The Bonddad Blog

Market Analysis: France

noreply@blogger.com (Hale Stewart) — Fri, 24 May 2013 11:00:00 +0000

I'm still bearish on the French economy (see here and here). The big reason is the terrible history of GDP growth. In 2011 the economy was barely positive and in 2012 the economy has printed three quarters of negative GDP growth.

The latest GDP read is also negative. From the report: In Q1 2013, French growth domestic product (GDP) in volume* decreased again: –0.2% after –0.2% in Q4 2012. It is the third decrease in the last four quarters.

Let's look at the overall data:

First note this is the third quarter in the last four where the economy has contracted. And the respite from contraction in 3Q12 is hardly encouraging, as the economy only grew .1%. Last quarter we see contraction across all major GDP categories: PCEs decreased .1%, government spending decreased .8%, all categories of invested dropped and exports declined -.5%.

Let's now turn to the French Markit PMI survey:

The downturn in French private sector output continued in May. Unmoved from April’s reading, the Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, posted 44.3. Although remaining above the levels registered in Q1, the latest reading was indicative of a marked rate of contraction in overall activity.

The decline was broad-based across the manufacturing and service sectors, with equally sharp falls signalled in each case. The latest drop in manufacturing production was fractionally weaker than in April, and the slowest in nine months, whereas service providers noted an unchanged rate of contraction in activity.

Here's a chart of the data:

The reading has been below 50 and declining for the last year. But going back to mid-2011, we see a large drop in overall output and production.

Let's go to the French ETF:

Despite my bearishness on the French economy, the French ETF continues to move higher. We essentially see three market stages over the last year: a rally from 17.5 to 25 over the June-February time period, a market consolidation from February to the end of April when we see an ~10% correction, and then a rally from mid-April to now as the market rallies in response to the return of the risk on trade.

Initial jobless claims stay just above normal expansionary level

noreply@blogger.com (New Deal democrat) — Thu, 23 May 2013 18:00:00 +0000

- by New Deal democrat

At 340,000 this week, and with the 4 week moving average at 339,500, initial jobless claims continue to hover just slightly above what would be a normal expansionary number of 335,000 or below.

We also continue in the track of our new range, as shown in the graph of weekly claims since the first of last year:

Last year we rarely got below360,000. This year since January we have rarely been above it. Given the fiscal headwinds of the payroll tax increase and the Sequester, this is pretty robust. We continue to make progress. Frustrating and maybe even glacial, but progress nevertheless.

Let's Be Honest About Europe: They're In a Depression

noreply@blogger.com (Hale Stewart) — Thu, 23 May 2013 15:30:00 +0000

For the last five quarters, the GDPs annual growth rate and been negative. More importantly, it's getting worse.

The quarterly rate of growth has been negative for six straight quarters.

While the rate of contraction is mild by historical comparison (most depressions see larger percentage contractions), the bottom line is growth has not existed in this region for over a year.

From hereon, I will be referring to the EU's economic situation as a depression. There is no other way to describe it.

Market Analysis: Japan

noreply@blogger.com (Hale Stewart) — Thu, 23 May 2013 11:00:00 +0000

From Bloomberg:

Japan’s economy expanded the most in a year last quarter as consumer spending and export gains outweighed the weakest business investment since the wake of the March 2011 earthquake and tsunami.

Gross domestic product rose an annualized 3.5 percent, a Cabinet Office release showed in Tokyo. Private consumption, making up 60 percent of GDP, contributed 2.3 percentage points to the jump. The Bank of Japan may upgrade its assessment of the economy after a May 22 policy meeting, according to people familiar with the central bank’s discussions.

Let's take a look at the underlying data:

In the official data, notice that private consumption was strong in the 1Q12, but weakened throughout 2012. But in 1Q13, it bounced back strong. Private residential investment contracted in 1Q12, but has been expanding at varying rates since. The real problem has been gross private non-residential investment, which is now in it's fifth quarter of contraction. However, Abe says he wants to specifically target this area of GDP going forward:

Abe said he aims to get annual private investment back to 70 trillion yen ($682 billion), the level before the 2008 financial crisis, through deregulation, taxes, spending, and equipment leasing deals. He also outlined a target of tripling infrastructure exports to about 30 trillion yen by 2020. Abe has said he will reveal his full growth plan ahead of the Group of Eight summit in Northern Ireland on June 17-18.

The measures are part of the “third arrow” of the prime minister’s strategy to revive the world’s third-largest economy through structural changes to improve competitiveness. His push for increased Bank of Japan monetary easing combined with fiscal stimulus has persuaded Japanese to open their wallets and sent stocks soaring as the yen weakens.

“We have gained international understanding for Abenomics,” Abe said.

As we've noted before (see here and here), Abenoics is paying off. First, we've seen a large decline in the yen. Despite having a weak economy post-recession, the yen rallied as traders perceived the currency to be a safe haven currency, leading to a long-term rally. This hurt Japan's exporters -- a primary driver of overall Japanese growth. Recent BOJ moves have been targeted to lower the yen's value -- a move that is for now being accepted by the G-7:

Finance ministers and central bankers reaffirmed their February commitment to “not target exchange rates” at a meeting in Aylesbury, near London, U.K. Chancellor of the Exchequer George Osborne told reporters May 11.

The Bank of Japan “can and should ease again if the current measure does not seem to be working,” Takuji Okubo, chief economist at Japan Macro Advisors in Tokyo, said in an e-mailed response to questions.

While signaling acceptance of the yen’s decline through 100 per dollar for the first time since 2009, G-7 policy makers said they examined Japan’s strategy and that they will monitor its impact on currencies. The yen has fallen 15 percent against the dollar this year and 13 percent versus the euro as the Bank of Japan stepped up monetary stimulus.

Here is how the Bank of Japan characterized the economy in their latest policy statement:

Japan's economy has started picking up. Exports have stopped decreasing as overseas economies have been moving out of the deceleration phase that had continued since last year and are gradually heading toward a pick-up. Business fixed investment continues to show resilience in nonmanufacturing and appears to have stopped weakening on the whole. Public investment has continued to increase, and housing investment has generally been picking up. Private consumption has seen increased resilience, assisted by the improvement in consumer sentiment. Reflecting these developments in demand both at home and abroad, industrial production has stopped decreasing and signs of picking up have become increasingly evident. Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) has been negative, due to the reversal of the previous year's movements in 2 energy-related and durable consumer goods. Some indicators suggest a rise in inflation expectations.

