Wednesday, January 31, 2007

Chicago PMI Drops

From the Chicago Purchasing Managers Website:

The Chicago Purchasing Managers reported the Chicago Business Barometer fell below neutral, ending 43 months ofpositive readings.

- Production advanced while New Orders retreated;

- Prices Paid continued to slump toward neutral;

- Employment fell to the lowest level in four years;

Buying Policy: 3 month average lead-times were longer, but January bucked the trend.

The various indexes within the report showed areas of concern. New orders have been dropping for a few months. Employment is at its lowest level in almost four years. One of the industry representative comments said overall demand was down almost 30% with high sales incentives. The new orders and overall production levels have been trending down for about 2 years, only now falling into contraction levels.

The comments section called the report "worrisome".

FOMC Statement

From the Fed:

Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time. However, the high level of resource utilization has the potential to sustain inflation pressures.

The Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

I have no idea why the markets were so excited about this statement. The Fed gave themselves ample wiggle room to raise rates if they need to. While the inflation number from the GDP report was encouraging, oil is creeping back up. There's still something to be concerned about for the Fed.

Globalization Barreling Down the Highway Toward America's Middle Class

When Muhammad Yunus accepted the Nobel Peace Prize last month, the Bangladeshi banker who invented the practice of making small, unsecured loans to the poor, said the globalized economy was becoming a dangerous “free-for-all highway.” According to The New York Times:
Its lanes will be taken over by the giant trucks from powerful economies… Bangladeshi rickshaws will be thrown off the highway.
Further, as The Times paraphrased Yunus as saying:
While international companies motivated by profit may be crucial in addressing global poverty…nations must also cultivate grassroots enterprises and the human impulse to do good.
Yunus has accomplished untold good for his nation’s impoverished citizens, even as he and others for years have sounded the alarm about the negative impact of globalization on the world’s most impoverished. But more and more, it’s not only the poor who are being run off the road. America’s middle class increasingly finds itself faced with the effects of globalization—and seemingly no way to stop the collision. And white-collar professionals are among those now in the headlights.

The United States always has traded with other nations—but until the 1970s, the international share of the U.S. economy was modest, and exports and imports were generally in balance or showed a small surplus. As Economic Policy Institute (EPI) economist Jeff Faux notes: the last 25 years, foreign trade has risen 700 percent, more than doubling as a share of gross domestic product to 28 percent. In 2006, the excess of imports over exports will reach some $900 billion—7 percent of GDP [gross domestic product].

Faux’s briefing paper, “Globalization That Works for Working Americans,” was released Jan. 11 at the launch of a new network of progressive economists, the Agenda for Shared Prosperity. In it, he continues:
This dramatic shift reflects more than simply an increased movement of goods and services between the United States and other nations. It reflects an unprecedented economic integration with the rest of the world that is blurring the very definition of the "American" economy.

American business is steadily moving finance, technology, production, and marketing beyond our borders. Some 50 percent of all U.S.-owned manufacturing production is now located in foreign countries, and 25 percent of the profits of U.S. multinational corporations are generated overseas—and the shares are rapidly growing.
As EPI economist Larry Mishel puts it, more trade, regardless of its terms, is not better for all of us. For many working Americans, the huge growth in foreign trade has resulted in the loss of family-supporting jobs, downward pressure on wages and increased inequality: From 2000 to 2005 alone, 3 million manufacturing jobs disappeared, at least one-third because of our trade deficit. But the greatest damage has been to wages— Mishel estimates as much as a loss of $2,000–$6,000 annually for the typical household. The doubling of trade as a share of our economy over the past 25 years has been accompanied by a massive trade deficit, directly displacing several million jobs.

Mishel, who testified Tuesday before the House Committee on Ways and Means, told lawmakers:
That trade will make the distribution of income worse is embedded in fundamental economic logic. When American workers are thrown into competition with production originating from low-wage nations, both those workers employed directly in import-competing sectors and all workers economy-wide who have similar skills and credentials will have their wages squeezed. In fact, at the same time as trade flows with low-wage nations have increased, the distribution of income and wealth in the U.S. has grown more and more unequal.
Such a view is not confined to progressive think tanks. David Autor, an economist at the Massachusetts Institute of Technology The New York Times yesterday:
The consensus until recently was that trade was not a major cause of the earnings inequality in this country. That consensus is now being revisited.
After years of thinking the nation’s economic gains were passing primarily by manufacturing workers, middle-class professional and technical workers are recognizing the oncoming car wreck is headed in their direction as well.

Discussing a recent Center for American Progress study, White Collar Perspectives on Workplace Issues, Jim Grossfeld and Celinda Lake wrote on The America Prospect online that “many young, white collar workers are now as bewildered by the ‘new economy’ as manufacturing workers have been for a generation.”
As a 20-something techie in the once bustling Silicon Valley told us: "I think a lot of people, you know, 30 years ago, could get a job that was relatively stable, but, here I am, five years out of school, and I've had four jobs. It's not because I'm not good because I've gotten praise from every single job I've been at. It's just that the fact that the companies don't seem stable."

But it's not just that these workers' future career prospects look murkier. The quality of their work lives is tanking, too. It is difficult to overstate the importance of this decline. Technical and professional employees share a profound conviction that their work ought to be intellectually satisfying—even an expression of their values. However, when employers press for cost savings and workloads soar, psychic wages take a plunge. Echoing the sentiments of many of the workers we spoke to, when asked to describe her office, one San Jose woman answered: "Busy, overworked, under staffed, not enough people in the group to do all the work we need to do so everyone's doing a lot of work and just running around like a chicken with a head cut off."
In fact, new data compiled by EPI show employment growth in the past five-year post-recessionary period has been subpar due to a weak economy. This conclusion is supported by the fact that employment rates, which some thought were at the demographically set peaks, have risen sharply in response to job growth and falling unemployment in 2006.

The union movement doesn’t oppose trade and globalization. In fact, it’s precisely because we recognize we live in a global economy that we see a lot of policy changes that should be made at the federal level to enhance the quality and stability of jobs in this nation. And when trade deals are negotiated, they need to do more than line corporate pockets—they need to ensure workers don’t get run off the road.

Faux offers many solutions in his issue paper on globalization, one of many the Agenda for Shared Prosperity will issue in coming months in advance of the 2008 elections on topics such as pension, health care and more. One solution he offers: Eliminate perverse tax incentives.
By law, corporations that invest in the United States pay taxes when they are earned. But corporations that invest overseas can delay the payment of taxes until they repatriate their profits—which can take a long time. In 2005, in order to get some short-term relief to the fiscal deficit, the Congress voted to offer corporations that brought their money back that year a 5.25 percent tax rate, a much lower rate than they would pay on profits made in the United States.

This loophole might have been justified after World War II as a way of helping Europe and others get back on their feet. But it has long outlived its rationale and should be eliminated.

Indeed, U.S. integration into the global economy requires us to rethink our whole approach to taxation. Other nations, for example, use "border-adjustable" value-added taxes (VATs) to favor exports over imports. A progressive VAT is some-thing that ought to be considered as an instrument to level the playing field.
In contrast to the Hamilton Project, which supports unfettered globalization, Faux offers many other options to making globalization work for working people. It’s all here.

As AFL-CIO President John Sweeney wrote recently in a USA Today op-ed:
Without dramatic changes in trade policy, we will continue to hemorrhage good jobs, while corporations take advantage of workers whose basic human rights are violated daily.

4th Quarter GDP Up 3.5%

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 3.5 percent in the fourth quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent.

The Bureau emphasized that the fourth-quarter "advance" estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The fourth-quarter "preliminary" estimates, based on more comprehensive data, will be released on February 28, 2007.

The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, and federal government spending that were partly offset by negative contributions from residential fixed investment and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The acceleration in real GDP growth in the fourth quarter primarily reflected a downturn in imports and accelerations in PCE for nondurable goods, in exports, in federal government spending, and in state and local government spending that were partly offset by downturns in private inventory investment and in equipment and software and a deceleration in nonresidential structures.

First, this number caught me by surprise. I predicted a recession in Q4 '06 or Q1 '07. It doesn't look like that's going to happen anytime soon.

So, let's look at the numbers to see where the US is growing.

Real personal consumption expenditures increased 4.4 percent in the fourth quarter, compared with an increase of 2.8 percent in the third. Durable goods increased 6.0 percent, compared with an increase of 6.4 percent. Nondurable goods increased 6.9 percent, compared with an increase of 1.5 percent. Services expenditures increased 2.9 percent, compared with an increase of 2.8 percent.

