Friday, December 4, 2009
It is anti-climatic to say the least to post this message after today's NFP number, which at -11,000, blew away just about every prediction out there. September and October were also revised closer to 0 (remember when September's original -263,000 caused some serious navel gazing about whether there really was a recovery or not?). Hours worked in manufacturing were up, as were durable goods orders - both leading indicators. Aggregate hours worked also turned positive, for the first time since the start of the recession. Overtime was up. Wages were OK.
Earlier this week, auto sales for November were also strongly positive. On the negative ledger, both ISM Manufacturing and Non-manufacturing data came in weaker than expected, the latter going back into contraction and serious labor contraction there still indicated. Additionally,
November same store sales came in negative:
Overall, sales fell 0.3%, reversing the gains seen in September and October, according to the International Council of Shopping Centers. The trade group had cut its November forecast twice to a sales increase of 3% to 4%.Turning to the high-frequency weekly indicators, the BLS reported new jobless claims fell again, to 457,000. Together with today's NFP number, this does suggest that job growth may actually arrive this month.
Black Friday weekend sales were up.:
Sales at U.S. retailers rose an estimated 1.6 percent during the U.S. Thanksgiving weekend, the start to the key holiday shopping season, according to ShopperTrakThe ICSC weekly seasonally adjusted weekly data on U.S. chain store retail sales were unchanged WoW, but up +3.1% YoY.
Rail traffic, including cyclical traffic, was still going up through November 28. I haven't compared carefully with prior years for this week, but if memory serves correct, this is just about unprecedented.
The Daily Treasury Statement for November 30 showed $127.7M in withholding taxes paid for November, down about 6% from a year ago (one of the best comparisons this year] and up from the last two months. This may indicate that 3Q was the bottom for this number - one quarter after the recession's end, as was the prior pattern.
Gasoline usage continued its seasonal decline, and was only slightly ahead of last year.
Bottom line: this was an excellent week for almost all current data, except for retail services, which continue to look pretty awful.
The unemployment rate edged down to 10.0 percent in November, and nonfarmpayroll employment was essentially unchanged (-11,000), the U.S. Bureau of Labor Statistics reported today. In the prior 3 months, payroll job losse had averaged 135,000 a month. In November, employment fell in construction manufacturing, and information, while temporary help services and health care added jobs.
Let's look at the data:
First of all, the trend of establishment jobs continues in the right direction. Notice the rate of jub loss continues to decrease. However,
While the unemployment rate dropped last month, the overall trend is still rising. We need a few more months of data before we can claim a change in the overall trend.
There are some other good tidbits of news in the report.
A.) The civilian labor force dropped and the number of employed people increased. This goes to the method of calculating the unemployment number. The decrease in the unemployment rate was caused by an increase in employment -- not a statistical "method of calculation" issue.
B.) Good producing employment is still down: construction jobs decreased by 27,000 and manufacturing jobs decreased by 41,000.
C.) Professional services saw an increase of 86,000. Health care/education jobs increased by 40,000.
D.) Government jobs only increased by 7,000 -- so this is not a "public sector" job creation issue.
E.) Temporary employment increased 52,000. It has increased 117,000 since July.
F.) Hours worked increased as did overtime hours worked.
This is a damn good report.
The NFIB has teased Tuesday's release of its monthly SBET, and the picture is not pretty. Their economist, Bill Dunkelberg:
NFIB Jobs Statement: Expect Coal in Small Business StockingsAnd, to take a page from my playbook:
“The job generating machine is still in reverse as November’s report represents the 22nd consecutive month with more small business owners reporting employment declines than employment increases. Sales are not picking up, so survival requires continuous attention to costs – and labor costs loom large.
“Eight percent (seasonally adjusted) of owners reported unfilled job openings, unchanged since August. Over the next three months, 17 percent plan to reduce employment (up one point), and 7 percent plan to create new jobs (down two points), yielding a seasonally adjusted net negative 3 percent of owners planning to create new jobs, two points worse than October. Still more firms are planning to cut jobs than planning to add.
“The consumer is the key to job creation, when businesses have more customers, they will hire more workers. Workers must generate enough sales to pay their salaries, or the firm loses money."More on this when the SBET is released on Tuesday and the data is fully available, but it appears that much of this report will actually be a downtick from last month's. If that is, in fact, the case, it's another very troubling development.
A.) Prices are clearly in a downward sloping channel.
B.) All the EMAs are in a bearish alignment: the shorter EMAs are below the longer EMs, all the EMAs are moving lower and prices are below all the EMAs. Also note the prices have had a difficult time getting above the EMAs -- there is not enough upward momentum to keep prices moving higher through these indicators.
C.) The RSI is medium -- that is, it's neither bullish or bearish.
D.) The MACD is trending lower, but at a very weak angle.
Bottom line: these is little reason to think the dollar will do anything except continue to move lower.
Thursday, December 3, 2009
A.) Prices spiked at the beginning of the trading session and then quickly fell. The reason was the contractionary reading of the ISM services number. This was enough to keep prices subdued from the remainder of the day.
B.) The late day sell-off had two causes. First, traders were worried about Bank of America's announcement that they would sell additional stock. There is concern that current shareholders will be diluted. But the second reason is more important: people are concerned about the jobs report tomorrow. If the number comes in low it could get very ugly tomorrow.
Reports from the twelve Federal Reserve Districts indicate that economic conditions have generally improved modestly since the last report. Eight Districts indicated some pickup in activity or improvement in conditions, while the remaining four--Philadelphia, Cleveland, Richmond, and Atlanta--reported that conditions were little changed and/or mixed.
