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

Last week, I wrote the following about the market:

There are two ways to look at the current market situation.

1.) The QQQs are making the first advance through important technical territory, to be soon followed by the other averages.

2.) The QQQs are rallying on average specific information, and the lack of confirmation from any of the other averages means the QQQs will be coming back down to a lower level.

Given the fundamental economic background, I think number two is by far the more likely analysis of the current situation.

In essence, the NASDAQ has rallied beyond resistance, but the other averages did not follow, which I believed indicated the QQQs were more likely to fall back through support. This turned out to be last week's market theme. However, the broader picture for the last few months is better illustrated in a P&F chart of the averages, which better shows the price action.


Click for a larger image

In April, May, June and July prices hit the 134 and 136 level, but fell back to lower levels. In addition, prices found technical support in the 126/128 areas. Put another way, the index has been trading in a 10 point range for the better part of 4-5 months. Sideways trading tells us several things.

1.) Traders are excited enough about the economy to push prices higher. but neither are they concerned enough to sell shares and more them lower.

2.) Right now, there is probably a fair amount of share turnover occurring, where traders who got into the market at lower levels are now selling their shares to take a profit and letting the new traders take new positions with the hope of higher market action.

3.) There is a big "wait and see" attitude in the market right now.


The QQQs show the exact same situation, except prices are moving between 54 and 59.


The IWMS show more volatility -- which is to be expected as this is a riskier average. But notice most of the volatility is to the down side. In addition, notice that, despite the volatility, prices are still trading in a pretty narrow range between 77 and 86.

When we pull back and look at the bigger picture, we see that all the major averages are trading in a price range, and have been doing so for between 4-6 months. This tells us that traders are "taking a breather." The sum total of the news is not sufficient to move the market higher nor lower. The good news is that there is still hope the current slowdown is temporary. However, the bad news is the market has little patience for poor performance.

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Weekend Diversion: Fire and Ice

- by New Deal democrat

Showing you that I'm not just a nerd for economic data, I'm a nerd for all data, here are two items from opposite sides of the geological spectrum.

First, fire: Hawaii's Kilauea volcano is one of the most awesome things I've ever seen. For years, it was spewing lava that ran in tubes down to the ocean - that is, until early March of this year, when fissures briefly opened up on the side of the volcano and the lava stopped. This completely drained the crater, called Pu'u O'o, from which it had erupted.

By early April, a small new pool of lava had formed at the bottom of the crater:



By a week ago, here is how it looked. Pu'u O'o is almost bursting at the seams with lava, to quote the geologists:



Lava has continued to fill the entire crater to the rim, and has begun to spill out. Here is the link to the webcam at the side of the crater.

Next, ice (or really, the lack thereof): Here is the most recent daily map of ice in the arctic ocean. This week, as you can see, the artic sea lane north of Asia is completely ice free. Ships can sail from the Atlantic Ocean east of Greenland, north of Russia, and through the Bering Strait to the Pacific Ocean, without ever encountering ice. The "Northwest Passage" through the islands north of Canada, has not opened - yet.



Have a nice weekend!

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Weekly Indicators: "Those who cannot see must feel" Edition

- by New Deal democrat

Without doubt, the rear view mirror news of a steep reduction in first Quarter GDP to a puny +0.4%, and the below expectations +1.3% 2nd quarter GDP, was the biggest item of the week. Durable goods and consumer confidence also fell - and durable goods had been expected to increase. Both of these are components of the LEI. Meanwhile the Case Shiller index was mixed, with month over month increases, but a deepening decrease in the March - May period. And then there is the utter lunacy in Washington, still continuing as I write this Saturday morning.

The resurrection of Andrew Mellon's mentality in Washington, that we shall shrink our way to prosperity, is doubly accursed, because the high-frequency weekly indicators showed a rebound for the second week in a row:

Plummeting Gasoline usage continues to be balanced by increasing retail sales

Oil finished at $95.70 a barrel on Friday. Gas at the pump rose another $.02 to $3.70 a gallon. Gasoline usage at 8999 M gallons was -6.6% lower than last year's 9632. This is the fifth week in a row that gasoline usage has been significantly less than last year, and the worst weekly comparison yet. Further, with the exception of 3 weeks, this comparison has been negative YoY since the week of March 12. With few exceptions, all this year Oil has been at or above 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. Indeed, the most recent decline in gasoline usage - similar to the decline in the last few months of 2007 - viewed alone must be viewed as flashing a full recession alarm.

Retail sales, however, tell a completely different story. The ICSC reported that same store sales for the week of July 23 increased 4.2% YoY, and increased 0.3% week over week. Shoppertrak reported a 4.3% YoY increase for the week ending July 23 and a WoW increase of 2.8%. This is the fifth week in a row of a strong rebound for the ICSC, joined for the second week by Shoppertrak.

The American Association of Railroads reported that total carloads increased 1.1% YoY, up 5800 carloads to 524,100 YoY for the week ending July 23. Intermodal traffic (a proxy for imports and exports) was up 1800 carloads, or 0.8% YoY. The remaining baseline plus cyclical traffic was up 3900 carloads, or +1.4 YoY%. This series has rebounded after going negative two weeks ago. Railfax graciously gave me their breakdown of baseline vs. cyclical carloads, which shows that baseline traffic was down 6104 carloads, or -3.3%YoY, while cyclical traffic was up 11,858 carloads, or +11.9% YoY.

As I pointed out last week, Professor James Hamilton of UC San Diego showed Oil shock recessions are triggered by overcompensating cuts in spending by consumers. In contrast, this year consumers appear to have instead cut back on gasoline in order to increase other retail purchases. Rail traffic likewise indicates a stall, but not a contraction at this point.

Employment rebounded slightly from its stall:

The BLS reported Initial jobless claims under 400,000 for the first time in 3 months last week, at 398,000. The four week average decreased to 413,750. Jobless claims are on the verge of breaking out to the downside from their recent range of 410,000 - 430,000.

The American Staffing Association Index rose 4 points to 88. The ASA indicates that this is a typical rebound from the prior July 4 holiday week decrease. This trend of this series for the year remains worse than 2007, but slightly better than the early recession of 2008.

Adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that withholding taxes collected for the first 18 days of July 2011 totaled $124.6 B vs. $116.8 B a year ago, for an increase of $7.8 B. For the last 20 days, $135.0 B was collected vs. $126.4 B a year ago, for an increase of $8.6 B, or 6.8%. In the past month, this comparison has improved considerably compared with its May - June stall.

Since these series all completely stalled in May and June, this two week rebound is welcome.

Housing sales continue to stabilize, and price decreases are getting "less worse":

The Mortgage Bankers' Association reported that seasonally adjusted mortgage applications decreased -3.4% last week. For the 8th time in 9 weeks, however, the YoY comparison in purchase mortgages was positive, up 2.2% YoY. Refinancing also decreased -5.5% w/w. The last 9 weeks have shown the best YoY comparisons since late 2007.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker showed that the asking prices declined -4.2% YoY. The areas with double-digit YoY% declines decreased by one to 8. The areas with YoY% increases in price increased by one to 8. This continues the record of improving YoY comparisons in this series.

