The Bonddad Blog

Bonddad Linkfest

2012-02-01T15:30:00.000-06:00

Where's the Crowding Out?

2012-02-01T13:30:00.000-06:00

If the issuance of treasury securities were creating a problem for private companies, the above charts (the top for junk bonds, the bottom of high grade corporate bonds) would be the exact opposite -- they'd both be heading south. However, we're seeing a rally in both sectors, telling as there is ample private demand for these securities. That probably has something to do with record low interest rates in the treasury market, which means investors will be looking for higher yielding assets.

1953: Investment

2012-02-01T10:00:00.000-06:00

The above chart shows the dual nature of 1953's investment picture. In the 1Q, overall investment added 1.2% to overall GDP growth, with equipment and software accounting for the lions share of the investment. However, even in the first quarter, we see that inventory investment subtracted a fair amount from growth. This trend became far more pronounced by the end of the year, when the inventory contraction accounted for a large drop in the overall contribution of investments to GDP growth.

As the Federal Reserve's report for the year explains, the drop in war spending is a big reason for the drop:

After midyear the pace of economic activity slackened appreciably as business buying for inventory dropped sharply and as fresh expansive forces were lacking. At this time reductions in defense spending came to be more widely anticipated. A truce in Korea was agreed to in July, and international tensions appeared to be easing somewhat. Business concerns and the armed services reduced new ordering and, with new orders below shipments, unfilled orders declined sharply from earlier high levels. Reflecting the effect of reduced output accompanying these developments, the buildup of business inventories, which had been at a seasonally adjusted annual rate of 6 billion dollars in the second quarter, was considerably retarded in the third quarter and turned into moderate liquidation in the fourth quarter. At that time, as the chart shows, stocks were being reduced by both manufacturers and distributors. The principal reductions were in stocks of durable goods, which earlier had advanced most.

Here is the accompanying chart:

I'll explain the recession that started mid-1953 in more detail later. However, as production dropped from the drop in war spending, we also see a drop in consumer purchases of heavier items (cars and furniture/household goods). Hence, the economy was hit by a double-whammy of declining consumer and government demand.

Morning Market

2012-02-01T06:25:00.001-06:00

Remember: what we're looking/waiting for in the equity markets is a move through support. So far, all, we've gotten in terms of price action is sideways movement, indicating the selling pressure isn't there -- at least, not yet.

The following price levels still hold:

IWM: 79
QQQ: 59.50 - 60.25 area
SPY: 131

Copper is still rallying. Prices have moved higher, the volume indicators show new money coming into the market and the MACD is still positive. However, the MACD is also near to giving us a sell signal, which will become more important if we see prices move through technical support -- especially the 200 day EMA.

The euro have broken through the upper trend line of its downward sloping channel, and is now hitting resistance at the early October lows. The shorter term EMAs (the 10 and 20) are both rising, momentum is positive and money is flowing into the market. A move through the 131 area would give us a new price target of 135.3 (the 200 day EMA).

In contrast to the euro, we have the dollar, which is now clearly in a downtrend. Prices are right at the 200 day EMA, but there are numerous, bearish indicators. The shorter EMAs are moving lower, the CMF and A/D are printing negatively, and momentum is down.

Bonddad Linkfest

2012-01-31T15:30:00.000-06:00

Feds Release the Senior Loan Survey

2012-01-31T13:55:00.000-06:00

From the FRB:

Overall, in the January survey, domestic banks reported that their lending standards had changed little and that they had experienced somewhat stronger loan demand, on net, over the past three months. Foreign respondents, which mainly lend to businesses, reported a net tightening of their lending standards while loan demand was about unchanged.²

Regarding business loans, domestic banks reported, on balance, little change in standards on commercial and industrial (C&I) loans but a continued easing of pricing terms on such loans during the fourth quarter. Domestic banks reportedly experienced stronger demand for C&I loans from firms of all sizes on net. The net fraction of banks reporting increased demand from small firms rose to its highest level since 2005.³ Foreign respondents reported having tightened both standards and terms on C&I loans, on net, and they indicated that loan demand had been about unchanged over the past three months. Domestic banks continued to report little change in their standards for CRE loans, but modest net fractions had eased some loan terms over the past year. Moderate net fractions of domestic banks reported that demand for CRE loans had strengthened in the fourth quarter. Modest net fractions of foreign respondents reported having tightened standards for CRE loans. Foreign respondents also reported, on balance, little change in demand for such loans.

On the household side, lending standards and demand for loans to purchase residential real estate were reportedly little changed over the fourth quarter on net. Standards on home equity lines of credit (HELOCs) were about unchanged, while demand for such loans weakened on balance. Moderate net fractions of banks reported that they had eased standards on all types of consumer loans over the past three months, and some banks also eased terms on auto loans. Demand for credit card and auto loans reportedly had increased somewhat, while demand for other types of consumer loans was about unchanged.

1953 PCEs

2012-01-31T10:00:00.000-06:00

1953 is a year with two sub-parts. The first two quarters we see decent growth. In the first quarter, the growth is pretty even, spread among durable, non-durable and service purchases. In the second quarter, we see a slight drop in durable good purchases. In the third quarter, non-durable goods purchases subtracted sharply from growth, while durable goods and lack of service purchases were the reason for the drop in the fourth quarter.

The above chart is fascinating, as it puts PCEs in perspective for the early 1950s expansion. Overall durable goods purchases remained fairly constant, coming in between $25 and $30 billion. However, service purchases continued to increase, moving up constantly for the entire expansion. Non-durables topped-off in 1953 and moved slightly lower in 3Q53 and 4Q53.

The above chart chart places the preceding observation into more detail. This expansion was about autos and homes, as evidenced by the purchases of autos and furniture. Also note how housing services continued to rise. Finally, food purchases saw strong gains, probably because we were still dealing with a culture that was getting away from war rationing.

The above chart of various consumer goods outputs really highlights the extent of the growth in consumer spending. In 1950, we made 3 million TVs. That number nearly doubled by 1953. Air conditioner output increased by a factor of 10! Clothes dryer output doubled.

This was the consumer on steroids.

Morning Market

2012-01-31T05:00:00.001-06:00

Morning Market

2012-01-31T05:00:00.000-06:00

The IWMs (Russell 2000) fell below a longer-term technical uptrend, but found support at a high established early on the 23rd right below the 79 handle.

The QQQs found support at a price from the 25th. Also note the strong level of support from the 19th. Both of these levels are centered around the 59 handle.

The SPYs opened the day lower, but rallied into the close. The 131 level is very important. However, prices are already below an upward sloping trend line.

What I find very interesting -- and telling -- is that both the QQQs and SPYs rallied today, with the QQQs ending the day slightly positive. That's tells us there is still a strong bid in the market.

The above equity charts show that, despite the desire to drop, the indexes are holding onto support. The following levels are approximate technically important levels to watch for:

IWM: 79
QQQ: 59.50
SPY: 131

The IEFs rallied to the top end of the their recent trading range, right around the 106 level. Notice how tight both the EMAs and MACD is; there is literally no momentum in either direction.

Like the IEFs, the TLTs are in a fairly tight range between 116 and 122. The MACD has a slightly downward bias, but it's not strong enough to lead to a short-selling opportunity just yet.

Right now, the treasury market is catching a bid from the safety trade. However, with yields this at very low levels, it's difficult to see much of a rally from these levels. On the equity side, we see indexes re holding their own -- at least for now.

1952: Compilation

2012-01-30T16:14:00.000-06:00

The following posts are all part of the Bonddad Economic History Project's 1952 series.

GDP
PCEs
Investment
Exports and imports
Employment and income
Government receipts
Inflation and Fed Policy

Bonddad Linkfest

2012-01-30T15:30:00.000-06:00

We're All Keynesians Now

2012-01-30T13:30:00.000-06:00

The New Yorker Magazine has a great piece on economic policy in the early years of the administration. It is written by Ryan Lizza and is one terrific piece of journalism. It is very detailed and nuanced -- which of course means that very few will actually read it.

Part of the article is based on a memo from Larry Summers to the President regarding the fiscal stimulus. Here is a link (PDF) to the entire article -- which I also recommend you read as it's a fascinating analysis of a very difficult time.

At this point, it's important to note a big difference in the economic world: there are those who believe that Keynes was correct in his economic analysis, and that Keynes basic ideas have been repeatedly born out by history and data. Then there is the Chicago school of economics who live in a fantasy world where economic models are populated by "rational individuals" and prices aren't sticky (seen a chart of housing prices recently?) Need I say more? Simply put, history and data clearly show that targeted government spending boosts economic growth. Hence, note the wide swath of people and organizations who supported the idea of stimulus:

• Robert Reich believes it should be $1.2 trillion over two years, but also indicated it could be larger.
• Joe Stiglitz believes it should be $1 trillion over two years.
• Paul Krugman: at least $600 billion in one year
• Jamie Galbraith: $900 billion in one year
• Institute for America's future (signed by Dean Baker, Andy Stern, Leo Gerard, John
Sweeney, and others): at least $900 billion

Republican Economists

Marty Feldstein was an early proponent of a spending-only package and currently
believes it should be $400 billion in the first year.
• Larry Lindsey, a former Federal Reserve Governor and NEC Director, estimates that
$800 billion to $1 trillion is desirable.
Ken Rogoff (widely respected macroeconomist, former chief economist of the IMF,
former McCain adviser): $1 trillion over two years
• Mark Zandi (widely quoted economist, fom1er McCain adviser): at least $600 billion in one year

Others:

• Senior Federal Reserve officials appear to be of the view that a plan that well exceeds
$600 billion would be desirable.
• Adam Posen (Deputy Director of the Peterson Institute): $500 to $700 billion in one year
• Goldman Sachs: $600 billion in one year
• Open Letter signed by 387 economists including Nobel Laureates Robert Solow, George
Akerlof, and Joe Stiglitz on November 19th [note that most economists, including Stiglitz,
support higher stimulus numbers today than they did a month ago]: $300 to $400 billion
per year

Put another way, it's not if we should do this, but how much we should spend.

I should add, I would fully expect some Republicans to now argue that none of the Republicans quoted are in fact "real Republicans" but merely RINOs.

Again, this is not rocket science. In fact, it's simple addition.

A Closer Look At Manufacturing.

2012-01-30T10:00:00.000-06:00

As we close out January, let's take a look at the overall state of US manufacturing.

New York appears to be rebounding somewhat:

The Empire State Manufacturing Survey indicates that manufacturing activity expanded in New York State in January. The generalbusiness conditions index climbed five points to 13.5. The new orders index rose eight points to 13.7 and the shipments index inched up to 21.7. The prices paid index was positive and slightly higher than it was last month while the prices received index jumped twenty points to 23.1, indicating a significant pickup in selling prices. Employment indexes were positive and higher, pointing to higher employment levels and a longer average workweek. Future indexes conveyed a high degree of optimism about the six-month outlook, with the future general business conditions index rising nine points to 54.9, its highest level since January 2011.

While these are not readings on the level of what we saw last year, they are an improvement from the 4Q11 when indicators went negative for a few months.

Philly appears to be in more or less the same boat:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged up slightly from a revised reading of 6.8 in December to 7.3 in January.* The demand for manufactured goods showed continued growth this month: The new orders index remained positive for the fourth consecutive month but declined from a revised reading of 10.7 in December to 6.9 this month. The shipments index also remained positive but fell 3 points. The indexes for both delivery times and unfilled orders recorded slightly negative readings this month.

Richmond reported similar numbers:

In January, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — increased nine points to 12 from December's reading of 3. Among the index's components, shipments gained fourteen points to 17 and new orders doubled, picking up seven points to finish at 14. The jobs index picked up eight points to 4.

Most other indicators also suggested stronger activity. The capacity utilization indicator advanced eight points to finish at 8, while the index for backlogs of orders gave up five points to end at −4. Additionally, the delivery times index was almost unchanged at 3, while our gauges for inventories were mixed in January. The finished goods inventories index lost fourteen points to 9, while the raw materials inventory index gained five points to end at 18.

Texas manufacturing, however, was weaker:

Texas factory activity weakened slightly in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, posted a second negative reading but moved up from –5.1 to –1.3. This suggests a slowing of the pace of decline.

Other measures of current manufacturing conditions indicated flat activity in December. The new orders index suggested stagnant demand, registering a near-zero reading after dipping into negative territory last month. The shipments index was little changed from its November reading and continued to suggest flat shipment volumes. The capacity utilization index was also near zero although it rebounded from last month, rising from –10.2 to 0.7.

Kansas, however, was printing just over 0:

The month-over-month composite index was 7 in January, up from revised totals of -2 in December and 4 in November (Tables 1 & 2, Chart). The composite index is an average of the production, new orders, employment, supplier delivery time, and raw materials inventory indexess Manufacturing activity increased in both durable and nondurable goods-producing plants, with
particular strength in chemical, fabricated metal, and aircraft production. Most other month-over-month indexes also improved in January. The production and shipments indexes jumped to their highest levels since June, and the new orders index climbed from -2 to 8. The order backlog index was positive for the first time since last summer, and the employment index rebounded from -5 to 9. The new orders for exports index increased and the raw materials inventory index moved higher, while the finished goods inventory index was unchanged.