Looking at the numbers, we see something a bit odd. In the 3rd quarter, purchases of food subtracted .07 from the overall numbers. In the 4th quarter, food added .69 to the number. In two previous quarters, we saw very slow growth in food purchases, but no negative numbers. It seems odd that purchases of food would somehow subtract from overall growth.

Overall, personal consumption expenditures added 3.05 to the overall number. Furniture and household equipment added .43 to the overall GDP number while residential investment subtracted 1.16 from overall GDP? That seems a bit off, especially when the same expenditure added .1 an .2 to 2Q and 3Q respectively. Some of those purchases might have been end of the year presents to the house -- sprucing up the place etc.. But a doubling in the number?

National defense spending added .53 to the numbers, whereas this spending had subtracted from growth in the previous 4 quarters. Overall federal spending added .31 to the numbers, whereas federal spending had subtracted from growth in the previous 2 quarters.

Exports of services added .4 to the overall number. This is the third highest amount services have added to the GDP number in the last 12 quarters. More importantly, this number is abnormally high. I wonder if there was a mega-deal that is responsible for this.

Disposable personal income increased 1.1% from the 3Q. I will caution -- this is a macro level number disproportionately affected by upper-income levels. However, rich people spend as well so it's important to include them in the calculation. This is probably the biggest reason for the increase in GDP.

Residential investment subtracted 1.16 from the overall number. That's a huge hit; it's also the third quarter where housing has impacted GDP in a big way. What's interesting is how housing's damage is contained in housing (at least so far).

I'm nitpicking with some of the above comments. This is obviously a good number. And again, my prediction of a recession doesn't look to be that good.

Housing Bottom? Highly Doubtful

From Safehaven:

New home sales rose by 4.8% in December, registering a fall of 17.3% on the year with 1.0631 million units sold in 2006, the largest drop in 16 years. Note that to sell these homes, an average of $47K in incentives was included. Also, unit sales are reported at contract signing, so these numbers do not include contracts broken where delivery was not taken by the buyers. Existing home sales fell by the largest amount in 17 years, with 6.48 million units sold for 2006, which is down 8.4% year over year.

All of the "soft-landing" economists are overlooking the fact that new and existing home markets retreated the most in over 15 years. That should put a chill down everybody's spine. That's more than a "simple correction"; that's a rout.

In addition, note builder incentives are not included in the purchase price of new homes. While the article uses an average amount for incentives, it is illustrative that builders are essentially bribing buyers to close the deal. Even with all of those incentives, buyers are canceling orders at high levels; all builders have reported large cancellation rates in their latest earnings reports. Also note that cancellations are not included in new home sales, meaning those numbers are overstated.

A simple "correction" is a decline of say 5%. A year-over-year decline 10%+ is an indication of a serious supply/demand problem.

India Growth Rate Increases

From Bloomberg:

India revised the economic growth rate for the year ended March 31, 2006, to 9 percent, the fastest pace on record, the government said.

The pace was faster than the 8.4 percent forecast earlier because of greater expansion in agriculture and manufacturing, the government said in a statement in New Delhi today.

``It augurs well for the gross domestic product for 2006- 2007,'' Finance Minister Palaniappan Chidambaram said in New Delhi today. ``Although, I must caution that since the base has now increased, we will have to wait and see how it reflects statistically on the growth in 2006-2007.'

This is really important news. For all the talk of China's growth, the emerging growth story for the next few years is likely to be India.

Food for thought.

Tuesday, January 30, 2007

Oil Has a Big Day; Another Nail in the Rate Cut Coffin

From Bloomberg:

Crude oil surged to its biggest gain in 16 months on speculation that colder weather and an improving economy will spur U.S. fuel consumption.

The National Weather Service predicted that below-normal temperatures will persist in the eastern U.S. for the next two weeks, and the price of natural gas, the country's most common home-heating fuel, jumped 11 percent. Consumer confidence in the U.S., where 25 percent of the world's oil is consumed, neared a five-year high, a report today showed.

``It's finally gotten cold, which will boost demand for natural gas and heating oil,'' said Bill O'Grady, director of fundamental futures research at A.G. Edwards & Sons in St. Louis. ``There's been a steady stream of good economic news in the U.S.,'' he said. ``The energy markets can no longer shrug off the economic numbers.''

As this daily chart of oil below shows, the market was probably a bit oversold at current levels. That means traders were looking for a reason to buy:

Photobucket - Video and Image Hosting

However, cold weather can't last forever to provide a floor for the oil market. But that wasn't the only reason mentioned for today's rally:

Oil is also getting support from the prospect that the Organization of Petroleum Exporting Countries will follow through on its pledges to cut production. The group, which pumps 40 percent of the world's crude, agreed in December to cut output by 500,000 barrels a day as of Feb. 1. That's on top of a reduction of 1.2 million barrels a day that went into effect in November.

OPEC's production cuts are finally having an impact on trader psychology.

But, that's not the only reason either. As mentioned above, all of the good economic news coming from the US us finally sinking in. A faster economy = more oil consumption by the US. In other words, the Goldilocks crowd hasn't counted on increasing oil prices.

To take this one step further, what does this mean for interest rates? All of the recent Fed statements have said inflation is still too high. This does not bode well for future rate cuts. In fact, I would guess that if oil continues rallying for the foreseeable future, rate cut talk will be declared dead on arrival.

UPS Issues Lower 2007 Earnings

Fromthe Financial Times:

UPS, the world's largest package delivery group, has warned it faces a "challenging year" in the US as the slowing domestic economy puts the brakes on parcel shipments.

Shares in the group were down more than 3 per cent on Tuesday afternoon after it issued lower-than-expected earnings guidance for 2007 and said the year got off to a slow start in the US.

But Scott Davis, chief financial officer, remained "bullish" about the long-term outlook, predicting that the US slowdown would prove short-lived.

"We feel that this economy is a bump in the road and expect it to get back to normal towards the end of this year or the start of 2008," he said, in an interview.

Everybody is always bullish about the outlook 1 or more years from now. This is one reason I usually discount the "future outlook" from the various Federal Reserve district's manufacturing surveys. It's just too easy to say, "things will be great in 2008!"

All that aside, UPS and Fed Ex ship a lot of packages in the US. When they issue earnings warnings it's important to pay attention. Just as importantly, here's a chart of the Dow Transports:

Photobucket - Video and Image Hosting

The average had a double top formation in 2006 and may be forming another one as we speak. More importantly, the transports failed to confirm the late 2006 rally. This is a clear violation of Dow theory. After you make goods, you have to ship them somewhere. When people aren't shipping you have to wonder how health the economy is.

Housing Bottom? Doubtful

From the Associated Press:

Prices of single-family homes across the nation rose in November at the slowest rate in more than a decade, a housing index released Tuesday by Standard & Poor's showed, countering other evidence that the housing slowdown may be nearing an end.

The S&P/Case-Shiller composite index showed a 1.3 percent year-over-year increase in the price of a single-family home based on existing homes tracked over time in 10 metropolitan markets.

For its 20-city composite index, prices grew 1.7 percent, the slowest rate ever for that data, according to the S&P index committee chairman, David Blitzer. That data has been collected since 2001.

"The weakness continues to spread," Blitzer said. "I don't see any signs of a bottom. Unfortunately, it's still looking pretty nasty from a housing point of view."

The last time the growth dipped lower than 1.3 percent for the 10-city index was in September 1996, when it measured 1.2 percent.

First -- the data record is only 5 years old for the 20-city composite index. In addition, the index was started just before the housing bubble started. So comparisons with the last 5 years are to a period of higher-than-average growth.

However, a slowdown in appreciation indicates sellers are just starting to get the message there is too much supply on the market.

On a related note,

"We have more than a million housing units of excess supply," said James O'Sullivan, an economist for UBS. "If you are looking for evidence that the worst is over for housing, you're not going to find it in this report. This argues that housing starts need to go down more."

In other words, don't expect a housing price rebound anytime soon.

Monday, January 29, 2007

Earnings Management

This chart has been making the econ blog rounds over the last few days:

Photobucket - Video and Image Hosting

Since October 2002, the lowest percentage of companies to beat earnings expectations is 59%. That's a pretty remarkable number when you think about it. It seems like most companies are going to beat expectations.

But -- let's look at the other side of the coin. Companies are pretty sophisticated about marketing. After all, most of these companies have sales and marketing departments, some have advertising accounts with some of the biggest advertising firms around and most CEOs are pretty marketing savvy. Here's the point: Companies do their best to influence market perception. It would not be surprising at all to learn that company x deliberately downplayed future expectations in order to beat those expectations and therefore hopefully drive the stock price up.

