Friday, June 11, 2010

Weekly Indicators: Double-dip??? Edition (1)

- by New Deal democrat

Although this was a slow news week, as I noted several days ago, 2 of 5 data points that can help determine if we are headed for a 'double dip" recession or just a slowdown were released today.

And boy oh boy did the first indicator, well, indicate! Retail sales didn't just disappoint due to gas station sales, they were poor across the board, going down-1.2% in total, and -1.1% ex autos. Retail sales ex-gasoline were down -1.0%. (April's retail sales were revised up from +0.4% to +0.6%, but that is trivial in comparison). Since May 2009 real retail sales were up +0.6%, this will lead to a YoY decline in real retail from about +5.5% to +4.5%. Peter Broekvar at The Big Picture has a very interesting point, that all of the non-gasoline decline was in building materials. More on that in the weekly rail traffic indicator below.

On the plus side both weekly M1 and M2 increased substantially. For the month of May, this means that "real" M1 is up over +0.8%, and M2 is up 1.1%. Since M2 is a Leading Economic Indicator, this will add +0.2 or +0.3 to that index in May. "Real" M2 will be up at least +0.8%. This means that "real" M1 is well above zero, and "real" M2 has turned positive on a YoY basis (but I would want to see +2.5% YoY on a "real" basis for M2 to be sure we are out of the woods).

Turning to the weekly indicators:

The ICSC reported that year over year sales were up 3.0% from last year for the week ending June 5, and also up +0.8% from the previous week. Shoppertrak reported that YoY retail sales increased 3.9% for the month of May compared with 2009, but did not make a weekly report.

The price of Gas remained steady at $2.73, a decline of $0.17 or about 6% from its high of $2.90 four weeks ago. The 4 week average of usage last week is actually slightly down from last year, again suggesting that the price of Oil did begin to "bite" and suggesting a slowdown. The price of a barrel of Oil is now only about 6% higher than last year at ~$74/barrel. [UPDATE: Apologies for the blank spaces. The spamalator at my place of employment decided the Bonddad blog was a personal storage and backup site and blocked me out for most of today! Hopefully this is just a one-time problem].

The BLS reported 456,000 new jobless claims last week. The inability of this indicator to decline below 440,000 has become a real concern. While we have no way of knowing from what sector this continued elevated level of layoffs is coming from, the monthly jobs reports make me suspect that it consists of construction jobs post expiration of the housing credit, and state and municipal workers.

The American Staffing Association's weekly index of temporary employment declined 0.95%, the first decline in 3 months. The Association blamed this on the shortened week due to the Memorial Day holiday.

Railfax - for the first time this year, this indicator is trending down YoY, although still ahead of last year's absolute numbers. Almost all of the loss can be laid at the doorstep (and framing and roof) of lumber shipments.

This bodes ill for the May and June housing statistics. May permits and starts will be reported next -Thursday- Wednesday.

Seven days into -May- June, the Daily Treasury Statement shows $54.7B in withholding taxes collected compared with $48.1B last year, a gain of 14% YoY! For the last 20 reporting days, withholding taxes for 2010 are $129.4B vs. $120.9B a year ago, a gain of 7%.

Given the strongly positive money indicators, and the strongly negative retail sales, railroad, and purchase mortgage indicators, all three focused on housing, next Thursday's housing permits and starts data is looming like the monster in "Cloverfield" over the economy.

Beige Book Overview

On June 9, The Federal Reserve released the Beige Book. This is a great document, as it provides a comprehensive overview of the US economy. It also includes anecdotal information. It's important to remember that each Federal Reserve District is intimately involved with its district's economy -- Fed Presidents and Fed staff are constantly talking with business leaders to get an idea for the region's health. As such, this document is very similar to a GDP report.

