Weekend Weimar and Beagle

It's that time of the week. The markets are almost closed. It's time to think about anything except the economy or the markets. To that end...

GDP Decreases Less Than Forecast

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 5.7 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to preliminary estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.

The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the decrease in real GDP was 6.1 percent (see "Revisions" on page 3).

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

The smaller decrease in real GDP in the first quarter than in the fourth reflected a larger decrease in imports, an upturn in PCE for durable goods, and a smaller decrease in PCE for nondurable goods that were partly offset by larger decreases in private inventory investment and in nonresidential structures and a downturn in federal government spending.

Let's look at where growth and contraction came from:



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Growth came from personal consumption expenditures and exports. But PCEs came down from 2.1% to 1.5% and exports/imports are a mathematical issue for GDP: negative imports adds to GDP. So a drop in imports (which indicates domestic weakness) actually adds to GDP.

Are Durable Goods Orders Bottoming?

From the Census Bureau:

New orders for manufactured durable goods in April increased $3.0 billion or 1.9 percent to $161.5 billion, the U.S. Census Bureau announced today. This was the second increase in the last three months and followed a 2.1 percent March decrease. Excluding transportation, new orders increased 0.8 percent. Excluding defense, new orders also increased 1.0 percent.

Granted -- other parts of the report are less rosy.

-- Shipments of manufactured durable goods in April, down nine consecutive months, decreased $0.3 billion or 0.2 percent to $174.2 billion.

-- Unfilled orders for manufactured durable goods in April, down seven consecutive months, decreased $8.9 billion or 1.2 percent to $748.9 billion.

In other words -- we have a long way to go before we're back to normal. But consider the following charts:



Is this a bottom in the month to month chart?


Is this a bottom in the year over year numbers?



This chart better shows the possible bottoming in the year over year numbers.

I want to caution: these are preliminary numbers. BUT, they're still pretty good.

Forex Fridays

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On the weekly chart, notice the dollar formed a double top. But also notice the second double top has weaker underlying technicals -- the RSI and MACD both trended lower. After prices fell from the second top, they formed a bear market flag pattern. But prices have now fallen from that level as well. This move is confirmed by the falling MACD and RSI.



The daily chart shows the bear market flag pattern in more detail. Also notice the bearish price/SMA alignment -- prices are below the SMAs, the shorter SMAs are below the longer SMAs and all the SMAs are moving lower. In addition, the RSI and MACD are both moving lower.

Bottom line? This is a bearish chart, plain and simple

Today's Markets

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The markets continue to consolidate in their respective patterns.

Quarterly Banking Profile, Pt II

Let's look at some charts from the profile.

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Notice how real estate construction and development loans are spiking; there is no end in sight at this point.

Both the non-current and quarterly charge off rates are at the highest level in 15 years.


For smaller banks, non-current construction and industrial loans are at 10 year years. The bigger banks still have a ways to go.


Non-current rates on residential loans are still increasing.




Both small and large banks are taking a big hit.

Notice how both of these numbers are increasing.


Credit quality of residential mortgage loans continues to deteriorate


Quarterly net charge offs evened out last quarter, but are still at high levels.

Quarterly Banking Profile, Pt I

Over the last few days the FDIC has released the quarterly banking profile. I'm going to tackle this in two parts. In the first I'll look at the report. In the second we'll look at the graphs:

Sharply higher trading revenues at large banks helped FDIC-insured institutions post an aggregate net profit of $7.6 billion in the first quarter of 2009. Realized gains on securities and other assets at a few large institutions also contributed to the quarter’s profits. First quarter earnings were $11.7 billion (60.8 percent) lower than in the first quarter of 2008 but represented a significant recovery from the $36.9 billion net loss the industry reported in the fourth quarter of 2008.1 Provisions for loan and lease losses were lower than in the fourth quarter of 2008 but continued to rise on a year-over-year basis. The increase in loss provisions, higher charges for goodwill impairment, and reduced income from securitization activity were the primary causes of the year-over-year decline in industry net income. Evidence of earnings weakness was widespread in the first quarter; more than one out of every five institutions (21.6 percent) reported a net loss, and almost three out of every five (59.3 percent) reported lower net income than in the first quarter of 2008.