Consumer spending was reported to have picked up moderately since the last report, for both general merchandise and vehicles; a number of Districts noted relatively robust sales of used autos. Most Districts indicated that non-auto retailers were holding lean inventories going into the holiday season. Tourism activity varied across Districts. Manufacturing conditions were said to be, on balance, steady to moderately improving across most of the country, while conditions in the nonfinancial service sector generally strengthened somewhat, though with some variation across Districts and across industries. Residential real estate conditions were somewhat improved from very low levels, on balance, led by the lower end of the market. Most Districts reported some pickup in home sales, though prices were generally said to be flat or declining modestly; residential construction was characterized as weak, but some Districts did note some pickup in activity. Commercial real estate markets and construction activity were depicted as very weak and, in many cases, deteriorating.
Financial institutions generally reported steady to weaker loan demand, continued tight credit standards, and steady or deteriorating loan quality. In the agricultural sector, the fall harvest was delayed in the eastern half of the nation due to excessively wet conditions during October and early November. Most energy-producing Districts noted a slight uptick in activity in the sector since the last report. Labor market conditions remained weak since the last report, though there were signs of stabilization and scattered signs of improvement. While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods.
Short version: things are moving in the right direction. The vast majority of districts sees improvement (8 of 11 districts saw things get better), but we have a long way to go. Let's break the data down into some smaller pieces.
Let's break the data down into smaller pieces:
Consumer spending strengthened since the last report, with sales of both general merchandise and autos improving across much of the country. Non-auto sales were reported to have picked up in the New York, Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, and San Francisco Districts; sales were described as steady or mixed in the Boston, Chicago, Minneapolis, and Dallas Districts. St. Louis described retail sales as below expectations and down from a year earlier. Auto sales generally improved since the last report, in some cases rebounding from a brief dip after the "cash-for-clunkers" program ended. Increased vehicle sales were reported from New York, Philadelphia, Richmond, Chicago, St. Louis, and Dallas, while sales were described as flat or mixed in the Cleveland, Minneapolis, Kansas City, and San Francisco Districts. A number of Districts reported that used vehicles have been selling better than new ones.
Here is a chart of the relevant data:
Notice the year over year number has been increasing all year. This is to be expected as the number is coming off of an incredibly low bottom. However, also note the gray lines on the chart. These represent month to month increases and decreases. We've had nine monthly reports this year. Three have shown a decrease. That's not bad for an economy that was in a recession for most of the year. While I would like to see the month to month numbers increase, that's not going to happen in the near future.
Most Districts reported mixed to moderately improving manufacturing conditions since the last report. New York, Philadelphia, Cleveland, Minneapolis, Kansas City, and San Francisco all noted modest increases in manufacturing activity within their Districts. Manufacturing conditions in the Boston and Dallas Districts were characterized as mixed, with some improvement noted for biopharmaceuticals companies in Boston and high-tech manufacturing firms in Dallas. By contrast, Richmond and Chicago both reported that manufacturing activity had leveled off since the last report, while activity continued to decline in the Atlanta and St. Louis Districts, although at a somewhat slower pace than the last report. Tighter credit limited the ability of customers to place new orders in the Richmond District, while in the Chicago District, contacts noted a slowdown in the restocking of inventories. Increases in activity related to the transportation industry were cited in the Chicago, St. Louis, Cleveland, and Kansas City Districts, although such activity was mixed in the Dallas District and reported as declining in the San Francisco District. Several Districts noted an uptick in food-related production.
Here is a chart of the relevant data:
The ISM manufacturing index has rebounded from incredibly low levels to print numbers in the expansion area (plus 50) over the last four months. Looking back before recession, these numbers are in line with what we were seeing pre-recession. Also note these numbers are consistent the the continual improvement we've witnessed in the various regional Federal Reserve surveys (the Empire State index etc...). Bottom line: manufacturing has rebounded.
Activity in the service sector generally picked up since the last report, though results were mixed across Districts and across service industries. New York and Philadelphia reported that service-sector activity overall remained steady to up slightly, while St. Louis noted expanding activity. The information technology industry was reported to be showing improvement in the Boston, Minneapolis, and Kansas City Districts. A pickup in activity at staffing firms was reported by Boston and Dallas, whereas New York noted that activity remained sluggish. Strength in health services was noted in the Boston and Richmond Districts. Shipping activity was characterized as flat in the Cleveland, Atlanta, and Kansas City District, while Dallas reports some gain; however, Dallas and Atlanta both noted particular weakness in rail shipping activity. Professional and business support firms reportedly registered some improvement in the St. Louis and Minneapolis Districts but flat to declining activity in Richmond and San Francisco.
Here is a chart of the relevant data:
Like the manufacturing sector, this number has rebounded from low levels to show expansion. This index (like the manufacturing number), has been steadily increasing sign October of last year.
Home sales and construction activity improved across much of the nation, though prices were generally said to be flat or still declining somewhat. A majority of Districts reported that the lower-priced segment of the housing market has outperformed the high end. Increases in sales activity were reported in the Boston, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, whereas sales were described as steady or mixed in the New York and Philadelphia Districts. Multifamily housing markets deteriorated further in the New York and Chicago Districts. More broadly, a number of eastern Districts reported continued declines in home prices--specifically, Boston, New York, Philadelphia, and Richmond. In contrast, prices were said to have firmed somewhat in the Dallas and San Francisco Districts and stabilized in the Chicago and Kansas City Districts. Most reports maintained that the lower end of the market has outperformed the higher end: New York, Philadelphia, Richmond, Atlanta, Minneapolis, and Kansas City all noted relative weakness at the high end of the market, with relative strength at the lower end; in most cases, this strength was largely attributed to the homebuyer tax credit (which was recently reinstated and expanded to include existing owners).
Existing home sales have clearly bottomed and are now moving higher.