We are at the point of maximum economic impact due to the abrupt 100,000 decrease in housing starts in spring 2010. The above two series indicate relative improvement going in to 2012.

Money indicators are generally bullish:

M1 remained even w/w, but was up 2.4% m/m, and up 14.6% YoY, so Real M1 was up 11.2%.
M2 was up 0.4% w/w, up 2.2% m/m, and up 7.8% YoY, so Real M2 was up 4.4%.
Both M1 and M2 have surged in the last 4 weeks. Real M2 is now solidly in the green zone above +2.5%, meaning that both money supply indicators are bullish.

On the other hand, weekly BAA commercial bond rates increased .04% to 5.75%. Yields on 10 year treasury bonds decreased .03% to 2.97%. This continues to indicate slowly increasing deflationary fears, and a slight increase in relative distress in the corporate market.

My old German grandmother used to have a saying which translates as "those who cannot see must feel." There is nothing in the high frequency data telling us that we are tipping over into a double-dip recession at this time, although very weak growth just above a stall has been evident for several months. But the economy is very vulnerable to a shock, as durable goods orders and plummeting consumer confidence show. Washington seems determined to provide that shock. America has been unable to see, and so it looks inevitable that shortly it will begin to feel.

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Jimmy Hoover Obama

- by New Deal democrat

There is little to do by way of economic analysis this week, because everything depends on the timing and extent of Washington idiocy.

As to which, as I type this Friday morning, it appears that we can confidently put to rest two assertions:

(1) this is all Kabuki and ultimately rational actors will prevail. Wrong. If this were just kabuki, it would have ended as soon as Wall Street called their servants in Washington and told them to make a deal. Instead, already we are paying a price in the markets and with the ratings agencies - who are likely to downgrade US debt even if a deal does emerge over the weekend. As Calculated Risk concedes this morning, "it is already impacting the markets." It does not matter that we can easily pay our debts, if there is a sufficiently powerful faction able to block those payments and willfully default.

(2) Barack Obama is a shrewd negotiator, backing the GOP into a corner. Wrong. Even if Obama were playing "11 dimensional chess" or "the long game," and actually facilitated this crisis in order to enact his "Grand Bargain," this has not happened. Instead the Teahadists have insisted on total, abject capitulation. Obama may have wanted a "balanced approach", but he has already moved from 2/3 cuts to 1/3 revenue increases, to 100% cuts and 0% increases, and still the GOP extrmemists have refused to budge. It is not out of the question that an extremist Tea Party wet dream will be passed by the House on Monday, leaving the Senate and the President with the options of adopting that bill, or facing immediate default. Via Big Tent Democrat a/k/a Armando, here is Robert Kuttner with a spot-on criticism:

This may sound churlish at such a moment, but in addition to blaming the recklessness of today’s Republican party, the man who deserves substantial blame for this impending economic doomsday is Barack Obama. For two and a half years, he has been all but training the Republicans, Pavlov fashion, to keep rejecting compromise. He has done this by rewarding them with a treat every time they up the ante or move the goal posts. [. . ] if the Republicans, like Europe’s leaders of 1914, miscalculate and create disaster, the responsibility will partly be theirs but also partly our overly eager-to-please president.

In other words, Obama may have the intellect of John Quincy Adams, and the soaring rhetoric of JFK or Reagan, but he has the economic instincts of Herbert Hoover, and the negotiating skill of Jimmy Carter.

Imagine if the Tea Party gets their capitulation now, and the world is saved from US default next week. They will pay no price with the public, who will believe that at the last moment, all became well again. Imagine what the budget "negotiations" will be like, let alone if the debt ceiling must be raised again before January 20, 2013. There is no good solution now, only the hope that once "those who cannot see, must feel," a cold and fearsome resolution will seize the electorate.

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Second Quarter GDP +1.3%; First Quarter Revised Down To .4%

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.3 percent in the second quarter of 2011, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.4 percent.

Let's stop right there. First quarter GDP was originally reported at 1.8%, which has now been revised down by over 1.5%. That's a huge revision and indicates the first quarter was a period of near contraction.

Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first.

The consumer has pretty much dropped out of the economic picture, pulling in his spending in reaction to the slow macro and employment environment. That means 70% of the economy is no longer participating, which is a huge problem. Most importantly, the 4.4% drop in durable goods purchases indicates the consumer is deeply concerned about the future and is avoiding long-term financial commitments. The durable goods data point also explains the sharp cancellation in exisitng home sales contracts in the latest report.

Real nonresidential fixed investment increased 6.3 percent in the second quarter, compared with an increase of 2.1 percent in the first. Nonresidential structures increased 8.1 percent, in contrast to a decrease of 14.3 percent. Equipment and software increased 5.7 percent, compared with an increase of 8.7 percent. Real residential fixed investment increased 3.8 percent, in contrast to a decrease of 2.4 percent.

This has been one of the bright spots in the economy during this recovery -- and continues to be. Over at Macroblog, David Altig has a nice post on this topic and concludes thusly:

That difference in the growth of consumption across the early quarters of recovery after the 1990–91 and 2001 recessions with little discernible difference in GDP growth across those episodes illustrates the pitfalls of mechanically focusing on specific categories of spending. In fact, the relatively slower pace of consumer spending in this expansion has in part been compensated by a relatively high pace of business spending on equipment and software:

Real federal government consumption expenditures and gross investment increased 2.2 percent in the second quarter, in contrast to a decrease of 9.4 percent in the first. National defense increased 7.3 percent, in contrast to a decrease of 12.6 percent. Nondefense decreased 7.3 percent, compared with a decrease of 2.7 percent. Real state and local government consumption expenditures and gross investment decreased 3.4 percent, the same decrease as in the first.

The drop in government spending is probably a big contributor to the drop in first quarter GDP (consider that a hint to Washington which will go completely unheeded).

This report stinks all around; there is no good news contained therein. The economy was near stall speed in the first quarter and is barely moving forward in the second.

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Friday Dollar Analysis

Last week, I wrote the following about the dollar:

Ideally, we'd see the dollar in a relief rally sometime over the next week or so to provide confirmation of the downside break-out. This is when I'd go short.

The dollar has been consolidating in a triangle pattern for the last few months. Last week, it broke to the downside. The ideal trade in this situation is to wait until the chart retests key technical levels and then trade in the direction of the break-out move. In practical terms, that means to wait until the index rallies into previous resistance, and then go short.

Let's take a look at the chart:


Last week, the vast majority of the price action occurred around the 21.10, 21.15 level. Prices dropped to the 20.90 level on Wednesday in reaction to the debt ceiling debate and poor economic numbers, but then rallied on Thursday and Friday, returning to the week's previous levels.


The daily chart shows prices have rallied into previous support. Also note the now bearish orientation of the EMAs -- the shorter are below the longer and all are moving lower. Prices have now found resistance at these levels. Also note the strength of the upward bars on the chart.