The first part of this overview indicates we've got a statistical blip. "Realized gains at a few large institutions" were the primary reason for the overall jump. The last sentence indicates there are still problems out in the financial sector. 21.6% of all institutions reported a net loss and 59.3% lower year over year results. Those that the figures that should cause us concern.

Insured institutions set aside $60.9 billion in loan loss provisions in the first quarter, an increase of $23.7 billion (63.6 percent) from the first quarter of 2008. Almost two out of every three insured institutions (65.4 percent) increased their loss provisions. Goodwill impairment charges and other intangible asset expenses rose to $7.2 billion from $2.8 billion a year earlier. Against these negative factors, total noninterest income contributed $68.3 billion to pretax earnings, a $7.8-billion (12.8 percent) improvement over the first quarter of 2008. Net interest income was $4.4 billion (4.7 percent) higher, and realized gains on securities and other assets were up by $1.9 billion (152.6 percent). The rebound in noninterest income stemmed primarily from higher trading revenue at a few large banks, but gains on loan sales and increased servicing fees also provided a boost to noninterest revenues. Trading revenues were $7.6 billion higher than a year earlier, servicing fees were up by $2.4 billion, and realized gains on securities and other assets were $1.9 billion higher. Nevertheless, these positive developments were outweighed by the higher expenses for bad loans and goodwill impairment. The average return on assets (ROA) was 0.22 percent, less than half the 0.58 percent registered in the first quarter of 2008 and less than one-fifth the 1.20 percent ROA the industry enjoyed in the first quarter of 2007.

The bottom line: there was some good news. But the bad news outweighed the good news. Loan loss provisions and goodwill impairments are increasing. These factors outweighed the increased revenue from servicing and trading.

For the sixth consecutive quarter, falling interest rates caused declines in both average funding costs and average asset yields. The industry’s average funding cost fell by more than its average asset yield in the quarter, and the quarterly net interest margin (NIM) improved from fourth quarter 2008 and first quarter 2008 levels. The average NIM in the first quarter was 3.39 percent, compared to 3.34 percent in the fourth quarter of 2008 and 3.33 percent in the first quarter of 2008. This is the highest level for the industry NIM since the second quarter of 2006. However, most of the improvement was concentrated among larger institutions; more than half of all institutions (55.4 percent) reported lower NIMs compared to a year earlier, and almost two-thirds (66.0 percent) had lower NIMs than in the fourth quarter of 2008. The average NIM at institutions with less than $1 billion in assets fell from 3.66 percent in the fourth quarter to 3.56 percent, a 21-year low.

The increased net interest margin was better for the bigger banks. Period.

First-quarter net charge-offs of $37.8 billion were slightly lower than the $38.5 billion the industry charged-off in the fourth quarter of 2008, but they were almost twice as high as the $19.6 billion total in the first quarter of 2008. The year-over-year rise in charge-offs was led by loans to commercial and industrial (C&I) borrowers, where charge-offs increased by $4.2 billion (170 percent); by credit cards (up $3.4 billion, or 68.9 percent); by real estate construction loans (up $2.9 billion, or 161.7 percent); and by closed-end 1-4 family residential real estate loans (up $2.7 billion, or 64.9 percent). Net charge-offs in all major categories were higher than a year ago. The annualized net charge-off rate on total loans and leases was 1.94 percent, slightly below the 1.95 percent rate in the fourth quarter of 2008 that is the highest quarterly net charge-off rate in the 25 years that insured institutions have reported these data. Well over half of all insured institutions (58.3 percent) reported year-over-year increases in quarterly charge-offs.