Let's take a look at the data

Consumer spending improved from the previous report. Spending continued to be concentrated in necessities as opposed to discretionary big-ticket items. Retail sales increased in April and May, although several Districts noted that the gains were uneven across months. Sales of spring and summer apparel were strong in the Boston, New York, Philadelphia, St. Louis, Kansas City, and Dallas Districts. Sales of home improvement and lawn and garden equipment were reported to have strengthened in the Richmond, Chicago, and San Francisco Districts. Modest improvement in sales of discretionary home goods was noted by Cleveland, Kansas City, and San Francisco. Vehicle sales also rose, but the rate of increase reportedly slowed in May in the New York, Cleveland, and San Francisco Districts. Tourism activity improved. Dallas reported a continued increase in leisure air travel. Hotel occupancy rates rose in the New York, Atlanta, Chicago, Kansas City, and San Francisco Districts, and convention activity increased in Atlanta and San Francisco. Richmond reported resort bookings for the Memorial Day holiday weekend were stronger than last year, and Atlanta indicated cruise-line bookings were up slightly. Atlanta also reported, however, that the Gulf oil spill and Tennessee floods had already resulted in some vacation lodging cancellations. The potential exists for a much greater impact, although contacts are quite uncertain as to the ultimate effects.

Real (inflation-adjusted) PCEs have been in an uptrend for about a year. Also note they are now slightly above levels seen before the financial collapse in 2008.

Services comprise the largest percentage of PCEs. They leveled off after the collapse and are now starting to increase.

Spending on non-durable goods is also in a clear uptrend and is approaching levels last seen at the height of the previous expansion.

Durable goods spending is also in an uptrend.

Business spending increased moderately from the previous report. Cleveland, Chicago and Dallas noted that growth in manufacturers' inventories was leveling off, while Boston, Atlanta, and St. Louis reported the same for retailers' inventories. In contrast, several Districts reported that auto production was failing to keep up with demand, pressuring already lean auto dealer stocks. Capital spending was slightly higher in a number of Districts, although several indicated that continuing caution on the part of firms and tight credit availability were limiting expenditures. The manufacturing, transportation, and energy industries accounted for most of the increase in spending on plant and equipment. Boston reported that spending on information technology services increased.

Here are some charts of the relevant data:

Overall investment has rebounded.

Inventory restocking is clearly taking place, as evidenced

by the above chart of real change in private inventories.

Nonfinancial service activity was slightly improved, on balance, from the previous report. Several Districts highlighted some strength in demand for professional technical services, such as software and information technology, engineering, and other scientific trades. In contrast, sluggishness remained in accounting, legal, marketing, media, and construction services. Demand for business support services was more mixed. Philadelphia and Chicago reported slightly higher demand while Boston and St. Louis noted that demand remained weak. St. Louis also indicated that budget cuts had led to reduced government and education services.

Manufacturing and transportation activity continued to gradually improve across all twelve Districts. Most Districts reported further increases in factory production, shipments, and new orders, although Philadelphia and Chicago noted that the pace of gains had slowed in May. Steel producers and metals manufacturers reported moderately higher production in Cleveland, Chicago, St. Louis, and Dallas, although Chicago indicated capacity utilization leveled off in May. Auto and parts production increased in the Cleveland, Richmond, and Chicago Districts. Oil refinery capacity utilization was up in the Dallas District. Higher residential construction increased demand for construction equipment and materials in the Philadelphia, Richmond, Chicago, Dallas, and San Francisco Districts. Chicago also noted that demand from Asia and South America for heavy equipment continued to be robust. The output of medical equipment and pharmaceuticals remained strong in Boston and Chicago, as did high-tech manufacturing in Boston, St. Louis, Kansas City, and San Francisco. Food processing increased in Dallas and San Francisco. Trucking and rail activity increased, with freight traffic and raw material shipments on the rise in Cleveland, Atlanta, and Dallas.

Manufacturing continues to do well, as does

The Non-manufacturing (services) sector.

Residential real estate activity improved since the last report. Most Districts noted an increase in home sales and construction prior to the April 30th deadline for the homebuyer tax credit, with contacts in many of these Districts also indicating a corresponding slowing in activity in May. Tight credit, the elevated inventory of homes available for sale, and the "shadow inventory" of foreclosed properties on banks' balance sheets held back residential development in the New York, Cleveland, Atlanta, and Chicago Districts. Commercial real estate activity generally remained weak. Office, industrial, and retail vacancy rates continued to drift upward in many Districts putting downward pressure on rents. However, lower rents were said to have led to an increase in leasing activity in New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco. The elevated inventory of existing properties for sale or rent continued to weigh on new private nonresidential construction. However, stronger industrial demand was noted in several Districts. Public construction increased in Philadelphia, Cleveland, and Chicago, but slowed in Minneapolis.