Remember: all of this miraculous "beating of expectations" also involves players who are very savvy about selling.

Food for thought.

Crucial Week For the Dollar

Here's a daily chart of the dollar from Stockcharts:

Photobucket - Video and Image Hosting

It's up 3.75% since early December. The main reason for the increase is encouraging economic news from the US. Since early December there has been a fair amount of speculation that the housing market has stabilized, job growth has been good, unemployment is low and the "official" retail numbers from the Census Bureau were decent. The Fed's official statements have all said they are still concerned about inflation, implying interest rates aren't coming down soon. All of this has helped the dollar increase in value. But is this a "real" rally, or is it a bear market suckers rally? Here's a weekly chart of the dollar:

Photobucket - Video and Image Hosting

The dollar chart has breached resistance at the 84 and 84.5 level. These are both technically strong developments that should encourage traders. While the last 4 bars have been weak, we can interpret those bullishly as the calm below the storm of this week's economic news or bearishly as overall market hesitancy.

Most importantly, the current rally is slightly above the 50% Fibonacci retracement level (84.82) of the October to December sell-off. This should have the bears ready to pull the short trigger on adverse news.

In addition, we have some important economic news this week -- payrolls, an FOMC meeting announcement on Wednesday and preliminary 4th quarter GDP. In order of importance, I would place the FOMC meeting first as interest rate policy is still a very important factor for currency traders. I would follow that with 4th quarter GDP because a perceived US slowdown combined with a perceived European and Japanese rebound were primary drivers of the October to December sell-off. Third I would place payrolls.

Theshort version?

"This week is make-or-break week for the U.S. dollar," said Kathy Lien, chief fundamentals analyst, at Forex Capital Markets in New York.

"The foreign exchange market has turned very dollar-bullish after a series of upside surprises in economic data, causing a sharp plunge in rate cut expectations," she added.

Mortgage Problems hit GMAC

From Seeking Alpha:

GM's announcement last Thursday that it is delaying its Q4 earnings report illustrates the effect the travails of the U.S. mortgage market have had on GMAC Financial Services, a lending unit GM divested in November. Cerberus Capital Management purchased 51% of GMAC for $14 billion, but there is some question whether the $14.4 billion tangible NBV ascribed to GMAC at the time was appropriate. At particular issue is GMAC's ResCap mortgage unit, which has suffered the same pressures that have hurt lenders throughout the industry. Lehman Brothers auto analyst Brian Johnson estimates that "complications" at ResCap could cost GM $300-400 million in cash charges in H1. A substantial payout to Cerberus could be a great strain on GM as it struggles to maintain liquidity and fund its restructuring. GM is planning to restate results from 2002 through Q3 2006 because of overstatements of deferred-tax liabilities. The company is forecasting a profitable Q4 with record revenue and says it ended 2006 with $26.4 billion in cash.

Expect to see more news like this over the next year. More and more lenders have gotten into the mortgage game. More and more sub-prime mortgages are moving into foreclosure at a faster pace.

Sunday, January 28, 2007

Fed President Lacker Gets the Wage Picture Right

From a 19 January speech:

Let me add a footnote here regarding wage rates and the inflation outlook. Some observers have viewed robust wage growth as a cause of inflationary pressures; I do not share that view. We can have healthy wage growth without inflation as long as we see commensurate growth in labor productivity. In fact, over time, real (inflation-adjusted) compensation tracks productivity growth fairly well, though they do not move in lockstep from quarter to quarter. I would note that the rate of growth of productivity shifted higher beginning in the middle of the 1990s, and while productivity is hard to forecast, I believe that reasonably strong productivity gains will continue and will warrant reasonably strong real wage gains. What would concern me – and we have not seen this as yet – would be a persistent increase in wage growth that was not matched by a commensurate increase in productivity growth. Ultimately this would result in higher inflation.

10-Year Treasury at 5-month Highs

From Bloomberg

Treasury 10-year note yields rose to the highest level since August this week after government bond sales drew weaker-than-expected demand and industry reports suggested the worst of the housing slump may be over.

Investors demanded higher returns on the $41 billion of securities sold as compensation for concern a strengthened economy will raise the threat of inflation. New- home sales rose more than expected and existing-home sales stabilized, the U.S. Commerce Department reported.

The government bond market has ``just been beaten down very hard,'' said Scott Gewirtz, head of Treasury trading at Lehman Brothers Inc. in New York, one of the 22 primary U.S. government securities dealers that trade with the central bank.

The yield on the benchmark 10-year note rose 10 basis points, or 0.10 percentage point, to 4.88 percent, according to bond broker Cantor Fitzgerald LP. It touched 4.90 percent yesterday, the highest since Aug. 16. The price of the 4 5/8 percent security maturing in November 2016 fell 24/32, or $7.50 per $1,000 face value, to 98 1/32.

For the last few months, talk of an interest rate cut has dominated trader's talk. I have speculated that an interest rate cut was off the table for now, largely based on numerous Federal Reserve speeches that said inflation was still too high. The Treasury market appears to share that view as the chart of the 10-year Treasury indicates:

Photobucket - Video and Image Hosting

Interest rate policy is the prime driver of the current expansion. Here is a chart from the St. Louis Fed of the effective Federal Funds rate:

Photobucket - Video and Image Hosting

The Fed lowered interest rates to 0% (after adjusting for inflation) by early 2002. Conventional economic thinking says it takes 12-18 months for interest rate changes to work their way through the economy. That would mean the last of massive cuts in 2001 fully hit the economy in early 2003 which is when overall GDP kicked into higher gear.

Now we have a Fed that is very concerned about inflation, as they have said so in a unified voice in their public speeches. Several non-official inflation measures (from the Cleveland and Dallas Fed) confirm inflation is still higher than the Federal Reserve would like. Therefore, a rate cut is still off the table, barring new economic numbers that work against that thesis.

So -- what does this mean going forward?

1.) Housing: We started to see better housing numbers in the last part of 2006. This is also when we saw interest rates drop. Therefore, don't be surprised if housing numbers fail to impress in the next few months.

2.) Borrowing costs are still historically low: 5% for capital is still cheap by historical standards. Therefore, don't expect a big dent in all of the M&A activity we have been seeing over the last half of 2006.

3.) The overall effect on consumer spending is a wild card. Pay is increasing, but consumers may want to allocate those increases to the record high debt payment level they currently have rather than spending on consumer goods. Also, the Christmas season was fair but not great, indicating consumer spending may already be slowing down.

Saturday, January 27, 2007

The Market's Last Week

Let's see how the markets acted last week. Just for review, I use the exchange-traded funds for the S&P 500 (SPY), Nasdaq 100 (QQQQ) and the Russell 2000 (IWN). The DJIA is at best antiquated.

Here's a chart for the S&P and QQQQs, which both say the same thing.

Photobucket - Video and Image Hosting

Photobucket - Video and Image Hosting

We had two days of gains followed by two days of selling. However, the selling occurred on noticeably higher volume. In addition, the SPYs hit a higher level on Wednesday, then quickly retreated to lower levels -- again on higher volume. The QQQQ's looked like they were going to start moving up, but sold off the earlier in the week levels -- on higher volume. So -- short version is simple: last week there were more sellers than buyers in the market. In addition, market participants sold into the rallies. This is not a sign of confidence.

The IWNs were a little different.

Photobucket - Video and Image Hosting

This average has been trading in a range since the beginning of December. Last week we say a similar pattern to the SPYs and QQQQs, but the IWNs sold off to about 50% of the Tuesday-Wednesday rally. In addition, it looks like the IWNs may be forming a triangle trading pattern, which usually means consolidation before a move in wither direction.

In summation, traders were concerned about the market last week, with an emphasis on selling rather than buying. Before I speculated that the decreased likelihood of an interest rate cut may be acting as a ceiling on the market. With the numbers from Friday showing strength, that may still be the case.

Friday, January 26, 2007

Weekend Weimar

Photobucket - Video and Image Hosting

New Home Sales Increase 4.8%

From Bloomberg

New home sales in the U.S. rose more than forecast in December, showing the real-estate market is improving following its biggest slump since 1990.

Sales rose 4.8 percent to an annual pace of 1.12 million in December, the most since April, from a 1.069 million rate the prior month, the Commerce Department said today in Washington. For all of last year, sales dropped 17 percent, the biggest decline in 16 years, to 1.061 million from a record 1.283 million in 2005.

