Saturday, December 22, 2012

A brief programming note

- By New Deal democrat

Weekly indicators will be posted, but probably not until tomorrow morning.

The economic data is essentially finished for the year, but I do have a number of things I want to post about, including taking a look at at how well or poorly my 2012 forecast panned out. The problem is having the time to put the posts together.

The bottom line is, I will have posts this coming week, but sporadically and probably not daily.

As for my co-blogger Bonddad, my bet is he won't be able to keep himself away from the computer for a full week and a half! We'll see.

Update From Bonddad:  What do you mean I can't stay away from the keyboard for more than a week?!?!?!?!?!?!

Friday, December 21, 2012

Happy Holidays

The last few weeks of the year are always slow.  My guess is that at least half the staff at most financial firms are already taking Christmas vacations.

Next week is an inherently slow week, and with New Years starting the following week, this seems to be a good place to say Merry Christmas.  I won't by posting anything until the beginning of the year; NDD will probably put a few things up next week.

Until then, here are the Bonddad Pups:

Morning Market Analysis

The daily gold chart (top chart) shows that prices have broken an uptrend started in late July.  Prices have also moved through the 200 day EMA and are pulling the shorter EMAs lower.  Momentum has dropped and the CMF is weak.  Finally, the heavy volume indicates traders are looking to get out.  However, the weekly chart (bottom chart) shows that prices are still trading in a range between ~150 and ~175.

The weekly chart of copper shows that prices are still consolidating in a symmetrical triangle pattern, consolidating right around the 200 day EMA.

 After the weaker housing starts news earlier in the week, the homebuilders section has stalled at upside support.

 The financial sector has broken through resistance right around the 15.25 area.  Prices are pulling the shorter EMAs higher on decent volume and rising momentum.  Considering that financials comprise one of the largest sectors of the SPYs, this is an important development.

Thursday, December 20, 2012

Sandy still affecting initial jobless claims - and Leading Indicators too

- by New Deal democrat

I've pointed out we can reasonably calculate Sandy's affect on initial jobless claims by backing out NY and NJ, comparing claims in those states to what they were a year ago as well as a month before Sandy, and using the unadjusted numbers from the remaining 48 states to calculate what the overall number would have been had Sandy not occurred. I updated that last week as to the claims from the week ending December 1.

While I can't make any statements about today's initial jobless claims number, we now have the state by state data for last week's number, and that shows that NY and NJ still had significantly elevated claims compared with the same week one year ago. Specifically, for the week ending December 8, NY and NJ claims made up 10.6% of all claims, compared with 8.9% in the month before Sandy, and 9.3% in the same week one year ago.

Calculating the effect ex-Sandy from the other 48 states, it appears that last week initial claims would have initially been reported at 337,000 rather than 343,000. The 4 week moving average would have been 361,000, the lowest since the onset of the last recession at the end of 2007.

I'll continue to report on this until NY and NJ claims return to their normal range.

Because initial claims are a component of LEI, the dramatic increase in claims after Sandy severely impacted that index, contributing -0.35 to their ultimate -0.2 result. Had Sandy not impacted those claims, the LEI probably would have come in at +0.1. Of course, the steep decline in initial claims will presumably contribute just as positively to the LEI next month.

Imports and Real GDP Growth

The following statement recently caught my interest:

Spoiler alert: We could already be in a recession. This is not the conventional wisdom. The common narrative goes some like talks look ugly, but in the end things will get resolved either before Jan. 1 or later in the month and the economy gets a new lease on life. See MarketWatch’s fiscal-cliff page.

The recession signal is being sent from the latest U.S. current account deficit report released earlier Tuesday.

According to the data, imports are now down two months in a row having fallen 8.4% in the third quarter and 2% in the prior quarter.  This is a rare event and has definitely raises the recessionary “red flag,” according to Robert Brusca, chief economist at FAO Economics. When the economy weakens, imports weaken rather quickly, Brusca notes.

The last time imports declined for two quarters was in 2009, the end of a four-quarter slide in imports during the Great Recession.
Fewer imports is a sign that domestic demand is faltering. A recession is “a real risk,” Brusca said.

I don't think we're currently in a recession, so I wanted to run the numbers on this statement.  What I found was really interesting.  Consider the following scatter plots.

