Credit Untion Rules To Be Relaxed

As the mortgage and credit drought worsens, the government is desperately trying to look as though it is doing something to ease people's burden. The government announced today, via the BBC, that it will unveil an initiative to help people, eg those on low wages, beat the credit crunch by relaxing the rules on credit unions.

Credit unions are community based savings and loans organisations. They act as low-risk savings and loans providers, usually for the less well-off.

It is an ugly fact of financial life that those most in debt, and least able to borrow more, are at the greatest risk from loan sharks.

Currently any area or organisation can form a credit union; however, they have to operate within their own communities (the Common Bond). The Treasury will broaden the Common Bond, allowing the sector to expand.

The government envisages that by this time next year, people will be able to access cheap, secure loans.

All very well, but the need for low cost credit and an easing of cashflow is now; not in one year's time.

The loan sharks are going to feast themselves sick over the coming months, on the rotting corpses left behind by the government's mismanagement of this crisis.

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Loan Sharks

The ongoing drought of cheap loans and mortgages is forcing already heavily indebted people into the arms of loan sharks, who charge interest rates up to a staggering 1000%.

Known as "pay day loans", they are taken out by the hapless debtor to provide short term cover until pay day.

The Times reports that the number of deals taken out in the UK has risen by more than 130% since last August.

Payday UK, Express Finance and Pounds Till Payday offer loans of up to £1,000. Payday UK demands that £125 be repaid for a £100 loan, or £937.50 for a £700 loan. The loan is usually paid off within a couple of days, as soon as the borrower's wages are paid into their account.

Payday UK has a typical APR of 1355%.

Needless to say, by borrowing money at such extortionate rates of interest in this way, the hapless debtor is in fact making his/her situation far worse than it already is.

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Eurozone Stagnates

The Times reports that the Eurozone is facing the twin nightmares of inflation and stagnant growth, meanwhile the European Central Bank (ECB) signalled earlier this month that Eurozone rates would have to rise further.

How has this situation come about?

1 The world economy is suffering from rising commodity, food and oil prices.

2 The ECB is using a "one size fits" all policy for interest rates, despite the fact that there are clear fault lines between the economies of the North of Europe and South of Europe.

3 The dollar has fallen leaving speculators to pile into the Euro, thus depressing European exports.

The current problems facing the ECB/EU show very clearly why the EU, in its current form with a single currency, will not work.

As the ECB battles to stave off inflationary pressures by raising rates, Southern countries such as Greece, Spain and Italy are in economic freefall. The political fallout from the collapsing economies of the South will destroy the EU in its current form.

Britain has been very wise/lucky not have signed up for the Euro as the currency will collapse.

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Housing Slump

The British Bankers' Association (BBA) have issued figures today that show that mortgage lending in May has slumped to the lowest level since 1997, as the total value of loans fell by £1.5BN compared to April.

Mortgage approvals fell from 34,752 in April to 27,968 last month.

The remortgaging business, where people have to refinance, is remaining firm.

The effect of the housing market of the mortgage drought is not entirely surprising, sellers now outnumber buyers by 15 to 1.

So, what happened to the government's much vaunted housing shortage?

People are now having to come to terms with living within their means, and that affects their living arrangements (eg stay at home with mum and dad, or live in less salubrious areas).

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Oil Prices

The Times reports the following:

"Oil prices headed back towards record levels today after surging by more than $1 in early trading after a pledge from Saudi Arabia, the world's biggest oil exporter, to raise production failed to calm concerns following fresh attacks on a pipeline on Nigeria.

US light crude for August delivery today rose $1.76 to $137.12 a barrel, below the $139.89 record reached on June 13, despite Saudi Arabia stating it will raise daily crude output by 200,000 barrels to 9.7 million barrels next month, and committed to pumping more if needed.

Saudi Arabia was speaking at an emergency meeting of oil producing and consuming countries in Jeddah over the weekend.

Market analysts suggested the rise in production was insufficient, saying production had to rise to at least 500,000 barrels. Saudi Arabian Oil Minister Ali Al-Naimi admitted yesterday that the move was unlikely to tame prices.

'I am convinced that the supply and demand balances and crude oil production levels are not the primary drivers of the current market situation and that markets are already well-supplied.' ..."

Exactly, as I have already stated on this site, oil prices no longer reflect traditional supply and demand scenarios.

Gordon Brown's emergency dash to the Middle East this weekend, to plead for an increase in production, was a waste of time and shows that he does not "get" the oil market.

This will resolve itself in due course, once the speculators (who are driving the prices higher) get burned. That being said, until that happens, it will be very painful for all of us.

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Sainsbury's Site Collapses

Sainsbury's website went down on 17 June and is still down, it has yet to confirm when the site will be back up and running.

Sainsbury's delivers to 90,000 customers a week and their average spend is approximately £80 per transaction. Therefore the glitch is estimated to have cost it already £1M in lost sales, plus the costs of £10 compensation offered to an estimated 20,000 people affected by the problem over Wednesday and Thursday.

This is not the first time that Sainsbury's have had problems with their online delivery service, as I can personally attest to.

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Sir John Gieve Falls on His Sword

Sir John Gieve, the Deputy Governor of the Bank of England, has fallen on his sword and is standing down from his role next year; he is taking the flak for last year's Northern Rock fiasco.

