Friday Dollar Analysis

Last week, I wrote the following about the dollar:

The A/D line shows a big move into the market in early May, but not much since. The CMF confirms the lack of movement into the market. The MACD shows increasing momentum, but note the current peak is lower than the last, indicating overall declining momentum right now. While the 10 and 20 day EMAs are still below the 50 day EMA, the shorter EMAs are now moving sideways rather than lower. They are also intertwined. The downward angle of descent on the 50 day EMA is also lower.

The chart is showing many signs of a reversal in progress.

The story in the currency markets for the last few weeks has been the Greek situation. Any story that was Greek resolution negative moved the euro lower and the dollar higher while the opposite was true. It is interesting to note the dollar is probably forming a bottom at an apex of the Greek vote story.

Let's start by looking at the really long view:


Last year, the market formed a head and shoulders pattern. In addition, since the top in mid-2010, prices have formed a down/up/down, lower high/lower low pattern. Currently, prices are forming a triangle pattern.



The above chart shows the consolidation in more detail. First, note the EMAs are moving closer together, which is usually a sign of market consolidation.


The jump in the A/D four weeks ago shows a big volume spike -- but nothing since then. The CMF indicates that money flowing into the market is evening out, while the MACD shows a slowing momentum.

I'm still thinking the dollar is forming some type of bottom at this time. The EU situation appears to be at a head, giving the market "closure."

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Special Bonddad blog midyear graph-reading contest

- by New Deal democrat

Today is June 30, and that means tomorrow starts a new fiscal year for most states. Which means it certainly is about time for Meredith Whitney's forecast of 50 to 100 significant municipal defaults totaling about $100 billion this calendar year, to start kicking in. Let's pull up a graph of a Municipal Bond index fund for the last year and see how far it's plummeted:



Oh, wait ....

So your special midyear graph-reading contest is, on what two dates did the Pied Piper of Doom predict that "the shit may, indeed, be hitting the fan concerning ... the truly dire straits of the finances of at least some of our country's states and municipalities," and specifically tout Whitney's prediction of a "meltdown" above?

Hint: he at least managed not to bottom-tick the price this time.

P.S. As of the most recent data, state tax collections continue to surprise to the upside, although that still doesn't make up for the loss of federal assistance.

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Treasury Market Selling Off?

From the WSJ:

For the third consecutive session, Treasury investors on Wednesday balked at buying new bonds at a large government-debt auction, sending prices lower and yields higher.

The yield on the benchmark 10-year note reached 3.11%, its highest since May 25. Yields on the 10-year note have risen every day this week, adding about 0.24 percentage point since Friday and sparking speculation that the bull run in the bond market may have passed its peak.

The Treasurys on sale on Wednesday were $29 billion of seven-year notes. That followed sales of two- and five-year notes, all of them showing low levels of demand in the private sector and among foreign buyers.

The poorly received auctions raised eyebrows ahead of Thursday's official finish of the Federal Reserve's second bond-buying initiative, a $600 billion "quantitative easing" program widely known as QE2.

This is something I've been writing about for the last few week (see here, here and here).

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Small Business Lending Heating Up?

From Reuters:

Borrowing by small U.S. businesses rose at a record pace in May, data released by PayNet Inc on Thursday showed, a sign that economic growth is poised to pick up in coming months.

The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of financing to U.S. small businesses, rose 26 percent in May from a year earlier, PayNet said.

The index is now at its highest since July 2008, two months before the collapse of Lehman Brothers and the near derailment of the world financial system.

.....

"If small businesses are taking these kind of chances, taking risks, making long term investments, they are seeing some long-term opportunities on the horizon," PayNet founder Bill Phelan said in an interview. "That's got to be a big positive sign for the economy."

Separate data also released on Thursday showed small business loan defaults at their lowest in five years, tying records set in April and May 2006.

Accounts in moderate delinquency, or those behind by 30 days or more, fell in May to 1.95 percent from 2.06 percent in April, PayNet said on Thursday.

Accounts 90 days or more behind in payment, or in severe delinquency, fell to 0.59 percent in May from 0.63 percent in April.

I have never heard of Paynet, but thought this was an interesting development in light of recent news.

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A Foretaste

Those who have been focusing on the ongoing Greek tragedy may care to remember that the portents of doom, concerning a Greek financial meltdown, are but a foretaste of the catastrophe that will be unleashed if the US doesn't get its debt laden house in order soon.

The IMF has issued a warning that the US needs to sort out its debt problems, and ensure that Congress passes legislation that allows its debt ceiling to rise. Failure to do so will lead to default on US debt, which will cause financial shock waves around the world.

The irony of course being that using debt to pay debt is in itself the road to ruin.

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Thursday Oil Market Analysis

Last week, I wrote the following about the oil market:

The oil market is caught between two different issues. In the short-term, there is concern about the pace of expansion. Lower growth = lower oil demand = lower prices. However, as I pointed out above, there has been a strong, fundamental, long-term shift in the world's oil demand as countries like India and China have grown with their demand supplementing US/EU demand, providing a long-term floor under prices. But currently, these countries are also tying to slow growth due to increased inflationary pressures within their respective countries. In other words, there is currently a great deal of negative sentiment weighing down oil prices.

On the same day, the IEA announced a coordinated effort to release oil from various strategic oil reserves in an effort to lower prices, which in fact happened.

The above analysis still stands: there are short-term issues that are hitting oil prices, but longer term supply and demand are still incredibly tight. Professor Hamilton summed up the basic issue in his article on the release:

In any case, the deed is now done, and the IEA has run an interesting experiment for us in how oil markets function. But I would recommend against further SPR sales, regardless of the final outcome of the current effort. The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we're talking about an oil price above $100/barrel in the first place.

A one-time release from the SPR, or even a series of releases until the SPR runs dry, does nothing whatever to address those basic challenges.

And the growing demand from emerging markets is the primary underlying force in the oil market right now, which I believe is putting a floor under oil prices.

