Today's Markets

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Was today a reversal day?


Prices opened higher but then moved lower on several strong downward sloping bars. Prices levels out until a little after 12 when the moved lower on a gap down. Prices then moved lower until just before the close when they jumped into the 10 minute SMA

The reason I asked (rhetorically) is based on the above chart (a move higher that can't be sustained) along with this chart:



Which shows an engulfing pattern on today's price.

I should add -- the question is extremely premature.

Employment Overview

Here are some relevant charts and graphs. What started this post was the following chart:



That's a good looking chart of initial unemployment claims. The bottom line is we have enough data to make a call that the 4-week moving average appears to be topping out. That's a very good sign. But then there was this passage from the Econoday report:

Initial jobless claims showed improvement in the latest week but continuing claims set another record high. Continuing claims in the April 18 week jumped 133,000 to 6.271 million, another record level and the 15th straight increase. A month-to-month comparison, useful for a gauge on the April employment report, showed significant deterioration, up 704,000 from 5.567 million at mid-March. But initial claims appear to have peaked in March, suggesting that continuing claims may plateau within a few months. Initial claims for the April 25 week slipped 14,000 to 631,000, down from 645,000 the week before.

While initial claims are topping, continuing claims are still setting records. That indicates that while the immediate lay-off situation is improving the continuing situation is still poor at best. Here are some relevant charts from the BLS that explain the situation in mare and better detail. I have used (when possible) a time frame that goes back to 1960.

Let's start with the overall unemployment rate which currently stands at 8.5%. This is the second worst rate of unemployment in the last 30 years. Let's delve deeper into the data:



Above are the charts for the number of people unemployed for 15+ weeks and the number of unemployed for 27+ weeks. While the percentage of the population represented by this number would be lower now than in the early 1980s because of the population increase, the absolute number of both figures is at a historical record. That tells us that the rate of job creation -- the flip side of job destruction -- is deteriorating right now.

Above is a chart for the number of people who are part-time for economic reasons. Again -- the absolute number is at a nearly 30 year high.


Finally, the median weeks people are unemployed is high, currently standing at 11.2 weeks. The has been higher twice in the last 30 years.

So -- the rate of job destruction appears to be topping. HOWEVER, we're not out of the woods yet as the rate of job creation has yet to pick up.'

The Stress Tests Part I

Yesterday the Federal Reserve issued the stress test report. This is all I'm going to write about today because it's really important news. But before we get to the results, let's look at the actual stress test used by the Fed to see what the basic scenario was.

Let's start with their GDP assumptions. Here is the chart of their baseline and more adverse GDP projections:




I'm assuming that "4 quarter percent change" is the same as year over year percent change. Notice the economy is already performing worse than expected in the GDP stress tests.




The current unemployment rate is more in line with the worst case scenario






The Fed's worst case scenario of home prices assumes a 22% year over drop this year. That is -- in December of this year prices will be 22% lower than in the 4th quarter of 2008. Prices are already falling at a roughly 18% year over year rate in February. Lots of people were excited when the Case Shiller number didn't set a record low in the latest report.

So

GDP is already performing more poorly than the Fed's stress test.

The worse case scenario for unemployment is the most realistic possibility.

Home prices are already closer to the Fed's worst case scenario than the median baseline forecast.

Bottom line: the worst case scenario is the most realistic scenario.

Janet Yellen on the Recovery

From the San Francisco Fed:

I can point to a number of specific factors in this recession that are likely to weaken recovery. First, despite signs that consumer spending is stabilizing, the chance of strong and sustained consumption growth appears low. For years prior to the recession, households went on a spending spree of major proportions. This occurred during what has come to be called the “great moderation,” a period of about two decades when recessions were infrequent and mild, and inflation was low and stable. This may have lulled households into a false sense of security. The personal saving rate fell from around 8 percent two decades ago to almost zero in recent years as households financed their lifestyles by drawing on increasing stock market and housing wealth, and taking on higher levels of debt.

Now, the era of such low saving may be over. Falling house and stock prices have vaporized trillions of dollars in household wealth. The destruction of their nest eggs is prompting households to rebuild savings. The deleveraging of household balance sheets could restrain spending for years. Indeed, the personal saving rate is finally on the rise, averaging more than 4 percent so far this year. It wouldn’t surprise me if this effect persists, as the shock of the financial crisis convinces many households that they need to save higher fractions of their incomes for the long term. Of course, ultimately this would be good for economic growth, channeling resources from consumption to investment. That said, the transition could be painful if subpar consumption growth restrains the pace of economic recovery.