New home sales have bottomed, although they are not as strong as existing home sales.
And while home prices are still declining, we're seeing clear improvement in the pace of the decline.
Short version: housing is getting better as well.
And then there is employment:
Labor market conditions remained weak since the last report, with further layoffs, sluggish hiring, and high levels of unemployment in most Districts. However, contacts in the Atlanta, Cleveland, and Richmond Districts reported that the pace of job cuts generally slowed in their regions, and most contacts in the Dallas District reported stable employment levels. Despite generally weak employment conditions, some signs of improvement were noted. For example, contacts in Boston reported that they were beginning to hire and reverse pay cuts or freezes that were implemented earlier in the year, and contacts in the St. Louis District reported that the service sector had started to expand recently. Expectations for the holiday season were mixed across Districts, with contacts in the New York and Dallas Districts reporting lighter-than-normal seasonal hiring and/or increases in the hours of existing employees, as opposed to hiring temporary workers, to meet the seasonal demand. On the other hand, most retailers in the Richmond District have hired the usual number of seasonal workers this year.
The good news is the front end of the labor market -- initial unemployment claims -- continues to decrease:
The 4-week moving average has been dropping since the Spring.
However, there is still no job creation. However, the rate of establishment job losses continues to decrease indicating we should start seeing job creation within the next 3-6 months.
Overall, the Beige Book indicates things are moving in the right direction.
The BLS reported that for the week ending Nov. 28, seasonally adjusted initial jobless claims were 457,000. Last week's number was revised down 4,000 to 462,000. The 4-week moving average was 481,250, a decrease of 14,250 from the previous week's revised average of 495,500. The 4 week seasonally adjusted moving average is now about 23% lower than the peak of 658,750 on April 3 of this year. Although the seasonal adjustment might now be overstating the decline, the trend certainly continues downward.
Unadjusted, there were 460,989 new claims, a decrease of 78,263 from the week before, and well below the 535,730 unadjusted initial claims in the same week last year. In unadjusted terms, this was the best new claims number, relative to normal seasonal adjustment, in well over a year.
Because the BLS normally surveys business payrolls in the week ending the 12th of the month, this won't show up until the December jobs number is reported a month from now (i.e., not tomorrow). According to my previous research, with almost two months' of jobless claims more than 16% off the high, and over one month more than 20% off the high, this morning's jobless claims number would indicate that jobs are actually being added to the economy this month.
If the jobless claims data was great, the ISM services index was equally bad:
“The NMI (Non-Manufacturing Index) registered 48.7 percent in November, 1.9 percentage points lower than the 50.6 percent registered in October, indicating contraction in the non-manufacturing sector after two consecutive months of expansion. The Non-Manufacturing Business Activity Index decreased 5.6 percentage points to 49.6 percent, reflecting contraction after three consecutive months of growth. The New Orders Index decreased 0.5 percentage point to 55.1 percent, and the Employment Index increased 0.5 percentage point to 41.6 percent. The Prices Index increased 4.8 percentage points to 57.8 percent in November, indicating an increase in prices paid from October. According to the NMI, six non-manufacturing industries reported growth in November. Respondents’ comments remain cautious about business conditions and reflect concern over the length of time for economic recovery.”
WHAT RESPONDENTS ARE SAYING …
“Capital markets remain very tight; lenders are not releasing funds for development projects, limiting expansion.” (Accommodation & Food Services)
“Fourth quarter still looking grim, but potential upturn for Q1 2010.” (Professional, Scientific & Technical Services)
“No one trusts that the recovery is real. Seems everything and everyone is in a holding pattern.” (Public Administration)
“Business is still flat.” (Wholesale Trade)
“U.S. business remains better than 2007 levels, although it’s been through personnel and cost reductions that we are now profitable. Business continues to be about 8 percent below 2008 levels.” (Real Estate, Rental & Leasing)
[note: my emphasis]
This is a poor report. The employment component in particular, while slightly better than last month, makes for the worst 3 month average since the teeth of the recession earlier this year. So far, consumer spending hasn't picked up enough to stop the onslaught of business layoffs in this part of economy, most likely among smaller firms.
So first, to try to demonstrate that I'm not Chicken Little, here are some excerpts that I think portray a balanced point of view (in response to NDD's challenge):
Dec 1And on C4C:
Industrial Production appears to have carved out at least (let's hope) a temporary bottom, and is one metric we can look at as a positive, notwithstanding that it's taken a whole lot of government largesse to get us there.
This [referring to FOMC minutes excerpt], to me, encapsulates exactly where we are right now -- still on life support without a clue as to how the patient might fare if it were withdrawn. In all, I think the FOMC minutes were another "things are less bad" report, but there are still very real concerns about the fragility of whatever recovery we may experience and the ease with which it might jump the tracks.
Though not necessarily cause for concern, the decline [in the CFNAI 3-mo MA] is certainly worth keeping an eye on. As one data point does not a trend make, I'll simply suggest this could be a yellow flag.
There were, in my opinion, only two needles to be found in Friday’s NFP haystack:
1) The previous two months’ revisions were positive to the tune of about 91k
2) There was a 34k add in temp help (often a leading indicator for the labor market)
To be crystal clear on where I stand:
1) My primary concern is -- and always has been -- about the "handoff" or sustainability of growth. I think we can all agree that the government can't -- and shouldn't -- prop up the economy indefinitely. I get all the Keynesian stuff, but the government "bridge," such as it is, has to let you off on the other side at some point. My visibility as to where that might be is still extremely hazy.