That being said, let's take a look at the chart:

The price chart is still negative. All the EMAs are moving lower and prices have been using the EMAs are technical resistance. Also notice that the EMAs have fanned out, obtaining a bit of distance from each other. The MACD is also weak; it's in negative territory and has shown little advance over the last month. However, it is about to give a buy signal.

My long-term prediction for oil is for prices to again move higher and stay there because of the macro level supply/demand situation (see the link above for the charts). However, right now the chart has to move through a fair amount of technical resistance. Prices have to advance through the EMAs and several resistance levels. I would give prices through July or mid-August to accomplish that feat before moving into higher territory.

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June YoY house price declines least since May 2007

- by New Deal democrat

Consider two different scenarios by which house prices could still decline 25% in real, inflation-adjusted terms, from the present:

(1) nominal prices decline 5% a year for 5 years, and inflation is 0% over that time.
(2) nominal prices do not decline at all over the next 5 years, but inflation is 5% a year.

Both of those give us "real" price declines of 25%, but with very different results, and very different amounts of pain.

In the first scenario, more and more homeowners are "underwater" with houses not worth what they paid for them, and not even worth the outstanding mortgage amount. They are unable to sell, since they can't bring cash with them to the closing table to make up the difference. More and more allow their houses to slide into foreclosure, thus increasing the shadow inventory of bank-owned houses.

In the second scenario, however, no more homeowners whatsoever are "underwater." Even better, mortgage payments - and purchases - are made with inflated currency. There is no further incentive to hand in the keys and walk away from the house, and shadow inventory is worked off.

Needless to say, the second scenario is a lot less painful than the first one and yet accomplishes the same result.

Over the last several weeks, I've read more and more commentary suggesting that at least nominal prices in the housing market might start to make a bottom. Now that we have the most recent Case-Shiller report (from April, but really a February, March, and April average), and the final June asking price data from Housing Tracker, which accurately showed the turn at the top of the market in 2006, let's take a look at whether housing prices may better fit the first or second scenario.

Here is the updated chart of YoY% change in asking prices from Housing Tracker's 1,000,000+ home database:

Month	2007	2008	2009	2010	2011
January	---	-7.5%	-11.5%	-5.8%	-8.7%
February	---	-7.8%	-12.0%	-5.2%	-8.4%
March	---	-8.3%	-10.9%	-5.0%	-7.3%
April	-2.7%	-8.6%	-9.6%	-5.0%	-6.8%
May	-3.5%	-9.1%	-8.1%	-5.0%	-5.6%
June	-5.0%	-9.8%	-7.0%	-5.0%	-4.4%
July	-5.4%	-10.4%	-6.1%	-5.1%	---
August	-6.0%	-10.6%	-5.5%	-6.1%	---
September	-6.2%	-11.1%	-5.1%	-6.6%	---
October	-6.7%	-11.4%	-4.5%	-7.0%	---
November	-6.6%	-11.7%	-4.5%	-6.7%	---
December	-7.2%	-11.4%	-5.6%	-7.8%	---

The YoY -4.4% decline in June is the smallest YoY decline since May 2007. Here is the same information (through 2 weeks ago) shown graphically (h/t Silver Oz):


In comparison, here is the YoY% change up through the February - April average in the Case-Shiller 20 city index:



Over the time period of comparison, the Housing Tracker trend in asking prices has appeared to run 1 to 4 months ahead of the Case-Shiller sales data. Keep in mind that the most recent Case-Shiller data compares sales from a period when buyers and sellers wanted to close quickly to take advantage of the $8000 housing credit, with a period one year later where there is no credit. Even so, it looks like the YoY% change may be close to bottoming.

I fully expect the Case-Shiller series to bottom out in YoY% terms within the next several months, and to mirror the more current better YoY comparisons in the Housing Tracker database. In other words, it continues to look like the second scenario set forth above is going to be closer to the truth, and among the possibilities, that's good news.

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Quick Update on the Equity Markets

Consider this chart from Bespoke Investment Group regarding the last two days of equity price action:


Notice that the rally has been led by more speculative areas of the marker -- technology and consumer discretionary.

Consider this in line with the treasury market, which should absorb the outflow of money from the stock market in the event of an equity sell-off. For the last few weeks, the Treasury market rally has shown decreasing momentum (see here and here), with the long-end of the curve moving sideways and the belly of the curve rallying a bit. At the same time, the stock market has found support at the 200 day EMA (see here and here). The question now becomes -- is this rally in the markets the beginning of a new trend, or a simple relief rally from the sell-off?

There are several possible scenarios. This chart from Channels and Patterns Blog offers a very realistic possibility.



That chart makes sense if the market becomes bearish on the second half outlook. While many economists have lowered their growth projections, the consensus is still for second half growth, albeit below trend. However, should we continue to see bad news for the foreseeable future, this is a real possibility.

A second possibility is the current sideways action is a rectangle consolidation, which traders are using to consolidate gains, and take some profits off the table. This makes sense if the current Treasury market stall is caused by a change in growth perceptions rather than concern about a possible default.

Either way, the markets are very much in a "wait and see" mode.

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The Economic Ball's In Washington's Court -- And That Ain't Good

As I see current economic events, the real story actually lies in Washington.

First, recent economic news has been poor. It started with high commodity prices squeezing margins and consumers. At the same time, we saw international growth engines India, Brazil and China raise interest rates and reserve requirements to slow their economies, thereby also muting the increased demand caused by their growing economies. In the US, consumers have switched focus from mass consumption to paying down debt and a frugal approach to buying, making the slowing demand from India and China that much more important as it creates a slight vacuum for macro-level, international demand.

This was followed by the shock of Japan's earthquake, which more or less completely threw-off global supply chains for consumer electronics and autos. This added further downward momentum to the manufacturing cycle, which was one of the strongest ares of the domestic economy. At the same time, the budget talks were then getting underway with every event being reported as if the situation were in a cage match.

In short, all action appears to be on hold until Washington solves (and I use that word in the most liberal manner possible) the current budget impasse. As I pointed out yesterday, this is creating a tremendous amount of uncertainly as both possible "solutions" offer little to no real help for the economy in the short-run. As such, I think most major economic players are moving into a disaster mentality, conserving capital and putting all major plans on hold.