The Chicago Fed's Midwest Index also increased in it's latest report:

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.7% in December, to a seasonally adjusted level of 87.4 (2007 = 100). Revised data show the index was unchanged in November. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.9% in December. Regional output in December rose 8.4% from a year earlier, and national output increased 4.0%.

At the national level, industrial production is still going fairly well:

Industrial production increased 0.4 percent in December after having fallen 0.3 percent in November. For the fourth quarter as a whole, industrial production rose at an annual rate of 3.1 percent, its 10th consecutive quarterly gain. In the manufacturing sector, output advanced 0.9 percent in December with similarly sized gains for both durables and nondurables. The output of utilities fell 2.7 percent, as unseasonably warm weather reduced the demand for heating; the output of mines moved up 0.3 percent. At 95.3 percent of its 2007 average, total industrial production in December was 2.9 percent above its level of a year earlier. The capacity utilization rate for total industry rose to 78.1 percent, a rate 2.3 percentage points below its long-run (1972--2010) average.

Here's a chart of IP's overall progress:

While still below recession levels, we're still moving consistently higher.

And the latest ISM was good:

"The PMI registered 53.9 percent, an increase of 1.2 percentage points from November's reading of 52.7 percent, indicating expansion in the manufacturing sector for the 29th consecutive month. The New Orders Index increased 0.9 percentage point from November to 57.6 percent, reflecting the third consecutive month of growth after three months of contraction. Prices of raw materials continued to decrease for the third consecutive month, with the Prices Index registering 47.5 percent, which is 2.5 percentage points higher than the November reading of 45 percent. Manufacturing is finishing out the year on a positive note, with new orders, production and employment all growing in December at faster rates than in November, and with an optimistic view toward the beginning of 2012 as reflected by the panel in this month's survey."

The ISM index moved lower at the end of last year but stayed about 50. Now it's moving higher again, although the move so far is preliminary.

Overall, manufacturing is again moving in the right direction, which jibes with the latest Beige Book's manufacturing report:

Manufacturing activity expanded in most Districts, generally continuing its steady overall expansion or, in the case of Atlanta, reversing a slowdown in prior periods. For the sector as a whole, further growth or improved conditions were reported by almost all Districts, except for Cleveland, Richmond, and Dallas, which reported that activity was largely stable or mixed, and Kansas City, which noted a slight decline. The strongest reports came from subsectors such as heavy equipment manufacturing and steel, for which demand has been boosted by robust growth in the energy, agricultural, and auto manufacturing sectors. Reports from Cleveland, Richmond, Atlanta, Chicago, and St. Louis confirmed vibrant activity for auto manufacturers, primarily for domestic makes. By contrast, demand remained somewhat weak for firms in housing-related subsectors, such as a door manufacturer in the Richmond District, furniture manufacturers there and in the St. Louis and San Francisco Districts, and makers of lumber and wood products in the San Francisco District. Demand for computers and related electronic components rose further, according to Kansas City, Dallas, and San Francisco. However, the pace of growth has slowed significantly from earlier in 2011, and Boston noted declining sales of semiconductors, mainly due to weaker demand from Asia. According to Dallas and San Francisco, aircraft makers saw further demand increases. Those Districts also noted weak domestic demand for refined petroleum products that was largely or completely offset by robust foreign demand. Demand grew smartly for food producers in the Philadelphia and Dallas Districts, but in the Kansas City District food processing was one of the weakest performers within the manufacturing sector. Export sales of assorted manufactured products generally performed well according to Atlanta and Chicago, although slower economic growth in China and Europe held back sales for some manufacturers.

Cleveland reported that capacity utilization remained below normal in most subsectors, with the notable exception of steel producers, who were operating at or near normal levels. Similarly, Chicago noted that some auto suppliers appear to be approaching capacity constraints, which may limit further production increases in the near term. Atlanta reported that recent flooding in Thailand was likely to exert modest restraint on auto production. Ongoing capital investments and increases in capacity were reported for various manufacturing concerns in the St. Louis and Minneapolis Districts and for an auto producer in the Richmond District.

UPDATE: The Dallas Fed printed their number today, and it was beter:

Texas factory activity increased in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 0.2 to 5.8, suggesting growth resumed this month.

Other measures of current manufacturing conditions also indicated growth in January. The new orders index jumped to 9.5, its highest reading in six months, after two months in negative territory. Similarly, the shipments index turned positive after two negative readings, rising from –1.1 to 6.1. Capacity utilization increased further in January; the index moved up from 4 to 8.5. Twenty-eight percent of manufacturers noted higher capacity utilization, the highest share in nine months.

Morning Market: Is The Rally Over?

2012-01-30T06:21:00.001-06:00

The 60 minute chart shows that prices moved sideways last week, using 131 as support. However, the overall uptrend is still intact

The 30 minute chart shows last week's price action in more detail. Monday and Tuesday were technically meaningless. On Wednesday, we see the rally inspired by the Fed's minutes, but that was completely erased by the end of trading on Thursday. Friday we see a saucer formation that never really materialized.

The weekly chart tells the real story: after consolidating in a symmetrical triangle pattern at the end of last years, prices broke higher. However, last week prices printed a spinning top candle pattern, which is considered a sign of a halt to the rally.

The treasury market, on the other hand, had a good week, as prices caught a bid. Notice how the entire curve rallied last week, bouncing off of technical support. By publicly stating that they were not going to raise rates until 2014, the Fed told the market the current crop of treasury bonds was as good as it was going to get from a yield perspective for quite sometime, thereby making current issues that must more valuable.

So we have a sideways equity market and a rallying treasury market. That means we're seeing some stalling in the overall risk-on move of the preceding weeks. Some of this is technical; market don't rally forever. In addition, on the shorter charts, we didn't see a big move lower; merely a consolidation sideways. However, we do want too keep our eye on support levels going forward.

Industrial metals are still in a strong rally. Prices have moved through important resistance levels, and the now the shorter EMAs are moving lower. We also see the MACD, A/D and CMF point to continued rallying. Some of this rally is caused by a weakened dollar, but that doesn't account for the entire rally.

The dollar has been dropping for the last few weeks. After consolidating sideways in mid-January, prices have been consistently moving lower. Part of this is the result of a strengthened euro, which was in turn caused by the EU appearing to be closer to solving their problems. The more recent move lower, however, was caused by the Fed keeping rates low for a few years.

The dollar's daily chart is now very bearish; the momentum and volume indicators are all moving lower and prices have moved through support.

What's important here is the fundamental reason for the sell-off. First, we have money moving back into the euro at the expense of the dollar. In addition, the Fed has stated they will be very accommodating for several years. The first scenario is positive for the US economy, assuming the momentum continues. The second is also positive, as lower rates should increase borrowing.

Overall, it appears the markers are pausing -- at least so far. A big reason for my thought there is the underlying market situation: last week, the following was the order of top five best performing sectors: basic materials, consumer discretionary, industrials, technology and utilities. Four of those five are riskier market sectors, and utilities probably rose because of an expectation of long-term low interest rates which makes high yielding utility stocks attractive. In addition I also think the rally in industrial metals is telling.

But, like all pauses, it's important to keep an eye open to all possibilities.

Weekly Indicators: continuing positive trends edition

2012-01-29T07:38:00.005-06:00

- by New Deal democrat

First, as to the monthly reports, home sales continued poor, but consumer confidence jumped back further, completely regaining its pre-debt debacle levels. In the rear view mirror department, 4Q 2011 GDP was +2.8% although some internal components were weaker. Those few sources who thought a new recession might begin by the end of 2011 were almost certainly wrong.

Turning now to the high frequency weekly indicators:

Weekly employment-related data was mixed.

The BLS reported that Initial jobless claims rose by 25,000 to 377,000, which is still an excellent in comparison with almost any report in the last 4 years except for the week preceding. This is the last report affected significantly by seasonality. The four week average declined by 1500 to 377,500. This is close to the lowest level since mid-2008.

The American Staffing Association Index rose by 3 to 87 last week, the best January reading since 2008, and significantly ahead of last year.

The Daily Treasury Statement showed that withholding for the first 17 days of January 2012 was $138.6 B vs. $132.7 B a year ago. Adjusting +0.27% due to the 2011 tax compromise, for the last 20 reporting days, $162.0 B was collected vs. $156.9 B a year ago, a gain of +3.3%.

Housing data was mixed:

The Mortgage Bankers' Association reported that seasonally adjusted purchase mortgage applications decreased 6.5% YoY and was also down -9.7% from one week ago. The overall trend remains flat since June 2010. Refinancing fell -5.2% in the last week.

For the seventh week in a row, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were positive, up +3.7% YoY. This is the best reading in close to 5 years. The number of metropolitan areas with YoY positive sking prices increased to 31. The number with YoY declines of greater than 5% decreased to 7.

Sales and transportation continued positive:

Retail same store sales were relaitvely weak. The ICSC reported that same store sales for the week ending January 21 increased 2.8% YoY, but were down -1.4% week over week. Shoppertrak, did not report, however, Johnson Redbook reported a weak 2.5% YoY gain, the weakest in 6 months.

The American Association of Railroads reported an increase in weekly rail traffic for the week ending January 21, 2012, with U.S. railroads originating 287,734 carloads, up 1.6 percent compared with the same week last year. Intermodal volume for the week totaled 219,706 trailers and containers, up 3 percent compared with the same week last year.

Money supply and Credit spreads were also positive:

M1 increased +0.4% last week, and +2.3% month over month. It is also up 18.9% YoY, so Real M1 is up 15.9%. This is about 5% off peak YoY gain at the end of last summer. M2 was up +0.2% week over week, and up +1.4% month over month, and up 10.1% YoY, so Real M2 was up 7.1%. This is about 3% less than its YoY reading at the crest of the tsunami.

Weekly BAA commercial bond rates declined .01% to 5.20%. Yields on 10 year treasury bonds rose .01% 1.96%. Falling spreads on lower rates is the best signal of improvement, although it is only for two weeks. This spread had a 52 week maximum difference in October and has been tightening slightly in the last few weeks.

Gasoline usage in particular continues to be much lower YoY:

Oil rose slightly to close at $99.56 a barrel on Thursday. This is about at the recession-trigger level calculated by analyst Steve Kopits (adjusted for general inflation). Gas at the pump was flat at $3.39. Measured this way, we are just at or slightly above the 2008 recession trigger level. Gasoline usage, at 8098 M gallons vs. 8632 M a year ago, was off -6.2%. The 4 week moving average is off -6.4%. Since last March the YoY comparisons have been almost uniformly negative, and substantially so since July. It's at least possible some of this reflects the unusually warm winter most of the country has been experiencing.

Now let's turn to new high frequency indicators designed to track the global slowdown/recession:

The TED spread is at 0.500 down from 0.520 week over week. This index is slightly above its 2010 peak, but has declined from its 3 year peak of 4 weeks ago. The one month LIBOR is at 0.270, down .007 from one week ago, below its 12 month peak of three weeks ago, and also remains below its 2010 peak.

The Baltic Dry Index at 726 continued to plummet -136 as it has for the last 4 weeks and further continues to decline from its October 52 week high of 2173. The Harpex Shipping Index was declining for a full year, but at 394 is above its 52 week low of 389 three weeks ago. It declined -2 last week. Please note that these two indexes are influenced by supply as well as demand, and have generally been in a secular decline due to oversupply of ships for over half a decade. The Harpex index concentrates on container ships, and has been leading at recent tops and lagging at troughs. The BDI concentrates on bulk shipments such as coal and grain, and has been more lagging at the top but has turned up first at the 2009 trough.

Finally, the unweighted Shadow Weekly Leading Index was slightly negative this week. Next day, so was the ECRI WLI. Once again I not surprised.

Global worries have continued to abate. In the US virtually all the news is positive, but some weakly so, and mortgage applications contnue to bounce up and down along their two year bottom. There remains no sign of any present or imminent downturn in the economy right now.

Have a good weekend.

Really -- Austerity is a Really Stupid Idea, Completely Divorced From Data and Reality

2012-01-27T08:26:00.000-06:00

Today, the BEA released the initial estimate of 4Q GDP. Above is a chart of the percentage change in 4Q11 GDP and the elements that contributed or subtracted from GDP growth. Guess what? Austerity subtracted from growth. This occurred because of contractions at the federal (which subtracted .62 from the calculation) and state level (which subtracted .32 from the calculation).

I would be remiss if I didn't add that this is not what Socialism looks like, either.

A Special Note From Bonddad on the Absolute Stupidity Behind the Expansionary Austerity Movement

2012-01-27T06:38:00.003-06:00

We've written quite a bit here about how mind-numbingly stupid the idea of austerity is. My reasoning is simple: government spending is a component of the GDP equation (which is C+I+(X-M)+G). This equation has been around a long time, and is a basic component of macro-econoimcs. Under the basic concepts of math, if you lower a value in an equation that involves addition, you wind up with a lower total number on the other side of the equals sign.