Sir John was responsible for maintaining the stability of financial markets.

Sir John had been accused of being asleep at the wheel during the Northern Rock debacle. He is staying on until next year, until new legislation to deal with a failing bank is in place, at the request of the Chancellor and Mervyn King (the Governor of The Bank of England).

Sir John is stepping down 2.5 years early, after being appointed to the five year role in January 2006.

It is not clear as to whether he has been pushed or jumped from his role. However, it is clear that more than one man was responsible for the failure of governance last year that led to the Northern Rock fiasco. The fundamental failing is that of the tripartite system, set up by Gordon Brown, which does not have a single organisation with overall responsibility for oversight, control and stability.

The size of Sir John's payoff has yet to be revealed, doubtless it will be generous.

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Fuel Bills To Rocket by 40%

To add further fuel (bad pun isn't it?) to the rising inflation figures (3.3% or 4% depending on which you believe), energy companies are expected to raise their prices by up to 40% this year as a result of the trebling in wholesale gas prices (which are linked to oil prices).

The average UK energy bill is expected to rise from £1048 to £1467 in the next 7 months.

Consumers may be forgiven for thinking that Ofgem the energy regulator will step in to protect them. However, this is a false hope, MPs have accused Ofgem of being a toothless tiger that does not do enough to help consumers.

Lindsay Hoyle, Labour MP for Chorley, attacked Alistair Buchanan, Ofgem's chief executive. Mr Hoyle said that energy companies blamed poor planning laws for not building enough storage facilities to enable Britain to be self-sufficient. However, he said that it was in the companies' interests to maintain a shortage so as to increase their profits.

Mr Hoyle is quoted in The Times as asking Buchanan whether he was prepared to act now to address the issue, adding:

"Or are you the toothless tiger that we imagined?"

The next 12 months will be very tough for all in the UK. The government remains on the sidelines, a bemused observer wringing its hands.

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What Inflation?

I have a mixed feeling about the possibility of future inflation. On one hand, commodity prices are still increasing. Oil is touching new highs nearly every day and agricultural prices are spiking thanks for floods in Iowa. On the other side, there's an old adage: "nothing cures high prices like high prices." In other words, high prices (in and of themselves) create incentives for people to purchase cheaper substitutes (if they exist) or to produce more of the high-priced good in an attempt to make money.

So, with the two stories listed below the question to ask is, "are these the type of price spikes that will create incentives for lower prices down the road?"

From Bloomberg:

U.K. inflation reached the highest since at least 1997 in May, and Bank of England Governor Mervyn King predicted it will exceed 4 percent later this year, adding to speculation that the economy will fall into a recession.

The Monetary Policy Committee ``is concerned about the present and prospective period of above-target inflation,'' King wrote in a letter to the government, after the Office for National Statistics said consumer prices climbed 3.3 percent from a year earlier last month. ``The path of bank rate that will be necessary to meet the 2 percent target is uncertain.''

.....

Policy makers ``are going to sit on their hands for the time being since there's not really much they can do for the moment,'' said George Buckley, chief U.K. economist at Deutsche Bank AG in London. ``They need to see what the economy does first.''

From Bloomberg:

European inflation accelerated to the highest in 16 years last month as food and energy costs soared, intensifying what finance ministers from the world's richest nations said is becoming a ``more complicated'' dilemma.

The inflation rate in the euro area rose to 3.7 percent, the highest since June 1992, from 3.3 percent in April, the European Union's statistics office in Luxembourg said today. The rate for May is higher than the 3.6 percent estimate published on May 30.

Soaring commodity prices have pushed up costs for companies and consumers and at the same time are posing a ``serious challenge'' to economic growth, officials from the Group of Eight nations said yesterday after a meeting in Japan. European Central Bank President Jean-Claude Trichet this month said the ECB may raise its benchmark interest rate a quarter point in July, signaling he is setting aside concerns about the economy's expansion to combat inflation.

With inflation accelerating ``it becomes increasingly difficult to argue against an ECB hike in July,'' said Carsten Brzeski, an economist at ING Group in Brussels. ``However, we still believe that a July rate hike would be a one-off, mainly to flaunt the ECB's willingness to fight any second-round effects.''

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Inflation Hits 3.3%

The UK inflation rate hit 3.3% in May, the highest since 1997 when the index began 11 years ago.

Bank of England Governor, Mervyn King, must now write a letter to the government explaining why the rate is more than 1% above the 2% target. This is only the second time that he has had to do this.

The pressure is now on the Bank to raise interest rates to curb inflation, despite the fact that the UK economy is teetering on the brink of recession.

The solution to this dilemma is for the Bank's target limit of inflation to be raised in the short term, to allow a soft landing of the economy.

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Treasury Tuesdays

Let's look at the Treasury market charts to see what they're telling us.



The TLTs consolidated in a rectangular pattern from the beginning of December 2007 to the end of May 2008. Since then they have dropped below the key support level established at the beginning of the consolidation.



The SMA chart gives us a much better picture of what is going on. Notice the following:

-- Prices are below the 200 day SMA

-- The 10, 20 and 50 day SMA have crossed below the 200 day SMA

-- The 10, 20 and 50 day SMA are all heading lower

-- Prices are below all the SMAs

The only positive point to make about the SMAs is the 200 is moving higher. That's it. Everything else is negative.