The dollar is being pulled from two distinct directions right now. On one hand, the debt debate and weak economic numbers are adding downward pressure to the index. On the other hand, the dollar is still considered a safe haven in times of distress. While we focus on our little legislative drama, remember that the EU situation continues to add further stress to the world's economies, thereby creating a bid for the dollar.

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Playing Politics With People's Lives - Republicans Fail

With 96 hours left to raise the debt ceiling, and in a sense save the world economy, the Republican Party has failed to gain sufficient internal consensus to support its plan that was scheduled to be put before Congress yesterday.

The leader of the Republicans in the House of Representatives, John Boehner, has lost his political credibility as he failed to persuade the Tea Party faction to support him.

As such, the vote and plan have been abandoned and the markets have continued to fall.

Proof, if ever it were needed, that the politicians care more about partisan politics than people's lives.

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The Greek Tragdey - The Irony!

Spanish government debt has been put on review for downgrade by Moody's.

For why?

It seems that the Greek bailout has increased risks for lenders to Spain.

Oh the irony!

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Prof. Geoffrey Moore on Leading Indicators from 1854-1938

- by New Deal democrat

Both academic economists like Prof. Brad DeLong, and lay observers have voiced skepticism, even "alarm," that economic indicators developed from post-WW2 inflationary recessions, usually brought about by Fed tightening, are applicable to deflationary scenarios brought about by asset and credit contraction like the present. In response to that, for over a month I have been testing publicly available economic data series that go back to the 1920s at least.

But did the founder of ECRI, and the father of modern business cycle research, Prof. Geoffrey Moore, leave behind no public record, in particular a record discussing Leading Indicators for pre-WW2 recessions? It turns out he did, in the form of a very thorough 1961 manuscript, available from the NBER via the St. Louis Fed, in which he identified and discussed Leading Indicators from the pre-WW2 period (as to some of which data went all the way back to 1854) and tested them to see if they applied to the post war recessions of the late 1940s and 1950s. They did.

The meat of his discussion is found in Chapter 3 of the manuscript, from which the following quotes are taken.

Prof. Moore summarized the study and its results as follows:

Before the war, in 1937, Wesley Mitchell and Arthur Burns picked a set of twenty-one indicators from among the several hundred time series that the National Bureau had analyzed in its study of business cycles. [NDD note: Mitchell and Burns' 1937 manuscript is here] After the war I undertook to redo the job and in 1950 published a new list of twenty-one indicators. They are classified in three groups— leading, roughly coincident, and lagging—according to their tendencyto reach cyclical turns ahead of, at about the same time as, or later than business cycle peaks and troughs. Many of the series in my list were either identical with or closely related to those in Mitchell's and Burns' list, but I omitted some that seemed redundant or of dubious value, and added some on the basis of new information. But both their study and mine were based on prewar information about the cyclical behavior of the data. The experimental part of the project consists in seeing whether this prewar information provided a useful guide to the postwar behavior of these data in relation to business cycles.
....
Most of the prewar relationships exhibited by the twenty-one indicators have survived a great many years and a wide variety of so-called "structural" changes in the economy. .... [T]he only series that should be shifted would be personal income, retail sales, and corporate profits. The first two now appear to be better classified in the roughly coincident group, and the third in the leading group. .... The other series have all behaved in a manner consistent, or at least not inconsistent, with their prewar record

(emphasis supplied)

Comparing his list with the 1937 list, Prof. Moore noted that:

[O[f the twenty-one indicators selected by Mitchell and Burns in 1937, only [two are] on our new list [of leading indicators]: business failure liabilities ... and average workweek in manufacturing

Prof. Moore categorizes the themes of the data series that proved useful as Leading Indicators as follows: (1) sensitive employment and unemployment indicators - in particular, hiring and firing in manufacturing, (2) commitments to new investment, (3) business profits and failures, and (4) inventory investment and industrial commodity prices.

He found that, as to the comparison of the postwar [WW2] with the indicators selected on the basis of prewar records did show that "What is significant, and encouraging, is the fact that the postwar record is substantially the same as the prewar record."

Here is Moore's list of Leading Indicators from the era before WW2, showing their typical leads in pre-WW2 recessions, and showing their continued viability thereafter, first as to economic peaks:



And here it is as to troughs:



Note that 4 of the leading indicators from the pre-WW2 era -- housing starts, stock prices, new orders for durable goods, and the manufacturing workweek -- are still on the list of 10 LEI's today. This should give us a great deal of confidence that what they show now is as valid as what they showed in the last 100 years and beyond.

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Playing Poltics With People's Lives

US politicians on Capitol Hill continue to play politics with people's lives, and as yet refuse to agree to raise the debt ceiling.

Ideology may give comfort to those who live and breath politics. However, the rest of the world needs a real job in order to feed and cloth itself. The damage being done to the world economy by the intransigence of the Prima Donna's on Capitol Hill is putting the livelihoods of millions at risk.

Irrespective of whether or not the debt ceiling is raised in time to avoid default, none of those involved in this disgrace deserve to be re-elected.

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In Response to Professor Thoma

Professor Mark Thoma over at Economists View is asking an interesting question:

When I was trying to figure out if there was a housing bubble or not, the academic economists I had come to trust said no, the fundamentals explain this. Sometimes this was backed by econometric analysis. But many people outside of academics, or at least a few, said there was a bubble. This was often backed by logic, intuition, and simple charts rather than sophisticated econometrics based upon theoretical constructs. For the most part, I dismissed the people I should have listened to, especially if it contradicted what the academics were saying. Most of all, I relied too much on the experts in the academic community instead of listening to all the evidence and then thinking for myself.

One of the reasons I didn't listen is that until I started blogging, I was pretty arrogant about academic economists. As far as I was concerned, pretty much, academic economists knew more about everything related to economics than anyone else. But one thing I've learned from the wide array of voices in the blogosphere is that I was wrong. Academic economists have a lot to learn if they are willing to listen.

I thought I would weigh in with some thoughts.

I remember one of my first economics classes where a professor was talking about consumers and how they plan for inflation. She argued that consumers wake up every day trying to figure out what the inflation rate would be. I disagreed, saying this is not a conversation many people have on a regular basis. She responded by saying I thought that people were stupid, thus ending the conversation. What she was arguing was that all people are rational -- a basis of the Chicago school of economic thought. I felt then -- and still argue to this day -- that this is a faulty premise on many levels. Hence, I believe that any model based on this theory is inherently wrong and should be completely ignored.

This leads to my two basic problems with most academic economists. The first is the use of models to predict behavior and economic performance. The US economy is over $14 trillion dollars in size with over 300 million people spread out over an incredibly diverse and wide ranging geography that has literally millions of different cultural biases and preferences. There is no way you can model that. Period. To argue that you can model that is folly.