For data, see this post on new home sales from CR and this post on existing home sales from CR. Housing is killing use right now -- but it's not doing well either. I'd place this in the slightly negative territory as to its effect on the overall economy.

Labor market conditions improved slightly with permanent employment levels edging up in most Districts. In addition, many Districts again noted an increase in temporary hires, with Boston and Dallas also indicating a pick up in temporary-to-permanent transitions. By industry, manufacturing was the most often cited source of employment gains (both temporary and permanent), and Cleveland, Minneapolis, and Dallas noted an increase in the manufacturing workweek. Other sources of increased employment were the biopharmaceutical industry in Boston, retail trade in Chicago, and transportation in Dallas.

This is the big weakness of the current expansion -- the lack of job growth. Initial unemployment claims are still in the 450,000 area and have moved sideways for a majority of the year. The rate of establishment job growth was increasing until last month when census jobs were the only jobs created. It is important to remember that is only one month of data, but it's still a very negative development.

Yesterday's Market

The GLD ETF may be forming a double top. First, note that we have two price spikes at more or less the same price level (a). Also note the volume on the first top (b) is higher than the second top (c).

Now take a look at several technical indicators. The A/D line printed a lower number on the second top (b), as did the CMF and MACD.

For the SPYs, we're still looking at a possible double bottom (a). I still find it very interesting that we have not seen a mass exodus in the A/D (b) or CMF (c). You would think both of these indicators would have tanked during the last sell-off. However, let's take a closer look at the sell-off:

Note the very large bar next to (a) -- that's a huge rebound move. Then look at section (b) -- another area where we have a large rebound and a large bar along with a gap higher. Section (c) also has a large rebound bar moving higher. Even during the worst of the sell-off, traders were still buying on the dips. That tells us that the ~1050 area holds a great deal of interest for traders.

The Treasury market may still be looking to reverse as well. First, what concerned me about the island reversal call [(a) and (b)] was that rebound (b) was moving into the island area. However, yesterday we saw prices move lower, through the uptrend. That's a big development. Also note the technical indicators are still pointing to a lower market -- money is flowing out of the market (c and d) and the MACD is moving lower (e).

Finally, note the industrial metals are still in a strong downtrend.

Thursday, June 10, 2010

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Initial Claims Down, But

From Bloomberg:

Initial jobless claims continue to disappoint but only mildly, at 456,000 vs. expectations for 448,000 and vs. 459,000 in the prior week which was revised 6,000 higher. The four-week average rose for the fourth straight week to its highest level in three months, up 2,500 to 463,000.

BUT, here's the chart:

We're still moving sideways -- not a good place to be.

More evidence the Foreclosure Wave is Cresting

- by New Deal democrat

Two months ago I had a brief debate with another blogger who viewed the March increase in foreclosures over February as the beginning of a new "tsunami." The genesis of this "second wave" story goes back to stories that started making the rounds in late 2006 noting that mortgage recasts and resets were due to hit in two waves: the first in 2007-08, and the second this year and 2011.

I have always been a little chary of that notion, because, while in 2006 lots of people were still deluding themselves that "real estate only goes up!" by 2008 and certainly 2009, they had been disabused of that notion. Thus, a lot of those homeowners, who were probably deeply underwater, already let their houses go into foreclosure, or else worked out a refinancing before now. Thus in my exchange with the other blogger, I countered that the data actually was more consistent with the crest of the foreclosure wave than the beginning of a new one, but that it could also be consistent with there being a lull during the "eye of the hurricane," and that,
if there is a new wave, or a "back side of the hurricane", then the percentages and the raw numbers of foreclosures ought to start increasing quickly. If, on the other hand, the 2nd derivative continues to be negative, then we ought to see foreclosures tip over into YoY negative percentages in the next few months, or certainly by the end of the year.
Sure enough, in April, foreclosures decreased 9% from March and 2% from April 2009.

This morning Realty Trac" released their May report:
There were 322,920 properties that received a foreclosure filing in May, down 3% from 333,837 in April. But it remains 1% above levels seen in May 2009....