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Greece Goes For Austerity

The Greek parliament has approved the five year austerity package.

Now all it has to do is implement it!

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Christine Lagarde Appointed Head of IMF

Christine Lagarde, the French Finance Minister, has been named as the new head of the International Monetary Fund.

Rather bizarrely, and certainly pathetically, French President Nicolas Sarkozy's office declared it a "victory for France".

Does Sarkozy not get the point that the IMF is an international organisation, it is not there to work for France or Sarkozy.

I suspect that Ms Lagarde has sufficient intelligence and ethics to understand that point, it is a pity that Sarkozy has taken the shine off her appointment by making such a partisan and crass comment.

She starts work on 5th of July, her first task being to sort out the Greek tragedy.

Good luck on that then!

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Wednesday Commodity Round-Up

The long-term gold chart shows that prices have broken one uptrend, but the longer trend started last year is still in place. Prices have technical support in the 144 and 140 area.


Prices are now below the 10, 20 and 50 day EMA. The 10 and 20 day EMAs are both moving lower, and the 10 day EMA has crossed below the 20. The 50 day EMA is now moving sideways. Also note that after peaking in late April, prices have yet to approach previously established highs.


While the A/D line shows a slight increase in inbound money, the CMF and MACD are both moving in negative directions. These two indicators tell us that momentum is decreasing and less and less money is flowing into the market.

Gold appears to be in a holding pattern right now. As commodity prices have dropped, the need for inflation protection has also dropped. However, there is still a fair amount of economic uncertainty, putting a bud under prices.

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A Note on Home Prices

Click on the above chart for a larger version.

The above is from the latest Case Shiller home price index. Notice the area in the black square. Note particularly that is has been around this level for the last two years or so. Finally, notice that prices have been in a fairly tight range for this period.

There's been an awful lot of talk/hype/pixels spilled lately regarding home prices. The above chart tells us that home prices have been fairly stable for the last two years. In fact, as NDD has pointed out, home prices may be far closer to stabilizing than previous thought.

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Commodity prices and pre-WW2 recessions

- by New Deal democrat

In the last week I have been looking at some economic data series that go back to at least the 1920s to determine which might serve as leading indicators of deflationary busts. Previously I have looked at BAA corporate bonds and housing starts.

Now let's look at commodity prices. These have been kept since 1913. Some sort of commodity index is thought to be an element of ECRI's growth index. Similarly, frequently you will read Bonddad and others making reference to "Dr. Copper," the idea that the use of that industrial metal is a good guide to the health of the economy overall.

Wholesale commodity prices have a somewhat spotty record. First, let's take a look at the pre-WW2 recessions:



While it's true that YoY commodity prices went negative before the 1927 and Great Depressions, they were coincident indicators for 1923 and 1938. Further, they gave a false signal in 1936.

Here is the same series from 1998 to the present:



While wholesale commodity prices plunged during recessions, they gave scant notice of the dot-com recession, and continued rising ($147 Oil!) 7 months into the "Great Recession."

I suspect there is a more complex relationship at play. Inflationary recessions are in part caused when commodity prices rise much faster than consumer prices (meaning producers cannot pass on costs and profit margins are squeezed), which explains the 1923 recession (commodity prices rose 10% while consumer prices barely rose at all) and the energy shock portion of the "great recession." To the contrary, commodity weakness in the face of deflation in consumer prices as well may be a signal of an oncoming deflationary bust (1927, 1929, and thereby excluding 1936). If there is a reliable signal, it is more complex than simply a rise or fall in commodity prices.

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PCEs Down .1%

From the WSJ:

Consumer spending, a key driver of economic growth, was flat in May, the Commerce Department said Monday. Incomes rose 0.3%, providing some hope that spending could pick again later in the year.

Economists surveyed by Dow Jones Newswires were expecting spending to rise by 0.1% and income to register a 0.4% gain.

For April, spending was revised down to 0.3% from an initial estimate of 0.4%, with incomes also changed to 0.3% from 0.4%.

May's weak spending levels give further evidence that the recovery has slowed during the first half of the year, as a rebound in the unemployment rate combined with higher gasoline and food prices have caused consumers to tighten their belts.

Monday's report showed that when adjusted for inflation, spending actually went down 0.1% in May.

Let's take a look at the data:

Real PCEs have now moved lower for the last two months.

Services -- which comprise 65% of PCEs -- rose law month. Also note the overall trend of these purchases is increasing.

Non-durable goods comprise about 22% if PCEs. Notice this indicator has been more or less flat for the last four months.



Durable goods expenditures -- although comprising the smallest part of PCEs are by far the worst performing segment, falling the last three months.

The above charts indicate that consumers are feeling a pinch from several places: high gas prices (which are lowering car expenditures and thereby durable goods) and still high unemployment. As a result, they are pulling back on spending. As this accounts for 70% of overall economic growth, this is a bad development.

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Monetary Velocity Indicates Slowing Economy

While it's important for the Federal Reserve to increase money supply during a recession to give the spending public more money for purchases, it's also important for the pace of purchases to increase, indicating more and more people are conducting purchases at a faster pace. This is called monetary velocity, and it's a very important statistic. Although not a perfect predictor, there is a strong relationship between the percentage change from last year in various monetary velocity indicators and GDP growth (this is something I researched a few months ago).

Consider these charts:





All of the above charts show that the pace of YOY percentage change in monetary velocity has dropped and has taken GDP growth with it.

In short, the pace of money moving through the economy is decreasing, indicating a slowing down of overall economic activity.

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The Greek Tragedy - Sarkozy's False Dawn

French president Nicolas Sarkozy believes that he has found the solution to the Greek crisis, by striking a deal with France's banks in which they have agreed to restructure their Greek debts.

However, before he pops his champagne cork he would do well to remember that the deal involves using Brussels funds to reduce potential losses of private bondholders. This is not something that the Germans want, indeed it should also be noted the the Greeks have not yet accepted the deal.

