Weekend Weimar and Beagle

I finally got an IPhone recently and I am totally hooked. The IPhone has a camera (like practically every other electronic device out there now) so I have been snapping pictures of my dogs.



This is Kate, a 13 year old female. She is sitting on the Weimar couch.



This is Sarge, who is, well, lounging.



This is a Beagle picture, in honor of the future Mr$. Bonddad who is a Beagle owner. I promise I will start to snap pictures of Scooby, her wonderful Beagle.

The markets are closed. Don't think about the markets. Go do something else.

Read More

Weekend Weimar and Beagle

I finally got an IPhone recently and I am totally hooked. The IPhone has a camera (like practically every other electronic device out there now) so I have been snapping pictures of my dogs.



This is Kate, a 13 year old female. She is sitting on the Weimar couch.



This is Sarge, who is, well, lounging.



This is a Beagle picture, in honor of the future Mr$. Bonddad who is a Beagle owner. I promise I will start to snap pictures of Scooby, her wonderful Beagle.

The markets are closed. Don't think about the markets. Go do something else.

Read More

Personal Consumption Expenditures Up .2%

From the AP:

Consumers, battered by a slumping housing market and a credit crunch, slowed the growth in spending to the smallest amount in four months.

The Commerce Department reported Friday that consumer spending edged up 0.2 percent in October, the weakest showing since a similar increase in June. Individual incomes grew by just 0.2 percent last month, the poorest showing in six months.

From the BEA:

Personal income increased $21.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $14.0 billion, or 0.1 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $23.8 billion, or 0.2 percent. In September, personal income increased $50.4 billion, or 0.4 percent, DPI increased $43.2 billion, or 0.4 percent, and PCE increased $33.0 billion, or 0.3 percent, based on revised estimates.

Here's a graph of the last six months of increases.



The light blue line is total expenditures. Notice it has declined for the last three months. Also notice there is very little difference between July and August. In effect, we've had four months of problems with this number.

Also notice how the durable goods numbers is jumping around quite a bit. May's number was followed by two months of contraction. August's jump was followed by September's weaker performance and last months decline. Some of this is to be expected; durable goods are goods that last a long time and are therefore more expensive. As a result, cash outlays for them are probably more prone to these types of jumps.

However, I have speculated that durable goods numbers are indicative of consumer sentiment. Because durable goods are more expensive, they are typically more expensive and therefore require financing. As a result, a durable goods order purchase means a financial commitment that requires confidence on the purchaser's part that they can continue to make payments. If a purchaser doesn't think he can make payments over an extended period of time, he is less likely to buy the item. Assuming my statement is correct -- the durable goods purchases are an indication of consumer confidence -- than this number should raise some eyebrows.

Read More

Personal Consumption Expenditures Up .2%

From the AP:

Consumers, battered by a slumping housing market and a credit crunch, slowed the growth in spending to the smallest amount in four months.

The Commerce Department reported Friday that consumer spending edged up 0.2 percent in October, the weakest showing since a similar increase in June. Individual incomes grew by just 0.2 percent last month, the poorest showing in six months.

From the BEA:

Personal income increased $21.2 billion, or 0.2 percent, and disposable personal income (DPI) increased $14.0 billion, or 0.1 percent, in October, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $23.8 billion, or 0.2 percent. In September, personal income increased $50.4 billion, or 0.4 percent, DPI increased $43.2 billion, or 0.4 percent, and PCE increased $33.0 billion, or 0.3 percent, based on revised estimates.

Here's a graph of the last six months of increases.



The light blue line is total expenditures. Notice it has declined for the last three months. Also notice there is very little difference between July and August. In effect, we've had four months of problems with this number.

Also notice how the durable goods numbers is jumping around quite a bit. May's number was followed by two months of contraction. August's jump was followed by September's weaker performance and last months decline. Some of this is to be expected; durable goods are goods that last a long time and are therefore more expensive. As a result, cash outlays for them are probably more prone to these types of jumps.

However, I have speculated that durable goods numbers are indicative of consumer sentiment. Because durable goods are more expensive, they are typically more expensive and therefore require financing. As a result, a durable goods order purchase means a financial commitment that requires confidence on the purchaser's part that they can continue to make payments. If a purchaser doesn't think he can make payments over an extended period of time, he is less likely to buy the item. Assuming my statement is correct -- the durable goods purchases are an indication of consumer confidence -- than this number should raise some eyebrows.

Read More

Bernanke's Speech

From Bernanke's speech:

How has the economic picture changed in the month since that meeting? As is often the case, the incoming economic data have been mixed. In the market for residential real estate, indicators of construction and home sales have continued to be weak. In contrast, the labor market remained solid in October, with some 130,000 new jobs added to private-sector payrolls and the unemployment rate remaining at 4.7 percent. Claims for unemployment insurance have drifted up a bit in recent weeks, although, on average, they have remained at a level consistent with moderate expansion in employment. We will, of course, have the labor market report for November next week, and in the coming days we will continue to draw on anecdotal reports, surveys, and other sources of information about employment and wages. Continued good performance by the labor market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending.

With respect to household spending, the data received over the past month have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting. I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.

