 Earnings

Fromthe Financial Times:

UPS, the world's largest package delivery group, has warned it faces a "challenging year" in the US as the slowing domestic economy puts the brakes on parcel shipments.

Shares in the group were down more than 3 per cent on Tuesday afternoon after it issued lower-than-expected earnings guidance for 2007 and said the year got off to a slow start in the US.

But Scott Davis, chief financial officer, remained "bullish" about the long-term outlook, predicting that the US slowdown would prove short-lived.

"We feel that this economy is a bump in the road and expect it to get back to normal towards the end of this year or the start of 2008," he said, in an interview.

Everybody is always bullish about the outlook 1 or more years from now. This is one reason I usually discount the "future outlook" from the various Federal Reserve district's manufacturing surveys. It's just too easy to say, "things will be great in 2008!"

All that aside, UPS and Fed Ex ship a lot of packages in the US. When they issue earnings warnings it's important to pay attention. Just as importantly, here's a chart of the Dow Transports:



The average had a double top formation in 2006 and may be forming another one as we speak. More importantly, the transports failed to confirm the late 2006 rally. This is a clear violation of Dow theory. After you make goods, you have to ship them somewhere. When people aren't shipping you have to wonder how health the economy is.

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Housing Bottom? Doubtful

From the Associated Press:

Prices of single-family homes across the nation rose in November at the slowest rate in more than a decade, a housing index released Tuesday by Standard & Poor's showed, countering other evidence that the housing slowdown may be nearing an end.

The S&P/Case-Shiller composite index showed a 1.3 percent year-over-year increase in the price of a single-family home based on existing homes tracked over time in 10 metropolitan markets.

For its 20-city composite index, prices grew 1.7 percent, the slowest rate ever for that data, according to the S&P index committee chairman, David Blitzer. That data has been collected since 2001.

"The weakness continues to spread," Blitzer said. "I don't see any signs of a bottom. Unfortunately, it's still looking pretty nasty from a housing point of view."

The last time the growth dipped lower than 1.3 percent for the 10-city index was in September 1996, when it measured 1.2 percent.

First -- the data record is only 5 years old for the 20-city composite index. In addition, the index was started just before the housing bubble started. So comparisons with the last 5 years are to a period of higher-than-average growth.

However, a slowdown in appreciation indicates sellers are just starting to get the message there is too much supply on the market.

On a related note,

"We have more than a million housing units of excess supply," said James O'Sullivan, an economist for UBS. "If you are looking for evidence that the worst is over for housing, you're not going to find it in this report. This argues that housing starts need to go down more."

In other words, don't expect a housing price rebound anytime soon.

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FSA Calls For MEAF Refunds

The Financial Services Authority (FSA) has called for lenders to justify, and refund, their increased mortgage exit administration fees (MEAF's).

MEAF's are charged by lenders when borrowers pay off their mortgage early, or switch to another lender. The theory is that the MEAF covers the administration costs of closing the mortgage early. However, the FSA and others are becoming increasingly suspicious of the recent MEAF increases being foisted on mortgage holders by some lenders.

The FSA stated that, with regards to current customers, lenders must decide by February 28th 2007, whether they will charge no MEAF, the original or revised lower MEAF or their current increased MEAF.

Those that decide to charge the latter will be required to justify their decision.

The FSA also stated that past customers, who are unhappy with their MEAF charges, must be treated in the same way as current customers. Those who complain about an increased MEAF, should expect a refund of the difference between the actual MEAF paid on exit and the original MEAF.

"This is Money" claims that some lenders, such as Alliance and Leicester, have trebled their original MEAF (Alliance and Leicester's now being £295).

No doubt the possibility of being able to make claims for excess MEAF's will bring about the creation of a whole new claims industry, who will live off other's misfortune.

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Earnings Management

This chart has been making the econ blog rounds over the last few days:



Since October 2002, the lowest percentage of companies to beat earnings expectations is 59%. That's a pretty remarkable number when you think about it. It seems like most companies are going to beat expectations.

But -- let's look at the other side of the coin. Companies are pretty sophisticated about marketing. After all, most of these companies have sales and marketing departments, some have advertising accounts with some of the biggest advertising firms around and most CEOs are pretty marketing savvy. Here's the point: Companies do their best to influence market perception. It would not be surprising at all to learn that company x deliberately downplayed future expectations in order to beat those expectations and therefore hopefully drive the stock price up.

Remember: all of this miraculous "beating of expectations" also involves players who are very savvy about selling.

Food for thought.

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Crucial Week For the Dollar

Here's a daily chart of the dollar from Stockcharts:



It's up 3.75% since early December. The main reason for the increase is encouraging economic news from the US. Since early December there has been a fair amount of speculation that the housing market has stabilized, job growth has been good, unemployment is low and the "official" retail numbers from the Census Bureau were decent. The Fed's official statements have all said they are still concerned about inflation, implying interest rates aren't coming down soon. All of this has helped the dollar increase in value. But is this a "real" rally, or is it a bear market suckers rally? Here's a weekly chart of the dollar:



The dollar chart has breached resistance at the 84 and 84.5 level. These are both technically strong developments that should encourage traders. While the last 4 bars have been weak, we can interpret those bullishly as the calm below the storm of this week's economic news or bearishly as overall market hesitancy.

Most importantly, the current rally is slightly above the 50% Fibonacci retracement level (84.82) of the October to December sell-off. This should have the bears ready to pull the short trigger on adverse news.

In addition, we have some important economic news this week -- payrolls, an FOMC meeting announcement on Wednesday and preliminary 4th quarter GDP. In order of importance, I would place the FOMC meeting first as interest rate policy is still a very important factor for currency traders. I would follow that with 4th quarter GDP because a perceived US slowdown combined with a perceived European and Japanese rebound were primary drivers of the October to December sell-off. Third I would place payrolls.

Theshort version?

"This week is make-or-break week for the U.S. dollar," said Kathy Lien, chief fundamentals analyst, at Forex Capital Markets in New York.

"The foreign exchange market has turned very dollar-bullish after a series of upside surprises in economic data, causing a sharp plunge in rate cut expectations," she added.

