Back On May 19

On Saturday, the future Mrs. Bonddad will no longer be the future Mrs. Bonddad but will in fact be Mrs. Bonddad. Then we are going forward to do out part for the economy by having a wonderful honeymoon at an undisclosed location.

I will be returning on Monday May 19, same Bond time, same Bond channel.

Will "Main Street Spoil the Recovery?"

From CNBC:

"Main Street has just entered the act. The peak of the pain is not visible yet," said Asha Bangalore, an economist with Northern Trust in Chicago.

The consumer strains are well-documented. Aside from the credit contraction, gasoline and grocery prices are on the rise, the housing market remains distressed, and consumer confidence is at recessionary levels. Tax rebate checks are in the mail, but that alone cannot compensate for the credit clamp-down and inflation pressure.

"Given that households are strapped financially, it is far-fetched even with the stimulus checks to expect a sharp increase in consumer spending," Bangalore said. "You have seen auto sales numbers for April, they posted a sharp drop."

.....

To say that Wall Street is expecting a second-half recovery would be an understatement. According to Thomson Reuters research, analysts are expecting fourth-quarter earnings growth of 62 percent for the S&P 500. Granted, that is a comparison with a disastrous fourth quarter of 2007, when earnings were down some 25 percent. In the current quarter, S&P 500 earnings are expected to be down 6 percent.

Not only is the market anticipating a swift recovery, but the earnings forecasts suggest that they think it will be lasting. For next year, analysts think earnings will be up 18 percent, twice the growth they are predicting for 2008.

They see particularly strong growth for consumer discretionary companies, beginning with the next quarter. Earnings for that sector are expected to jump by 41 percent in the fourth quarter, and 24 percent next year.

The article focuses on the tightening credit situation in the market (which I dealt with here.) But I want to focus on a basic problem of the market rallying in the current economic environment.

Here's the fundamental question: will the economy rebound in the 2H 2008, proving the market right?" I have doubts for the following reasons.

First, let's start with the following charts:



Job growth is still dropping from a year over year perspective, and



The unemployment rate is still increasing



Real disposable income is decreasing, which is



Lowering sentiment and



Confidence



Year over year spending did increase in the latest report. However, note the following regarding that upturn.

-- in the latest GDP report, both durable and nondurable goods purchases decreased. The reason for the increase was an unseasonably high increase in service purchases.

-- One month does not a trend make especially in light of the preceding trend.

Also remember that inflation is high right now:







High inflation crimps consumer spending.

This is not to say that people won't increase their spending. But in light of declining job prospects, record oil and food prices and a slowing economy, it just doesn't seem like the consumer spending will increase in a big way anytime soon.

Then there is housing which started this mess. The inventory/demand situation is still horribly out-of-whack. From Calculated Risk, here is a chart of total existing homes on the market:



So -- we're at 4 million. And that number will increase because foreclosures are increasing in a big way -- they more than doubled in the first quarter. And it's not like we need all those homes -- not by a long shot. Home vacancies are now at a record.

And who is going to buy these homes when credit conditions are tightening and consumers already have a record amount of debt?





So, according to the facts we have the following situation:

-- job growth is slowing

-- as is real income, which is

-- lowering consumer confidence and sentiment. In addition,

-- inflation is high, lowering spending.

-- Housing inventory is still high, and

-- rising foreclosures will increase that number.

-- Record levels of household debt and tightening lending standard will prevent a housing rebound.

Simply put, this is not a pretty picture for the second half of the year.

Thursday Oil Market Round-Up

On the daily chart, notice the following:

-- The shorter SMAs are above the longer SMAs

-- Prices are above the SMAs

-- The trend that started in early February is still intact

-- Prices have continually moved through upside resistance



On the weekly chart, notice the following:

-- The uptrend that started in early 2007 is still intact

-- As prices have risen they have moved into 5 separate consolidation areas to absorb the gains.

After the Fed cut rates, oil dropped in response to a rising dollar:

Crude-oil futures fell for a third day Thursday as strength in the dollar reduced commodities' appeal as an investment alternative.

