Mortgage Approvals Stall

Despite boast from the government that the budget's changes to stamp duty (for the next two years first-time buyers purchasing properties worth up to £250K will pay no stamp duty) will give the housing market and, by definition, the economy a much needed boost, reality does not match political spin.

Figures from the Bank of England show that mortgage approvals fell in February by just over 1,000 to 47,094, the third consecutive monthly fall.

This indicates that first time buyers are having trouble raising the loans necessary to buy their homes, it is unlikely that the stamp duty holiday will be enough to change that situation.

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Market Mondays

Let's start this analysis with a look at the IWMS 1-minute chart because it is very revealing.


For the last few weeks, small and mid-cap stocks have outperformed the larger (DIAs and OEFs) stocks. However, last week we saw some interesting and bearish technical developments in the IWMs First, notice the price spike at point A, for which there was no follow-through (prices didn't continue the advance). While we saw the other averages spike at the same time, they did not do so in this degree. The lack of follow-through signaled possible lower prices were ahead. Second, look at B. This was the second top on the weekly chart giving the IWMs a double top for the week. Also note the triple top at B -- another topping formation. Finally, notice the overall arc of prices, meaning the IWMs formed a rounding top pattern (see C). In short, the average that led the market higher gave several important sell signals last week.


Looking at the daily chart we see the following.

First, what is the right trendline -- A or B. I prefer A because it connects more lows along the length of the trend. While B is still a valid trendline, it does not touch any lows aside from the first two early in the trend.

Notice the large number of upside gaps that existed early in the rally. However, the upside move stalled at D as prices have been stuck in a range for about the last two weeks. In addition, the MACD has given a sell-signal and the A/D line has stalled its upward advance.

Let's add in the SPYs


The market was in an uptrend, marked by line A. However, on Thursday, the market gapped higher at the open (B), moved to a new high (C) but then moved lower and closed below trend line A. That's the kind of daily action that signals possible problems.


A.) The primary uptrend is still in place, although prices are right at the trend line.

B.) The MACD is about to give a sell-signal and

C.) The A/D line is moving sideways.

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What a Real Recovery Looks Like: and Why We Likely Won't Have One

I am going to examine (graphically) the recovery follow the early 80's recession(s). Specifically, I am going to look at the recovery following the very deep 7/81-11/82 recession that saw unemployment peak at 10.8% and had a major decline in GDP (like our current recession). I am also going to show a comparison of where we are now (compared to where we were then) using the St. Louis Fed's assumption that the recession ended in July 2009 (meaning 7 months from the end). Finally, I am going to demonstrate why we had a very robust recovery following the end of the 1981 recession and why we are unlikely to have a robust recovery this time.

So, let's take a journey back to the early 80's when The Smith's were just getting started, the Weather Channel went live, Ripken had just began his streak, and the last decade in which the Yankees didn't win the World Series.

The recession that began in July 1981 (and followed on the heels of a recession that had just ended a year earlier) was the deepest (at the time) since the depression with unemployment topping out at 10.8% and GDP falling 2.6% over the recession. The recovery that followed this recession, however, was very robust (for several reasons) as we can see here looking at the decline in the unemployment rate (compared to GDP) and the change in payrolls (I adjusted this to compare to today's much higher population in rough terms):




As you can see here, the initial recovery was incredibly strong in terms of both employment and GDP, but as the decade languished, unemployment remained stuck around 7% even with consistent GDP growth above 2.5%. The reason I used an adjusted payroll growth number was to give a better illustration for purposes of comparing the positive job gains of the 80's recovery to what we may begin to see later this year (likely next month).

Now, let's look at some comparisons to where we are now versus then (pardon the hard to read nature of these):



This first graph shows (in percent change terms) payroll growth coming out of each recession. Not only do we start with a larger hole to dig out of, but the early 80's recovery was already positive by now and then exploded over the course of that first year or so (we can use this graph to compare later on this year).

Next, looking at GDP shows us that we are already behind the 80's recovery here and that it is looking highly unlikely that we are going to catch up

as the initial 80's recovery saw two quarters in excess of 7.5% to kick it off, while we are looking at two Q's just above 5%. That will come back to haunt us later.