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Mortgage Problems hit GMAC

From Seeking Alpha:

GM's announcement last Thursday that it is delaying its Q4 earnings report illustrates the effect the travails of the U.S. mortgage market have had on GMAC Financial Services, a lending unit GM divested in November. Cerberus Capital Management purchased 51% of GMAC for $14 billion, but there is some question whether the $14.4 billion tangible NBV ascribed to GMAC at the time was appropriate. At particular issue is GMAC's ResCap mortgage unit, which has suffered the same pressures that have hurt lenders throughout the industry. Lehman Brothers auto analyst Brian Johnson estimates that "complications" at ResCap could cost GM $300-400 million in cash charges in H1. A substantial payout to Cerberus could be a great strain on GM as it struggles to maintain liquidity and fund its restructuring. GM is planning to restate results from 2002 through Q3 2006 because of overstatements of deferred-tax liabilities. The company is forecasting a profitable Q4 with record revenue and says it ended 2006 with $26.4 billion in cash.

Expect to see more news like this over the next year. More and more lenders have gotten into the mortgage game. More and more sub-prime mortgages are moving into foreclosure at a faster pace.

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Banks' Underhand Methods

Banks were accused by Which? of using underhand methods to dissuade customers from seeking refunds, after they have been charged "unfairly" for exceeding their overdrafts.

Which? said that banks have threatened to close accounts, pass details on to debt collectors and charge for statements when customers challenge their overdraft fees.

Which? claims that it has heard of charges of up to £5 per page for duplicate statements. The law permits a maximum charge of £10.

One bank tried to charge £30 an hour labour charges to send duplicates, with a total bill of £360.

Doug Taylor, the personal finance campaigner at Which?, said:

"Banks are employing increasingly underhand methods to avoid their responsibility to treat their customers fairly and refund the charges."

Angela Knight, the chief executive designate of the British Bankers' Association, said:

"Which? is clearly trying to exploit its position as a consumer body by sensationalising what could be a useful piece of research.

The banking industry handles over seven billion transactions a year and occasionally something will go wrong that's human nature.

But the way in which Which? has approached this is also personally insulting to the front-line bank staff who do an excellent job serving their customers."

As I have said before, banks are on this earth to make money they are not a charity. Try to stop them making money in one way, and they will find another way to charge you.

Customers would be well advised to help themselves lessen the banks' avenues for charging, by keeping their bank statements for at leastr 6 years.

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Fed President Lacker Gets the Wage Picture Right

From a 19 January speech:

Let me add a footnote here regarding wage rates and the inflation outlook. Some observers have viewed robust wage growth as a cause of inflationary pressures; I do not share that view. We can have healthy wage growth without inflation as long as we see commensurate growth in labor productivity. In fact, over time, real (inflation-adjusted) compensation tracks productivity growth fairly well, though they do not move in lockstep from quarter to quarter. I would note that the rate of growth of productivity shifted higher beginning in the middle of the 1990s, and while productivity is hard to forecast, I believe that reasonably strong productivity gains will continue and will warrant reasonably strong real wage gains. What would concern me – and we have not seen this as yet – would be a persistent increase in wage growth that was not matched by a commensurate increase in productivity growth. Ultimately this would result in higher inflation.

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10-Year Treasury at 5-month Highs

From Bloomberg

Treasury 10-year note yields rose to the highest level since August this week after government bond sales drew weaker-than-expected demand and industry reports suggested the worst of the housing slump may be over.

Investors demanded higher returns on the $41 billion of securities sold as compensation for concern a strengthened economy will raise the threat of inflation. New- home sales rose more than expected and existing-home sales stabilized, the U.S. Commerce Department reported.

The government bond market has ``just been beaten down very hard,'' said Scott Gewirtz, head of Treasury trading at Lehman Brothers Inc. in New York, one of the 22 primary U.S. government securities dealers that trade with the central bank.

The yield on the benchmark 10-year note rose 10 basis points, or 0.10 percentage point, to 4.88 percent, according to bond broker Cantor Fitzgerald LP. It touched 4.90 percent yesterday, the highest since Aug. 16. The price of the 4 5/8 percent security maturing in November 2016 fell 24/32, or $7.50 per $1,000 face value, to 98 1/32.

For the last few months, talk of an interest rate cut has dominated trader's talk. I have speculated that an interest rate cut was off the table for now, largely based on numerous Federal Reserve speeches that said inflation was still too high. The Treasury market appears to share that view as the chart of the 10-year Treasury indicates:



Interest rate policy is the prime driver of the current expansion. Here is a chart from the St. Louis Fed of the effective Federal Funds rate:



The Fed lowered interest rates to 0% (after adjusting for inflation) by early 2002. Conventional economic thinking says it takes 12-18 months for interest rate changes to work their way through the economy. That would mean the last of massive cuts in 2001 fully hit the economy in early 2003 which is when overall GDP kicked into higher gear.

Now we have a Fed that is very concerned about inflation, as they have said so in a unified voice in their public speeches. Several non-official inflation measures (from the Cleveland and Dallas Fed) confirm inflation is still higher than the Federal Reserve would like. Therefore, a rate cut is still off the table, barring new economic numbers that work against that thesis.

So -- what does this mean going forward?

1.) Housing: We started to see better housing numbers in the last part of 2006. This is also when we saw interest rates drop. Therefore, don't be surprised if housing numbers fail to impress in the next few months.

2.) Borrowing costs are still historically low: 5% for capital is still cheap by historical standards. Therefore, don't expect a big dent in all of the M&A activity we have been seeing over the last half of 2006.

3.) The overall effect on consumer spending is a wild card. Pay is increasing, but consumers may want to allocate those increases to the record high debt payment level they currently have rather than spending on consumer goods. Also, the Christmas season was fair but not great, indicating consumer spending may already be slowing down.

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The Market's Last Week

Let's see how the markets acted last week. Just for review, I use the exchange-traded funds for the S&P 500 (SPY), Nasdaq 100 (QQQQ) and the Russell 2000 (IWN). The DJIA is at best antiquated.

Here's a chart for the S&P and QQQQs, which both say the same thing.





We had two days of gains followed by two days of selling. However, the selling occurred on noticeably higher volume. In addition, the SPYs hit a higher level on Wednesday, then quickly retreated to lower levels -- again on higher volume. The QQQQ's looked like they were going to start moving up, but sold off the earlier in the week levels -- on higher volume. So -- short version is simple: last week there were more sellers than buyers in the market. In addition, market participants sold into the rallies. This is not a sign of confidence.

The IWNs were a little different.




