Weekend Weimer and Beagle

It's that time of the week. See you on Monday

Is This Another Sign of A Market Correction?

Yesterday the IEFs and TLTs made higher moves. Is this money that would be going into the market instead going into bonds because their yield is attractive? Or, are people taking profits off the table and moving into Treasuries awaiting the next move? Click on all images for a larger image -- and ignore the last bar.

CBO Sees Problems Brewing

From the CBO:

Today CBO released the Long-Term Budget Outlook. Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario. Unless tax revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States.

Keeping deficits and debt from reaching levels that could cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy. Although the policy choices that will be necessary are difficult, CBO’s long-term budget projections make clear that doing nothing is not an option: Legislation must ultimately be adopted that raises revenue or reduces spending or both. Moreover, delaying action simply exacerbates the challenge, as is discussed in the report.

I ran some of the current numbers from the CBO's historical data series. Here are the relevant charts (click for a larger image):

Forex Fridays

Overall, the downward trend from the double top continues. Prices are moving lower and the MACD and RSI are confirming the trend. The 10 and 20 week EMA are also moving lower with the 10 week EMA going though the 50 week EMA and the 20 about to follow suit.



The daily chart is a great example of bear market rallies -- it contains two. Notice how prices are moving lower but the lower movement is interrupted by several pennant and flag patterns. These are classic bear market corrections.

Today's Markets

The big news today was from a technical perspective. Notice that prices moved above 10 day trendlines on all four averages. That's a very important move technically. However, look at the daily charts and you'll notice that prices are rebounding from a downward movement.

The DIAs are rallying into the 200 day SMA

The SPYs are rallying from teh 200 day SMA (a good development) but are rising from the lower point of a downward sloping channel.


The one exception is the QQQQs

A Look At Unemployment Claims

The 4-week moving average is still moving lower.

GDP Decreases 5.5%

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

The good news is this number keeps going higher and (or less worse).

But there are still major problems, especially in the area of investment. Consider these points from the report:

Real nonresidential fixed investment decreased 37.3 percent, compared with a decrease of 21.7 percent. Nonresidential structures decreased 42.9 percent, compared with a decrease of 9.4 percent. Equipment and software decreased 33.7 percent, compared with a decrease of 28.1 percent. Real residential fixed investment decreased 38.8 percent, compared with a decrease of 22.8 percent.

Investment fell out of bed last quarter in a big way. Residential has been terrible for a few years now, so that number is not shocking. However, business essentially halted any expansion plans last quarter. That's very concerning. In addition, consider this chart which shows the percentage of non-residential investment as a percentage of GDP. All figures are inflation adjusted.



The median value for that chart is 10.60% -- which is right about where we are currently after the drop-off.

FOMC Statement

The key points are in bold.

Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Short version: things are getting a bit better although the economic condition is still extremely fragile. Inflation isn't an issue so we can keep rates really low.

Oh yeah -- we're still going to buy some fixed income pieces.

Click on all images for a larger image.

The main point with all three averages is they are all in a confirmed correction -- that is, they are all in well-formed downward sloping consolidation patterns. Notice the SPYs and the IWMs are right at their respective 50 day EMAs. A move through either of those on decent volume would signal a possible problem with the markets. However, the QQQQs still have some downside room before they hit their 50 day EMA. That still gives us a bit of breathing room -- but not much.

Click on all images for a larger image


The weekly chart is still in an uptrend. While the market has sold-off a bit, it looks more like a bull market flag pattern than a significant sell-off. Also note the MACD and RSI are still rising as are the 10 and 20 day EMA.



The daily chart confirms that so far we are in s standard price correction; prices have gently moved to the 20 day EMA. While the MACD and RSI are moved lower on this latest move prices are still at technically important levels. If we see prices move lower -- that is, through the EMA -- then we should reconsider out analysis.

Let's take a look at the fundamental picture.

Oil supplies -- while still above normal - are dropping. The trend is bullish while the level is not.


While gas demand dropped last week, the overall trend for the last 5 weeks has been a move higher leading to




higher prices.

Today's Markets

I'll post this in the morning.

Durable Goods Up

From the Census Bureau:

New orders for manufactured durable goods in May increased $2.8 billion or 1.8 percent to $163.9 billion, the U.S. Census Bureau announced today. This was the third increase in the last four months and followed a 1.8 percent April increase. Excluding transportation, new orders increased 1.1 percent. Excluding defense, new orders also increased 1.4 percent.

