Weekend Weimer and Beagle

For reasons unknown to me as of this writing, I am unable to upload pictures of the kids to the Google blog account. And that really bugs me because I've got some great photos. My $i$ter in law made some incredibly cute blankets for the kids -- she even put a "Bonddog" in the corner of each blanket with each dogs name. So basically, I'm whetting your appetite for these pictures as soon as I can figure out why they're not uploading.

So until Monday, have a good and safe weekend.

Second Half Recovery?

From CNBC

"As a result, this recession looks to be longer and more severe than originally forecast. Still, there are indications that the second half of the year will show improvement," he said.

Lower energy prices and concerted monetary and fiscal policy efforts should set the stage for a recovery later in 2009, he said.

"Energy prices have fallen dramatically, making it much less expensive to drive cars or heat homes," he said, "Fiscal stimulus packages being discussed in Washington could provide an economic boost. And monetary policy is also contributing," he added.

The Federal Reserve last month cut its benchmark fed funds rate to a range of zero to 0.25 percent after an aggressive rate cutting cycle and has rolled out a raft of unprecedented liquidity programs to support key credit markets in its effort to battle the worst financial crisis in 80 years.

"While all these developments will take time to fully impact the economy, they should be sowing the seeds of a recovery later in 2009," he said.

A lot of us are banking on the fiscal program to really help ameliorate the damage in the second half of next year. The Fed president also makes a strong case about lower energy prices having a net positive effect. Then there is the issue of monetary policy. In general it takes 12-18 months for interest rates to move through the economy. Assuming we are still in a time when that is an appropriate analysis (and we may not be), the impact of lower rates will be hitting the economy all next year. Assuming all of this to be accurate and the second half of next year will be OK but not great. This is the scenario that I think is most likely, but there are a lot of ifs that have to happen for that work.

Job Losses, Well, Suck

From the BLS:

Nonfarm payroll employment declined sharply in December, and the unemployment rate rose from 6.8 to 7.2 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Payroll employment fell by 524,000 over the month and by 1.9 million over the last 4 months of 2008. In December, job losses were large and widespread across most major industry sectors.

In December, the number of unemployed persons increased by 632,000 to 11.1 million and the unemployment rate rose to 7.2 percent. Since the start of the recession in December 2007, the number of unemployed persons has grown by 3.6 million, and the unemployment rate has risen by 2.3 percentage points. (See table A-1.)

About 1.9 million persons (not seasonally adjusted) were marginally attached to the
labor force in December, 564,000 more than 12 months earlier. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey. Among the marginally attached, there were 642,000 discouraged workers in December, up by 279,000 from a year earlier. Discouraged workers are persons not currently looking for work specifically because they believe no jobs are available for them. The other 1.3 million persons marginally attached to the labor force in December had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities. (See table A-13.)

There is no good news in this report; it is uniformly bad across all sectors and areas.

In addition, consider this executive summary from a new BLS report:

Another important indicator of labor market difficulty, the number of persons working part time for economic reasons, has suggested a softening in the demand for labor since about mid-2006. Sometimes referred to as involuntary part-time workers and viewed as underemployed, these individuals wanted full-time jobs but worked less than 35 hours during the survey reference week primarily due to slack work (a reduction in hours in response to unfavorable business conditions) or the inability to find full-time work. In November 2008, 7.3 million persons were employed part time for economic reasons, up by 3.4 million from a recent low of 3.9 million in April 2006.

And in one of the greatest ironies of all, the BLS added 72,000 jobs to this report thanks to the birth death model.

About the TARP Criticism

From the WSJ:

The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges.

In the most scathing criticism yet of Treasury's implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appear to be "significant gaps" in Treasury's ability to track hundreds of billions of dollars of taxpayer money.

"The panel's initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury," said the draft report, which found that the department has "not yet explained its strategy" for stabilizing the financial markets.

The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions.