This average has been trading in a range since the beginning of December. Last week we say a similar pattern to the SPYs and QQQQs, but the IWNs sold off to about 50% of the Tuesday-Wednesday rally. In addition, it looks like the IWNs may be forming a triangle trading pattern, which usually means consolidation before a move in wither direction.

In summation, traders were concerned about the market last week, with an emphasis on selling rather than buying. Before I speculated that the decreased likelihood of an interest rate cut may be acting as a ceiling on the market. With the numbers from Friday showing strength, that may still be the case.

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Weekend Weimar

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New Home Sales Increase 4.8%

From Bloomberg

New home sales in the U.S. rose more than forecast in December, showing the real-estate market is improving following its biggest slump since 1990.

Sales rose 4.8 percent to an annual pace of 1.12 million in December, the most since April, from a 1.069 million rate the prior month, the Commerce Department said today in Washington. For all of last year, sales dropped 17 percent, the biggest decline in 16 years, to 1.061 million from a record 1.283 million in 2005.

Buyers were lured back into the market after builders cut prices and sweetened incentives. Combined with more jobs, rising incomes and still-cheap mortgage rates, the sales increase may give companies such as Lennar Corp. reason to be more optimistic on the outlook for this year

Looking at the numbers from the Census Bureau, there are two large gains in the Midwest and Northeast -- which each increased 27% from November levels. I am guessing that unseasonably weather weather had something to do with these increases. Finally, these numbers to not completely comport with the slew of horrible homebuilder announcements this quarter, a majority of which have been horrible. I speculated that homebuilders may be front-loading bad news into their reports -- that is, adding a ton of bad news to an already bad quarter simply to get it over with. We'll have to wait and see if this is the case.

(From Bloomberg) The median price of a new home fell 1.5 percent in December, to $235,000 from $238,600 a year earlier. The median price of $245,300 for all of 2006 was 1.8 percent higher than the previous year.

The number of homes for sale at the end of the month fell to 537,000, the fewest since January, from 542,000 in November. That left the supply of homes at the current sales rate at 5.9 months' worth, compared with 6.1 months in November.

The drop in median prices indicates that sellers concessions are starting to pay-off in terms of higher sales. However, I would caution that lower prices do not include the increased use of incentives in sales. I would also caution that new home sales do not account for cancellations. Home builders have reported a much larger cancellation rate over the last few months.

Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and reduce inventories.

Such incentives are not subtracted from the sales price reported to the government. Sales are reported when a contract is signed, not at the closing of the sale.

What's more, many of the nation's home builders have reported a large increase in cancellations in recent months. Cancellations are not reflected in the government data, so the reported sales are likely overstated.

The drop in inventory is a welcome development. The huge inventory overhang over the last year has been very concerning. However

However, the inventory of completed-but-unsold homes rose to a record 172,000, up about 50% in the past year. With builders having to carry the costs of those vacant houses, housing starts should weaken further this year until the inventory is worked off, Moody said.

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Durable Goods Orders Increase 3.1%

From the Census Bureau:

New orders for manufactured durable goods in December increased $6.7 billion or 3.1 percent to $221.9 billion, the U.S. Census Bureau announced today. This was the fourth increase in the last five months and followed a 2.2 percent November increase. Excluding transportation, new orders increased 2.3 percent. Excluding defense, new orders increased 3.9 percent.

These numbers jib with the Fed's industrial production figures for December.

Excluding transportation, the overall number has decreased each month for the last three months. This indicates how important Boeing is to the US economy.

There was a big drop in semi-conductors (down 22%), but semis increase big two months ago (up 29.2%). My guess is producers are still working off that inventory.

There was also a big drop in computers and related equipment (down 5.7%). Communication equipment dropped 10.7%,Considering how important technology is to the latest stock market rally, this does not bode well for the coming trading week.

We saw a good increase in auto production (up 5.8%). This is probably a production increase in anticipation of new models.

Thank-God foreign airlines are buying planes.

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Construction Layoffs In Last Unemployment report

For the last few months, I've been looking at the weekly unemployment reports to see how the housing slowdown is impacting construction employment. There have been some pretty sizable layoffs, and last week was no exception.

California had 10,000+ layoffs in "construction and service" employment.

Minnesota had Pennsylvania had 4000+ layoffs in construction or "construction, trade and service."

Florida had 3400 layoffs in "construction, trade, service, and manufacturing industries."

I am expecting this slow bleed to continued for some time. We've had a rash of homebuilding companies report very negative numbers for the 4th quarter. While housing inventory decreased in the latest existing homes survey, it's still had very high levels. Sales in 2006 dropped the most in over a decade. In other words, the soft landing for housing is still suspect.

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Richmond Fed -- Another Bad Month

The Richmond Fed issued this report on January 23. Because I was traveling I missed it and am now playing catch-up/.

From the Richmond Fed

Manufacturing activity in the central Atlantic region contracted again in January, according to the Richmond Fed’s latest survey. Respondents reported further declines in factory shipments and new orders, although employment and order backlogs declined on pace with December. Capacity utilization moved slightly lower, while delivery times edged higher. In addition, manufacturers reported somewhat quicker growth in finished goods inventories.

This chart is not good -- it shows the Richmond Federal Reserve District had another bad month and has been contracting for the better part of 2006. On the good side, the overall index had similar performance between 2004 - 2005 without a major problem. However, seeing any index drop like this does not raise confidence.

Here are the shipments and new orders indexes. They both show a similar pattern.





We've seen mixed manufacturing news over the past month. While overall industrial production for December increased .4%, the 4th quarter showed an overall decline. The Phily Fed was up moderately, but was nothing to write home about. The Empire State Survey softened a bit. The Kansas Fed index eased as well.

All of these regional reports are pointing to a slowing of overall production in February.

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The Long View: Where Is the Trade Deficit?

BruceMcF

A long time ago, I looked at the current account blowout in The Long View: Current Account, which ended with a promise to have a look at the make-up of the blow out in terms of both geography and industry.

What I am looking at now is the broad outline of the geographic break down.

How broad? I am breaking the whole world down into The Americas, Europe, Asia & Oceania, and Africa. So the answer is, just about as broad as possible.

The Story So Far

Where I left off, before the long haitus, was the stark reality of the current account blowout:

• It is massively bigger than anything we have experience in living memory


• The problem is not income or unrequited transfers: it is trade

The trade account is made up trade in goods and trade in services. What I am going to be looking at today is trade in goods.