The Greek parliament votes on the austerity measures tomorrow. In the event that the measures are approved, no one seriously believes that the measures will be faithfully and fully implemented in the coming years.

Am I too cynical?

Consider this, the country is already in political turmoil, any further cuts will push it over the edge to anarchy. It should also be remembered that is it guilty of committing fraud on a national level in order to join the Euro in the first place.

This is a false dawn, Greece will default and be pushed out of the Euro.

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Treasury Tuesdays

Last week, I wrote the following about the Treasury market:

While I'm not seeing anything to indicate a mass exodus from with security, I do think the rally is over for now. I'd take profits if you haven't already.

My concern for the rally was based on two things. First, the MACDs of both the IEF and TLTs were giving sell signals. In addition, the charts of both were starting to break down. The IEFS had dipped below support followed by a subsequent rally and the TLTs had broken their uptrend and were moving sideways.

Over the last week, the Treasury market has continued to benefit from Greece fallout and concern over the US economy.


On the daily chart, notice the IEFs are still in an upward rally and have broken through resistance to make a further advance. All of the EMAs are bullishly aligned -- all are moving higher, and shorter are above the longer and prices are using the EMAs for technical support. Also note the slight uptick in volume for the last few weeks, possibly indicating a buying climax.


Notice that the A/D line -- after making a strong advance, hasn't increased for a few weeks. This lack of volume is confirmed by the CMF. The MACD indicates momentum is decreasing.


The long end of the yield curve is still moving sideways and has again broken below the EMAs. Yesterday's price action was also a big move lower. Note the underlying technicals are giving way to bearish developments. The A/D line tells us new money is not flowing into the market. The CMF is moving lower as well, and the MACD shows a distinct lack of momentum.

The fact that the long end of the curve didn't follow the belly higher is interesting. That and the continued deterioration in the TLT's technicals tells me the long end of the curve is selling off -- or at least holding even for awhile. I'm not convinced the IEFs are going to maintain a strong rally here, largely because the long-end of the curve is not following through. As such, I don't see the IEFs current move higher continuing. That would analysis would change if the TLTs break higher to new levels.

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Housing starts as a Pre-WW2 leading indicator

- by New Deal democrat

This is another post concerning leading indicators from before the inflationary era. Previously we saw that BAA corporate bond rates were one such indicator. Now let's look at housing starts.

Unfortunately the only data for housing starts before WW2 comes from the Statistical Abstract of the United States, and is annual. While that limits our ability to judge its effectiveness somewhat, the good news in that regard is that, as Professor Edward Leamer has shown, post-WW2 housing starts typically haven't had their maximum impact on the economy until a year or even 6 quarters out. Thus if we see that housing starts peak the year before a recession, and bottom the year before a recession ends, that is strong supportive evidence that Leamer's theory holds for the pre-WW2 era of deflationary busts.

It is also good to keep in mind that the 1920's housing boom was every bit the equal in population-adjusted terms as the boom of the first part of the last decade.

So here is the data (in 100's):

Year	Nonfarm housing starts	Recession dates
1919	315	-
1920	247	1/20-
1921	449	- 7/21
1922	716	-
1923	371	5/23-
1924	893	-7/24
1925	937	-
1926	849	10/26-
1927	810	-11/27
1928	753	-
1929	509	8/29-
1930	330	cont.
1931	254	cont.
1932	134	cont.
1933	93	-3/33
1934	126	-
1935	221	-
1936	319	-
1937	336	5/37-
1938	406	-6/38
1939	515	-
1940	602	-

Sure enough, while the data isn't perfect, housing starts generally peaked the year before the recession began, and bottomed the year before it ended. As to the 1927-28 recession, note that housing starts declined -88k in 1926, - 39k in 1927, and -57k in 1928, which on a second derivative basis conforms to the hypothesis. Similarly, while the 1937-38 recession took up almost half of each of 2 years, it is impossible to know if the hypothesis works, after increasing 98k in 1936, they only increased 17k in 1937 before accelerating by 70k in 1938, which likewise on a second derivative basis conforms to the hypothesis.

Note also that like our era, the 1920s housing bubble popped several years before the severe economy-wide downturn kicked in.

In other words, while the fact that the data is annual rather than monthly limits our ability to test it somewhat, there is strong evidence that housing starts are an equally valid leading indicator in eras of deflationary busts, as well as the post-WW2 inflationary era.

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The Washington Uncertainty Situation

Consider this fact pattern: you are currently a business owner thinking about either hiring someone or taking out a loan. As part of this process, you think about political events over the next few months and see the following:

1.) Washington allows the debt ceiling debate to expire. As a result, US Treasuries sell-off, yields spike and the entire yield curve is thrown off. This of course increases the cost of your capital and makes the possibility of closing a loan nearly impossible. If you are looking at hiring a new person, you see this scenario as one that halts any forward economic momentum, meaning an already weak aggregate demand situation becomes weaker, making hiring someone a low priority.

2.) Washington solves the debate issue. In doing so they negotiate huge spending cuts. This lowers GDP growth (remember, government spending is a variable in the GDP equation). As such, this deal also hurts your company in the medium term, thereby lowering the possibility of taking out a loan or hiring somebody.

Here's the point of the above scenario: no matter what Washington does right now, all possible, publicly floated program options will lower overall growth. That means Washington is clearly a problem, creating a large amount of macro-level uncertainty that is in turn freezing action.

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Chickens Coming Home

In April 2010 I wrote that Greece would be eventually forced out of the Euro.

Now, some 14 months later, it appears that the EU is finally waking up to the reality of Greece defaulting on its debt and being forced out of the Euro.

The UK Treasury for its part is attempting to "do a Canute", and "persuade" banks to "take a haircut" on their £2.5BN visible Greek debt. Even if the "ever generous" banks were to be persuaded to "go to the barbers", and take a hit, that would be but the tip of the iceberg.