Let's look at this in a few smaller pieces:

1.)The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system: True, but there's a reason for that: the Treasury's rationale has been changing. First they were going to buy troubled assets, then they injected capital into the banks. The bottom line is the second option -- injecting capital -- was a far better idea. But it was the Treasury's second choice. And don't be surprised if a third option emerges and is debated.

2.) not answered questions asked by a government watchdog: Big problem for which there is no defense. If you get taxpayer money, you answer taxpayer questions.

3.) and has done nothing to help struggling homeowners: my understanding was this was not part of the TARP's original plan. I could be wrong (and if I am please let me know), as the initial bill was passed quickly with the usual "shove this in at the last minute" mentality. That's not to say nothing should be done, because this is at the heart of the problem the US economy is facing right now.

4.) having no ability to ensure banks lend the money they have received from the government: news flash: loan issuance drops during a recession. In addition, according to the latest Quarterly Banking Profile from the FDIC banks are really struggling meaning loan issuance isn't a high priority right now.

5.) having no standards for measuring the success of the program: The US financial system is still living and breathing. That makes it a success.

Let me back up a bit. I think what the Treasury was originally trying to do was prevent a systemic meltdown -- like the one that started the Great Depression. Their primary objective was to prevent a wave of failures and collapses that would paralyze the economy and send really painful ripples around the globe. And in that, so far, we've succeeded. I think an emergency room analogy is appropriate. The person came in after a car wreck caused by a DUI. This is not the appropriate time to lecture them on the dangers of what they did. Instead it is the time to stabilize the body and get it into surgery.

And to hope that this would somehow lead to an increase in loans in the middle of a recession where banks are in the process of writing down asset values is a misplaced fantasy. That wasn't going to happen with the money.

The lack of communication with Congress about what is happening is wrong. There is no defense for it.

So -- what should happen with the money? All of the government money received should be placed in a separate account at the bank. It should first be used to stabilize that bank, for example, if the bank has to increase its loan loss reserves or has to write down the value of assets. The bank should be able to use the money to buy a distressed institution so long as the merger will not cause the buying institution to become distressed. In addition, the bank should suspend all dividend payments and bonuses for all employees. This is an emergency -- and in an emergency everybody tightens their belt.

Forex Friday's

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Notice the following on the weekly chart

-- Prices have dropped to about the 58.2% Fibonacci retracement level from the late 2007 rally

-- The 10 week SMA is moving lower

-- The 20 week SMA is providing upside technical resistance

-- The MACD has topped out and is now falling

-- The RSI is falling



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-- Prices have been rallying since mid-December, but

-- Prices have run into upside resistance at the longer-term trend line

-- The 50 day SMA is moving lower, but at a slight angle

-- The 20 day SMA is moving lower but

-- The 10 day SMA is moving higher

-- Prices and the 10 and 20 day SMA are in a tight configuration

-- The RSI is rising and

-- The MACD is bottoming out and is looking to move higher

Bottom line: there is a lot of conflicting information on this chart.

Today's Markets

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Notice the following on the chart

-- Prices are right at the 10 day SMA. They have sold-off are a nice rally.

-- The volume today was lighter than the previous day

-- The 10 day SMA has crossed over the 20 and 50 day SMA

-- The 20 day SMA is above the 50 day SMA, but the SMA is now moving sideways.

-- The upward trend line is still in place

Bottom line: we're still in a rally

Jobless Claims At 26 Year High

From Bloomberg:

The number of Americans collecting unemployment benefits surged to a 26-year high as the labor market worsened in a yearlong recession.

Initial jobless claims unexpectedly fell by 24,000 to 467,000 in the week that ended Jan. 3, the lowest level in almost three months, the Labor Department said today in Washington. The total number of people getting benefits rose a week earlier to 4.6 million, the most since 1982.