And before I put this information up, I will add a note that you should not shoot the messenger. After careful contemplation, I have come to the firm conclusion that messenger-shooting is counter-productive.

The source of this information is the same BEA site that provided the info for the first in this series. The only difference is that instead of working with table 1, I am working with Table 2b: Trade in Goods, Additional Historical Historical Data.

Where In The World Is the Trade Taking Place?

First, lets look at Exports to these four regions as a share of total exports. In all three of these graphs:

• the Americas are the "dash" line,
• Europe is the "dot" line,
• Asia and Oceania is the "dash dot" line, and
• Africa is the "dash dot dot" line.

The trends here are simple. Europe is losing ground as an export market, with most of that share being taken up by the Americas, and some being taken up by Asia and Oceania. Africa is a very small market, both because of the small size of so many African economies as export markets, and because of the dominance of European firms in those markets.

Now, lets look at Imports from these four regions, as a share of total imports.

Here we have the Americas as the dominant source of imports, with a loss in market share in the 80-85 period that is regained with something to spare. The second spot, however, trades place, Europe holding a slight lead over Asia in 80-85, while by 01-05, Asia and Oceania is on a path toward taking over as the primary source of imports.

Don't Forget the Blowout

A word of caution is in order here. It is important to bear in mind that the two diagrams are showing shares of totals that are sliding rapidly apart. That is, 45% (about) of our goods exports go to the Americas, and 35% of our goods imports. But that is 45% of a smaller number, and 35% of a bigger number.

The way I have set this up is to take the average of imports and exports as "average trade", and look at the Balance of Payments with each global region as a percentage of "average trade". And here ... as in the earlier diary that focused on the current account overall ... things are moving "south" at a very rapid pace.


Bear in mind here that what you are looking at is trade in goods, not goods and services overall. The US tends to have a stronger position in services than in goods. As you will see when I look at trade in services, a "small" negative balance in goods trade is good news for the overall trade account.

And for the global regions, the balance of trade compared to average trade breaks down into two stories. For the Americas, Europe, and Africa, the story by and large is improvements up through to 90-95, and then a rising deficit through to 00-05 (and, if we sneaked at table 2a, on to the present).

For Asia and Oceania, the "improvement" in the trade deficit is there, but it is very small ... from about -11% to about -9% ... and the slide since then is the single largest source of the trade deficit.

And remember: this last figure is compared to the average amount of all trade in goods. The deficit in goods trade with Asia and Oceania is more than 20% of the average trade in all goods.

The Path Ahead

Of course, whenever you find Economic bad news, you can find a pollyana that will explain that its just the market in operation, and in the end its all for the best. The main hope for the pollyanas are that "in the long run", the deficits in the goods trade will be balanced by surpluses in services trade.

And so, in the third installment in this series, I will see what the long term view of the balance of trade in services has to tell us. ... to be continued ...

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Existing Homes Sales Decrease .8%

From Bloomberg

Sales of previously owned homes in the U.S. declined in December for the first time in three months, capping the biggest annual drop since 1989, a slide that's shown signs of bottoming.

Purchases dropped 0.8 percent to an annual rate of 6.22 million, the National Association of Realtors said today in Washington. For the entire year, sales fell 8.4 percent from 2005's record. In a sign the slide may be nearing an end, the number of homes on the market decreased for a second month.

``This grinding sort of correction will continue for much of this year,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``Housing will make a negative contribution to the economy this year, but the declines won't be as big as those we have seen in the most recent past.''

The best news in this report is the drop in inventory, which decreased from a 7.3 month supply to a 6.8 month supply. While that figure is still high, it is lower than recent inventory readings.

It's important to remember that interest rates have increased to around 4.85%. This does not bode well for continued strength in the housing market. When interest rates dropped from this level in mid-October we saw an increase in housing sales. Now that rates have returned to this level, I would expect sales to decrease.

While sales appear to have stabilized over the last four months, the high level of consumer debt indicates we are not out of the woods yet in housing.

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Council Tax Blunder

According to The Telegraph there has been a blunder in the council tax bandings, that may mean that many people may be entitled to claim a rebate.

The article notes that "hundreds of people are receiving money back from local authorities after challenging the council tax banding of their properties".

Seemingly many of the 1991 valuations were performed by estate agents who would just drive past the house, without so much as "poking their noses round the door".

You can check what your neighbours are paying on the Valuation Office Agency website (www.voa.gov.uk), which gives the band for any house in the country.

If there is a discrepancy, you can contact your local council and ask them to look at the banding.

However, be warned, there is a chance that may increase your tax banding!

I had someone round from the VOA yesterday, and will publish the result when known.

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Credit Reports

As is widely known, credit reports compiled by companies such as Experian are a "public" record of an individual's financial deeds and misdeeds.

They are used by credit card companies, banks, loans companies, phone networks etc to provide an assessment of an individual's credit worthiness.

Those with a "poor" rating are deemed to be a greater risk than those with an "excellent" rating; as such, those with the "poor" score may have their application for credit refused, or have higher than normal charges imposed.

It well known that having negative items such as, ccj's, debt defaults and related negative issues on the credit report can damage an individual's rating. However, the converse is also true.

Where there are no positive comments from lenders, banks or other financial institutions the individual will also be given a low credit score.

I discussed this matter with Experian, and asked how do people get positive statements added to their credit file. Seemingly lenders and banks will do so where the customer has had a good credit history.

However, there is a catch, where the individual has had a relationship with a company such as a bank for many years; without defaulting, or any other negative incident, the institution will not record a positive comment in the individual's file.

Why?

Simple, a relationship going back so long will have meant that the individual at the time of opening his/her account would not have signed a form giving consent to share information with a third party.

The result being that those of us with a decade or more of excellent credit histories with the same institution are being penalised by those who access credit reference agencies, as there is no positive affirmation of our good credit history.

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Financial Brokers Exposed

The Publican warns of two financial brokers who are scamming licensees:

"Gateway Finance.co.uk and Funds4Business, the brokers exposed by The Publican after ripping off licensees, are making it onto TV.

BBC South’s investigative programme Inside Out has been looking into their director Gary Thomas, and has interviewed victims of the financial broker.

The Publican unveiled the company in February 2005 following investigations, which revealed that licensees were left out of pocket after loans promised by the company failed to materialise. The company was also the subject of an investigation by The Mirror, following The Publican’s investigations.