On the 1 year chart of the 7-10 year part of the curve, notice the market caught a huge bid at the beginning of the credit crunch and kept on rally until the beginning of April 2008. Since then the market has clearly been in a sell-off.



On the three month SMA chart, notice the following:

-- Prices are below all the SMAs

-- The 10 day SMA has moved below the 200 day SMA

-- The 20 day SMA is about to move below the SMA

-- The 10, 20 and 50 day SMA are both moving lower

The only good point on this chart is the 200 day SMA is moving higher. But that's it.



On the one year chart, notice the short-end of the curve had a strong rally since the beginning of the credit crunch. However, they have since sold-off.



On the SMA charts, notice the following:

-- Prices are below all the SMAs

-- Prices are below the 200 day SMA

-- All the shorter SMAs (10, 20 and 50 day) are heading lower

-- The 10 day SMA has moved below the 200 day SMA

The bottom line is the Treasury market is selling off, largely as a reaction to higher inflation. In addition, we've had numerous statements from government officials that imply rates are going higher.

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Today's Markets

Oil hit a new record, but then retreated from it's all time highs. Part of the reason for the new high is Saudi Arabia announced a production increase, but the dollar's drop after a the G8 failed to announced a policy of intervention didn't help. Home builder sentiment hit a new low. In the US, the Empire State survey showed another quarter of contraction.



On the SPY's chart, there are two important points to note.

-- Prices were in a rally since about 1PM CST on Friday.

-- Prices broke that day+ rally right near the close.



The QQQQs opened a touch higher and then consolidated until right around 10 EST when they made a big move higher on decent volume. Then they formed a reverse head and shoulders formation until right after lunch when they again moved higher. The average formed a pennant formation in the last hour or so of trading.



The IWMs opened a bit higher, and then like the QQQQs moved sharply higher right around 10 AM CST. Then notice they moved higher and consolidated gains after their move. Also note the upward trend that started in the afternoon on Friday is still intact.

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Market Mondays

Finally, let's turn our attention to the Russell 2000, or the IWMs.



On the five year chart, we can see a strong and very clear uptrend that started in mid-2004. The IWMs continued on this path until the end of 2007/beginning of 2008 when they fell through support.



On the one year chart, notice the clear downward trajectory of the chart.

On the three month chart, notice the following:

-- There are several upward sloping channels and trend lines, all of which the average has broken

-- Prices got beyond the 200 day SMA, but fell back quickly unable to maintain upward momentum

-- The 10 day SMA just turned lower and is about to cross below the 20 day SMA

-- Prices have fallen to the 50 day SMA which is the last possible technical support line from the SMAs

-- Prices are below three of the 4 major SMAs



On the IWM P&F chart, notice the lower highs on the chart.

The bottom line is this chart is deteriorating, but it has not completely fallen apart yet.

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Market Mondays

Below is a run-down of the SPYS. Now let's look at the more tech-heavy NASDAQ as represented by the QQQQQs.



On the 5-year, weekly chart, notice there are two trends in place. The first started at the beginning of 2004 when the index formed an upward sloping channel. The second formed in the middle of 2006 when the index moved through the upper resistance channel line of the 2004 channel. Prices broke through the rally that started in 2006 at the end of 2007/beginning of 2008. Prices also moved through the upper trend line at the beginning of 2008. Prices have since rallied through and back down through this upper channel line.



Above is a 1 year chart that shows the more recent action with a bit more clarity. Also notice the index formed a double top in mid-May and early June of 2008 and has since fallen from these levels.



On the three month chart, notice the following:

--- The 10 and 20 day SMAs are above the 50 and 200 day SMA

-- The 10 and 20 day SMA have recently turned negative

-- Prices have moved through the 200 day SMA

-- Prices are using the 50 day SMA as technical support



The main point the P&F chart shows us is the QQQQs have a series of declining highs.

The bottom line with these charts is they show a weakening sector. It's not a completely bearish chart, however. It's more lukewarm.

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Market Mondays

I'm back. While Mr$. Bonddad and I are far from done, all of out big important stuff is now in the new house. So, it's back to blogging for me. Over the course of the day I'm going to take a look at each average -- the S&P 500, the NASDAQ 100 and the Russell 2000 -- from a long-term, medium, short-term and point and figure view. The point here is to get an idea about where the market is overall in the grand cycle of things.



On the SPYs, notice the market rose in a nice channel from the beginning of 2004 until the end of 2006 when the market broke through upside resistance. The market continued rising until it formed a double top in 2007. Since then, the index has moved through both the upper and lower trend lines of the 2004 - 2007 channel. Prices have moved through the lower trend line going up and have now fallen through the line.

This tells us the overall bull market that started in 2004 is now officially over.



The one year chart provides a much closer look of the fall through the two trend lines. First, notice the double top with the first top in late July and the second top in October of 2007. Then notice how the average fell through the two trend lines from the 2004 - 2007 channel in early 2008. After the Fed back-stopped the JPM/Bear Stearns deal in mid-march the market rallied higher. But the 200 day SMA proved too much upside resistance for the average and prices have fallen back from those levels.



On the three month chart, notice the following:

-- Prices advanced to the 200 day SMA but since pulled back

-- The 10 day SMA has fallen through the 50 day SMA, and the 20 day SMA is about to fall through the 50 day SMA.