Buyers were lured back into the market after builders cut prices and sweetened incentives. Combined with more jobs, rising incomes and still-cheap mortgage rates, the sales increase may give companies such as Lennar Corp. reason to be more optimistic on the outlook for this year

Looking at the numbers from the Census Bureau, there are two large gains in the Midwest and Northeast -- which each increased 27% from November levels. I am guessing that unseasonably weather weather had something to do with these increases. Finally, these numbers to not completely comport with the slew of horrible homebuilder announcements this quarter, a majority of which have been horrible. I speculated that homebuilders may be front-loading bad news into their reports -- that is, adding a ton of bad news to an already bad quarter simply to get it over with. We'll have to wait and see if this is the case.

(From Bloomberg) The median price of a new home fell 1.5 percent in December, to $235,000 from $238,600 a year earlier. The median price of $245,300 for all of 2006 was 1.8 percent higher than the previous year.

The number of homes for sale at the end of the month fell to 537,000, the fewest since January, from 542,000 in November. That left the supply of homes at the current sales rate at 5.9 months' worth, compared with 6.1 months in November.

The drop in median prices indicates that sellers concessions are starting to pay-off in terms of higher sales. However, I would caution that lower prices do not include the increased use of incentives in sales. I would also caution that new home sales do not account for cancellations. Home builders have reported a much larger cancellation rate over the last few months.

Home builders have piled on incentives, including offering free vacations and new cars, to sell homes and reduce inventories.

Such incentives are not subtracted from the sales price reported to the government. Sales are reported when a contract is signed, not at the closing of the sale.

What's more, many of the nation's home builders have reported a large increase in cancellations in recent months. Cancellations are not reflected in the government data, so the reported sales are likely overstated.

The drop in inventory is a welcome development. The huge inventory overhang over the last year has been very concerning. However

However, the inventory of completed-but-unsold homes rose to a record 172,000, up about 50% in the past year. With builders having to carry the costs of those vacant houses, housing starts should weaken further this year until the inventory is worked off, Moody said.

Durable Goods Orders Increase 3.1%

From the Census Bureau:

New orders for manufactured durable goods in December increased $6.7 billion or 3.1 percent to $221.9 billion, the U.S. Census Bureau announced today. This was the fourth increase in the last five months and followed a 2.2 percent November increase. Excluding transportation, new orders increased 2.3 percent. Excluding defense, new orders increased 3.9 percent.

These numbers jib with the Fed's industrial production figures for December.

Excluding transportation, the overall number has decreased each month for the last three months. This indicates how important Boeing is to the US economy.

There was a big drop in semi-conductors (down 22%), but semis increase big two months ago (up 29.2%). My guess is producers are still working off that inventory.

There was also a big drop in computers and related equipment (down 5.7%). Communication equipment dropped 10.7%,Considering how important technology is to the latest stock market rally, this does not bode well for the coming trading week.

We saw a good increase in auto production (up 5.8%). This is probably a production increase in anticipation of new models.

Thank-God foreign airlines are buying planes.

Construction Layoffs In Last Unemployment report

For the last few months, I've been looking at the weekly unemployment reports to see how the housing slowdown is impacting construction employment. There have been some pretty sizable layoffs, and last week was no exception.

California had 10,000+ layoffs in "construction and service" employment.

Minnesota had Pennsylvania had 4000+ layoffs in construction or "construction, trade and service."

Florida had 3400 layoffs in "construction, trade, service, and manufacturing industries."

I am expecting this slow bleed to continued for some time. We've had a rash of homebuilding companies report very negative numbers for the 4th quarter. While housing inventory decreased in the latest existing homes survey, it's still had very high levels. Sales in 2006 dropped the most in over a decade. In other words, the soft landing for housing is still suspect.

Thursday, January 25, 2007

Richmond Fed -- Another Bad Month

The Richmond Fed issued this report on January 23. Because I was traveling I missed it and am now playing catch-up/.

From the Richmond Fed

Manufacturing activity in the central Atlantic region contracted again in January, according to the Richmond Fed’s latest survey. Respondents reported further declines in factory shipments and new orders, although employment and order backlogs declined on pace with December. Capacity utilization moved slightly lower, while delivery times edged higher. In addition, manufacturers reported somewhat quicker growth in finished goods inventories.

Photobucket - Video and Image Hosting

This chart is not good -- it shows the Richmond Federal Reserve District had another bad month and has been contracting for the better part of 2006. On the good side, the overall index had similar performance between 2004 - 2005 without a major problem. However, seeing any index drop like this does not raise confidence.

Here are the shipments and new orders indexes. They both show a similar pattern.

Photobucket - Video and Image Hosting

Photobucket - Video and Image Hosting

We've seen mixed manufacturing news over the past month. While overall industrial production for December increased .4%, the 4th quarter showed an overall decline. The Phily Fed was up moderately, but was nothing to write home about. The Empire State Survey softened a bit. The Kansas Fed index eased as well.

All of these regional reports are pointing to a slowing of overall production in February.

The Long View: Where Is the Trade Deficit?


A long time ago, I looked at the current account blowout in The Long View: Current Account, which ended with a promise to have a look at the make-up of the blow out in terms of both geography and industry.

What I am looking at now is the broad outline of the geographic break down.

How broad? I am breaking the whole world down into The Americas, Europe, Asia & Oceania, and Africa. So the answer is, just about as broad as possible.

The Story So Far

Where I left off, before the long haitus, was the stark reality of the current account blowout:
  • It is massively bigger than anything we have experience in living memory

  • The problem is not income or unrequited transfers: it is trade

The trade account is made up trade in goods and trade in services. What I am going to be looking at today is trade in goods.

And before I put this information up, I will add a note that you should not shoot the messenger. After careful contemplation, I have come to the firm conclusion that messenger-shooting is counter-productive.

The source of this information is the same BEA site that provided the info for the first in this series. The only difference is that instead of working with table 1, I am working with Table 2b: Trade in Goods, Additional Historical Historical Data.

Where In The World Is the Trade Taking Place?

First, lets look at Exports to these four regions as a share of total exports. In all three of these graphs:
  • the Americas are the "dash" line,
  • Europe is the "dot" line,
  • Asia and Oceania is the "dash dot" line, and
  • Africa is the "dash dot dot" line.

The trends here are simple. Europe is losing ground as an export market, with most of that share being taken up by the Americas, and some being taken up by Asia and Oceania. Africa is a very small market, both because of the small size of so many African economies as export markets, and because of the dominance of European firms in those markets.

Now, lets look at Imports from these four regions, as a share of total imports.

Here we have the Americas as the dominant source of imports, with a loss in market share in the 80-85 period that is regained with something to spare. The second spot, however, trades place, Europe holding a slight lead over Asia in 80-85, while by 01-05, Asia and Oceania is on a path toward taking over as the primary source of imports.

Don't Forget the Blowout

A word of caution is in order here. It is important to bear in mind that the two diagrams are showing shares of totals that are sliding rapidly apart. That is, 45% (about) of our goods exports go to the Americas, and 35% of our goods imports. But that is 45% of a smaller number, and 35% of a bigger number.

The way I have set this up is to take the average of imports and exports as "average trade", and look at the Balance of Payments with each global region as a percentage of "average trade". And here ... as in the earlier diary that focused on the current account overall ... things are moving "south" at a very rapid pace.

Bear in mind here that what you are looking at is trade in goods, not goods and services overall. The US tends to have a stronger position in services than in goods. As you will see when I look at trade in services, a "small" negative balance in goods trade is good news for the overall trade account.

And for the global regions, the balance of trade compared to average trade breaks down into two stories. For the Americas, Europe, and Africa, the story by and large is improvements up through to 90-95, and then a rising deficit through to 00-05 (and, if we sneaked at table 2a, on to the present).

For Asia and Oceania, the "improvement" in the trade deficit is there, but it is very small ... from about -11% to about -9% ... and the slide since then is the single largest source of the trade deficit.

And remember: this last figure is compared to the average amount of all trade in goods. The deficit in goods trade with Asia and Oceania is more than 20% of the average trade in all goods.

The Path Ahead

Of course, whenever you find Economic bad news, you can find a pollyana that will explain that its just the market in operation, and in the end its all for the best. The main hope for the pollyanas are that "in the long run", the deficits in the goods trade will be balanced by surpluses in services trade.

And so, in the third installment in this series, I will see what the long term view of the balance of trade in services has to tell us. ... to be continued ...

Existing Homes Sales Decrease .8%

From Bloomberg

Sales of previously owned homes in the U.S. declined in December for the first time in three months, capping the biggest annual drop since 1989, a slide that's shown signs of bottoming.

Purchases dropped 0.8 percent to an annual rate of 6.22 million, the National Association of Realtors said today in Washington. For the entire year, sales fell 8.4 percent from 2005's record. In a sign the slide may be nearing an end, the number of homes on the market decreased for a second month.