In addition, we have a ton of data from the existing attempts to use this idea that it really doesn't work. Here's a post I wrote a little bit ago titled, "this is not what socialism looks like." In the US, government spending at the state level has been contracting for 6 of the last 8 quarters. Guess what? It's subtracting from overall US growth. We're not the only country to experience this first hand: we've also see it happen in the Baltic States and Ireland. And of course, China spent massively to avoid the effects of the recession and their economy has grown at a very strong pace, proving the point from the opposite side of the argument. Then of course, there was the US experience during the Great Depression when we saw growth rates of around 10% for three years straight and then 5% the following year thanks to government spending. And, as I've noted in my history projects, Korean War spending shifted the US economy into overdrive in the early 1950s (see here, here and here).

Now we have more data that shows how stupid austerity is, this time coming from England. First, this outcome was projected to happen, as reported by Bloomberg on July 13, 2010:

U.K. Prime Minister David Cameron’splanned budget cuts increases the chance the economy will slipback into recession, said Geoffrey Dicks, who heads economicforecasting at Britain’s new fiscal watchdog.

Responding to questions during a parliamentary hearing inLondon today, Dicks said measures proposed in the June 22 budgetled his office to shave 0.5 percentage points from its growthforecast in the “near term.” His Office for BudgetResponsibility predicts an expansion of 1.2 percent in 2010.

“There are some budget measures which will have reduceddemand,” Dicks told the Treasury Committee, which scrutinizeseconomic policy. “The near-term outlook for GDP is not as goodas it was before the budget. I still don’t think that will meana double dip, but logically the chances of that happening haveincreased.”

Someone in the British government knows their macro and someone doesn't. Guess who? From Professor Brad DeLong:

Yep. This many months after the start of the Great Depression, the British economy was rapidly converging back to its pre-depression level of production under Chancellor of the Exchequer Neville Chamberlain's policy of using stimulative policies to restore the price level to its pre-Great Depression trajectory.

By contrast, the Cameron-Osborne policies of expansion-through-austerity have produced a flatline for real GDP, and the odds are high that British real GDP is headed down again.

In less than a year, if current forecasts come true, the Cameron-Osborne Depression will not be the worst depression in Britain since the Great Depression, but the worst depression in Britain… probably ever.

That is quite an accomplishment.

Reality continues to intrude rudely and sharply into the proposals of the austerity crowd. Yet, despite the overwhelming amount of data that disproves their central thesis, they continue to cry for austerity. Obviously, facts, data and logic are meaningless now, as, despite the fact that that we have an overwhelming amount of data, we continue to hear from people who argue on the other side of them. We are clearly through the looking glass in regards our public discourse.

Bonddad Linkfest

2012-01-26T15:30:00.000-06:00

1953: GDP and Contributions to Growth

2012-01-26T13:30:00.000-06:00

According to the NBER, the early 1950s expansion lasted from October 1949 to July 1953. We can clearly see the contraction in the last two quarters in this chart:

We see the economy growing strongly in the first quarter, hitting a 7.7% growth rate. Consumers are adding a fair amount to the overall growth, but the real contributor is government spending, which accounts for 43% of overall growth. We see the same type of scenario play out in the second quarter, but government spending now accounts for 70% of all economic growth. The third fourth quarter have contractions, where the big contributor to the contraction is the drop in investment, with consumer spending and government spending also contributing to the slowdown.

Also note the severity of the contraction, especially in the fourth quarter, where we see the economy contract by 6.2%. That's a very large drop, and one we're not use to seeing.

Beta testing the Shadow Weekly Leading Index (week 3)

2012-01-26T11:45:00.002-06:00

- by New Deal democrat

As readers know, I am trying to reverse engineer the ECRI Weekly Leading Index.

Research has revealed that the WLI (per Lakshman Achuthan) has 7 components. We know that two are initial jobless claims and the JoC-ECRI commodity index. Six of the seven are public record.

Since the possible early monthly reports were reported two weeks ago, they wouldn't count in any event. This week we can begin to find out if the components are weighted (almost certainly they are) and their relative weights, since several components had significant moves in opposite directions,

Here are the presumed components of the WLI, with several possible alternative measures:

JoC ECRI 122.01 123.87 +1.5%

FRB H8 real estate loans flat
Alternatively, MBA PMA -9.7%

sp 500 1289.09 to 1315.38 +2.0%

wbaa bonds* 5.21 to 5.20 0.0%
Alternately, DJ Bond Avg 115.05 114.90 -0.1%

Credit spreads* 3.26 to 3.24 -0.1%
Altrnatively, real m2 9733.8 to 9756.1 0%

Initial jobless claims* 352k to 377k +7.1%

[*Note: these are inverse relationships, so the higher the number, the lower the growth score]

The unweighted average change is -2.2 if purchase mortgage applications are used, and -0.6 if the alternative real estate loans is the metric. The predicted week over week change is therefore predicted to be negative in either event. A positive result would suggest that commodity prices are weighted more heavily compared to initial claims and either real estate metric.

We'll see tomorrow.

A Closer Look At the Four Largest SPY Sectors

2012-01-26T10:00:00.000-06:00

On Monday, I noted that the underlying technicals of the market had changed; more aggressive, "growth areas" of the market were rising. Below are daily charts of (in order technology, financials, energy and health care ETFs). Combined, these four sectors comprise 57% of the S and P 500.

Technology (which accounts for 19.39% of the SPYs) is in a strong uptrend. After consolidating in a symmetrical triangle, prices have been moving higher. All the EMAs are rising and the shorter are above the longer. The MACD is positive and the A/D and CMF are all rising. Notice that over the last four days, we've also seen a bump in volume.

Financials (which account for 14% of the market) are also rising. However, add that they have (finally) crossed their 200 day EMA to the picture.

Energy is a bit behind the curve, as it it still constrained by the highs of late October. However, prices are bumping up along that line. Also note the positive underlying techncials -- rising EMAs and volume indicators. The MACD is not negative, but also not positive, which is obviously a slight negative.

Health care (which accounts for 11.64% of the average) shares all the above bullish points, save one: the MACD is about (or already has) given a sell-signal. Yesterdays prices action, if it continues, could change that development, but we need several days of strong price action for that trend to develop.

Overall, the largest sectors are, well, looking pretty good. If energy breaks out (which is highly likely assuming the volatile oil market environment) it would replace the possible downward pressure exerted by a correcting health care sector.

Morning Market

2012-01-26T06:32:00.003-06:00

Yesterday's market was really a tale of two markets, with the prices moving sideways under a little after lunch, and then rallying strongly for the remainder of the day. The main cause was the Fed releasing it's statement that interest rates should stay very low for a few years.

The daily chart shows that prices are still rallying and are in an uptrend. Also note that the MACD have given a further buy signal.

Yesterday, we say a strong pop in gold on extremely high volume. Also note the bullish underlying technicals -- the MACD is rising, the shorter EMAs are rising, and the A/D and CMF show money flowing into the market. The big reason for the move is the perception among investors that the Fed's policy will be long-term inflationary.

On the weekly chart, gold prices have broken through a longer-term resistance line.

Industrial metals are in a strong rally now. They've moved through all the EMAs and the shorter EMAs are rising. We're seeing money flow into the market and the MACD is rising. This is good, because

The dollar dropped sharply yesterday, and looks to be moving lower. The reason for the sharpness of the drop was, again, the Fed's move. This was a double, negative whammy for two reasons. First, it implies a possible future inflationary environment, and second, it means interest rates will stay low for the foreseeable future. Both outcomes are dollar negative. The first scenario devalues the security and the second means that traders will not have a high interest rate when they purchase physical currency and park it in the US.

1952: Inflation and Fed Policy

2012-01-25T16:00:00.000-06:00

This posting is part of the Bonddad Economic History Project

CPI was quite moderate. The YOY percentage change started at 4% and slowly decreased throughout the year to a little under 1%. Now, this type of deceleration can also be a sign of a potential recession on the horizon, which did start in the 3Q of 1953.

The YOY percentage change in PPI was negative for the entire year, indicating the input prices were dropping.

The above charts shows the absolute PPI level for the year, which shows the drop more completely.

As a result of the stable inflation picture, we see that the Fed did not raise rates in 1952. We also see that interest rates were fairly steady, with the exception of the continued upward movement of Treasury Bills, which jumped higher at the end of the year. The Fed explained the increased as an increased demand for loans at the end of the year.

The above table shows the increase in various types of loans over the year. Note the slow pace at the beginning of the year, while we see a big bump in the 4th quarter. We see two reasons for the increase. Business loans increased, with almost all of the increase coming in the fourth quarter. In addition, "other loans to individuals" increased by $2.2 billion , but this increase came from a strong growth in the second, third and fourth quarters (for more on the increase in consumer credit, see the 1952; PCE post).

The above tables shows that corporate security issues rose strongly in 1952, and competed for commercially available capital. The increase in 4th quarter lending was probably partially caused by an inability to complete an offering prior the end of the year. Again, note the large increase in consumer credit.

In short, what we see here is a fairly stable financial system.

Emerging Market/BRIC Currencies Breaking Out

2012-01-25T13:00:00.000-06:00

Granted, they're breaking out from low levels, but they are breaking out.

Here's the Real Problem At the Federal Level

2012-01-25T10:00:00.000-06:00

I've shows this graphic a few times in various forms, but it really deserves to be repeated. At the federal level, we have two issues: low tax receipts and high spending. As I've pointed out a few times, the big issue in the spending room is health care costs in the federal budget. However, at some point, taxes are going to have to go up as well.

The above graph is from Econbrowser.

Morning Market

2012-01-25T05:00:00.000-06:00

All three, 60 minute charts of the major equity averages show that prices are still in an uptrend.

The dollar is a different story. The top chart (a daily chart) show that prices have broken their uptrend and found support at lows established in early January. In addition, the shorter EMAs are moving lower and the 50 day EMA is moving sideways. The MACD has given a sell signal and the A/D and CMF show money is leaving the market.

On the lower, weekly chart, we see that prices have broken their upward trend line. While the MACD is still positive, it is approaching a sell signal. However, the trend break is the real story here.

This is a chink in the bullish market argument, as a rising dollar would be a sign of improved investor sentiment toward the US economy as a place to invest. Some of this decline is due to the euro's recent risk (it has broken it's downward sloping channel patter). However, I'm guessing there is also some second guessing occurring regarding the US economy's overall situation.

After breaking slight upward sloping trend lines, the IEFs an TLTs are hitting support established over the last few months. Prices need to make moves through these support levels to give the bulls added upside momentum.

Right now, it appears we're seeing a bit of upward hesitancy. This is to be expected, given that last week we saw prices move through important technical levels. However, a pause can quickly turn into a reversal with the right fundamental change, so we definitely need to keep our eyes open.

Bonddad Linkfest

2012-01-24T15:30:00.000-06:00

1952: Government Receipts and Expenditures

2012-01-24T13:30:00.000-06:00

I'm including information on the 1950 and 1951 federal budget situation in this post, and will continue to look at federal expenditures and receipts from this point going forward as part of the Bonddad Economic History Project.

This is interesting. First, here is the chart of federal receipts and expenditures from the BEA:

The red lines are receipts and the blue lines are expenditures. Notice that, according to BEA data, the government ran a surplus from 1Q50 to 4Q52. However, according to the then prevailing information, the government ran a deficit:

So -- why the difference. My guess is the BEAs data is the result of a far more complete data set being available for the measurement.

Here's a graphical picture of the above chart:

The above chart shows the increase in the deficit as measured in the 1950s occurred in the second half. My guess is, given the lack of computerization in the 1950s, the second half had a much stronger revenue collection than previously estimated by the Treasury.

By the end of 1952, US nominal GDP was $371.4 billion and the total public debt outstanding was $267.4 billion, giving us a debt/GDP ratio of 72% -- a very manageable amount.

The above table shows that the vast majority of the federal governments expenditures went for wars time spending, as defense spending accounted for 71% all federal spending. Here's a graph of the data:

The above chart places the Korean War expenditures in graphical form, shows the extreme amount of distortion caused by the war spending.

Inflation Looks Contained for Now

2012-01-24T10:00:00.000-06:00

Last week, we saw the release of both CPI and PPI. I wanted to take a closer look at both reports.

The YOY percentage change in total CPI is now moving in the right direction. It has decreased for three straight months -- which is a positive development.

However, the YOY percentage change in core CPI is still rising, although this is still below 2.5%.

Overall, the YOY percentage change in overall PPI is declining as well.

The above chart shows the YOY percentage change in PPI and CPI over the last 30 years. Notice how far more volatile PPI is relative to CPI. Also note that, regardless of the wild moves in PPI, CPI absorbs the price moves very efficiently.

My concern is still food prices. Although they sold off last week (thanks to the USDA underestimating the South American crop), grains are looking at a fairly volatile 2012 when price spikes are possible. However, overall, inflation appears to be contained for now.