Second, the basic assumption that people are rational and make all of their decisions rationally. No. That does not happen at all. We are not Vulcans, we are humans with a tremendous amount of emotional complexity that prevents purely logical decision making. To argue we are rational is to ignore reality. And to base an entire discipline on that assumption is the height of arrogance or stupidity (or a combination of both).

In short, I think a fair amount of academic economists are stuck in a theoretical world that has absolutely no bearing on reality. They remind me an awful lot of law professors who write articles on incredibly bizarre topics that get published in law reviews to be read by other academics who then write more obtuse responses. This creates a great, self-perpetuating cycle of more and more ridicules research that has no use to the everyday legal practitioner.

What I do look for are economists who utilize relevant information. A great example is David Rosenberg, who use to be with Merrill Lynch and is now with Gluskin Sheff in Canada. He uses all sorts of information to derive his conclusions. Mark Zandi at Moody's is another good example, or Paul Kasriel at Northern Trust or Dr. Ed Yardeni or the folks at the Liscio report. I should also add that a fair amount of economic blogs fall into this camp, which makes them that much more relevant. All of these people look at data, compare it to other relevant data and try to figure out what is going on. As such, a lot of these people wound up being right about the housing bubble, the recession and a whole lot more. And in case you're wonder -- this is the type of analysis we try and do here at the Bonddad Blog -- look at the data to see what is happening and figure out where things might be going.

The primary difference that I see between the academic world and the real world economists is the difference in the use of their information. Academic economists seem to be interested in writing for their own little bubble world of other academic economists while the real world economists are trying to create "actionable information" to determine where to allocate money. As such, the academics seem pretty irrelevant to those of us in the real world.

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Thursday Oil Market Analysis

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

Give the fundamental supply/demand situation, I still expect prices to be moving higher. But right now, we're seeing the standard issues of prices moving through a large number of technical resistance levels on their move higher, which is to be expected given the chart.

After selling off about a month ago, prices have slowly moved higher. But they have encountered resistance as they have hit important technical levels such as Fibonacci levels and EMAs. Let's take a look at the charts:


The above chart shows that prices consolidated between 99 and 100, but then sold off yesterday.


Prices were in a rally and did move through the EMAs. However, notice the candles over the last few days -- the days when prices were above the EMAs -- were weak, indicating there was little demand pulling prices higher. Also note the strength of yesterday's bar moving lower, which was quite strong. Finally, the MACD is about to give a sell signal.

Yesterday, all speculative commodities took a hit as the markets started to seriously consider the possibility of a US default. Right now, this trumps the overall supply and demand situation. Should a default occur, expect prices to move lower, as a default will slow economic growth and thereby lower overall demand. However, if a default is avoided, expect the upward trajectory to continue.

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We Must Destroy the Economy to Save It

After thinking about NDDs position yesterday, I want to go on record as saying I agree with him.

A situation that should have gone off without a hitch has now demonstrated the US Congress is an utter joke, completely unable to govern: The debt ceiling debate should have been a non-starter -- a simple voice vote in the House where everybody realized voting for the increase was in the nation's financial self-interest. Instead, we've seen the most ridicules ideas rise to the top of the political debate.

There is no leadership: Boehner has no control over the Tea Party Wing and Reid has little real power. Pelosi -- who does seem to have more control over the more liberal house elements -- has been left out of negotiations. Obama has become more adept at using the bully pulpit, but doesn't seem to have the nuanced negotiating skills necessary for intricate negotiations. As such, there is no figure who can ram something through at the last minute.

There is every indication the economy is slowing: The consumer is trimming his expenditures, investment is weaker and manufacturing growth is slowing. The only component of the GDP equation that can increase growth right now is government spending. And yet we're talking about massive cuts large enough to send the economy into a mild recession. Why don't we ask England how their experiment with austerity is going? Or Ireland? And then there is this observation regarding austerity:

Lagarde also urged caution in adopting large deficit-reduction measures, saying that “the impact is likely to be negative” in the short term. “Our research has found that a 1 percentage point cut in the deficit could lower growth by about one-half percentage point over two years,” she said. “This is why measures that are legislated now — but only reduce deficits in the future, when the recovery is more robust — would be particularly helpful.”

There is no acknowledgement of the real problem: when was the last time anyone in Washington talked about unemployment? 'Nuff said.

There is no talk of a real solution: if you want to balance the budget, you have to talk about tax increases. The gap between revenues and expenditures is simply too large to consider any other option. And yet, those are off the table -- despite the fact the overall tax burden is the lowest it's been in nearly 50 years. This is amazingly stupid.

I have called the culture in Washington the "Washington Lobotomy Factory" for a reason: there is no mention of logic or facts; instead, everything is pure politics. No one wants to solve a problem; everyone wants to score political points, and nothing more.

As such, let them bear the fruit of their actions -- or in-actions. Shut the government down from sheer stupidity. Let the economy take a hit and contract for at least a quarter and probably two. And then vote all of these idiots out of office.

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Debt Ceiling Debacle Must Reads

The Effect of A Downgrade on All Levels of the Economy

How a Downgrade Will Effect Consumers

Three Signs that Investors are Getting Antsy

Boehner Faces Rebellion

I love the smell of stupidity in the morning. It smells like .... Washington.

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The British Gas Price Fix Offer

In the wake of the rather paltry £2.5M fine levied by Ofgem against British Gas failing consumers who complain (British Gas made operating profits of £585M for the first half of 2010).

Watch out for the nice little rip off they tried on my dear old mum recently.

British Gas offer to fix your prices until 2013.

Good offer?

No....you have to pay an extra 5% on top of their new standard tariffs if you wish to fix.

Also, "oddly enough", there is no mention of what happens if prices fall (even if that is unlikely). It seems the hapless customers lock themselves into a fixed price which won't fall if British Gas drop their prices.

Rip off Britain!

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Playing Politics With People's Lives - The People Fight Back

I am pleased to see that the American people have woken up to the fact that the politicians on Capitol Hill have let them down.

The switchboard at Congress almost crashed as Americans voiced their anger at the stalemate in Washington over raising the country's $14.3 trillion debt ceiling.

The vote on raising the debt ceiling has been postponed until Thursday.

The message to the politicians is simple, don't play politics with people's lives!

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Wednesday Commodity Round-Up

Today, I want to take a look at copper, as this chart is giving me hope for the next few months.


First, note that from the beginning of February to roughly the end of June, copper was in a downward sloping pennant pattern, eventually finding support around the 200 day EMA -- the line the generally separates bull and bear markets. Since than, copper has rallied.


The above chart shows that copper prices jumped through resistance and from the 200 day EMA, quickly making strong gains over about a week of time. During this rally, prices printes some very strong bars on very impressive volume.


Since the, prices have consolidated sideways, using the 10 day EMA as technical support. Volume has dropped off, but we've not seen an accompanying drop in prices. The EMAs are becoming bullishly aligned.


The A/D line does not show an outflow, but the CMF is lower. Most importantly, the MACD has just given a sell signal.