2) I was for the stimulus package. In fact, I was for a bigger stimulus package. And while I'm not bemoaning -- only pointing out -- that last week's 3.5 print was largely government subsidized, I always seem to be left wondering, "Where do we go from here?" What is going to be the driver, the growth catalyst, to get GDP back up the sustainable trend (~3.0 or so) we require to get to fuller employment and see some wage growth? This is something that could have been -- should have been -- under discussion six months ago and is, as best I can see, still not.
3) My concern about sustainability is focused on the consumer.
I’d be a fool not to acknowledge that most of the recent economic releases have been better than expected, particularly as relates to the [sic] most of the headline numbers. However, I’m still not sold on the sustainability, and in some cases I don’t necessarily like what I see lurking beneath the surface. I continue to believe that when it comes time for the government to hand-off the spending baton to the American consumer, the transition might not go as smoothly as everyone seems to think it will.
The question needs to be asked: How many more vehicles/driver are we going to put on the road? How many cars/driver do we really need? Further, I will respectfully disagree with Bonddad and state for the record that there’s little doubt in my mind that Cash for Clunkers pulled forward some (perhaps unquantifiable) amount of future sales. The run rate didn’t go from ~9MM annually to ~13MM annually on its own. Unfortunately, it appears we’re headed back down toward ~9MM again, so it’s hard to believe the Clunker program didn’t cannibalize some Q4 sales. Keep in mind, too, that scrappage is about 12MM vehicles/year so we are, in fact, taking cars off the road, which would be consistent with the trend of the chart above beginning to turn down.I think my Sept. 19 comment -- 2 1/2 months later -- is beginning to play out, and as NDD mentioned, Paul Krugman invoked the specter of a double-dip on his blog just yesterday.
To me, it really all boils down -- as I've said countless times -- to the consumer and jobs, jobs, jobs. To that end, I intend to have some employment-related posts (with what I hope will be some nifty chart work) up fairly soon. (Let's just say I don't think we need to debate whether or not this will be a jobless recovery -- it already is.)
Click for a larger image
A.) Prices are still in a downward sloping pennant/flag formation.
B.) Momentum is decreasing, but
C.) We haven't seena huge move out of the oil market from a volume perspective.
Notice how the EMAs are bunched together with no clear signal in either direction? That means we're waiting -- which is probably one of the hardest things to do from a trading perspective -- wait for something to happen (or until the chart changes). Also note that prices are hovering around the 200 day EMA. In other words, we don't know if we're in a bull or bear market right now.
Wednesday, December 2, 2009
On the two charts above (as always, click for a larger image) notice that both are running into a lot of upside resistance. Also note that both are printing a series of very weak candles -- very small bodies with very long shadows. Note that volume is also down. These charts are telling us prices can't get above a certain level, indicating the upward momentum has dropped.
The IWCs -- the microcaps -- have already fallen from highs and are consolidating above the 200 day EMA. This tells us that risk capital is pulling back from the market.
The XLBs have been in a trading range for the last few months. And the financials
Have been there longer. In addition, we've seen a weakening momentum in the SPYs and a concentration of upward action in larger shares. As a result market breadth has narrowed. Consider these charts:
New York market breadth as moved sideways and
NASDAQ market breadth is dropped.
Simply put, it's not the greatest market to make a trade in.
Now -- unfortunately I deleted a very insightful comment that mentioned that moving averages are the best indicator for a sideways market. And -- since markets usually more more sideways than up or down, moving averages weren't the best indicator. This is a good observation. However it depends on what you are looking for.
Trading sideways markets is (in my opinion) a waste of time. Markets move sideways because there is no momentum one way or the other. With no momentum, even the most well thought out plans can get laid to waste. Momentum really helps the odds.
Regarding EMAs etc. it's important to look at all the EMAs. The shorter will whip around a bit more and therefore must be looked at in conjunction with the larger trend -- the longer EMAs.
This week, naturally, is dominated by the issue of jobs, jobs, jobs. Somebody on CNBC actually made some sense a short time ago by noting that Congress and the Obama Adminsitration probably wish it had paid more attention to this issue, and less on healthcare this year. Surely there was a sense of "Mission Accomplished" conveyed by the Administration once they passed the stimulus legislation in February, dusted off their hands and moved on to the next item on their "to-do" list.
Anyway, I have been harping for a few months now on how Real Retail Sales is the "Holy Grail" forecasting future jobs growth, and produced a variety of graphs showing how one led the other, typically by about 5 months. Today I want to look at a few variations on that theme.
First of all, the same leading nature of Real Retail Sales is apparent on graphs showing year-over-year change, for example this graph showing the last ten years:
A similar relationship as that found as to the absolute numbers exists: about half the time there is a two month difference of less between the number of months between a trough in Retail vs. jobs, and the number of months when each series crosses from negative to positive. In other words, if YoY% of Retail decline troughs 6 months before YoY% of jobs decline, there is a 50/50 chance that Retail will become positive 4-8 months before jobs on a Y-o-Y basis.
Secondly, while before 1982 there was no relationship between the YoY% of retail decline/growth vs. absolute monthly number of jobs lost/gained, in the recessions/recovery since then, there has been a relationship, and never moreso than in the last year:
I have noted previously how in this "Great Recession" services jobs have been particularly hard hit. While the above graph just shows correlation, not causation, it is fair to say that in the last year, employers have behaved exactly as if they are making decisions based on YoY retail spending, with the breakeven point of 0 jobs at +0.7% YoY retail growth.
This point is amplified by the below graph of the ISM non-manufacturing employment index (which is only about 15 years old)(the line), and BLS monthly jobs data (the bars). Especially when we average the ISM data over three months (not shown on the graph), the correlation seems exceptionally close, with the crossover point actually being about 48 or 49 rather than 50.
The above two graphs of ISM non-manufacturing employment, and YoY% change in real retail sales, are the two that have continued most closedly to correlate (on a coincident, not leading basis) with jobs data in the last year.