Above are four decades comparing the year over per percentage change in real imports on a quarterly basis, with the year over year percentage change in real GDP on a quarterly basis.  The top chart is for the 1970s, the second from the top is for the 1980s, the third from the top is for the 1990s and the fourth from the top is for January 2000 to July 2012.  Note there is a pretty strong correlation between net negative YOY change in imports and net negative year over year GDP and positive YOY imports with net positive YOY GDP.

The primary difference between the story's measurement and the above is the story is using month to month percentage change  and the above is using a quarter measurement. 

Put another way, imports are a pretty good coincident indicator.

What's Wrong With the UK Economy?

Last week, I looked at the UK economy's problems.  Here are some more great observations:

    The UK government debt has low interest rates now because growth is low and demand for safe assets is high. British interest rates decline in response to bad news on growth, and market measures of the riskiness of gilts increase when interest rates and growth drop.  The opposite should hold – rates and market risk should rise together – if indebtedness were markets’ concern.  They don’t and it isn’t.

    Private UK businesses have kept adding workers in recent years (albeit some part-time or temporary) because they view future prospects as unchanged or better.  Employers only increase staff in a flexible decentralized labour market like Britain’s when they think wage costs are competitive.  The opposite should hold – declining growth and wages should lead to permanent cuts in employment – if UK potential growth was down for most businesses.  They didn’t and it isn’t.

    The spreads between the interest rates that small businesses and first time mortgage borrowers must pay for loans versus established large borrowers, and the fees that those new borrowers are charged have gone up and stayed up.  If there were lack of demand for investment, the interest rates and fees that banks could charge for loans would be declining – they are rising instead.

    Sterling has been stable in value since its 2008 depreciation, and foreign direct investment continues to pile in to such industries as auto manufacturing and fancy foods as well as business services.  If the lack of investment were due to doubts about government solvency or business competitiveness, capital would be flowing out of the UK and the pound would be declining.  The opposite is the case.

    Cuts in government spending and increases in taxation have had large effects per pound on consumption and growth overall (far larger than the Government, the MPC, and the OBR projected).  That occurs when confidence is being beaten down rather than raised up by fiscal consolidation.  If lack of confidence in government finances were a major weight on British households and businesses, the direct drag from fiscal contraction would be offset (if not reversed) by a rise in investment.  Again, the opposite is the case, and no such confidence effects have been seen.

Morning Market Analysis

The top chart shows that the SPYs have broken through most upside resistance and are now in the middle of a simple sell-off during the rally as traders take profits.  The 60 minute chart (lower chart) shows that prices are currently in the middle of standard Fibonacci support.

The real issue for the market right now is the fiscal cliff. Assuming a deal emerges that the markets like, expect the 147 handle on the SPYs to be vulnerable to a strong breech.

The weekly charts of the long-end of the yield curve are showing increasing technical weakness.  The TLHs (10-10 years, top chart) have decreasing momentum and volume flow.  In addition, prices have broken support established during a rally earlier this year.   The TLTs have broken shorter them support, have decreasing momentum and a weakening CMF picture.

Yesterday, oil made a strong move higher on decent volume.  The next logical area of resistance is the 200 day EMA.

Wednesday, December 19, 2012

CPI and Chain Weighted CPI Explained

Both of the following definitions are from Investopedia:

Definition of 'Consumer Price Index - CPI'

A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Sometimes referred to as "headline inflation."
Read more:

Investopedia explains 'Consumer Price Index - CPI'

The U.S. Bureau of Labor Statistics measures two kinds of CPI statistics: CPI for urban wage earners and clerical workers (CPI-W), and the chained CPI for all urban consumers (C-CPI-U). Of the two types of CPI, the C-CPI-U is a better representation of the general public, because it accounts for about 87% of the population.

CPI is one of the most frequently used statistics for identifying periods of inflation or deflation. This is because large rises in CPI during a short period of time typically denote periods of inflation and large drops in CPI during a short period of time usually mark periods of deflation.

Definition of 'Chain Weighted CPI'

An alternative measurement for the Consumer Price Index (CPI), removing the biases associated with new products, changes in quality and discounted prices. The chain weighted CPI incorporates the average changes in the quantity of goods purchased, along with standard pricing effects. This allows the chain weighted CPI to reflect situations where customers shift the weight of their purchases from one area of spending to another.
Read more:

Investopedia explains 'Chain Weighted CPI'

The chain weighted CPI incorporates changes in both the quantities and prices of products. For example, let's examine clothing purchases between two years. Last year you bought a sweater for $40 and two t-shirts at $35 each. This year, two sweaters were purchased at $35 each and one t-shirt for $45.