Morning Market

2012-01-24T05:00:00.000-06:00

Today, I wanted to start with oil, which is still contained by it's mid-November high. Since the beginning of the year, it has been in a slightly downward sloping channel, but it's overall range has been about 6 points -- hardly a violent series of price swings.

However, above the 105 prices level, there is a ton of room to run.

In addition, after consolidating after a mid-year sell-off, the Brazilian real has broken out of its consolidation range and rallied fairly strongly over the last few weeks.

The 60 minutes SPY chart really shows the price action in it's most important manner. Prices are slowly moving higher, but consolidating as they go. From a day trading perspective, this is an incredibly difficult market to make money in.

The weekly treasury chart shows the important price action in the most detail. Prices hit resistance in the 120/122.5 area. However, money is starting to flow out of the market (declining A/D and CMF) and momentum is turning against traders (declining MACD). Prices have support of the 20 day EMA, but below that, prices would have to fall a few points to find decent support.

The weekly chart for the IEFs shows the same thing for the belly of the market.

In short, things appear to be moving the bulls way. Equities are rising and treasuries are falling.

Bonddad LinkFest

2012-01-23T15:30:00.000-06:00

Euro Update

2012-01-23T13:30:00.000-06:00

The daily chart shows that the euro has caught a bid. It has broken out of the downward sloping channel and moved through the 10 day EMA. Money is flowing into the market and momentum has turned up (although the MACD is still negative). The next logical trading target is the low established in early October.

On the weekly chart, the 10 week EMA and the 61.8% Fib level are more or less at the same point, so they provide a good target as well.

So -- why is this happening? Last month, the ECB created a large lending facility that added a ton of liquidity to the banking system. As such, the fear of wide-spread bank defaults is decreasing, leading to investor confidence in the region.

The WSJ has more on the lending program here.

Morning Market

2012-01-23T05:00:00.000-06:00

Just to review my overall analysis of the economy and the markets. I turned more bullish on the economy last week. I outlined my general thesis here. There are several key points to the argument, with the first being the drop in initial unemployment claims followed by the general steadying of the employment situation and the rest of the economy holding its own. The real wild card is Europe, where a wave of defaults across the region would obviously cast a very dark cloud over the US.

As for the markets, we've seen the equity markets move higher and a sell-ff in the treasury markets. The dollar is still doing well and copper has made a comeback. Last week, the leading market sectors were energy, technology financials and consumer discretionary, so traders are making bullish economic bets.

Moving forward, the big concern is to look for economic and market weakness.

Let's start with some equity charts:

The QQQs are in a bullish orientation. Prices consolidated in a symmetrical triangle and then rallied through October highs. The EMAs are bullishly aligned, money is flowing into the market and momentum is positive. However, given last week's advance, I would expect a pullback sometime in the next few weeks as traders catch their breath. Also note some general profit taking is probably in order.

The QQQs weekly chart shows that last week's price action printed a strong bar. Also note that the A/D and CMF line have not turned negative over the last year, although the market as a whole has been weaker. This tells us that money has not left the market, but new money has not come in. Finally, the MACD is in a position to move higher.

The SPYs daily chart shows a meandering rally, with prices moving up incrementally. However, we're seeing money move in and momentum increase. However, like the QQQs, I wouldn't be surprised to see prices move back to the EMAs on a slight sell-off.

The weekly chart is more bullish. Prices consolidated in a symmetrical triangle and have moved higher the last three weeks. Money is moving in and momentum is increasing.

In addition, both the IEFs and TLTs have moved below short-term trend lines. This is welcome news for the bulls, as it indicates there might be a chink in the safety trade. It's still early, however.

Copper has broken through the short-term resistance of its downward sloping trend line and the 100 day EMA. However, like the equity markets, I would expect a sell-off this week, largely to take some profits off the table.

As I've noted several times above, I would expect to see some selling over the next few weeks; we've had a decent rally through resistance, so that would be an appropriate response for the moment. That would also let traders "catch their breath" in order to assess the economic background.

Weekly Indicators: all positive edition

2012-01-21T08:00:00.004-06:00

- by New Deal democrat

Before turning to the high frequency weekly indicators, as usual let's briefly check out the monthly reports. Virtually all of the monthly data reported this week was positive, including industrial production, capacity utilization, the Empire State and Philly Fed reports, and housing permits and existing home sales. On the other hand, housing starts did decline month over month, and consumer prices were totally flat, meaning that in 4Q 2011 there was a very slight DEflation, normally a sign of coincident weakness.

There is still one more week where holiday seasonality can significantly influence the some of high frequency weekly indicators.

Weekly employment-related data continued positive, by one standard very strongly so:

The BLS reported that Initial jobless claims fell by 47,000 to 352,000, the best report in almost 4 years. The four week average declined by 3500 to 379,000. This is close to the lowest level since mid-2008.

The American Staffing Association Index rose by 11 to 84 last week, the best January reading since 2008. The steep rise nevertheless does show typical seasonality.

There was a surge in tax withholding in the last 20 day reporting period. the Daily Treasury Statement showed that withholding for the first 12 days of January 2012 was $109.1 B vs. $98.0 B a year ago. Adjusting +0.54% due to the 2011 tax compromise, for the last 20 reporting days, $172.0 B was collected vs. $158.1 B a year ago, a gain of +8.8%.

Housing data was strongly positive:

The Mortgage Bankers' Association reported that seasonally adjusted purchase mortgage applications increased 2.2% YoY and was also up 10.3% from one week ago. The overall trend remains flat since June 2010. Refinancing rose 27.9% in the last week as mortgage rates continued to hit new lows.

For the seventh week in a row, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were positive, up +2.5% YoY. This is the best reading in close to 5 years. A majority of metro areas -- 31 -- had YoY price increases. Only 7 areas still had YoY% price declines of -5.0% or worse. Chicago remained the only area with a 10% YoY price decrease.

Sales and transportation continued strong:

Retail same store sales continued to perform well. The ICSC reported that same store sales for the week ending January 14 increased 3.0% YoY, but were flat week over week. Shoppertrak, did not report, however, Johnson Redbook reported a weak 2.8% YoY gain, the weakest in 6 months.

The American Association of Railroads reported that for the week ending January 14, 2012, with U.S. railroads originating 298,560 carloads, up 5.5 percent compared with the same week last year. Intermodal volume for the week totaled 229,091 trailers and containers, up 7.4 percent compared with the same week last year.

Money supply and Credit spreads improved:

M1 increased +1.2% last week, and +1.6% month over month. It is also up 19.4% YoY, so Real M1 is up 16.4%. This is near its peak YoY gain at the end of last summer. M2 was up +0.2% week over week, and up +1.4% month over month, and up 10.4% YoY, so Real M2 was up 7.4%. This is about 3% less than its YoY reading at the crest of the tsunami.

Weekly BAA commercial bond rates declined .07% to 5.21%. Yields on 10 year treasury bonds fell .04% 1.95%. Falling spreads on lower rates is the best signal, although it is only for one week. This spread had a 52 week maximum difference in October and has been generally flat for the last month.

Gasoline usage in particular continues to be much lower YoY:

Oil closed at $98.33 a barrel on Thursday. This is about at the recession-trigger level calculated by analyst Steve Kopits (adjusted for general inflation). Gas at the pump rose $.01 a gallon to $3.39. Measured this way, we are just at or slightly above the 2008 recession trigger level. Gasoline usage, at 7996 M gallons vs. 8775 M a year ago, was off -8.9%! The 4 week moving average is off -6.9%. Since March the YoY comparisons have been almost uniformly negative, and substantially so since July. It's at least possible some of this reflects the unusually warm winter most of the country has been experiencing.

Now let's turn to new high frequency indicators designed to track the global slowdown/recession:

The TED spread is at 0.520 down from 0.542 week over week. This index is slightly above its 2010 peak, but has declined from its 3 year peak of 3 weeks ago. The one month LIBOR is at 0.277, down from one week ago and below its 12 month peak of two weeks ago, and also remains below its 2010 peak.

The Baltic Dry Index at 893 has plummeted in the last 3 weeks and further continues to decline from its October 52 week high of 2173. The Harpex Shipping Index was declining for a full year, but at 396 is above its 52 week low of 389 two weeks ago. Please note that these two indexes are influenced by supply as well as demand, and have generally been in a secular decline due to oversupply of ships for over half a decade. The Harpex index concentrates on container ships, and has been leading at recent tops and lagging at troughs. The BDI concentrates on bulk shipments such as coal and grain, and has been more lagging at the top but has turned up first at the 2009 trough.

Finally, the unweighted Shadow Weekly Leading Index was positive this week. Next day, so was the ECRI WLI. Why was I not surprised?

For the last two weeks, global worries have been abating. In the US virtually all the news is positive, but some weakly so. Still, there is no sign of any present or imminent downturn in the economy right now.

Have a good weekend.

P.S. This is a slightly truncated version due to ongoing time constraints. I will update with money supply, withholding taxes, and railroad information later if time permits.

UPDATE 1/22: the missing info has now been added.

Weekend Humor -- Fibonacci Pigeons

2012-01-20T14:00:00.000-06:00

From a friend on facebook. Priceless ... just priceless

Notes about this week's data

2012-01-20T12:00:00.000-06:00

- by New Deal democrat

Some quick hits about the economic data this week:

1. We still need to take the great initial jobless claims report with a grain of salt. Unadjusted claims were 521,600 vs. 549,600 a year ago, so seasonality is still with us and will be for one more week. Nevertheless, it is harder to make the "imminent recession" argument in the face of such a decline.

2. In addition to initial claims, long leading indicator housing permits continued at 3 year highs for the second month in a row. Another long indicator, corporate Bonds, whether AAA, BAA, or the DJ Corporate Bond index, are within a whisker of all time highs. Money supply is still ample. A short indicator, the stock market, is within 2% of its six month high.

3. On the negative side, the 3 month average of CPI has tipped into deflation. In the past this has meant coincident weakness. Although YoY inflation is down to 3%, that's still higher than YoY wage growth, so real wages are still in decline.

4. While real retail sales for December turned out to be barely positive, both that metric and industrial production are a very small revision away from being negative. These are two of the 4 normally accepted metrics used by the NBER to determine if the economy is in recession or not.

In short, the data is consistent with very poor growth in the last few months, but suggests an improvement in the economy at least after this quarter.

Is the Economy Getting Ready to Shift Into Overdrive?

2012-01-20T07:45:00.000-06:00

Consider the following charts:

Weekly initial unemployment claims have been decreasing for the last three months. Yesterday, they printed a drop of 50,000. While the series is by definition volatile, the trend is very encouraging.

The 4-week moving average is also moving lower.

Both of the above numbers are now below 400,000, which is a very important point.

While there has been much talk and understandable concern about the job market, notice that the economy has created 1,572,000 in the last 12 months. Granted, that is far from enough, but it's not as though nothing has been happening.

The unemployment rate has dropped nearly a point over the last year.

The homebuilding sector of the stock market is in the middle of a very strong rally. The daily chart (the upper chart) shows prices are at a 6 month high. Morover, the underlying technicals are solid. The EMAs are bullishly aligned, the MACD is rising and we're seeing money flow into the market. Also note the volume surge over the last few weeks, as evidenced by the sharp increase in the A/D line.

The lower chart (a weekly chart) shows a very strong rally since last October, rising momentum and increasing volume inflow. notice the very strong weekly bars over the last few weeks as well. In other words, it looks as through traders are moving money into the homebuilding sector. A move above 19.5 would be technically important.

The point of the above two charts is this: is the homebuilding ETF acting as a leading indicator of the housing market?

After dropping in the fall of last year, auto sales have picked-up and are now near their highest point of the recovery. In addition, consider this data point:

The average age of a car or truck in the U.S. hit a record 10.8 years last year as job security and other economic worries kept many people from making big-ticket purchases such as a new car.

That's up from the old record of 10.6 years in 2010, and it and continues a trend that dates to 1995, when the average age of a car was 8.4 years, according to a study of state vehicle registration data by the Southfield, Mich.-based Polk automotive research firm.

That's a lot of pent-up demand for a durable good. A big increase in auto sales was a big reason for the strong economy of the early 1950s, and may help to provide some of the ripple effect associated with an increase in new home sales that the economy is missing.

Overall real retail sales are still increasing and in an upward trajectory. However, December's results were disappointing, especially considering all the advance hoopla.

However, a broader and more complete picture of consumer spending -- real PCEs -- is clearly above its previous peak and is moving higher.

Copper is rallying strongly on the weekly chart. This tells us industrial demand -- especially from China -- is increasing.

And regarding Europe, consider this:

Spain and France, both hit by ratings downgrades last week, paid predominantly lower borrowing costs Thursday than at their previous auctions as markets remained upbeat after news of a possible boost in resources for the International Monetary Fund and hopes that Greece is moving closer to a deal with its bondholders.

Spain sold €6.61 billion (€8.5 billion), more than the €3.5 billion to €4.5 billion planned. With its January bond auctions, Spain has completed almost 20% of its 2012 targeted gross issuance of €86 billion.