Let's take a look at the daily stock chart of the Japanese ETF:

The daily chart shows a strong rally starting in mid-November, with a nice balance between rallies and consolidation. The EMAs are bullishly aligned with prices using the EMA for technical support. The MACD is strong, but it has stalled over the last month and a half. However, the CMF remains strong.

The Dollar is Rallying

noreply@blogger.com (Hale Stewart) — Wed, 22 May 2013 17:35:00 +0000

The dollar ETF bounced along the 21.6 price area for the September-February period, with a brief rally to the 50% Fib level from the July-August sell off. Starting in February we see a rally, the hit resistance at the 61.8% Fib level from the same sell-off. Now prices have cleared resistance at all Fib levels and have room to rally to the lower 23s/.

How the Case For Austerity Crumbled

noreply@blogger.com (Hale Stewart) — Wed, 22 May 2013 14:30:00 +0000

Over the weekend, The New York Review of Books published a long article written by Paul Krugman on how the case for austerity fell apart. It's a long read, but well worth the time. Here are the opening paragraphs:

In normal times, an arithmetic mistake in an economics paper would be a complete nonevent as far as the wider world was concerned. But in April 2013, the discovery of such a mistake—actually, a coding error in a spreadsheet, coupled with several other flaws in the analysis—not only became the talk of the economics profession, but made headlines. Looking back, we might even conclude that it changed the course of policy.

Why? Because the paper in question, “Growth in a Time of Debt,” by the Harvard economists Carmen Reinhart and Kenneth Rogoff, had acquired touchstone status in the debate over economic policy. Ever since the paper was first circulated, austerians—advocates of fiscal austerity, of immediate sharp cuts in government spending—had cited its alleged findings to defend their position and attack their critics. Again and again, suggestions that, as John Maynard Keynes once argued, “the boom, not the slump, is the right time for austerity”—that cuts should wait until economies were stronger—were met with declarations that Reinhart and Rogoff had shown that waiting would be disastrous, that economies fall off a cliff once government debt exceeds 90 percent of GDP.

Indeed, Reinhart-Rogoff may have had more immediate influence on public debate than any previous paper in the history of economics. The 90 percent claim was cited as the decisive argument for austerity by figures ranging from Paul Ryan, the former vice-presidential candidate who chairs the House budget committee, to Olli Rehn, the top economic official at the European Commission, to the editorial board of The Washington Post. So the revelation that the supposed 90 percent threshold was an artifact of programming mistakes, data omissions, and peculiar statistical techniques suddenly made a remarkable number of prominent people look foolish.

The real mystery, however, was why Reinhart-Rogoff was ever taken seriously, let alone canonized, in the first place. Right from the beginning, critics raised strong concerns about the paper’s methodology and conclusions, concerns that should have been enough to give everyone pause. Moreover, Reinhart-Rogoff was actually the second example of a paper seized on as decisive evidence in favor of austerity economics, only to fall apart on careful scrutiny. Much the same thing happened, albeit less spectacularly, after austerians became infatuated with a paper by Alberto Alesina and Silvia Ardagna purporting to show that slashing government spending would have little adverse impact on economic growth and might even be expansionary. Surely that experience should have inspired some caution.

Does Oil Now Have A Price Ceiling In the $98-$100 Area?

noreply@blogger.com (Hale Stewart) — Wed, 22 May 2013 11:00:00 +0000

The chart above shows that since the beginning of 2013, oil has hit the $98-$100 price area four times. Each time, it has retreated. The question is, why?

There are several potential reasons:

1.) Overall, world growth is slow. The strongest country -- China -- is in the midst of a slowdown (albeit from 10% growth to 7%). All other economies are experiencing similar slowdowns. Some parts of the globe (the EU) are in the middle of a prolonged recession.

2.) Commodities are losing their investment luster: the drop in gold was perhaps the icing on the cake, but all other commodities are struggling to make price gains. With inflation low and the dollar stronger, commodities just aren't needed right now. Hence an exit from this asset class by hedge funds:

Money managers are the most bearish on commodities in more than four years as a majority expected a weaker Chinese economy for the first time in 14 months, a Bank of America Corp. survey showed.

A net 29 percent of the fund managers surveyed were underweight the asset class in May as their positions “collapsed” to the lowest level since December 2008. One in four now consider a “hard landing” in China as the biggest risk to their investments. The bank surveyed professional investors who together oversee $517 billion.

3.) The development of the US shale oil market has sent "shockwaves" through the oil markets:

North America will provide 40 percent of new supplies to 2018 through the development of light, tight oil and oil sands, while the contribution from the Organization of Petroleum Exporting Countries will slip to 30 percent, according to the International Energy Agency. The IEA trimmed global fuel demand estimates for the next four years, and predicted that consumption in emerging economies may overtake developed nations this year.

“The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15,” the Paris-based adviser to 28 oil-consuming nations said in its medium-term market report today.

The development of U.S. shale resources, enabling the nation’s highest level of energy independence in two decades, is creating a “chain reaction” in the global transportation, processing and storage of oil that may escalate as other countries try to replicate the American oil boom, according to the IEA. Crude futures for settlement in 2018 are trading at a discount to current prices, signaling expectations for increasing supplies and constrained demand.

Deficit Declining

noreply@blogger.com (Hale Stewart) — Tue, 21 May 2013 18:00:00 +0000

From the CBO

If the current laws that govern federal taxes and spending do not change, the budget deficit will shrink this year to $642 billion, CBO estimates, the smallest shortfall since 2008. Relative to the size of the economy, the deficit this year—at 4.0 percent of gross domestic product (GDP)—will be less than half as large as the shortfall in 2009, which was 10.1 percent of GDP.

From the CBPP

Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period).

. . . Aaannd gas prices roar back

noreply@blogger.com (New Deal democrat) — Tue, 21 May 2013 15:30:00 +0000

- by New Deal democrat

One thing I hope I'm clear about when I discuss the Oil choke collar is that I claim no special knowledge as to what will happen with energy prices in any kind of short term timeframe. My impression is that large speculators can and do push gas prices up and down over the short term roughly between $3 and $4 a gallon, and constantly relieve the suckers of their betting money. Once you get past a few months, the economy reacts to the relatively high or low price by accelerating or decelerating. In this way the price of gas acts like a governor on the speed of the economy. I do believe that increased efficiency, alternate sources of energy, and new discoveries of petroleum will act over the longer term to lower prices, and that may have already started this year, but we will see.