The above scenario is a big reason why I think the 2.1% increase in personal consumption expenditures last quarter was a misnomer -- or at least not the great sign that people think it was.

Today's Markets

Actually it's yesterday's market, but who's counting?

Again -- this is an incredibly bullish chart. Notice how prices move higher, consolidate gains and then move higher again. It's absolutely gorgeous.

Too bad I don't see the fundamental reason for this. Actually, along that from I'm now convinced I will never be a bull ever again.

Thursday Oil Market Round-Up

The weekly chart is still very bullish. After a long and painful fall at the end of last year, prices consolidated in a triangle pattern over a 4 month period. Now prices have broken out of that pattern to the upside. The rallied and fell back to the 10 week SMA. Now they have advanced beyond the previous high which is technically a good sign. Also note the MACD and RSI have upward sloping trends and each has plenty of room to run.


The daily chart shows the consolidation. In actuality we had two triangle patterns where prices consolidated. Also note that prices rallied from the first triangle, topped and moved sideways for a bit and now are moving higher. Moves like this allow the market to "catch its breath" as it were. Some traders get out and others get in. Finally, note the MACD has given a buy signal and the RSI is increasing.

All of this is perplexing against the fundamental backdrop.


Oil stocks are increasing and are far above the average range.

Gas stocks are near the top of their average range.

Gas prices are holding steady at just above $2.00/gallon. This indicates there isn't must demand pull on prices. The lack of demand pull is coming from



A big decrease in the miles driven.

And yesterday I looked at the price charts of various transportation sub-components. They weren't pretty.

Today's Markets

Just got back in the office. I'll post this in the morning

Orbitz Down Earnings Got Me Thinking....

From the WSJ:

Orbitz Worldwide Inc.'s first-quarter loss widened sharply on a write-down related to declines in the company's stock price.

The online travel agent has looked to aggressively cut costs as demand falls. Businesses and consumers have been scaling back travel amid the weak economy, and those cutbacks hurt companies like Orbitz, which allows customers to book hotels and flights at discount rates through its site.

The company posted a loss of $336 million, or $4.02 a share, compared with a year-earlier loss of $15 million, or 18 cents a share. The latest results included a $332 million write-down because of the decline of the company's stock price during the quarter. Total operating costs more than doubled, although cost of revenue declined on lower volume.

I'm a big fan of Dow Theory, which basically says averages have to confirm each other. If one average goes up, other averages should also increase. This is especially true with the Transportation averages. If things are better, we should be shipping more stuff and traveling more. The reverse is also true. So if things are getting better according to Ben, why is Orbitz reporting a poor quarter?

So, here are some charts from Prophet.net that show sub-sections of the transportation industry.

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This chart really caught my eye. If things are getting better shouldn't we be shipping more stuff? Prices are still moving lower and volume is still high indicating traders are dumping shares.





And the railroads trucking and shipping areas are still moving lower. On the positive side, at least the volume has subsided on the shipping and trucking charts.




And we sure aren't traveling individually or in a business capacity yet.

Bottom line - the transportation subsets don't tell a story of recovery.

More Signs of Credit Thawing

From the WSJ:

A key measure of risk reached its lowest level since last fall as investors snapped up the biggest junk-bond issue of the year, further signs companies can now borrow to meet their cash needs but still have to pay above-normal rates.

.....

"A few months ago, you couldn't give a bond away," said Mitch Stapley, chief fixed-income officer for Fifth Third Bank in Grand Rapids, Mich. "But now signs are coming into place that things are looking better, there becomes a scramble to get that credit exposure."

Credit markets are extending a rally that took hold in April -- tracking gains in stock markets -- as investors became more confident banks were recovering from the recent market turmoil and the housing market was showing signs of having hit a bottom. The reduction in Libor indicates liquidity is returning to the financial system, and the ability of companies to sell debt shows they can finance themselves, albeit at higher rates.

Momentum gathered in deals eligible for a federal program to boost consumer lending, and Bank of New York Mellon sold bonds without government backing.

Here's the accompanying chart

Bernanke's Happy Talk

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Ben was on the hill yesterday. He gave a generally happy talk. Personally, I think he's lying through his teeth. Here's why:

However, the recent data also suggest that the pace of contraction may be slowing, and they include some tentative signs that final demand, especially demand by households, may be stabilizing. Consumer spending, which dropped sharply in the second half of last year, grew in the first quarter. In coming months, households' spending power will be boosted by the fiscal stimulus program, and we have seen some improvement in consumer sentiment. Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market and the declines in equity and housing wealth that households have experienced over the past two years. In addition, credit conditions for consumers remain tight.