While the government projects a surge in firings in late December and early January, job cuts may have come earlier last year as sinking sales and the worst credit conditions in seven decades forced companies such as General Motors Corp. and Chrysler LLC to pare costs. The claims report came as President- elect Barack Obama warned the U.S. risks sinking deeper into an economic crisis without a stimulus package of about $775 billion.

“The labor market is just hemorrhaging here,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, who correctly forecast claims would fall. “Just look at the continuing claims numbers, they give you a better idea of what is going on. Nobody can find work once they’re fired.”

This is not looking good.

However, I still think (maybe it's a wild hope) that we're in the absolute worst part of the storm right now. I am hoping it will get better by the end of the second quarter.

Retail Takes It On the Chin

From the WSJ:

Retailers' sales slumped in December, with even Wal-Mart Stores Inc. bending to economic realities by cutting its earnings expectations for the current quarter.

Other U.S. retailers also cut their outlooks, including Gap Inc., Pacific Sunwear of California Inc., Macy's Inc. and Ulta Salon, Cosmetics & Fragrance Inc.

Retailers' November results were terrible, made worse by the fact that the timing of Thanksgiving last year pushed some post-holiday sales into December. But the spillover did little to bolster December's numbers.

Wal-Mart, which has benefited from bargain-hunting in a weak economy, reported that for its US. stores open at least a year sales, excluding gasoline, grew 1.7% last month amid a 1.9% increase at its namesake chain and 0.1% rise at Sam's Club.

This shouldn't be surprising; retail sales in particular and personal consumption expenditures in general have been terrible. Consider this from the latest Fed minutes:

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months.

Thursday Oil Market Round-Up

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Notice the following on the weekly chart

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

BUT

-- The MACD is oversold, and

-- The RSI is oversold



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Notice the following on the daily chart

-- Prices are below the 50 day SMA, just moved through the 20 day SMA and are resting on the 10 day SMA. That's a big technical move for one day -- especially with such a large bar.

-- The 10 and 20 day SMAs are starting to move higher

-- The MACD has been rising for the last two months

BUT

-- The RSI is dropping.

Today's Markets

Or more specifically -- yesterday's markets.



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On the daily 5 minute chart, note prices have almost fallen to the 50% Fibonacci retracement level.



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On the three month chart, notice the following:

-- The 10 and 20 day SMA are moving higher

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

-- The 10 day SMA is about to cross over the 20 day SMA

-- Although prices fell today they are still above the shorter SMAs

Today's Market

I'm writing this from my IPhone and obviously can't get to a computer. I'll post the market recap in the morning.

It's A Small World After All

From the Fed's latest Minutes:

Economic activity in most advanced foreign economies contracted in the third quarter, driven by sharp declines in investment and by significant negative contributions of net exports, as the global recession took hold more strongly. Incoming data pointed to an even weaker pace of activity in the fourth quarter. In Canada, however, real gross domestic product (GDP) increased at a faster-than-expected pace in the third quarter, though consumption and investment continued to soften. In the euro area and the United Kingdom, purchasing managers indexes fell in November to levels associated with severe contractions in economic activity. Labor market conditions in the advanced economies deteriorated further, with most countries experiencing rising unemployment rates. In Japan, real GDP fell in the third quarter as domestic demand declined and private investment fell for the second consecutive quarter. After peaking in the third quarter, consumer price inflation moderated in all advanced foreign economies, primarily as a result of falling energy and food prices. Economic activity in most emerging market economies decelerated sharply in the third quarter, though a surge in agricultural output helped to support activity in Mexico, and the Brazilian economy continued to expand rapidly. In Asia, output decelerated significantly, as the pace of real activity moderated in China and several other economies saw declines in real GDP. Recent readings on production, sales, and exports suggest that emerging market economies weakened further in the current quarter. Headline inflation generally declined across emerging market economies, primarily because of lower food and energy prices and, in some cases, weaker economic activity.