In any event, after retreating just below $3.50 a gallon by the end of April, in just the last 20 days it has zoomed back up over 5% to about $3.70. Here's the relevant graph from Gasbuddy:

Following my back of the envelope formula, take this increase, divide it by 10 (or 16 if you want to be conservative), and add 0.1%, and you should be very close to the non-seasonally adjusted inflation rate for the month. This gives us a +0.5% or +0.6% increase in prices for May - as of now. Since there is no significant seasonal adjustment this month, that will also be the adjusted inflation rate.

This will also have a significant effect on real wages and sales.

US Employment: Employer Behavior

noreply@blogger.com (Hale Stewart) — Tue, 21 May 2013 11:00:00 +0000

Once again, I'm going to turn to the new employment graph started by the Macroblog website, this time focusing on employer behavior. And for that, I'll be looking at JOLTS data. This is a relatively new data set -- in only goes back to the beginning of the 2000s. This means we don't have the ability to do any historical comparisons. However, it does give us an objective reading on what employers are doing in the jobs market, which in turn gives us an idea to what they're thinking.

Let's start with a graph of layoffs:

Total layoffs are now at levels below the last expansion. This tells us that employers aren't adding to the unemployment rate at a high rate.

Here's the definition used by the BLS for this data: a job opening is [a] specific position of employment to be filled at an establishment; conditions include the following: there is work available for that position, the job could start within 30 days, and the employer is actively recruiting for the position. Put another way, if an employer is looking to add to his workforce, he will advertise a job opening to fill.

This number -- like most employment numbers -- cratered during the recession. But, it's been slowly bouncing back to levels seen during the last expansion. However, note that during 2012 the data series appeared to stall between the 3.6 and 3.8 million level. This was also during the period when employment growth seemed to stall at moderate levels.

Let's turn now to total hires:

Like the openings data, this number appeared to stall during the 2012 period. However, the level at which the data series stalled was a the lowest point of the previous expansion. This tells as that the rate of hiring is still at very low levels.

These two data points are interesting. While the job openings number has bounced back, the job hires numbers have not. So while employers want to increase their labor force by posting an opening, they are very unwilling to make the final commitment and hire a person.

Australian Dollar ETF Breaks Key Support Level

noreply@blogger.com (Hale Stewart) — Mon, 20 May 2013 18:30:00 +0000

Three reasons why this might be a more permanent move:

One is the weakness in commodity prices. Iron ore, Australia’s most valuable commodity export, slipped into bear market territory last week amid concerns about slowing economic growth in China.

“Iron ore is down 20 per cent from the highs in February and coking coal has seen similar price action,” notes Robert Rennie, global currency strategist at Westpac.

A second is the slowdown in foreign direct investment as large resources companies slash spending on new projects and expansion in Australia.

The recent reduction in the RBA’s benchmark rate to 2.75 per cent has also eroded the attractiveness of the Aussie by narrowing the interest rate differential with the US, where rates are effectively zero. Many economists believe the RBA will be forced to lower rates again to help rebalance the economy as the resources investment boom peaks.

Ample Supply of "Softs" Are Keeping Prices Low and the Market Depressed

noreply@blogger.com (Hale Stewart) — Mon, 20 May 2013 15:00:00 +0000

From Investing.com:

Coffee futures have been under heavy selling pressure in recent sessions as traders worried over ample global supplies and speculators pushed prices lower.

.....

Sugar prices fell to the weakest level since August 2010 last week as farmers in Brazil started to accelerate harvesting of the nation's sugar crops.

Sugar growers in Brazil's center-south region, which accounts for about 90% of the country's production, are forecast to harvest a record 589.6 million metric tons of sugar cane in the 2013-14 season, according to Unica, Brazil's sugar industry association.

Let's go to the chart:

Prices are in a classic downtrend. Most importantly, notice the 200 day EMA is clearly moving lower and that prices are below this key indicator. The shorter EMAs are also moving lower and are below the 200 day EMA. Mathematically, this will continue to pull the 200 day lower. Candles are using the 10, 20 and 50 day EMAs are technical resistance, which is another sign of a bear market. Prices are moving lower lows and lower highs as well.

Short version: this is a great example of a bear market chart.

Market Analysis: US

noreply@blogger.com (Hale Stewart) — Mon, 20 May 2013 11:00:00 +0000

Last week, we received continued confirmation that the US economy is growing, although at a weak pace. Let's look at the day.

The Good

LEIs Increased: (From the report): The Conference Board LEI for the U.S. increased in April after a small decline the month before. Large positive contributions from building permits, initial claims for unemployment insurance (inverted) and all the financial components offset negative contributions from consumer expectations, average workweek in manufacturing and ISM® new orders. In the six-month period ending April 2013, the leading economic index increased 1.7 percent (about a 3.5 percent annual rate), faster than the growth of 0.5 percent (about a 1.1 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators have become more widespread.

Of the 10 components, 3 were negative. This tells us there was a fair amount of breadth to the latest reading. In the preceding LEI reading, the components were equally balanced between positive and negative, leading to the .1% contraction. Most concerning in this data is the continued weak reading in the average workweek for production workers, which has been stable for seven months.

Consumer Sentiment Increased: Consumer spirits are improving dramatically this month in what very well may be a reflection of improvement in the jobs market. The consumer sentiment index jumped to 83.7 for the mid-month reading vs 76.4 for the final April reading and vs April's mid-month reading of 72.3. The Econoday consensus was looking for 78.0 with the high-end estimate at 82.5. The latest reading is near the recovery high set in November.

Consumer activity has been remarkably resilient after the increase in withholding taxes at the beginning of the year. Considering this is still 70% of US economic activity, this increase is a good thing.

Prices are contained: The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent in April on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment. Producer prices decreased .7%/

As I noted several times last week (see here, here, here and here) inflation is a non-issue right now. In fact, one could argue that the greater threat is still one of potential deflation rather than inflation.