So where am I leading? First, the employment number in tomorrow's ISM non-manufacturing index is very important. While it only precedes the BLS payrolls number by one day, it is important confirming information from a private source.
Secondly, with November's good auto sales data, and so-so same store sales data, it looks likely that November Real Retail Sales will hold steady or show slight improvement. Unless we think that December's sales are going to tank, then YoY Real Retail Sales in December are going to be slightly positive, on the order of +0.5% to +1.5%. If the relationship between YoY retail sales and monthly jobs data continues to hold (obviously not a guarantee), then:
(1) there is a good chance that YoY payrolls, which troughed 8 months after Real Retail sales, will cross zero at some point between June and October of next year, meaning that the trough in "actual" jobs (as opposed to YoY%) will be some number of months before then; and
(2) any number above +0.7% (which could happen as soon as December's data), per the second graph above, would more likely than not correlate with job growth rather than losses (+/- monthly noise in the payrolls data).
There are major structural problems with the US economy -- chief among them, a yawning trade deficit that orthodox economics has no answer for; a lopsided accumulation of income, assets, and wealth at the very top; and a hollowed out former middle class. The road to reforming these imbalances would be painful even if political and economic geniuses with their hearts in the right places were at the helm.
I have said over and over before that the Progressive case is not Armageddon, it is Inequality, a pernicious, pervasive and incessant inequality of opportunity and reward that puts paid to the former American myth.
Doomers don't get it. Everything must be fed into the Doomsday machine. Every statistic, shorn of everything going up, is going down, therefore things are bad bad bad, and must necessarily lead to Great Depression II. Of course, we could still have GD2, and Prof. Krugman yesterday warns of the rising risk of a double-dip, appropriately so in my opinion.
But it ain't necessarily so. Ben Bernanke et al., have also read the books on the Great Depression -- in fact in the Fed Chairman's case, he's written one. So both the Keynesian and Monetarist solutions to GD1 have been tried with mild abandon in the last year (no, that's not a typo). They are bound and determined not to make the same old mistakes -- they will make new ones. Hopefully the new mistakes will not lead to the supposedly inexorable old outcome.
And so, yesterday, another Doomer myth bit the dust. November car sales were reported at 10.9 million vehicles, up from a year ago, and up from last month. This is the second increase in a row over September, and October and November have been the best months this year, ex- the 2 "cash for clunkers" months of July and August. In other words, the notion that the only thing that "cash for clunkers" did was borrow sales from the future, and we would have sub-9 million car sales a month for the foreseeable future, is yet another dead doomer black swan.
Not that they'll ever admit it. There isn't a week that goes by that I don't mention some news items that are contrary to my general take on the economy, and I always try to be open to the data changing my mind -- just as I was back in January and February when I noticed that consumers were coming "back from the grave" instead of spiraling ever deeper down into the endless abyss. But Doomers never have to admit that they have been wrong. They just move the goalposts, and move on to the next reason why Armageddon is upon us.
And if anyone in particular thinks this post is aimed at them, here is my challenge: find 5 times in the last 3 months when you have reported that data was positive. Not begudgingly, but with an accurate, neutral description. If you can't do that -- if you haven't been able to acknowledge that even 5 pieces of data in the last 3 months have been positive -- then you are ideology driven and are not, in fact, "reality based".
A, B and C are all consolidation areas. Notice this is where the market has spent most of its time over the last 4 months -- consolidating after gains.
D tells us that as markets are consolidating there isn't a lot of money leaving the markets. People are content to let their money remain in this particular security to see what happens.
A.) EMAs are in a bullish position -- the shorter are above the longer and all are moving higher.
B.) The last two days have seen some strong volume surges as more money comes into the market.
Tuesday, December 1, 2009
Find the trend. No really -- find the trend. Can't find it? You're not alone. Over the last month I have seen fewer and fewer charts that in any was resemble a chart that would provide any kind of trade. I'll post some tomorrow to illustrate the point. Essentially we're in an overbought market; there is little strong upside potential. Yet there just aren't that many bearish things happening -- or at least not enough to take a position lower. So we're stuck right now in a sideways/trendless market.
Except this overlooked a few basic points. First -- the total debt involved was $80 billion. That's tiny. Then there is the issue of what was really going on -- a renegotiation of real estate debt. In essence, a borrower was saying "I want to renegotiate the terms of my loan."
How do I know this?
Dubai World began talks with banks to restructure $26 billion of debt, including $3.5 billion owed by property unit Nakheel, and said the remainder of its liabilities are on “a stable financial footing.”
Debt from subsidiaries including Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations, Dubai World, one of the emirate’s three main state-related holding companies, said in a statement. The cost to protect Dubai debt against default fell to the lowest since Nov. 25. Dubai’s main equity index dropped 6.6 percent.
Dubai is seeking to delay payments on less than half its $59 billion of liabilities, easing the potential damage to banks recovering from $1.7 trillion of losses and writedowns from the global crisis. Shares worldwide recovered some of the losses suffered since Dubai announced it would seek a “standstill” agreement on all of Dubai World’s debt as the Dow Jones Euro Stoxx 600 gained 1.2 percent and the MSCI Emerging Markets Index showed the first back-to-back gains in two weeks.
For anyone that's been around the markets for longer than a day, the real reason for this situation should not have been surprising. In fact, it happens all the time especially in this environment. Borrowers ask banks to rethink the terms of a loan. And they usually start by saying, "I can't pay this." Duh.