Core inflation--that is, inflation excluding the relatively more volatile prices of food and energy--has remained moderate. However, the price of crude oil has continued its rise over the past month, a rise that will be reflected in gasoline and heating oil prices and, of course, in the overall inflation rate in the near term. Moreover, increases in food prices and in the prices of some imported goods have the potential to put additional pressures on inflation and inflation expectations. The effectiveness of monetary policy depends critically on maintaining the public’s confidence that inflation will be well controlled. We are accordingly monitoring inflation developments closely.

I've explained my reservations about the current employment numbers in this article.. Short version: the birth/death model is responsible for a large number of recently created jobs. While I can't say for certain these reports are wrong, I personally have some very deep suspicions about their veracity.

Dealing with consumer spending is incredibly complicated. Let's start with a basic premise: Americans love to shop. They will do anything to keep on shopping. Parents will sell their children for medical experiments to keep shopping. Any headwinds have to be seen in this light. However, there are a ton of headwinds out there. The question is what is the exact relationship between fact number one and the current economic environment? Exactly how strong are the headwinds and to what degree are people heeding them? I have no idea, and figuring that one out is a Herculean economic task.

As for his statements on inflation ... Ben can read charts! Ben can read charts! Thank God he finally started to mention food and energy inflation. I was beginning to wonder just how out-of-touch he was. As to what he does about it is anybody's guess. But at least he knows the problem is out there and will probably have a negative impact on prices.

Being the Fed Chairman right now would suck. On one hand you have an economy that is withstanding a financial market catastrophe and slower economic growth. On the other hand, you have inflation.

Personally -- and not like Ben calls me on a regular basis or anything -- I'd err on the side of keeping the inflation genie in the bottle. Once inflation starts to run, getting it back under control is often an extremely painful process (just ask Paul Volcker). And as I've said time and time again, the issue in the credit markets is about counter-party confidence not money. So lowering rates really isn't the solution.

Read More

Bernanke's Speech

From Bernanke's speech:

How has the economic picture changed in the month since that meeting? As is often the case, the incoming economic data have been mixed. In the market for residential real estate, indicators of construction and home sales have continued to be weak. In contrast, the labor market remained solid in October, with some 130,000 new jobs added to private-sector payrolls and the unemployment rate remaining at 4.7 percent. Claims for unemployment insurance have drifted up a bit in recent weeks, although, on average, they have remained at a level consistent with moderate expansion in employment. We will, of course, have the labor market report for November next week, and in the coming days we will continue to draw on anecdotal reports, surveys, and other sources of information about employment and wages. Continued good performance by the labor market is important for maintaining the economic expansion, as growth in earnings helps to underpin household spending.

With respect to household spending, the data received over the past month have been on the soft side. The Committee will have considerable additional information on consumer purchases and sentiment to digest before its next meeting. I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.

Core inflation--that is, inflation excluding the relatively more volatile prices of food and energy--has remained moderate. However, the price of crude oil has continued its rise over the past month, a rise that will be reflected in gasoline and heating oil prices and, of course, in the overall inflation rate in the near term. Moreover, increases in food prices and in the prices of some imported goods have the potential to put additional pressures on inflation and inflation expectations. The effectiveness of monetary policy depends critically on maintaining the public’s confidence that inflation will be well controlled. We are accordingly monitoring inflation developments closely.

I've explained my reservations about the current employment numbers in this article.. Short version: the birth/death model is responsible for a large number of recently created jobs. While I can't say for certain these reports are wrong, I personally have some very deep suspicions about their veracity.

Dealing with consumer spending is incredibly complicated. Let's start with a basic premise: Americans love to shop. They will do anything to keep on shopping. Parents will sell their children for medical experiments to keep shopping. Any headwinds have to be seen in this light. However, there are a ton of headwinds out there. The question is what is the exact relationship between fact number one and the current economic environment? Exactly how strong are the headwinds and to what degree are people heeding them? I have no idea, and figuring that one out is a Herculean economic task.

As for his statements on inflation ... Ben can read charts! Ben can read charts! Thank God he finally started to mention food and energy inflation. I was beginning to wonder just how out-of-touch he was. As to what he does about it is anybody's guess. But at least he knows the problem is out there and will probably have a negative impact on prices.

Being the Fed Chairman right now would suck. On one hand you have an economy that is withstanding a financial market catastrophe and slower economic growth. On the other hand, you have inflation.

Personally -- and not like Ben calls me on a regular basis or anything -- I'd err on the side of keeping the inflation genie in the bottle. Once inflation starts to run, getting it back under control is often an extremely painful process (just ask Paul Volcker). And as I've said time and time again, the issue in the credit markets is about counter-party confidence not money. So lowering rates really isn't the solution.

Read More

Subprime Deal in the Works?

From the WSJ:

The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.

.....

The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

.....

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.

.....

Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help.

This is very interesting news, and it allows me to advance my Hank Paulsen theory.

My theory (for which I have no proof at all) is that Paulsen told the White House he would take the Treasury position if he had little to no political interference and he could pretty much do what he wants. The White House agreed because Paulsen's resume speaks for itself. He had an incredibly successful career on Wall Street. My guess is he wanted to end his professional career in a public service role. Again -- all of this is just my guess.