This chart gives me a bit of hope, as copper is a good leading indicator. However, this is one of the only charts lately that shows any sign of anticipated economic expansion.

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Thought for the day

- by New Deal democrat

"Diejenigen, die nicht sehen können, müssen sich fühlen."

Translation: "Those who cannot see, must feel."
- my old German grandmother

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YoY Housing price declines lessen further in July

- by New Deal democrat

Housing Tracker's final report of asking prices in 54 metropolitan areas is in, and it shows that the YoY rate of declines continues to lessen, although at much less brisk a pace than the first half of this year. Asking prices were -4.4% less YoY in June, and -4.2% less YoY in July. Here's the updated chart:
;

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%	-4.2%
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%	---

Additionally, Housing Tracker's updates continue to show that inventory is also declining.

Note that Housing Tracker is current through last week, vs. this morning's Case-Shiller report, which is an average of March, April, and May. Because of the distortions resulting from the existence and the distortions resulting from the $8000 tax credit that expired a year ago, it is interesting to compare 2011 YoY vs. 2009 as well as 2011 YoY vs. 2010. Here are the numbers - the first column is vs. 2010, the second vs. 2009:

February: -3.5% -2.7%
March : -3.9% -1.4%
April : -4.2% -0.6%
May : -4.5% 0%

In short, as the distortions abate in the YoY comparisons, I expect Case Shiller to join Housing Tracker (which is current through last week) in reporting "less worse" declines.

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A further, heretical, thought on the debt debate: Bring on the Default!

- by New Deal democrat

I just wanted to add a brief, and totally out of the box, comment to Bonddad's last post.

Allowing the US to default, even temporarily, on its debts, would have horrible reverberations to our, and the world's economy, possibly sending us right back into economic contraction, and would increase the interest on all of our debts for years to come.

Making cuts to Social Security and Medicare, and imposing a strait-jacket of fiscal austerity, would have horrible reverberations for our economy and the welfare of 90% of our citizens, would undoubtedly only be the first course in the Grand Banquet of cuts to the safety net, and would cause misery and privation that would last for decades to come.

In short, at this point, as horrible as the disease is, the posited cure is even worse. Given the choice, bring on the default, and we the voters will fix things in 2012.

P.S.: Let me just add that I agree with the first Anonymous below. A "clean" bill or even abolishing the debt limit entirely is the best choice. My comment above speaks to the abysmal choices that are actually being debated in Versailles.

P.P.S.: Prof. Krugman makes a similar point.

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Thoughts on The Debt Debate

1.) Of all the debates we could be going through at this point, this is the dumbest possible. The last two employment reports have been terrible prints, consumer spending is slowing and manufacturing is also showing weakness. All that leaves is government spending to help the economy along. And now we're going to slow that down, too.

2.) Obama is actually leading. This has been a pleasant surprise. For the last two weeks, he's been using the bully pulpit pretty effectively. Of course, it would have been nice if he'd been doing this for the rest of his presidency ....

3.) The current state of the Republican party shows the long-term effects of living in a hermetically sealed world of right wing radio and Fox news: you become dumber than a post. After these yahoos get their decreased spending, they're going to wonder why GDP prints negative for at least one quarter and probably more.

4.) The level of disappointment and shame I feel regarding the incredibly sorry state of affairs in Washington is incredibly high. All of these people are pathetic.

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Playing Politics With People's Lives -The Columbian Stand-off

Sadly, for those of us who live in the real world, the politicians in the US have so far failed to reach any form of agreement wrt raising the debt ceiling.

Partisan hatreds and ideology are driving this protracted Columbian stand-off, whilst the economic well being of real people who have to earn a living in the real world is being held hostage by the antics of those on Capitol Hill.

he risk of a US default is increasing, as talks between President Obama and Boehner (the leading Republican in Congress) collapsed acrimoniously.

Needless to say, the politicians are blaming each other for this mess.

President Obama made a television address in which he stated:

"We risk a deep economic crisis - this one almost entirely caused by Washington."

Boehner claims that he "had made a sincere effort to work" with the White House but that divisions could not be narrowed.

Playing politics with people's lives will lead to economic disaster, and will cost both the Democrats and Republicans dear in the next elections.

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Treasury Tuesdays

I wrote the following about the market last week:

The treasury market is still caught between conflicting trends. On one hand, the US is the "least dirty shirt in the hamper," meaning it is still considered a safe haven play in relation to the goings on in Europe. But there are big problems at home, especially as the debt ceiling drama plays out. The latest inflation data is pretty benign, indicating that won't be a reason for a sell-off. However, I'm still concerned that Wall Street has their collective fingers on the sell button.

Let's start by taking a look at the longer picture.


The IEFs have been rallying since late April. The originally started to rally over concern about the pace of expansion in the US. In addition, fears about the EU situation added to upward pressure during the rally. Prices are clearly about the 200 day EMA, and the shorter EMAs are bullishly aligned. Prices have hit resistance at previously established levels.


The longer part of the yield curve has rallied as well, but it is closer to the 200 day EMA. In addition, the shorter EMAs -- are less strong in their orientation. Prices are far from previous highs, and in fact have hit resistance at highs established within the last few months.

These two charts tell us the yield curve is still very steep, which tells us a few things.

1.) There is little concern about the Fed raising rates anytime soon.

2.) There is little concern about inflation.

3.) The US Treasury market is still a safe haven in a time of uncertainty.

Also note the middle of the curve is near highs established last year. While they could go lower -- that effective yield on the 10 year could conceivably drop to 0% -- this is realistically out of the cards. For the last few months, yields have moved around the 3% level, which seems to be an appropriate return based on all available factors.

Let's take a look at the shorter chart:


After approaching previously established highs, prices have fallen back, and are now entangled with the 10 and 20 day EMAs. The 10 and 20 day EMAs have reached previously established levels, with the 10 day now moving lower. As I mentioned above, the 3% interest area seems to be the "center of gravity" right now.

Neither market has any firm direction right now and is instead at the mercy of macro economic and political events. There is no trade that I can see right now.

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What DeLong Said

From Brad Delong

But Wall Street is not all that matters. A lot of small businessmen and women out here in what you people in Washington sometimes call "flyover country" are and have for some time been (a) desperately anxious about the shortage of demand, (b) somewhat anxious about instability in the tax code, and (c) slightly anxious about what their health-insurance options will be come 2014. Now they are very anxious about (d) the prospect of what they call "a U.S. government bankruptcy" on August 3, 2011. If the people I talk to are in any sense representative, this added risk that they perceive has been a material drag on the U.S. economy this year and will continue to be a material drag until resolved.

Yep.

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Service Spending Taking A Big Hit

Last week, I noted that PCEs were lower during this expansion than the last two. Today, let's take a more detailed look into PCEs to see where the drop in spending is taking place.


The YOY percentage change in durable gods is strikingly strong. While some of the increase is a reaction to the negative reading during the recession, the recent readings indicate consumers are still making purchases in durables in a fairly strong way.


The YOY percentage change in non-durables spending is a bit weaker than the last two expansions, but not by much.