The Bad:

Housing metrics took a hit: housing starts decreased 16.5% from the previous month. However, housing permits increased 14.3%. As of now, this is a one month statistical point that could simply be noise. However, we do want to keep an eye on this metric as the housing market's rebound is a very important part of the ongoing recovery in the US economy.

Manufacturing took more hits: As I noted above, the near stagnation in the workweek for production workers over the last seven months is concerning. In addition, the Empire State manufacturing number fell to -1.4, the Philly Fed manufacturing number fell to -5.2 and industrial production contracted .5%. The IP contracted was especially concerning as it's decline was very broad based.

Manufacturing renaissance in the US has been a most untold story for this expansion. However the recent spate of data -- especially its broad base -- indicates an overall slowdown may be occurring. This does not appear to be a contraction, but a reading just above expansion on the next ISM number (a reading just above 50) looks more and more likely.

Conclusion: we're still where we've been for an extended period of time. The US economy is growing, albeit weakly. Both internal and external demand is weak at best. We're also probably seeing some effects from the sequester kick in.

Let's turn to the US markets:

The SPYs are still very much in a bull market. The uptrend started in mid-November continues to move higher, with the index printing a series of higher highs and higher lows. The EMAs continue in their bullish orientation -- all are rising, the shorter EMAs are above the longer EMAs and prices are above all the EMAs. Momentum is positive and increasing and money is flowing into the market.

The weekly chart displays the exact same patterns. Prices are printing higher highs and higher lows with a bullish underlying EMA picture. Momentum is positive and strong and the CMF reading shows a big influx of money.

A thought for Sunday: Four years ago - "Do we need another WPA?"

noreply@blogger.com (New Deal democrat) — Sun, 19 May 2013 13:00:00 +0000

From Bonddad: NDD wanted to re-post this piece with which I heartily agree. Repeat after me: borrow $1 trillion dollars at today's record low rates, hire the out-of-work manufacturing and construction workers and rebuild our nation's crumbling infrastructure.

It's really not that complicated.

- By New Deal democrat

"So the point I'm making -- and Blanche is exactly right -- we've got to be non-ideological about our approach to these things. ... We don't want to be looking backwards. We can't just go back to the New Deal and try to grab all the same policies of the 1930s and think somehow they'd work in the 21st century."
- Barack Obama, february 3, 2010

Four years ago on Friday, Bonddad and i published a joint essay entitled, Do we need another WPA?I'm republishing it in a mildly truncated form below, deleting graphs and a little other information that is no longer timely. Obviously not all of our prognostications were perfect, but they have proven close enough that, wIth unemployment still at 7,5%, the u-6 employment rate including discouraged workers still at about 14%, and employment still about 6 million short of a population adjusted full recovery, it's fair to suggest that Bonddad and I have been proven right, and Barack Obama wrong.

This is the road not taken. The Very Serious People should be asked on what basis they can still justify their decision not to take it. How much better the conditions would be now for millions of American families had we taken it!

- - - - -

Regardless of when this recession ends, the malaise of working and middle class America will not be relieved until wages increase, and employment rates return to a robust level. Since unemployment is a lagging indicator, the news on that score is grim. Almost every analyst believes that there will be another "jobless recovery" such as those that followed the 1990 and 2001 recessions. Even after GDP bottomed and those recessions technically ended, there was an average 17 month increase in unemployment of .9% (or a 15% percent increase in the rate) followed by a 13.5 month decrease back to the rate at the "bottom" of the recession. If that pattern holds true again, then even if this recession bottoms shortly, unemployment will be 10.1% by July, rise to 11.3% by December 2010, and take until at least early 2012 to decrease back under 10%, looking like this graph:

Note this is U3 unemployment, so U6 unemployment will be correspondingly worse. It is safe to say that there will be major social and political consequences from an unemployment rate over 10% for 2 1/2 or more years -- and that's under the optimistic scenario that in GDP terms, the recession bottoms shortly. As this graph of reconstructed U3 and U6 unemployment since 1900 shows, such a rate would surpass 1981-82 and be second only to unemployment during the Great Depression itself:

If ever there was a time to reinstitute the CCC and the WPA, the large scale public works employment programs which were the cornerstones of the "RELIEF" element of the New Deal, now is it! Even extended unemployment benefits will run out far too soon, leaving many able - bodied and - brained workers sitting unproductively and sullenly at home. Putting them to work on public sector projects would not just be important symbolically to society, and psychologically to the workers and their families, but would produce real and long-lating tangible benefits as well. The Civilian Conservation Corps, a work relief program for young men ages 18-25 from unemployed families, was established in 1933. The CCC became one of the most popular New Deal programs among the general public and operated in every U.S. state and several territories in 2600 work camps. The young men were paid wages, but were expected to share their wages with their families. They built such things as fire trails, camp sites in parks, and also cleared swamps and planted trees.

In a similar vein, the Works Progress Administration, so named in 1935, was the largest New Deal agency, employing millions of people and affecting most every locality in the United States, especially rural and western mountain populations. Between 1935 and 1943 the WPA provided almost 8 million jobs and income to the unemployed. ..., the programs built many public buildings, projects and roads and operated large arts, drama, media and literacy projects, employing actors, artists, musicians, and writer (nearly 4 million in 1936 alone). It fed children and redistributed food, clothing and housing. Almost every community in America has a park, bridge or school constructed by the agency, and most public buildings of a certain age will feature architecture or a mural created by one of its artisans:

....

Obama's $787 Billion stimulus program has a lot in common with FDR's: An author, economist and historian who have all studied the Depression agree Obama's stimulus plan might do for a somewhat different crisis what FDR's public works programs did for even worse times. Author Nick Taylor said both FDR and Obama made job creation through infrastructure improvements the "main thrusts" of national initiatives to solve economic crises each inherited from prior administrations. The author of "American-Made: The Enduring Legacy of the WPA," he said Obama's critics don't acknowledge that creation of the WPA and CCC helped lower unemployment from 25 to 14 percent between 1933 and 1937.

.... Associate Professor Harold Petersen, who teaches economics at Boston College, believes ... FDR and Obama both made sound decisions, based on the valid principle that spending drives economic growth, to create job programs that put money in peoples' hands. .... Professor William Keylor, who teaches history at Boston University, said ...."It does indeed sound like what FDR was up to. Our infrastructure is in bad shape. If done efficiently, these projects could really improve our communities."

