Weekend Weimer and Beagle

It's that time of the week. The markets are almost closed. It's time to do anything except think about the economy and the markets. So to help you relax, here are some pictures of the kids. I'll be back bright an dearly on Monday.

More Employment Graphs

In the post below I broke down goods production employment. Let's take a look at services.



Information services fell for the first two years of this expansion and never recovered. Some of this was caused by Y2K, which was a huge employment boom for the industry. In addition, the dot.com bubble helped in this area as well.

Retail employment has dropped to nearly the low point of the last 7 years. Also note that a large percentage of the job gains are now gone.


Financial activities have lost more than 50% of the jobs created during the last expansion.

Professional services have lost more than a third of their job gains over the last expansion

Leisure and hospitality is still doing well. But then there's the pay issue....


Education and health care are the only areas where we're still seeing growth.

Employment Report is Damn Ugly

From the BLS:

Total nonfarm payroll employment fell sharply (-598,000) in January. Since the recession began in December 2007, 3.6 million jobs have been lost, with about half of the decrease occurring in the last 3 months. In January, employment declined in nearly all major industries, while health care and private education added jobs.

Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today.

Manufacturing employment fell by 207,000 in January, the largest 1-month decline since October 1982.

Construction lost 111,000 jobs in January. Employment in the industry has fallen by about 1.0 million since peaking in January 2007.

Retail trade employment fell by 45,000 in January and by 592,000 since a peak in November 2007.

There is nothing good in this report.

Let's look at some charts that start in 2001 to get an idea of what is happening related to the jobs created during the last expansion.

Above is a chart of total goods producing employees. Notice this number never recovered to pre-recession levels. Also note this number has been ticking down since roughly the first quarter of 2006.

The main reason for the lack of growth to pre-recession levels is the drop in manufacturing jobs. Some of this drop is due to the increase in productivity we've seen. But a drop of this magnitude also represents the loss of some jobs that are no related to productivity.


Construction jobs did very well thanks to the housing bubble. But, we're now right back where we started at the beginning of this expansion. In other words, the job losses have completely wiped out all of the gains related to construction employment for this expansion.


Service producing jobs started to take a hit at the beginning of last year. Notice that with the complete loss of all construction jobs created during the last expansion all that is left ar the service jobs created. That's one hell of a loss overall.

Forex Fridays

Notice the following on the weekly dollar chart:

-- In the second rally prices have not gotten as high as the previous rally

-- The recent rally is printing incredibly weak candle bars for the last three weeks

-- The MACD and RSI are weakening


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Notice the following on the daily chart:

-- Prices are having a hard time getting about the (roughly) 87 level

-- The uptrend that started in mid-December is still in place

-- The SMA picture is very cloudy. All the SMAs are bunched together in a tight range. While the 10 and 20 week SMA just rallied through the 50 week SMA, the 50 week SMA is moving lower indicating a deteriorating trend

-- The MACD is still moving higher

bottom line: The weekly chart says the rally is losing steam. The daily chart's inability to move through 87 is also a concern. But no major selling pressure seems to have emerged yet.

Today's Markets

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The main issue with this chart is prices have not gotten through the 61.8% level from the January 28 to February 2 sell-off.

Tomorrow is what everybody is waiting for -- especially the employment report. That's the main issue right now.

More on the Financial Stocks

In the post below I discussed the fundamental situation in the financial sector. Now let's take a look at the technical situation to see what the charts say.


The regional banks weekly chart shows a long, continual decline. Prices have continually moved through previously established lows to make new lows. All of the SMAs are moving lower, the shorter SMAs are below the longer SMAs and prices are below all the SMAs. This is a very bearish formation.

The financial services weekly chart shows a long, continual decline. Prices have continually moved through previously established lows to make new lows. All of the SMAs are moving lower, the shorter SMAs are below the longer SMAs and prices are below all the SMAs. This is a very bearish formation.


The financial services weekly chart shows a long, continual decline. Prices have continually moved through previously established lows to make new lows. The 20 and 50 week SMA are moving lower, while the 10 week SMA is moving sideways. Prices are below all the SMAs



The financials weekly chart shows a long, continual decline. Prices have continually moved through previously established lows to make new lows. All of the SMAs are moving lower, the shorter SMAs are below the longer SMAs and prices are below all the SMAs. This is a very bearish formation.

Bottom line: all of these charts show a sector in an incredibly bearish alignment. It doesn't get much worse.

Is Banking The Key to a Rally?

From the WSJ:

Until confidence returns on the solvency of banks, the market is unlikely to break out of the range between 750 and 900 on the Standard & Poor's 500 and between 7500 and 9000 on the Dow Jones Industrial Average, traders say.

