Weekend Beagle and Weimar

It's time to think about anything except the markets or the economy. See you Monday.

States See Drop in Tax Revenue and Income

From Stateline:

States racing to cobble together new budgets for their July 1 deadline could find themselves sinking back into red ink sooner than they think, as Americans’ income and the taxes they pay on it shrink, new data show.

Personal income taxes paid to the states plummeted 26 percent, or $28.8 billion, in the first four months of 2009, compared with the same time period last year, the Nelson A. Rockefeller Institute of Government said in its June 18 report.

.....

The federal government found similar bleak news, with overall personal income falling in 37 states in the first quarter of 2009. Job losses, lower interest rates and smaller corporate dividend payments all helped to push personal income down, the U.S. Bureau of Economic Analysis said in a June 18 report.

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Philly Fed Shows Improvement

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There are several points from the above data:

1.) There are now two months of solid increased (the lower gray lines). While this is not strong enough to call a trend, it does indicate that activity has increased over the last two months. This has probably led to an increase in the future expectations.

2.) Notice the big bump in new orders, shipping and overall activity. Those are welcome changes. However, also notice that employment and hours worked are still hovering at low levels. That means we haven't seen enough strong and continuous activity to see movement, indicating there is still a fair amount of caution about longer term prospects right now. That makes a great deal of sense considering we've only seen two months of solid improvements.

Because of their geographic proximity, here is a link to the latest NY Fed report. Remember it fell a bit this month, but has been in an uptrend for a few months before that indicating the NY area may be just a bit ahead of Philly.

Forex Fridays

The weekly charts shows the dollar is clearly in a downward trend. Prices formed a double top at the end of last year and the beginning of this year and have been falling since. The MACD and RSI are both falling and all the EMAs are heading lower.


The dollar us currently in a bear market pennant pattern -- basically a counter-trend rally as prices move lower. Unless prices meaningfully break through the top of this pattern I would expect another downward move.

Today's Markets

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The main issue with the SPYs is getting over the 92.60 level. A move above there would be technically important. The market has a slight upward bias right now, but not an impressive one.



The QQQQs are still moving in a sideways configuration.



The IWMs are consolidating in a triangle consolidation pattern.

Leading Indicators Up Again

From the Conference Board:

The Conference Board LEI for the U.S. increased sharply for the second consecutive month in May. In addition, the strengths among its components continued to exceed the weaknesses this month. Vendor performance, the interest rate spread, real money supply, stock prices, consumer expectations, and building permits contributed positively to the index, more than offsetting the negative contributions from weekly hours and initial unemployment claims. The index rose 1.2 percent (a 2.4 percent annual rate) between November 2008 and May 2009, the first time the index has increased over a six-month period since July 2007, and the strengths among the leading indicators have become balanced with the weaknesses during this period.

Those are a nice two months of data.

Can We Afford All This Spending?

There has been a war of words written about Washington's recent increase in spending. However, none of this has focused on the numbers -- as in the data. So, let's take a look at the numbers to see what they tell us.

First, some background. I was against Bush's deficit spending for a large part of his administration. One reason was I was against the Iraq War more or less from the beginning. From an economic perspective, war is a horrible utilization of resources. In addition, Bush made the same fiscal mistake Reagan made: he decreased revenues by cutting taxes and increased spending. This is a recipe for increasing debt, which was the final result of Bush's policies. Total debt outstanding at the end of Bush's first year in office (9/30/01) was $5,807,463,412,200.06. When he left office 9/30/08) that number was $10,024,724,896,912.49.

However, I supported most of the current spending (see this article and this article for more information). The reason for that is simple: read A Monetary History of the US by Milton Friedman -- especially the chapter titled "The Great Contraction". Starting with the announcement of Bear Stearns in the summer of 2007 that two of its hedge funds were suffering major losses the US financial system has been in a shooting gallery. What really made the great depression worse were the financial events of 1929-1933 when the US went through major financial turmoil. That essentially shut down the economy, leading to a contraction of more than "50% in current prices from 1929 to 1933". This time the situation was no different. In addition, by the end of 2008 it was obvious the country's greatest threat was a deflationary spiral. In short, the government had two choices: do nothing and practically guarantee economic freefall or do something to prevent it.

Throughout the above statements is the idea that government should act prudently during good times in order to spend during bad times -- that is, use its spending muscle during the bad times to limit the economic damage of a slowdown while cutting its spending and letting the private sector take over when the economy turns around. At least -- that's the ideal. It has yet to happen in real practice (although the 1990s came pretty close).

All that being said, let's take a look at where we are now. According to the Bureau of Public Debt, total US debt is $11,406,012,959,882.55 while total nominal US GDP is $14.089 trillion, making the debt/GDP ratio 80.956%. That's not good, but not catastrophic either. However, the budget projections from the CBO provide the following deficits for the years 2009-2012: $-1.845, $1.379, $-.970 and $-658. So, assuming these estimates are correct, by the end of fiscal 2012 we'll have $4.852 trillion more in debt. Tacking that onto the current daily total of all debt outstanding we get $16.258 trillion. Now -- assuming we have no growth for the next four years and our nominal GDP stays at $14 trillion we would have a debt/GDP ratio of 116% by the end of fiscal 2012. That is not a good development. That does assume there will be no GDP growth over the next 4 years which is also not likely. However, no matter how you slice the information it is not a healthy way to run an economy.