Licensees claimed they had been promised a loan or mortgage, paid an administration fee of £350 and had not received the deal they have been promised.

Some have even paid arrangement fees of nearly £2,000 while others have paid for a valuations costing up to £1,600 and have still not been provided with the deal they were promised.

The programme will be shown on BBC 1 South Friday, January 26 at 7.30pm".

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State of the Union: A Nation Off Track

So, we’re all eagerly awaiting President Bush’s State of the Union address to hear the honest facts about the nation’s economy, among other key issues.

OK, not.

Looks like we’ll have to dig up the real deal on our own by taking a gander at some of the recent data and what they portend for us working types.

Tonight, Bush likely will talk about the great economic recovery we’ve seen in the past couple of years. But newly released data from two separate sources reveal just how skewed the distribution of economic growth has been in the current recovery, according to the Economic Policy Institute.

Data from the Bureau of Economic Analysis through the third quarter of 2006 show that a historically high share of corporate income is going into profits and interest (i.e., capital income) rather than employee compensation. And a newly released Congressional Budget Office (CBO) analysis of household incomes shows that a greater share of this capital income goes to the richest households than at any time since the CBO began tracking such trends. In other words, our economy is producing more capital income and that type of income is more likely to go to those at the very top of the income scale. Together, these dynamics are contributing to a uniquely skewed recovery.

That means those in the top 1 percent of the income scale received 59.4 percent of all the capital income in 2004 (CBO's latest data), up from 49.1 percent in 2000 and just 37.8 percent in 1979. The increase in the concentration of capital income to the upper 1 percent grew as quickly over the four-year period from 2000 to 2004 as over the preceding 11 years (1989–2000).

So, the economic recovery Bush will tout is mostly about the rich getting richer. And those tax cuts that Bush will call the shining star of his economic acumen? Guess what. They’re helping the rich more than the economy. As Citizens for Tax Justice puts it:

First, the tax breaks enacted since 2001 are heavily skewed toward the very wealthiest few. Second, because the tax cuts are being paid for with borrowed money, the cost of paying the added national debt more than wipes out any benefits from the tax cuts for 99 percent of residents in each state. Only the best-off one percent are net winners from the president’s fiscal policies.

But those tax cuts for the wealthy must do something for the overall economy, right? Indeed. According to the Center on Budget and Policy Priorities:

Congressional Budget Office data show that the tax cuts have been the single largest contributor to the reemergence of substantial budget deficits in recent years. Legislation enacted since 2001 has added about $2.3 trillion to deficits between 2001 and 2006, with half of this deterioration in the budget due to the tax cuts (about a third was due to increases in security spending, and about a sixth to increases in domestic spending). Yet the president and some Congressional leaders decline to acknowledge the tax cuts’ role in the nation’s budget problems, falling back instead on the discredited nostrum that tax cuts “pay for themselves.”

As the Center on Budget and Policy Priorities sums up:

A study by the president’s own Treasury Department recently confirmed the common-sense view shared by economists across the political spectrum: Cutting taxes decreases revenues.

The Bush administration ran the Clinton budget surplus into the ground after less than a year in office—and has kept adding to the national tab so that the United States is now more than $8 trillion in debt (that’s nearly $29,000 for every man, woman and child in the nation). Yet after all these years of draining the federal budget into oblivion, administration cronies now suddenly are sounding the alarm.

And they’re offering solutions. But they’re not suggesting the nation cut back on the $255 million a day Bush is spending on the Iraq war or back off those tax cut payoffs to wealthy donors. Instead, in a recent speech, Ben Bernanke, Federal Reserve chairman, used a warning about the growing deficit as the opening salvo to attack on what’s left of our country’s successful heath and retirement programs.

Warning against complacency over the federal deficit, Ben S. Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a “calm before the storm” masking a long-term danger posed by looming deficits in Social Security and Medicare.

snip

Bernanke’s comments were consistent with his past warnings, and those of his predecessor, Alan Greenspan, about the unfunded cost of the postwar generation’s retirement. But his tone was more urgent, and it seemed aimed at the arrival of a new Democratic-led Congress that is just now setting its priorities.

Let’s see. The budget deficit is in the dumpster and the Bush administration wants to salvage it by cutting back on retirement and health care. Let’s look at retirement. Without Social Security, millions of retired Americans would struggle in poverty. Between 1960 and 2004, Social Security helped cut the poverty rate among seniors by more than two-thirds, from 35 percent to 10 percent. Social Security takes on more, not less, importance as we go forward, with fewer and fewer workers getting retirement benefits on the job. As AFL-CIO Secretary-Treasurer Richard Trumka said in testimony today before the House Ways and Means Committee:

Only half of American families have an employer-provided retirement plan of any sort, a proportion largely unchanged for decades. However, whereas 40 percent of workers participated in employer guaranteed “defined-benefit” pension plans in 1980, today only 20 percent have such plans. In substituting “defined-contribution” for defined benefit plans, employers are shifting the risk of retirement onto workers. And American workers are ill prepared to carry this risk.

There are a lot of reasons why Bush’s approval rating has tanked, according to recent polls. And it’s pretty clear that Iraq isn’t the only reason 71 percent are saying the country is seriously off track.

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Traveling

I am traveling today and tomorrow. Posting will resume on Thursday afternoon.

BS

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FSA Fines Banks

In the coming weeks, ten banks and lenders will be fined by the Financial Services Authority (FSA) for mis-selling payment protection insurance (PPI).

It is expected that these, yet to be named, bodies will each receive fines of about £1M.

It is also expected that the news of the fines will prompt customers to launch their own compensation claims, for the mis-selling of these insurance policies. Some cynics dub the selling of these policies as a "protection racket".

In 2006 the OFT conducted a 5 month investigation into PPI, describing it as a type of insurance that failed consumers because too often it gave them a poor deal and offered less protection than they thought.

To date Regency, Loans.co.uk, and Redcats have been fined £781K between them for mis-selling the policies.

It seems to be an unfortunate fact of life that Britain's financial services industry seems to regard the Biriahs public as sheep ready for "financial slaughter". It is time that the public fought back.

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UK's Second Largest Ever Islamic Finance Deal

The UK's second largest Islamic finance deal has just been concluded, with the purchase of the Grosvenor House Apartments Ltd by Park Lane Properties Ltd.