Here is the key takeaway: The annualized net charge-off rate on total loans and leases was 1.94 percent, slightly below the 1.95 percent rate in the fourth quarter of 2008 that is the highest quarterly net charge-off rate in the 25 years that insured institutions have reported these data.

The high level of charge-offs did not stem the growth in noncurrent loans in the first quarter. On the contrary, noncurrent loans and leases increased by $59.2 billion (25.5 percent), the largest quarterly increase in the three years that noncurrent loans have been rising. The percentage of loans and leases that were noncurrent rose from 2.95 percent to 3.76 percent during the quarter; the noncurrent rate is now at the highest level since the second quarter of 1991. The rise in noncurrent loans was led by real estate loans, which accounted for 84 percent of the overall increase. Noncurrent closed-end 1–4 family residential mortgage loans increased by $26.7 billion (28.1 percent), while noncurrent real estate construction loans were up by $10.5 billion (20.3 percent), and noncurrent loans secured by nonfarm nonresidential real estate properties rose by $6.9 billion (40 percent). All major loan categories experienced rising levels of noncurrent loans, and 58 percent of insured institutions reported increases in their noncurrent loans during the quarter.

First loans become non-current, then banks charge them off. In other words wven though banks are charging off a ton of loans, there are more defaults in the pipeline. That is terrible news. In addition, the rate of increase appears to be accelerating. None of this is good.

A Statistical Look At Europe

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The following charts and graphs are from Eurostat:


The percentage change from previous quarters and the same quarter a year ago are all decreasing. Decreasing GDP means


Increasing unemployment, which leads to
Decreasing retail sales, which leads to

Declining industrial production.

And -- this scenario is leading to possible deflation. In the chart below I have blocked off the countries that look to be moving toward deflation:

Thursday Oil Market Round-Up

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The weekly chart continues to show strong, bullish tendencies. The MACD and RSI are still rising. Prices continue to advance. In addition, prices are above the SMAs, the 10 week SMA is above the 20 week SMA and both are advancing.


The oil market has been advancing since mid February. Notice how prices have continually moved higher. They have formed two bull market flag patterns to consolidate gains only to return to higher price action. Also notice the incredibly bullish price/SMA alignment -- prices are above all the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are moving higher. This is a bullish chart, plain and simple.

Let's look at some of the fundamentals:

Oil stocks are still at high levels, although they have decreased over the last few weeks.

Oil demand remains steady, but

Prices are edging up.

Today's Markets

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Bottom line: we're still consolidating across all the averages.

We're Nowhere Near a Bottom in Housing

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Here are the two relevant charts/graphs:



Prices are nowhere near bottoming out.




Only 5 cities had a year over year price decline less than 10%.

Only three cities had a month to month increase.

Is 2% The New Growth Rate?

From Bloomberg:

Americans may have to get used to unemployment greater than 8 percent for the first time since 1983 and an economy that won’t grow much beyond 2 percent as a consequence of the lost confidence in consumer credit that shattered financial markets.

By this time next year, “the market will realize that potential growth for the U.S. is no longer 3 percent, but is 2 percent or under,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said in an interview with Bloomberg Radio.

“We are transitioning to what we call at Pimco a new normal,” El-Erian said. Pimco, in Newport Beach, California, is the biggest bond fund manager with about $756 billion in assets.

This is an incredibly interesting observation -- and one that I think is fundamentally accurate. I've spent a fair amount of time talking about the US consumer -- specifically the crushing debt load that he has along with a terrible job market and massive losses in wealth. These are not the fundamental conditions that will lead to big increases in consumer spending. On the contrary -- it is a return to "frugality".

The U.S. financial crisis and recession have produced lasting shifts in consumer spending and savings reminiscent of the 1950s that may crimp profits and productivity, said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto and former chief North American economist at Bank of America Corp.

“This is going to be a new era of frugality,” Rosenberg said. “This isn’t some flashy two- or three-quarter deal. This is a secular change in household attitudes.”