-- Prices are below all the SMAs

This chart is turning more and more bearish.



The P&F chart shows a few important points.

-- Notice with the latest rally prices moved through upside resistance, but then fell back down through important levels just as quickly.

-- The 124 level provides important support. Any move through there would signal a strong downside move was dead ahead.

The general conclusion get from this chart is the SPYs are heading lower.

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Adaptability

Alastair Darling will use this Wednesday's Mansion House speech to make clear that Britain's framework for tackling economic and financial stability will have to change to meet the challenges posed by globalisation.

Darling will say that while the current tripartite framework (created by Gordon Brown) is essentially sound, there are ways in which it can be improved.

He wants to strengthen the Bank of England's role in promoting financial stability, by bringing in greater expertise and reforming the central bank's governance structure.

He also wants to give the Bank more powers to help reduce the likelihood of a bank or other financial institutions running into trouble, and wants greater international cooperation between regulators.

This is all very well. However, it ignores the fundamental failing of the tripartite system; namely that there is no one body actually in charge of it. It is this structural weakness that caused the Northern Rock fiasco to drag on much longer than it should have done, and leaves the financial system open to more failures and abuse.

Until one of the member bodies (FSA, Bank of England or Treasury) of the tripartite system is given overall authority over the others, nothing much will change.

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Back On Monday -- Moving Weekend

Over the next four days Bonddad and Mr$. Bonddad are going to move into their new house. I would love to tell you I can blog and move at the same time. I can't. So I'm going to spend the next 4 days moving all my stuff from the oil house to the new house. I'll be back on Monday.

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Today's Markets

Oil spiked again, closing at $136.38. There's been a ton of volatility in the oil market lately. Corn also spiked as the floods in the Midwest delayed planting. The Fed's Beige Book painted a fairy dour picture of the economy. Finally, the US Treasury reported a record deficit, largely thanks to the stimulus checks that went out.

Let's take a look at the charts.



The SPYs gapped down at the open, then traded sideways for most of the rest of the day. They found resistance at various points, first at the 20 minute SMA then at a previous high. The index tried to make a move through the 50 SMA but couldn't make it. Notice the SPYs broke through support about a half hour before before the close and continued to move lower on increasing volume.



The QQQQs also gapped down at the open. They rallied into the 10 and 20 minute SMA until about 1PM CST when they tried to move above the 50 SMA. They couldn't maintain the strength and fell into the close. Notice the accelerating volume at the end of trading.



The IWMs also sold off in the morning. Throughout the day they tried to rally three times but couldn't get any momentum. They fell with ab out half and hour to go in trading and then moved lower on increasing volume.

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Read This Now

What Barry said.

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Inflation On the Brain

There is a ton of news today about inflation. Consider the following:

From the WSJ:

Inflation worries are heating up around the world and jolting financial markets in the process.

On Tuesday, China's stock market was the latest to feel the blow, with the benchmark Shanghai Composite Index tumbling by 7.7%, to its lowest close this year. The drop came after the government announced steps to remove cash from the financial system in an attempt to tamp down inflation.

.....Also Tuesday, officials in Vietnam effectively devalued their currency in a step aimed at easing market pressures related to soaring inflation rates. (See related article.)

And in the U.S., investors sold off U.S. Treasury securities, one day after Federal Reserve Chairman Ben Bernanke warned that the run-up in oil prices is adding to upside risks for inflation. The price of the two year Treasury note, most sensitive to the Fed's moves, has fallen sharply (and its yield has risen) as investors grow convinced that the central bank may have to raise rates this autumn to contain inflation. On Tuesday, the two-year note's yield was 2.9%, up from 2.4% on Friday, marking a major jump in that rate.

Meanwhile, the Bank of Canada surprised markets Tuesday by holding off on an expected interest-rate cut; the central bank said the risk of inflation, driven by high energy prices, had grown too great to allow for further rate cuts. The European Central Bank is also considering interest rate increases to fend off inflation.

From Bloomberg:

European Central Bank board member Juergen Stark damped speculation of a series of interest-rate increases, saying policy makers have signaled only that they may raise borrowing costs in July.

``The markets have understood the Governing Council's signal,'' Stark, 60, said in an interview in Chatham, Massachusetts, late yesterday. ``However, we are not talking about a series of rate increases.''

ECB President Jean-Claude Trichet said last week the bank may raise its benchmark rate by a quarter-point to 4.25 percent in July to curb inflation, which is running at the fastest pace in 16 years. Investors responded by increasing bets on higher borrowing costs. They expect the ECB to lift the key rate twice this year, taking it to 4.5 percent, according to Eonia forward contracts.

.....

Oil prices above $130 a barrel and rising food prices pushed inflation in the 15-nation euro region to 3.6 percent in May, well above the ECB's 2 percent limit. Central banks around the world are changing rate policy in response to surging inflation.

Global Policy Shift

Vietnam, Brazil, Chile, the Philippines and Indonesia all lifted borrowing costs this month. The Bank of Canada yesterday unexpectedly kept its benchmark rate unchanged after four straight reductions. U.S. Federal Reserve Chairman Ben S. Bernanke has also signaled the Fed is done cutting rates, saying this week he'll ``strongly resist'' any surge in inflation expectations.

Tie this information to the CRB chart below, especially the following points.