So -- why do we need to look at the idea of creating another WPA? Because looking at the overall structure of the US economy there are no areas that appear to be ready to drive the economy into a recovery. Let me illustrate this point. Let's break down GDP into its four basic components -- personal consumption expenditures, gross domestic investment, exports and imports and government. While I do think retail sales have bottomed I also don't think they will be the driver of an expansion. As I wrote previously:

Let me make clear: I don't think we're going to have a gangbusters, consumer led recovery. The US consumer still faces a weak job market, massive debt and a big destruction in his wealth over the last few years. This is not an environment where people will go out and spend. However, I do think that the overall trend of durable, non-durable and retail sales numbers indicates the decline is moderating and we will see a clear bottom over the next 4-6 month Let's take the above points one at a time. As this graph demonstrate, the rate of unemployment claims is topping:

Yet the number of unemployed people remains at high levels as I noted in this article. These is no reason to see this situation ameliorating any time soon. In fact, I expect that we'll be hearing about a "jobless recovery" when things start picking up. In short, this is not an environment when people ramp up spending. Combine that with a high level of household debt. Total household debt outstanding is almost as high as total US GDP. Simply put, people need to de-lever their financial position. Leading to that de-leveraging is the massive loss of household wealth that has occurred over the last two years. Total household wealth stood at $64.3 trillion in 2Q07 and currently stands at $51.4 trillion -- a decrease of 20%. All of these factors add up to a consumer who will not be driving the recovery.

And overall investment won't help us either. Here is a chart of the percentage change in total gross investment:

It has dropped in 9 of the last 12 quarters -- and one of the quarters where we saw in incease was only an increase of .4%. In addition, last quarter saw a decrease of 51.8% from the preceding quarter. Simply put, that number is terrible.

Let's break this number down into its sub-parts -- residential investment, non-residential investment and equipment and software investment.

Residential

Do we really need any more houses? No. (Thanks to Calculated Risk for the graphs)

The existing home inventory is still at very high levels. And this number does not include the "shadow inventory" of houses in foreclosure that are still on bank's balance sheets.

While the new home inventory is down to a more normal level

The months of available supply are current sales levels is still at sky high levels. In addition,

The vacancy rate is still at abnormally high levels, indicating we're not using all the houses we've built. As a result:

Housing starts are at multi-decade lows. In other words, we're not building our way out of this recession. Non-residential Here is a chart of the percentage change from the preceding quarter in non-residential structure investment.

Last quarter this number dropped by 44.2%. Also note this number continued to increase until the 4Q08. In other words, this area of the economy is just starting to contract. Considering the severity of last months drop and the continued tight credit conditions it's difficult to see this area of the economy picking up any time soon.

Software and equipment

Here is a chart of the percentage change from the preceding quarter in software and equipment investment:

Finally, capacity utilization is at its lowest level in over 40 years:

There is no reason to invest when you've not using what you already have.

OUR CONCLUSION

While the overall trend of economic numbers is moderating that does not mean we have the driving force to get us out of the hole we're in. People don't just start spending money; businesses don't just start investing. Someone has to make the first move. And that's where Keynsean policies come into play. A WPA would accomplish several tasks. It would lower the overall long-term unemployment rate for a period of time. In addition, it would also increase domestic investment in areas we need like infra-structure. Finally, it would provide the force to get us out of the hole. While the economic numbers are getting better we need that "something" to get the numbers moving higher. And no other area of the economy appears ready to provide that push.

Obama's program works mainly through private employers, and is not focused on manual labor. If as it appears, we are about to undergo a sustained period of over 10% unemployment, there is a real and pressing need to get even the relatively unskilled into even manual labor cleaning, building, rebuilding and repairing our infrastructure and parks. they should not just rely on the states and the private sector. Congress and the Obama Administration should not wait. Both for real, and important symbolic reasons connecting them to the FDR legacy, they should enact legislation now laying the foundation to re-establish the WPA and the CCC immediately and for the duration of double-

Weekly Indicators: more of the month of 'meh' edition

noreply@blogger.com (New Deal democrat) — Sat, 18 May 2013 12:16:00 +0000

- by New Deal democrat

April monthly data reported this past week included significant declines in industrial production and capacity utilization, declines in several regional manufacturing indexes, and a big decline in both monthly consumer and producer prices. due mainly to declining gas prices. Retail sales were positive. Michigan consumer sentiment, mainly as to present conditions, reached a multiyear high, while future expectations remained in the basement. Due mainly to soaring building permits, the April LEI rose 0.6. Housing starts had a big decline.

Let's start our look at the high frequency weekly indicators again with transport:

Transport

Railroad transport from the AAR

+0.6% carloads YoY

+0.5% carloads ex-coal

+3.9% intermodal units

+2.1% YoY total loads

Shipping transport

Harpex up 1 to 398

Baltic Dry Index down 43 to 841

Rail transport had a second decent week, after turning negative for three recent weeks. The Harpex index continues to improve slowly from its January 1 low of 352, and the Baltic Dry Index remains above its recent low.

Consumer spending

ICSC -2.0% w/w +1.2% YoY

Johnson Redbook +2.8% YoY

Gallup daily consumer spending 14 day average at $91 up $20 YoY

Gallup's YoY comparisons have generally been extremely positive since last December, and were so again this week. The ICSC varied between +1.5% and +4.5% YoY in 2012, so this was an extremely poor week. By contrast, the JR report this week also rebounded the upper part of its typical YoY range for the last year.

Employment metrics

Initial jobless claims

360,000 up 37,000

4 week average 339,750 down 3,000

American Staffing Association Index

93 unchanged w/w, down -0.1% YoY

Initial claims spiked, but remained well within their recent range of between 325,000 to 375,000. The ASA is still running slighty below 2007, but now essentially unchanged from last year as well. In other words, the comparison has been generally deteriorating on a YoY basis.

Housing metrics

Housing prices

YoY this week +6.8%

Housing prices bottomed at the end of November 2011 on Housing Tracker, and averaged an increase of +2.0% to +2.5% YoY during 2012. This weeks's YoY increase makes another new 6 year record.

Real estate loans, from the FRB H8 report:

down 18 or -0.5% w/w

up 7 or +0.2% YoY

+2.1% from its bottom

Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012. In the last several months the comparisons have softened significantly.