Consumer Confidence Up

From the Conference Board:

The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. The Present Situation Index increased to 28.9 from 25.5 last month. The Expectations Index rose to 72.3 from 51.0 in April.

The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for May's preliminary results was May 19th.

Says Lynn Franco, Director of The Conference Board Consumer Research Center: "After two months of significant improvements, the Consumer Confidence Index is now at its highest level in eight months (Sept. 2008, 61.4). Continued gains in the Present Situation Index indicate that current conditions have moderately improved, and growth in the second quarter is likely to be less negative than in the first. Looking ahead, consumers are considerably less pessimistic than they were earlier this year, and expectations are that business conditions, the labor market and incomes will improve in the coming months. While confidence is still weak by historical standards, as far as consumers are concerned, the worst is now behind us."

Here is a chart of the data:



The chart shows a big jump -- although we are still at incredibly low levels. The big question is why? Personally, I think a lot of it is political. Now -- before everybody jumps on the "your full of it" line of attack, consider these two graphs from Pollster.com





Last years election was a nadir of sentiment. People were extremely dissatisfied with the direction the country was taking. Since the election the percentage of people who are happier/more positive about the direction of the country has increased. In addition, the number of people who think the country is on the right track has increased and the number of people who think the country is on the wrong track has decreased. That's what the data says.

Wednesday Commodities Round-Up

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Today I'm going to look at the gold market, largely because of an article I wrote with a friend. Here is a link. The data does not indicate inflation is an issue and so far won't be for the near future. However, that does not mean investors are not concerned about inflation prospects. As a result, keeping an eye on gold prices is a good idea.


Above is a 9 month chart. Notice a rally that started at the end of last year and continued until the beginning of March. That is when investors switched from other markets to equities -- meaning gold dropped. Prices then formed a downward sloping flag pattern but have since risen through the top of that pattern.


In the above chart, notice that gold is started another rally in mid-April and has been moving higher even since. Also note the price/SMA picture has slowly turned more bullish -- prices are above the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are now moving higher.


Also note the MACD is rising and



The RSI is moving higher as well. Also note the technical divergence circled on the chart. In April gold made two lows right around 85. But the RSI made a higher high on the second low. This is the kind of technical divergence that traders look for as it gives signals in advance of moves.

Today's Markets

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Notice the SPYs have formed a flag/pennant pattern at the top of the rally that started at the beginning of March. This means the markets are taking a breather as it were to get a better idea for what the background is and where they want to take the market next. Notice how the other averages are also trading in a pattern as well.

A Tale of Two Economic Views, Pt. II

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From the Confidence Board:

The Conference Board LEI for the U.S. rose sharply in April, the first increase in seven months, and the strengths among its components exceeded the weaknesses for the first time in one and a half years. Stock prices, the interest rate spread, consumer expectations, initial unemployment claims, the average workweek, and supplier deliveries all contributed positively to the index this month, more than offsetting the negative contributions from real money supply and building permits. The six-month change in the index has risen to -0.6 percent (a -1.2 percent annual rate) in the period through April 2009, up from -2.4 percent (a -4.8 percent annual rate) from April to October 2008. However, the weaknesses among the components have remained widespread over the past six-month period.

Here is the chart from the release:



And here is a graph of the contributing factors:



There are several charts from Pollster.com which I have posted that show consumer sentiment is increasing as well. I think this is vitally important -- people who think things are getting better are more prone to contribute to the economy.

A Tale of Two Economic Views

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Last week the Federal Reserve issued the latest FOMC minutes. Let's take a look at what they see regarding the current economic conditions.

Labor market conditions deteriorated further in March. Private nonfarm payroll employment registered its fifth consecutive large monthly decrease, with losses widespread across industries. Moreover, the average workweek of production and nonsupervisory workers on private payrolls ticked down in March from the low level recorded in January and February, and total hours worked for this group stayed below the fourth-quarter average. The civilian unemployment rate climbed to 8.5 percent, and the labor force participation rate edged down from its February level. The four-week moving average of initial claims for unemployment insurance remained elevated in April, and the number of individuals receiving unemployment benefits relative to the size of the labor force reached its highest level since 1982.