1.) The weekly chart is still in a major rally.

2.) The daily chart is still bullishly aligned

3.) The P&F chart shows a series of multiple new highs.

These developments explain the following statement from Bernanke's most recent speech:

Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities. Thus far, the pass-through of high raw materials costs to the prices of most other products and to domestic labor costs has been limited, in part because of softening domestic demand. However, the continuation of this pattern is not guaranteed and future developments in this regard will bear close attention. Moreover, the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.

NY Fed President Geithner echoed Bernanke's sentiment:

Geithner also said containing global inflation risks will probably require tighter monetary policy. The Fed has cut U.S. interest rates sharply to 2 percent since September, though markets expect it to raise them later this year.

And Treasury Secretary Paulson has supposed dollar intervention which is a de facto way to cure inflation caused by the dropping dollar:

U.S. Treasury Secretary Henry Paulson on Tuesday said he stood by comments made a day earlier in which he said he would never rule out currency intervention as a potential policy tool.

"I'll let my comments stand," Paulson said in an interview with Bloomberg Television. "I never like to say never, but my focus is on long-term fundamentals."

Now -- US officials have talked a good game for awhile, but haven't done anything. Let's see if they are will to act.

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Wednesday's Commodities Roundup

I'm going to break this into two different sections. First we'll take the CRB and Gold



Remember that overall the CRB has been rallying since the beginning of 2007. It has continually moved through upside resistance and made new highs. Also note the SMAs are in the most bullish alignment possible. The shorter SMAs are above the longer SMAs and all the SMAs are moving higher.



On the daily chart, notice that prices have been technically moving higher since late March. However, also notice that whenever prices have made new highs they have immediately fallen back to previous levels indicating traders are less than thrilled with the new highs.

An the SMA front, notice the following:

-- The 20 and 50 SMA are both moving higher

-- The 20 is greater than the 50, but the 10 is trading right at the 20.

-- All the SMAs are moving higher

-- Prices are above the SMAs

This is still a good alignment, but it could be better.



On the P&F chart, notice that prices have made continually made new highs.



On gold's weekly chart, notice that it has broken through support and is currently consolidating in a triangle pattern.



On the daily chart, notice that after hitting a new high in March the market has been selling off and is currently in a triangle consolidation pattern. Also note that prices and the SMAs are bunched up with little direction. This indicates a we really don't know what the next move will be.



On the P&F chart, notice the series of lower highs, indicating a general sell-off.

Gold's chart tells us that inflation expectations have dropped a bit. That's good news.

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Today's Markets

Oil fell $3 on reports of a drop in demand and s stronger dollar. The dollar rose the most in two years. A survey of economists now thinks the US will have a protracted slowdown rather than a recession. The trade gap widened to $60.9 billion, largely thanks to oil. And the Shanghai market dropped over 7%.

Considering all of the action as of late, let's step back and look at the numbers from afar -- that is from the 5-day perspective to see where we stand.



The big news here is the huge drop on Friday and Monday. Notice that prices dropped really heavily on those two days. But also notice that prices leveled out today, making today a consolidation day. In other words, today the market took a deep breath to figure out where it wants to move next.



Note the same action with the QQQQs -- they had a really big drop but then rose a touch today in a consolidating move.



Note the IWMs are very similar to the SPYs.

After the hard and heavy action of the last few days, a drop in the intensity helps to calm everybody's nerves.

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Quick Oil Market News

From CNBC:

Saudi Arabia's oil output increased by almost 500,000 barrels a day this quarter, to 9.54 million barrels, sources in the Saudi Oil Ministry told CNBC.

However:

World oil demand will rise at its slowest pace in six years during 2008 as a raft of fuel subsidy cuts in Asia erodes consumption, the International Energy Agency said on Tuesday.

But the adviser to 27 industrialized economies also sharply lowered its projection for supply outside the Organization of the Petroleum Exporting Countries, increasing consumers' reliance on the exporter group.

In its monthly Oil Market Report, the IEA said global oil demand will rise by 800,000 barrels per day (bpd) this year, 230,000 bpd less than its previous forecast.

It still looks net long to me.

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Bernake on the Economy

From his speech last night

Before turning to those issues, however, I would like to provide a brief update on the outlook for the economy and policy, beginning with the prospects for growth. Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly. Indeed, although activity during the current quarter is likely to be weak, the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so. Over the remainder of 2008, the effects of monetary and fiscal stimulus, a gradual ebbing of the drag from residential construction, further progress in the repair of financial and credit markets, and still-solid demand from abroad should provide some offset to the headwinds that still face the economy. However, the ongoing contraction in the housing market and continuing increases in energy prices suggest that growth risks remain to the downside.

What Bernanke is arguing -- correctly I think -- is there are two sets of forces at work.

On one hand we have a bottoming in housing, credit market repair and exports helping to ameliorate the effect of high energy prices and the housing slowdown. Some of this hangs on when housing will bottom out, and as I have repeatedly asserted, I don't see that happening anytime soon. Simply put, supply is still massive, demand is still weak and lenders are facing tremendous headwinds from a tightening of their balance sheets. These are not conditions conducive to healing.

Oil's chart has been rising since early 2007. That's a strong rally to kill. In addition, the summer months are typically a period of higher prices, so we're arguing against a strong historical trend. In addition, we've got 2 billion people (India and China) with higher standards of living. So I don't see that dropping anytime soon.

