Weekend Weimer and Beagle

Mr$. Bonddad and I are in Dallas this weekend. We're seeing the traveling King Tut show (everyone should see their mummy on Halloween). So, while we visit the ancients, here are some pictures of our kids. I'll be back on Monday.

FOMC Statement and GDP Redux

Although this is a bit late, the latest FOMC statement highlights some serious problems:

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

I assume the Fed gets advance copies of of economic reports. Hence the inclusion of the following statement: "The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures." The Fed obviously knew about the serious drop in consumer spending coming in the GDP report. Take a look at this post from yesterday or this one.

But there are obviously other problems: "Business equipment spending and industrial production have weakened in recent months."

Here are the relevant charts:

Business is pulling back on investment:



Leading to a drop in industrial production at the macro level:




While is also leading to a drop at the regional level:



Leading to lower capacity utilization:



In addition, "slowing economic activity in many foreign economies is damping the prospects for U.S. exports." Consider the following story from today's WSJ:

The crisis has yet to affect the job market in Europe's largest economy, Germany. The number of unemployed people there fell to 2.997 million from 3.081 million in September, translating into a fall in the jobless rate to 7.2% from 7.4%, data from Germany's labor office showed. German labor-office think tank IAB said it expects the first signs of adverse economic effects to feed into the work force in the second half of 2009. Some economists say those signs could emerge earlier.

"Unfortunately, this is probably just [Germany's] last hurrah. With the economy slipping into a serious recession, unemployment looks set to shoot up significantly next year," said Holger Schmieding, an economist at Bank of America in London.

Consumer gloom is dragging down retail sales in the region and is likely to feed through to weaker output. Spanish retail sales in September fell 5.6% on the year in calendar-adjusted terms after falling 5.9% in August and 6% in July, data from Spain's National Statistics Institute showed.

Manufacturers' selling-price expectations fell for a third consecutive month in October. The indicator that measures consumers' price expectations over the next 12 months edged up to plus 19 from plus 17, indicating more people expected prices to rise over the coming year. But October's figure was well below June's plus 31, indicating consumers think the inflation peak has passed.

And this:

Japanese Prime Minister Taro Aso unveiled a stimulus package with five trillion yen ($51.5 billion) in new government spending to buttress Japan's economy against the fallout from the global financial crisis.

.....

The stimulus package is the country's second in two months, and follows similar moves by governments world-wide. Japan, which economists say faces a steep recession, announced a set of stimulus steps in August with about 1.8 trillion yen in new spending to tackle high energy and material costs. The Bank of Japan is also considering a cut in Japan's already low interest rates for the first time in seven years.

Finally we have "the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit." The bottom line is the credit markets are still in need of help. Credit is tightening and consumers are slowing their spending in a big way.

Bottom line: The FOMC sees a very gloomy picture. And there's a damn good reason for the gloomy outlook.

Forex Friday

Click for a larger image

On the weekly chart, note the following:

-- Prices have continually moved though upside resistance levels.

-- The shorter SMAs are above the longer SMAs

-- Prices are above all the SMAs

-- All the SMAs are moving higher

Bottom line: this is a very bullish chart. The dollar has become the safe haven currency again.



Click for a larger image

On the dollar's daily chart, note the following:

-- Prices have continually moved through upside resistance

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher

-- Prices are above the 20 and 50 SMA. In addition, prices are right below the 10 day SMA, using it for technical support.

-- The market is technically approaching overbought levels.

Bottom line: this is a bullish chart.

Today's Markets

OK -- it's actually yesterday's market, but who's counting?



Click for a larger image

On the daily chart, note the following:

-- Prices have broken through upside resistance from the downward sloping upper line of the triangle consolidation pattern. However, they haven't done so convincingly. Instead we see two hammers; the first is upside down and the second is right side up. The difference between opening and closing prices is very small. This indicates there is a lack of conviction.

-- Prices are above the 20 day SMA.

-- The smaller SMAs are below the larger SMAs

-- The 20 and 50 day SMA are heading lower

-- The 10 day SMA is turning positive.

-- The chart is technically oversold

Bottom line: short term indicators are bullish: prices are above the 20 day SMA and the 10 day SMA is turning positive. In addition the market is technically oversold. However, the longer SMAs are still negative -- the 20 and 50 day SMAs are heading lower.