Banks have a far greater (unseen) exposure to Greece than the on balance sheet debt of £2.5BN. The banks failed to learn the lessons from the American toxic debt crisis, that almost crippled the world's banking system, and have repeated the mistakes of the past by creating and selling complex financial instruments based on toxic Greek debt.

Needless to say, the complexity of these instruments means that no one is exactly sure as to how badly the banks are exposed.

It is ironic that the banks have failed to learn the lessons of the last financial crisis, and even more ironic that they chose to play the same "Ponzi game" of selling each other toxic products in a country that committed major fraud on a national scale in order to join the Euro.

Chickens are coming home to roost!

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Equity Week in Review and Preview of the Upcoming Week/Month

Last week, I wrote the following about the market:

The IWMS and QQQs are both down ~ 9.5% from their peaks, while the SPYs are down ~ 7.25%, meaning the sell-offs are still in standard correction territory. This week, the most important developments will occur regarding the 200 day EMAs. The QQQs have already moved through this key technical area, while the IWMs and SPYs are holding their ground. If we see the IWMs and SPYs break this important level, the sell-off could get much worse.

There are two issues for the financial markets right now. First, for the last month the pace of economic deceleration in the US has led to concerns about the long-term implications for the recovery. Secondly, there is the issue of Greece; last week, the EU went through another white knuckle round of measures related to the Greek fall-out. Both of these events have led to bearish sentiment and market action over the last two months.


The chart above of the 5-minute/10 day price action shows that most of the action occurred in a very narrow price range. While prices twice attempted to move higher, they were unable to maintain upward momentum, and returned to their previous trading range.


The daily chart shows that prices are wedded to the 200 day EMA. The 20 and 50 day EMAs are both heading lower, but the 10 day EMA is now moving sideways. Also notice the slight uptick in volume over the last week and a half. While not significant enough to indicate a selling climax, it could indicate a price pause at the 200 day EMA level.


The technical indicators show that inflowing money more or less stalled in March. While we saw a slight uptick in May, it was hardly enough to justify a strong upward move. The CMF confirms this view, while the MACD indicates that momentum has been declining over the same period. Overall, this chart has strong bearish implications.


While the QQQQs dropped below the 200 day EMA, they are now about the 200 day EMA.


The IWMs have bounced off the 200 day EMA and are now entwined with the 10 and 20 day EMAs.

Right now, the 200 day EMAs are providing enough technical support to allow the markets to "catch their breath" from the recent sell-off. Traders have understandable concerns about the pace of recovery and the Greek debt situation. However, the disciplined pace of the sell-off and the stalling of the descent at the 200 day EMA indicate there is enough bullish sentiment to give the market pause -- at least for now.

However, a strong, multiple market break (involving 2 of the 3 major averages) below the 200 day EMA would be a watershed moment for this market. Should that happen, I would wait for a rebound into an EMA and then short.

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Weekly Indicators: economy in danger of full stall edition

- by New Deal democrat

In the rear view mirror, Q1 GDP was revised up 0.1% to +1.9%. Monthly data focused on home sales. Both new and existing home sales for May declined slightly from April, but in the longer perspective simply continued to bounce along the bottom they first made two years ago. Durable goods orders fared better, up 1.9% from the previous month. New orders for non-defense capital goods, a component of the LEI, increased 5.8% from the month before. Durable goods may be the first signal that the Japan-induced slowdown in manufacturing is ending.

Virtually all of the coincident high-frequency weekly indicators show a complete stall or something close to it this week:

Highlighting the deterioration in tone, the ICSC reported that same store sales for the week of June 18 increased 2.2% YoY, and decreased -0.7% week over week. The yearly comparison here has continued to decrease in the last few weeks. Shoppertrak reported a 1.0% YoY increase for the week ending June 18 and a WoW increase of 8.6%. YoY weekly retail sales numbers had been a bright spot, but comparisons have been slowly weakening. This week marks the first time when same store sales have joined other indicators in signaling a real slowdown.

Similarly, the American Staffing Association Index remained flat. The index has been rebenchmarked, so the new value is 87. This series is just barely above a stall, and is a significant danger sign. It is weaker than early 2007, but not trending down as during the recession.

Railfax was up 3.2% YoY for the week, or 9,200 carloads. Baseline traffic is actually down -0.14% from a year ago. Cyclical traffic is up 2.24% YoY. Intermodal traffic (a proxy for imports and exports) is up 2.71% compared with a year ago. Railfax continues to flirt more and more with going negative, and has almost done so on a carload basis.

The BLS reported that initial jobless claims last week were 429,000. The four week average increased slightly to 426,250. We have stabilized under 430,000, but this is still considerably higher from earlier this year.

Weekly BAA commercial bond rates remained the same at 5.73%. This compares with yields on 10 year treasury bonds decreasing .01% to 2.99%. The continuing decline in treasury rates shows fear of deflation, and the relative increase in corporate rates shows a slight increase in relative distress in the corporate market.

Adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that for the first 17 days of June 2011, $7109.4 B was collected vs. $115.2 B a year ago, for a decrease of $5.8 B, or -5% YoY. For the last 20 days, $139.2 B was collected vs. $131.6 B a year ago, for an increase of $7.6 B, or 5.7%. Use this series with extra caution because the adjustment for the withholding tax compromise is only a best guess, and may be significantly incorrect. Neverthless, that in the past few weeks some negative YoY comparisons have appeared is emphatically not good.

M1 was down -0.2% w/w, up 0.6% m/m, and up 13.1% YoY, so Real M1 was up 9.7%.
M2 was up 0.1% w/w, up 0.5% m/m, and up 5.3% YoY, so Real M2 was up 1.9%.
Real M1 remains very bullish, while Real M2 remains stuck in the caution zone under 2.5%

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker showed that the decline worsened -.2% to -4.7% The areas with double-digit YoY% declines increased by one to 10. The areas with YoY% increases in price decreased by two to 3.