Alcoa's Job Cuts

From the WSJ:

Alcoa Inc. announced the elimination of about 15,000 jobs, more plant closures, plans to sell assets and a 50% cut in capital expenditures to contend with the sustained recession.

The moves raise the question of whether other companies that have cut costs also will feel the need to dig deeper. Alcoa, the world's largest aluminum producer, announced a round of cost cutting in October when demand for commodities and the availability of credit began to fall.

The combined restructuring will result in a fourth-quarter charge of $900 million to $950 million, or $1.13 to $1.19 a share. The company expects to report fourth-quarter earnings next week. Alcoa earned $632 million, or 75 cents a share, in the fourth quarter of 2007.

"Many of these things are painful and many of these things are drastic," Alcoa Chief Executive Klaus Kleinfeld said in an interview Tuesday. "We will continue to monitor the dynamic market situation to ensure that we adjust capacity to meet any future changes in demand and seize new opportunities.

My theory right now is that companies are getting the pain out of the way now after a terrible year. Note this will cause a 4th quarter charge -- a charge at the end of a long and painful fiscal year.

However, a contrary view would be, "isn't there a big stimulus bill coming down the pike? Shouldn't that help a company that works with raw materials?"

Translating Fed Speak

Yesterday the Fed released the minutes of their latest meeting. These provide an excellent overview of the US economy. Let's coordinate the Minutes with some charts and graphs:

The labor market continued to worsen. According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups, including manufacturing, construction, retail, financial activities, and business services. Indicators of hiring plans also dropped steeply in November, and other labor market indicators suggested that jobs remained in short supply. The unemployment rate climbed to 6.7 percent in November, while the labor force participation rate fell after remaining steady for much of the year. New claims for unemployment insurance rose sharply through early December.

The establishment's year over year survey has been dropping for a few years and



the unemployment rate has been increasing for about two years.

Industrial production, excluding special hurricane- and strike-related effects, fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based. The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement. The production of business equipment was held down by declines in the output of both industrial and high-tech equipment. The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified. In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages. Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months.

Industrial production has been dropping for most of the year and is currently "cliff diving".



Capacity utilization is also dropping. This means that when the economy starts back-up there will be a dearth of investment as companies seek to first utilize capacity that lay idle.

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months.

Consumers are closing their wallets big time.



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Retail sales (inflation adjusted) are falling hard and fast, and on a year over year level



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Retail sales are falling off a cliff

Broader consumer spending is also dropping.



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Personal consumption expenditures are also dropping for the first time in 10 years, and on a year over year basis



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They are falling off a cliff

Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term.

Housing has been a mess for a few years and there is no indication that will change soon.



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Sales evened out for most of 2008 but took a big drop last month.



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The absolute inventory of existing homes has been fluctuating between 4 and 4.5 million for a year and a half now, and




The number of months it would take to clear existing inventories at the current sales pace has been between 10 and 11 months for the last 6 months.

As a result:

Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001.

The financial market meltdown that’s reverberated around the globe has prompted banks to curb lending, signaling the housing slump will persist for a fourth year in 2009. Falling property values have eroded household wealth, causing consumers to pare spending and deepening what is projected to be the longest recession in the postwar period.

The bottom line is clear.

1.) Consumers have stopped spending in a big way. The drops in PCE's and real retail sales are sharp and strong. As a result:

2.) Home sales will continue to drop, and

3.) Industrial production will remain at depressed levels.

Wednesday Commodity Round-Up

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Notice the following on the weekly chart

-- Prices have crossed over the 10 day SMA

-- The MACD is now reversing

-- The RSI is rising



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Notice the following on the daily chart

-- Prices are now above the 50 day SMA

-- The 10 day SMA has crossed over the 20 day SMA\

-- The RSI is rising

-- The MACD has been rising for the last two months

Bottom line: this chart looks like it is turning around.

Today's Markets

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Notice the following:

-- After rising through downside resistance, prices have been mellow for the last few days.