But let's look at this from another angle: interest paid on the debt. Let's assume we don't retire any debt (which we won't) buy only pay interest on the debt. Can we at least afford that? Here is a chart of the percentage of interest payments as a percentage of total federal expenditures.



This number was at its highest in the late 1980s to the early 2000s when it fluctuated between (roughly) 14% and 15%. It dropped during the first part of this decade thanks to record low interest rates. Those will not remain for the next four years. However, the above chart indicates the interest payments are not so high we will face current problems. In addition, we do have room for upward movement on interest rates.

So -- the overall conclusion is we're going to be pushing the envelope of US finances which is never good. Overall debt/GDP will most surely be at 100% by the end of fiscal 2012. In addition, the interest component of the federal budget will surely increase as well. Now -- is this development fatal? No. But are we adding more stress to the system? Yes. But finally, do we have a choice? That is, is there another viable option right now? No. Fiscal conservatives (who by the way don't exist in the Republcan party's policy implementation arm) will argue to do nothing. But given the precarious nature of the economy right now that is still a recipe for economic suicide.

Thursday Oil Market Round-Up

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The weekly chart is still very bullish. The MACD and RSI are still rising. Prices are still advancing and have moved through all the EMAs. The 10 and 20 week EMA are both moving higher and the shorter EMA is above the longer EMA.



On the daily chart the situation is still mostly bullish with one caveat: the MACD is about to give a sell signal. Aside from that prices are still moving higher and and currently consolidating in a bull market pennant pattern. The RSI is pegged at a high level, but has been for some time. All the EMAs are moving higher and the shorter are above the longer. Prices are using the EMAs for technical support.

Let's look at the fundamental side.

Oil stocks are high but decreasing


Gas demand is increasing an d

that is leading to an increase in gas prices.

Today's Markets

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Notice how the market has been in a lower high/lower low pattern since last Thursday. However, today prices advanced through previous lows before running into resistance at the 200 minute SMA. Let's take a closer look at the last three days of action


After falling in the first hour and a half of trading prices moved higher until about 1:40 when they broke the upward sloping trend line. Volume then escalated as prices fell.

The IWMs are remarkably similar:


However, notice the QQQQs formed more of a trading pattern over the last few days.


So -- what does this mean? One of the averages isn't confirming.

Laughing at Laffer

About the inflation scare, here's the YOY chart of PPI and CPI




Now -- on a month over month basis, we're getting some stabilization.

Industrial Production Blows

From the Fed:

Industrial production decreased 1.1 percent in May after having fallen a downward-revised 0.7 percent in April. The average decrease in industrial production during the first three months of the year was 1.6 percent. Manufacturing output moved down 1.0 percent in May with broad-based declines across industries. Outside of manufacturing, the output of mines dropped 2.1 percent, and the output of utilities fell 1.4 percent. At 95.8 percent of its 2002 average, overall industrial output in May was 13.4 percent below its year-earlier level. The rate of capacity utilization for total industry declined further in May to 68.3 percent, a level 12.6 percentage points below its average for 1972-2008. Prior to the current recession, the low over the history of this series, which begins in 1967, was 70.9 percent in December 1982.

If there is one figure that can blow the "things are getting better" argument it's the latest industrial production figure. Now -- the overall month to month chart is still encouraging (click on all images for a larger image):



Notice the rate of decline has decreased over the last six months save the current month. That means the current month could be a "blip" on the way to things getting better. But it also means we have to keep a very strong eye on all the industrial figures for the next few months. In addition, there has already been a ton of damage done to overall industrial production. Consider the following charts:



Notice that we've lost all production gains of the previous expansion. In addition



Utilization is at multi-decade lows. That means when the economy starts back up there is little incentive for business to engage in any capital expansion as their first priority will be to use the big slack in their production systems.

Again -- if there is a set of statistics that could really screw us up, this is it.

From the Census Bureau

Privately-owned housing starts in May were at a seasonally adjusted annual rate of 532,000. This is 17.2 percent (±14.4%) above the revised April estimate of 454,000, but is 45.2 percent (±5.8%) below the May 2008 rate of 971,000.

Single-family housing starts in May were at a rate of 401,000; this is 7.5 percent (±14.2%)* above the revised April figure of 373,000. The May rate for units in buildings with five units or more was 124,000.

Here are some very interesting housing charts. They break down the single family and total housing starts data by region.

The West's total figures were right below 150,00o for four of the last seven months. But the three months -- February, March and April -- prevent a conclusion the market has stabilized.

There are two ways of looking at the West's data. Either we have a three month rising trend or a 6 month period where starts are fluctuating between 60,000 and 80,000. Either way it's ... interesting.

The south has stabilized for the last 6 months both at the single family level and

The total level
The mid-west has seen five months of increases at the single family level but


At the total level I think the proper phrase is bouncing along the bottom.


The northeast isn't impressing at the single family level but


The total level looks stable (although at an extremely depressed level).