The only good news here is in exports, which should do well so long as the dollar remains cheap. And given the sorry state of the Federal government's finances, I don't see that changing anytime soon.

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House Sales Slump

The Times reports that house sales have slumped to a 30 year low last month.

Chartered surveyors reported that an average of 17.4 transactions had been completed each month between March and May, down from 18.5 in the three months to April.

This is the lowest figure since records began in January 1978, according to the Royal Institution of Chartered Surveyors (RICS).

Given that the housing market in Britain has been made, rather unwisely, into the engine of the economy this news is not good for anyone (home owner or not).

One crucial factor that affects house sales is that of interest rates, and these in turn are set by Libor.

Libor is a benchmark supposed to represent the cost of borrowing in the London interbank market. However, Forbes reports that in recent months, empirical evidence and market rumors suggest that banks are manipulating the Libor setting process for their own ends.

Banks manipulating the market?

Surely not!

Ironically the British Bankers' Association (BBA), which represents 230 banks from around 60 countries that operate in Britain, said today that it will increase its scrutiny of banks that contribute to the setting of Libor.

Shutting the stable door firmly after the horse has bolted.

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Treasury Tuesdays

Treasuries area still caught between their safe haven status:

Renewed banking trouble Monday sent investors scrambling to buy low-risk government debt, with shorter-dated maturities making the biggest gains.

The two-year note rose 8/32 point, or $2.50 for every $1,000 invested, to yield 2.512%. That is down from 2.641% Friday as bond yields fall when prices rise. The yield on the benchmark 10-year note fell below the 4.0% mark again -- a level just breached last week. It was yielding 3.971% Monday.

The advances helped government debt gain back some ground after suffering a rout in the past few weeks amid rising inflation worries, speculation over higher interest rates and a recovery in risk appetite.

But risk aversion returned Monday after British mortgage lender Bradford & Bingley warned about the outlook for 2008, and two major U.S. banks, Wachovia Corp. and Washington Mutual Inc. made management changes. That reminded investors that the credit-market crunch, while improved from the worst levels in March, is far from over.

Standard & Poor's downgrades of the counterparty ratings on three major U.S. brokers added to investors' worries, as the ratings firm said it expects Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Morgan Stanley to make additional writedowns.

"You are seeing a flight-to-quality bid into Treasurys again," said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG's private wealth-management unit in New York. "The credit market crisis isn't over. This is just a reminder of that. The market is repricing risk."

and inflationary pressures.

Crude oil spiked to new records around $139 per barrel, deepening a stock market sell-off and driving flows out of riskier assets into safe-haven Treasuries. However, a sustained acceleration of inflation pressures even in a period of weak economic growth could later prove negative for bonds, analysts warned.

However, looking at the charts you could argue that inflation fears are starting to win, with the flight to safety trade happening as events warrant.

Also remember that last week we saw Bernanke and Paulson jawboning the dollar. This implies that interest rates might be rising. And then there was this from Bernanke yesterday:

Federal Reserve Chairman Ben S. Bernanke said policy makers will ``strongly resist'' any surge in inflation expectations, delivering his clearest message yet the central bank is done lowering interest rates.

Bernanke played down the biggest jump in the unemployment rate in 22 years in May and said the risk of a ``substantial downturn'' receded in the past month. Policy makers will need to pay ``close attention'' to make sure the increase in commodity costs doesn't pass through to broader consumer prices, he said in a speech to a Boston Fed conference late yesterday.

The Fed chief's remarks spurred investors to bet that officials will raise rates later this year and sent two-year note yields to their highest level since January. Bernanke and his colleagues are raising the alarm on inflation after oil costs doubled in the past year and companies from Dow Chemical Co. to tire-maker Titan International Inc. raised prices.

The short end of the Treasury market bounced between a narrow set of points from Tuesday of last week to Friday. However, the short end sold off yesterday.



The 7-10 year part of the curve is caught between two points. This a trading range which indicates traders are still caught between several conflicting interpretations of the markets.



And the 20+ year area of the market is still moving between interpretations as well.



Looking at the short end's daily chart, we see the following:


-- Prices have been in a downtrend since a little after the beginning of the year. This is a sell-off that came at the end of the fight to safety from last year.

-- Prices have just moved below the 200 day SMA

-- Prices are below all the shorter SMAs

-- All the shorter SMAs are moving lower

-- The shorter SMAs are below the longer SMAs



On the 7-10 year chart, notice the following:

-- Prices are bouncing around the 200 day SMA, but haven't made a firm move either above or below.

-- Prices are below all the shorter SMAs

-- All the shorter SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices have been in a confirmed downtrend since the beginning of the year



In the 20+ year market, notice the following:

-- Prices have moved below the 200 day SMA

-- Prices are below all the shorter SMAs

-- All the shorter SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices have been in a confirmed downtrend since the beginning of the year

The yearly charts show we are at/near a crossroads.



The short end of the curve has been declining for awhile and prices are right at the 200 day SMAs.



The IEFs (7-10 year) have also been declining since the beginning of the year and have been bouncing around the 200 day SMA



The TLTs have broken their trading range -- which they had been in since late last year -- and are firmly moving lower.