Today's Markets

I will post this tomorrow morning. I am currently in the car with Mr$. Bonddad. We are driving to Dallas for a long weekend.

Another Look at GDP

Click for a larger image.

US GDP decreased .3% in the third quarter. Before we get really concerned about this report remember this is the first of three GDP reports. So the number could change.

Now -- the chart above shows what is responsible for growth and contraction in the GDP number. Note the following:

1.) Personal consumption expenditures provided a ton of bad news for the report. If this trend continues we have real problems. Remember -- PCEs account for 70% of US growth.

2.) Exports added 1.13 to the total. Do you think that will continue with the following chart of the dollar?


Click for a Larger Image

3.) Government spending really helped. However, this is the largest contribution government expenditures have made to the percent change in GDP since 4Q2004.



Click for a Larger Image

In other words:

1.) The consumer number is likely to continue given the weakening job market and plummeting consumer confidence.

2.) The credit crunch is likely to add to lenders woes, lowering domestic investment

3.) A higher dollar and slowing international economies are likely to lower the contribution from exports

4.) That leaves government spending propping up the economy

GDP Down .3%

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.3 percent in the third quarter of 2008, (that is, from the second quarter to the third quarter), according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 2.8 percent.

.....

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

Let's take this one bit at a time.

1.) Anyone who thinks the economy grew by 2.8% in the second quarter is a fool. That growth rate was the result of a statistical anomaly, not actual growth.

2.) The report noted that "Most of the major components contributed to the downturn in real GDP growth in the third quarter." In other words, there wasn't much good news.

3.) Personal consumption expenditures dropped 3.1% for the 3Q. Ouch. Durable goods purchases dropped a whopping 14.1% and nondurable goods dropped 6.4%. The US consumer is clearly trimming his spending. This does not bode well for the holidays.

4.) Residential investment dropped 19.1%. While I say this a lot it bears repeating: we're nowhere near a bottom in housing.

5.) Non-residential construction dropped 1%. With the credit crunch in full swing I would expect this to be the beginning of a trend. In addition -- and as noted by the blog Calculated Risk -- commercial real estate is not doing well right now.

6.) Exports increased 5.9%. With the rest of the world slowing down I don't expect this trend to continue.

7.) Government spending increased 5.8%. When government spending increases by this much you know you're in trouble.

All in all, this report indicates the problems are mounting for the US economy.

Thursday Oil Market Round-Up

On the weekly chart, note the following:

-- Price have continually moved through support levels

-- The 10 week SMA has moved through the 50 day SMA

-- The 20 week SMA is about to move through the 50 day SMA

-- The 50 week SMA is turning lower

-- Prices are below all the SMAs



On the daily chart, notice the following:

-- Prices have been moving lower for three months

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

Bottom line: both of these charts are bearish. The only bullish element is the markets are technically oversold right now.

Today's Markets

The big news today was obviously the Fed's interest rate decision. However, take a look at the last 10 minutes of trading:



That's a mammoth sell-off on incredibly high volume. Simply put traders got really scared about something in those ten minutes and just dumped shares.



On the daily chart notice we're still out of the triangle pattern. However, prices ran into the 20 day SMA and pulled back today. There's support from the 10 day SMA and the downward sloping trend line from the triangle pattern.

However, note we still have the following bearish points.

-- The 20, 50 and 200 day SMA are moving lower

-- The shorter SMAs are below the longer SMAs

HOWEVER


-- Prices are above the 10 day SMA and

-- The 10 day SMA is moving sideways.

The Detroit Death March Continues

From the WSJ:

General Motors Corp. said its third-quarter vehicle sales dropped 11% world-wide, the latest indication that growth overseas has stopped offsetting declining sales in North America.

GM, marking its third straight quarterly drop, sold 2.11 million vehicles in the quarter. That pushed GM, until recently the world's largest auto maker by sales, further behind Toyota Motor Corp., which last week reported third-quarter global sales of 2.24 million vehicles, down 4%.

In North America, a slumping U.S. market and a consumer shift to smaller cars from trucks, on which GM depends for much of its revenue, are hurting the auto maker. Until this year, overseas growth had kept GM's total vehicle sales rising, but sales in Western Europe have slid and key emerging markets show signs of weakness as economic and credit turmoil hurt consumer confidence.