-- Prices are above the 10, 20 and 50 day SMA

-- The 10 and 20 day SMA are both moving higher

-- The 10 and 20 day SMA have crossed the 50 day SMA

Retail Sales Drop

From Bloomberg:

Purchases at U.S. retailers declined last week as post-Christmas markdowns failed to overcome what may have been the worst holiday shopping season in four decades.

Sales at stores open at least a year dropped 0.8 percent in the seven days through Jan. 3, the International Council of Shopping Centers and Goldman Sachs Group Inc. said today in a statement. ICSC Chief Economist Michael Niemira said November- December sales declined as much as 2 percent.

Macy’s Inc., Talbots Inc., Aeropostale Inc. and other retailers offered discounts of 65 percent or more on some sweaters, jewelry and pants to clear out merchandise after Christmas. Higher markdowns may put more pressure on earnings.

“December was relatively chaotic in price, with more discounts than retailers planned, especially in department stores,” Richard Hastings, a consumer strategist at Global Hunter Securities LLC of Newport Beach, California, said in a telephone interview. “Consumers have discovered that the industry is responding with lower and lower and lower prices.”

This shouldn't be a surprise to anyone; the economy is in a recession after all.

But the charts of the actual sales data are downright scary.



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Above is a graph of real retail sales. Note the cliff diving that is now occurring.

And then there is the year over year change in retail sales:



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That's one hell of a drop

It makes you wonder why



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the retail stock sector is rebounding along with the



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specialty retail sector.

How Long Can Non-Residential Spending Hold-Up?

From the WSJ:

Residential spending fell at a 4.1% rate in November to $336.3 billion, 22.8% lower than November 2007. Despite the credit crunch and worsening economy, nonresidential spending showed surprising resilience, rising 1% during the month to $742.1 billion, up 9.2% from the previous year.

Here is the accompanying chart:



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Notice that non-residential spending has remained strong as residential spending has dropped. However, note this:

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

That does not bode well for the coming year.

The "Paradox of Savings"

This is a video I did for a show called "Meet the Bloggers." It highlights one of the central problems of the US economy: we consume at massive rates at the expense of savings.

Here is a chart from the St. Louis Federal Reserve of the personal savings rate:



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Notice it has been declining since the early 1980s. Let's coordinate that data with this chart of household debt:



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This chart has been increasing for some time.

And finally, here is a chart of consumer debt payments as a percent of disposable income:



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This number has been increasing since the early 1990s.

Usually an increase in the savings rate is a good thing. But not now:

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

"The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen," said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government's Troubled Asset Relief Program funds.

BUT consider this:

The flaw of looking at savings as undercutting spending and deepening a recession is that it looks at the beginning of the down cycle and not what helps bring about the end.

As prices of everything from cars to housing fall, the money which has been taken out of wages and put into savings to reduce credit balances is available for purchases. Items get so inexpensive that consumers are drawn back into the market. But, drawing them in depends on their ability to capitalize on weak demand and falling prices. A tax cut and stimulus package will increase that ability geometrically.

The trend toward savings may be bad this year, but it may be a salvation in 2010.

Translating Fed Speak

Yesterday the Fed released the minutes of their latest meeting. These provide an excellent overview of the US economy. Let's coordinate the Minutes with some charts and graphs:

The labor market continued to worsen. According to the November employment report, payroll employment fell at a rapid pace over the preceding three months, with substantial losses across a wide range of industry groups, including manufacturing, construction, retail, financial activities, and business services. Indicators of hiring plans also dropped steeply in November, and other labor market indicators suggested that jobs remained in short supply. The unemployment rate climbed to 6.7 percent in November, while the labor force participation rate fell after remaining steady for much of the year. New claims for unemployment insurance rose sharply through early December.

The establishment's year over year survey has been dropping for a few years and



the unemployment rate has been increasing for about two years.