The Institute for Supply Management's Manufacturing Index was reported this morning at 53.6. (This is a diffusion index; any reading above 50 indicates expansion. The higher the number above 50, the more the expansion). Just as importantly, the ISM Manufacturing Employment Index was reported at 50.8; and supplier deliveries fell to 55.7. These all indicate continued expansion, but at a slower pace. Only new orders and exports increased at a faster pace. Inventories did shrink, a good sign as to the need for manufacturers to increase production to restock.
In summary, this means that manufacturing continues to expand, but at a slightly slower pace. Employment in manufacturing is just barely positive. The Supplier deliveries component is an LEI, and this in conjunction with November consumer sentiment and most importantly housing permits means that it is likely that for the first time since March, November LEI will print negative.
It is instructive to review the ISM Manufacturing Index since its post-WW2 inception. From 1948 through 1983, the economy relied much more upon manufacturing than it does today. There were repeated booms and busts, as shown on this graph:
Note how often the index fell below 40 and sometimes to 30 in recessions, and how frequently in expansions thereafter it reached not just 60, but sometimes as high as 70.
Now take a look at the same graph from 1984 to the present, a period of 25 years:
During the 1991 and 2001 recessions, the index almost never fell below 40 -- but on the other hand, the index only exceeded 60 during 9 of the 300 months since 1984. This is a symptom of what was euphemistically called "The Great Moderation" (R.I.P.).
Now let's look at the employment index and compare it with the manufacturing index.
Here is the same graph from 1948 to 1984, but with employment added in red:
There are two things to notice: (1) the red line moves up across 50 (indicating generally that more employers are hiring than not) after the blue line, meaning that manufacturing expansion comes before jobs grow; and (2) jobs start to grow very quickly and as equally strongly after manufacturing does.
Next, here's the same comparison graph from 1984 to the present:
The red line still moves up after the blue one, but notice how long it takes to rise over 50, indicating expansion. Until now (note: today's number isn't included on the graph) -- the blue line moved above 50 in August, and red line followed only 2 months later in October.
Today's decline to 53.8 is still consistent with numbers which in the past had coincided with actual job growth (the inflection point being at 53.0), but has not been so this time, due to how hard retail and services employment were hit in this recession.
Finally, let's look at overtime hours in the manufacturing sector. Here again there has been a sharp rebound, although not by a long shot making up all the time lost since 2007:
Overtime has already risen .6 hours. It took 10 months after the 1991 expansion to rise that much - and a full 2 years after 2001!
Simply put, while manufacturing (including employment in manufacturing) is having a more robust recovery than in either 1992 or 2002 - primarily due to cutting too far during the recession, and export sales to foreigners whose standard of living unlike that of Americans is still improving - it still isn't really V shaped.
Just as importantly, in our domestic economy, manufacturing this year is the relative bright spot, while the US consumer continues to struggle as indicated by Invictus' post earlier this morning.
NDD labeled this a disappointment. I disagree for the following reasons:
On the chart notice the overall trend is still higher. In addition, notice the last four readings have clustered in positive (expansion) territory. So long as we have a reading above 50 we're expanding. That's good news.
Consider these points from the report
While there is concern with commodity prices, also note that the last three comments deal with increased activity in three different areas. These comments are included because they are representative of what people are hearing. Simply put, this is more good news.
- "Becoming concerned about the value of the U.S. dollar." (Apparel, Leather & Allied Products)
- "Low value of the dollar driving commodity costs higher." (Food, Beverage & Tobacco Products)
- "Demand from automotive manufacturers remains strong and building." (Fabricated Metal Products)
- "Capital construction seems to be picking up, and we are seeing more jobs that are bid out." (Electrical Equipment, Appliances & Components)
- "Steady increase in business." (Primary Metals)
A quick note in response by NDD:
I agree with Bonddad that in terms of the economy as a whole, there is no doubt this indicates continued expansion, at least for now. At this point, though, I am filtering all economic news through the prism of whether this will be a "jobless recovery" or not, and in that regard I am looking for a stronger "V" than this report shows.
Sunday's New York Times had two Page 1 above-the-fold stories that, in my opinion, cast serious doubts on what type of "recovery," for lack of a better word, we're in store for. First up is "Food Stamp Use Soars Across U.S., and Stigma Fades." The lede: "With food stamp use at record highs and climbing every month, a program once scorned as a failed welfare scheme now helps feed one in eight Americans and one in four children." As concerned as I've been for some time about what's going with our economy, these numbers startled even me. This story is a real eye-opener, and should be a wake-up call for us all.
The other noteworthy story appeared right beside the food stamp story: "U.S. To Pressure Mortgage Firms for Loan Relief." Lede: "The Obama administration on Monday plans to announce a campaign to pressure mortgage companies to reduce payments for many more troubled homeowners, as evidence mounts that a $75 billion taxpayer-financed effort aimed at stemming foreclosures is foundering."
We continue to see an ever-increasing number of homeowners underwater on their mortgages, and there's concern that another wave of defaults and/or foreclosures is headed our way in 2010. So you'll excuse my muted reaction to the fact that initial claims for unemployment insurance dropped into the mid-400k range. The government has stepped in and to fill the spending void created by the tightening of purse-strings on the part of both businesses and consumers. But there are underlying, structural issues at play here (like our collective debt-to-income ratio) that the government simply cannot address.
But let's shift gears and look at the stuff that matters in actually making the recession call.
Employment is still a mess, although we know it's less of a mess and a lagging indicator.
Industrial Production appears to have carved out at least (let's hope) a temporary bottom, and is one metric we can look at as a positive, notwithstanding that it's taken a whole lot of government largesse to get us there.
Real Income continues to go nowhere fast. With unemployment as high as it is and record slack in the labor market, it's hard to envision a scenario any time soon wherein workers will have any leverage to seek higher wages. Just too many people looking for work now to get any wage inflation.