Finally, let's look at some of the drivers of the 80's recovery and see why we are not set up nearly as well as back then. First up is the elephant in the room, interest rates:



While these look very high compared to today, they essentially fueled the recovery by allowing significant refinancing (and lower business costs) activity that continued for the next 25+ years to some extent. The level of these rates also kept the economy more honest, as everything had to be evaluated against a 10-year bond that was never below 7% for the decade (ie no need to chase yields and speculation). These interest rates also kept savings high



which help to provide an economic backstop and can fuel growth as the rate declines (not necessarily good in the long run, but can lead to larger growth over a shorter term). Finally, we need to look at debt levels, as expanding levels of debt (to a certain point) can have a huge impact on growth



and as we can see here, as the 80's progressed we saw debt service jump by nearly 20%, which helped to fuel the expansion.

So what does all of this say about the situation facing us today? Well, we do not have the catalysts that the 80's had to fuel a large economic expansion. Our savings rate is low and looks to be rising (good for long term, but bad in the short run). Our debt service rate high (and even after a spectacular decline is still higher than the 80's peak), which will limit our ability to use household debt (ie consumption) to jumpstart a recovery. Interest rates are already at historic lows, which will prevent significant refinancing activity from helping out families and will also create a huge ceiling on home prices going forward as rates rise. Finally, our initial burst out the gate simply wasn't fast enough to make up the ground we lost. In other words, we are likely going to be facing a recovery/expansion that has many more risks to the downside than it does catalysts to the upside and we will be doing it this time without the luxury of having a Keynesian backstop should we falter again.

For Bruce:

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Weekly Indicators: Rail Traffic, Withholding Tax upside blowouts

- by New Deal democrat

The monthly data widely reported this week was mixed. New home sales hit an all-time low, just barely. Essentially for the last year they have trended sideways. Consumer sentiment about the present ticked higher, but expectations - a leading indicator - ticked lower. Another leading indicator, durable goods orders, increased 0.5% and was the third increase in a row. January's number was revised higher, to a 3.9% increase. The GDP for last quarter was revised slightly lower, to 5.6%.

One item that got little notice, but seems particularly noteworthy, was the report by Edmunds.com that

An early look at March auto sales indicates that sales are currently pacing at a Seasonally Adjusted Annual Rate, or SAAR, of 13.2 million, according to Edmunds.com, the premier resource for automotive information.
"The industry has been recharged by incentives offers from Toyota and other automakers," observed Edmunds.com Senior Analyst Jessica Caldwell. "There is a lot of money in the marketplace right now, and people are responding."

This is only an estimate, of course, but if it close to correct, that will be the highest monthly sales since September 2008 ex-cash for clunkers. Even averaging March with February because of the Toyota issue would yield strong back-to-back sales of about 12 million SAAR, well above the 9 million SAAR low last year.

Update: The American Trucking Association reported that its

Truck Tonnage Index dipped 0.5 percent in February followed a revised 1.9 percent (previously reported 3.1 percent) January gain....

Despite the sequential decrease, the ATA said the SA was up 2.6 percent year-over-year, marking the third straight year-over-year gain. The ATA added that for the first two months of 2010, SA tonnage was up 3.5 percent compared to the same timeframe a year ago.

The weekly indicators varied from warm to downright hot. The ICSC reported same store sales for last week were up +0.1% YoY and +3.7% YoY. In a similar vein, Shoppertrak reported sales up 0.3% for last week and 1.8% YoY.

The E.I.A. weekly report showed gasoline prices increasing again to $2.82 a gallon. Gasoline demand is running equal with last year in the reported text, but the accompanying graph shows it ahead of last year(?!?).

The BLS reported that last week's initial jobless claims totaled 442,000. The 4 week moving average was 453,750. As I said yesterday, the unadjusted number confirms that this time, there is no seasonal distortion detracting from the good number, and it strongly suggests that the continuing trend of initial claims is downward. (P.S.: Someone asked about the revision in reporting without which the number would have been 11,000 higher. It was right in the report. I saw it. I don't consider it material, and it doesn't change my opinion. Go look at the 4-week moving average).

Two reports were of particular note.