Mortgage applications from the Mortgage Bankers Association:

-4% w/w purchase applications

+10% YoY purchase applications

-8% w/w refinance applications

This year purchase applications have finally established a slightly rising trend, and this week's number was the best in 3 years. Refinancing applications were very high for most of last year with record low mortgage rates, but decreased slightly since then.

Interest rates and credit spreads

4.65% BAA corporate bonds up +0.13%

1.70% 10 year treasury bonds up +0.13%

2.82% credit spread between corporates and treasuries unchanged

Interest rates for corporate bonds have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012. Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012.

Money supply

M1

-2.3% w/w

+2.5% m/m

+11.9% YoY Real M1

unchanged w/w

+0.2% m/m

+5.8% YoY Real M2

Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since. This week's YoY reading increased sharply. Real M2 also made a YoY high of about 10.5% in January 2012. Its subsequent low was 4.5% in August 2012. It has increased slightly in the last couple of months.

Oil prices and usage

Oil $96.02 down -$0.02 w/w

Gas $3.60 up +$0.06 w/w

Usage 4 week average YoY -3.1%

The price of a gallon of gas, after declining sharply in March and April, has risen again in May. The 4 week average for gas usage remained negative after previously spending nine weeks in a row being positive YoY.

Bank lending rates

0.24 TED spread down -.01 w/w

0.2000 LIBOR unchanged w/w

The TED spread recently increased again, but is still near the low end of its 3 year range. LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices

down -0.75 to 124.83 w/w

+3.81 YoY

After months of gradual deterioration, last week there were no negatives in the weekly indicators. This week was a great big "meh."

Positives included house prices, and YoY purchase mortgage applications. Money supply was positive. Overnight bank rates are somnolent. Consumer spending as mesured by same store sales were mixed, with two strong positives and one very week reading. Rail traffic had a decently positive week in over a month.

Negatives included commodities, real estate loans, mortgage applications, and the Baltic Dry Index, but these were all minor. The only real negative was the spike in initial jobless claims, which may or may not portend anything.

All in all, Meh. Have a nice weekend.

Weekend Weimar, Beagle and Pit Bull

noreply@blogger.com (Hale Stewart) — Fri, 17 May 2013 19:39:00 +0000

For reasons unknown, blogger and I are having a debate about uploading pictures. NDD will be here over the weekend and I'll be back on Monday.

Until then ....

An updated look at the short leading indicators

noreply@blogger.com (New Deal democrat) — Fri, 17 May 2013 17:30:00 +0000

- by New Deal democrat

Last week I took an updated look at the long leading indicators identified by Prof. Geoffrey Moore, the founder of ECRI, 20 years ago. None of those 4 series, which in the past have generally topped out 12 months or more before the economy as a whole, showed any sign of rolling over. This morning the Conference Board's LEI also showed a continued positive trend, increasing 0.6 in April (thanks in large part to building permits, initial jobless claims, and the yield curve), and +1.7 over the last 6 months.

In addition to his long leading indicators, Prof. Moore also proposed a series of 11 short leading indicators. These are more variable but typically turn a few months before the economy as a whole. Moore identified them as:

S&P 500 stock price index
Average workweek in manufacturing
Layoff rate under 5 weeks
Initial claims for unemployment insurance
ISM manufacturing vendor performance
ISM manufacturing inventory change
Journal of Commerce change in commodity prices
Change in deflated nonfinancial debt
New orders for consumer goods and materials
Dun and Bradstreet change in business population
Contracts and orders for plant and equipment

If this list looks familiar, it is because most of its components made it into the 1990's remake of the LEI, which was subsequently turned over the the Conference Board for calculating and publishing, and over half of the components (or similar components) still are contained in the Conference Board's Index. Where they differ is primarily that the Conference Board's LEI is a mix of longer (e.g., building permits) and shorter (e.g., initial jobless claims) indicators, whereas Moore advocated monitoring the Long Leading Index, and then looking for confirmation of a turn in the short leading index.

So let's look at the components of Moore's Short Leading Indicators in order. First, here's the S&P 500:

No surprise here, this index has been making new highs.

Here's the average workweek in manufacturing:

Unlike the stock market, this has declined slightly in the last few months (although not as much as it typically does before the onset of a recession):

Here is the layoff rate for 0 to 5 weeks. This is a series from the monthly employment report:

This series made new yearly lows in the last couple of months, and has only been lower one time since the end of the great recession.

Iniital jobless claims have also been trending lower:

The minimum time between these establishing a new low and the onset of a recession has been 3 months, but is usually longer.

ISM vendor performance is one of the indexes in the monthly ISM manufacturing report:

This has been at a rate consistent with both expansions and recession, so is giving an ambiguous signal.

ISM inventory changes also come from the monthly ISM manufacturing report:

These are consistent with continued growth.

Next is the JoC-ECRI commodity price index:

This is greatly influenced by the price of oil.

The change in deflated nonfinancial debt:

This series has recently been increasing, not declining.

New orders for consumer durables and materials are part of the durable goods report:

These are holding up rather well.

I am told that Dun and Bradstreet's tabulation of business starts and bankruptices still does exist, but is proprietary and only available in a specialist publication. It is the only indicator to which I don't have access.

Finally, contracts and orders for plant and equipment are no longer kept in the same format, but a successor series is the new factory orders report, both in total and for core capital goods excluding aircraft, both of which are shown below:

Like other manufacturing series, these are flagging, but are not decisively showing either recession or expansion.

Generally speaking, there is a bifurcation in the short leading indicators. Those closely associated with manufacturing have either stalled or actually declined slightly over the last year, to the point where they are at least consistent with, if not exclusively associated with, the onset of recession. The other indicators are not consistent with recession, but continue to show an expanding economy.

In summary, with the exception of manufacturing, which is clearly hurting, both the long and short leading indicators are telling us to expect that the economy will continue to grow for the next few months and even into next year. As I indicated last week, however, this can be derailed by sudden external events. The increase in the payroll tax, Sequestration, and the next fight over the debt ceiling coming up in a few months all qualify as such shocks.

Why Aren't We Seeing Inflation?

noreply@blogger.com (Hale Stewart) — Fri, 17 May 2013 14:30:00 +0000

Chart from Tim Duy

I've been on a bit of an inflation kick this week, largely because there just isn't any in the economic system as a whole right now. We are seeing isolated areas of it in some countries (India and Brazil), but that's it. Overall, prices are very much contained.