``This grinding sort of correction will continue for much of this year,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``Housing will make a negative contribution to the economy this year, but the declines won't be as big as those we have seen in the most recent past.''

The best news in this report is the drop in inventory, which decreased from a 7.3 month supply to a 6.8 month supply. While that figure is still high, it is lower than recent inventory readings.

It's important to remember that interest rates have increased to around 4.85%. This does not bode well for continued strength in the housing market. When interest rates dropped from this level in mid-October we saw an increase in housing sales. Now that rates have returned to this level, I would expect sales to decrease.

While sales appear to have stabilized over the last four months, the high level of consumer debt indicates we are not out of the woods yet in housing.

Tuesday, January 23, 2007

State of the Union: A Nation Off Track

So, we’re all eagerly awaiting President Bush’s State of the Union address to hear the honest facts about the nation’s economy, among other key issues.

OK, not.

Looks like we’ll have to dig up the real deal on our own by taking a gander at some of the recent data and what they portend for us working types.

Tonight, Bush likely will talk about the great economic recovery we’ve seen in the past couple of years. But newly released data from two separate sources reveal just how skewed the distribution of economic growth has been in the current recovery, according to the Economic Policy Institute.
Data from the Bureau of Economic Analysis through the third quarter of 2006 show that a historically high share of corporate income is going into profits and interest (i.e., capital income) rather than employee compensation. And a newly released Congressional Budget Office (CBO) analysis of household incomes shows that a greater share of this capital income goes to the richest households than at any time since the CBO began tracking such trends. In other words, our economy is producing more capital income and that type of income is more likely to go to those at the very top of the income scale. Together, these dynamics are contributing to a uniquely skewed recovery.
That means those in the top 1 percent of the income scale received 59.4 percent of all the capital income in 2004 (CBO's latest data), up from 49.1 percent in 2000 and just 37.8 percent in 1979. The increase in the concentration of capital income to the upper 1 percent grew as quickly over the four-year period from 2000 to 2004 as over the preceding 11 years (1989–2000).

So, the economic recovery Bush will tout is mostly about the rich getting richer. And those tax cuts that Bush will call the shining star of his economic acumen? Guess what. They’re helping the rich more than the economy. As Citizens for Tax Justice puts it:
First, the tax breaks enacted since 2001 are heavily skewed toward the very wealthiest few. Second, because the tax cuts are being paid for with borrowed money, the cost of paying the added national debt more than wipes out any benefits from the tax cuts for 99 percent of residents in each state. Only the best-off one percent are net winners from the president’s fiscal policies.
But those tax cuts for the wealthy must do something for the overall economy, right? Indeed. According to the Center on Budget and Policy Priorities:
Congressional Budget Office data show that the tax cuts have been the single largest contributor to the reemergence of substantial budget deficits in recent years. Legislation enacted since 2001 has added about $2.3 trillion to deficits between 2001 and 2006, with half of this deterioration in the budget due to the tax cuts (about a third was due to increases in security spending, and about a sixth to increases in domestic spending). Yet the president and some Congressional leaders decline to acknowledge the tax cuts’ role in the nation’s budget problems, falling back instead on the discredited nostrum that tax cuts “pay for themselves.”
As the Center on Budget and Policy Priorities sums up:
A study by the president’s own Treasury Department recently confirmed the common-sense view shared by economists across the political spectrum: Cutting taxes decreases revenues.
The Bush administration ran the Clinton budget surplus into the ground after less than a year in office—and has kept adding to the national tab so that the United States is now more than $8 trillion in debt (that’s nearly $29,000 for every man, woman and child in the nation). Yet after all these years of draining the federal budget into oblivion, administration cronies now suddenly are sounding the alarm.

And they’re offering solutions. But they’re not suggesting the nation cut back on the $255 million a day Bush is spending on the Iraq war or back off those tax cut payoffs to wealthy donors. Instead, in a recent speech, Ben Bernanke, Federal Reserve chairman, used a warning about the growing deficit as the opening salvo to attack on what’s left of our country’s successful heath and retirement programs.
Warning against complacency over the federal deficit, Ben S. Bernanke, the Federal Reserve chairman, said Thursday that recent positive trends on the budget were a “calm before the storm” masking a long-term danger posed by looming deficits in Social Security and Medicare.


Bernanke’s comments were consistent with his past warnings, and those of his predecessor, Alan Greenspan, about the unfunded cost of the postwar generation’s retirement. But his tone was more urgent, and it seemed aimed at the arrival of a new Democratic-led Congress that is just now setting its priorities.
Let’s see. The budget deficit is in the dumpster and the Bush administration wants to salvage it by cutting back on retirement and health care. Let’s look at retirement. Without Social Security, millions of retired Americans would struggle in poverty. Between 1960 and 2004, Social Security helped cut the poverty rate among seniors by more than two-thirds, from 35 percent to 10 percent. Social Security takes on more, not less, importance as we go forward, with fewer and fewer workers getting retirement benefits on the job. As AFL-CIO Secretary-Treasurer Richard Trumka said in testimony today before the House Ways and Means Committee:
Only half of American families have an employer-provided retirement plan of any sort, a proportion largely unchanged for decades. However, whereas 40 percent of workers participated in employer guaranteed “defined-benefit” pension plans in 1980, today only 20 percent have such plans. In substituting “defined-contribution” for defined benefit plans, employers are shifting the risk of retirement onto workers. And American workers are ill prepared to carry this risk.
There are a lot of reasons why Bush’s approval rating has tanked, according to recent polls. And it’s pretty clear that Iraq isn’t the only reason 71 percent are saying the country is seriously off track.


I am traveling today and tomorrow. Posting will resume on Thursday afternoon.


Sunday, January 21, 2007

10-Year Treasury and Housing

Talk of a housing bottom started sometime in October. Since then we've gotten more news on new and existing home sales to stoke talk of a housing bottom (We've also had home builders report some really lousy earnings reports). In addition, interest rates started to drop about that same time. Here's a chart of the 10-year Treasury from

Photobucket - Video and Image Hosting

Rates have risen steadily since early December, largely because good economic news and public statements from various Fed governors dampened speculation of a rate cut in early 2007. As a result, the 10-year Treasury's interest rate is back near 4.84%. This was at least a non-restrictive interest level in October. We'll have to see if that still holds going forward.

Saturday, January 20, 2007

Cleveland Median CPI +.3%

From the Cleveland Federal Reserve:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.3% (3.5% annualized rate) in December. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

Earlier today, the BLS reported that the seasonally adjusted CPI for all urban consumers rose 0.5% (6.7% annualized rate) in December. The CPI less food and energy rose 0.2% (2.3% annualized rate) on a seasonally adjusted basis.

Over the last 12 months, the median CPI rose 3.7%, the CPI 2.5%, and the CPI less food and energy 2.6%.

Over the past few months, several Fed officials have commented they think inflation was too high. While no one has mentioned the Cleveland median CPI as the source of their information, I am beginning to think it carries more weight than the Fed is letting on. I can't prove that -- it's just a hunch.

The Markets Last Week

Let's take a look at how the markets performed last week. All charts below are from

Here's the chart for the SPY (S&P 500).

Photobucket - Video and Image Hosting

Remember the market's were closed on Monday.

Four days with a slight downward bias that followed three strong upward bars. That indicates several points. First, there was no news strong enough to send the market in either direction. In other words, the good news canceled out the bad news. We had some good earnings news this week (broker dealers), but we also had some bad news (Motorola, IBM, Intel) combined with CPI and PPI implying the Fed won't be lowering rates anytime soon. One analysis described the market thusly:

"I think we're at an extremely pivotal psychological level," said T.J. Marta, economic strategist at RBC Capital Markets. He said earnings and economic data support the Federal Reserve's notion that the economy can pull off a soft landing. Marta contends Wall Street is now mulling whether the economy will do a "fly-by" and skip a soft landing entirely with growth continuing apace.

This analyst didn't mention the implied ceiling caused by the Fed's not acting on interest rates. I think that is a big ceiling on the market right now.

Here's a chart of the QQQQs

Photobucket - Video and Image Hosting

This is where the bad tech news really hit hardest. Technology has reemerged as a market sector over the last 6 months, and the news from Intel, IBM and Apple hit this market hardest. Take a look at various technology related ETFs for the week:


Photobucket - Video and Image Hosting


Photobucket - Video and Image Hosting


Photobucket - Video and Image Hosting


Photobucket - Video and Image Hosting

This charts should cause concern among those in the bullish market camp. Technology has been the driver of the latest rally that started in late July/early August of last year. Now that sector is somewhat suspect going forward.