Retail Sales are flatlining for some time now, and early reports (as of Sunday night) for Black Friday seem to indicate heavier foot traffic, a very modest increase in spending, and a laser-like focus on the part of the consumer for discounted goods.
In a nutshell, we may technically be out of recession by virtue of what will likely be two consecutive quarters of GDP growth (although frankly I think the NBER is going to ponder this recession-end call long and hard before they make it), but it is clear that tens of millions of Americans don't much care what economists or the NBER are -- or aren't -- calling it, as they're still feeling significant distress.
I started this post on Sunday night, and intended to finish it up on Monday night with some final thoughts. Little did I know that Paul Krugman would finish it for me in his Monday column:
"There’s a pervasive sense in Washington that nothing more can or should be done [to promote job growth], that we should just wait for the economic recovery to trickle down to workers.
"This is wrong and unacceptable.
"Yes, the recession is probably over in a technical sense, but that doesn’t mean that full employment is just around the corner. Historically, financial crises have typically been followed not just by severe recessions but by anemic recoveries; it’s usually years before unemployment declines to anything like normal levels."
And, finally, it looks like Black Friday sales might not have been up at all.
This piece in today's WSJ further exemplifies Invictus' point:
Mr. Crane is part of a growing group of underemployed -- people in part-time jobs who want full-time work or people in jobs that don't employ their skills. Since the recession began two years ago, the number of people involuntarily working part-time jobs has more than doubled to 9.3 million, according to the federal Bureau of Labor Statistics, the highest number on record.
The proliferation of underemployed could represent a profound reordering of the employment structure. Many people who had comfortable full-time jobs with benefits and advancement opportunities now are cobbling together smaller jobs often at lower pay, in a shift that economists say could become permanent for many individuals stuck in the cycle. Underemployment, along with unemployment, is widely seen as a force slowing the economic recovery.
The trend has been building for years, says Robert Reich, who served as labor secretary under President Bill Clinton and now is a professor of public policy at the University of California, Berkeley. "For decades, workers have been watching their salaries and benefits erode," says Mr. Reich, who took an 8% pay cut last week, along with the rest of the Berkeley faculty.
"We are subjecting millions of people to a standard of living below that which they could achieve if the economy were at full capacity," he says. "Underemployment means that many more people who can't spend as much as they otherwise would."
Adding, for the record: Rosie's piece wasn't published until hours after this post printed, lest anyone wonder who was ripping off whom.
A.) There is only one point I want to make with this chart: according to the accumulation/distribution line, money is moving into the Treasury market. In addition, this movement has been pretty consistent over the last 6 months.
A.) Prices have been rallying since the earlier part of November. Prices are now approaching levels where we had a sell-off.
B.) The EMA picture is bullish: the shorter EMAs are above the longer EMAs, all the EMAs are moving higher and prices are above all the EMAs. However, it's important to remember that as prices rise yields decrease. At some point, yields won't be attractive.
C.) The MACD shows that momentum is increasing.
D.) Again note we're seeing a net inflow into the Treasury market.
Monday, November 30, 2009
You can't have it both ways, either you adjust or you don't. And if you decide not to then you must accept that last month the unadjusted household survey showed an unemployment rate of 9.5% (instead of the adjusted 10.2%) and the establishment survey showed an unadjusted employment GAIN of 641,000 jobs. Sadly, neither of those numbers backed up the "economy is getting worse" claims and thus the same people who are clamoring to use the unadjusted jobless claims data are using the adjusted employment situation data. Seems kinda hypocritical to me, but who am I.
Sorry for the short post, but it had to be said.
Click for a larger image
A.) Notice the incredible range that trading took today. Prices touched all the major EMAs. Going down to the 50 day EMA is a big deal -- it indicates there is a lot of bearish sentiment out there right now. However, also note the prices formed a narrow candle.
The canard that we should ignore Seasonally Adjusted Initial Jobless Claims in favor of the non-seasonally adjusted claims is back. This canard was least seen masquerading as a "black swan" back in July, when as now seasonally adjusted claims were falling because the non--seasonal number of claims was not rising as much as would normally be expected at that time of year.
Of course, none of the people telling us that "non-seasonally adjusted claims are the real claims" had a peep to say about the subject back in September when SA claims were running at 557,000, and NSA claims were at 466.267 (having fallen from 671,242 in early July). Were there any breathless headlines about 200,000 fewer "real" job losses? No, of course not. NSA claims only matter when they are higher (for seasonal reasons) than SA claims.
In the case of the blogger in July, his black swan quickly turned up dead in August as jobless claims resumed their fall. The Doomsayers now will just as surely be proven wrong come the end of January -- by which time they will ignore the data and simply move on to the next reason to predict Armageddon.
But given the sudden downdraft in SA claims to 466,000 last week, Prof. Brad DeLong not unreasonably asks if the seasonal adjustments are missing something. The long answer, I suppose, would have to be given by the BLS statisticians themselves (and they would probably respond to a query from Professor DeLong), but we can give a good approximate answer, because there are comparable past episodes that suggest a result.
In addition to this past July, the other episodes include the severe recessions of 1974 and 1982. Both of these deep recessions each featured two periods of large seasonal adjustments: once as they deepened and once again as they abated. Let's take a look at them.
First, here is a graph of both SA and NSA initial jobless claims during the 1974 recession:
The 1973-74 holiday season NSA spike appears to have sometimes - but not always - exaggerated the underlying trend upward. Similarly, the July 4 1975 spike seems to have briefly exaggerated the underlying trend downward. In neither case, however, did the SA reverse or hide the trend. It is almost impossible to read what if anything the 1974-75 holiday season NSA spike may have done, as it occurred right at the height of SA claims. If anything, in that case it may have slightly muted the trend - but again, the trend is unmistakable.