Spending on services is -- by far -- taking the biggest hit.

Services account for about 65% of PCEs -- meaning the drop in service spending is that much more important.

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Economic Week in Review

Last week was pretty light on economic news. However, we did get some numbers.

Consumer spending: there was no news in this area of the economy.

Manufacturing: The Philly Fed manufacturing index increased from -7.7 to 3.2 -- a reading of barely positive. The new orders and activity component were also reported at around a reading of "0" indicating a weak overall picture.

Housing: Housing starts jumped 14.6%, but the general trend of the housing market is still sideways. We need at least a few more months of data to confirm this is a new trend and not an overreaction from a depressed reading the previous month. Existing home sales decreased .8%, largely because of an unexpected spike in contract cancellations. My reading of this data point is that consumers are becoming increasingly skittish about the economic outlook and are therefore looking to avoid any long-term financial commitment.

Finally, the leading economic indicator increased .3. However, the internals were less than inspiring. Save for a big bump in M2 and a wide interest rate spread, the rest of the internal numbers showed a very weak underlying economy.

Overall, there was little last week to indicate the economy is coming out of its current soft patch.

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Playing Politics With People's Lives

The markets are beginning to realise that, thanks to the intransigence of the politicians, the US may well default on its debts. The opening sessions in all major countries this week saw falls in their key indexes.

Sadly, the politicians are more concerned with playing politics with people's lives rather than raising the country's $14.3 trillion debt ceiling.

Some cynics are of the view that the chaos caused (and flight to gold - today it touched an all time high of $1,622.49 per ounce) by the ongoing impasse in raising the debt ceiling is benefiting those with an interest in gold.

Let us trust that those politicians who are blocking a deal are not found to have significant holdings of gold.

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

Last week, I wrote the following about the markets:

With all three major ETFs, I'd use the 200 day EMA as a lower support target. I'd place upside resistance for the SPYs at 137, the QQQs at 59 and the IWMs at 86.5 - although I don't expect any of the averages to hit those levels soon. For now, the markets are still waiting out the EU situation and the determination of the US' economic trend.

The QQQ's did hit that number and higher -- they closed the week at 59.6. But the SPYs ended the week at 134.5 and the IWMs at at 84. In addition, the transports have yet to rally strongly, taking away important confirmation of the QQQ rally.

Let's take a look at the charts.


Prices dropped on Monday, but gapped higher on Tuesday then consolidated on Wednesday. They again gapped higher on Thursday and consolidated gains on Friday. This chart is very encouraging for the bulls, as it shows a strong upward trend.


However, the daily chart shows a fair amount of upward resistance from the highs of several weeks ago and those established in early May. While the EMAs are bullishly aligned (the shorter are above the longer and all are moving higher) they have just recently "unbundled" and only recently started to move higher. In addition, the A/D and CMF lines are giving contradictory volume information and the MACD just went positive.



In contrast, the QQQs moved through important resistance levels, but did so on weak volume.


But the transports are nowhere near important upside levels to give us any kind of positive reinforcement.


The IWMs also have yet to make a new high. Their chart resembles the SPYs with prices being below major points of resistance.

There are two ways to look at the current market situation.

1.) The QQQs are making the first advance through important technical territory, to be soon followed by the other averages.

2.) The QQQs are rallying on average specific information, and the lack of confirmation from any of the other averages means the QQQs will be coming back down to a lower level.

Given the fundamental economic background, I think number two is by far the more likely analysis of the current situation.

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Weekly Indicators: economic cross-currents edition

- by New Deal democrat

This was a sparse week for monthly data. Housing permits and starts both increased to near 12 month highs. Partly as a result, the Leading Economic Indicators for June were reported up .3, and May was revised to up .8. This appears to take a near-term economic contraction off the table (idiocy in Washington permitting).

The high-frequency weekly indicators rebounded. Let's take the opportunity to review their recent trends, because there are interesting, but mixed, currents in employment, housing, sales, and money supply:

Employment is stalled:

The BLS reported that Initial jobless claims last week were 418,000. The four week average decreased to 421,250. Jobless claims appear to have stabilized in a range generally between 410,000 - 430,000.

The American Staffing Association Index declined 3 points to 84. The ASA indicates that this reporting week included the July 4 holiday and so reflects seasonal weakness. This trend of this series for the year is distinctly worse than 2007, but slightly better than the early recession of 2008. Unless this report increases significantly in the next few weeks, it will have completely stalled.

Both of these generally have completely stalled since the end of the first quarter.

Housing shows signs of stabilization, or at least getting "less worse":

The Mortgage Bankers' Association reported that seasonally adjusted mortgage applications decreased -0.1% last week. For the 7th time in 8 weeks, however, the YoY comparison in purchase mortgages was positive, up 8.3% YoY. Refinancing also increased 2.3% w/w. The last 8 weeks have been the best for this series since late 2007.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker showed that the asking prices declined -4.1% YoY. The areas with double-digit YoY% declines decreased by one to 9. The areas with YoY% increases in price remained at 7. Except for 3 weeks ago, this is the best showing in 4 years.

Mortgage applications, like permits and sales, show a slow improvement in the housing market over the least few months. Prices show slowing declines. I read a report this week that homeowners had finally thrown in the towel to bearishness, with a large majority believing their houses would decline in price for the next year, and about half believing the decline would go on for up to 5 years. If we saw that kind of sentiment in the stock market, it would be a strong sign of a bottom. Housing brings out strong opinions, but the data is the data.

Gasoline and retail sales show substitution but not overcompensation by consumers:

Oil finished over $99.87 a barrel on Friday. This is decisively back above 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 rose another $.04 to $3.68 a gallon. Gasoline usage at 9028 M gallons was -2.2% lower than last year's 9435. This is the fourth week in a row that gasoline usage has been significantly less than last year. Further, with the exception of 3 weeks, this comparison has been negative YoY since the week of March 12.

The ICSC reported that same store sales for the week of July 16 increased 4.5% YoY, and increased 0.4% week over week. This is the second week in a row of the best YoY comparison in months. Shoppertrak reported a 3.2% YoY increase for the week ending July 16 and a WoW increase of 3.1%. YoY weekly retail sales numbers had been slowly weakening for a month or so, but this week is the fourth week of a rebound for the ICSC, now joined by Shoppertrak.

The American Association of Railroads reported that total carloads increased a tiny +0.4% YoY, up 18000 carloads to 511,700 YoY for the week ending July 16. Intermodal traffic (a proxy for imports and exports) was up 2600 carloads, or 1.2% YoY. The remaining baseline plus cyclical traffic was down 800 carloads, or -0.3 YoY%. This series went negative for the first time one week ago after deteriorating all year.