Natural gas futures also fell sharply after government data showed U.S. natural gas inventories rose more than expected last week.

Crude for June delivery dropped 94 cents, or 0.8%, to close at $112.52 a barrel on the New York Mercantile Exchange. It fell to an intraday low of $110 a barrel earlier. June natural gas futures fell 28.2 cents to end at $10.561 per million British thermal units.

Oil hit a new intra-day high on Monday:

Oil futures rose to an all-time high near $121 a barrel Tuesday in Asia, fueled by worries about threats to supply and a weakening of the U.S. dollar.

The surge in oil prices was also fueled by hopes that the U.S. economy will be spared a sharp downturn after the release of data Monday showing an unexpected expansion in the U.S. service sector in April, analysts said.

Light, sweet crude for June delivery rose to a record $120.93 a barrel in electronic trading on the New York Mercantile Exchange. The contract later retreated to $120.24 a barrel, up 27 cents from Monday's close. Crude futures settled on Monday at $119.97 a barrel, up $3.65 from Friday's close.

"The bulls are in control of the market," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The sentiment is that the oil pricing is likely going to stay quite strong, with a lot of volatility."

Monday's rise was based on the following geo-political hot spots:

Crude futures jumped $3.65, or 3.1%, to an all-time high $119.97 a barrel in New York as traders worried about developments in several key oil-producing countries: Diplomatic tensions between Iran and the West are rising again. Rebels have attacked Nigerian oil facilities in recent days. And Turkey recently conducted fresh strikes against the Kurdish minority in northern Iraq. Many analysts worry that long-simmering rivalry may see reprisals and continued violence this week.

While there are a lot of geo-political problems impacting oil, there is also the basic increase in demand:

Amid the occasional threats to crude supplies, global demand for oil continues to grow. While demand for oil and gasoline has been soft in the U.S., the Chinese and Indian economies are growing by double digits, boosting global demand for oil.

There is growing speculation that oil will continue on higher. Goldman was predicting $200/bbl oil in a recent report:

Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

New York-based Murti first wrote of a ``super spike'' in March 2005, when he said oil prices could range between $50 and $105 a barrel through 2009. The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record of $122.49 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.

There is also a growing realization that oil's upward climb may continue:

A growing number of oil-market watchers say voters riled by soaring fuel costs may face far worse this summer, as factors ranging from unrest in Nigeria to slumping production in Russia could shove benchmark oil prices over $150 a barrel.

.....

The world's diminished spare production capacity remains the strongest single catalyst for high prices, Mr. Yergin says. The world's safety cushion -- the amount of readily available oil that could be pumped in a moment of crisis -- is now around two million barrels a day, according to most estimates. That's just 2.3% of daily demand, and nearly all of the safety cushion is in one country, Saudi Arabia. Everyone else is pretty much pumping all they can, which makes the world vulnerable to political or other shocks.

And finally, gas prices are moving higher (again).

Once again, and for the sixth week in a row, the U.S. average retail price for regular gasoline moved higher, this time by one cent. As a result, the U.S. average price for regular gasoline set yet another all-time high of 361.3 cents per gallon. While the average price has gone up by 55.9 cents per gallon above the price a year ago, it has also shot up by nearly the same amount (exactly 56 cents) since December 31 of last year. On a regional basis, prices increased throughout the country with the exception of the Lower Atlantic portion of the East Coast where they went down a mere 0.6 cent. Elsewhere on the East Coast, prices increased by 2.5 cents per gallon in New England and 2.3 cents per gallon in the Central Atlantic while the average price for the entire East Coast region was 361 cents per gallon, a 0.9-cent increase. The average price in the Midwest was 357.9 cents per gallon, an increase of 1.1 cents. The increase in price for the Gulf Coast was smallest of any region, going up only two tenths of a cent to 350.7 cents per gallon. Despite an increase of 1.6 cents in the Rocky Mountain region, the price of 349.4 cents per gallon was the lowest for any region. The West Coast price went up by 1.4 cents to 380 cents per gallon, while the price in California increased by 1.1 cents to 390.3 cents per gallon.