This is but one auction -- and one of the first big ones after the ECB opened up an increased lending facility. However, it is a good sign.

Also consider these data points:

After falling at the end of last summer, the ISM manufacturing index has rebounded. Also note this number never went negative, instead resting just above the 50 line.

The ISM service index has been hanging just in positive territory as well.

Yesterday's initial claims print was the real driving force of this thought process. That number has been fluctuating around 400,000 for the better part of the last year. Yesterday's drop was exceedingly sharp and pronounced, and moved the number well into a "we're going to have a stronger recovery" territory. My guess is employers have gotten to the point where they simply have to increase their labor force and so have said, "it's time. Let's move forward." Now, it's also important to remember that it's only one print and could reverse next week. But then it's important to note the overall direction, which is clearly lower. That makes me think a rebound will be a temporary hike as opposed to the beginning of a long-term, upward trend.

Couple that data with the recent employment figures -- which have been pretty good -- and it appears that the employment situation is finally set to really improve. This solves one of the biggest problems with the economy. That led me to look at the homebuilding sector of the stock market, which I hadn't really seen in a while. The charts were very bullish, which made me think traders were more and more comfortable making long-term bets on the market. Assuming the employment market continues to improve, that should have a ripple effect into the housing market, where record low interest rates and lower prices should bring in buyers. The continued strength in car sales tells me that consumers are comfortable making long-term purchases, so a new home is a simple stretch from that position. Assuming the preceding thought process is accurate, we see that the economy is on the way to solving its two big problems: employment and housing.

Also note the general backdrop provided by the rest of the economy is still fairly sound. The manufacturing and service sectors -- as represented by the respective ISM indexes - are still in positive (read expanding) territory. This tells us that both business sectors are at minimum holding their own. And while the EU situation is still the big wild card in the room, the recent move by the ECB to greatly increase liquidity is so far having its desired effect -- to calm markets. While we're still not out of the woods in the EU (in fact, if anything will derail the previous thesis it's the collapse of the EU in some manner), the region has limped along for the last year. If we do see a recession (or if we're already in one, which is highly likely) I think it will be shallow and only last for 2-4 quarters.

Finally, consider this:

The US economy has been growing for the last nine quarters. Granted, the growth has been weak, but it has been moving forward. This tells us that there is already a foundation for growth.

In short, the piece are aligning. I will add that execution is an entirely different matter. But, put me in the, "I think the possibilities are getting far more bullish" camp for the moment.

Morning Market

2012-01-20T05:00:00.000-06:00

I'm not the only person who has been concerned with the inter-market market situation. Corey over at Afraid to Trade has noted that the stock, oil and treasury markets are rallying, which is a situation that can't hold forever.

On that note, one of my concerns has been the rallying treasury market. However, that situation may be changing:

Both the IEFs and TLTs are right at short-term support. The technicals for both are weakening. The respective CMF's are negative and the MACD was very weak for the rally. In fact, note the MACD for both for the last six months; it peaked over 5 months ago and has been moving more or less sideways since.

The 60 minute QQQ chart is great. It's in a clear uptrend. Over the last three days we've seen a gap higher, rally and further gap higher today.

The daily chart of the QQQs shows an increasing volume inflow (rising A/D and CMF) and increasing MACD. Prices are not through six month resistance levels.

On the weekly chart, we see prices break through resistance, printing a strong candle.

The IWMs have moved through resistance. They printed a strong bar day before yesterday, but printed spinning top outside of the upper Bollinger Band, which is usually a sign of an upcoming reversal. However, we're seeing a rising CMF, A/D and MACD.

The SPYs are still in an uptrend, with a strongly positive CMF and rising A/D. Also note theh rising MACD.

The weekly copper chart is very bullish. We've seen strong moves over the last two weeks on very strong volume. Money is flowing in and momentum has reversed. This is a great chart.

Bonddad Linkfest

2012-01-19T16:00:00.000-06:00

It's Been a Banner Week At the Bonddad Blog

2012-01-19T14:30:00.000-06:00

I wanted to take the time out to make the following points about the blog.

1.) NDD has been doing some great work on breaking the ECRI leading index. This is a great example of what makes blogs great: people with a particular specialty providing very useful information to the viewing community. To read more see these links:

A Peek Inside ECRI' Black Box
An Examination of the Model for ECRI's Black Box
Beta Testing the Shadow LEI Index
The ECRI Index, unmasked

2.) I would be remiss if I didn't point out that I went bullish on the market on Monday when it broke out (of course, having said that, expect a crash in the next few days).

For more, see the following:

What Will It Take For Me to Be Impressed With the Market
Morning Market
Morning Market
Morning Market

So, from both NDD and myself, thanks for reading and having a data-centric view of reality.

Beta testing the Shadow Weekly Leading Index (week 2)

2012-01-19T13:52:00.003-06:00

- by New Deal democrat

As readers know, I am trying to reverse engineer the ECRI Weekly Leading Index.

Research has revealed that the WLI (per Lakshman Achuthan) has 7 components. We know that two are initial jobless claims and the JoC-ECRI commodity index. Six of the seven are public record.

Since the possible early monthly reports were out last week, they wouldn't count in any event. Unfortunately, I don't have time to be as thorough as I would normally like, but ALL of the 6 public weekly components (with the possible exception of the rate of growth of real estate loans, I haven't had time to check) were positive this week:

DJ Bond Avg up
S&P 500 up
Initial Jobless claims*: down over 40,000
Commodity price changes: up
Purchase Mortgage applications: up
10 year treasury - BAA credit spread*: down

The predicted week over week change is therefore predicted to be positive.

[*Note: these are inverse relationships, so the higher the number, the lower the growth score]

We'll have an answer tomorrow.

1952: Employment and Income

2012-01-19T10:00:00.000-06:00

1952 continued the strong employment situation started in 1951:

The unemployment rate -- which was already low -- continued at it's strong rate, fluctuating between 3.4% and 2.7% for the year.

Total employees on all payrolls was more or less constant for the first seven months of the year, but really started to take-off in the last five months.

Goods producing industries were pretty constant for the the first five months of the year. They dropped over the summer, but then really took off. adding over 600,000 jobs in the last five months of the year.

Service producing industries saw better overall performance; they increased a bit during the first few months, leveled off, and then increased strongly in the last five months of the year. Overall, we see services adding a little under 1 million jobs for the year.

Growth in government employment mirrors the service industry chart for the year.

Thanks to a low rate of unemployment, we see strong growth in DPI:

Total DPI increased every quarter in absolute (inflation-adjusted) terms.

The continuously compounded annual rate of change was weak in the first quarter, but picked-up momentum in the second and third quarter, and ended the year on a strong note.

The rate of change year over year was small in the first half of the year, but accelerated in the second.

Finally, above is a chart from the 1953 Economic Report to the President that shows income and savings -- which was at a very strong rate in 1952.

Morning Market

2012-01-19T05:00:00.000-06:00

Take a look at the three ETF charts below: I'm much happier.

Both the IWMs and the QQQs broke through important resistance levels yesterday, printing fairly decent bars. I'd like to see more volume, but nothings perfect. In addition, we see some strength in the SPYs. On the QQQs and the SPYs we see the EMAs fanning out into a stronger, more bullish formation. We also see the CMFs increasing. In short, the equity charts are looking much better now. In addition, we're seeing an advance where all three averages are making moves. That's a very good sign.

The QQQs are approaching key resistance levels on their weekly chart, and

The IWMs have broken through short-term resistance. Also note the increasing CMF and A/D line above, indicating more participation in the riskier equity index.

While I missed the first part of the rally due to caution, I still believe my concern was warranted. Also note the importance of looking at multiple markets in order to make a decision.

Bonddad Linkfest

2012-01-18T16:00:00.000-06:00

1952; Exports and Emports

2012-01-18T13:30:00.000-06:00

This posting is part of the Bonddad Economic History Project

The above charts shows that in 1952 neet exports were a drag on overall growth. We see one quarter -- the first -- where overall exports increased and added to GDP. But in that quarter we all see a large contraction in imports, meaning overall net exports subtracted from growth. The second and third quarter show marked contractions as well. The fourth quarter we see a positive contribution from overall exports, but, again, imports sharply contracted, leading to an overall contraction for the quarter and a terrible year for exports.

The information below is from the 1953 Economic Report to the President and is part of the Bonddad Economic History Project

What Makes Up CPI?

2012-01-18T10:00:00.000-06:00

Morning Market

2012-01-18T05:00:00.000-06:00

On the day I turn bullish, the market pops higher -- it happens so rarely, that you've got to take credit for the call. That being said, the above 5 minute charts show that the price action was weak -- upside gapping in the AM with a downward drift throughout the day. This is the type of price action that led me to be very cautious about the market as a whole. A lack of follow-through is very concerning.

However, the 60 minute chart is still bullish for both the QQQ, and SPY.

The fact the IWMs are still hemmed-in by their late October highs is a problem as well.

However, the IEF and TLTs are still above long-term trends. The good news for stock bulls is the A/D and CMF are weakening for both, but we still need to see momentum move lower.

On the good side, industrial metals generally and copper specifically are posting strong gains. Industrial metals are right at technical resistance and copper is right below the 200 day EMA. On both chart, we're seeing the shorter EMAs (10, 20 and 50) move higher. We're also seeing a nice volume surge -- especially in copper.

Bonddad Linkfest

2012-01-17T15:30:00.000-06:00

1952: Investment

2012-01-17T13:00:00.000-06:00

In 1952, we see some pretty wild vacillations in overall gross investment and its contributions to overall GDP. The first quarter -- which saw GDP increase 4.1% -- saw investment contribute about 36% of overall growth. The second quarter's figure was incredibly negative which was caused exclusively by a huge contraction in inventory investment. This was reversed in the third quarter with a move to restock inventories.

Here is how the 1953 Economic Report to the President explained it:

Beginning in the third quarter of 1951, the rate of business inventoiy accumulation declined, as businessmen attempted to bring over-plentiful stocks into line with sales volume. By mid-1952, sellers of such diverse commodities as textiles, apparel, autos, and home appliances appeared to have completed the process of paring down the excess inventories which they had accumulated in the preceding months. Indeed, in some areas retail inventories had probably dipped below the levels required by sales, while business purchasing agents were pursuing a policy of handto- mouth ordering.

During the third quarter, a change became evident as nonfarm inventories were accumulated at an annual rate of 3 billion dollars. Since there was some decline in inventories of steel during this quarter, the rate of accumulation of nonsteel items exceeded 3 billion dollars. Most nondurable goods industries and the nonsteel-using segments of durable goods industries shared in this rise. However, business sales to ultimate consumers did not rise in line with inventories; production and shipment of producers' durables and automobiles fell, largely as a result of the steel strike. But as the final quarter of the year got under way, metal-using firms had already completed in most cases a remarkable recovery. Production and sales of automobiles, appliances, apparel, and almost all types of commodities expanded considerably. At the same time, inventories continued the more rapid climb begun earlier, while government purchases of goods and services rose moderately.

The following chart shows the situation graphically:

The distortions caused by the inventory situation hide the fact that there was a strong investment environment among manufacturing companies. This was caused primarily by an accelerated depreciation credit that was passed to encourage investment in defense related industries. Here's a chart that shows the investment situation:

Behind the Jobless Recovery

2012-01-17T10:00:00.000-06:00

Great piece today in the WSJ on how low interest rates and economic uncertainty are creating an environment that encourages investment over hiring.

In no other U.S. recovery since World War II have companies been simultaneously faster to boost spending on machines and software, while slower to add people to run them.

Part of this is the old story of substituting capital for labor. But a combination of temporary tax breaks that allowed companies in 2011 to write off 100% of investments in the first year and historically low short- and long-term interest rates have pushed that process into overdrive.

.....

Instead of hiring, companies such as Sunny Delight and chain-saw maker Stihl Holding AG are investing in technology or other ways to make existing operations faster and more productive. History suggests that investment that increases productivity eventually will create jobs and raise living standards. The mechanization of the farm and the automation of the factory both raised fears of permanent unemployment that were unrealized, as efficiencies in production of basic commodities created jobs in all sorts of services.

.....

And that is happening more in this recovery than in the recent past. Spending on gear and hiring usually are more synchronized. Since the economy began growing again in 2009, spending on equipment and software has surged 31%, adjusted for inflation. In the postwar period, only in the wake of the 1982 and 1970 recessions has such spending grown faster. Private-sector jobs have grown just 1.4% over the same span. Only recoveries following the 1980 and 2001 recessions saw slower job growth.

Erik Brynjolfsson, a Massachusetts Institute of Technology economist, says companies began stepping up labor-saving investments in the first half of the last decade. The turning point, he says, came during the recession, when companies realized they could do far more than they expected with fewer people.

Even as demand has drifted back, companies are keeping that ball rolling by spending more money on machinery that automate functions. "It's as if the economy had a pent-up potential for labor savings that hadn't been harvested until the recession," says Mr. Brynjolfsson, author of a new book on automation.

.....