Park Lane Properties are co-owned by Kuwait based ADEEM Investment Company (ADEEM) and The Investment Dar (TID). The £100M refinancing was arranged with Lloyds TSB Corporate Markets.

The deal has been structured in accordance with Shariah principles, and using a series of sequential Murabaha transactions.

Mustafa Al-Saleh, Managing Director and Chief Executive Officer of ADEEM said:

"We are delighted to have secured such a significant deal with Lloyds TSB, allowing our vision for one of London's most historic buildings to be progressed. Working in strategic partnership with SPARC Group, our specialist Development Managers and Lloyds TSB Corporate Markets, we are now confident the building’s transformation into a super deluxe apart-hotel can be realised."

Rob Milne, property relationship director at Lloyds TSB Corporate Markets, said:

"This is a landmark Murabaha deal that required a specially tailored and individually structured finance package. We were able to bring together our commercial property experience, our track record in Islamic finance and our financial markets expertise to ensure we arranged the best deal for ADEEM."

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10-Year Treasury and Housing

Talk of a housing bottom started sometime in October. Since then we've gotten more news on new and existing home sales to stoke talk of a housing bottom (We've also had home builders report some really lousy earnings reports). In addition, interest rates started to drop about that same time. Here's a chart of the 10-year Treasury from stockcharts.com



Rates have risen steadily since early December, largely because good economic news and public statements from various Fed governors dampened speculation of a rate cut in early 2007. As a result, the 10-year Treasury's interest rate is back near 4.84%. This was at least a non-restrictive interest level in October. We'll have to see if that still holds going forward.

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Cleveland Median CPI +.3%

From the Cleveland Federal Reserve:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.5% annualized rate) in December. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (6.7% annualized rate) in December. The CPI less food and energy rose 0.2% (2.3% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 3.7%, the CPI 2.5%, and the CPI less food and energy 2.6%.

Over the past few months, several Fed officials have commented they think inflation was too high. While no one has mentioned the Cleveland median CPI as the source of their information, I am beginning to think it carries more weight than the Fed is letting on. I can't prove that -- it's just a hunch.

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The Markets Last Week

Let's take a look at how the markets performed last week. All charts below are from stockcharts.com

Here's the chart for the SPY (S&P 500).



Remember the market's were closed on Monday.

Four days with a slight downward bias that followed three strong upward bars. That indicates several points. First, there was no news strong enough to send the market in either direction. In other words, the good news canceled out the bad news. We had some good earnings news this week (broker dealers), but we also had some bad news (Motorola, IBM, Intel) combined with CPI and PPI implying the Fed won't be lowering rates anytime soon. One analysis described the market thusly:

"I think we're at an extremely pivotal psychological level," said T.J. Marta, economic strategist at RBC Capital Markets. He said earnings and economic data support the Federal Reserve's notion that the economy can pull off a soft landing. Marta contends Wall Street is now mulling whether the economy will do a "fly-by" and skip a soft landing entirely with growth continuing apace.

This analyst didn't mention the implied ceiling caused by the Fed's not acting on interest rates. I think that is a big ceiling on the market right now.

Here's a chart of the QQQQs



This is where the bad tech news really hit hardest. Technology has reemerged as a market sector over the last 6 months, and the news from Intel, IBM and Apple hit this market hardest. Take a look at various technology related ETFs for the week:

Semiconductors



Software



Networking



Internet



This charts should cause concern among those in the bullish market camp. Technology has been the driver of the latest rally that started in late July/early August of last year. Now that sector is somewhat suspect going forward.

Here's a chart for the Russell 2000



We're back to a trading range for this index, between roughly 76 and 79.50. Trading ranges mean supply and demand are about equal. Traders aren't bullish enough to bid the index higher or bearish enough to sell it lower. We're waiting for some catalyst to make the market decide on one direction.

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Phily Fed Up Moderately

From the Phily Fed:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a revised reading of -2.3 in December to 8.3 (see Chart).* This month, 25 percent of the firms reported increased activity; 17 percent reported decreased activity. The new orders and shipments indexes offer mixed signals about the strength of this month’s overall improvement. Demand for manufactured goods has not yet recovered much: The new orders index rose two points, from -0.9 to 1.3, after negative readings for two consecutive months. The shipments index increased 10 points from December; 37 percent of the firms reported an increase in shipments; 13 percent reported a decrease. Indexes for delivery times and unfilled orders remained negative, indicating shorter delivery times and a decline in unfilled orders.

Evidence of modest growth in manufacturing is suggested by replies concerning employment and hours worked. The percentage of firms reporting an increase in employment (21 percent) was somewhat higher than the percentage reporting decreases (13 percent). The current employment index was virtually unchanged from its revised December reading. The average workweek index edged four points higher, but the percentage of firms reporting longer hours (16 percent) was nearly the same as the percentage reporting shorter hours (15 percent).

Let's take a look at the general diffusion chart:



The gray line (current conditions) has trended down for the last 6 months or so. We saw a longer downtrend from mid-'04 to mid-'05 without a serious problem. That means the most recent decrease could be nothing more than a natural slowdown from peak activity. In addition, we have seen modest increases over the last year, so the recent increase into positive territory could be the beginning of a return to slower but positive production levels. However, we are near the 0 line, so this trend bears watching.

The new orders index rose two points, from -0.9 to 1.3, after negative readings for two consecutive months.

The new orders index isn't offering us much hope right now.

Here's some good news in the report:



The prices paid component has dropped for the last 6 months. This is good news on the inflation front.

The current employment index was virtually unchanged from its revised December reading.

We've seen manufacturing employment take a big hit during this expansion. Here's a chart of national manufacturing since 2000.



The large productivity gains have translated into fewer manufacturing employees. There is no reason to think this trend won't continue.

The short version is all the recent manufacturing numbers have showed a slightly positive reading not strong enough to warrant extreme optimism, but enough to warrant a soft-landing.

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Explain This To Me

From Bloomberg:

``Central banks will get naughtier,'' said Jan Loeys, global head of market strategy at JPMorgan Chase & Co. ``They will see inflation and they will have to raise rates.''

OK -- I've been reading financial press for about 20 years. I have never see a central bank described as naughty. Maybe it's an English thing.....

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FT For Sale

It is reported that the Financial Times (FT), or the "Pink 'Un" as it is known by those who work in the City, is up for sale.

Pearson, its owner, is reportedly looking for around £650M for the paper and its associated website.