Standard CPI calculations would produce an inflation level of 13.64%
((1 x 35 + 2 x 45)/ (1 x 40 + 2 x 35)) =1.1364

The chain weighted approach estimates inflation to be 4.55%
((2 x 35 + 1 x 45)/ (1 x 40 + 2 x 35)) =1.0455.

Using the chain weighted approach reveals the impact of a customer purchasing more sweaters than t-shirts.
Read more:

Mexico -- South Of the Border Growth Dynamo

Last week, I noted that Japan, UK and EU are all "zombie economies" -- economies that are for all practical purposes dead in the water right now.  However, other regions of the world are doing very well -- especially those south of the border.  While Mexico does have some serious problems (the drug war and over 25,000 dead come to mind, along with systemic corruption), the overall economy has actually done very well since the end of the great recession.  Consider the following data points from the Central Bank's latest Inflation Report:

Overall GDP has grown strongly.   The chart on the right indicates that the quarterly percent change has been positive since 2009 and has been in the .75-1.5% range.  The chart on the right shows that the annual rate of change has been positive as well -- 4% appears to be a good average to use for the last few years.

The left chart shows ANTAD sales (retailer's association) have been rising strongly over the last five years.  Also note these moved sideways during the recession.  The right side also shows retail and wholesale sales, both of which have risen since their recession lows and both of which are now above their pre-recession peaks.

A reason for the increase in consumption is the strong growth of wages.  The left charts shows that wages have been growing in the 4% range for the last few years.  The right chart shows that consumer confidence -- which although below pre-recession levels has been rising for the last few years.  Finally, we see that remittances from the US are actually down.

Investment has also been very strong.  The left chart shows that overall investment (black line)  has been rising consistently since the recession and is now above pre-recession levels.  It has risen because of incredibly strong machinery and equipment investment (red line) and overall construction.  Machinery investment has increased as a result of both domestic and imported machinery (middle chart).  Finally, overall confidence for producers is strong.

The left chart shows that total activity has been strong for the industrial and service sectors, while the middle chart shows that manufacturing has been strong -- even without a bump from auto production (the red line).  Finally, total vehicle production (left char) is still very strong.

Finally, notice that the economy has adequate funding from both foreign and domestic sources.

The bottom line is that  -- despite the above mentioned problems -- the overall Mexican economy is doing very well, especially compared with the rest of the world.

Morning Market Analysis

The German market consolidated between 22.5 and 23.5 (not including a quick dip to the 200 day EMA) for about three months.  Now prices have broken through upside resistance at the 23.5 area and are inching higher.  The underlying technicals -- the EMAs, MACD and CMF -- all confirm the move higher

Both the Singapore market (top chart) and Taiwan market (bottom chart) have dropped sharply.  The Singapore market did so yesterday -- dropping to the 10 day EMA -- while the Taiwan market started to do so a few days ago and is now through the 20 day EMA.  The Singapore sell-off occurred on weaker volume, but the Taiwan sell-off is on high volume.

For the last six months, the Japanese market has been one long consolidation pattern between 8.75 and 9.50.  However, with the new government taking over, prices are right at upside resistance and may be ready for a break out. 

Over the last few days, I noted that the TLT's had broken support.  Now the TLH's have followed suit, making their 200 day EMA the next logical target.

The IYTs (transports) have broken through upside resistance.  This could have significant bullish potential for the markets as a whole (Thanks to a specific reader for pointing this out).


Tuesday, December 18, 2012

The Good, Bad And Ugly of 2013; Part 2 -- The Bad and Ugly

Yesterday I outlined my basic theory on the US economy since the end of the great recession and also talked about the good economic elements going forward.  Now, let's look at the bad and ugly.

The Bad

Not all is well with the consumer sector as evidenced by the following graphs:

Unemployment is still far too high (top chart) which is leading to very slow growth in real disposable personal income (lower chart).

I believe these two charts throw cold water on the idea that the US economy -- whose growth is comprised mostly of consumer spending -- will grow at a stronger pace than right around 2% (give or take) for the first half of next year.   There is simply too much slack in the economy to allow for upward wage pressures, leading to increased wages and stronger, sustainable consumer spending until at least August 2013 (3Q13).

Also adding to the negative sentiment going forward is the fiscal cliff.  Should no deal be worked out, we'll see spending cuts and a tax increase that will hurt growth, and probably lead to a shallow recession in the first half of 2013.