Why? Let's look at a few underlying reasons.

1.) China's growth slowdown. I realize that saying China's growth is slowing down is a bit of a misnomer, as their GDP growth is moving from ~10% to ~7%. But for an economy that has been experiencing massive growth for a number of years (in the 10%+ range), this is a big move. The slower growth means the consumption of raw materials from China just won't be there at the same pace as before. Also remember that China wants to change its economic growth composition from one of exports to internal consumer demand, which also lowers growth for raw materials.

2.) The growth of the US oil market. I'll touch on this more next week, but the US' development of shale oil as a viable method of extracting oil is keeping a lid on energy prices. This is keeping one of the most volatile areas of costs very much contained.

3.) Slow growth. The EU's ongoing recession is really the big story here. The second largest economic region in the world (behind the US) is now in its sixth quarter of negative growth. That means lower demand, which means little upward price pressure. Also note that we're seeing slower growth in some larger Asian economies as well.

4.) Is the commodity bull market over? Commodities were the big investment category for the last 12 years as traders bet primarily on Chinese growth driving commodity demand. Is that story over? Who knows at this point. But, the question is certainly in play.

5.) Debt Deflation Dynamics: The US has had a slow recovery because we're in the middle of a debt-deflation economy. However, we aren't the only economy to be experiencing this phenomena. Canada and South Korea also have consumer debt issues as do Spanish banks. There's just enough of this dynamic across the globe to make it a contributing factor to slow growth, which leads to depressed demand, which in turn lowers inflation.

Market Analysis: South Korea

noreply@blogger.com (Hale Stewart) — Fri, 17 May 2013 11:25:00 +0000

The South Korean Economy has been growing since the end of the recession. However, they are starting to run into problems of a few fronts. As an export driven economy, they're losing business from the overall slow growth of the world economy. China's change to a more demand driven economy are also contributing. Living next door to the world's craziest dictator does not help. And finally there are a few structural issues that are contributing. Overall, there are few signs that the economy will halt all growth, but there are several areas leading to slowing growth.

Let's flesh out the South Korean economy in a bit more detail by focusing on GDP

The above graph of year over hear growth in various GDP components shows that growth is occurring, but at a slower rate. Manufacturing has slowed to a roughly 1.75% average over the last four quarters; private consumption has slipped to a 1.8% average over four quarters while investment and construction have been contracting. And while exports are still positive, they are also slowing down.

The slowdown was noted in the latest policy release from the South Korean Central Bank where they lowered rates 25 basis points:
In Korea, exports have maintained their trend of recovery, albeit at a modest pace, but the Committee appraises economic growth to have remained weak, with indicators related to domestic demand alternating between improvement and worsening. On the employment front, the increase in the number of persons employed has accelerated, centering around the 50-and-above age group. Going forward there is no change to the Committee’s forecast that the domestic economy will show a negative output gap for a considerable time, due mostly to the slow recovery of the global economy, to the influence of Japanese yen weakening, and to the geopolitical risk in Korea.

Like most economies, there is a projection for below trend growth caused in general by a slowing world economic situation. There is also the issue of Korean goods competing against Japanese goods in the world market. With Abenomics lowering the value of the yen, Korean goods are less competitive.

In addition to lowering interest rates, the Korean government has unveiled a supplementary budget that provides a measure of stimulus.

There is also this structural issue, which US readers should be able to assocaite with: a high level of household debt:

South Korean consumers are among the world’s most heavily indebted, with a household debt pile equivalent to about 160 per cent of annual incomes. The country’s financial authorities view this as one of South Korea’s main economic weaknesses, and as a major drag on consumer spending.
This factor will be contributing to slowing consumer spending growth for the foreseeable future. And households are not the only sector that is being weighed down by an increased debt burden:

In most places in the world, companies and households have been reducing their debt burden. But in South Korea, leverage still remains too high. The top 30 conglomerates have 1,000tn won ($893bn) in debt according to one recent study. In the second half of last year, four of the top 12 groups were unable to cover their interest payments from operating profit.

Now, let's turn the toe South Korean ETF:

On the weekly chart, we see a consolidation triangle from mid-2011 to mid-2012. Prices broke through resistance in the spring of 2012 and rallied a bit, but have been falling since the beginning of the year. The fall was caused by the China slowdown and the drop in the yen, which competes with South Korea in the export market. Also remember SK's northern neighbor is doing its best to destabilize the region.

On the daily chart, notice that there is little to no direction in the market at all. We see the July-February rally, but also note the trend break in the Spring. The current EMA picture is muddled; all are entangled close to the 200 day EMA with no one giving any meaningful directional signals. Momentum has been mostly weak. The CMF tells us there is some money flowing into the market.

The SK ETF is directionless right now. Traders are most likely waiting for a clearer set of fundamental economic signals before firmly committing to the market.

US Consumers Eating Out More

noreply@blogger.com (Hale Stewart) — Thu, 16 May 2013 18:30:00 +0000

From CNBC:

Sales at eating and drinking places in April reached $45.9 billion, a $200 million seasonally-adjusted increase from the previous high in December 2012, according to preliminary figures from the U.S. Census Bureau.

.....

"After totaling nearly $45.7 billion in December, eating and drinking place sales were dampened somewhat during the first three months of 2013, likely due in part to the impact of the payroll tax hike," the National Restaurant Association's Chief Economist Bruce Grindy wrote in his analysis of the numbers. Sales have steadily increased since dipping to $45.2 billion in February. Those numbers are expected to continue rising, according the restaurant group's own survey.

April consumer deflation boosts real wages and sales

noreply@blogger.com (New Deal democrat) — Thu, 16 May 2013 14:30:00 +0000

- by New Deal democrat

As I expected, the big, surprising decline in gas prices caused April consumer prices to decline -0.4%, one of the biggest declines recorded in the last 50 years outside of the 2008 recession. This brought YoY inflation down to +1.1%, likewise one of the lowest readings outside of the great recession, as shown in blue in the graph below, which also shows YoY producer prices for consumer goods in red [Note: FRED hasn't updated their CPI series yet, so the graphs below don't include April data. I'll update as soon as they do! UPDATE: up to date graphs added.]:

This also raised real, inflation adjusted wages by +0.5% in April, to their highest level in several years:

YoY growth in wages is the highest since early 2011 as well:

And it also means April real retail sales rose to a new post-recession high:

Because the decline in April prices was due to energy costs, I do not think this correlates with economic weakness, but rather shows how even a temporary loosening of the oil choke collar acts like an economic stimulus.