The markets have had bad feelings about these companies for awhile. Note the following charts for GM and Ford:





Still -- let's lend these guys some money because they deserve it.

At the Federal Level It's About Medical Costs

Today's NY Times has an article about both candidates fiscal plans. The bottom line isn't pretty:

While both presidential candidates enter the campaign’s final week promising to be the better fiscal steward, each has outlined tax and spending proposals that would make annual budget deficits worse, analysts say, with Senator John McCain likely to create a deeper hole than Senator Barack Obama would.

This article is based on an analysis by the Tax Policy Center which concluded:

Both John McCain and Barack Obama have proposed tax plans that would substantially increase the national debt over the next ten years, according to a newly updated analysis by the non-partisan Tax Policy Center. Compared to current law, TPC estimates the Obama plan would cut taxes by $2.9 trillion from 2009-2018. McCain would reduce taxes by nearly $4.2 trillion. Obama would give larger tax cuts to low- and moderate-income households and pay some of the cost by raising taxes on high-income taxpayers. In contrast, McCain would cut taxes across the board and give the biggest cuts to the highest-income households.

This is a very difficult time for fiscal conservatives like myself. Over the last 8 years the Federal Government has been run by idiots who have spent a ton of money and issued mammoth amounts of debt to pay for it. Now we are faced with a true economic crisis of global proportions. The ability to issue mammoth amounts of debt without negative implications would be great. Instead we are left with a country already heavily in debt thereby making the payments for fiscal stimulus an economically iffy proposition. The bottom line is the US is going to engage in a big flurry of deficit spending over the next few years, thereby increasing the total amount of debt outstanding.

That means on the back-end we have figure out a way to pay for all of this debt we're going to issue. And a central issue there is medical costs:

But for the long run, they say, the president’s fiscal record will hinge on whether he can achieve the health care cost savings each promises, which in turn will help control the fast-rising expenses for Medicare and Medicaid. Neither candidate has a comprehensive proposal to address unsustainable growth in those programs.

According to the CBO spending for Medicare was $237.9 billion in 2001 and $436 billion in 2007. That's an increase of 83% in 7 years. Over the same period Medicaid spending increased from $129.4 billion to $196 billion or an increase of 51.45%. Total spending on these two programs has increased from 19.71% of federal spending in 2001 to 23.15% in 2007.

Wednesday Commodities Round-Up

On the weekly chart notice the following:

-- Prices are at or near their lowest level in three years

-- Prices have dropped 45.24% since their early July high

-- The 10 and 20 week SMA have moved through the 50 week SMA

-- Prices are below all the SMAs

-- The only bullish point to make is the average is technically oversold

Bottom line: this is a bearish chart.



On the daily chart notice the following:

-- Prices are below all the SMAs

-- Prices have continually moved through previously established support levels

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- The only bullish point to make is the average is technically oversold

Bottom line: This is also a very bearish chart.

Today's Markets

The main phrase I've seen with the today's market action is "bargain hunting." Here's the relevant chart:



Note the following:

-- Assuming the triangle pattern is how other traders are looking at the market, we've seen a consolidation occur for most of this month. Also note that today's action took prices through upside resistance and through the 10 day SMA. The next logical point of resistance is the 20 day SMA which looks to be right around the 97 level.

Here's a closer look at the triangle:



HOWEVER

-- All the SMAs are moving lowerr

-- The shorter SMAs are below the longer SMAs and

-- Prices are below all the SMAs

In other words, it's a bearish chart still.

We're Nowhere Near A Bottom In Housing

From Marketwatch:

Home prices in 20 major U.S. cities dropped 1% in August compared with July and fell a record 16.6% from the previous year, according to the Case-Shiller home price index published Tuesday by Standard & Poor's.

Prices have fallen 20.3% from their peak in June 2006.

"The downturn in residential real estate prices continued, with very few bright spots in the data," said David Blitzer, chairman of the index committee at S&P.

Prices have fallen in all 20 cities compared with a year ago. In the past year, Phoenix and Las Vegas have had the largest declines, down nearly 31% in both cities. Prices had fallen the least in Dallas (down 2.7%) and in Charlotte (down 2.8%). Prices fell more than 20% in six cities.

And don't expect people to rush in a buy all of these great bargains:

Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low in the series' 41-year existence, the Conference Board reported Tuesday.

Despite falling gasoline prices, the October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists surveyed by

MarketWatch had expected an October reading of 52. See Economic Calendar.

Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%.

"Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season," said Lynn Franco, director of the Conference Board Consumer Research Center.

So -- what will it take to see a bottom in housing:

1.) Year over year price stabilization. This is by far the most important thing to look for. When prices stop dropping then we have a bottom.

2.) But this won't happen until we have a bigger drop in inventories. Right now the existing homes market is coming off of a record high in terms of absolute numbers. The months of available supply at current sales rates is still at high levels as well. This inventory has to get worked off before we can see any stabilization. The problem is it's going to take awhile to get this done. And inventories won't drop until we deal with the massive vacancy rates in the housing market



I'm loathe to put any time possibility on this; there are just too many factors to consider and deal with. My best guess is that maybe (and that's a big maybe) by next summer we'll see enough of a work-off in inventories to see a price bottom.

Read This Now

Corey at Afraid to Trade has a great analysis of the S&P 500.

Life Insurers May Get Some of the Bail-out Money

From Bloomberg:

U.S. life insurers are in talks with the government for potential investments as companies jockey for the remaining $90 billion of the $250 billion set aside to prop up ailing financial companies.

The Treasury has been ``asking us how we can fit into the program,'' said Jack Dolan, spokesman for the Washington, D.C.- based American Council of Life Insurers, declining to name companies that may participate.

Life insurers, including MetLife Inc. and Prudential Financial Inc., have lost more than half of their value this month on concern that investment declines will squeeze liquidity and force them to raise capital. American International Group Inc., once the world's largest insurer, ceded control to the U.S. on Sept. 16 after losses from bad bets tied to housing.

Here's what everyone is concerned about:



The reason for the concern is justified. Life insurers are some of the largest institutional investors on the planet. They take premiums, investment them over multiple times frames and then pay-out the policy after many years of compounded growth. However, the stock market has taken a big hit over the last few months. In addition, institutional investors are also large purchasers of bonds/fixed-income products. As a result, all of the write-downs over the last years have created some problems for the industry.

Take a look at some charts from the industry:

Metlife:



Prudential:



This are not encouraging charts.

Treasury Tuesdays

Let's take a longer look at the Treasury market to see where we are in the cycle:



Note first the multi-year double bottom. The first bottom occurred in mid-2006 and the second occurred in mid-2007. In mid-2007 the market started an almost year-long rally caused by the credit crisis. Then the market sold-off because of a stock market rally, only to rally again.

Note that in 2008 we have a double top formation with the first rally ending at the end of 1Q 2008 and the second rally ending at the end of 3Q 2008. Also remember that on the other side of Treasuries' price is yield, which is inversely related to price. That means higher-price = lower yield. This means there is a limit to upward price appreciation of a bond because eventually the yield won't adequately compensate the purchaser. Given the higher pace of inflation this year I think it's fair to say we have probably reached the top of the price range for treasuries.

Assuming that we have seen the top treasury prices we have two possible moves.

1.) Sideways: below are two charts -- the multi-year chart from above and a 1 year chart that use the same upper and lower lines of support and resistance. A sideways market means bull and bear forces are in equilibrium. On the bull side we have further problems in the stock market, the credit crisis and the flight to safety. On the bear side we have more treasury issuance from the increased US government funding needs and yields not being high enough to compensate investors for inflation.





2.) A sell-off: This would assume there is a viable alternate investment which would consistently draw funds from the Treasury market. Given the highly volatile nature of the stock market right now I don't see this happening.

Today's Markets

First, remember that I originally thought the 90 line of support was the most important for the SPYs. Additionally, I thought the support established at 84 was too weak for the current market. Well:



Today we see the market holding at a bit above 84, making that level really important right now.



On the 10 day chart, notice that we had really heavy selling right at the end of trading today. Also note how important the level right above 86 is right now.

On the daily chart, remember we still have an incredibly bearish chart -- all the SMAs are moving lower, the shorter SMAs are below the longer SMAs and prices are below all the SMAs

New Home Sales Surprise to the Upside

From Bloomberg:

Sales of new houses in the U.S. were unexpectedly rising before credit markets froze this month, having rebounded from a 17-year low thanks to a drop in prices.

Purchases increased 2.7 percent in September to an annual rate of 464,000 from 452,000 the prior month that was less than previously estimated, the Commerce Department said today in Washington. The median sales price decreased to a four-year low.