Finally -- we have total US data for all housing starts (single and multi-family)


Although at a low level, that is a fairly stable six months. While I am loathe to call a bottom yet, that chart is extremely encouraging.

Wednesday Commodities Round-Up

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The weekly industrial metals chart is still bullish. Prices are moving higher, as are the MACD and RSI. The 10 and 20 week SMAs are moving higher and the 10 week EMA is above the 20 week EMA. Prices are also right below the 50 week EMA.


The daily chart is a mixed bag. First, prices are clearly in a strong uptrend and have been since the end of February. Also note the EMA picture -- the shorter EMAs are above the longer EMAs and all the EMAs are moving higher. Prices are right below the 10 week EMA which is standard technical support. Both nother the RSI and MACD are a bit mixed.

The weekly ag prices chart is generally still bullish, but there are some chinks in the armor. First, the MACD and RSI are still moving higher and the 10 and 20 week EMAs are still moving higher. But prices gapped down this week which is never a good signal.



The daily chart also shows the gap down and the reversing of the MACD and RSI. Also look how prices have blown through the 10, 20 and 50 day EMAs. If prices continue to move lower they're going to blow out various stops.

Today's Markets

There's been a fair amount of technical damage over the last two days. Let's take a close look. Click on all images for a larger image

Prices have fallen through the 10 and 20 day SMAs along with two technical support levels.


Prices have fallen through the 10 and 20 day SMA along with an important technical support level



Prices have fallen through the 10 and 20 day SMA along with two support levels

Simply put, that's a lot of carnage in a few days.

More Signs of Global Stabilization

From Reuters:

The Bank of Japan forecast on Tuesday that the world's second largest economy may stop shrinking later this year, and investors signaled that recession in Germany was nearing its low point.

Japan's central bank sounded slightly more optimistic after keeping interest rates unchanged, although its outlook was hedged with caution.

A survey of investors and analysts in Germany, Europe's dominant economy, was much stronger than expected, although that optimism has yet to filter into the real world, where companies are struggling and workers are losing their jobs.

Also consider the following:

While is still too early to assess whether it is a temporary or a more durable turning point, OECD composite leading indicators (CLIs) for April 2009 point to a reduced pace of deterioration in most of the OECD economies with stronger signals of a possible trough in Canada, France, Italy and the United Kingdom. The signals remain tentative but they are present in the majority of the CLI component series for these countries. Compared to last month, positive signals are also emerging in Germany, Japan and the United States. However, major non-OECD economies still face deteriorating conditions, with the exception of China and India, where tentative signs of a trough have also emerged. etc.

Market Breadth

We've had a good run in the markets starting in Mid-March. Let's see what this run has done to market breadth

The New York A/D line has made good progress. It indicates the market is looking healthier. But...


NASDAQ is still in the process of bottoming out. There are a few points on this chart. First -- it indicates the depths of the NASDAQ sell-off. The market has rallied since the beginning of March and the A/D line has not made meaningful progress from its bottom. That tells you there was a ton of technical damage done to NASDAQ. In addition, consider the following two charts:




Neither the NYSE not NASDAQ has made a meaningful improvement in the new high/new low numbers. That tells us stocks are still trading very much near their lows instead of highs.

Value Line Lowers Equity Exposure

I love Value Line. I still remember when they issued their reports in giant binders. They sent out a new section every week/month (I forget which). It was -- and still is -- one of the best overall information sources for stocks.

From Marketwatch:

Value Line's recommended equity exposure range is now between 60% and 70%, which is the lowest level it has recommended in five years. That represents a 10-percentage-point reduction from the range that existed prior to Monday morning.

Value Line didn't decide to reduce its equity exposure because of worries that an even deeper economic recession is ahead of us. On the contrary, it believes that, though the current recession "is still with us ... its fury is lessening."

Instead, the source of Value Line's concern is the sheer magnitude of the market's rally over the last three months, which certainly appears to be discounting more than just a mere lessening of the recession's fury. Since the March 9 low, for example, that rally has tacked on more than 40% to the overall market, and even more to some of the most speculative sectors of the market.

.....

Another factor leading Value Line to become more bearish is the recent rise in long-term interest rates. The CBOE's 30-year Treasury Yield index for example, has nearly doubled this year -- an extraordinary rise in so short a time. Since longer-term bonds compete with equities, this rise makes stocks relatively less attractive, especially when the stock market has itself risen so fast.

There are two interesting data points there:

1.) This isn't economic -- that is, the survey is not saying we're going to see a double dip recession. Instead this is about a big rally that has lost its wind and

2.) Rising interest rates are now competing with stocks. That's really interesting. For someone interested in income the relative safety of Treasuries is fair right now.

Treasury Tuesdays

Is it time for a bond market rebound? Consider the following charts (click for a larger image):

Prices have been falling since the stock market started to rally. This is natural -- money is leaving the more conservative areas of the market and moving into riskier areas. However, also note the volume pick-up over the last few weeks. Is this a "selling climax" -- that is -- the last big move out of Treasuries before a move higher? Also consider...



The MACD has been dropping for some time and has now given a buy signal.