Market Analysis: Mexico

noreply@blogger.com (Hale Stewart) — Thu, 16 May 2013 11:48:00 +0000

From the FT:

Mexico’s lower house of Congress late Thursday gave overwhelming general approval to a telecoms bill that seeks to curb the power of some of the country’s most powerful businessmen.

The approval, by 414 votes to just 50 against, marks the first big step towards introducing more competition into telecoms and television as part of a wider push to make Latin America’s second-largest economy more competitive and grow faster.

In addition, they are also considering a banking reform bill:

Mexico’s centrist government announced it would send a financial reform bill to Congress that seeks to boost economic growth by making it easier and cheaper for companies to access credit.

Enrique Peña Nieto, the reform-minded president, has said that, together, the reforms would lift the annual growth rate in Mexico to as much as 6 per cent a year within five years from less than 4 per cent in 2012.

Flanked by opposition leaders, now a customary sight when announcing an important reform, Mr Peña Nieto said the reform proposal was “essential for the economy to grow more and to generate the jobs that our population needs”.

This has led to an upgrade in Mexican debt:

The upgrade of Mexico’s sovereign ratings reflects its strong macroeconomic fundamentals, including the absence of macro-financial imbalances, consistent adherence to its inflation targeting and flexible exchange rate regimes, as well as the greater than anticipated commitment of the new administration and Congress to pass structural reforms. Moreover, the resilience of the economy is supported by the stabilization of oil production and progress in addressing drug-related violence, albeit it remains high.

All of the above news items are very positive for the country going forward. Let's take a look at some of the macro numbers

The current account is in good shape.

The annual growth rate has been consistent for the duration of the latest recovery

The government budget deficit is contained.

Inflation is running a little hot, but not at a fatal level.

And the unemployment rate is very low.

Let's turn to the Mexican ETF:

Resistance was strong in the 60-65 price area -- the pre-recession highs. However, prices have recently moved through that level.

Essentially, we see a rally from mid-June2012 to the Spring of 2013. Since the beginning of the year, prices have been meandering sideways, trading between the 70 and 76 level. Overall momentum has been weak, with the MACD nearing a "0" reading. The CMF tells us there's a net selling situation, albeit at small levels. All three of the shorter EMAs are trading in a very tight range, again giving us no sense of upcoming direction.

Overall, the daily chart is one of consolidation since the beginning of the year. As with any chart, pay particular attention to the price/200 day EMA relationship. Right now, it tells us we're still in a bull market.

What US Inflation?

noreply@blogger.com (Hale Stewart) — Wed, 15 May 2013 18:30:00 +0000

From Bloomberg:

Wholesale prices in the U.S. dropped in April by the most in three years, reflecting a decrease in fuel costs that is helping underpin profits.

The producer-price index declined 0.7 percent, the biggest decrease since February 2010, after falling 0.6 percent in March, according to a Labor Department report released today in Washington. The median estimate in a Bloomberg survey of 73 economists projected the index would decline 0.6 percent. So-called core wholesale inflation, which excludes often-volatile food and energy prices, climbed 0.1 percent.

Slow growth in the U.S. and abroad is holding input-price gains in check for American factories. Absent a surge in inflation, policy makers at the Federal Reserve have the option of weighing whether the U.S. economic expansion needs more stimulus to pick up.

“We’ve seen a moderation in inflation across the board, given the weak demand environment everywhere,” Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, said before the report. “Inflation is just not problematic to central bankers, particularly those at the Fed.”

Guess What? The EU Is Still A Basket Case!

noreply@blogger.com (Hale Stewart) — Wed, 15 May 2013 14:30:00 +0000

From the latest GDP report:

GDP fell by 0.2% in the euro area1 (EA17) and by 0.1% in the EU271 during the first quarter of 2013, compared with the previous quarter, according to flash estimates2 published by Eurostat, the statistical office of the European Union. In the fourth quarter of 2012, growth rates were -0.6% and -0.5% respectively.

Compared with the same quarter of the previous year, seasonally adjusted GDP fell by 1.0% in the euro area and by 0.7% in the EU27 in the first quarter of 2013, after -0.9% and -0.6% respectively in the previous quarter.

Let's look at the data from the report:

The chart above shows the EU has been contracting for over five quarters. More importantly, let's look at the breadth of the contraction:

As the above chart shows, the breadth of the slowdown is wide: 8 countries have seen four straight quarters of year over year contraction. France and Germany have printed a negative Y/O/Y number in the latest quarters. Only three countries (the Baltic state of Latvia, Lithuania and Estonia) are showing any rate of meaningful Y/O/Y/ growth and they are still far below potential GDP rates with high unemployment.

This is the net end result of austerity.

Spain's Economy Is Still a Basket Case

noreply@blogger.com (Hale Stewart) — Wed, 15 May 2013 11:00:00 +0000

Consider the following two charts of Spanish GDP growth:

The economy has been experiencing negative quarter on quarter growth rates for 8 quarters or two years. Just as importantly, consider the year on year growth rates in the second chart that show a contraction for five quarters.

Let's look a little deeper into the GDP numbers.

With the exception, we see a decrease in the annual percentage changes of all major GDP components. And these are not small changes: machinery investment is dropping on average at a 6.65% rate, construction is dropping at an 11.45% rate, and overall PCEs are dropping 2.15% rate on average. The only good news is coming from exports which are increasing.

Let's place this information into a market context by looking at the Spanish ETF, EWP.

Notice three basic price trends. First we see a decline from April 2011 to July 2012. Prices consolidated about half way down between the 26 and 32 price level. Starting at the end of last summer, the ETF rallied as the ECB stated it would do "whatever it takes" to keep the euro together. However, we see that rally end in the spring of 2013 as negative news about the EU region started to increase.

On the daily chart, we see the trend break right at the end of January. However, the sell-off was quite disciplined; notice that prices moved lower in a downward sloping trend channel, to right below the 200 day EMA and the 61.8% Fib level from the late summer-early spring rally. Prices are now meandering with little sense of direction.