James Saccacio, CEO of RealtyTrac, added lenders are not making as many new filings and are instead focusing on the backlog of distressed properties built up over the past 20 months, a continued trend from April....

“Lenders appear to be ramping up the pace of completing those forestalled foreclosures even while the inflow of delinquencies into the foreclosure process has slowed,” Saccacio said
Here is the updated chart of year over year changes in foreclsoure activity for the last 14 months:

MonthYoY % changeactual foreclosures
04/2009+32 342,038
05/2009+18 321,480
06/2009+33 336,173
07/2009+32 360,149
08/2009+18 358,471
09/2009+29 343,638
11/2009+22 306,627
12/2009+15 349,519
01/2010+15 315,716
02/2010+6 308,524
03/2010+8 367,056
04/2010-2 333,837

So far, this certainly looks more like the cresting of a wave than the beginning of a new one, but I'd still like to see another month or two of data to be sure that the spring 2010 resets haven't impacted the YoY numbers, due to their lagging nature.

It's also possible that a second hump in foreclosures, probably a small echo of the first, could occur not because of resets but because of further price declines, now that the $8000 home buyers' credit has ended. If so, I would expect that to show up later this year or early next year for reasons that go beyond the scope of this post. (Way back in 2006 I was able to call the turn in the housing market in real time, due to a web site that posted really good and timely weekly data on about 40 housing markets. That same web site still exists and appears to be giving clues as to when housing prices might bottom. But that is another, long, post).

Yesterday's Market

First, congratulations to the Chicago Blackhawks for winning the Stanley Cup. It was a great series, but Chicago had the edge. I am very pleased they took the cup home (especially with the say the Cubs look this year).

Now, let's start with the dollar.

First, note that over the last 10 days, the dollar is in a clear uptrend.

On the first daily chart, note the EMAs are in a very bullish posture (a)and indicate the short, intermediate and long-term trends are up. However, volume has been dropping since the beginning of May (b).

The A/D line and CMF indicate money is flowing into the market, but at a weak rate (a and b). The MACD (c) is pegged.

The strong dollar is one reason we're seeing a drop in commodity prices. Industrial metals are still in their downtrend, bounded by lines (a) and (b). The EMA picture is turning more bearish; all the shorter EMAs have crossed below the 200 day EMA and prices are below all the EMAs. the A/D line and CMF are weak (d and e). Finally, momentum is nil (f).

After bouncing from its lows, oil is now in a consolidation pattern just around the 10 and 20 day EMAs (a). While the EMA picture is generally bearish (b), note the 10 day EMA is starting to move more horizontally. The A/D and CMF indicate some money has moved back into the market, but must importantly, the MACD us given a buy signal.

The daily chart shows more detail regarding the consolidation pattern. Note that prices have basically consolidated in two areas (a and b).

In yesterday's market, prices gapped higher at the open (a), but peaked at 10:30 (b). They then moved lower, but slowly until the shorter EMAs crossed over the 50 minute EMA (c). Then prices dropped hard (d) in higher volume.

Finally, yesterday I noted the SPYs appeared to be forming a double bottom (a). That appears to still be a viable argument.

Wednesday, June 9, 2010

Herbert Hoover Rises From the Dead

From Barron's:

WHEN EUROPEAN CENTRAL BANK President Jean-Claude Trichet asserted last weekend that the fiscal retrenchment taking place in the European Union ought to boost consumer confidence and thereby spur economic recovery, it sounded awfully familiar to students of economic history.

"Nothing is more important than balancing the budget," asserted President Herbert Hoover in 1931 as he sought a huge tax increase in the midst of the Great Depression. The tax hike would be "indispensable to the restoration of confidence and to the very start of economic recovery," he added.

And while the popular view of Hoover was of hidebound Republican fiscal conservative, he reflected the bipartisan consensus. The Democratic Party platform of 1932 called for the federal budget to be balanced immediately, while then-candidate Franklin D. Roosevelt excoriated the Hoover administration for running budget deficits.

Oblivious to this precedent, the finance ministers of the Group of 20 major industrialized nations last weekend endorsed fiscal retrenchment to deal with the debt crisis that has cut a swath across southern Europe -- even as most of the industrialized world either remains in recession or shows signs of a slowing recovery.