The FT is now profitable, and 2006 year end figures are expected to show profits of around £10M.

It is rumoured that the US firm, Kohlberg Kravis Roberts may be interested buying the FT.

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New Nome Construction Increases 4.5%

From CBSMarketwatch

New construction on homes in the United States rose for the second straight month in December, reflecting year-end strength in apartment construction, the Commerce Department estimated Thursday.

Meanwhile, the number of new building permits issued rose for the first time in 11 months.

Economists said weather played a major role in the increased building activity.

The increase in housing starts was likely due to "a few large multifamily projects that were able to get started due to record warm weather," wrote Joshua Shapiro, chief economist for MFR, in an e-mail to clients.

"We do not take the data as a sign that the housing market is stabilizing, nor do we believe the worst of the housing correction is behind us," wrote Richard Moody, chief economist for Mission Residential, in an e-mail.

...

Starts of multifamily housing jumped 42.1% in December, reaching 412,000. This marked the biggest gain since April 2005.

On the other hand, starts of single-family homes fell 4.1%, trending to a seasonally adjusted annual rate of 1.23 million from 1.28 million in November.

The starts in multi-family projects appear to be the reason for the jump. That makes sense. Considering the following charts from the WSJ:



Sales are trending down and inventory is up. This is not the time to be adding to inventory.

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CPI Up .5%; Core Up .2%

From the Bureau of Labor Statistics:

On a seasonally adjusted basis, the CPI-U increased 0.5 percent in December, the first advance since August. Energy prices, which had declined in each of the preceding three months, rose 4.6 percent in December. Within energy, the index for petroleum-based energy increased 7.7 percent and the index for energy services increased 1.2 percent. The food index was unchanged in December. The index for all items less food and energy, which was virtually unchanged in November, increased 0.2 percent in December. Upturns in the indexes for apparel and for tobacco and smoking products werelargely responsible for the acceleration. Shelter costs rose less than in November, but still accounted for about 80 percent of the December advance in the index for all items less food and energy.

From Bloomberg:

U.S. consumer prices accelerated in December for the first time in four months, suggesting the easing of inflationary pressures that the Federal Reserve is counting on will be slow.

The consumer price index increased 0.5 percent last month, the most since April and reflecting higher costs for gasoline and natural gas, after no change in November, the Labor Department said today in Washington. Excluding food and energy, so-called core consumer inflation rose 0.2 percent, following no change a month earlier.

Let's break these numbers down a bit.

1.) The core and total numbers same in at or slightly above expectations -- depending on whether you read Bloomberg or CBS.Marketwatch for your forecasts. So the number won't be unexpected.

2.) Transportation and energy costs were a big reason for the increase. Transportation increased 1.8% after three months of declines and overall energy prices increased 4.6% after three months of decreases. Oil has dropped in a big way since late December, meaning January's number may be much lower than December.

3.) The 12-month December to December change is 2.5%. This is still high for the Fed.

4.) Bloomberg notes this is the biggest increase since April. That's not a good development.

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Beige Book's Inflation News is Fair

From the Beige Book:

Overall prices increased moderately. Prices for energy and a number of materials have eased, and competition has kept prices for final goods in check. Atlanta, Chicago, Minneapolis and Kansas City described price pressures as easing or moderating. Manufacturers in the Boston and Cleveland Districts reported that input prices were stable, although contacts noted some increases in metal prices. Meanwhile, manufacturers in the New York District indicated some increases in input price pressures. Retail prices were steady in the New York, Atlanta and Dallas Districts, but were edging up slightly in the Richmond District. Philadelphia noted that reports of price increases at business firms were not as widespread as they were earlier in the fall. Dallas described price pressures as mixed, while San Francisco said final prices rose at a modest pace.

First -- copper prices have dropped since this report was written. That means the "some contacts indicated metal prices were increasing" has either already gone away or is in the process of ameliorating.

This report uses the word "moderating" and "eased" a lot. That plays into the Fed's general story right now, which is as the economy slows price pressures will weaken. This has been the Fed's contention for the last 6 months. When Bernanke first started using this language I was skeptical. However, the economy is making Ben look good right now.

The areas of inflation increases look more like inflation "hot pockets" -- areas of limited scope and influence rather than a system wide problem.

Ben speaks to the Senate today.

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Misleading Insurance Adverts

Those of you who have tried to claim on an insurance policy, only to be disappointed and have your claim rejected by the invocation of the small print, may raise a faint smile at the news that the Financial services Authority (FSA) have rebuked the industry for making misleading claims in their adverts.

The FSA reviewed the press advertisements of 57 insurance firms, and has subsequently warned companies in the home, travel and car insurance markets to stop using saving claims in their advertising that mislead consumers.

The FSA has also threatened regulatory action, after it found that 57% of motor insurance advertisements with savings claims were either unclear or misleading.

The FSA also noted that 25% of home insurance advertisements were misleading.

Vernon Everitt, FSA retail themes director, said:

"Most people rely on some form of insurance to protect them and advertising is a major influence on what they choose to buy. So it must be clear, fair and not misleading, leaving people with a balanced picture of what's on offer.

This work demonstrates that firms in the home, travel and car insurance markets must shape up and ensure that the claims they make don't mislead."

However, Which? Claims that the FSA has not done enough.

Emma Bandey, personal finance campaigner at Which?, said:

"Why is the FSA consistently reluctant to name and shame firms?"

Which? needs to understand the reality of the financial services industry in Britain; it is here to make large sums of money for itself, not to provide a value for money service to its customers.

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Industrial Production Increases .4%

From CBSMarketwatch.com

U.S. industrial production rose by an overall 0.4% in December, as the high-technology and motor-vehicle industries posted strong output for the month, the Federal Reserve said Wednesday.

....

Bear Stearns economists said that, coupled with other recent data, the industrial output figure showed the economy improved at the end of the year.

"Data on employment, retail sales, and production suggest that the economy's momentum was picking up at the end of 2006," the economists wrote in a research note.

Let's look inside the report, because there are two sides to analyze.

Overall industrial production decreased -.3%, -.1% and -.1% in September through November, respectively. That means the overall .4% look like a rebound.

On a monthly basis there are lots of increases -- consumer durables and non-durables, business equipment (which saw a big bump), durable and nondurable manufacturing and mining all saw increases. These increases should give the market some confidence going forward because they occurred across a wide spectrum of industrial areas.