The U.S. today is second only to Japan in the use of industrial robots. Orders for new robots were up 41% through September from a year earlier, according to the Robotics Industries Association trade group. That has helped fuel a larger boom in productivity. Output per hour worked in nonfarm businesses has increased 6% during the recovery. Hours worked are up only 1.5%.

This plays into a few themes we've noted here on the Bonddad Blog.

1.) The decrease in manufacturing employment -- which has cratered over the last 10 years -- is partly caused by an increase in automation. Consider the following two charts:

The top chart shows durable goods manufacturing jobs and the bottom shows non-durable goods jobs. Both have been cratering. Yet, we're still seeing increasing in manufacturing industrial production:

Put another way, the US economy is simply making more with less.

Secondly, there is tremendous investment occurring. As the article points out, inflation adjusted investment in plant and equipment has increased 31% during this expansion.

I highly recommend the rest of the article.

Morning Market

2012-01-17T05:00:00.000-06:00

Let's start with what my qualifications for "liking" the current market rally.

1.) An uptick in copper
2.) A continuing rally in the dollar
3.) A sell-off in the treasury market

What I'm looking for in all three of these markets in confirmation that, not only is the stock market rallying, but other markets are either confirming the strengthening of the US economy or traders are starting to sell-off their safety assets.

On the daily chart, we see that the dollar is technically in an uptrend. But prices are just barely above previously established highs and the A/D and CMF are both printing bearishly right now, while the MACD is moving sideways.

The weekly chart shows the dollar in a positive uptrend.

I'd give this chart a weak bullish rating. While the price chart is still bullish, the underlying tecnhicals are weak.

Coppers daily chart printed strong break-out last week. Plus, the 10 and 20 day EMAs are moving higher with the 10 day EMA moving through the 20. Additionally, the MACD is also moving higher as well.

The weekly chart shows a strong break-out on very strong volume. The MACD and volume indicators all confirm the move. This is a bullish chart.

However, last week the treasury market rose, largely in reaction to the EU situation.

Given my above criteria, the dollar, copper and treasury market situation now put me in the bullish camp. However, from a fundamental perspective I still have concerns largely based on the EU situation and the possible long-term fall out. But if the equity markets are a leading indicator (and they are a component of the Conference Boards LEI index), then the data tells us the latest moves are in advance of anticipated economic action in the US. That being said, let's take a look at the equity ETFs.

The IWMs have been inching higher for the last few weeks. Right now, they are just below long-term resistance established in late October. The MACD is slightly positive and has given a buy signal, while the volume indicators are both bullish. The shorter EMAs are also moving higher. I'd place a buy at about 77.50 on the above chart.

The QQQs are a bit more difficult to gauge. Frankly, I'd wait to make a move here until we see prices over the highs established at the end of October; there is simply too much overhead resistance.

The SPYs have been moving up in stages; they gap higher and then trade sideways for a few days to consolidate gains. I'd move in at current levels.

All of the above positions would be small; I'm still not thrilled by the market not the underlying fundamentals. But the ancillary markets are now confirming the upside move so it's time to at least make a few preliminary trades.

The ECRI Weekly Leading Index, unmasked

2012-01-16T08:30:00.005-06:00

- by New Deal democrat

This is a continuation of my series reverse engineeering ECRI's Weekly Leading Index (WLI). I began by noting that ECRI's founder, Prof. Geoffrey Moore, in 1990 initially proposed a Weekly Leading Index made up of indicators whose values could be computed weekly, or if monthly were reported at the beginning of the next month. While this index would be a little less reliable than the Long Leading and Short Leading Indeces, it would have the advantage of being more timely.

Its weekly components were:

Real M2
Dow Jones Bond Average
S&P 500 stock price index
Initial claims for unemployment insurance
Journal of Commerce change in commodity prices
Dun and Bradstreet new business formation and large business failure
Real estate loans, deflated, growth rate

The quickly reported monthly components were:

Average workweek in manufacturing
Layoff rate under 5 weeks
ISM manufacturing vendor performance
ISM manufacturing inventory change

The questions remained, were the monthly components included in the final result? Were the weekly components weighted? Were there any changes in the list? As to the last, I have noted that it is almost impossible to generate a decline such as ECRI claims for the WLI in 2011 if Real M2, which experienced a tsunami-like increase in late summer, were still included. I have suggested that the credit spread between government and corporate bonds might have replaced Real M2 in the list at some point.

It appears that ECRI spokesman Lakshman Achuthan himself has all but settled the issue. Appearing as a guest author at Barry Ritholtz' "The Big Picture" blog in 2009, he wrote:

Our leading indexes are composites of key drivers of the business cycle. Correlations are not part of our process which focuses on the relationship of indicators around inflection points in growth and inflation. .... ECRI does not suggest that the LLI is a perfect leading indicator, but it does not include stock prices and has a longer lead than stock prices over growth rate cycle turns.

You can read more about the Weekly Leading Index (formerly known as the Business Week leading index) here: http://books.google.com/books?id=vSz99DDF-q8C&pg=PA107&dq=beating+the+business+cycle+weekly+leading+index&client=firefox-a

(my emphasis) (UPDATE: To avoid confusion, please note that the reference to stocks not being included, is to ECRI's "long leading index," a completely separate index).

The link takes you to the book "Beating the Business Cycle," authored by Achuthan in 2004. There, at pp. 108-09 he says

"To monitor developments on a more frequent basis, Moore helped develop a Weekly Leading Index (WLI) in 1983. Some of the components of the WLI, like initial jobless claims, had long been available on a weekly basis. Others had to be created from scratch, like the Journal of Commerce-ECRI industrial materials price index, designed to measure inflation in a broad range of industrial raw materials. Starting in 1983, the weekly index was published in Business Week magazine. Known at the time as the Business Week Leading Index, ... In the late 1990s, ECRI began to publish the index through our own website, businesscycle.com.

Then, at pp. 135-36 he elaborates:

"We .. determin[e] good proxy measures for the various drivers [of the economy] -- that is, individual leading indicators -- and combin[e] them into composite indeces which objectively summarize their information. For example, in constructing the Weekly Leading Index (WLI) , we use a specific leading indicator -- initial claims for unemployment insurance -- to represent employment, which is a key driver of the business cycle. Likewise, we pick out six other specific leading indicators that are updated weekly, to represent other cyclical forces. Because the seven indicators are rarely unanimous, we summarize them into the composite WLI ...."

(my emphasis)

So that is pretty clear. There are seven indicators (confirming that the early monthly reports are not part of the index), and specifying that initial jobless claims and the JoC-ECRI industrial commodity index are two of the components.

Finally, a little google searching reveals that several issues of Business Week including the "Business Week Leading Index" are archived online. Here is a screenshot of one of them, edited only to delete a line describing another unrelated index. Note that it includes precisely seven indicators:

Another example can be found here.

So that just about settles it. The referenced "real estate loans" are sourced to the Federal Reserve Bank and weekly updates can be found here.

It appears that the index is weighted. Also, I continue to question whether Real M2 survived the transition, just as it appears that AAA bonds were substituted for the similar Dow Jones Bond Average. With those caveats, the components of the WLI are unmasked.

I'll Be Back in the AM

2012-01-16T05:00:00.000-06:00

The markets are closed in observance of MLK's birthday, so I'll be back in the AM. However, NDD has a piece up shortly that will be very cool.

Weekly Indicators Will Return Next Week

2012-01-14T08:30:00.000-06:00

NDD has had a brutal week at work and simply ran out of time this week. As his attorney or record, I've counseled him to consumer a large quantity of adult beverages in quick succession.

Weekly indicators will return next week.

Stephen Colbert: The Presidential Candidate of the Bonddad Blog

2012-01-13T14:30:00.000-06:00

If ever anyone -- and I mean anyone -- could make me have hope in the current electoral situation, it is Jon Stewart and Stephen Colbert. Unfortunately, Jon is not running. However, Stephen is at least forming an exploratory committee. There, I, Bonddad of the Bonddad Blog, do hereby formally announce my endorsement of Stephen Colbert for President of the United States of South Carolina.

Seriously -- if anyone can demonstrate how completely screwed up our current political fundraising system is, it's Colbert and Stewart. And the clips below are gold -- they're funny, but they're not, but they are, but they're not. These guys make the 24 hour news cycle bearable. The clips below explain why.

The Colbert Report
Get More: Colbert Report Full Episodes,Political Humor & Satire Blog,Video Archive

1952 PCE's

2012-01-13T11:30:00.000-06:00

The above chart shows the percentage contribution that personal consumption expenditures (PCEs) made to GDP in 1952, along with the contribution of the subparts of the PCE statistic. The second and fourth quarter were the big months for PCEs, with the second quarter's growth being drive by non-durable goods while the fourth quarter's growth was driven by durable goods purchases. The first quarters contributions were incredibly weak, with an actual contraction in non-durables being the reason for the contraction. Also note the drop in durable purchases in the third quarter.

The reason for the large drop in durable goods purchases in the third quarter was a large steel strike, which shutdown auto manufacturing. With the strike ended in the fourth quarter, auto production ramped back up, leading to higher production and, therefore, more durable goods.

Regarding the expansion and increased use of consumer debt, consider the following from the 1953 economic report to the president:

1952: A Look At GDP and Its Subparts

2012-01-13T09:30:00.000-06:00

This post is part of the Bonddad Economic History Project.

Above is a graph of the percentage change in GDP and the contributions of various subparts. The data tells us the following:

1.) There were two quarters of very good growth -- the first and fourth quarter. The second quarter the economy was very close to 0% while the second quarter's growth was fair.

2.) PCEs provided a lot of firepower in the second and fourth quarter, while they added some in the third.

3.) Gross private investment was very strong in the third and fourth quarter. It was a primary reason for the drag on growth in the second quarter.

4.) Net exports subtracted from growth in each quarter of the year.

5.) Government spending (from the Korean War) was the primary driver of growth in the first and second quarter. It contributed in the third and added remarkably little in the fourth.

Morning Market

2012-01-13T06:14:00.000-06:00

Remember that I'm looking for the following events to "like" the market rally: an increase in copper, better intra-day stats in the equity markets, a continued rally in the dollar and a sell-off in the treasury market.

Yesterday, copper popped higher on very high volume. While it printed a small bar, which I really don't like, the upward gap is impressive. Plus, the gap has come at a technically important time.

The dollar is right at important technical levels -- highs from early October. The EMAs are still strong, but the A/D and CMF are weakening, which is concerning.

The dollar has been moving sideways for the last six days, using the late and mid-December high points as technical support. We need to see the dollar move through the 23 price level.

The treasury market is consolidating and not selling off -- at least not yet.

The above two charts of the IWMs and SPYs illustrate my continued concerns with the equity markets. The IWMs stayed in a tight range for about a week and a half before drifting higher over the last three sessions. The SPYs have traded in two tight ranges for the last week and a half, but there hasn't been a lot of strong intra-day action.

The QQQs are the best looking average, with a clear uptrend, but also have the same issue -- trading in ranges, popping a bit, and then trading sideways. The fact that only one average has a good chart is also concerning.

Bonddad Linkfest

2012-01-12T15:30:00.000-06:00

Will Food Prices Reassert Themselves?

2012-01-12T12:30:00.000-06:00

Three stories over the past week caught my eye:

First, we have a dry spell in South America:

Crop prices rose sharply this week on worries that unusually dry weather in South America could cut global supplies. Temperatures rose last week in South America and rains that fell over the weekend were lighter than had been expected. The dryness could leave corn plants there stunted because they are pollinating this time of year.

According to the Associated Press, traders are worried that lower exports from Brazil and Argentina could reduce world food supplies. Strong demand from livestock producers and ethanol makers has already drawn down global reserves of corn and soybeans.

Crop prices had been falling this winter on expectations that exports from the United Sates could help supply the global market. A hot summer didn't damage the U.S. corn crop as severely as some traders had expected. But gains from the U.S. Farm Belt could be offset by losses in South America if dry weather there leads to lower crop yields.

January soybeans rose 37 cents Tuesday to $12.095 per bushel. March wheat rose 22.75 cents to finish at $6.4475 per bushel. March corn rose 13.75 cents to $6.3325 per bushel

Second, we have a lack of corn seed supply in the US midwest:

As farmers across the U.S. prepare to plant this year's corn crop, they are running up against an unexpected obstacle: a lack of seed.

By some estimates, U.S. production of corn seed was down 25% to 50% ahead of this planting season. Output of corn seed, which is grown from specialized plants, was sliced by drought conditions across the Midwest and the Great Plains last year

The shortage of seed threatens to scuttle what some expect to be the biggest planting of corn in the U.S., the world's largest producer, since World War II. Early forecasts have been calling for up to 95 million acres to be sown with corn this spring, a 3.4% increase from 2011.

The problem could mean the second year in a row of tumult for the corn market. Last year, hot weather led to a smaller U.S. crop than traders had expected, fueling a historic rally in corn prices to a record $8 a bushel in late spring.