Substantial changes to tax and spending policies are scheduled to take effect in January 2013, significantly reducing the federal budget deficit. According to CBO’s projections, if all of that fiscal tightening occurs, real (inflation-adjusted) gross domestic product (GDP) will drop by 0.5 percent in 2013 (as measured by the change from the fourth quarter of 2012 to the fourth quarter of 2013)—reflecting a decline in the first half of the year and renewed growth at a modest pace later in the year. That contraction of the economy will cause employment to decline and the unemployment rate to rise to 9.1 percent in the fourth quarter of 2013. After next year, by the agency’s estimates, economic growth will pick up, and the labor market will strengthen, returning output to its potential level (reflecting a high rate of use of labor and capital) and shrinking the unemployment rate to 5.5 percent by 2018. 

There is also the slowing of monetary velocity:

All three monetary aggregates -- MZM, M1 and M2 -- have a decreasing velocity.  This tells us that the pace of transactions is slowing, leading to the conclusion that consumers are hoarding cash.

US manufacturing helped to pull the economy out of the great recession.  Unfortunately, in the last six months, the ISM index has printed below 50 four times, indicating manufacturing contraction.  Consider the following anecdotal points from the latest ISM report:
  • Conditions still appear to be positive for continued growth in sales." (Machinery)
  • "Business is steady, but not much more than that. We are in a lull." (Food, Beverage & Tobacco Products)
  • "The principle business conditions that will affect the company over the next three or four quarters will be the U.S. federal government tax and budgetary policies; the impact of those policies is not yet clear." (Petroleum & Coal Products)
  • "Differences between first half of year and remaining half are very dramatic, growing to a peak in the middle of the year with a gradual decline since." (Plastics & Rubber Products)
  • "Seeing a slowdown in request for quote activity." (Computer & Electronic Products)
  • "The fiscal cliff is the big worry right now. We will not look toward any type of expansion until this is addressed; if the program that is put in place is more taxes and big spending cuts — which will push us toward recession — forget it." (Fabricated Metal Products)
  • "Seeing a slowdown in demand across markets." (Electrical Equipment, Appliances & Components)
  • "Economy is very sluggish. Production is down and orders have slowed considerably from Q1." (Transportation Equipment)
  • "East Coast storms delayed some shipments." (Primary Metals)
  • "Global economic uncertainty still seems to be sticking around which is not necessarily making things worse, but it is also not making things better from a demand standpoint." (Chemical Products)
Notice that the primary responses indicates either slowing activity or uncertainly caused by the situation in Washington.  There is also concern regarding the international situation (see below).  None of these statements bodes well for the future.

The Ugly

The ugly is all international.  As I noted last week, three big international economies -- Japan, the UK and the EU -- are all in terrible shape.  Japan and the EU are in a technical recession, and the UK has seen little meaningful growth since 2008.   It's difficult seeing the US grow at strong rates in any way with these three economic trading partners in such bad shape.

These three economies greatly cloud the overall horizon and add nothing but potential downward pressure on US growth.


While there are bright spots for the US economy, there are simply too many dark clouds to hope for anything other than sub-par growth for the next 6-12 months.  Although consumers are confident enough to make durable goods purchases, the fiscal cliff, high unemployment, slow wage growth, slowing monetary velocity and a terrible international situation lead to the conclusion there is far more downside than upside to 2013.


Morning Market Analysis

Yesterday, the long end of the treasury curve sold off on decent volume, moving through the short-term support.  The next logical target is the 200 day EMA.  Notice the volume pick-up over the last four trading sessions -- a clear negative reaction to the Fed's decision which is seen as accepting a higher rate of inflation

The financial sector had a big day, printing a very strong candle on high volume.  Combine that with the rising MACD and CMF, and a break through the 16.2 and 16.4 level looks like a strong possibility. 

The homebuilding sector is still consolidating between the 24.5 and 27 price level.  Remember the old trading adage that the longer the amount of time spend consolidating, the stronger the rally afterward.

The Chinese market appears to be making strong progress to get out of the doldrums.  Over the last few trading sessions, we've seen some incredibly strong bars printed, which has moved the market through the shorter EMAs and towards the 200 day EMA.  In addition, prices are currently right at levels established in early September and mid-October.   

Monday, December 17, 2012

The Good, Bad And Ugly of 2013; Part 1 -- The Good

As we approach year end, thoughts naturally turn to the "year that was" type of thinking.  Unfortunately, as NDD and I have written over the last few weeks, there really isn't much to write about from the US perspective which is anything near glowingly positive.