I should note that last months manufacturing ISM saw increases as well, although the index was hovering around 50 which is the line between expansion and contraction.

However, overall industrial production fell at a -.5% rate in the fourth quarter. The second lowest annual growth rate occurred in the third quarter at 4%. In other words, the fourth quarter saw an overall downturn. All industrial areas - manufacturing, consumer goods, energy, business goods -- saw low numbers on a quarterly basis. Manufacturing contracted -1.4% on an annual basis in the 4th quarter.

The breadth of this month's increases is a good sign. However, another month of increases is required before we pop the champaign corks.

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Homebuilder Lennar Swings to Loss

From the Street.com

The Miami-based homebuilder lost $196 million, or $1.24 a share, for the quarter ended Dec. 31, reversing the year-ago profit of $581 million, or $3.54 a share. Revenue slipped 15% from a year ago to $4.27 billion.

Analysts surveyed by Thomson Financial were looking for an loss of 81 cents a share on sales of $4.15 billion.

The latest quarter includes write-offs of option deposits and pre-acquisition costs of $111.1 million and valuation adjustments of $382.8 million. Lennar said it posted a latest-quarter homebuilding operating loss of $319.4 million, as new orders dropped 6% from a year ago.

"Uncertain market conditions make it difficult to provide a 2007 earnings goal," CEO Stuart Miller said. "While we know that the margin in our backlog will result in lower profitability in the first half of 2007, we believe that if the current environment of strong employment, low interest rates and a healthy economy continues, and the market for new homes demonstrates traditional, seasonal improvement, we will meet or exceed our 2006 earnings of $3.69 per share."

Some of these losses could be the company loading a ton of bad news into an already bad quarter, essentially taking care of all the bad news at once. We have seen a large number housing companies report terrible fourth quarters that include a ton of bad news.

However, I wouldn't be surprised if we saw a continuation of this trend going forward for at least another quarter. Cancellations are high and the US consumer is heavily indebted with mortgage debt already. In addition, with the declining sales rate and increasing inventory, the market is shifting to a buyers market, which is going to put more downward pressure on prices.

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PPI Increases .9% in December

From the BLS:

The Producer Price Index for Finished Goods increased 0.9 percent in December, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 2.0-percent advance in November and a 1.6-percent decline in October. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.5 percent in December after climbing 0.7 percent a month earlier, and the crude goods index increased 2.9 percent following a 15.7-percent gain in November.

Finished food products had the largest jump in 12 months, increasing 1.7%, while finished energy prices increased 2.5%.

The number ex-food and energy increased .2%.

The best news in the report was the 1.1% 12-month percentage change in the PPI from last December.

Both Reuters and Bloomberg note the number rose more than forecast, indicating traders may be taken back by the news.

Here's how Bloomberg reported the news:

Prices paid to U.S. producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline costs that have since reversed.

The 0.9 percent gain in the producer price index followed a 2 percent increase in November, the Labor Department said today in Washington. So-called core wholesale prices that exclude energy and food rose 0.2 percent after rising 1.3 percent.

Crude oil costs have dropped 20 percent since mid-November, and some raw-materials prices have also decreased. The declines may reassure Federal Reserve policy makers that price pressures will ease. Dallas Fed Bank President Richard Fisher said last week that there's been ``encouraging news'' on inflation, and he's ``very comfortable'' with the level of interest rates.

``We have seen a notable moderation in year-over-year wholesale inflation in the second-half of the year,'' Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. The smaller increases ``suggest less inflation risk in the pipeline, which is a favorable development for the Fed.''

Reuters reported the news thusly:

U.S. producer prices rose slightly more than expected in December but they advanced at a far more moderate pace than a month earlier on smaller gains in energy prices, a government report on Wednesday showed.

The Labor Department's Producer Price Index advanced by 0.9 percent in December. Excluding volatile food and energy prices, the index inched up a smaller 0.2 percent. Still, the gains were slightly greater than expected.

Economists polled by Reuters ahead of the report were expecting a 0.5 percent rise in the overall index and a more moderate 0.1 percent advance in the so-called core PPI, which excludes food and energy prices.

...

Economists had forecast producer prices to rise 0.5 percent, according to the median of 70 estimates in a Bloomberg News survey. Estimates ranged from a 0.1 percent decline to a 1.2 percent rise. Core prices were expected to rise 0.1 percent.

Both reports noted the official government number came in higher than expected. This means traders may be taken back by the number.

Since December, copper has fallen in a big way (see below). Aluminum has dropped as well, although not as precipitously. Oil has also dropped, helped by Goldman Sachs rebalancing its commodities index. It is now at a 20-month low and is looking to test technical support at $50/bbl. All three of those figures bode well for next month's PPI -- assuming those trends remain in place. They also mean the markets are essentially doing the Fed's work for them -- dropping prices and reducing inflationary pressures so the Fed doesn't have to increase interest rates.

However, I think this number is too high to warrant talk of a rate cut anytime in the near future. All recent Fed speeches have included statements to the effect they think inflation is still a concern. This number will not ease those concerns.

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FSA Chief Quits

John Tiner, the CEO of the Financial Services Authority (FSA), announced his resignation yesterday.

He will leave in July 2007, having held the post for four years.

Tiner said that he was leaving because he wanted to take up a fresh challenge in the private sector, before thinking about retirement.

He joined the FSA in April 2001 as managing director of the consumer, investment and insurance directorate and was appointed chief executive in 2003.

FSA chairman Callum McCarthy said:

"He has been a leader in developing international regulation through his work in Europe. Within the FSA, he has been invaluable in developing and leading a management structure with discipline and enthusiasm."

Rather bizarrely Tiner will remain an employee of the FSA until January 2008, during which time he will be excluded from any work within the financial services sector or for any UK listed company.

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More Mortgage Industry Job Cuts

From Reuters

ResCap, the holding company for the real-estate financing business of GMAC, said on Tuesday it would cut 1,000 jobs -- about 7 percent of its work force -- in a cost-cutting triggered by a slack U.S. housing market.

ResCap said it would incur a charge of about $10 million as a result of the job cuts, but expected to save $65 million in 2008 as a result of the reduction in its payroll.

The company said in a filing with U.S. securities regulators that it would cut 800 jobs by October and eliminate another 200 unfilled positions. The majority of the jobs would be cut in the first and second quarters of this year, ResCap said.

This is not news that occurs at a housing bottom.

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