I should also advance Bonddad's personal belief about how a President should pick a Treasury Secretary. Every president should go to Wall Street and find 5 people who are in the same political camp and pick the one he likes the most. Not that anyone's asking, but that's how we should get our Treasury secretary from now on.

Paulsen is running into a big problem right now. He's in the middle of a situation that calls for some sort of government intervention, yet he is personally opposed to government intervention. Philosophically he's running into a big problem and has to figure out exactly what he can do within his own belief system. For any person who is self-aware, places like this are fascinating and wonderful experiences; they provide incredible opportunities to grow. In short, I'm sure it's a very interesting place for him on a personal level.

All that being said, some type of plan was bound to some into play as the mortgage mess plays out. The question is how to accomplish this. The article mentions one group of borrowers will be helped: "those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates." would be the only people eligible. It looks as though all of the mortgage lenders are going to have to basically re-qualify a ton of borrowers. In fact, if this plan goes through it means that lenders are going to have to do th ejob they should have done in the first place.

Read More

Subprime Deal in the Works?

From the WSJ:

The Bush administration and major financial institutions are close to agreeing on a plan that would temporarily freeze interest rates on certain troubled subprime home loans, according to people familiar with the negotiations.

.....

The plan is being negotiated between regulators including the Treasury Department and a coalition of mortgage-related companies including Citigroup Inc., Wells Fargo & Co., Washington Mutual Inc. and Countrywide Financial Corp. People familiar with the talks say the individual members have agreed to follow any agreement reached by the coalition, which is called the Hope Now Alliance.

Details of the plan, which could be announced as early as next week, are still being worked out. In general, the government and the coalition have largely agreed to extend the lower introductory rate on home loans for certain borrowers who will have trouble making payments once their mortgages increase.

.....

Exactly which borrowers will qualify for the freeze and how long the freeze would last are yet to be determined. Under one scenario, the freeze could run as long as seven years. The parties are developing standard criteria that would determine eligibility. The criteria should be finalized by the end of year.

.....

Treasury officials say financial institutions are likely to set criteria that divide subprime borrowers into three groups: those who can continue to make their payments even if rates rise, those who can't afford their mortgages even if rates stay steady, and those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates. Only the third group would be eligible for help.

This is very interesting news, and it allows me to advance my Hank Paulsen theory.

My theory (for which I have no proof at all) is that Paulsen told the White House he would take the Treasury position if he had little to no political interference and he could pretty much do what he wants. The White House agreed because Paulsen's resume speaks for itself. He had an incredibly successful career on Wall Street. My guess is he wanted to end his professional career in a public service role. Again -- all of this is just my guess.

I should also advance Bonddad's personal belief about how a President should pick a Treasury Secretary. Every president should go to Wall Street and find 5 people who are in the same political camp and pick the one he likes the most. Not that anyone's asking, but that's how we should get our Treasury secretary from now on.

Paulsen is running into a big problem right now. He's in the middle of a situation that calls for some sort of government intervention, yet he is personally opposed to government intervention. Philosophically he's running into a big problem and has to figure out exactly what he can do within his own belief system. For any person who is self-aware, places like this are fascinating and wonderful experiences; they provide incredible opportunities to grow. In short, I'm sure it's a very interesting place for him on a personal level.

All that being said, some type of plan was bound to some into play as the mortgage mess plays out. The question is how to accomplish this. The article mentions one group of borrowers will be helped: "those who could keep their homes if the maturity date of their mortgages were extended or the interest rates remained at the teaser rates." would be the only people eligible. It looks as though all of the mortgage lenders are going to have to basically re-qualify a ton of borrowers. In fact, if this plan goes through it means that lenders are going to have to do th ejob they should have done in the first place.

Read More

Uncomfortable Times

Mervyn King, the Governor of the Bank of England, issued a warning in terms that only a seasoned Bank of England could, that the economy is heading for a very rough patch.

He was addressing the Treasury Select Committee and warned of "rather uncomfortable" times ahead, with a "big risk" that the credit squeeze could intensify.

Whilst these warnings if used by mere mortals may not seem to be that dire, to emanate from the mouth of the Governor they are very serious indeed.

As I have noted earlier, it is fear that is the key feature of this "crisis". King said that "sheer uncertainty", and fear of what lies ahead was driving wholesale interest rates back up to levels seen at the height of the summer credit crises.

Mr King said:

"In recent months, the near-term outlook for both inflation and growth has become less benign.

For the UK, the consequences of are difficult to assess and are likely to be evident first in the housing and commercial property markets."

The Monetary Policy Committee (MPC) meets next Thursday. The question is will they lower interest rates?

There are many debt burdened consumers and mortgage holders who are hoping for an early Christmas present from the MPC.

Read More

Credit Crunch Still Going Strong

From the NY Times:

The combined value of two leading sources of credit — outstanding commercial and industrial bank loans, and short-term loans known as commercial paper — peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.

Not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975; at other times such declines tended to occur in conjunction with an economic downturn.

