LEI #3: Initial Jobless Claims were ...

- by New Deal democrat

This morning's initial jobless claims report is the 3rd of 4 reports on leading economic indicators this week. The first two, ISM manufacturing and manufacturers' nondurable goods orders, were strongly positive.

Most commentators think the continuing declines in the 4 week moving average of new jobless claims means the recession is close to ending. Some pessimists insist that July's numbers were an aberration and that economic Armageddon will resume, starting with today's number.

Since I will be unavoidably unavailable when this figure is reported, here is a guidebook for what the initial jobless report means:

Today's Initial jobless claims number was:


Very good. The 4 week moving average is continuing to fall. It is getting close to the point where in the past net jobs have increased in the economy, and would be consistent with the recession being virtually over.

Here is the actual report:

In the week ending Aug. 1, the advance figure for seasonally adjusted initial claims was 550,000, a decrease of 38,000 from the previous week's revised figure of 588,000. The 4-week moving average was 555,250, a decrease of 4,750 from the previous week's revised average of 560,000.

Better yet -- here is the unadjusted number:

The advance number of actual initial claims under state programs, unadjusted, totaled 463,062 in the week ending Aug. 1, a decrease of 48,296 from the previous week. There were 382,792 initial claims in the comparable week in 2008.

That means in the last three weeks we've seen an unadjusted drop of 200,000.

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Thursday Oil Market Round-Up

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The main question on the weekly chart is are prices forming a double top? While the MACD is still rising prices are still below the previously established levels from earlier this year.



And as the daily chart shows, the current rally has been weak the last few days as prices have formed very weak candles. In addition, prices have already dipped below the trend line once (although they have since risen above it). Finally, it is nearing the end of the summer and with that comes the end of the summer driving season. This could lead traders to start selling positions.

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The Last Post

I see that there is more trouble for the beleaguered Royal Mail, as over 25,000 postal workers strike this this weekend in an ongoing row over pay and jobs.

The Times notes that in 2007, 60% of days lost in the whole UK economy through industrial action were accounted for by Royal Mail strike action.

Doubtless "the brothers" feel suitably empowered at being able to exercise their right to strike. However, they may care to consider this during their days of self imposed leisure:

1 The Royal Mail is in financial difficulties, and cannot be maintained for much longer in its present shape and form (whatever the Queen may wish).

2 There are many ways to communicate these days, outwith sending a letter (eg, email, phone, fax etc). The strike will simply push customers to seek alternatives to "snail mail".

3 There are other companies that provide a fast reliable delivery service for parcels, packages and letters. Customers will simply use these, if the Royal Mail workers continue to act up.

4 Britain is facing its worst recession for decades. Striking now is idiotic, to say the least.

The Royal Mail will be a shadow of its former self within the next 3 years, helped on its way by its own staff.

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Today's Market

I will post this in the morning. I'm in an all-afternoon meeting.

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Personal Income Drops 1.3%

However -- there's a bit more to that headline.

Personal income in June fell back heavily due mostly to an end to a specific fiscal stimulus program. Meanwhile, spending and inflation were up. Personal income fell a sharp 1.3 percent after jumping a revised 1.3 percent in May. The drop was worse than the consensus forecast for a 1.1 percent decrease. June's fall was primarily due to a 5.9 percent fall in transfer payments which had spiked 8.0 percent in May from one-time payments under the American Recovery and Reinvestment Act of 2009. In the latest month, the wages and salaries component dropped 0.4 percent after dipping 0.1 percent in May. Consumer spending jumped 0.4 percent after edging up 0.1 percent in May. However, June's gain was price related from higher gasoline prices.

Over the last few months the only thing increasing personal income has been transfer payments from the government. But last month the end of a program led to a drop in income.

Here is a chart of personal income:


The chart better shows the big increase followed by the decrease. If also shows that we've had some severe swings over the last year -- again largely due to transfer payments. Considering the high rate of unemployment it's difficult to see salaries rising anytime soon. However, an extended period of decreasing income will lead to a drop in spending. And on that note, consider this chart of real PCEs:



On a year over year basis (the brown line) we're still moving horizontally which is good. However, we've had three decreases in the last five months on a real (inflation-adjusted) basis:



That is not good as it indicates there is still a fair amount of caution from consumers regarding spending.