Yes, consumer spending increased 2.1% in the first quarter. But looking a bit deeper into the data we don't see a lot of strength. As I pointed out in this post the main reason for the first quarter increase was a jump in durable goods purchases in January. This total has decreased the last two months and is still far below the September/October levels of last year. In addition, wages are decreasing in a big way. In fact, disposable income increased only because of transfer payments and tax reductions. And consider this chart of total household debt as a percentage of GDP:



And combine that information with this chart of the savings rate:

So -- wages dropping, households area losing wealth, the job market is terrible, households are heavily in debt and are increasing their savings rate. There are the reasons I'm bearish about consumer spending.

Bernanke continued:

The housing market, which has been in decline for three years, has also shown some signs of bottoming. Sales of existing homes have been fairly stable since late last year, and sales of new homes have firmed a bit recently, though both remain at depressed levels. Although some of the boost to sales in the market for existing homes is likely coming from foreclosure-related transactions, the increased affordability of homes appears to be contributing more broadly to the steadying in the demand for housing. In particular, the average interest rate on conforming 30-year fixed-rate mortgages has dropped almost 1-3/4 percentage points since August, to about 4.8 percent. With sales of new homes up a bit and starts of single-family homes little changed from January through March, builders are seeing the backlog of unsold new homes decline--a precondition for any recovery in homebuilding.

Here is a chart from Martin Capital of new and existing home sales:





I dealt with the new home sales market in this post yesterday. Bottom line -- sales may be bottoming. But we only have two months of data to back that up making a prediction of a bottom seem premature.

As for the existing home sales market, he is correct that sales may have bottomed. Of course they may have bottomed last year as well. And again, remember the household debt chart from above? Who is going to buy these homes?

And all of that is before we get to the massive drop in home prices from the Case Shiller price index:

Ben goes on about business investment:

In contrast to the somewhat better news in the household sector, the available indicators of business investment remain extremely weak. Spending for equipment and software fell at an annual rate of about 30 percent in both the fourth and first quarters, and the level of new orders remains below the level of shipments, suggesting further near-term softness in business equipment spending. Recent business surveys have been a bit more positive, but surveyed firms are still reporting net declines in new orders and restrained capital spending plans. Our recent survey of bank loan officers reported further weakening of demand for commercial and industrial loans.¹ The survey also showed that the net fraction of banks that tightened their business lending policies stayed elevated, although it has come down in the past two surveys.

Here is a chart of the percentage change in gross investment from the preceding quarter:


Investment has been weak for some time and was terrible last quarter.

I barely see the possibility of a recovery at this point. And I don't see a robust recovery in any way. On that Ben and I agree:

Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further. We expect that the recovery will only gradually gain momentum and that economic slack will diminish slowly. In particular, businesses are likely to be cautious about hiring, implying that the unemployment rate could remain high for a time, even after economic growth resumes.

Wednesday Commodities Round-Up

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The weekly industrial metals chart is still bullish. First, the MACD and the RSI are still rising. Prices have broken out of the consolidation pattern. In addition, prices are using the 10 week SMA as technical support. The 10 and 20 week SMA are both rising with the 10 above the 20.



The daily chart shows a mixed situation. While prices are technically still in an uptrend they have sold off from their peak a few weeks ago and have yet to move through the previous high. The RSI and MACD confirms the weakening of the price picture.


The weekly agricultural chart is bullish. Notice the rising MACD and RSI. The RSI is only at a reading around 50 so it has plenty of room to move higher as does the MACD. Prices have advanced through the triangle consolidation pattern as well. However, the SMA picture is a bit jumbled right now.


The daily chart -- like the industrial metals daily chart -- is mixed. The general trend is still up. But note both the RSI and MACD have printed a near horizontal pattern in April. Also note the SMAs are in a very jumbled orientation -- they are tied closely together. While they are technically in a bullish position (shorter above longer, all moving higher) we need more time in this position to make a solid call.

Bottom line: the long-term charts are still bullish. My guess is traders are playing two long-term trends: the eventual economic rebound and a hard asset inflation play. The daily charts show that traders are having second thoughts, but we haven't seen those thoughts bleed over into the weekly chart.

Today's Markets

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This is a gorgeous chart. Prices have been moving higher in an exceedingly disciplined manner. notice how prices move up a bit and then spend the next few days trading around the fibonacci retracement levels. Prices have done this three times over the last 10 days in an incredibly efficient manner.

Below are the charts for the QQQQs and IWMS. Notice the exact same trend.