From the NY Times:

The mood in both parties of Congress has turned decidedly anti-deficit, meaning that the job-creation programs once favored by the White House and Democratic leaders in Congress have been cut back, then cut again. It is a measure of the mood that Mr. Obama on Tuesday hailed an initiative by his administration to cut the budgets of most major government agencies by 5 percent, at a time when conventional theory would call for more government spending to lift the economy.

Even the Federal Reserve is pulling in its horns. No one could expect it to cut interest rates further — they are at rock bottom. But spurred by inflation hawks in their midst, the Fed has gotten out of the business of buying Treasury securities and mortgage bonds, one of its main strategies over the last two years for pushing down long-term interest rates.

Over the last few weeks, the cautious optimism that the economy is on the mend has given way to more caution than optimism.

First, let's review a few basic economic facts.

Here is the GDP equation: C+I+(x-i)+G=GDP. Or, consumer spending plus investment plus (exports net of imports) plus government spending = GDP. Notice that right off the bat we have government spending as part of the equation. In fact, if we look at figures from the CBO we see government spending has traditionally accounted for about 20% of US GDP since 1970 (give or take a few percentage points). In other words, there has not been a government takeover of the economy. In fact, government spending is integral to the economy.

The question now moves to, "is this the right time to cut spending?" Gee, I don't know. So let's look at the data.

As I've point out, things in general are getting better. But there is one indicator that is really not doing well: unemployment. At minimum, unemployment benefits should be extended.

But, let's say the government spends $400 billion on something like ... infrastructure. This would serve two important ends. First, a lot of the unemployed are blue collar, manual labor employees. Infrastructure spending would give them jobs. Secondly, this investment would have a multiplier effect, meaning we would get a lot more out of the investment than we put in. Ever wonder why the economy grew really strongly in the 1960s? A big reason is we started building the highway system in the 1950s, thereby enabling us to move goods more efficiently across the country.

Folks -- this really isn't that complicated. It's really not. The problem is there are politicians involved. The Republicans have embraced an anti-intellectual agenda for so long that they have lost the general ability to reason. The Democrats have absolutely no business sense or leadership ability. Hence, we get the worst of all worlds: one party that is stupid and another that hates business and can't make a decision. Great.

Double-dip? 5 Data Points to Watch For

- by New Deal democrat

As I've said in my last few posts, for the first time in over a year I am rethinking my overall view of where the economy is heading. It has been hit with at least 5 fresh concerns: (1) the Euro crisis (which I addressed a couple of weeks ago. I do not believe it is sufficient to cause more than a slowdown in growth here); (2) the aftereffects of the increase in Oil to nearly $90 or 4% of GDP (also not quite enough to put us back into recession); (3) the Oil cataclysm in the Gulf of Mexico - as to which I have no special insights, but it will clearly cost some GDP growth, with some counterbalancing spending on the vast cleanup that will be necessary; (4) the sudden slowdown in housing due to the expiration of the $8000 housing credit; and (5) the withdrawal/ending of stimulus help to the states and the long-term unemployed.

There are 5 data points, all but one of which will be available within the next 10 days, which may be crucial in determining which course the economy takes. They are:

1. retail sales ex-gasoline (this Friday)
2. weekly M1 and M2 (this Friday)
3. housing permits (next Thursday)
4. withholding taxes paid (by next Friday)
5. Congressional action on stimulus (by the end of the month)

So let's begin.

1. Retail sales ex-gasoline. Deflationary pulses tend to happen very quickly (that's why in the old days they were called "panics".) But it isn't like there is no warning at all. The Panic of 2008 really took off in September, but retail sales declined in May and accelerated that decline throughout the summer (averaging nearly -1.0% a month) before falling off a cliff in September:

I've been harping for close to a year now on how real retail sales lead employment and have for at least 60 years. In short, retail sales will give us a warning, and as the graph above shows, real retail sales have remained positive this year.

While most pundits expect the CPI (reported next Thursday) to be +0.1, that seems inconceivable to me. Gasoline is off about 10% for the month. Owner's equivalent rent has been running at 0.0 or -0.1 for half a year, and I don't see that changing. In the similar 2006 decline in Oil, CPI came in at -0.4% and -0.5% in the critical months.