Incomes won't increase until we deal with unemployment - and that is going to take awhile. As such, this area of of GDP is going to be touch and go for the foreseeable future.

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An Inventory Build Story?

Consider the above chart. Notice two things. First, inventories have been dropping since the second quarter of 2008. Secondly, inventories have contracted at a sharper rate then the 2001 recession. Let's play out a hypothetical: let's assume that demand increases sharply. What happens?

With the U.S. Senate considering a vote on putting more money into the government's "Cash for Clunkers" program, some auto dealers are raising concerns about a new threat to the incentive program: tight inventories.

The clunker program, which offers subsidies of as much as $4,500 to consumers who trade in older vehicles and buy new, more fuel-efficient models, sparked a surge in sales in late July, leaving many dealers with lean stocks of cars and trucks on their lots.

"We've got an inventory issue," Mr. Kelleher said.

Chrysler's stocks are tighter than those of most other auto makers because the company shut down all its plants while it reorganized in bankruptcy court in May and part of June, and shipments to its franchises ground to a halt.

Still, Toyota Motor Corp. only had enough Prius hybrids in stock at the end of July to last 13 days at the current rate of sales, according to Autodata Corp. It had a 34-day supply of Corolla compacts and a 37-day supply of Camrys.

Auto makers consider a 65-day supply optimal, and frequently stock dealers with enough vehicles to last 80 or more days. Inventories have been declining in recent months because auto makers reacted to a deep downturn in sales by slashing production.

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LEI #2: June nondurable goods up sharply

- by New Deal democrat

As I indicated at the beginning of this week, the Index of Leading Economic Indicators appears to be at a crucial inflection point. Two of the four reports on LEI data for this week are now in, and both are strongly positive.

On Monday we got the ISM manufacturing index, the coincident part of which is a hair shy of expansion, and the leading parts of which are already showing expansion.

This morning we got June nondurable goods (and durables, which almost exactly tracked factory orders down last week, as usual). Manufacturers' orders for nondurable goods came it at +2.7%. This is a sharp increase, and the best report since the "Black September" panic of last year. Nondurable goods had been the gloomiest data of the 10 LEI's, but with June's number, are now positive for both the last 3 and 6 months.

Under the circumstances, this is an excellent number.

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Wednesday Commodities Round-Up

Industrial metals are in a clear and strong uptrend that started in early March. the MACD is rising as is the RSI. The RSI is just starting to approach overbought territory. However -- the RSI can stay pegged over 70 for quite some time. Notice the 10 and 20 week EMA are moving higher and the 10 week EMA has crossed over the 50 week EMA.


The daily chart shows a good advance. First notice along the way we've seen consolidation in the form of pennant and flag patterns. Also notice the very bullish orientation of prices the EMAs -- prices are above all the EMAs, the shorter EMAs are above the longer EMAs and all the EMAs are rising. Prices recently broke through areas of key resistance and are moving higher.


This is fascinating chart. First, prices broke below the lower trend line a few weeks ago. Then they consolidated below this level. This led me to thing prices were going lower. However -- and here's the key point: that was based only on the information available from the chart; it did not take the fundamental backdrop into consideration. And that is what has moved the market higher. Commodities rallied earlier this week in anticipation of a recovery.


And that increase is seen very clearly on this chart -- notice the upward gap accompanied by the rising MACD and RSI. In short, earlier this week traders saw the economy improving.

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Lloyds Loses £4BN

Gordon Brown's state sponsored merger of Lloyds and HBOS has shown that he has the direct opposite of the "Midas Touch", as today the semi nationalised bank reported pre tax losses of £4BN for the first half of this year.

Sir Victor Blank, ex Chairman of Lloyds, who was conned by Brown into merging with HSBC has also paid a price as he was forced to stand down as chairman.

The lesson here is never trust Brown, and always perform a thorough due diligence before taking on anything offered by Brown/Labour.

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Today's Market

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Here's an interesting point to consider. There are two gaps on the SPYs daily chart. However, they don't conform to the basic description of exhaustion or continuation gaps which usually require high volume. The high volume is not always necessary, but it does help.

Simply put, this rally looks like it is getting long in the tooth and needs a pullback to move higher.

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