I'm less impressed with new homes sales than existing home sales largely because of the size difference between the markets. New homes on the market are about 10% of the existing home sales market (400,000 vs. 4.2 million). However, it is important to keep track of both markets.

The following two graphs from Calculated Risk indicate why I don't think we're anywhere near a bottom.

Although the absolute number of homes on the market has been decreasing:



The rate of sales has also been decreasing which is increasing the number of months' of inventory on the market.



That means further price declines are ahead, especially considering the job market is looking terrible leading to lower confidence leading to fewer homes purchased.

Holiday Sales Looking Bleak

From the WSJ:

"Retail executives are expecting this to be the toughest holiday season in more than 15 years," said Doug Hart, a partner in BDO Seidman's retail and consumer products practice. The pessimism is "pretty broad across all the categories," except at discounters, which typically do well in an economic downturn.

Thirty-nine percent of the executives said they expect same-store sales to decline this holiday season, 41% said they expect flat sales and 20% said they expect sales to rise. Last year, only 5% of chief marketing officers told BDO Seidman that they expected sales to fall and 41% said they expected to ring up higher sales.

In a more ominous sign, 65% of the executives said they don't expect to see a meaningful economic turnaround until the third quarter of 2009 at the earliest. The survey, conducted Sept. 22 through Oct. 17, involved executives at retail companies with sales of more than $100 million, said BDO Seidman, an accounting and consulting firm.

This shoudn't be a surprise. However, let's put a few pieces together to tell the complete tale.



The year over year rate of employment growth has been dropping for about 2 years.



Unemployment has been rising for about a year and 3/4. Therefore there is less money being made leading to



A drop in personal consumption expenditures. A subset of this data is retail sales



which are also dropping sharply.

Market Mondays

I'm back. Let's start off the week with a look at the SPYs.



There are several ways to look at this chart. The first is as a triangle. While I don't disagree with this analysis I have thought that a broader view is needed to take the high volatility into account. As a result, I thought this was more of a complex bottom (meaning there really wasn't a recognizable trading pattern forming) then anything else. I thought there were two important price levels: 90 and a bit below 84. In addition, I thought 90 was far more important because there was a lot more action around that level.

The reason for all of this is my thesis was we were in a bottoming stage. The market has dropped for about a year. We're at levels from 2002-2003. In other words, it was time to start looking for a point to put money back into the market.

That is looking less and less likely. First the chart is still extremely bearish. Consider the following points:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- Prices are near the low point of the trading range

Then we have this news today:

Asian markets swooned for the second straight trading day as fearful investors pulled out of the region's equity and currency markets, leading to a 12.7% drop in Hong Kong and a 6.4% drop in Tokyo.

.....

Markets in Shanghai, the Philippines and Taiwan also fell, while Mumbai and Bangkok were down intraday.

In Europe, the pan-European Dow Jones Stoxx 600 index fell 5% to 188.82, a level not seen since early 2003. The U.S. looked set for a dismal opening: The S&P 500 index futures contract was trading 4.3% lower at 828.70.

Then there is this look at the labor market:

A rash of new job data show the labor market is now the worst it's been since the two prior recessions in 2001 and the early 1990s. One of the starkest indicators is that the number of people who have been unemployed for 27 weeks or more reached two million in September. That's 21% of the total unemployed, and approaching the prior peaks of about 23% in 2003 and 1992. The prospects of these job seekers grow dimmer as layoffs spread beyond the financial, home-building and auto industries.

Also in September, companies saw 2,269 mass layoffs -- in which at least 50 people are let go at once -- more than at any time since September 2001. And while the unemployment rate is at a five-year high at 6.1%, a broader measure of weakness that includes people who have stopped looking for work or whose hours have been cut to part-time is 11% -- the highest in 15 years.

What worries many economists is that labor markets usually reach their weakest point after a recession has ended. During the so-called "jobless recovery" following the 2001 recession, jobs continued to be shed after it was officially declared over. But the current weakness comes as the country heads into a recession that is now forecast to be deeper and longer than previously thought.

"No one thinks we are anywhere near the bottom of this, and we're already rivaling these other recessions," says Heidi Shierholz, an economist at the Economic Policy Institute, a left-leaning think tank in Washington.

Bottom line: I'm pretty sure I was wrong about this being a bottom.