Conclusion: there is no reason to think oil won't continue to move higher. The charts are incredibly bullish, demand is still strong, political tensions still exist (in a big way) and supply is tight.

Today's Markets

I'm out of pocket for the rest of the day -- lots of wedding stuff going on. I'll do a market wrap in the morning.

Fed Governor Concerned About Inflation

From Marketwatch.com:

The latest comments form Federal Reserve Bank of Kansas City President Thomas Hoenig also will be scrutinized, as he said late Tuesday that rising inflationary pressures are "troublesome" and a "serious" matter, and now stand at "unacceptably high levels." Hoenig isn't a voting member of the FOMC.

Let's take a look at some of the inflation measures to see how they're doing:



Although it has stabilized, PPI is still at high levels.



CPI has also stabilized, although at high levels as well.



Import prices are spiking. So long as oil is in a rally, expect this trend to continue.



And now for the Shadow Stats alternate CPI measures, just to show you that yes, there is probably more inflation in the system than the Fed wants to admit.

So - who is right? I'm not a statistician so I can't speak to the validity or non-validity of any of these numbers. However, I can tell you there has been a tremendous amount of debate about the US CPI calculation which leads me to believe there is a problem somewhere. However, where it is and to what degree it is impacting the current situation I don't know.

I will add my own observations. I have noticed big food price increases over the last few years. Nothing concrete -- no "prices have increased by x%" -- but I know my food bill is going up and my eating habits have not changed. FWIW.

Wednesday Commodity Round-Up

On the weekly agricultural prices chart, notice that prices have broken a year long upward sloping trend. Also note that prices are possibly forming a triangle top. Triangles are usually considered reversal patterns, but also note that prices have been forming consolidation patterns on the rally that has lasted the last year. That means this triangle could simply be another consolidation pattern on the way up.



On the overall CRB index, notice we may be looking at an overall double top. Some of this will be determined by the dollar index which I will review on Friday.



Gold has also broken a year-long uptrend.



Wheat has been under selling pressure because of the possibility of an increasing dollar. There is also news that farmers are increasing wheat crops:

Wheat fell below $8 a bushel for the first time in five months as investors speculated the U.S. will slow the pace of interest-rate cuts, boosting the dollar and reducing grain exports that surged as the currency weakened.

.....

Advance export sales of wheat in the marketing year that ends May 31 are 41 percent ahead of the year-ago period, U.S. Department of Agriculture data show. Actual shipments are up 46 percent, the USDA said in a report on April 24.

Still, analysts expect global production to rise as farmers plant more to capitalize on the higher prices. Farmers worldwide will harvest 645 million metric tons of the grain in the year that starts July 1, up 6.8 percent from the previous year, the International Grains Council said on April 24.

Producers in the U.S., the largest exporter of the grain, probably increased seeding in the marketing year that ends on May 31 by 5.6 percent to 63.8 million acres, the USDA said in a report last month.

``At this price level, growers are going to plant a lot of wheat,'' Holaday said.

Wheat is also dropping:

Consumer demand for rice may also slip, with some Asian consumers expected to adjust their diet to include more bread and less rice, Mr. Nelson said. Wheat, used to make bread flour, and rice are both major food grains.

Wheat is looking more affordable these days, as the price of the most-active CBOT July wheat contract has plunged to around $8 a bushel from $12 in March.

The world may see a record wheat crop this year after growers expanded plantings due to high prices. "Wheat is part of the diet in many of these countries," Mr. Nelson said. "To me, it seems like a part of the solution would be, as appropriate, that people could eat more bread."

On the daily chart of wheat, notice that prices are now near the lowest levels of the last 6 months.



On the weekly chart, notice that prices have broken through key support established in an almost year-long rally. That's a significant price break.

A rising dollar was having a negative impact on gold last Thursday:

"The return of dollar strength this morning has led to a swift reversal in direction with gold dropping back to $864, and given the pace of decline, suggests gold will remain at risk to further corrections in the coming sessions," said James Moore, an analyst at TheBullionDesk.com, in a research note.

Gold had finished Wednesday's regular trading session sharply lower, ending down $11.70 at $865.10. However, in electronic trading, gold rallied, boosted by the Federal Reserve's decision to cut the fed funds rate by 25 basis points to 2.0%.