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Today's Markets

The big news today was Lehman Brothers announcing they are raising $6 billion in capital along with a $2.8 billion dollar loss. Guess what? The credit crisis is far from over. In a sign the housing market is nowhere near bottom, pending home sales dropped 13.1% from last year's level. Paulson didn't rule out the possibility of dollar intervention. New York Federal Reserve President Tim Geithner made a similar statement. This is the third federal official who has come out talking about the need to watch and possibly support the dollar in the last few weeks. Finally the Saudis called for a meeting between oil producers and consumers.



The SPYs moved sideways for most of the morning. However, the bar that printed at noon shows a strong move downward move, followed by a continued move downward with a heavy volume spike 15 minutes later. The market continued to move lower until about 1:45 when the market rebounded. The SPYs printed a double bottom and then broke through the 10 and 20 minute SMA to close right around the 61.8% Fibonacci level from the morning's sell-off.



Notice the QQQQs continued their downward move started on Friday. The market opened lower then consolidated sideways. However, the 50 minute SMA provided resistance right around noon and the marker moved lower, eventually gapping down twice. The two arrows point out a double bottom, but the market printed a strong upward moving bar on strong volume 20 minutes before the close.



The IWMs dropped at the open, but moved sideways until they found resistance at the downward trend line started on Friday. The market moved lower until it formed a double bottom (pointed out by the two arrows). The market rallied at the end of the day, eventually closing above the resistance line started on Friday.

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Gas at $4/ Gallon

From Bloomberg:

U.S. gasoline rose to $4 a gallon at the pump for the first time, threatening to further shake the confidence of consumers whose spending makes up two-thirds of the economy.

.....

``The fact that confidence has gone down as inflation expectations are going up indicates gasoline has been an important driver because it's one of the reasons expectations are rising,'' Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts, said.

Consumers are already rattled by falling home values and a weakening job market, prompting them to curb spending and threatening to halt the six-year expansion. Consumer confidence in May fell to a 28-year low, as inflation expectations rose to their highest in more than two decades, according to last month's Reuters/University of Michigan sentiment survey.

There's only so much strain consumers can take. At some point, they will day, "to hell with it" and stop spending. In addition, at some point, prices will start to really impact overall consumer behavior. In fact, price may already be at that level. For example, in their recent announcement of 4 plant closings, GM stated consumers were walking away from big SUVs in droves and moving into smaller, more fuel-efficient cars. Because of the importance of car purchases in the consumer budget this is huge news and could signal an incredibly large shift in consumer behavior.

Let's add to that predictions like these:

Oil prices are likely to hit $150 a barrel this summer season, the global head of commodities research at Goldman Sachs said on Monday, as tighter supplies outweigh weakening demand.

"I would suggest that the likelihood of that happening sooner has increased tremendously ... sometime in summer," Jeffrey Currie told an oil and gas conference in the Malaysian capital, referring to oil at $150 a barrel.

Goldman Sachs, the most active investment bank in energy markets and one of the first to point to triple-digit oil more than two years ago -- a once unthinkable level -- said last month oil could shoot up to $200 within the next two years as part of a "super spike."

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Will We See a Second Half Rebound?

From Newsweek:

First the good news:

The cause for optimism: the U.S. has called in the economic cavalry, which has responded in textbook fashion. The Federal Reserve has aggressively cut interest rates, bringing the Federal Funds rate down from 5.25 percent last September to 2 percent. Earlier this spring, Congress and President Bush, in a rare moment of bipartisan accord, passed a stimulus package, which will shove nearly $100 billion into the pockets of American consumers by mid-July.

Both of these events are net positives for the economy. For the next few months, the stimulus checks are going out. They are already responsible for the increase in Wal-Mart's recent sales report. In addition, cheaper money is usually a good way to get the economy moving.

But here's the bad:

But this downturn is likely to last longer than the eight-month-long recession of 2001. While the U.S. financial system processes popped stock bubbles quickly, it has always taken longer to hack through the overhang of bad debt. The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months. To aggravate matters, the twin crises that dominate the financial news—a credit crunch and the global commodity boom—are blunting the stimulus efforts. As a result, the consumer-driven economy may not bounce back as rapidly as it did in the fraught months after 9/11.

Let's take these one at a time.

it has always taken longer to hack through the overhang of bad debt

There is a ton of debt in the system which will blunt the effects of lower interest rates. I wrote this last week:

Total debt outstanding -- that is personal, corporate and government debt outstanding -- is $31.758 trillion. Total US GDP is $14.196 trillion. That means that there is 2.23 times the amount of debt in the US relative to the total value of the US economy.

Total household debt is $13.960 trillion. That means total household debt as a percentage of GDP is 98.33%. Disposable income at the national level is $10.502 trillion. That means that total household debt is 132.92% of disposable income at the national level.

Simply put, the US is literally drowning in debt. And it's going to take awhile to pay this debt off.

The head winds that drove the economy into this dead calm— a housing and credit crisis, and rising energy and food prices—have strengthened rather than let up in recent months

The housing crisis shows no signs of abating. The ultimate sign of problems is the massive drop in price:

May 27 (Bloomberg) -- Home prices in 20 U.S. metropolitan areas fell in March by the most in at least seven years, pointing to weakness in the housing market that will constrain economic growth.