Senior Loan Survey Data Points

From the Federal Reserve:

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Demand for commercial and industrial loans is down, but
Notice that lending standards for C and I loans took a sharp upward turn in the 2Q07 and have been tightening for the most part since. However there is some good news in the latest report:

On net, about 40 percent of domestic respondents, compared with around 65 percent in the January survey, reported having tightened their credit standards on commercial and industrial (C&I) loans to firms of all sizes over the previous three months. On balance, domestic banks have reported tightening their credit standards on C&I loans to large and middle-market firms for eight consecutive surveys and to small firms for ten consecutive surveys. Although 40 percent is still very elevated, the April survey marks the first time since January 2008 that the proportion of banks reporting such tightening fell below 50 percent.

That's good news. And there's more:


The percentage of respondents tightening CRE loans is decreasing although



The demand for CRE loans is still depressed.

The report noted:

About 65 percent of domestic banks, on net, reported tightening their lending standards on commercial real estate (CRE) loans over the previous three months, compared with about 80 percent in the January survey. On balance, domestic banks have been tightening credit standards on CRE loans for 14 consecutive surveys, and the April survey marks the first time since October 2007 that the net proportion of banks reporting such tightening fell below 70 percent.

Finally, the number of banks tightening residential credit increased although



Residential demand is increasing.

The report noted:

In the April survey, somewhat larger fractions of domestic respondents than in the January survey reported having tightened their lending standards on prime and nontraditional residential mortgages. About 50 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages over the previous three months, and about 65 percent of the 25 banks that originated nontraditional residential mortgage loans over the survey period reported having tightened their lending standards on such loans. About 35 percent of domestic respondents saw stronger demand, on net, for prime residential mortgage loans over the previous three months, a substantial change from the roughly 10 percent that reported weaker demand in the January survey. About 10 percent of respondents reported having experienced weaker demand for nontraditional mortgage loans over the previous three months-a substantially lower proportion than in the January survey. Only two banks reported making subprime mortgage loans over the same period.

Frankly, this report is good and should be a reason why people think things are getting better.

You Are Here

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Are There Signs of Recovery in the New Homes Market?

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From the NY Times:

Investors and first-time buyers, the traditional harbingers of a housing rebound, are out in force here, competing for bargain-price foreclosures. With sales up 45 percent from last year, the vast backlog of inventory has diminished. Even prices, which have plummeted to levels not seen since the beginning of the decade, show evidence of stabilizing.

Indications of progress are visible in other hard-hit areas, including Las Vegas, parts of Florida and the Inland Empire in southeastern California. Sales in Las Vegas in March, for example, rose 35 percent from last year.

“It’s fragile, and it could easily be fleeting,” said an MDA DataQuick analyst, Andrew LePage. “But history suggests this is how things might look six months before prices bottom out.”

The story has many important caveats.

Instead, this is what passes for wild-eyed optimism: a belief that things have finally stopped getting worse. “A period of price stagnation would boost a lot of spirits,” Mr. LePage said.

When a market bottoms, foreclosures usually stop piling up and banks become more willing to make loans, confident the collateral backing them will not fall in value.

Nationally, signs of progress in real estate are still faint at best. Existing home sales in March were down 7 percent from last year, according to the National Association of Realtors.

The supply of unsold homes was about 10 months, a number that has changed little over the last year and is abnormally high. But first-time buyers were an impressive 53 percent of the market — and that was largely before a first-time buyer’s tax credit of $8,000 became available.

With the tax credit in place and interest rates low, the pace of sales may be picking up. The Realtors’ group said Monday that the number of houses under contract in March was up 1 percent from a year earlier. Those pending deals will be reported in the existing-home sales for April and May.

Sales volume tends to recover long before prices. In fact, some analysts think price declines in many markets are accelerating. First American CoreLogic, a real estate data firm, reported that “the depth and breadth of price declines continued to worsen in February.” Fitch Ratings recently revised its estimate of future declines to 12.5 percent, from 10 percent, saying the drop would extend to the end of next year.

Let's look at some data to see how it's playing out.


The overall trend in new home sales is clearly down. The last two months we have possibly seen a bottom in sales, but we need more data before we make that call. In addition



The months of available supply at the current sales pace is really high indicating we've got a ton of work to do before we can claim victory.
Total sales in the North East are down over the last three months and are below year ago levels.
Sales in the South may have bottomed. But we need more data to make that call. And we've below year ago levels as well.

Sales in the mid-west are down and are below year ago levels.

Sales in the West have risen the last two months but are the overall trend since last July is down and we're still seeing current levels below year ago levels.



And the Case Shiller Index tells us prices are still falling at fast rates. And consider this chart of city's real estate prices.



God I feel like the big bad bear to whom nothing is ever enough. But I just don't see enough data to say things are getting better.