The bottom line is this was a good number all the way around. It also gives me hope that we'll start to see a moderation in the industrial production number from the Federal Reserve.

Let's break the chart down in three ways:


First, notice at the end of last year the month over month number dropped hard.

Secondly, the month over month number has started to moderate over the last few months,.

Third, the year over year number bottomed in January has has sat there since. That looks like a bottoming to me.

OECD Report Sees Bottom

The OECD has issued a report that says the bottom is near for the US economy. Here is a quick summary:

The Organization for Economic Cooperation and Development said Wednesday that developed economies will shrink less sharply this year than it previously expected, and will grow next year.

The projection was the first upward revision to the OECD's growth forecasts since June 2007, before the financial crisis began. The International Monetary Fund is likely to follow suit when it releases new forecasts July 7.

Let's look at the good news in chart form. Click on all charts for a larger image


The credit crunch is ending -- yields are dropping.



People are selling the safe trade (bonds) and moving into stocks.



Inflation isn't an issue now and won't be because there will be tremendous slack in the economy. First,

Unemployment is already high and


The output gap -- the difference between what the economy could produce and what it will produce -- is the largest it's been in 40 years. This is a primary reason why inflation isn't an issue right now.

Why Inflation Isn't A Problem

A poster asked me to explain my position on inflation. First, here is a link to an article I wrote that outlines some of the issues. Please note the article I wrote with Invictus was published before Krugman's. Here are two other excerpts from NY Times editorials on the issue.

Paul Krugman:

First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

Alan Blinder:

Rather, it’s more like a grand version of what the Fed does every Christmas season. The Fed always puts more currency into circulation during this prime shopping period because people demand it, and then withdraws the “excess” currency in January.

True inflation hawks worry about that last step. (Did someone say, “Bah, humbug”?) Will the Fed really withdraw all those reserves fast enough as the financial storm abates? If not, we could indeed experience inflation. Although the Fed is not infallible, I’d make three important points:

•

The possibilities for error are two-sided. Yes, the Fed might err by withdrawing bank reserves too slowly, thereby leading to higher inflation. But it also might err by withdrawing reserves too quickly, thereby stunting the recovery and leading to deflation. I fail to see why advocates of price stability should worry about one sort of error but not the other.

•

The Fed is well aware of the exit problem. It is planning for it, is competent enough to carry out its responsibilities and has committed itself to an inflation target of just under 2 percent. Of course, none of that assures us that the Fed will hit the bull’s-eye. It might miss and produce, say, inflation of 3 percent or 4 percent at the end of the crisis — but not 8 or 10 percent.

•

The Fed will start the exit process when the economy is still below full employment and inflation is below target. So some modest rise in inflation will be welcome. The Fed won’t have to clamp down hard.

I just don't see it right now.

Wednesday Commodities Round-Up

Gold has been -- interesting. I first noticed this thanks to Tim Knight over at Slope of Hope.


Gold broke a trendline last week. In addition, there have been two gaps down since then. Both the 10 and 20 day SMA are moving lower and the 10 day SMA has crossed below the 20 day SMA.


Also note the MACD went lower as prices topped and


The on balance volume was decreasing, indicating fewer people were participating in the rally.

So -- why did this happen? Part of the answer is simple market psychology -- nothing increases in price forever; at some level traders take profits off the table. However, I have to wonder whether or not people are re-thinking the "inflation scare" concept. The bottom line is there is a ton of slack in the economy from high unemployment and low capacity utilization. This is not an inflation environment. That makes gold a less attractive investment -- at least for now.

Today's Markets

Click for a larger image

Notice the following:

1.) Prices made a big gap down yesterday on higher volume.

2.) Prices are below all the EMAs

3.) The 10 day EMA has moved below the 20 day EMA and both are moving lower.

This is not a good chart and indicates the market is most likely going to move lower.

A Look At the Transports

Click on all images for a larger image.

The Transports are part of Dow Theory, which basically says indexes have to confirm movements. That is, when one index rises, another has to rise and so on. The transports are important because they tell us if investors think the economy will have to move more stuff from point A to point B, indicating increased economic activity.


Are the transports forming a double top? Maybe. But also notice the index could not rise above the 200 day EMA indicating traders do not want it to move into bull market territory.




The accumulation/distribution line printed a lower total on the second top, as did


the MACD. In addition


On balance volume did not increase on the second top, indicating there was not an increase in trading inflows.