Many large banking stocks are trading at distressed levels, and Bank of America closed Wednesday at its lowest level since 1990. A pattern has emerged where banking stocks lead the broad market on a rally at the first signs of new government intervention, only to return to their downward ways during the ensuing weeks as the harsh reality sinks in: There is no quick fix to fears of insolvency in the banking system.

Recent stock-market action reminds some market participants of the short-lived rallies when a plan to rescue mortgage lenders Fannie Mae and Freddie Mac was unveiled, or when the Troubled Asset Relief Program, or TARP, financial rescue package was floated.

So far, some traders say, there is little reason to believe the unfolding of this new plan will be any different to the other instances of "buy the rumor, sell the news."

In this case, there is no guarantee that any government plan will stabilize the financial sector, and there remains the possibility that the government could have to take big ownership stakes that would dilute current shareholders. "Every time we have some kind of financial stimulation from the government, we definitely pop initially, but the overall trend tends to be lower" for the financials and the market, said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research.

There's a lot of important information in the preceding paragraph. In addition, I'm going to spend the day on this because I think it's a really important question.

Let me begin with a few observations:

-- The modern economy requires a well-functioning financial system. Without it, we're essentially dead in the water. So long as the financial sector is in the middle of this extended crisis the economy cannot grow at full potential.

The basic issue has been and still is how to deal with toxic assets. Everybody owns either the loans directly or a large enough block of securitized loans that their respective balance sheet is effected. No plan adequately deals with what to do with these assets. The bad bank idea implies that at some time the institutions will have to sell the assets to another party. Let's assume these assets are not correctly valued. That means the sale will force institutions to take a big loss, probably hurting its balance sheet further.

The idea of nationalizing the banks runs into different problems. From the question of who to nationalize, to how to actually perform the transition from private to public ownership to preventing the politicalization of the banking sector once the public owns the shares this idea is also fraught with problems. I detailed the problems in more detail in this article.

What people seem to be clamoring for is a one shot solution where Congress passes bill X with provisions Y and afterward everything moves forward. Personally, I don't see how that can happen. The problems are too big and wide and far too complicated. I think the answer will come piecemeal at best. And as a result, the US economy will grow at below potential for at least this year and probably into the next.

More on the Oil Market

From today's WSJ:

Every time the oil market attempts to ignite a rally, an upsurge from the sea of crude stored on waterborne tankers snuffs it out.

The accumulation of oil held in "floating storage" gained speed in December, as available space in traditional onshore storage hubs dwindled due to excess supplies. This floating storage is now among the biggest impediments to oil prices recovering any of the ground lost over the past six months. Companies are quick to sell cargoes at the hint of a turnaround, unleashing a flood of oil onto the market.

More oil is being produced than recession-stricken economies need, and prices have fallen as the extra crude fills storage terminals world-wide. Crude-futures prices are down 72% from the record hit in July. Wednesday, light, sweet crude oil for March delivery settled 46 cents lower, or 1.1%, at $40.32 a barrel on the New York Mercantile Exchange.

The oil sitting at sea adds an extra layer of uncertainty about the supply overhang, which traders said must be whittled down for oil prices to rebound.

Tankers carrying up to two million barrels each aren't counted in official statistics. Ship trackers estimate that as many as 80 million barrels may be on the water, or more than twice the amount kept in the largest commercial storage center in the U.S., in Cushing, Okla.

"There's no database of ships sitting on storage right now. It makes it very, very difficult to speculate" on what is on the water, said one tanker broker.

In other words, there is a huge wild card out there for supply: a ton of floating oil the floods the market as soon as prices tick higher. And as these charts of supply from This Week in Petroleum show the only area of the oil market that has decreasing supply is the propane market:









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Thursday Oil Market Round-Up

Notice the following on the weekly chart:

-- Prices are forming a triangle consolidation pattern

-- All the SMAs are moving lower

-- Prices are below the 20 and 50 week SMA

-- Prices are tied in with the 10 week SMA

-- The MACD is oversold

-- The RSI is oversold




Notice the following on the daily chart

-- Prices have been in a tight range (roughly 10 points) for the last month

-- Prices and the SMAs are all tied together in a very tight range

-- The MACD has been increasing for the last three months

Today's Markets

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The prices/indexes are still within the upward sloping channel. However,



Looking at the daily 5-minute chart, we've got some issues.

-- First, prices broke a two day upward-sloping trendline.

-- Prices are now hugging the 200 minute SMA.

-- Prices also look like they are forming a bear market flag pattern

Also remember we're moving forward to Friday's job report which is not looking good.

Markopolos on Capital Hill

From Bloomberg:

Harry Markopolos, a former money manager who sought to convince regulators for nine years that Bernard Madoff was a fraud, said the U.S. Securities and Exchange Commission suffers from “investigative ineptitude.”