Here's a chart for the Russell 2000

Photobucket - Video and Image Hosting

We're back to a trading range for this index, between roughly 76 and 79.50. Trading ranges mean supply and demand are about equal. Traders aren't bullish enough to bid the index higher or bearish enough to sell it lower. We're waiting for some catalyst to make the market decide on one direction.

Friday, January 19, 2007

Phily Fed Up Moderately

From the Phily Fed:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a revised reading of -2.3 in December to 8.3 (see Chart).* This month, 25 percent of the firms reported increased activity; 17 percent reported decreased activity. The new orders and shipments indexes offer mixed signals about the strength of this month’s overall improvement. Demand for manufactured goods has not yet recovered much: The new orders index rose two points, from -0.9 to 1.3, after negative readings for two consecutive months. The shipments index increased 10 points from December; 37 percent of the firms reported an increase in shipments; 13 percent reported a decrease. Indexes for delivery times and unfilled orders remained negative, indicating shorter delivery times and a decline in unfilled orders.

Evidence of modest growth in manufacturing is suggested by replies concerning employment and hours worked. The percentage of firms reporting an increase in employment (21 percent) was somewhat higher than the percentage reporting decreases (13 percent). The current employment index was virtually unchanged from its revised December reading. The average workweek index edged four points higher, but the percentage of firms reporting longer hours (16 percent) was nearly the same as the percentage reporting shorter hours (15 percent).

Let's take a look at the general diffusion chart:

Photobucket - Video and Image Hosting

The gray line (current conditions) has trended down for the last 6 months or so. We saw a longer downtrend from mid-'04 to mid-'05 without a serious problem. That means the most recent decrease could be nothing more than a natural slowdown from peak activity. In addition, we have seen modest increases over the last year, so the recent increase into positive territory could be the beginning of a return to slower but positive production levels. However, we are near the 0 line, so this trend bears watching.

The new orders index rose two points, from -0.9 to 1.3, after negative readings for two consecutive months.

The new orders index isn't offering us much hope right now.

Here's some good news in the report:

Photobucket - Video and Image Hosting

The prices paid component has dropped for the last 6 months. This is good news on the inflation front.

The current employment index was virtually unchanged from its revised December reading.

We've seen manufacturing employment take a big hit during this expansion. Here's a chart of national manufacturing since 2000.

Photobucket - Video and Image Hosting

The large productivity gains have translated into fewer manufacturing employees. There is no reason to think this trend won't continue.

The short version is all the recent manufacturing numbers have showed a slightly positive reading not strong enough to warrant extreme optimism, but enough to warrant a soft-landing.

Explain This To Me

From Bloomberg:

``Central banks will get naughtier,'' said Jan Loeys, global head of market strategy at JPMorgan Chase & Co. ``They will see inflation and they will have to raise rates.''

OK -- I've been reading financial press for about 20 years. I have never see a central bank described as naughty. Maybe it's an English thing.....

Thursday, January 18, 2007

New Nome Construction Increases 4.5%

From CBSMarketwatch

New construction on homes in the United States rose for the second straight month in December, reflecting year-end strength in apartment construction, the Commerce Department estimated Thursday.

Meanwhile, the number of new building permits issued rose for the first time in 11 months.

Economists said weather played a major role in the increased building activity.

The increase in housing starts was likely due to "a few large multifamily projects that were able to get started due to record warm weather," wrote Joshua Shapiro, chief economist for MFR, in an e-mail to clients.

"We do not take the data as a sign that the housing market is stabilizing, nor do we believe the worst of the housing correction is behind us," wrote Richard Moody, chief economist for Mission Residential, in an e-mail.


Starts of multifamily housing jumped 42.1% in December, reaching 412,000. This marked the biggest gain since April 2005.

On the other hand, starts of single-family homes fell 4.1%, trending to a seasonally adjusted annual rate of 1.23 million from 1.28 million in November.

The starts in multi-family projects appear to be the reason for the jump. That makes sense. Considering the following charts from the WSJ:

Photobucket - Video and Image Hosting

Sales are trending down and inventory is up. This is not the time to be adding to inventory.

CPI Up .5%; Core Up .2%

From the Bureau of Labor Statistics:

On a seasonally adjusted basis, the CPI-U increased 0.5 percent in December, the first advance since August. Energy prices, which had declined in each of the preceding three months, rose 4.6 percent in December. Within energy, the index for petroleum-based energy increased 7.7 percent and the index for energy services increased 1.2 percent. The food index was unchanged in December. The index for all items less food and energy, which was virtually unchanged in November, increased 0.2 percent in December. Upturns in the indexes for apparel and for tobacco and smoking products werelargely responsible for the acceleration. Shelter costs rose less than in November, but still accounted for about 80 percent of the December advance in the index for all items less food and energy.

From Bloomberg:

U.S. consumer prices accelerated in December for the first time in four months, suggesting the easing of inflationary pressures that the Federal Reserve is counting on will be slow.

The consumer price index increased 0.5 percent last month, the most since April and reflecting higher costs for gasoline and natural gas, after no change in November, the Labor Department said today in Washington. Excluding food and energy, so-called core consumer inflation rose 0.2 percent, following no change a month earlier.

Let's break these numbers down a bit.

1.) The core and total numbers same in at or slightly above expectations -- depending on whether you read Bloomberg or CBS.Marketwatch for your forecasts. So the number won't be unexpected.

2.) Transportation and energy costs were a big reason for the increase. Transportation increased 1.8% after three months of declines and overall energy prices increased 4.6% after three months of decreases. Oil has dropped in a big way since late December, meaning January's number may be much lower than December.

3.) The 12-month December to December change is 2.5%. This is still high for the Fed.

4.) Bloomberg notes this is the biggest increase since April. That's not a good development.

Beige Book's Inflation News is Fair

From the Beige Book:

Overall prices increased moderately. Prices for energy and a number of materials have eased, and competition has kept prices for final goods in check. Atlanta, Chicago, Minneapolis and Kansas City described price pressures as easing or moderating. Manufacturers in the Boston and Cleveland Districts reported that input prices were stable, although contacts noted some increases in metal prices. Meanwhile, manufacturers in the New York District indicated some increases in input price pressures. Retail prices were steady in the New York, Atlanta and Dallas Districts, but were edging up slightly in the Richmond District. Philadelphia noted that reports of price increases at business firms were not as widespread as they were earlier in the fall. Dallas described price pressures as mixed, while San Francisco said final prices rose at a modest pace.

First -- copper prices have dropped since this report was written. That means the "some contacts indicated metal prices were increasing" has either already gone away or is in the process of ameliorating.

This report uses the word "moderating" and "eased" a lot. That plays into the Fed's general story right now, which is as the economy slows price pressures will weaken. This has been the Fed's contention for the last 6 months. When Bernanke first started using this language I was skeptical. However, the economy is making Ben look good right now.

The areas of inflation increases look more like inflation "hot pockets" -- areas of limited scope and influence rather than a system wide problem.

Ben speaks to the Senate today.

Wednesday, January 17, 2007

Industrial Production Increases .4%


U.S. industrial production rose by an overall 0.4% in December, as the high-technology and motor-vehicle industries posted strong output for the month, the Federal Reserve said Wednesday.


Bear Stearns economists said that, coupled with other recent data, the industrial output figure showed the economy improved at the end of the year.

"Data on employment, retail sales, and production suggest that the economy's momentum was picking up at the end of 2006," the economists wrote in a research note.

Let's look inside the report, because there are two sides to analyze.

Overall industrial production decreased -.3%, -.1% and -.1% in September through November, respectively. That means the overall .4% look like a rebound.

On a monthly basis there are lots of increases -- consumer durables and non-durables, business equipment (which saw a big bump), durable and nondurable manufacturing and mining all saw increases. These increases should give the market some confidence going forward because they occurred across a wide spectrum of industrial areas.

I should note that last months manufacturing ISM saw increases as well, although the index was hovering around 50 which is the line between expansion and contraction.

However, overall industrial production fell at a -.5% rate in the fourth quarter. The second lowest annual growth rate occurred in the third quarter at 4%. In other words, the fourth quarter saw an overall downturn. All industrial areas - manufacturing, consumer goods, energy, business goods -- saw low numbers on a quarterly basis. Manufacturing contracted -1.4% on an annual basis in the 4th quarter.

The breadth of this month's increases is a good sign. However, another month of increases is required before we pop the champaign corks.