In the first, Railfax reported another strong week for rail traffic. All four elements of traffic - baseline, intermodal, cyclical, and total – are increasing, and increasing at a rate faster than last year. Three of the four continue to exceed last year, and baseline traffic now equals last year’s volume on a 4-week moving average basis. Additionally:

“Crushed Stone and Lumber are the two leading indicators of new construction (commercial and residential). Tracking these two economically sensitive commodities gives an up to the minute view of future construction.”

For the first time, both of these are higher YoY, and are increasing as well.

In the second, the Daily Treasury Statement showed $140.1B in withholding taxes paid through March 24. For the same number of days in March 2009, $136.2B was paid. We are currently ahead +$3.9B or 3% for March to date. In a 4 week rolling average basis, we have also pulled ahead for the first time since late 2008: $150.0B vs. $147.0B, for a $3.0B or +2.0% gain YoY. Some but not all of this may reflect census hiring.

As I said yesterday, the signs are accumulating that this will be the month where we actually show job growth.

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Treasuries Are At Important Technical Levels

A.) Is this the final break to lower prices?

Here is the reason for the move:

A sudden drop-off in investor demand for U.S. Treasury notes is raising questions about whether interest rates will finally begin a march higher—a climb that would jack up the government's borrowing costs and spell trouble for the fragile housing market.

For months, investors have focused their attention on the debt crisis in Europe, but there are signs the spotlight is turning to the ability of the U.S. to finance its own budget deficit.

This week, some investors turned up their noses at three big U.S. Treasury offerings. Demand was weak for a $44 billion 2-year note auction on Tuesday, a $42 billion sale of 5-year debt on Wednesday and a $32 billion 7-year note sale Thursday.

The poor demand, especially from foreign investors, sent the bonds' prices sharply lower and yields higher. It lifted the yield on the 10-year note to 3.9%—its highest since last June, and approaching the psychologically important 4% mark. That mark has been pierced only briefly since the financial crisis in 2008.

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Extraordinary Fed Measures Largely Over

From Bernanke's testimony:

Broadly speaking, the Federal Reserve's response to the crisis and the recession can be divided into two parts. First, our financial system during the past 2-1/2 years experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of financial institutions and markets and severely disrupted normal channels of credit. In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on taxpayers, were a critical part of the government's efforts to stabilize the financial system and restart the flow of credit to American families and businesses. Besides ensuring that a range of financial institutions--including depository institutions, primary dealers, and money market mutual funds--had access to adequate liquidity in an extremely stressed environment, the Federal Reserve's lending helped to restore normal functioning and support credit extension in a number of key financial markets, including the interbank lending market, the commercial paper market, and the market for asset-backed securities.

As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs. Some facilities were closed over the course of 2009, and most others expired on February 1.¹ The Term Auction Facility, under which fixed amounts of discount window credit were auctioned to depository institutions, was discontinued in the past few weeks. As of today, the only facility still in operation that offers credit to multiple institutions, other than the regular discount window, is the Term Asset-Backed Securities Loan Facility (TALF), which has supported the market for asset-backed securities, such as those backed by auto loans, credit card loans, small business loans, and student loans. Reflecting notably better conditions in many markets for asset-backed securities, the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.²

In addition, the Federal Reserve has been normalizing the terms of regular discount window loans. We have reduced the maximum maturity of discount window loans from 90 days to overnight for nearly all loans, restoring the pre-crisis practice. In mid-February the Federal Reserve also increased the spread between the discount rate and the upper limit of our target range for the federal funds rate from 25 basis points to 50 basis points. We have emphasized that both the closure of our emergency lending facilities and the adjustments to the terms of discount window loans are responses to the improving conditions in financial markets. They are not expected to lead to tighter financial conditions for households and businesses and hence do not constitute a tightening of monetary policy, nor should they be interpreted as signaling any change in the outlook for monetary policy.

The Fed's actions during this crisis have been a primary reason the US did not slip into a depression.

Remember how this started:

See video at about 2:10 for about a minute. The country was literally hours away from a complete financial meltdown in the form of an electronic run on the banks.

The only way to deal with that is a massive influx of liquidity (record low rates) and unconventional programs like those the Fed engaged in. It's really that simple.

But also note that most of those programs are done. And for some reason no one is celebrating that -- or even pointing that out.