Markopolos told Congress today that he contacted the SEC in 2000 after examining Madoff’s investment strategy and determining in four hours that returns exceeding 10 percent weren’t possible. Markopolos, in almost a decade of communication, said only one SEC staff member understood Madoff’s scheme and “the threat it posed to the public.”

“My experiences with other SEC officials proved to be a systemic disappointment and lead me to conclude that the SEC securities lawyers, if only through their investigative ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed,” Markopolos said. Madoff “had a lot of help,” Markopolos said.

I caught his opening remarks this morning. They were a devastating indictment of the SEC's lack of doing anything constructive.

ADP Reports Big Job Loss

From Bloomberg:

Companies in the U.S. cut an estimated 522,000 jobs in January as the economy weakened at the start of the year, a private report based on payroll data showed today.

The drop in the ADP Employer Services gauge was less than economists forecast and followed a revised cut of 659,000 for the prior month.

Employers are slashing workers as clogged credit markets and slumps from housing to manufacturing threaten to extend the longest recession in a quarter of a century. Persistent job losses will probably further curb consumer spending, which represents about 70 percent of the economy.

“We’re in for several more months of bleeding on the jobs front,” Joel Prakken, chairman of Macroeconomic Advisers LLC in St. Louis, said on a conference call with reporters.

Friday will be a big day with the employment coming out at 7:30 CST.

Planned Lay-Offs At 7-year High

From CNBC:

Planned layoffs at U.S. firms in January reached their highest monthly level in seven years, according to a report released on Wednesday, as the more than year-old U.S. recession took an increasingly heavy toll on employment.

.....

Planned layoffs at U.S. firms in January reached their highest monthly level in seven years, according to a report released on Wednesday, as the more than year-old U.S. recession took an increasingly heavy toll on employment.

Here is a chart from the BLS of mass lay-offs.



The series only goes to 1995. We're at the highest level in the series.

Wednesday Commodities Round-Up

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Above is a chart of platinum. Notice that prices have literally fallen off a cliff starting in July of last year. Prices have moved through key support levels at several points.




Above is a chart for palladium. Notice the incredible speed at which prices crashed. This is a monthly chart, yet in the circled area there are huge gaps down. Selling pressure was incredible during this time.



Above is a weekly chart of palladium, which gives us a bit more detail of the previous chart. Note the incredible speed of the price decline. The gaps are several and large. Simply put, it was time to get out.




The main point on the cattle chart is that although prices have been increasing for some time they are currently at the long-term trend line. A move below would signal a reversal of the long-term trend. Should this happen then prices will go the way of other agricultural commodities.

Today's Markets

On the daily chart, simply notice that prices are still within their trend channel.






On the 5-minute chart, notice the following:

-- Prices bottomed on Monday, then formed an upward sloping trend channel

-- Prices broke through the downward sloping trend line that started last Wednesday

-- Prices broke out of the trend channel today and rallied to the 38.2% Fibonacci level from the sell-off.

Auto Sales Down

From Bloomberg:

Ford Motor Co. said U.S. sales fell 40 percent in January, and Toyota Motor Corp. posted a 32 percent drop as the recession ravaged demand in the world’s biggest auto market.

The declines were the 14th and ninth in a row for the two automakers, and pointed toward further contraction for U.S. industrywide sales that haven’t increased since October 2007. Honda Motor Co. said U.S. sales were down 28 percent.

Consider this information along with the ISM info from below.

Wow, just Wow

From Bloomberg:

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth as the economy went into recession, Zillow.com said.

.....

About $6.1 trillion of value has been lost since the housing market peaked in the second quarter of 2006 and last year’s decline was almost triple the $1.3 trillion lost in 2007, Zillow said.

Values have dropped for eight straight quarters. They fell in Manhattan for the first time since Zillow began including the New York City borough in its records two years ago.

A few points.

1.) I've noticed there has been a diminished use of household net worth as an econometric measure. Now you know why. Households are getting clobbered from the real estate and equity side of the equation.

2.) The possibility of an increase in personal consumption expenditures in the current environment is wishful thinking, nothing more. People are going to pay down debt and save for the foreseeable future.

3.) 16% of all US homeowners are underwater. That's huge.

Manufacturing Still Contracting

From the ISM:

The report was issued today by Norbert J. Ore, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. "January marked 12 months of contraction in the manufacturing sector. However, the rate of decline as measured by the PMI was slower than experienced in December. The January New Orders Index is at 33.2 percent, up from the seasonally adjusted 23.1 percent recorded in December. While this is a significant month-over-month improvement, it is still a sign of continuing weakness in the sector. Comments from our respondents indicate that it will take a recovery in automobiles and housing for the manufacturing sector to once again prosper. On a positive note, the Prices Index continues to indicate significant deflation in the prices that manufacturers have to pay for their inputs, and this should ultimately be good for the consumer."