Pundits also expect retail sales to be reported at +0.4% (Marketwatch) or +0.3% ( this Friday. In the past few years, typically about half of the positive or negative impact on retail sales has come via gasoline sales. Including gasoline, the "expected" number seems just about impossible, so I expect retail sales to "disappoint."

Take out gasoline, however, and the likely downdraft in both CPI and retail sales should cancel one another out. The "real" number to watch will be retail sales ex-gasoline. If it's a negative number, then that is a warning. If it is a positive number, however, then real retail sales for May will be up again, and YoY sales should still be over 5% (although there may be a small decline, since May 2009 real retail sales were +0.6%). If retail sales ex-gasoline shows consumers are still "in the game", then a double-dip looks quite unlikely.

2. Weekly M1 and M2. One graph of Doomer porn has been the steep decline in the continued M3 series. The problem is, generally in the past M3 has been a poor portent of recessions and recoveries. "Real" M1 and M2 have much better records. If "real" M2 is up less than 2.5% YoY, and "real" M1 is negative, that is a bad sign. In fact, M2 is one of the 10 series in the LEI.

The second derivative of both of these numbers has been declining this year. Through April, real M2 is actually negative. Real M1 is up about 2%. The decline in M2 has been the chief reason for the easing of the Leading Indicators this year, and in particular for the negative reading in April.

With one week to go, however, in May both numbers have trended very positive, and look to go right back to their highs of February. This Friday we get the last weekly number for May. If it's good, then the odds of a double-dip recede -- and let's hope Ben Bernanke keeps his foot on the accelerator.

3. Housing permits. Leading Indicators also went down in April because of a decreases in two other componets. One was the ISM vendor performance index (from white hot to red hot, but it's listed as a negative. Go figure). In May that went sideways, so it is a non-issue. The other leading component that tanked was housing permits, declining from 685k to 610k in response to the expiration of the $8000 housing credit (The all time low was 522k in March 2009):

By contrast, the Mortgage Bankers Association's index of purchase mortgage applications has continued to fall to all time low's in the last 5 weeks:

Since ECRI apparently includes the MBA's purchase mortgage index as part of its own leading economic index, ECRI's index fell all the way to ZERO from red hot growth in just one month:

I had a brief email exchange with Bill McBride a/k/a CR about the relationship between the purchase mortgage index and housing permits, and he advises me that there is a correlation, but it is "loose."

While the recovery from the early 2009 bottom in housing permits and starts has been relatively lackluster, as indicated in the graph of permits above, it has nevertheless been a recovery. If we are going to have a double-dip, I would expect permits to follow the MBA index to new lows. On the other hand, if the consensus estimate of 655k permits issued in May turns out to be correct, and there is a rebound in housing permits this month, then the odds of a double-dip become very low.

4. Withholding taxes. This isn't anything new, I've been watching these for months. But after March's YoY advance of +5% and April's of +4%, May ended with a pitiful YoY advance of less than 1% compared with one of the two worst months during the entire recession and immediate aftermath. Furthermore, that downturn was concentrated in the last half of the month. It coincided with a very disappointing May employment report showing only +20,000 non-Census jobs. Interestingly, Trim Tabs research, which I've criticized in the past for how they make use of withholding data, nailed this one, having called for only 75,000 to 125,000 private sector jobs to have been created in May, in advance of the official BLS report.

If May presaged a double-dip, I would expect withholding taxes to continue to roll over. On the other hand, if employers simply froze for a couple of weeks in May in response to Doom in Europe, then there should be a rebound. By the end of next week, we may have enough information to know.

5. Congressional stimulus. The budget years for 46 of the 50 states start on July 1. While most states' revenues hit bottom in the first quarter of this year, and almost all are now reporting YoY gains in tax revenue on a monthly basis, they are at their absolute nadir in being able to support existing programs, and their combined budget shortfalls beginning July 1 are approaching $90 Billion!

Last year the federal stimulus package included money directly aimed at states, which in turn could be released to their various municipalities. As a result, many teacher and other positions that would have been ended were saved. If the stimulus is not replaced, those positions will now be eliminated, dealing public services a critical blow, not to mention that public employees spend money in the economy too -- in other words, the multiplier effect applies to them too.