"Despite the lack of a clear pause signal in yesterday's Fed announcement, the markets are treating May/June as the pivot point beyond which they can no longer reliably depend on ever cheaper dollars to fuel speculative binges in commodities," said Jon Nadler, senior analyst at Kitco Bullion Dealers.

On Thursday, the stronger dollar was also impacting the copper and wheat. IBD reported as much on Friday:

A resurgent dollar sent commodity markets reeling Thursday, as investors interpreted the latest economic data and monetary policy to mean interest rate cuts since September may be over.

Crude oil and gasoline fell as much as 3% each on the back of the dollar-related sell-off, as investors unloaded commodities denominated in the currency. Crude had hit record highs earlier this week, adjusting to the weak dollar and stronger rival currencies then.

Soybeans plunged 3% as well on Thursday, and grains like wheat and rice were under pressure as the dollar hit a five-week high vs. the euro.

In metals, gold sunk to a four-month low and copper plummeted 5% to a five-week low.

The Reuters-Jefferies CRB Index, which tracks 19 commodities futures, fell to a 3 1/2-week low.

And now because of food inflation concerns Congress is looking at the possibility of altering basic food policy in the US:

In Congress, some lawmakers are calling for changes in the nation's commitment to ethanol as the biofuel of choice to replace oil. "This is a classic case of the law of unintended consequences. Congress surely did not intend to raise food prices by incentivizing ethanol, but that's precisely what's happened," said Rep. Jeff Flake (R-Ariz.), who introduced legislation this week that would end federal support for ethanol.

After a huge run-up, the price of rice is retreating:

Chicago Board of Trade rice futures have likely seen a top for the year after global supply fears sparked a record-breaking rally, analysts said.

Nearby CBOT May rice has shed 17% since hitting its high of $24.6850 per hundredweight April 24. It settled Friday at $20.55. Most-active CBOT July rice has fallen more than 16% since reaching an all-time high of $25.07. The contract tumbled the daily, exchange-imposed limit for four consecutive days last week and closed Friday at $20.9450.

It seems as though all the bullish views about shrinking world supplies have been factored into the market, analysts said. Prices climbed recently as major producers like India and Vietnam curbed their export sales to protect domestic supplies, but there are now signs the tightness is easing, they said.

"I'm very much of the opinion that we've seen a top in the market," said Neauman Coleman, a principal at Neauman Coleman & Co., a brokerage and advisory firm in Brinkley, Ark. "From here, every time the market rallies, you're going to see an increase in folks who want to sell, particularly in the new crop months"

Above is a weekly chart of rice. Whenever prices move like this -- in a parabolic arc, the arc never lasts. Now the question becomes will prices maintain their downward trajectory or will they hover at high levels for the foreseeable future.



On the daily chart of rice notice the prices have broken through support established on the latest bull run.

However, with China still growing a high rates, it's possible that upward pressure on commodity prices won't slow down anytime soon:

In the first quarter, China's GDP expanded 10.6% vs. a year earlier, down from 11.4% in the last three months of 2007. China's inflation remains near decade highs, but slowing export gains make it less likely that Beijing will try to slam on the brakes, analysts say.


The Asian Development Bank forecasts that China's economy will grow 10% in 2008. The World Bank projects 9.4% growth. Much of the same is expected next year.

"China is the main source of increased demand for a lot of commodities, but the difference between 11.5% and 9.5% growth isn't that much," said David Wyss, Standard & Poor's chief economist.

More prosperous Chinese continue to buy bigger, gas-guzzling cars, driving up global oil demand. And China's rising energy and labor costs have been a factor in creeping U.S. inflation through the cost of imported goods.


"A slowdown in the Chinese economy would definitely take some pressure off of commodity prices, particularly crude oil, copper and steel," said Brian Bethune, chief U.S. economist at Global Insight.

The big news in commodities is some of the wind is leaving commodities' sales. We've seen some pretty important trend breaks in some big charts. This is very important from an inflation perspective. Commodities related inflation has been a big concern for some time.