Policy makers at the Federal Reserve are growing increasingly alarmed about the problem, which is an outgrowth of the woes of the housing and mortgage industries. Just yesterday, the Fed’s vice chairman, Donald L. Kohn, said that the latest market turbulence appeared to be reducing credit to businesses and consumers, hinting that the central bank, in response, was prepared to cut interest rates further.

From Bloomberg:

``The credit crunch began in earnest back in July, but what you're seeing now is it's deepening and spreading out,'' said Kathleen Bostjancic, an economist in New York at Merrill Lynch & Co., which expects the Fed's target lending rate to fall to 2 percent by the end of the second quarter of 2009. ``You're seeing a tremendous flight to quality.''

.....

``Certainly it feels a lot like the Long-Term Capital Management crisis,'' said Vincent Boberski, senior vice president of portfolio strategies in Chicago at FTN Financial.

When people in the financial markets start to compare recent events to another financial disaster you know things are bad.

This is a huge problem and it isn't going away anytime soon. It is also the primary reason why more rate cuts won't do any good. The problem is not about money. It's about confidence. It seems like everyday we hear from a financial company that is writing down a portfolio, or has massive losses in mortgage related products or something similar. The issue is confidence -- as in, "will this borrower be able to pay me back in even a short period of time?" More and more the answer is coming back "no," so loans are drying up.

This highlights the bigger issue, which is the impact of spreading risk out far and wide. While I am all for structures that spread risk out, I am not all for -- and in fact am completely against -- the terrible underwriting standards the lending industry had for about two years. Basically lenders would check to see if a borrower had a pulse. If he was alive, he got a loan (and frankly, I think the pulse was optional with some lenders). Lenders were confident they could spread this risk out far enough so that it wouldn't have an impact.

Well -- now we know better. And as a result credit -- which is the lifeblood of the modern economy -- is tightening right before out very eyes.

And the problem is this is just getting started. Below is a chart from the IMF with data from Credit Suisse. I've pulled this chart out half a million times since it came out, and I will continue to do so. It shows very clearly that we have another 3-4 years of mortgage resets coming. And the sheer amount of those rests is huge. Notice that in 2010 and 2011 we have similar monthly totals of resets that we had this year. And this year has sucked royally.



This chart is one of the main reasons I have been sharply critical of anyone advising people to buy financial companies. I think that advice is reckless beyond belief considering the implications of the above chart.



As a result of all of this, we've seen a huge flight to quality. That means Treasury bonds are rallying.

1-3 year Treasury ETF



7-10 year Treasury ETF



20+ year Treasury ETF



So long as the uncertainly about the credit markets is out there I doubt we'll see a sell-off in the bond market.

Read More

Credit Crunch Still Going Strong

From the NY Times:

The combined value of two leading sources of credit — outstanding commercial and industrial bank loans, and short-term loans known as commercial paper — peaked at about $3.3 trillion in August, according to data from the Federal Reserve. By mid-November, such credit was down to $3 trillion, a drop of nearly 9 percent.

Not once in the years since the Fed began tracking such numbers in 1973 has this artery of finance constricted so rapidly. Smaller declines preceded three recessions going back to 1975; at other times such declines tended to occur in conjunction with an economic downturn.

Policy makers at the Federal Reserve are growing increasingly alarmed about the problem, which is an outgrowth of the woes of the housing and mortgage industries. Just yesterday, the Fed’s vice chairman, Donald L. Kohn, said that the latest market turbulence appeared to be reducing credit to businesses and consumers, hinting that the central bank, in response, was prepared to cut interest rates further.

From Bloomberg:

``The credit crunch began in earnest back in July, but what you're seeing now is it's deepening and spreading out,'' said Kathleen Bostjancic, an economist in New York at Merrill Lynch & Co., which expects the Fed's target lending rate to fall to 2 percent by the end of the second quarter of 2009. ``You're seeing a tremendous flight to quality.''

.....

``Certainly it feels a lot like the Long-Term Capital Management crisis,'' said Vincent Boberski, senior vice president of portfolio strategies in Chicago at FTN Financial.

When people in the financial markets start to compare recent events to another financial disaster you know things are bad.

This is a huge problem and it isn't going away anytime soon. It is also the primary reason why more rate cuts won't do any good. The problem is not about money. It's about confidence. It seems like everyday we hear from a financial company that is writing down a portfolio, or has massive losses in mortgage related products or something similar. The issue is confidence -- as in, "will this borrower be able to pay me back in even a short period of time?" More and more the answer is coming back "no," so loans are drying up.

This highlights the bigger issue, which is the impact of spreading risk out far and wide. While I am all for structures that spread risk out, I am not all for -- and in fact am completely against -- the terrible underwriting standards the lending industry had for about two years. Basically lenders would check to see if a borrower had a pulse. If he was alive, he got a loan (and frankly, I think the pulse was optional with some lenders). Lenders were confident they could spread this risk out far enough so that it wouldn't have an impact.

Well -- now we know better. And as a result credit -- which is the lifeblood of the modern economy -- is tightening right before out very eyes.