Industrial production, excluding special hurricane- and strike-related effects, fell markedly in November after sizable declines in the preceding two months. The recent contraction in industrial output was broadly based. The steep pace of decline in the production of consumer goods reflected not only cutbacks in motor vehicle assemblies but also drops in the output of other goods, such as appliances, furniture, and products related to home improvement. The production of business equipment was held down by declines in the output of both industrial and high-tech equipment. The output of construction supplies extended its decline after a brief pause in the middle of the year, and the contraction in the production of materials intensified. In particular, steel production plummeted, and the output of organic chemicals contracted noticeably. For most major industry groups, factory utilization rates declined relative to their levels in July and remained below their long-run averages. Available forward-looking indicators pointed to a significant downturn in manufacturing output in coming months.

Industrial production has been dropping for most of the year and is currently "cliff diving".



Capacity utilization is also dropping. This means that when the economy starts back-up there will be a dearth of investment as companies seek to first utilize capacity that lay idle.

Real personal consumption expenditures (PCE) fell for the fifth straight month in October, with the slowdown evident in nearly all broad spending categories. Sales of light motor vehicles, which slumped in October, fell further in November, but the available information on retail sales suggested a small increase in real outlays for other consumer goods. The annualized three-month change in spending on services in October was just one-third of the rate registered in the first half of 2008. Preliminary data for October and November suggested that overall fourth-quarter real spending would receive a modest boost from recent price declines for gasoline. Real incomes were also boosted by the reversal in energy prices, though the negative wealth effects of continued declines in equity and house prices likely offset this somewhat. Measures of consumer sentiment released in November and December remained low, and available evidence suggested further tightening in consumer credit conditions in recent months.

Consumers are closing their wallets big time.



Click for a larger image

Retail sales (inflation adjusted) are falling hard and fast, and on a year over year level



Click for a larger image

Retail sales are falling off a cliff

Broader consumer spending is also dropping.



Click for a larger image

Personal consumption expenditures are also dropping for the first time in 10 years, and on a year over year basis



Click for a larger image

They are falling off a cliff

Housing demand remained weak, and although the number of unsold new single-family homes continued to move lower, inventories remained elevated relative to the current pace of sales. Sales of existing single-family homes changed little, although a drop in pending home sales in October pointed to further declines in the near term.

Housing has been a mess for a few years and there is no indication that will change soon.



Click for a larger image

Sales evened out for most of 2008 but took a big drop last month.



Click for a larger image

The absolute inventory of existing homes has been fluctuating between 4 and 4.5 million for a year and a half now, and




The number of months it would take to clear existing inventories at the current sales pace has been between 10 and 11 months for the last 6 months.

As a result:

Home prices in 20 major U.S. cities declined at the fastest rate on record, depressed by mounting foreclosures and slumping sales.

The S&P/Case-Shiller index declined 18 percent in the 12 months to October, more than forecast, after dropping 17.4 percent in the year through September. The gauge has fallen every month since January 2007. Year-over-year records began in 2001.

The financial market meltdown that’s reverberated around the globe has prompted banks to curb lending, signaling the housing slump will persist for a fourth year in 2009. Falling property values have eroded household wealth, causing consumers to pare spending and deepening what is projected to be the longest recession in the postwar period.

The bottom line is clear.

1.) Consumers have stopped spending in a big way. The drops in PCE's and real retail sales are sharp and strong. As a result:

2.) Home sales will continue to drop, and

3.) Industrial production will remain at depressed levels.

Treasury Tuesdays

There's been a lot of talk lately about a treasury bubble. All of that talk seems to be getting investors' attention:



On the longer end of the curve, notice how prices have moved through both the 10 and 20 day SMA. Also note the strength of the bars and the higher volume on the sell-off. Also note the 10 day SMA has turned lower.



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On the IEFs note the same technical developments as the TLTs -- prices moved through the 10 and 20 day SMA on higher volume. Also note the 10 day SMA has turned lower.