There was some good news this week, however, and particularly so because it involves two areas that generally lead the economy:

Oil finished at $91 a barrel on Friday, which means it is now below the level of 4% of GDP (which according to Oil analyst Steve Kopits is the point at which a recession has been triggered in the past). Gas at the pump fell for the fifth week in a row, declining $.06 more to $3.65 a gallon. Gasoline usage at 9319 M gallons was +.8 higher than last year's 9241. This is the third time in four weeks that gasoline usage has exceeded last year, after a two month period of negative YoY comparisons. In other words, the Oil choke-collar continues to loosen.

The Mortgage Bankers' Association reported that seasonally adjusted mortgage applications decreased 2.8% last week. It was 4.4% higher than this week last year. This is the fourth week in a row that YoY comparisons in purchase mortgages were positive. Except for the rush at the two deadlines for the $8000 mortgage credit, these are the first YoY increases since 2007. Refinancing decreased 7.2% w/w with a slight increase in mortgage rates.

Ultimately it is the loosening of the Oil choke collar and the bottoming of the housing market in prices as well as sales which will lead to a longer-term, more sustainable recovery in the economy (that, and fixing systemic financial risk and dealing with global wage arbitrage, prospects as to which Versailles has not shown the slightest interest). The improvement in housing and oil as shown above is helpful. The concern is that contractionary policy emanating from Versailles will swamp those effects.

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The Washingotn Lobotomy Factory Continues

From the NY Times:

Congressional Republicans on Thursday abandoned budget talks aimed at clearing the way for a federal debt limit increase, leaving the outcome in doubt as they vowed not to give in to a Democratic push for new tax revenues as part of any compromise.

.....

Mr. Cantor had previously expressed optimism that the sessions could produce a deal. But he announced he would not be attending Thursday’s scheduled meeting because Democrats continued to press for part of the more than $2 trillion savings target to come from moves like phasing out tax breaks.

“As it stands, the Democrats continue to insist that any deal must include tax increases,” Mr. Cantor said in a statement. “There is not support in the House for a tax increase, and I don’t believe now is the time to raise taxes in light of our current economic situation. Regardless of the progress that has been made, the tax issue must be resolved before discussions can continue.”

Senator Jon Kyl of Arizona, the No. 2 Senate Republican and the party’s other representative in the talks, said later Thursday that he would also skip the next negotiating session as he and Senator Mitch McConnell of Kentucky, the Republican leader, turned up the pressure on President Obama to play a larger role in the push for a debt limit deal.

OK -- let's do something really radical right now like look at data and facts.

1.) Treasury debt is bench mark debt -- meaning it forms the foundation of the fixed income market. To play with this market in anyway invites extreme, economically dislocating problems.

2.) The US is running a trillion dollar plus deficit. That means the only way to solve the problem is with a combination of spending cuts and tax increases. Neither solution in isolation will solve the problem; it's mathematically damn near impossible.

3.) The GDP equation is very clear: government spending contributes to economic growth. And as the CBO clearly illustrates in its historical budget data, government spending has accounted for between 19% and 23% of US GDP for the last 30 years.

This is an utterly pointless situation at this point.

In case you're wondering, I still think Bernanke has the best solution for the current situation.

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Putting a stake through the heart of an employment canard

- by New Deal democrat

Since the site's occasional Doomoron troll has posted one of his usual central falsehoods, claiming "Bonddad and NDD were dead wrong in predicting the recovery of employment," it's time to set the record straight.

Bonddad is a big boy and can speak for himself, but as for me , in September 2009, as the economy was still shedding over 200,000 jobs a month, I wrote a 6 part analysis looking at indicators which in the past had led the jobs turnaround and concluded:

Based on my analysis above, November or December are when I believe that turning point will be reached, plus or minus one month in either direction. Let me be the first to acknowledge that this is not a scientific truth or certainty, but a best estimate based on a logical review of existing data with a long history that accommodates both traditional and "jobless" recoveries. Nevertheless, at least in terms of payroll growth, the analysis in these six installments cause me to predict that this will not be a "jobless recovery" for long.

So what are the facts? Here's how private jobs look beginning in August 2009:



As of the most recent revisions, the turning point was in February/March, only 2 months later than my window. I was off by a grand total of 63,000 jobs lost in January and February. In fact, before the most recent revisions, the 2010 current data showed my prediction to be spot on. By the way, the data looks the same for all jobs if you take out census hires and fires, but there's no graph for that.

Since then, every single month has shown job growth - clearly not enough compared with the 8 million lost jobs from 2007, but consistent growth nevertheless. I'll let you decide if that means I was "dead wrong in predicting the recovery of employment" or not.

As for our troll's hero, the Pied Piper of Doom, on January 13, 2010 he claimed that the only job growth in 2010 would be that of Census hiring. OOPS!

And while I was writing the above in 2009, he said:

overall unemployment rates are expected to enter into the double digits (and I'm only talking about the Bureau of Labor Statistics' U.3 index, not the more accurate, and much greater numbers posted in their U.6 index), and remain there throughout 2010

In fact, the highest unemployment reached in 2010 was 9.8% OOPS!! OOPS!!

He also predicted in March 2010 that the unemployment rate would not fall below 9.7% at any point in 2010.

In fact, unemployment fell below 9.7% in May and remained below 9.7% for all but two of the next 7 months. OOPS!!! OOPS!!! OOPS!!!

Facts are very inconvenient things. The above are just 3 of the over 100 false prophecies made by the Pied Piper of Doom about which that I have kept book. His acolytes have to have very big memory holes down which to pour and forget about all of those false prophecies.

By no means do I claim infallibility. But by now the facts have put a stake through the heart of the canard repeated by our troll.

From Bonddad:

On August 22, I wrote the following:

Let's tie all of this information about unemployment together.

1.) The trend of initial unemployment claims is down. We see this in the 4-week moving average, along with other data such as the Challenger job cut report, the decrease in the number of seasonally adjusted mass lay-off events and the decrease in the number of seasonally adjusted people laid-off in mass lay-offs. Because the number of initial claimants is decreasing, we can expect a slow improvement in the number of people unemployed for various lengths of time.