And the problem is this is just getting started. Below is a chart from the IMF with data from Credit Suisse. I've pulled this chart out half a million times since it came out, and I will continue to do so. It shows very clearly that we have another 3-4 years of mortgage resets coming. And the sheer amount of those rests is huge. Notice that in 2010 and 2011 we have similar monthly totals of resets that we had this year. And this year has sucked royally.



This chart is one of the main reasons I have been sharply critical of anyone advising people to buy financial companies. I think that advice is reckless beyond belief considering the implications of the above chart.



As a result of all of this, we've seen a huge flight to quality. That means Treasury bonds are rallying.

1-3 year Treasury ETF



7-10 year Treasury ETF



20+ year Treasury ETF



So long as the uncertainly about the credit markets is out there I doubt we'll see a sell-off in the bond market.

Read More

Today's Markets

Good news today for the bulls. The markets didn't have a late day sell-off for a second day in a row.



The SPYs closed a touch lower. But they maintained their uptrend they started yesterday. On the negative side, the moving averages are pretty bunch-up right now, which indicates a lack of short-term direction.



The QQQQs had the best day of the averages (SPY and IWM). It's possible the average is forming a triangle consolidation pattern, but we'll need tomorrow's action to see for sure.



The IWMs closed down .5%. There are two trend lines in place. The lowest is the weakest because the space between the two points of contact with prices are pretty far apart. There is a second trend line in place which appears stronger because of more price contact and a closer spacing between the points of contact.



On the daily chart, note the SPYs broke their downward trend line of a few weeks duration. Prices are also over the 20 day SMA which they can use for support for a further rally or to prevent a drop into lower territory. Prices also gapped up yesterday which is a bullish sign.



The QQQQs had a stronger gap up and a stronger bar rallying from the 20 day SMA. The average is also above the 200 day SMA, keeping it in bullish territory.



The Russell 2000 broke its weeks long downtrend, but the average is still trading below the 20 day SMA.

So -- where do we go from here?

Let's start with a blatantly obvious observation: markets can move in three directions -- up, sideways or down (duh!!!).

Going Up: I'd assign this at most a 20% possibility. There is just too much bad news out there. Also consider today's GDP announcement and its lack of impact on the markets. If that news had come at the beginning of an economic expansion, the markets would probably have exploded. Instead we got a very lackluster response. I think the markets know that number is yesterday's news and the economy is going into a weaker period. In addition, there is a ton of bad news out there. This week's housing news was terrible and indicated we're nowhere near bottom. And the durable goods number was another bad number.

Sideways: Of the remaining 80%, I'd give this a 40%. Yesterday's dovish Fed speech ignited the rally and some of that is still there. So long as there is the possibility of another cut in the pike the market will have an implied floor somewhere.

Down: Only 40% left, isn't there? There's a ton of bad news out there still. For example, from the various estimates I have read of the sub-prime problem, it seems the median amount of predicted losses is about $300 billion or so. But we haven't seen more than $75 billion in announced writedowns yet. In other words, everyday it's possible we'll see a financial player announce a loss related to mortgage paper. In addition, the Christmas season news I have been reading is mixed. While shopping is pretty good, retailers are having to heavily discount, meaning profits might be really thin. And Sears' announcement today didn't help at all.

So, I think we're nearing the end of a sucker's rally. The question is do we trade sideways or move lower. At that point, flip a coin.

Read More

Today's Markets

Good news today for the bulls. The markets didn't have a late day sell-off for a second day in a row.



The SPYs closed a touch lower. But they maintained their uptrend they started yesterday. On the negative side, the moving averages are pretty bunch-up right now, which indicates a lack of short-term direction.



The QQQQs had the best day of the averages (SPY and IWM). It's possible the average is forming a triangle consolidation pattern, but we'll need tomorrow's action to see for sure.



The IWMs closed down .5%. There are two trend lines in place. The lowest is the weakest because the space between the two points of contact with prices are pretty far apart. There is a second trend line in place which appears stronger because of more price contact and a closer spacing between the points of contact.



On the daily chart, note the SPYs broke their downward trend line of a few weeks duration. Prices are also over the 20 day SMA which they can use for support for a further rally or to prevent a drop into lower territory. Prices also gapped up yesterday which is a bullish sign.



The QQQQs had a stronger gap up and a stronger bar rallying from the 20 day SMA. The average is also above the 200 day SMA, keeping it in bullish territory.



The Russell 2000 broke its weeks long downtrend, but the average is still trading below the 20 day SMA.

So -- where do we go from here?

Let's start with a blatantly obvious observation: markets can move in three directions -- up, sideways or down (duh!!!).

Going Up: I'd assign this at most a 20% possibility. There is just too much bad news out there. Also consider today's GDP announcement and its lack of impact on the markets. If that news had come at the beginning of an economic expansion, the markets would probably have exploded. Instead we got a very lackluster response. I think the markets know that number is yesterday's news and the economy is going into a weaker period. In addition, there is a ton of bad news out there. This week's housing news was terrible and indicated we're nowhere near bottom. And the durable goods number was another bad number.

Sideways: Of the remaining 80%, I'd give this a 40%. Yesterday's dovish Fed speech ignited the rally and some of that is still there. So long as there is the possibility of another cut in the pike the market will have an implied floor somewhere.