World Banks Sees A Scary World Picture

The primary driver of yesterday's market sell-off was a World Bank Report that saw slower growth. But, the report was a bit more complicated then that. Here is a short synopsis of its central thesis.

1.) Developed economies (The US and Europe) are slowing down. Therefore they are purchasing less heavy equipment which is made more and more by developing countries.

2.) This is leading to a slowdown in developing countries who are export dependent.

3.) The developing countries are experiencing a slowdown right as their capital needs are increasing. Therefore, countries that are in a poor fiscal position will experience increasing trouble regarding financing.

Here's a short version of the report:

As capital became increasingly hard to come by, and uncertainty soared about future demand, there was a sharp decline in production of manufactured goods, and in global trade in these goods. The level of industrial production in rich countries has dropped by 15 percent since August 2008, and that in developing countries, excluding China, by 10 percent.

GDP growth in developing countries is expected to slow sharply, from 5.9 percent in 2008 to 1.2 percent in 2009. However, their performance surpasses rich countries, whose collective GDP is expected to fall 4.5 percent in 2009. Notably, when India and China are removed from the total, developing countries as a group will experience a contraction in GDP of 1.6 percent, a real setback for poverty reduction.

Global GDP growth is expected to rebound to 2% in 2010 and 3.2% by 2011. In developing countries growth is expected to be higher, at 4.4 % in 2010 and 5.7 % in 2011, albeit subdued relative to the robust performance before the current crisis.

.....

Developing countries are likely to face a dismal external financing climate in 2009, according to the GDF. With private capital flows declining dramatically, many countries will find it difficult to meet their external financing needs, estimated at $1 trillion.

Private debt and equity flows will likely fall short of meeting the external financing needs of developing countries by a wide margin, amounting to a gap estimated to range between $350 billion and $635 billion. Capital flows from official sources, plus tapping foreign reserves, will help fill the gap in some countries, but in others, there will—of necessity—be sharp and abrupt macro adjustments.

A long version is available here.

Insiders Are Dumping Shares

From the Financial Times:

Executives in charge of the largest US companies sent a signal of their concerns by selling far more shares than they bought this month, according to data based on Securities and Exchange Commission filings.

Share sales by so-called company insiders are outstripping purchases so far this month by more than 22 times. TrimTabs, the investment research company, said insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases.

“The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” said Charles Biderman, chief executive of TrimTabs.

No indicator is fool-proof, and no indicator is 100% accurate. But this is a really important sign that the market has probably topped out for now. The people who have access to confidential sales and financial informaiton are dumping shares. That's not good.

Treasury Tuesdays

First, it's important to note where we are in the bigger market cycle. Starting in mid-2007 when the financial sector really started to bleed, treasuries became a very popular investment. Notice the IEFs started to rally in mid-2007 until early 2008, then sold-off, then rose again at the end of last year. All of this was the result of the credit crunch. Simply put, investors started looking for safety and this is where they found it. Also notice the sell-off of the last few months has put prices near the middle of their 2008 trading range -- which occurred because of fear.


In last week's update, I speculated that the increased volume over the last few week's may be a selling climax and therefore the market may be rebounding. Higher volume is agood indicator of that, as is an extended more in one direction along with yields nearing 4%. Notice that prices appear to be forming a bottom -- or at least are leveling off before a further move lower (we won't know until prices move in one direction or the other).

There are some incredibly strong cross-currents in the Treasury market right now. On the down side we have a ton of issuance coming to market. There is also an inflation scare (which I believe is bunk). However, high yields during a low inflaiton environment is very attractive which is why I thought the 4% yield mark was very important.

Today's Markets

In the last two Market Monday's (see here and here) I've note the market was in a downward posture. We're now in full blown correction mode. Click on all images for a larger image.



On today's chart notice the market opened much lower with a gap down and then another gaop down within 10 minutes. The market then continued to run into resistance at the 10 and 20 minutes SMA. Finally, at the end prices sold-off on high volume, indicating no one wanted to hold a position overnight.



On the daily chart notice that prices have moved through the 50 day EMA. That is avery bearish development.

About the Credit Crunch

The following graphs show the year over year percentage change in business, consumer and real estate loans:





Yes, they are all dropping. However, they are all still positive, indicating the rate of growth is slowing. But it is still increasing. Note the closest to actual year over year contracting is business loans. But also notice the rate of year over year change has been lower several times. Also note that consumer and real estate loans have also seen lower year over year rates as well.