There are several key points in the preceding paragraph:

1.) The index has shown a decline for 12 months. This is not a temporary slowdown caused by a market hiccup; it is a serious downward move that shows a fundamental weakness in the economy.

2.) Housing and autos must recover in order for manufacturing to recover. I've been harping on housing for, well, forever. The bottom line is so long as we are seeing home prices drop at fast year over year levels we aren't anywhere near a bottom in housing. And considering this chart:



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We're nowhere near a bottom. When we see the y/o/y price declines slow -- that is, we see the y/o/y declines in the 3% - 5% range then we'll know that a bottom is approaching. But we're not there yet.

As for autos, consider the following chart from the BEA:



This chart shows the percentage change in real consumer spending on durable goods for the last 8 quarters. It has consistently moved lower. That means people are really pulling back on spending in a big way. Add to that an increasing savings rate and you have real problems for the US auto sector.

Treasury Tuesdays

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Notice the following:

-- Since the late December peak the 7-10 year Treasury market has been in a clear downward trajectory, making lower lows and lower highs.

- The 10 and 20 day SMA are both moving lower now.

-- The 10 day SMA has crossed below the 50 day SMA and the 20 is about to

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

Today's Markets

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The main issue with today's market is prices closed right near the lower trading band. That tells us the next few days of actions that much more important.

We still have a bearish SMA/price picture

Personal Spending Drops

From Marketwatch:

U.S. real consumer spending fell in December for the sixth time in seven months as consumers saved what they gained from falling energy prices, the Commerce Department reported Monday.

Nominal spending fell 1% in December, marking the sixth straight decline. This was in line with expectations of economists surveyed by MarketWatch. See Economic Calendar.
After adjusting for a 0.5% decline in prices, real consumer spending fell 0.5% in

December, a reversal following a 0.3% increase in November, the government said. It was the sixth decline in real spending in the past seven months. Read the full government report.

Here is a chart of the year over year change in PCEs.



Notice this figure has been in decline for over a year now on the above chart. That indicates there is a trend in place regarding consumer spending -- it is slowing in a big way. This is the worse trend in PCEs since 1961:

Consumer spending in the U.S. fell in December for a record sixth consecutive month, capping the worst year since 1961, a slump that is likely to persist as companies slash payrolls.

The Inventory Story

From IBD:

Inventories unexpectedly rose by $6.2 billion, adding 1.3 percentage points to GDP, after falling in the prior four quarters. Yet that "really is not a positive in an economy where demand is falling rapidly," Dye said.

Slashing stockpiles could be a big negative in early 2009.

In other words, business was not as swift acting as they wanted to be. Instead of cutting back on purchases and creating a leaner inventory picture for themselves they added goods they probably didn't need. That does not bode well for the first quarter numbers that feed into inventory -- numbers like industrial production, durable goods orders and the regional manufacturing surveys.

And that's not all the bad news in the report:

Final sales, which exclude inventories, fell at a 5.1% pace in the fourth quarter amid broad and deep weakness.

Consumer spending on durable goods such as cars and TVs dived at a 22.4% annual rate in the fourth quarter, the biggest drop in more than two decades. Residential investment plummeted 23.6%, and investment in equipment and software dropped at a 28% pace.

There is literally noting to be happy about in the latest GDP report. It shows an economy in deep, deep trouble.

Market Monday's

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My main issue with the yearly chart is the conclusion that prices have formed a triangle consolidation pattern. I am not a fan of triangles that have such extreme price movements. Notice the big drop in late November. The price established at that level is a statistical outlier. I am personally not comfortable with using that as the basis for a triangle pattern. However, it is a price established on the chart so some may want to use it

The second issue I have with it is the fundamental background right now. I'm not sure the news is such that a final consolidation is in order. Fourth quarter earnings are a mess, the financial sector is as well, Washington is, well a mess ... you get the idea. I don't see an news that indicates we're near a bottom right now. I should add that I expect the economy to be at neutral (0% growth) by the end of the year. But I don't see any fundamental events that indicate we're at that point yet.




Notice the following on the EMA charts

-- Since the beginning of the year prices have moved lower and then higher. Combine this with the direction of all the EMAs and we have a market that is going lower

-- All the EMAs are moving lower

-- The shorter EMAs are below the longer EMAs

-- Prices moved through the lower two EMAs in the last two trading days of last week. Volume was higher on Friday than Thursday






Notice the following on the SMA chart

-- All the SMAs are moving lower

-- The 20 day SMA just moved below the 50 day SMA

-- Prices are below all the SMAs


On the MACD chart, notice the MACD is at high levels. However, the signal line may be moving into a buy signal.