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).

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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

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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:


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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

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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:

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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:

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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.

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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:

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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:

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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:

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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.

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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:

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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)

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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.