Homebuilder Lennar Swings to Loss

From the

The Miami-based homebuilder lost $196 million, or $1.24 a share, for the quarter ended Dec. 31, reversing the year-ago profit of $581 million, or $3.54 a share. Revenue slipped 15% from a year ago to $4.27 billion.

Analysts surveyed by Thomson Financial were looking for an loss of 81 cents a share on sales of $4.15 billion.

The latest quarter includes write-offs of option deposits and pre-acquisition costs of $111.1 million and valuation adjustments of $382.8 million. Lennar said it posted a latest-quarter homebuilding operating loss of $319.4 million, as new orders dropped 6% from a year ago.

"Uncertain market conditions make it difficult to provide a 2007 earnings goal," CEO Stuart Miller said. "While we know that the margin in our backlog will result in lower profitability in the first half of 2007, we believe that if the current environment of strong employment, low interest rates and a healthy economy continues, and the market for new homes demonstrates traditional, seasonal improvement, we will meet or exceed our 2006 earnings of $3.69 per share."

Some of these losses could be the company loading a ton of bad news into an already bad quarter, essentially taking care of all the bad news at once. We have seen a large number housing companies report terrible fourth quarters that include a ton of bad news.

However, I wouldn't be surprised if we saw a continuation of this trend going forward for at least another quarter. Cancellations are high and the US consumer is heavily indebted with mortgage debt already. In addition, with the declining sales rate and increasing inventory, the market is shifting to a buyers market, which is going to put more downward pressure on prices.

PPI Increases .9% in December

From the BLS:

The Producer Price Index for Finished Goods increased 0.9 percent in December, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 2.0-percent advance in November and a 1.6-percent decline in October. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.5 percent in December after climbing 0.7 percent a month earlier, and the crude goods index increased 2.9 percent following a 15.7-percent gain in November.

Finished food products had the largest jump in 12 months, increasing 1.7%, while finished energy prices increased 2.5%.

The number ex-food and energy increased .2%.

The best news in the report was the 1.1% 12-month percentage change in the PPI from last December.

Both Reuters and Bloomberg note the number rose more than forecast, indicating traders may be taken back by the news.

Here's how Bloomberg reported the news:

Prices paid to U.S. producers rose more than forecast in December, reflecting higher costs for crude oil and gasoline costs that have since reversed.

The 0.9 percent gain in the producer price index followed a 2 percent increase in November, the Labor Department said today in Washington. So-called core wholesale prices that exclude energy and food rose 0.2 percent after rising 1.3 percent.

Crude oil costs have dropped 20 percent since mid-November, and some raw-materials prices have also decreased. The declines may reassure Federal Reserve policy makers that price pressures will ease. Dallas Fed Bank President Richard Fisher said last week that there's been ``encouraging news'' on inflation, and he's ``very comfortable'' with the level of interest rates.

``We have seen a notable moderation in year-over-year wholesale inflation in the second-half of the year,'' Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado, said before the report. The smaller increases ``suggest less inflation risk in the pipeline, which is a favorable development for the Fed.''

Reuters reported the news thusly:

U.S. producer prices rose slightly more than expected in December but they advanced at a far more moderate pace than a month earlier on smaller gains in energy prices, a government report on Wednesday showed.

The Labor Department's Producer Price Index advanced by 0.9 percent in December. Excluding volatile food and energy prices, the index inched up a smaller 0.2 percent. Still, the gains were slightly greater than expected.

Economists polled by Reuters ahead of the report were expecting a 0.5 percent rise in the overall index and a more moderate 0.1 percent advance in the so-called core PPI, which excludes food and energy prices.


Economists had forecast producer prices to rise 0.5 percent, according to the median of 70 estimates in a Bloomberg News survey. Estimates ranged from a 0.1 percent decline to a 1.2 percent rise. Core prices were expected to rise 0.1 percent.

Both reports noted the official government number came in higher than expected. This means traders may be taken back by the number.

Since December, copper has fallen in a big way (see below). Aluminum has dropped as well, although not as precipitously. Oil has also dropped, helped by Goldman Sachs rebalancing its commodities index. It is now at a 20-month low and is looking to test technical support at $50/bbl. All three of those figures bode well for next month's PPI -- assuming those trends remain in place. They also mean the markets are essentially doing the Fed's work for them -- dropping prices and reducing inflationary pressures so the Fed doesn't have to increase interest rates.

However, I think this number is too high to warrant talk of a rate cut anytime in the near future. All recent Fed speeches have included statements to the effect they think inflation is still a concern. This number will not ease those concerns.

Tuesday, January 16, 2007

More Mortgage Industry Job Cuts

From Reuters

ResCap, the holding company for the real-estate financing business of GMAC, said on Tuesday it would cut 1,000 jobs -- about 7 percent of its work force -- in a cost-cutting triggered by a slack U.S. housing market.

ResCap said it would incur a charge of about $10 million as a result of the job cuts, but expected to save $65 million in 2008 as a result of the reduction in its payroll.

The company said in a filing with U.S. securities regulators that it would cut 800 jobs by October and eliminate another 200 unfilled positions. The majority of the jobs would be cut in the first and second quarters of this year, ResCap said.

This is not news that occurs at a housing bottom.

Copper Prices Under Pressure

From Bloomberg

Copper prices in New York fell for the third session in a row on speculation demand will lag behind supplies with global inventories of the metal close to the highest since July 2004.

Stockpiles monitored by exchanges in London, Shanghai and New York have jumped 52 percent in the past three months, data compiled by Bloomberg show. Copper prices have dropped 36 percent from a record $4.04 a pound on May 11.

``The inventories are rising, and the price is falling,'' said John Gross, director of metals management at Scott Brass Inc. in Cranston, Rhode Island. ``The sentiment has changed. The market has been in a downtrend after copper broke the psychologically important $3 a pound level'' last month, he said.

Here' the daily copper chart:

Photobucket - Video and Image Hosting

We have a clear downtrend that started in mid-October. We also have a big gap-down in late December/early January. Downward gaps are very bearish chart signs; they signal a lot of downward price pressure.

Here's the monthly chart:

Photobucket - Video and Image Hosting

Prices really peaked back in late April/early May and have been in a downtrend since. We see the downtrend accelerate at the end of last year.

The Bloomberg article is pretty clear -- inventories have increase in 50% in three months. That indicates there there is a either a big drop in demand or middle men have greatly overestimated copper demand. Either way, excess supply = lower price.

Oil hits 19-Month Low

From Bloomberg:

Crude oil in New York plunged to the lowest in more than 19 months after Saudi Arabia's oil minister rejected calls for more production cuts.

The Organization of Petroleum Exporting Countries must wait to assess the effect of supply curbs that start Feb. 1, the minister, Ali al-Naimi, told reporters in New Delhi. Prices have plunged 16 percent this year, leading Venezuela and Algeria to call for OPEC to restrain output.

``The Saudis don't see the need to take any immediate action, which just reinforces the bearish sentiment in the market,'' said Kyle Cooper, director of research at IAF Advisors in Houston. ``If the Saudis don't want OPEC to make further cuts it won't happen.''

Crude oil for February delivery fell $1.78, or 3.4 percent, to $51.21 a barrel on the New York Mercantile Exchange, the lowest close since May 26, 2005. Futures touched $50.53, the lowest intraday price since May 25, 2005. Prices are down 23 percent from a year ago. There was no floor trading in New York yesterday because of the Martin Luther King Jr. holiday.

I'm fond of mentioning the market will do everything it can to humble you -- and it has a hell of a lot of tools at its disposal. Well, on January 89 I wrote that OPEC's discussions may give oil a price floor. Boy was I wrong.

I was watching Bloomberg TV earlier today and heard the Wachovia analyst mention OPEC's previous cuts were not fully implemented yet. This was why OPEC is not looking to cut production again. He also mentioned that stockpiles of oil are high right now, further depressing prices.

It is looking like technically, the big up-coming price level is $50/bbl.

NY Manufacturing Index Drops Sharply

From CBS MarketWatch

Manufacturing activity in the New York area declined sharply in January, the New York Federal Reserve Bank said Tuesday. The bank's Empire State Manufacturing index fell to 9.1 in January from a revised 22.2 in December. This is the lowest level since the summer of 2005. The drop was much greater than expected. Economists were expecting the index to slip to 20.0 from the initial estimate of 23.1 in December. The indexes for new orders, shipments and employment also fell sharply. The inventories index dropped to its lowest level in well over a year.

From the survey; trend of a particular indicator:

New Orders: Down

General Business Conditions: Down

Shipments: Down

Prices Paid: Up

Number of Employees: Down

Average Workweek: Down

Expectations in six months and the trend of a particular indicator:

General Business Conditions: Down

New Orders: Down

Shipments: Down

Short version? This report stinks.