Next, here is a graph of both SA and NSA initial jobless claims during the 1982 recession:
While the 1981-82 holiday season NSA spike appears to have had no affect on the underlying trend, the 1982-83 spike appears to have amplified the downward trend, as briefly so did the July 4 1983 spike. Contrarily, the July 4 1982 spike seems to have muted the upward trend in claims, but only for a couple of weeks.
Similarly, the July 4 spike this past summer briefly amplified the downward trend in jobless claims - but my no means hid the trend.
It seems likely that last week's sudden SA decline in initial jobless claims similarly amplified the underlying downward trend -- but by no means hides any alleged "real" countertrend higher. Just as in August initial jobless claims never again were recorded at the 600,000+ level they had been in June, it seems likely that by the end of January, there will be a slight rebound in initial claims - but never again hitting the 500,000+ recorded in October.
One final note: Prof. DeLong says that
[t]he worry is that not as many people are being laid off because there aren't as many people at work in construction and Christmas rush goods-producing jobs to be laid off, and that we should be at the very least cautious in interpreting one-week movements in unemployment insurance claims. Perhaps we want to argue that the labor market is improving in a sense, but we should be clear on what sense that improvement is. It is: in a normal year new weekly unemployment insurance claims rise by about 100,000 in the month before Thanksgiving; this year they have risen by only about 50,000. So things are getting better.
In the ultmate sense of jobs in the economy, I wonder if the Professor's worry isn't something of a wash. Yes, it's true that temporarily employed workers would have had paychecks for 8 or 12 or 16 weeks. But on the other hand, the failure to hire, let's say, 100,000 seasonal workers in July-September means that there were 100,000 less jobs recorded in the jobs survey those months, and 100,000 layoffs that will not correspondingly be counted in the November jobs survey. So in the payroll employment sense, the effect washes out.
Reading blogs that in any way write about economics has generally become an exercise in utter futility. According to most good news is either propagated by corporate whores who are blind to the realities around them or presented without considering "all" the facts. All government statistics and all economists are wrong -- unless they support or present a bearish viewpoint. Then the facts are treated as irrefutable truths presented by intellectual gods. And Goldman Sachs or the Federal Reserve manipulated everything to further some plot. In other words, ridiculous conspiracy theories are far more common than simple factually based analysis. How did things get so out of line?
There are several reasons. The first and most obvious is, "if it bleeds it leads." This is a saying from the days when newspapers were the predominant form of presenting and communicating information. Bloody pictures and sensationalistic headlines simply sold more newspapers. Translate that to the blogsphere and proclamations that the economy is going to hell will probably attract more readers. For reasons that I still don't understand, train wrecks are fun to watch. I'm reminded here of the album by Megadeath titled Peace Sells ... But Who's Buying?
Then there is the issue that many people in the blogsphere were right about the economy. Over the last three or so years, the only people who issued any warnings about the US' economic trajectory were blogs. At first they were the lunatic fringe, the voice in the wilderness. But after the crash happened more people tuned into blogs to get their financial information. Readership increased. But as the facts changed -- as we saw economic indicators start to bottom and then turn positive -- blogs did not change their opinions. The reasons here are two fold. First, many people made a name for themselves by being bearish. Changing their perception would mean giving up the quality that made them famous in the first place and thereby threaten their readership. The second is many people have a preconceived perspective -- that is, some people are fundamentally bearish regardless of the economic environment. Just as importantly, there are some who want things to be bad in order to create an environment where fundamental change is more likely. In other words, these people have a clear political agenda; they simply use economics to accomplish these ends. There is nothing wrong with this. But their bias should be understood and clearly made.
Third, there is the simple fact that people who write about the economy don't understand the economy. Here is a classic example. The unemployment rate is a lagging economic indicator. This means it goes down after the economy starts growing. The intuitive reason for this is simple. During a recession businesses cut production and lay people off. As the economy starts to grow, businesses first increase production and the hours that their existing work force works. Then, as demand picks up more and more, businesses start to hire again. However, reading the economic blogsphere it becomes very obvious that people writing about the economy don't know about this relationship. I'd love to tell you that unemployment will suddenly drop to 5% next quarter. But that's just not going to happen because that's not the way the economy works. Certain things happen at certain times in economic cycles.
And finally there are the conspiracy theories floating around the Internet. According to some the entire crash was orchestrated by Goldman Sachs. According to others, the Federal Reserve is part of a secret plot to do ... something. The reality is the economic meltdown was caused by numerous, inter-related events coming together in what is literally a once-in-a-lifetime perfect economic storm. It's going to take a long time to sort through the mess to figure out what went wrong and how all of those pieces fit together. In difficult times it's easy to scapegoat parties and institutions. The reality is it's a lot more complicated.
So, here's the reality of where we are. The economy is back from the brink; we're no longer falling off a cliff. Last quarter the economy grew by 2.8%. Yes, that was the result of the stimulus -- which is exactly what is supposed to happen at the end of a recession. However, we have a lot of work to do. The unemployment rate is still over 10.2%. Unemployment benefits must be increased and extended. And plans to get the unemployment rate down should be initiated.
A.) The SPYs are forming a broadening top.
B.) The EMA picture is still bullish: the shorter EMAs are above the longer EMAs, and teh longer EMAs (20 and 50) are still moving higher. The 10 day EMA is moving lower, but this EMA is always more volatile.
C.) Momentum is decreasing.
D.) Notice that on the most recent top the A/D failed to make a new high. In other words, the same amount of volume/people are participating; we're not seeing a huge new rush of new investors. That's concerning.
A.) Leading up to the new high we see very weak candles.
B.) When prices hit new highs, we see very weak candles.
Bottom line: this is a very weak top to a market.