The number of government employees now exceeds the number of manufacturing employee, so the impact is by no means trivial. Hopefully if the states receive aid this year, by next year their budgets will have sufficiently recovered that no further aid will be necessary. There is no reason Congress couldn't extend the aid as loans, either, to be paid back over (say) the next five years.

Congressional action on this specific front would be a great aid. On the other hand, if Congress succumbs to austerity chic, it will send a very bad signal.

If the above 5 data points come up on the optimistic side, then we are just in a rough patch, a temporary slowdown that in no way derails the recovery. On the other hand, should all five come up on the pessimistic side, then watch out for a possible double dip.

For now, I am leaning on the optimistic side -- a slowdown or at worst one quarter of slightly negative GDP -- but no double dip. I'll discuss each of these data points as they come in.

Yesterday's Market

Note the SPYs may be forming a double bottom (a). Also note the volume on the first bottom (b) is higher than the volume on the second bottom (c).

The DIAs confirm the possibility of a double bottom, as do

The QQQQs. However,

The IWMs do not confirm (a). Ideally we'd like to see all the averages move in the same direction and make similar trading patterns. However, right now it appears there are three of the four major averages forming a double bottom.

a.) The EMA picture is bearish. All the EMAs are moving lower, the shorter are below the longer and prices are below all the EMAs -- including the 200.

b.) The A/D line has been remarkably stable, as has

c.) the CMF.

d.) There is obviously negative momentum right now.

I had been working on a theory that the long-end of the Treasury market had formed an island reversal at (a). This theory is no longer valid, as prices have moved higher after the reversal. However, see this article from yesterday arguing the bond market may be forming a bubble. While I don't think the bubble is extreme, I do think it raises interesting points. For example, considering the concern traders have regarding sovereign debt, should the US be allowed to have a 30 year yielding 4.11%?

Note the EMA picture is still bullish -- all the EMAs are moving higher and the shorter EMAs are above the longer EMAs.

But also note the technical picture is weak -- money is clearly flowing out (c and d) and momentum is weakening (e).

Although prices are still in a clear downtrend, industrial metals may have reversed course for a small counter-trend rally yesterday (a).

Tuesday, June 8, 2010

Is the Bond Market Forming a Bubble?

From the WSJ:

They say that bad things come in threes, and in the past decade investors have seen two market bubbles burst. Now some money managers believe a third downturn is in the making—in bonds.

And just as the previous losses were made worse by investors rushing headlong into assets that showed signs of overheating, bond prices are being inflated by investors pouring cash in at record rates.

Yet unlike the tech-stock and credit-fueled bubbles that resulted from eager buyers chasing returns, this latest bubble is forming in part because frightened investors want to minimize risk and avoid further losses.

After the fall of technology stocks in 2000 and the financial crisis of 2008, many investors shunned stocks and headed for the perceived safety of fixed income. But that stampede into bonds, coupled with changes in the economy, threatens investors with losses in their longer-term bond funds.

That is because interest rates will likely rise in coming years from a base of almost zero today. Higher rates slam bond values. But investors mostly only know what they have seen in the past 25 years, which for the most part has been a period of steadily declining interest rates and rising bond prices.

Moreover, the flood of cash cascading into bond funds forces managers to buy securities in a low-rate environment. When rates move higher and the value of their bond holdings slides, many fund investors are likely to head for the exits—further baking in losses as managers sell to meet redemptions.

"It's fallacious reasoning that you can't lose money in bonds," said James Swanson, chief investment strategist at MFS Investment Management.

The Data Does Not Support A Double Dip Conclusion

There has been increased discussion of a possible double dip recession. As of now, the data does not support that conclusion.

First, Professor Hamilton over at EconBroswer has a nice summation of a few statistics: ISM manufacturing, industrial production, the CFNAI, all of which show expansion.

Let's add some other data points.

The non-manufacturing sector (services) is also in strong shape.

Real retail sales have been increasing for the last 9 months. The talk of a blip would be one month of data as compared to the trend we see.

Real PCEs have been increasing for the last year as well.