Research by Professor James Hamilton of UC San Diego has shown that in the past, Oil shock recessions are triggered by price increases to levels higher than at least several years past, causing consumers to overcompensate, cutting back spending more than 2 times the amount that is spent because of increased gasoline prices. The wisdom of that research is borne out by the gasoline usage and retail sales statistics above. Contrary to Oil shock recessions, this year consumers appear to have cut back on gasoline sufficiently to continue to make retail purchases. There was a 3 week period in June when gasoline usage went positive YoY, and it was in that same time frame that weekly same store sales recorded their weakest YoY advances. Consumers do not appear to be overcompensating, hence an overall stall rather than a contraction. Rail traffic likewise indicates a stall, but not a contraction at this point.

Money indicators have generally turned outright bullish:

M1 was up 1.1% w/w, up 2.8% m/m, and up 15.1% YoY, so Real M1 was up 11.7%.
M2 was up 0.1% w/w, up 0.1% m/m, and up 7.8% YoY, so Real M2 was up 4.4%.
Both M1 and M2 have surged in the last 3 weeks. Real M2's move has put it solidly in the green zone above +2.5%, meaning that both money supply indicators are bullish.

Adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that for the first 13 days of July 2011, $97.9 B was collected vs. $88.2 B a year ago. For the last 20 days, $137.2 B was collected vs. $124.9 B a year ago, for an increase of merely $12.3 B, or 9.9%. Use this series with extra caution because the adjustment for the withholding tax compromise is only a best guess, and may be significantly incorrect. In the past few weeks, this comparison has improved considerably.

The only weak spot in the money picture is that weekly BAA commercial bond rates declined -.13% to 5.71%. Yields on 10 year treasury bonds decreased .18% to 2.94%. Over the last 3 months, both yields have come down, but BAA corporates have gone generally sideways for the last 2. This indicates slowly increasing deflationary fears, and a slight increase in relative distress in the corporate market.

Overall, the picture that emerges is that of improving money conditions, and virtually everything else close to flatlining. The trend, however, has been from positive to stall in employment and transportation, vs. negative to flat in the housing market. The negative trend in gasoline sales is being offset by the positive trend in other retail sales. Since housing is a long leading indicator, and money supply a shorter term leading indicator as well, I continue to believe that the stall will not lead to a meaningful contraction (idiocy in Washington permitting), and we may be at the beginning of the ultimate bottoming process in the housing market.

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How The Debt Debate Is Hurting the Economy

From Slate:

This Northern Virginia consulting firm, for instance, has recommended that companies "collect any fees owed your company by the government as soon as contractually possible, just in case" and "anticipate delayed program starts (for the limited number of new programs), and delayed acquisitions for upcoming solicitations." If the Federal Reserve is doing contingency planning for a potential default, shouldn't you be too?

Wall Street is also preparing for the possibility that the government might miss its deadline. According to a New York Times story, investment banks and boutique firms alike are looking for ways to reduce exposure to a possible default—and even to make money off of it. For example, at Wells Fargo "executives said they had been keeping close tabs on the bond market and making sure they had ample cash on hand." The Times report adds: "[E]ven if a deal is reached in Washington, some in the industry fear that the dickering has already harmed the country's market credibility."

Hedge funds and venture capital firms—major investors in new and growing businesses—have also changed their ways, just in case. George Soros' $25.5 billion Quantum Endowment Fund has pulled back trading and is now holding a whopping 75 percent of its assets in cash—just hanging onto them, not investing them, not using them to help the economy grow. Why? In part the debt crisis in Europe, in part China's tamping down on inflation, and in part the "debate over the U.S. debt ceiling," Bloomberg reports. Many other money managers, like the giant asset manager BlackRock, are doing the same.

The almighty American consumer has also started getting worried, according to a Goldman Sachs note this week. Goldman attributes the recent hit to consumer confidence to a few things, including high unemployment and the failure of the recovery to pick up steam. But it says that all the news reports coming from Capitol Hill about the world's biggest economy teetering on the verge of an unnecessary default are starting to have an impact too.

"A sharp drop in measures of consumer confidence in recent weeks coincides with a surge in news coverage on the debt ceiling," the company notes. "A model incorporating lags of the unemployment rate, the year-over-year change in the unemployment rate, real average hourly earnings, the S&P 500 index, home prices, and consumer lending standards … explains only about half of the recent drop," it says, suggesting worry over the debt ceiling makes up much of the rest. "Confidence in government economic policies" has fallen to the lowest level in 50 years.

Not that any of this matters to the Yahoos in Congress...

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Lack of Demand Is Big Problem

Above is a chart of the percentage change from a year ago in real personal consumption expenditures. Notice that the current pace of YOY percentage change is directly analogous to the 2001-2003 period -- a time of very slow growth where we again heard the phrase jobless recovery. It was also during this time that the Fed kept interest rates very low out of concern for a possible deflationary environment. In short -- YOY percentage changes of this lower magnitude are associated with periods of lower growth.

It could also be argued that the US consumer is starting to change his spendthrift ways. Remember that the previous expansions in consumer spending were fueled by easy credit and the ever increasing accumulation of household debt -- which eventually reached over 130% of disposable personal income at the national level a few years ago. Over the last few years, we've seen a big bump in the savings rate and a decline in the household financial obligations ratio, indicating consumers are paying down debt in a meaningful way. We've also seen an overall slowdown in spending. In short, it's beginning to look like we could argue the US consumer is changing to a slower spending model.

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Greece To Default

The markets have been, for the moment, calmed by the EU bailout "plan" that kicks the can of systemic failures of Europe further down the road.

However, the fact that Greece will default and the fact that the wealthier nations in Europe (ie Germany) will have to pay more to prop up Greece has not gone down well with the taxpayers.

Germany's largest taxpayers lobby (Germany’s League of Taxpayers) is not happy, and says that the decision reveals "negligence" toward taxpayers' interests and an unacceptable lack of accountability for indebted states

Reiner Holznagel, vice president of Germany’s League of Taxpayers, told Handelblatt newspaper:

"There has to be improvement in this respect so that taxpayers aren’t constantly faced with new liability risks. The EU decision that the bailout fund in the future can buy debt of states in crisis by itself seals the transformation into a liability union. "

Whatever the political "elite" of Europe claim, there is not the political will on the ground to support unification or unlimited bailouts; especially when those bailouts are applied to a country that knowingly committed fraud in order to join the Euro.

The markets, for the moment, may be appeased. However, be under no illusions, this deal will unravel and along with it the Euro.

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Friday Dollar Analysis

Last week, I wrote the following about the dollar:

All the EMAs are in a tight bunch, indicating a lack of overall direction from the market. This means last weeks break-out was a false break-out, and we're left waiting to see that happens.

The dollar has been consolidating for the last few months in a classic triangle consolidation pattern. The EMAs are tightly bunched, indicating a lack of conviction from traders. In addition, we've already seen one false break-out to the upside over the last few weeks.

The dollar has been buffeted by the EU and Washington debt talk situation. The closer Europe has come to a deal, the less people want the dollar relative to the euro. In addition, the recent noise from the various ratings agencies about the negative impact of a budget stalemate has led to downward pressure on the dollar.