Down: Only 40% left, isn't there? There's a ton of bad news out there still. For example, from the various estimates I have read of the sub-prime problem, it seems the median amount of predicted losses is about $300 billion or so. But we haven't seen more than $75 billion in announced writedowns yet. In other words, everyday it's possible we'll see a financial player announce a loss related to mortgage paper. In addition, the Christmas season news I have been reading is mixed. While shopping is pretty good, retailers are having to heavily discount, meaning profits might be really thin. And Sears' announcement today didn't help at all.

So, I think we're nearing the end of a sucker's rally. The question is do we trade sideways or move lower. At that point, flip a coin.

Read More

Crisis Has Further To Run

David Blanchflower, the Bank of England Monetary Policy Committee (MPC) member, has stated that credit crisis that is damaging the UK economy and housing market has further to run, and that banks' losses could be much greater than currently estimated.

Quote:

"There is still concern in the credit market."

In a less than cheery pre Christmas interview with the Birmingham Post, he indicated that worse is to come.

As such he is calling or an early interest rate cut, and is supported in that call by Sir John Gieve another member of the MPC. Given that the MPC consists of 9 members, it just requires 3 more to bring about a much needed reduction in rates.

The question is will they have the vision to do this?

Read More

Beige Book + Charts

In this article, I'm going to combine the Fed's Beige Book with some relevant charts to see how the markets and the Fed are lining up. The Fed's writing will be off set and italicized.

Reports on retail spending were downbeat in general, with several significant exceptions. Most Districts characterized sales as weak or indicated that they had softened, with a few reporting that the volume of sales had fallen relative to the preceding survey period or a year earlier. However, the Boston, Philadelphia, Minneapolis, and Kansas City Districts highlighted a pickup in retail sales relative to the preceding survey period. Among product categories, several Districts noted continued solid growth in sales of consumer electronics, while a few also noted that demand for luxury goods continued to rise at a healthy pace. By contrast, sales of automobiles and light trucks were flat to down, with contacts from several Districts expecting declines going forward.

The retail ETF is clearly in a bearish posture. Prices are below the 200 day SMA by 9.3%. All of the shorter SMAs are moving lower, the shorter SMAs are below the longer SMAs and prices are below all the SMAs. This is a chart that says "sell me."



The electronic stores sector is at least above the 200 day SMA. But it has been in a trading range for the better part of a year. Also notice the shorter SMAs are bunched-up indicating a lack of direction.



While the auto dealership sector is still above the 200 day SMA, it broke a three year uptrend on heavy volume earlier this year. That indicates this sector is in the middle of a trend reversal.

Reports on nonfinancial services generally were consistent with expanding economic activity, with the primary exception of transportation services. Several Districts pointed to continued strong demand growth for health-care services, while the Richmond, St. Louis, and Minneapolis Districts noted an ongoing expansion for providers of legal and other professional services. The Dallas District reported steady demand for legal services but noted a shift toward litigation related to bankruptcy filings, which may signal a slowing economy. In the San Francisco District, demand for advertising services was held down by weak demand from sellers of automobiles and home furnishings. Providers of temporary staffing services saw strong demand in the Richmond District as well as a pickup from the legal and financial industries in New York City, but demand for temp workers was reported as "sluggish" overall by Dallas.

The transports are in a bear market. Prices are below the 200 day SMA. The shorter SMAs are below the longer SMAs and all the shorter SMAs are heading lower. While this index experienced a bounce yesterday, we have a long way to go before we can confirm this is a trend reversal.



Ad agencies broke a three year uptrend recently, although they are still about the 200 day SMA.



Management services formed a double top and are currently trading at important support levels. However, this sector is still in bull market territory.



Staffing agencies have

1.) Broken a 5-year uptrend,

2.) Broken through the 200 day SMA

3.) And are trading at a technically important level. If they fall further they have a ways to go before they find additional technical support.

Manufacturing activity was mixed across subsectors but appeared to be largely stable on balance. Demand remained weak or fell further for machinery and manufactured materials related to home construction, such as lumber and concrete, and automakers have scaled back their production activities this year. By contrast, demand rose solidly for various other types of capital goods, such as non-automotive transportation equipment, information technology products, and machinery used in the agriculture, energy extraction, and mining industries. Chicago reported that steel production increased, in part because of reduced import competition of late, but Cleveland characterized steel shipping volumes as "flat" in that District. Among nondurable products, several Districts noted continued robust demand for food and significant gains for paper and plastics. However, Dallas reported "stable" demand for food and a drop in sales of corrugated boxes, and St. Louis noted that food manufacturers plan to lay off workers in that District. The reports generally indicated that increases in demand were especially strong for products and firms with significant export markets, for which sales have been boosted in part by the lower exchange value of the U.S. dollar.

Manufacturing is still in a strong uptrend. However, it may have formed a double top over the last few months.



Materials and Construction formed a head and shoulders formation over 2007 and recently broke through a 5 year trend line.

Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown. Most Districts pointed to further increases in the inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers. Consequently, prices on new and existing homes sold were reported to be down on a short-term or year-earlier basis in most Districts. The pace of homebuilding remained very low in general, and builders continued to shelve projects and lay off workers in many areas; contacts generally do not expect a significant pickup in homebuilding until well into next year at the earliest. Among scattered positive signs, however, co-op and condo sales in New York City picked up during the survey period, Richmond reported favorable readings on home sales in a few areas, and Kansas City reported that home inventories fell a bit in the Denver metro area. Weak home demand had mixed effects on conditions in rental markets: Chicago reported that builders' conversions of new homes to rental property put downward pressure on rents, while Dallas noted that demand for apartments picked up, in part because some potential homebuyers are unable to qualify for mortgages.

The homebuilders ETF is in a bearish chart. Prices are below the 200 day SMA; shorter SMAs are below longer SMAs; all the SMAs are moving lower and prices are below all the SMAs. It does not get more bearish than this.



The real estate ETF broke a 5 year uptrend earlier this year.



After breaking the 5-year uptrend, the ETF rallied to the previous trend line and has since traded down. Also note the index is below the 200 day SMA. Prices and the SMAs are a bit jumbled right now, indicating a lack of clear direction. Finally, this ETF may have formed a double bottom, with the first being in August and the second occurring over the last few weeks.

Lending to businesses generally was at high levels, but the reports suggested a slower rate of growth than in previous survey periods. Commercial and industrial lending activity changed little or declined in the Cleveland, Atlanta, St. Louis, Kansas City, and San Francisco Districts, although it increased noticeably in the Philadelphia District and continued to show modest growth according to Chicago. Lending standards for construction projects and commercial real estate transactions tightened further in the New York and St. Louis Districts, and they remained tight more generally and reportedly held down the volume of lending for these categories in the Boston District. The reports indicated slight increases in delinquencies on commercial and industrial loans and slightly larger increases for commercial mortgages in many areas.

The Financial sector is in a bear market. The index is below the 200 day SMA. The shorter SMAs are below the longer SMAs. All the SMAs are headed lower. While prices have rebounded recently, it's doubtful this trend will continue. The sector is continually announcing writedowns at this point.

Reports on the natural-resources sector indicated further growth from very high levels of activity. High oil prices have stimulated expanded drilling in the Atlanta and Dallas Districts; Minneapolis reported increased activity in the energy and mining sectors since the last report; and Kansas City reported that "energy activity remained robust." However, Cleveland reported a slight decline in production of natural gas.

The basic materials ETF is still in the middle of a 5 year rally. However, it may have recently formed a double top.



On the 6-month chart, notice prices rebounded through the 200 day SMA yesterday. While the index formed a shorter duration double top in October, yesterday's rally may have helped to kick this sector back into bullish territory.



The energy sector is still in a bull market.



On 6 month chart, we have prices pulling back from a mid-October high. However, the pullback is very orderly; the chart doesn't have a lot of wild price swings. While the shorter SMAs are headed lower, the shorter SMAs in general are bunched in a tight range. Also note that prices have formed a trading range for about the last week while the market has been a but more haywire. Finally, prices are still above the 200 day SMA, indicating we're in a bull market. Until we see more volatile action or serious price drops, this chart looks to be in the middle of a standard bull market sell-off.

Read More

Beige Book + Charts

In this article, I'm going to combine the Fed's Beige Book with some relevant charts to see how the markets and the Fed are lining up. The Fed's writing will be off set and italicized.

Reports on retail spending were downbeat in general, with several significant exceptions. Most Districts characterized sales as weak or indicated that they had softened, with a few reporting that the volume of sales had fallen relative to the preceding survey period or a year earlier. However, the Boston, Philadelphia, Minneapolis, and Kansas City Districts highlighted a pickup in retail sales relative to the preceding survey period. Among product categories, several Districts noted continued solid growth in sales of consumer electronics, while a few also noted that demand for luxury goods continued to rise at a healthy pace. By contrast, sales of automobiles and light trucks were flat to down, with contacts from several Districts expecting declines going forward.

The retail ETF is clearly in a bearish posture. Prices are below the 200 day SMA by 9.3%. All of the shorter SMAs are moving lower, the shorter SMAs are below the longer SMAs and prices are below all the SMAs. This is a chart that says "sell me."



The electronic stores sector is at least above the 200 day SMA. But it has been in a trading range for the better part of a year. Also notice the shorter SMAs are bunched-up indicating a lack of direction.



While the auto dealership sector is still above the 200 day SMA, it broke a three year uptrend on heavy volume earlier this year. That indicates this sector is in the middle of a trend reversal.

Reports on nonfinancial services generally were consistent with expanding economic activity, with the primary exception of transportation services. Several Districts pointed to continued strong demand growth for health-care services, while the Richmond, St. Louis, and Minneapolis Districts noted an ongoing expansion for providers of legal and other professional services. The Dallas District reported steady demand for legal services but noted a shift toward litigation related to bankruptcy filings, which may signal a slowing economy. In the San Francisco District, demand for advertising services was held down by weak demand from sellers of automobiles and home furnishings. Providers of temporary staffing services saw strong demand in the Richmond District as well as a pickup from the legal and financial industries in New York City, but demand for temp workers was reported as "sluggish" overall by Dallas.