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Note the strength of the sell-off with the high volume mark. Also note prices have moved through the 10 and 20 day SMAs and that the 10 day SMA has moved through the 10 day SMA

So -- what's the reason for the sell-off?

Investors may be glad to see 2008 in the rearview mirror, but in the Treasury market, they already are worrying about 2009.

A chief concern is the amount of issuance on tap. Goldman Sachs Group Inc. puts the amount the U.S. government needs to raise at about $2 trillion, including new issuance and rolled-over securities. Goldman said it could be more, depending on the size of the incoming Obama administration's stimulus package.

The worry: Just as this onslaught of debt hits, investors could turn their noses at the Treasury market's historic low yields and venture instead into riskier assets. That likely would be even more the case once government programs to kick-start financial markets and the economy gain traction.

And as Barron's noted in this week's issue:

THE BIGGEST INVESTMENT BUBBLE TODAY may involve one of the safest asset classes: U.S. Treasuries. Yields have plunged to some of the lowest levels since the 1940s as investors, fearful of a sustained global economic downturn and potential deflation, have rushed to purchase government-issued debt.

The market also has been supported by comments from the Federal Reserve that it, too, may buy long-term Treasuries. - As a result, the benchmark 10-year Treasury note yields just 2.40%, down from 3.85% as recently as mid-November. The 30-year T-bond stands at 2.82%, and three-month Treasury bills were sold last week for a yield of just 0.05%. - Many investors argue it's dangerous to buy Treasuries with such low yields. While a holder can expect to get repaid in

full at maturity, the price of longer-term Treasuries could fall sharply in the interim if yields rise. The 30-year T-bond, for instance, would drop 25% in price if its yield rose to 4.35%, where it stood as recently as Nov. 13. The bear market may have begun Wednesday, when prices of 30-year Treasuries fell 3%. They lost another 3% Friday. - "Get out of Treasuries. They are very, very expensive," Mohamed El-Erian, chief investment officer of Pacific Investment Management Co., warned recently. Pimco runs the country's largest bond fund, Pimco Total Return (ticker: PTTPX). - Treasuries offer little or no margin of safety if the economy unexpectedly strengthens in 2009, or the dollar weakens significantly, or inflation shows signs of reaccelerating. Yields on 30-year Treasuries easily could top 4% by year end.

Today's Markets

Click for larger image

Notice the following on the daily chart:

-- Prices are still above the downward sloping upper resistance level

-- The 20 day SMA is now above the 50 day SMA

-- The 10 day SMA has moved higher, although it is a preliminary move

Bottom line: the market wants to rally, but it needs a fundamental reason to do so. I think the markets are waiting for a better read on Washington's policy response.

Janet Yellen Calls For Fiscal Stimulus

From the Federal Reserve of San Francisco:

For all of these reasons, I support Marty's conclusion that there is an exceptionally strong case for substantial fiscal stimulus over the next few years. In ordinary circumstances, there are good reasons why monetary, rather than fiscal policy, should be used for stabilization purposes. But these are exceptional circumstances, and fiscal policy can help get the economy going.

.....

If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now. Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.

More on Manufacturing

In the post below, we learned that global manufacturing activity is dropping like a stone. However, according to manufacturing industry stock charts, traders are anticipating a rebound in this sector. The charts below are from Prophet.net.



Notice that on the overall manufacturing index prices sold-off hard at the end of last year but have since rallied through resistance.



Farm and construction is rebounding and is approaching the 50 week SMA.



Diversified machinery has also broken through resistance levels.



Machine tools are already bouncing back.



Metal fabrication formed a reverse head and shoulders pattern and appears ready to move through the pattern's neckline.



Pollution treatment machinery has moved through key resistance levels as well.



Small tools stocks have moved through key resistance levels as well.

Traders are speculating there will be a big stimulus bill that will help all of these stocks -- at least that's my assumption.