2.) The structure of unemployment is showing improvement. The number of people unemployed for less than 5 weeks has been decreasing since the beginning of the year. The number of people unemployed for 5-14 weeks and 15-26 weeks dropped in the latest jobs report. The longer term unemployed are still increasing, but given the drops in the other metrics this number should start to show a decrease within the next 4-6 months.

Now -- that leads to the final question: when will the jobs come back? In order for that to happen we need to see at least one quarter of a positive GDP and probably two. That means the soonest we can expect a drop in the unemployment rate would be the a few months from now and that is only under the rosiest of scenarios. The most likely possibility is it won't be until the end of the first quarter of next year before we start to see a ticking down (and that assumes a stronger rate of growth than I think is going to happen).

So, in the meantime what should we do?

1.) Make sure the longer-term unemployed are given benefits and other help to ease their suffering.

2.) Ask ourselves is there a way we can better implement the stimulus money to increase the rate of GDP growth and thereby see a faster drop in GDP?

As NDD has pointed out above, we started to see job increases in the first quarter of 2010.

In addition, if you look at the way the recovery has unfolded, it has done so more or less in line with what I wrote in the First and Starts Expansion. And, I should also add that both NDD and I have advocated for the creation of a new WPA, along with highlighting the importance of maintaining our infrastructure. See here, here, here, here, here and here.

None of this will of course appease the trolls, but then nothing ever will.

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Friday Dollar Analysis

Last week, I observed the dollar appeared to be forming a bottom. Quoting an article from Forex Blog, I noted the dollar was acting somewhat contrary to what we would anticipate: stronger economic data had led traders to a "risk on" strategy, which meant selling dollars while softer economic news led to a "risk off" strategy, meaning dollar purchases. In addition, as the euro has weakened over the last few weeks, the dollar has been the beneficiary.

Let's go to the charts.


On the longer chart, notice that prices have moved through resistance, only to drop back. However, prices again are bumping up against key resistance.


Prices are also forming a consolidating triangle.


The A/D line shows a big move into the market in early May, but not much since. The CMF confirms the lack of movement into the market. The MACD shows increasing momentum, but note the current peak is lower than the last, indicating overall declining momentum right now. While the 10 and 20 day EMAs are still below the 50 day EMA, the shorter EMAs are now moving sideways rather than lower. They are also intertwined. The downward angle of descent on the 50 day EMA is also lower.

The chart is showing many signs of a reversal in progress.

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Initial Claims Still Too High

From Bloomberg:

More Americans than forecast filed first-time jobless claims last week and consumer confidence fell, highlighting Federal Reserve Chairman Ben S. Bernanke’s concern that the slowdown in the economy may persist.

Applications for unemployment benefits increased 9,000 in the week ended June 18 to 429,000, Labor Department figures showed today. The level of claims exceeded the highest estimate in a Bloomberg News survey in which the median projection called for 415,000 filings. The Bloomberg Consumer Comfort Index dropped to minus 44.9 last week from minus 44.

After dipping below 400,000 for a brief time, claims have remained about 400,000 for too long. Here's the chart:

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The Great Rebalancing

From the WSJ:

Several factors are at play in the uneven global economy. One is a big rebalancing that many economists believe has been long coming. China and other developing economies have depended on exports to the U.S. to fuel their growth. Meantime, U.S. consumers feasted on cheap imports. In the process, China amassed a large trade surplus and the U.S. trade deficit soared. Global growth appears to be shifting, with the U.S. consuming less and exporting more, and the opposite happening in places like China. While healthy in the long-run because it reduces these imbalances, the change is proving to be highly disruptive, especially to the U.S. economy, which depends so heavily on domestic consumption.

Let's place this paragraph in perspective, as it says a great deal about what is happening internationally.


Above is a chart of the US' trade balance, which clearly indicates we are a net importer, and have been for some time. However, the recession greatly slowed our imports, and while the situation has worsened somewhat since then, it has still improved from the 2006-2008 position.


Above is a chart of Chinese imports. While it has rebounded from the drop we saw during the recession, it's rate of increase is clearly slowing. There are many reasons for this. The biggest is China no longer provides as strong a labor arbitrage as before, largely because their middle class is growing.


The above chart is perhaps the most important, as it shows a strong increase in US exports to China since the start of the latest expansion. There is still a vast difference which clearly favors China. However, the above chart shows that US manufacturing is helping to decrease the difference.

As NDD has already noted, households continue to de-leverage as well. This is one contributing factor in the slower pace of US consumption. Also adding pressure to US consumers are higher commodity prices and weak wage growth. While consumers are still spending, they are not spending as much as they did.

The US has a lot to do in order to catch-up with Chinese imports. But, we are clearly starting. In addition, US consumption is slowing, helping to lower demand for Chinese imports. But, the rebalancing process is very slow.

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Thursday Oil Market Analysis

Last week, I noted that oil finally moved through the 96/98 price level, which had been providing major support for a few weeks. This move signaled a shorting opportunity. However, underlying the oil market is this change in the underlying fundamentals:

This is something I've been talking about for some time: increased demand from the developing world is providing a floor for oil prices. That being said, let's take a look at the charts:


Oil prices have clearly moved through technical support and are now resting in the 92-94 price area. All the EMAs are moving lower and the shorter EMAs are below the longer EMAs. Prices are using the EMAs for technical resistance, another bear market characteristic. Momentum is weak. But most importantly, prices are below the 200 day EMA, the line delineating the difference between a bull and bear market.


On the 5-minute chart, the 95/95.5 are is providing upside resistance. This was the lower boundary of previous support. The 93 area is providing short-term support. However, the primary trend from last week is one of sideways consolidation.

The oil market is caught between two different issues. In the short-term, there is concern about the pace of expansion. Lower growth = lower oil demand = lower prices. However, as I pointed out above, there has been a strong, fundamental, long-term shift in the world's oil demand as countries like India and China have grown with their demand has supplementing US/EU demand, providing a long-term floor under prices. But currently, these countries are also tying to slow growth due to increased inflationary pressures within their respective countries. In other words, there is currently a great deal of negative sentiment weighing down oil prices.