Let me back up and explain my basic theory of the US economy.  When we first started to emerge from the Great Recession, I wrote a piece titled, the Fits and Starts expansion, where I essentially argued that we'd be in for a period of sub-par growth.  Here is the concluding paragraph to that piece:

I describe the initial phase of the next expansion the "fits and starts" expansion because not one of the four elements outlined above will lead completely or continually. I think it's far more likely we'll see an increase in consumer spending one quarter followed by increased stimulus spending and an increase in exports the next quarter. In other words, various economic sectors will take the lead one quarter and then fall back. In other words, we'll see fits and starts from the above sectors.

I wrote that back in August 2009, and we've seen nothing but stubbornly slow growth since.  Consider these two charts of US GDP:

The top chart shows that in real terms, total US GDP is above pre-recession levels.  That's good because, frankly, not many countries can make that assertion right now.  The bottom chart shows the same data, but in a "percentage change from the same quarter last year" perspective.  Notice that growth has been hovering around 2% for most of the last few years, and only approached 3% in one quarter.  Simply put, that's nothing more than a fair track record at best.  Again, it's better than most (see my posts last week on Japan, the UK and the EU), but that's really not saying much.

So -- why this slow pace of growth?  As I've pointed out a few times before, we're in the middle of a debt deflation recovery, which was first theorized by Irving Fisher.  In the previously linked document, he proffered the following steps to this phenomena:

Then we may deduce the following chain of consequences in nine links: (1) Debt liquidation leads to distress setting and to (2) Contraction of deposit currency, as
bank loans are paid off, and to a slowing down of velocity of circulation.  This contraction of deposits and of their velocity, precipitated by distress selling, causes (3) A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be (4) A still greater fall in the net worths of business, precipitating bankruptcies and (5) A like fall in profits, which in a " capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make (6) A reduction in output, in trade and in employment of labor. These losses, bankruptcies, and unemployment, lead to (7) Pessimism and loss of confidence, which in turn lead to (8) Hoarding and slowing down still more the velocity of circulation. The above eight changes cause (9) Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

Put in less formal terms, the country as a whole takes out too many loans, so they have to spend a lot of time paying off or liquidating the debts.  This is the end result of the housing bubble and why these types of bubbles create an entirely different post-recession growth dynamic.

Against that framework, let's look forward into 2013 and organize the data between the good, the bad and the ugly.

The Good

There are some good signs which are encouraging for next near.

First, the financial service obligations ratio of US households (which is the broader measure of consumer debt health) has been dropping sharply for the last few years and is now near 30 year lows.  This tells us that households have either been paying off or liquidating debt in sufficient quantities to lower overall household debt. That helps us move away from the debt-deflation dynamic.

We can look at the same data using Flow of Funds data:

 The above data shows total household credit market debt outstanding in Log scale and shows that over the last few years, the rate of increase has actually become a decrease.

In addition to the improving consumer credit market, we also see the housing market rebounding.  Consider the following chart (thanks to Calculated Risk for all the Housing Charts):

The above chart shows the year over year percentage change in the Case Shiller housing price index.  This number has been rising for the entire year and is now in positive territory.  The reason is inventories are now at far healthier levels:

The top chart shows that new home inventory is at its lowest level in nearly 40 years, while the bottom chart shows the existing home inventory level is far closer to levels seen at the beginning of the 2000s.  Lower supply equals higher prices and a far healthier supply/demand scenario.

The decreased number of new homes for sale leads to a discussion of housing starts, which are now emerging from a historically low level:

As the chart above shows, housing charts have risen from their lows and are now moving to far healthier levels.  This is a very encouraging sign according to Leamer.

In addition to housing making a comeback, auto sales are rising:

Auto sales have rebounded from the post-recession lows and are now at levels seen in the mid-1990s.

The reason the housing and auto sales markets provide us with good news is they are durable goods which typically require long-term financing.  Consumers don't engage in these transactions unless they think they'll be able to make the payments for an extended period of time.  Hence, these are indicators that some consumers have enough confidence to go into longer-term debt.

Finally, the above chart shows CPI and PPI, both core and total's year over year percentage change.  Inflation is clearly under control.  And while we have seen PPI spike several times over the last 5 years, producers have absorbed those costs, thereby preventing them from bleeding into broader prices.

Tomorrow, I'll look at the bad and the ugly.