Now -- let's look at a few points that are causing concern -- but point to a slowdown and not a double dip.


The deflation we are seeing in the commodities market is the result of several issues. First, the dollar has rallied:

As most commodities are priced in dollars, this increase translates into a natural decrease in commodity prices. In addition, there are events in China that indicate they are trying to slow down their economy. But that is from a pace of over 10% to around 8%. In other words; the combined issues don't indicate demand destruction; they indicate a slowdown and a repricing of assets. Also bolstering this lack of demand destruction are the manufacturing indexes from the US (see the ISM Manufacturing index and the various regional Fed indexes) which show a strong a strong appetite for raw materials. See also this rise in British Manufacturing and German manufacturing -- both reports from the last few days.

In the past I have noted that a little inflation is good as it indicates that demand is pulling prices slightly higher. Conversely, a little deflation is bad, but only if it indicates a drop in demand. Given the rise in retail sales PCEs, the strong US manufacturing numbers and China's still strong growth, I don't see a huge hit to demand for raw materials.

As for the dollar, the dollar has rallied 14.29% this year from it's absolute low to it's current price level. That's a big increase in the base currency for commodities.


As I noted, the last unemployment report was terrible. However, let's look at the trend:

Friday's report would send the last data point lower if we take out census workers. But even with that, notice the pace of job destruction reached its nadir at the end of last year and the beginning of this year. In other words, things are moving in the right direction. Friday was one data point in an otherwise good data series. We need a few more terrible reports before we slice our collective wrists.

And while the initial unemployment claims are still high, they have returned to just above 450,000 where they were after a nasty jump to 471,000. I do agree that we need to see these numbers start to move lower soon, however.

Money Supply

Of the indicators that are negative, this one I find most concerning.

While the year over year percentage change in M2 is low, it is still positive. In addition,

M2's YOY percentage change reached similar levels after the early 1990s recession without having the economy fall into a recession.

The month to month change shows an injection of liquidity over the last month or so which should help.

MZM's YOY percentage change is just below 0%. However, this same situation occurred in early 1995 and 2005 without immediately leading to a recession.

Leading Indicators:

Last month the LEIs dropped .1%.

The reasons were four of the indicators were lower.

However, this is after a long series of increases. In addition, the drop of .1% does not mean the US economy is going into a recession anytime soon. It does mean the pace of expansion will probably slow.

The point is clear: There are more than enough indicators which say the underlying expansion remains. Multiple indicators from manufacturing and the service sector show expansion. As for the areas of concern:

1.) The employment figures are still moving in the right direction. However, we do need to see improvement in initial unemployment claims soon.

2.) Commodity deflation is not caused by demand destruction, but instead by a rise in the dollar and China stepping on the brakes.

3.) Money supply is a concern; we need to see an increase in this number.

4.) The drop in the LEIs indicates growth will slow: it does not mean we'll see a contraction.

Yesterday's Market

By far the biggest story yesterday was the rise in gold.

Gold gapped lower at the open (a) but then hit a big rally area where there was a massive volume boost (b). For the rest of the day, prices used the EMAs for technical support (c).

From a volume and price level, the last rally has been less than inspiring. The first rally (a) occurred with large volume levels and strong candles. Compare that to the second rally, where we have less volume and weaker candles (although there are some upward gaps).

Over the last few days, we've seen the technical indicators move into a more bullish orientation. While the A/D line has been advancing (d), we have the CMF and MACD giving us a buy signal as well. In short, this chart is becoming more bullish.

The markets traded sideways for most of the day yesterday (a), but sold off at the end of trading on a volume increase (b). Late day sell-off are never good as they indicate traders are nervous about negative overnight developments.

On the daily chart, first notice that prices are still above key support levels. While the over all trend orientation is bearish (a) (all the shorter EMAs are moving lower) the lack of a major drop in the A/D and CMF indicates we're not seeing a mass exodus from the market (yet). However, there is also a clear lack of momentum (d).

Finally, let's look at agricultural commodities as a group.

Prices have moved to new lows (b) by breaking through previous support levels. The EMA picture is negative (a) will all the EMAs moving lower and the shorter EMAs below the longer EMAs. Money is moving out of the market (c and d) and the MACD is clearly weak (e).