Monday, January 15, 2007

National Retail Federation Says Holiday Sales Were "Subdued"

According to the National Retail Federation (NRF), retail industry sales for December (which exclude automobiles, gas stations, and restaurants) rose 3.9 percent unadjusted over last year and increased 0.4 percent seasonally adjusted from November. November industry sales were revised down from 6.3 percent unadjusted to 5.1 percent unadjusted.

December retail sales released today by the U.S. Commerce Department show that total retail sales (which include non-general merchandise categories such as autos, gasoline stations and restaurants) rose 0.9 percent seasonally adjusted from November and increased 3.6 percent unadjusted year-over-year.

“Unseasonably warmer weather and the slower housing market had a clear impact on consumer spending,” said NRF Chief Economist Rosalind Wells. “NRF expects these subdued gains to continue into the first half of 2007.”

Last month was the second month in a row where I took issue with the official government number. This type of news release leads to me to believe the new official Census sample is a bit off and will again be lowered with the next consumer numbers.


The Coming Week

This week we get some really important reports.

CPI (Thursday) and PPI (Wednesday) top of the list. Over the last few weeks, several Fed governors have come out and essentially said inflation is still too high above their comfort zone. This at a time when the official BLS numbers were pretty good on the inflation front for the last several months. Keep an eye on the alternate Fed inflation measures from the Cleveland and Dallas Fed. I'm suspecting these numbers are more important for the Fed than they are letting one.

We get two regional manufacturing reports; the New York (Tuesday) and Philly Fed (Thursday). Let's see how these jibe with the recent uptick from the ISM national survey. We also get industrial production.

Finally, we have housing starts on Thursday. Housing is still in a slump. As I have written before, I don't see a bottom yet because inventories are still very high and sales are still decreasing.

How Do the Markets Look After Last Week's Rally?

Here's a chart of the SPY's from Stockcharts.

Photobucket - Video and Image Hosting

The SPYs closed at $143.24, a touch higher than the $142.89 from mid-December. However, notice the lower volume total for Friday's close. New highs should be accompanied by increasing and/or high volume to indicate excitement. The lack of rising or strong volume makes the rally a bit suspect. The lack of high volume is not fatal, however. It's just something to keep our eyes on.

Here's a chart of the QQQQs:

Photobucket - Video and Image Hosting

Last week the QQQQs had a good rally with decent volume. Friday's close was above the highs of mid-December. This chart gives us some good upward momentum for the coming week.

Here's a chart for the Russell 2000 (IWM)

Photobucket - Video and Image Hosting

This is not a good chart for future upward moves. Last week's rally didn't break any new levels and occurred on decreasing volume. In other words, traders were less excited about this particular market index. Increasing prices on decreasing volume has all of the hallmarks of a reaction rally, implying the IWMs may be moving lower.

So, we have the QQQQs in a good technical position for the coming week -- rising prices with good volume. The SPYs are a bit suspect because of the lack of volume, but it's not fatal. The IWMs would need strong upward movement with better volume to break-out.

And here's my usual caveat: technical analysis isn't a science. The market's will do everything they can to humble you at every turn.

Friday, January 12, 2007

Weekend Weimar

Photobucket - Video and Image Hosting

This is the exact same look I get every morning before I walk my two -- an 11-Year old female named Kate and a 2-3 Year Old male named Sarge. They will sit there and just stare at me.

I'm traveling this weekend, so I won't be posting until Sunday night.

Have a good weekend.

Import Prices Up 1.1%

From the BLS:

Import prices rose for the second consecutive month in December and the 1.1 percent increase was the largest monthly advance since May. The price index for overall imports also increased for the fifth straight year in 2006, advancing 2.5 percent after more substantial increases of 8.0 percent and 6.7 percent in 2005 and 2004, respectively.

A 4.8 percent increase in petroleum prices was the largest contributor to the overall December rise. Petroleum prices resumed their upward trend after declining 21.5 percent for the three-month period ended in November. The index rose 6.2 percent overall in 2006, the fifth consecutive year the index advanced, but the smallest annual increase over that period.

Nonpetroleum prices increased 0.4 percent in December after a 0.9 percent advance the previous month. Prices for nonpetroleum imports rose 1.7 percent over the past 12 months after advancing 2.4 percent and 3.7 percent in 2005 and 2004, respectively. The December increase in nonpetroleum prices was driven by a 1.5 percent rise in nonpetroleum industrial supplies and materials prices. That advance in turn was led by higher prices for natural gas, up for the second consecutive month, metals and chemicals prices. The price index for nonpetroleum industrial supplies and materials increased 4.5 percent over the past year.

There is good news for Fed watchers in this report. Note that nonpetroleum import prices are showing a decreasing trend. On an annual basis, they rose 3.7% in 2004, 2.4% in 2005 and 1.7% in 2006. That annual trending decrease may rekindle speculation about a rate cut in the coming year.

In addition, oil prices have dropped in a big way since the beginning of the year. Depending on oil's price action for the remainder of the month, this may make the 1.1% increase in December nothing more than statistical noise.

The December to December percent changes in commodity imports was 2.5% for 2006, which is a decrease from the 8% increase in the December to December 2005 period. A decrease in oil prices is the primary reason for the drop.

Retail Sales Increase .9* in December

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for December, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $369.9 billion, an increase of 0.9 percent (±0.7%) from the previous month and up 5.4 percent (±0.7%) from December 2005. Total sales for the 12 months of 2006 were up 6.0 percent (±0.5%) from 2005. Total sales for the October through December 2006 period were up 4.9 percent (±0.5%) from the same period a year ago. The October to November 2006 percent change was revised from +1.0 percent (± 0.8%) to +0.6 percent (± 0.2%).

Yes, there's an asterisk in the title for a reason. I have a serious problem with this number.

First -- allow me to pat myself on the back. From CBSMarketWatch:

Retail sales increased a revised 0.6% in October and 0.7% excluding autos. This is down from the initial estimate of a 1% gain in overall sales and a 0.9% ex-auto gain.

Regarding the last report, I noted:

So, while the Census data says retail sales increased at a high rate in November, all other surveys say sales of various retail sales components decreased. There is an important difference in methodology in the other reports because they are seasonally adjusted. However, using the old Sesame Street game "One of these things is not like the other one" we come to the conclusion the Census will probably lower their numbers for November.

OK -- self-congratulation over.

Regarding the new .9% increased, consider the following from the International Herald Tribune on January 4th:

Industry sales at stores open more than a year rose 3.1 percent in December, making the holiday season this year the slowest in two years, the International Council of Shopping Centers said. Federated Department Stores' sales rose less than analysts anticipated, and Gap lowered its profit forecast by 18 percent after sales declined.

Slower growth threatens holiday-season profits, which account for almost a third of the industry's annual earnings. Retailers discounted flat-screen televisions, while cold-weather clothes went unsold during the warmest December in a decade.

The slowdown is also an indication that the global economy might not be able to count on the spendthrift U.S. consumer as much as it has in the past.

"The numbers are going to be less robust than everyone hoped for," said Patricia Edwards, who manages assets at Wentworth, Hauser & Violich in Seattle. "Promotions were high and earnings are going to be difficult across the board."

Sales for the two months of November and December increased 2.8 percent. In 2005, sales for the two months had risen 3.6 percent, while sales for December alone had gained 3.5 percent.

"It's at best a moderate gain," said Michael Niemira, chief economist of the International Council of Shopping Centers. "We have certainly seen a slower pace of spending at the end of the year. That's what we're likely to see in 2007."

The economist at the International Counsel of Shopping Centers was less optimistic about the sales numbers than the Census Bureau's numbers indicate. Considering this guy is paid to help spin numbers positively, his statements are very telling. Even removing gas sales from the total we get an increase of .6% which still seems high considering that less than robust pace reported in early January.

In addition, considering the following retail sale headlines from early January courtesy of the Big Picture:

• Retailers Post Disappointing Sales For December on Heavy Discounts (WSJ)
• Warm weather and gift cards pinch December sales (Marketwatch)
• U.S. Retailers' December Sales Slow on Price Cutting (Bloomberg)
• Time to Take Down the Decorations, Earnings Forecasts (Holiday Sales Tracker)
• Shopping Bags Half Empty
• Retailers Post Disappointing December Sales (AP)
• Wal-Mart Expects Continued Paltry Gains (WSJ)

Basically we have the same problem in December that we had in November. Every other data point suggests a fair Christmas season while the Census says sales were really good. Again -- color me skeptical.