The S&P/Case-Shiller home-price index dropped 14.4 percent from a year earlier, more than forecast and the most since the figures were first published in 2001. The gauge has fallen every month since January 2007.

Prices continue to slide as record foreclosures put more homes on the market and stricter lending standards make it harder to get loans. Falling home values are slowing consumer spending, threatening to halt the six-year expansion.

``There is excess supply, weakening demand, prices are falling and will continue to fall,'' said Kevin Logan, senior market economist at Dresdner Kleinwort in New York. ``Housing sales are still trending lower.''

When prices drop that much, you've got a problem.

We're still getting mixes news on the credit crisis front. Libor is still higher than the Federal Funds rate, indicating banks are still reluctant to lend to one another. In addition, the TED spread is still high, although it has come in a bit:



While some analysts have said the crisis is over (or has at least turned the corner) there are still sign of problems. For example:

Lehman unloaded at least $120 billion of holdings in the second quarter, said people with direct knowledge of the matter. At least $18 billion of the assets were tied to mortgages and leveraged-buyout loans that plummeted in value, said one of the people, who declined to be identified because the figures haven't been disclosed.

``They're doing all the right things, such as de-leveraging aggressively, but these are stressful times, and they don't always get the credit they deserve,'' said UBS AG analyst Glenn Schorr, who has a ``neutral'' rating on Lehman. ``Although Lehman is very different than Bear, there's one similarity, and that's what could undo all the other positives: perceptions can become reality.''

As a result of events like this, some analysts see problems for the foreseeable future:

Fund manager BlackRock expects the global credit crisis to last another two to four years as a weakening U.S. economy triggers more writedowns by banks, its chief investment officer for equities said on Monday.

"The credit crisis will be with us for a long time," said Bob Doll, CIO and also vice chairman of the U.S. money manager, which managed $1.36 trillion in assets at the end of March.

"The deleveraging of the financial system, which is the outgrowth of the credit crunch, will likely last a couple of more years -- two, three, four," he said.

Financial institutions around the globe such Citigroup and UBS have suffered more than $300 billion of write-downs and credit losses during a credit crisis triggered by the collapse of the U.S. subprime mortgage market.

And then there is oil. Here's the daily chart:



This is a bull market chart. Notice the following:

-- Prices are above all the SMA

-- All the SMAs are moving higher

-- The shorter SMAs are higher than the longer SMAs

-- Prices have continually moved through upside resistance

This is a bull market chart, plain and simple.

And here's a chart of gas prices from the latest This Week in Petroleum:



Not a pretty picture, is it?

And I'll add my own biggie: job growth stinks:





Bottom line -- it just doesn't look that promising right now.

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Market Mondays

Wow - what a sell-off on Friday. The big news was the employment report -- or the lack thereof. Simply put, we're shedding jobs, and have been for some time on a year over year basis. I dealt with the numbers more here. The huge jump in gas prices didn't help either. Basically, we learned that things aren't that hot and that "Goldilocks" isn't in the house right now.

Let's see what the charts say is going on. The overall picture is very interesting.

First we have the SPYs



On the 10 day, 5 minute chart notice the SPYs have been bouncing between 137.60 and about 140.70 for the last ten days. We've started this 10-day period (2 weeks ago) down around 137.60, then spiked to 140.60 level on May 29 and 30. Prices dopped back down to the 137.60 area by last Wednesday, but they rallied again on Thursday. Then came Friday, when prices moved below the 137.60 level in a convincing way. Also note the heavy volume spike at the end of trading -- no one wanted to hold anything over the weekend. This indicates a great deal of concern among traders.



On the SPYs weekly chart, notice the following:

-- Prices hit the 200 day SMA about two and a half weeks ago. Since then they have retreated. Prices could not get across the 200 day SMA.

-- Prices dopped to the 50 day SMA, rallied to the 10/20 day SMA, fell back, rallied again, and are now through the technical support offered by the 50 day SMA.

-- The 10 and 20 day SMA are both moving lower

-- The 10 day SMA crossed below the 20 day SMA.

This chart is turning bearish.



On the QQQQs 3 month chart, notice the following

-- The chart is still in an uptrend

-- The 10, 20 and 50 day SMAs are all moving higher.

-- The smaller SMAs are above the longer SMAs

-- Prices are above the 200 day SMA

In other words -- this is still a good chart. While you could argue the index may be forming a double top, we're still way too early to make a formal call.



On the 10-day chart, notice the overall trend is up, and there are some minor ups and downs. However -- also notice that prices closed just below the 10-day trend line on Friday. That makes today's open that much more important.



On the IWMs 3-month chart, notice the following:

-- The chart is still in an uptrend

-- Prices made a convincing move above the 200 day SMA on Thursday, but quickly retreated below that level on Friday's sell-off

-- The 10, 20 and 50 day SMAs are all moving higher

-- The 10 day SMA is > 20 day SMA which is > 50 day SMA -- a bullish alighment

-- Prices retreated to the 10 day SMA on Friday's sell-off

This is still a bullish chart



The 10 day, 5-minute chart of the IWMs still has an upward bias. There have been two mini-rallies and sell-offs, but the overall trend remains.

So -- what does all of this mean?

The SPYs are in danger of turning bearish, but the QQQQs and IWMS still have strong formations. The question now becomes "will the SPYS lead the market lower, or will the other averages pull the market higher?"

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