The transports are in a bear market. Prices are below the 200 day SMA. The shorter SMAs are below the longer SMAs and all the shorter SMAs are heading lower. While this index experienced a bounce yesterday, we have a long way to go before we can confirm this is a trend reversal.



Ad agencies broke a three year uptrend recently, although they are still about the 200 day SMA.



Management services formed a double top and are currently trading at important support levels. However, this sector is still in bull market territory.



Staffing agencies have

1.) Broken a 5-year uptrend,

2.) Broken through the 200 day SMA

3.) And are trading at a technically important level. If they fall further they have a ways to go before they find additional technical support.

Manufacturing activity was mixed across subsectors but appeared to be largely stable on balance. Demand remained weak or fell further for machinery and manufactured materials related to home construction, such as lumber and concrete, and automakers have scaled back their production activities this year. By contrast, demand rose solidly for various other types of capital goods, such as non-automotive transportation equipment, information technology products, and machinery used in the agriculture, energy extraction, and mining industries. Chicago reported that steel production increased, in part because of reduced import competition of late, but Cleveland characterized steel shipping volumes as "flat" in that District. Among nondurable products, several Districts noted continued robust demand for food and significant gains for paper and plastics. However, Dallas reported "stable" demand for food and a drop in sales of corrugated boxes, and St. Louis noted that food manufacturers plan to lay off workers in that District. The reports generally indicated that increases in demand were especially strong for products and firms with significant export markets, for which sales have been boosted in part by the lower exchange value of the U.S. dollar.

Manufacturing is still in a strong uptrend. However, it may have formed a double top over the last few months.



Materials and Construction formed a head and shoulders formation over 2007 and recently broke through a 5 year trend line.

Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown. Most Districts pointed to further increases in the inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers. Consequently, prices on new and existing homes sold were reported to be down on a short-term or year-earlier basis in most Districts. The pace of homebuilding remained very low in general, and builders continued to shelve projects and lay off workers in many areas; contacts generally do not expect a significant pickup in homebuilding until well into next year at the earliest. Among scattered positive signs, however, co-op and condo sales in New York City picked up during the survey period, Richmond reported favorable readings on home sales in a few areas, and Kansas City reported that home inventories fell a bit in the Denver metro area. Weak home demand had mixed effects on conditions in rental markets: Chicago reported that builders' conversions of new homes to rental property put downward pressure on rents, while Dallas noted that demand for apartments picked up, in part because some potential homebuyers are unable to qualify for mortgages.

The homebuilders ETF is in a bearish chart. Prices are below the 200 day SMA; shorter SMAs are below longer SMAs; all the SMAs are moving lower and prices are below all the SMAs. It does not get more bearish than this.



The real estate ETF broke a 5 year uptrend earlier this year.



After breaking the 5-year uptrend, the ETF rallied to the previous trend line and has since traded down. Also note the index is below the 200 day SMA. Prices and the SMAs are a bit jumbled right now, indicating a lack of clear direction. Finally, this ETF may have formed a double bottom, with the first being in August and the second occurring over the last few weeks.

Lending to businesses generally was at high levels, but the reports suggested a slower rate of growth than in previous survey periods. Commercial and industrial lending activity changed little or declined in the Cleveland, Atlanta, St. Louis, Kansas City, and San Francisco Districts, although it increased noticeably in the Philadelphia District and continued to show modest growth according to Chicago. Lending standards for construction projects and commercial real estate transactions tightened further in the New York and St. Louis Districts, and they remained tight more generally and reportedly held down the volume of lending for these categories in the Boston District. The reports indicated slight increases in delinquencies on commercial and industrial loans and slightly larger increases for commercial mortgages in many areas.

The Financial sector is in a bear market. The index is below the 200 day SMA. The shorter SMAs are below the longer SMAs. All the SMAs are headed lower. While prices have rebounded recently, it's doubtful this trend will continue. The sector is continually announcing writedowns at this point.

Reports on the natural-resources sector indicated further growth from very high levels of activity. High oil prices have stimulated expanded drilling in the Atlanta and Dallas Districts; Minneapolis reported increased activity in the energy and mining sectors since the last report; and Kansas City reported that "energy activity remained robust." However, Cleveland reported a slight decline in production of natural gas.

The basic materials ETF is still in the middle of a 5 year rally. However, it may have recently formed a double top.



On the 6-month chart, notice prices rebounded through the 200 day SMA yesterday. While the index formed a shorter duration double top in October, yesterday's rally may have helped to kick this sector back into bullish territory.



The energy sector is still in a bull market.



On 6 month chart, we have prices pulling back from a mid-October high. However, the pullback is very orderly; the chart doesn't have a lot of wild price swings. While the shorter SMAs are headed lower, the shorter SMAs in general are bunched in a tight range. Also note that prices have formed a trading range for about the last week while the market has been a but more haywire. Finally, prices are still above the 200 day SMA, indicating we're in a bull market. Until we see more volatile action or serious price drops, this chart looks to be in the middle of a standard bull market sell-off.

Read More