Third, we have this:

Hedge funds raised their wagers onhigher commodity prices by the most since July 2010 after signsof accelerating U.S. growth bolstered optimism that demand forraw materials will strengthen.

Money managers expanded their combined net-long positionsacross 18 U.S. futures and options by 25 percent to 671,915contracts (.MMLOSH) in the week ended Jan. 3, Commodity Futures TradingCommission data show. Bullish bets on cotton rose the most sinceApril 2009 and those on coffee doubled. Crude-oil holdingsreached a three-week high.

Prices for metals and bulk commodities such as coal rose atleast 85 percent of the time since 2004 when global industrialproduction strengthened, Macquarie Group Ltd. estimates. U.S.unemployment fell to the lowest in almost three years, and itjoined China, Australia, Germany, India and the U.K. inreporting manufacturing gains. Almost $253 billion was added tothe value of global equities last week on speculation economieswill skirt a slump as Europe’s debt crisis deepens.

“You’ve been seeing a risk-on trade across the board, notjust in commodities,” said John Bailey, the founder and chiefexecutive officer of Stamford, Connecticut-based Spruce PrivateInvestors LLC, which advises investors holding about $3 billionof assets. “Between a calming in Europe and better-than-expected numbers in the U.S., including employment and housing,that has led to a risk-on attitude among managers.”

That got me thinking about this graph, which shows the YOY percentage change in the food price component of CPI:

While food prices only comprise 14.79% of CPI calculations transportation prices only comprise 17.3%. Yet, large oil spikes (and subsequent gas spikes) can have a disproportionate effect on consumer sentiment and spending. And while the chart above does not conclusively state that high YOY percentage changes always proceed a recession, it does say that high high prices can be a precursor to recession. So, it behooves us to keep an eye on this situation.

I always look at the grains charts as a proxy for food prices, largely because corn, wheat and soybeans are the foundations of the US food system. To that end, consider these charts of grains:

The weekly grains chart sold off at the end of last summer and drifted lower through mid-December. Prices rallied strongly at the end of last year and in the first week of January. While the EMA picture is still bearish, prices have rallied into the 20 week EMA. The MACD has given a buy signal as sell, although the A/D and CMF volume indicators are weak.

The daily chart shows that grains have rallied strongly over the last few weeks. Prices have advanced through the 10, 20 and 50 day EMA. These EMAs are also rising, with the 10 now moving through the 50. The MACD is rising and has now turned positive. However, the A/D line is not that exciting, although the CMF shows some positive movement.

In short, food prices may be a problem to keep an eye on this year.

Beta testing the Shadow Weekly Leading Index

2012-01-12T09:30:00.002-06:00

- by New Deal democrat

As readers know, I am trying to reverse engineer the ECRI Weekly Leading Index. Prof. Geoffrey Moore recommended 11 elements for this index when he proposed it in 1990. As originally conceived, the weekly index was supposed to anticipate the monthly LEI, which had to rely on late reports like housing permits and durable goods orders. By contrast, the 4 monthly numbers incorporated into the weekly index would all be known within one week of the end of the previous month. The weekly index would be slightly less reliable than the LEI, but by dint of early report, would be very useful.

Ten of the 11 elements are publicly reported (the 11th is Dun and Bradstreet's weekly number of business formations and dissolutions which is not available to the public). Of the remaining 10, six are weekly series and the other 4 are the monthly series noted above. I have already created several preliminary graphs based on only 7 elements which look very close to ECRI's Weekly Index, including its roller coaster ride of the last two years. So it's time to beta-test and make refinements based on the results.

The list below is the changes in those 10 numbers for the last week. The only change I have made is the substitution of credit spreads for real M2, which I have reason to believe was replaced on the list. Another issue is whether ECRI continues to include the early monthly reports, or changed Moore's original concept by only relying on weekly reports. The last issue is whether the report is an unweighted average of the elements or not. I am giving two forecasts for the WLI, one that includes and one that does not include the early monthly reports. The forecast assumes an unweighted index.

The following weekly components changed as follows for the week ending January 6 (YoY change in parenthesis):

DJ Bond Avg -.07 to 114.58, or -0.1% (YoY up from 111.12, or +3.1%)
S&P 500 +20.21 to 1277.81, or +1.6% (YoY up from 1271.50, or +0.5%)
Initial Jobless claims*: +27,000 to 399,000 or -6.8% w/w (YoY -15,000 from 414,000, or +4.8%)
Commodity price changes: +2.47 to 119.81, so +2.1% (YoY -17.05 from 133.65, or -10.4%)
Purchase Mortgage applications: +8.1% w/w (YoY -17.9%)
10 year treasury - BAA credit spread*: +.02 to 3.29%, or -0.6% (YoY up from 2.69%, or -18.2%)

If only weekly series are used, the predicted week over week change is +0.7, and the YoY growth rate is -6.4.

The following early monthly reports changed as follows (YoY change in parenthesis):

Avg manufacturing workweek +.1 to 41.5, or +0.2% (+.2 YoY, or +0.5%)
Unemployment 0-5 weeks*:+159 to 2669, or -6.0% (YoY -32, or +1.2%)
ISM vendor performance flat at 49.9, or 0.0 (YoY -6.8, or -12%)
ISM inventory change -1.2 to 47.1, or -2.5% (YoY -4.7 or -9.1%)

If the early monthly reports are included, the unweighted predicted weekly change is -0.4 and the YoY growth rate is -5.8.

[*Note: these are inverse relationships, so the higher the number, the lower the growth score]

We'll have an answer tomorrow. I anticipate refining the forecast as I am able to determine better how ECRI constructs their Index.

Morning Market

2012-01-12T06:54:00.001-06:00

Yesterday, commenter I Will Not Accept the Terms of Service (great name, BTW) asked the following question:

These charts of been going up for 2 weeks And you still arent impressed? ;-)

We followed with a few exchanges, which ended with this (from him): At the same time, if stocks rise and bonds haven't yet started falling, that means there's still a lot of money sitting outside the equity market wondering if it should come back. I guess maybe you really just want to see it take off first before committing... which is okay I guess.

This gives me a good set-up to the way I look at the markets.

I'm a huge fan of inter-market analysis. Put another way, one market's price action does not happen in a vacuum. Other markets and the economy also have to act/react in certain ways. We also have to consider the fundamental economic situation to see if that information jibes with the markets. For more on this, I would suggest reading John Murphy's Intermarket Analysis, or Martin Pring's The All Season Investor.

Yesterday, I posted an article titled, "What Will It Take For Me to Be Impressed With the Markets?" where I outlined other technical developments that I need to see. First, it's not important to me that the markets are rising, but how they are rising. To me, the equity price charts are very weak -- the candles are small, intra-day action is weak and volume is low. In addition, we haven't seen other markets either sell-off (the treasury market) or rally (copper). If the stock market were really in a strong upswing we'd see money come out of the safety bid (treasuries) and more money move into industrial commodities (copper). Also consider that as of the end of last year the best performing market for a year was the treasury market -- which is not a harbinger of a strong equity market. Finally, while the US' fundamental situation is improving, Europe is on (or at the beginning of) a recession and Asia is slowing. Can the US realistically de-couple from these markets and not have it effect growth? I have my doubts on that.

Finally, let me add this: I could be wrong. The markets like to make an ass out of all analysis (myself included) on a regular basis. So, I would recommend that you also read the writings of a more bullish analyst as well because they could be seeing things correctly.

All that being said, something I forget to add to my "What Will It Take For Me to Be Impressed With the Markets" article was the dollar. For the last 6-9 months, the dollar has been the beneficiary of a safety bid, largely caused by the declining euro. However, there has been talk in the currency markets that the dollar may now be benefiting from the "risk on" trade. This means that as the US economy improves, more international investors want to invest here, which increases the dollar's value.

The dollar spent the last quarter of the year in a symmetrical consolidation pattern. Prices broke out mid-December and have drifted higher since. However, notice the weakening position in the A/D and CMF; both are indicating that the volume inflow is declining. In addition, the MACD is even and not showing much momentum. For the dollar, the big question is, "is this now rising because of increased confidence in the US economy, or is it a safety trade because of a declining euro?" I think it's a bit of both right now, meaning a continued move higher in the dollar would be a net positive.

In addition

Yesterday, copper had a nice pop and is now right at upside resistance. Which we're not out of the woods yet, we are closer.

In addition, industrial metals (which includes copper) have moved through resistance and are now approaching resistance. While the MACD has given a buy signal, the EMA picture is still weak and the CMF/A/D picture is muted.

The treasury market is the biggest stick in the mud. The daily chart shows prices are rising and the weekly chart shows prices are still above the long-term trend line.

So, the short version is the conditions are improving; the dollar is rising (some of which is a risk on trade) and copper specifically and industrial metals generally are improving. But the treasury market is still strong, which is not equity positive and which ultimately gives me great pause.

Bonddad Linkfest?

2012-01-11T15:30:00.000-06:00

What's Holding the Economy Back?

2012-01-11T12:30:00.000-06:00

For the last year and half, the US economy has not been able to get to "escape velocity" -- a rate of growth over 3%. There are several reasons for this with the biggest one being the lower level of consumer spending. Consider this chart of the seasonally adjusted annual rate of change of personal consumption expenditure growth:

For the latest expansion, we've seen growth rates right around 2.5%. However, this rate is low when compared to the last two expansions. Consumers are spending; just not in the same amounts as before. As such, we are seeing lower growth. Because consumers make-up 70% of GDP growth, this is a very important issue. In addition,

austerity is hurting growth. The above chart shows the impact of government spending on overall economic growth. Over the last 8 quarters, government spending has subtracted from growth. In other words, a contractionary policy is, well, contractionary.

The above chart shows the percentage contribution to GDP from commercial real estate and the bottom charts shows the percentage contribution from residential construction. The commercial chart is a bit more positive, but it's still very weak. The residential charts is terrible. At least it's been hurting less over the last four quarters.

Both of these charts show that we're not building anything right now which has a tremendous impact on the economy. First, it creates jobs. But the actual building requires raw materials such as wood, copper etc.. which have to be mined. The process involves heavy machinery -- which increases durable goods manufacturing. And once the structure is build, we have to put furniture in it. In short, construction has a very large multiplier effect that we're simply not seeing right now. For more on this topic, see this paper from Edward Leamer.

So, we have the following:

1.) A weaker consumer. Consumer spending comprises 70% of the economy. While the consumer is spending, he's simply not spending as much.

2.) Austerity. Since 1970, federal government spending has accounted for about 20% of overall GDP. As I've shown in the Bonddad Economic History Project, government spending for the Korean War was a tremendous driver of the early 1950s expansion. For 6 of the last 8 quarters, we've seen government spending subtract from overall growth.

3.) A lack of housing participation. Housing -- and it's incredibly important multiplier effect -- are absent from this recovery.

Remember, the GDP equation is

Consumer spending + gross investment + net exports + government spending = GDP.

Elements 1 and 2 are weaker, element 3 has subtracted from growth for the last 10+ years and we've deliberately letting element 4 subtract from growth.

What Will It Take For Me To Be Impressed With the Markets?

2012-01-11T09:30:00.000-06:00

Since the beginning of the year, I've been complaining about the market rally. While it technically looks like it's rallying, the rally is very weak. Frankly, I don't think it's a rally that has any legs. However, here are the conditions I need to see to be impressed.

1.) Print some strong bars: We've seen a lot of very weak candles on the daily chart. What we really need to see is strong, intra-day price action. In fact, we need to see several days of strong, intra-day price action -- say, 1%+ for 2-3 days on really good volume. Having the trading end on the highs of the day on a volume spike would be great. And having the intra-day rally move higher would be stellar. Instead, what we've seen for the last week is a lot of sideways trading, which is not exciting me.

2.) Copper has to break out. Right now, copper is trading in a downward range:

Copper has to make strong move higher, indicating that industrial demand is picking up again. The good news from the commodity markets is that we're already seeing the grain markets rally. But, we really need to see the industrial metals pop.

3.) We have to have a sell-off in the treasury markets. So long as there is a safety bid in the market in the form of the treasury market, money will get sucked away from the equity market. What we need to see is traders throw-in the towel on the safety trade and plow their sale proceeds into the equity markets.

Morning Market

2012-01-11T05:00:00.000-06:00

The 60 minute IWM chart shows that prices gapped higher yesterday. This is technically good, but notice (again) the lack of follow through. Prices gapped and then stopped.

The daily chart shows the remarkable lack of strong bars over the last week and a half. Most bars have very small bodies and small shadows. There is simply no conviction in the market.

In fact, the QQQs gapped higher and then moved lower throughout the session. Notice that prices closed near the low of the day -- not the high. This is not a sign of strength.

And while the SPYs have technically broken out, I've circled the price clusters the index has formed. Instead of making a strong move through resistance on heavy volume, prices moved higher and then moved sideways for about a week (the first circled area). Then prices gapped higher and formed a second price cluster.

And notice that various sectors of the market are suffering from the same weak conditions.