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Some Notes on Existing Home Sales

Click for a larger image. Thanks to Calculated Risk for the chart.

1.) Over the last three years, despite the whipsaws created by the approaching tax credit expiration and subsequent expiration -- the median and average pace of sales appears to be in the 5 million/year range (I'm eyeballing the chart to make a point). This is despite the worst housing market in about 50 years.

2.) The current sales pace is more or less equal to the sales pace from the early 2000s.

3.) In the mid 1990s, the average/median sales pace was about 1 million homes/year less, coming in about 4 million. I doubt this is the level that sales are moving towards. If they were going to move to this level, they already would have done so.

Here's the point: to my eyes, existing home sales have hit their primary pace for this expansion.

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Corporate bonds and pre-WW2 recessions

- by New Deal democrat

One of the items I always list in my "Weekly Indicators" column is BAA corporate bond yields. Since yesterday I wrote about the existence of economic indicators in the pre-inflationary era before WW2, it's worth revisiting that data, including BAA corporate bonds,because one of the reasons I added it to my list is precisely because we have good data on corporate bonds (both AAA and BAA) for almost a century - since 1919. BAA bonds have shown more reaction to economic conditions, so that is the series I track.

Here is the graph of BAA corporate bond yields from 1919 through 1941:



Note that, with the sole exception of the 1927 recession, BAA (i.e., lower grade) corporate bond prices began to fall, and their yields rise, in advance of the onset of a deflationary recession, and then continued to rise as corporate creditworthiness became more risky during the recessions. BAA corporate bond yields also typically began to decline in advance of the end of the recessions. In short, they functioned as a leading indicator.

Now let's look at BAA corporate bonds for the last 10 years. Note that there is the same pattern in advance of and during the "great recession" of 2007-09. BAA corporate bond yields began to rise in 2005 and continued to rise as risk of corporate defaults increased during the recession. Yields declined in advance of the bottom of the "great recession" in 2009. Once again, they functioned as a leading indicator.



Now, take a look at the far right end of the graph above, showing 2010 and 2011. Do you notice the rising bond yields in anticipation of worsening corporate creditworthiness?

No? Well, neither do I.

Publicly available leading economic indicators from the pre-inflationary era are not non-existent. Over the next week, time permitting, I'll post some more series that go all the way back to the 1920s or even 1910s.

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Cost of Wars Is Finally An Issue

From the NY Times:

President Obama will talk about troop numbers in Afghanistan when he makes a prime-time speech from the White House on Wednesday night. But behind his words will be an acute awareness of what $1.3 trillion in spending on two wars in the past decade has meant at home: a ballooning budget deficit and a soaring national debt at a time when the economy is still struggling to get back on its feet.



As Mr. Obama begins trying to untangle the country from its military and civilian promises in Afghanistan, his critics and allies alike are drawing a direct line between what is not being spent to bolster the sagging economy in America to what is being spent in Afghanistan — $120 billion this year alone.

On Monday, the United States Conference of Mayors made that connection explicitly, saying that American taxes should be paying for bridges in Baltimore and Kansas City, not in Baghdad and Kandahar.

The mayors’ group approved a resolution calling for an early end to the American military role in Afghanistan and Iraq, asking Congress to redirect the billions now being spent on war and reconstruction costs toward urgent domestic needs. The resolution, which noted that local governments cut 28,000 jobs in May alone, was the group’s first venture into foreign policy since it passed a resolution four decades ago calling for an end to the Vietnam War.

And in a speech on the Senate floor on Tuesday, Senator Joe Manchin III, Democrat of West Virginia, said: “We can no longer, in good conscience, cut services and programs at home, raise taxes or — and this is very important — lift the debt ceiling in order to fund nation-building in Afghanistan. The question the president faces — we all face — is quite simple: Will we choose to rebuild America or Afghanistan? In light of our nation’s fiscal peril, we cannot do both.”

I was against the Iraq War from the beginning -- not for a higher reason such as wars are inherently immoral -- but instead for purely economy reasons: wars are expensive. And when the US got into Iraq, they did nothing to actually pay for the war effort. As the article notes, we've spent $1.3 trillion dollars on the two wars over the last 8 years. It has gotten us nothing. And this at a time when all that money could have been pumped into the US' sagging infrastructure. In short, ending the wars ASAP will at minimum end the drain they are putting onto the federal budget.

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Wednesday Commodity Round-Up

Today, I'm going to look closer at the copper market because it's a good harbinger of the economy. Let's start with the one year chart.

The primary point made by the one year chart is prices have broken a long-term uptrend. However, also note that from a long-term perspective prices have not dropped as sharply as anticipated given the overall weakness of the current economic numbers.


On the shorter chart, prices have continued to move in a down, up, down pattern. Notice the disciplined manner of the sell-off; prices have not collapsed in a massive sell-off, but have instead moved in a disciplined move lower. For the last several weeks, prices have moved sideways. Also note the 10 and 20 day EMA are now moving sideways, and both EMAs are entwined with the other. The MACD indicates momentum is fair. There chart says traders are in a wait and see mode.

Overall, this is really not a bad chart. Although China and India are raising rates, Japan is just starting to dig out from the earthquake and US manufacturing is slowing down, prices are still only down about 12%. Given the macro backdrop, the lack of a price collapse is very good news.

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Is the Stock Market Over Sold?

Consider the following chart from Bespoke Investment's Blog:

Here's the explanation:

The chart to the right summarizes where the S&P 500 and each of the ten sectors are trading relative to their normal trading ranges. For each sector, the circle represents where the sector is currently trading while the tail represents where the sector was trading one week ago. When the circle is in the pink or red area it is considered overbought, while the green areas indicate oversold levels.

I find the above chart interesting in comparison to the Treasury market. Consider these two charts:



While the bond market has benefited from increased concern about the EU area and the US' economic expansion, the upward rally has stalled for the last month-month and a half. While the inverse relationship between stocks and bonds is not perfect, it can be a telling indicator.

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