Let's take a look at the chart:


The chart shows the dollar has broken out to the downside on strong volume. However, we have yet to see the EMAs follow through -- which they wouldn't be doing at this point.

Ideally, we'd see the dollar in a relief rally sometime over the next week or so to provide confirmation of the downside break-out. This is when I'd go short.

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Apple Stoers and pent-up housing demand

- by New Deal democrat

I got nothing at the moment, but here are two more items well worth reading:

1. BirdAbroad spots an Apple Stoer. No, that isn't a typo. Chinese counterfeiting is being taken to a whole new level.

2. Karl Smith at Modeled Behavior discusses pent up housing demand. When the turnaround happens, it is likely to be very sharp.

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Thursday Reads

• The GOPs Fuzzy Math.
• Is Consumer Spending the Problem?
• Debt Ceiling Debate Already Hurting Consumer Sentiment
• Why Employers Are Slow to Fill Jobs
• Gas Prices Are Still High
• Consumer Sentiment and Oil Prices
• All Recoveries Are Now Jobless

Pay particular attention to consumer issues.

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The EU Hail Mary

The EU's Hail Mary (wrt "solving" the Euro crisis) has been leaked by the Telegraph.

Key elements:

1 More money will be thrown at Greece.

2 "We call on the IMF to contribute to the financing of the new Greek programme in line with current practices." The IMF are far from guaranteed to support this.

3 Lower interest rates and extended maturities means default.

4 "We call for a comprehensive strategy for growth and investment in Greece." Fat chance of this happening!

5 "All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest." Fat chance of this happening!

This Hail Mary response will not impress the markets.

Friday will be an "interesting" day!

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The Dow Jones Bond Average and pre-WW2 recessions

- by New Deal democrat

This continues my look at potential leading indicators as they may apply to pre-WW2 deflationary recessions. I have already looked at BAA bonds, housing starts, commodity prices, the stock market, the yield curve, and money supply. Today I will look at bond prices generally.

Laksham Achuthan of ECRI is on record saying that their index does not make use of the yield curve. On the other hand, they may make use of information from the bond market. One little-known source of this information that goes back at least to the 1890s is the Dow Jones Bond Average (renamed the DJ Corporate Bond Average about 15 years ago). The DJBA consists of 30 bonds of varying types and maturities, and was designed to give an overall view of the bond market. Its value is and has always been computed daily.

I would love to be able to show you a simple graph covering the pre-WW2 era, but I've never been able to find one. Entering the daily or even monthly prices would take more time than I have available for this exercize, but what I can do is give you the below chart which shows significant highs and lows from 1920 through 1940. Where there are no entries, the up or down trend continued from the last chronological entry. Note that sometimes the yearly low in the right column comes before the yearly high in the left column. The most significant highs and lows are bolded:

Year	High	Low	Recession dates
1920	81.40 Jan	71.64 May	-
1921	84.13 Dec		- 7/21
1922	92.12 Sep		-
1923		85.77 Mar	5/23-
1924	91.32 Apr		-7/24
1925		91.20 Apr	-
1926	95.52 Jun	94.69 Oct	10/26-
1927			-11/27
1928	99.48 Jan		-
1929	96.32 Jan	91.76 Sep	8/29-
1930	97.68 Sep	92.83 Dec	cont.
1931	96.76 Jan		cont.
1932	83.26 Aug	63.78 Jun	cont.
1933	89.07 Jul	73.21 Mar, 78.62 Nov	-3/33
1934			-
1935			-
1936	106.01 Dec		-
1937			5/37-
1938		83.39 Mar	-6/38
1939	92.22 Mar	83.06 May	-
1940	91.01 Dec		-

The most important conclusion is that the DJBA did accurately lead all three of the big recessions in the era - the 1920-21 recession (which was similar to the 1981-82 recession in that it killed the WW1 inflation), the 1929-32 collapse, and the 1937-38 deep recession.

Of the five recessions, highs in the DJBA preceded the 4 onset in our period by 8, 4, 19, and 5 months. The 5 troughs were preceded by 12, 16, 13, 9, and 3 months. Note that for the first year of the Great Depression, bonds did not decline steeply. Only after the depression deepened severely did they cliff-dive.

At the same time, this fits very well with the DJBA or a similar bond average being a "long leading indicator" in ECRI's model.

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Foresight

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Thursday Oil Market Analysis

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

Overall, prices are moving about how I thought they would after the sell-off. Remember -- there is a tremendous amount of resistance to move through right now which takes time. However, I still see prices moving higher for the next month or so.

This is in addition to the fact I see the supply/demand situation driving prices higher -- a position which I feel is bolstered by China's recent printing of a 9/5% GDP.

Let's take a look at the charts


The 5-minute daily chart shows prices moving between 95.5 and 99.25. There is no indication of a rally, although the price action looks like a consolidation.


The daily chart really shows the consolidation. Over the last few weeks, prices have formed a consolidating triangle and are hitting resistance at the 50 day EMA. The 10 and 20 day EMA are moving higher, and prices have found a center of gravity around the 200 day EMA. The MACD has given a buy signal, although the fact it is still negative tells us the 12 signal line is below the 26 signal line, although with the lines approaching a "0" crossover will soon occur -- which will give us another buy signal.

Give the fundamental supply/demand situation, I still expect prices to be moving higher. But right now, we're seeing the standard issues of prices moving through a large number of technical resistance levels on their move higher, which is to be expected given the chart.

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The Last Chance Saloon

The European experiment and the US economy both face zero hour.

This morning Germany and France claim to have reached a common position on a second bailout of Greece. However, unsurprisingly, no details have been released.

Notwithstanding the economic viability/credibility of this "accord", European leaders are holding a crisis summit today in Brussels in the vain hope that a solution that will save the Euro experiment will be found.

Meanwhile, across the Atlantic, as the politicians on Capitol Hill hold the US and world economy to ransom whilst they continue to bicker; the Federal Reserve is pro-actively preparing for the US to default on its debt.

Politicians on both sides of the Atlantic have failed the people that they claim to represent. As and when the Euro collapses and (quite probably) when the US defaults, the politicians will then engage in an exercise of passing the plate of blame whilst the people of the world suffer from the economic effects of their failure to show leadership.

This is the last chance saloon for the world economy, sadly the fate of the world economy is in the hands of politicians.

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More on Food Inflation

Earlier today, I noted that fundamental supply and demand issues are keeping food prices high. That got me thinking about the actual price index of some food groups, so I want to the St. Louis Fed and found these charts:


The YOY percentage change in cereals and grains has been pretty steady for the last 20 years except for a massive spike right before the last recession. Also note that the YOY change is now increasing pretty sharply.


We've also seen a pretty big increase in sugar prices over the last few years, with is also reflected in the above chart. Notice that sugar prices spiked during the last recession.


Meat, poultry and fish increases have actually been pretty steady for the last 30 years. But notice that current increases are near the top of the YOY range for the last 30 years as well.

While energy prices get all the headlines, increases in food inflation are also causing problems for consumers.

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