Total employment is still heading lower and


The percentage change from last year in the establishment job survey is still dropping



Average weekly hours is still heading lower and


The unemployment rate is heading higher



The Federal Reserve calls this chart "elevated" -- which it is. However, I would add that it looks to be topping.

Industrial production fell substantially in March and for the first quarter as a whole, with cutbacks widespread across sectors, and manufacturing capacity utilization decreased to a very low level. First-quarter domestic production of light motor vehicles reached the lowest level in more than three decades as inventories of such vehicles, while low, remained high relative to sales. The output of high-technology products decreased in March and in the first quarter overall, with production of computers and semiconductors extending the downward trend that had begun in the second half of 2008. In contrast, the production of communications equipment edged up in the first quarter. The output of other consumer durables and business equipment stayed low, and broad indicators of near-term manufacturing activity suggested that factory output would contract over the next few months.

Industrial production is dropping hard and


Capacity utilization is at record lows. I should add -- these are the two numbers that scare me the most.

The available data suggested that real consumer spending rose moderately in the first quarter after having fallen in the second half of last year. Real spending on goods and services excluding motor vehicles fell in March but was up, on balance, for the first quarter as a whole. Real outlays on new and used motor vehicles expanded in the first quarter following six consecutive quarterly declines. Despite the upturn in consumer spending, the fundamentals for this sector remained weak: Wages and salaries dropped, house prices were markedly lower than a year ago, and, despite recent increases, equity prices were down substantially from their levels of 12 months earlier. As measured by the Reuters/University of Michigan survey, consumer sentiment strengthened a bit in early April, as households expressed somewhat more optimism about long-term economic conditions; however, even with this improvement, the measure was only slightly above the historical low for the series recorded last November.

We've been over this a few times. I think retail sales have bottomed. I outlined my arguments in this article. Nothing has changed since then to change my mind (although it could). However, this report from the San Francisco Federal Reserve explains the problems going forward for the household sector.

The latest readings from the housing market suggested that the contraction in housing activity might have moderated over the first quarter. Single-family housing starts flattened out in February and March, and, after adjusting for activity outside of permit-issuing areas, the level of permits in March remained above the level of starts. The contraction in the multifamily sector also showed signs of slowing, as the drop in starts in the first quarter was well below the pace experienced during the fourth quarter of 2008. Recent data also indicated that housing demand might have stabilized. Sales of new single-family homes held steady in March after edging up in February, but the level of such sales remained low, leaving the supply of new homes relative to the pace of sales very high by historical standards. Existing home sales in March were slightly below the average pace for January and February. Most national indexes of house prices stayed on a downward trajectory. Lower mortgage rates and house prices contributed to an increase in housing affordability. Rates for conforming 30-year fixed-rate mortgages extended the significant decline that began late last year. Rates on jumbo loans came down as well, although the spread between the rates on jumbo and conforming loans was still wide and the market for private-label nonprime MBS remained impaired.

As I've said many times, housing won't recover until prices stop falling. And prices won't stop falling until inventory comes down. And there is a ton of inventory right now:

A full recovery for housing, and maybe the broader economy, depends on a third step: Prices must stop falling. On that front, as with other economic data, the "second derivative" is improving -- things are still getting worse, but at a slower rate.

Unfortunately, the day when prices start rising might still be far away.

That is mainly due to a dizzying supply of housing, which can keep a lid on prices even as demand rises. This glacier is melting slowly: Existing-home inventories are down to 9.8 months' supply, higher than their long-term average of six months, but off their recent peak of 11.3 months.

There is a massive shadow inventory of bank- and investor-owned homes, enough to push existing-home supply to 12 months, notes David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm.

So -- the economy is terrible, right? Well -- maybe not.