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Yesterday's Market

Prices gapped higher at the open (A) and then formed a double top (B). Prices moved through support (C), dropped, and then consolidated in an upward sloping pennant pattern (D). Prices then fell to the 200 day EMA (E), rose in another consolidation move and finally fell through the 200 minute EMA (F). Also note the increased volume on the sell-off at the close (G).



A.) The transport average has broken its uptrend on

B.) Increase volume.

Finally -- was yesterday a key reversal day in the market?

According to the standard definition, of course, a key reversal day occurs when the market hits a new intraday high and then closes down. And that, the stock market did on Thursday.

At one point in Thursday's session, in fact, the Dow Jones Industrial Average was up nearly 120 points, reaching the 10,955 level -- a new high for the bull market that began in March 2009. Reclaiming the 11,000 level seemed like a sure thing.

And, then, the rally abruptly lost steam. By the close, the broad market had slipped into the loss column for the session -- though the Dow finished with a 5-point gain.

Dramatic as Thursday's reversal was, though, its bearishness -- in and of itself -- is probably of just short-term significance.

That, at least, is the argument made in the latest edition of Technical Analysis of Stock Trends, the classic textbook on technical chart formations. Written originally many decades ago by Robert Edwards and John Magee, this textbook was updated as part of the latest (ninth) edition by W. H. C. Bassetti, who is an adjunct professor of finance and economics at Golden Gate University.

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The Greek Bailout

Despite protestations from Greece that it would look to the IMF not the EU for a bailout (if it "really needed one"), a joint IMF/European bailout of sorts has been agreed.

EU leaders have agreed on a paltry $30BN bailout for Greece, which will simply delay the day of reckoning for that failed economy.

In return for this much hyped gesture of little substance, the EU has extracted a heavy price. The EU has granted itself sweeping new powers to co-ordinate all EU economies.

Whilst the Euro made some recovery, this will be only a short term recovery. Even if Greece really has been "saved" (and there are serious doubts that it has), there are other EU countries that are also close to economic meltdown eg; Portugal, Spain and Ireland.

As part of the deal the little known and untested Herman Van Rompuy, the permanent European Council President, is now in charge of "the economic governance of Europe".

Unsurprisingly there have been calls from Angela Merkel, the German Chancellor, for a new treaty to give the EU extra economic powers. Those with good memories will recall that only last year EU leaders "promised" that they wouldn't need anymore powers, and that the Lisbon treaty was good enough for at least 10 years.

The lesson to learned here is that politicians, most especially European politicians, should never be trusted.

This will end badly for Eurozone countries, both politically and economically.

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Forex Fridays

Line A was the primary resistance line for Friday, Monday and Tuesday.

B. Prices gapped higher on Wednesday and then started moving higher on trend line C.

Yesterday, prices again moved higher at point D.


Prices are in a general uptrend, but they have consolidated in two pennant patterns A and B.

Prices moved through line C on a strong upward gap (see chart above) and have continued to move higher (D).

Fundamentally, the dollar is benefiting from the situation in Europe; the dollar is currently seen as an alternative to the Euro which is in a strong downtrend.

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Social Security Payments Exceed Revenue

From the NY Times:

This year, the system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016, according to the Congressional Budget Office.

Stephen C. Goss, chief actuary of the Social Security Administration, said that while the Congressional projection would probably be borne out, the change would have no effect on benefits in 2010 and retirees would keep receiving their checks as usual.

The problem, he said, is that payments have risen more than expected during the downturn, because jobs disappeared and people applied for benefits sooner than they had planned. At the same time, the program’s revenue has fallen sharply, because there are fewer paychecks to tax.

Analysts have long tried to predict the year when Social Security would pay out more than it took in because they view it as a tipping point — the first step of a long, slow march to insolvency, unless Congress strengthens the program’s finances.

Let's look at three charts compiled from information provided by the CBO:

Mandatory spending (which included SS) has been increasing as a percentage of the total federal budget. This means that Washington has less and less ability to cut spending without a change in the law.

Interestingly enough, medical payments are the real reason for the increase in mandatory payment increases.

Mandatory spending as a percent of GDP has been pretty stable. This is a very good development as it indicate we're far from the point of financial Armageddon.

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