1951 Summation

2012-01-10T17:00:00.000-06:00

Below are links to all the posts on 1951, which are part of the Bonddad Economic History Project

Employment and Income
Exports and Imports
Investment
PCEs, Income and Savings
GDP
Fed policy and inflation

Bonddad Linkfest

2012-01-10T15:30:00.000-06:00

1951; Prices and Fed Policy

2012-01-10T13:30:00.000-06:00

This is part of the Bonddad Economic History Project

Remember that the early 1950s saw tremendous growth in consumer demand and employment growth (see here and here). Hence there is s tremendous amount of demand pull inflation in the economy. In addition, the US is now producing for a massive war effort, which greatly increases the demand of basically every raw material. As such, inflation increases. Yet, in 1951 we see a decrease in inflation, which leads to the question, why?

Price controls. In 1951, Congress passed the General Ceiling Price Regulation of 1951, which froze prices at their highest level reached in late December 1950 and late January 1951.

Also of extreme importance this year was the Treasury Fed-Accord of 1951, which was:

Agreement between the U.S. Treasury Department and the Federal Reserve Board of Governors that enabled the Fed to pursue an active Monetary Policy, independent of the Treasury and the federal government. Before 1951, the Fed had to assure low cost Treasury financing by purchasing Treasury securities at a set price. Afterward, the Federal Reserve Open Market Committee was able to purchase as much, or as little, of Treasury securities offered for sale by the Treasury Department as it wanted, instead of having to buy whatever the Treasury issued at the prevailing rate. Also known as the Treasury-Fed Accord.

You can read a more complete history at the Richmond Fed.

In short, the Fed no longer had to buy bonds at set prices; as such lenders could no longer count on
the Fed to purchase bonds whenever they (the lenders) needed to extend credit. As such,

While the Fed did not raise the discount rate, they did increase the reserve requirements for banks, and the margin account requirements for stock purchasers. They also tightened installment credit terms and real estate lending. In addition, there was also a voluntary restraint on "non-essential lending, related to war activity.

The charts below, from the Federal Reserve report, show the changes in overall credit for year.

Business loans still grew at a strong rate, largely thanks to loans for essential war activity. The constraints on consumer lending show clearly on the chart (and below, which show a small .1% increase in consumer lending) as does the constraints on mortgage credit.

The above chart shows the overall upward drift of interest rates in the government security areas, which was primarily caused by the new arrangement between the Fed and the Treasury department.

Finally, consider the following charts of inflation from the 1952 Economic Report to the President.

2012: Housing, Oil, and the race between Deleveraging and Deflaton

2012-01-10T08:30:00.000-06:00

- by New Deal democrat

Part I: The K.I.S.S. method forecast

This is one of those times when I am working on so much different material that nothing gets finished on time, like my year-end review of housing sales and prices, and reflections on the Oil choke collar. The good news is, I have been spending so much time decoding ECRI's black box (with a great deal of success, I might add. It just isn't finished yet) that I can give you a much more detailed forecast for 2012.

Let me begin this year the same way I began last year: why I use the K.I.S.S. method of forecasting. Even though the LEI is the statistic most denigrated by Wall Street forecasters, it has the inconvenient habit of being right more often than the highly-paid punditocracy, especially at turning points.

Since I'm not a highly paid Wall Street pundit, I simply rely upon the LEI for the short term, and the yield curve for the longer term with the caveat of watching out for deflation. The simple fact is, with one exception, if real M1, and real M2 (less 2.5%), are positive, and the yield curve 12 months ago was positive, the economy has always been in expansion. When real money supply is negative, and the yield curve was inverted 12 months ago, the economy has always been in contraction. The exception is that the yield curve does not help to project the economy 12-16 months later if the economy at that later date is in deflation - as it was in 1930-32 and late 2008 through early 2009 - which will feature a negative real money supply.

The simplest forecast, therefore, is that since the LEI were positive all during 2011, and since both M1 and M2 are positive -- in fact, courtesy of the tsunami of cash that washed ashore in August and September due to the Euro crisis, both have been almost off-the-charts YoY positive for the last few months -- and since the yield curve did not invert at any point in the last year, so long as we don't fall into deflation we should have growth all through 2012.

This year, though, simply citing leading indicators is uniquely complicated because of what Doug Short calls The Great Leading Indicator Smackdown. The Conference Board's LEI shows clear sailing ahead. ECRI called for a recession to begin by the end of 2011, and has insisted that at very least one will begin by the end of this half. Here's Doug Short's close-up of the divergence between the two indexes:

The divergence is due in part to differing approaches, and in part to what are elements of the indexes. ECRI makes use of long, short, and weekly leading indicator indexes, while the Conference Board relies upon one mixed medium-term index. While we don't know exactly what is in ECRI's black boxes, we do know what indexes they inherited from their founder, Prof. Geoffrey Moore. Specifically, we know his proposed long leading index consisted of real M2 money supply, the Dow Jones Bond Average, housing permits, and a measure of corporate profits. His proposed WLI included weekly readings of M2, the DJBA, the S&P500, Dun and Bradstreet's business birth/death count, and (probably) the Mortgage Bankers Association's Purchase Mortage Index, and credit spreads. The Conference Board, by contrast, does not make use of the DJBA or corporate profits, but does include the yield curve.

That difference is crucial. In fact at some point between December 2009 and June 2011 one or more of ECRI's 4 legacy long leading indicators were always negative: real M2 (minus 2.5%) was negative the longest, but housing permits also declined by 150,000 between April 2010 and February 2011, corporate profits dipped at the end of 2010, and the DJBA turned down between August 2010 and February 2011. Here's the graph, showing each of the LLI normed to 100 at their maximum reading before turning down in 2010 (note: substituting the nearly identical BAA bonds trend for the DJBA):

That is about equivalent to their collective negative turn in advance of the 2001 just-barely-a-recession, although the relative components were different. The yield curve, by contrast, did invert in 1999 but did not come close in 2011. Nor did real M1, which has also always turned negative before at the inception of a recession. Here's the equivalent graph with each LLI normed to 100 at their pre-2001 recession peak:

Since the long leading indicators are designed to give at least 12 months warning of a recession, that puts us in the greatest window of weakness right about now.

In this respect, the LEI aren't that different: their weakest readings were in April and September, and if you discount the M2 and yield curve readings, were negative in April and again from June through September (h/t EconomPicData):

meaning that they also forecast maximum weakness right about now.

Just as interestingly, though, all of ECRI's long leading indicators have turned up since last spring, with real M2 and the DJBA making new all time highs. Here's the same graph we looked at above -- you can see that all 4 LLI's have rebounded and two have made new highs:

This, plus the positive yield curve, tells me that for the second half of 2012, the indicators are really in agreement -- there will be growth.

So what do the shorter leading indicators say about the first half of 2012? I'll spare you a very noisy graph, but here's the scorecard:

- The positives are that the stock market has been rallying for the last 5 months, durable goods orders are still climbing, and consumer expectations have regained virtually all their losses from the July debt debacle. Initial jobless claims have come down to 3 1/2 year lows.

- The negatives are that the ISM manufacturing indexes have been just barely positive for most of the last 6 months, the vendor delivery subindex has declined substantially, and credit spreads are at their widest since 2009. Also, the gasoline price spike from a year ago has reached the point, based on past history, of maximum impact, and will remain there through April. Commodity prices are falling, and the last two months the CPI has actually registered deflation, raising a caution flag about relying upon the yield curve. Finally, as I will detail more in part 2, you can't go on forever with real wages in decline, as they have been for all of 2011.

One other item: typically recessions do not begin until at least 8 of the 10 LEI's are lower than they were 6 months ago: through November 6 are negative, 4 are positive. That's close, but not quite enough.

Ultimately the question as to whether the trend is slightly positive or slightly negative in the first part of 2012 becomes whether housing will show enough actual strength, and whether the Oil choke collar will weaken sufficiently, to support US growth if manufacturing and exports falter. For reasons I will explore more in part 2, my best judgment is that we will avoid recession, but that at least one quarter of negative GDP, with the likelihood greater in this quarter than the second quarter, can't be ruled out.

Morning Market -- Still Not Sold on the Rally

2012-01-10T05:00:00.000-06:00

First, I'm starting to feel like the great complainer regarding the latest developments in the equity markets. However, consider the above three charts, which are in the 30 minute time frame.

The IWMs opened the year by gapping higher and then fell. While it has rallied since then, it is still below the highs established on the gap higher. The IYTs are in the same boat. The SPYs are the same way, although they have moved a bit closer to their highs. The QQQs are the only averages who have continued their break-out and advanced to higher levels. In short, there just isn't any follow-through on the rally, and the length of time from the original pop to now is a big deal.

In addition, we see that the IEFs gapped lower, but haven't sold off any more. If we were seeing a big rush into equities, we'd probably be seeing a bigger sell-off in the treasury market.

After hitting resistance at the 38.2% Fibonacci level and selling off into the EMAs, the grains ETF has a nice move higher yesterday. Notice the upward momentum implied by the EMAs -- the shorter EMAs are rising and the 50 is also turning positive, although at a smaller angle. We see overhead resistance at the 38.2% Fib level and the 200 day EMA.

Oil is still trapped below resistance established in November. The volume indicators tell us there has not been a major move out of the security, but we also haven't seen a big rush in yet.

Bonddad Linkfest

2012-01-09T14:30:00.000-06:00

3 important trends from the employment report

2012-01-09T11:30:00.000-06:00

- by New Deal democrat

This is an update on several trends I've been tracking, one that helps explain the relatively anemic job gains in the recovery, and two that forecast changes in the unemployment rate.

First, here is an updated graph of aggregate hours (blue) vs. total payrolls (red) measured from their pre-recession top.

You can see that the economy shed almost 10% of all hours worked, while only about 6% of jobs were lost. Since then, aggregate hours have improved at a much higher rate than jobs have been added. If the current trend continues, at some point in the next 6 to 9 months, it is likely that aggregate hours will catch up with jobs. From that point forward I would expect job growth to more closely mirror the growth of hours in the economy.

Second, here is the graph from Thumbcharts showing initial jobless claims for the last 6 month period vs. the same 6 months one year prior, showing that it leads the unemployment rate measured the same way.

;

The thumbcharts graph strongly suggests that the unemployment rate will continue to be well below it was in the last half of 2009 (i.e., under 9%) and probably will decline further from its current level.

The third graph is a comparison of initial jobless claims as a percentage of the population vs. the unemployment rate, again showing how the first leads the second. This is a graph I began running in December 2010 when I was totally surprised by the close and long-lasting fit (although there has been a slight drift upward over the long term in the unemployment rate vs. claims):

Here's what I said in March 2011:

This graph argued [in December 2010] that the unemployment rate was far too high compared with initial claims. Since then the unemployment rate has declined 0.9%!!! As population-adjusted initial claims has consistently led the unemployment rate for almost 50 years, this graph suggests that further declines in the unemployment rate in the coming months are likely. If so, the dramatic drop in the unemployment rate could be the surprise economic story of 2011.

Here's a close-up of the last few years:

Well, maybe it wasn't the economic surprise of the year, but it certainly was lower than just about everyone was forecasting. Please note that the December initial jobless claim rate data isn't included in the graph, and since this leads the unemployment rate, it strongly argues for a further decline in the employment rate in the next few months. An unemployment rate under 8% by election day is certainly not out of the question.

The Current Economic Situation

2012-01-09T08:30:00.000-06:00

Last week, we saw the release of the latest Fed minutes. These provide a really god overview of the current US economic situation.

The unemployment rate dropped to 8.6 percent in November, and private nonfarm employment continued to increase moderately during the past two months. Nevertheless, employment at state and local governments declined further, and both long-duration unemployment and the share of workers employed part time for economic reasons remained elevated. Initial claims for unemployment insurance moved down, on net, since early November but were still at a level consistent with only modest employment gains, and indicators of job openings and businesses' hiring plans were little changed.

(I wrote this before the release of the last employment report, which NDD wrote about here. This report did show an improving situation). There are several points made above which are very important. First, the continued bleeding of government jobs is a very negative issue for the employment situation, and is probably a reason for the continued high showing in the initial unemployment claims over the last year. The continued high level of long-term unemployed, the high JOLTS survey and the high level of part-time for economic reasons employment tells us that while the bleeding has stopped, we're simply not creating enough jobs to pick-up the slack in the labor market. I have a supply of graphs on this topic at this link.

Industrial production rose in October, reflecting in part a rebound in motor vehicle production from the effects of supply chain disruptions earlier in the year. Factory output outside of the motor vehicle sector also continued to rise, and the rate of manufacturing capacity utilization moved up. However, motor vehicle assemblies were scheduled to only edge higher, on balance, in the coming months, and broader indicators of manufacturing activity, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that suggested only modest increases in production in the near term.

Overall, manufacturing appears to be improving. After a 6-8 month, mid-year lull, we're starting to see better numbers come from this sector. However, it's important to remember that Europe is near a recession (if not already in one) and Asia is slowing (although it is still printing growth numbers). In other words, we're not out of the woods yet. And even if we see a strong performance from this sector, it's not large enough to pull the economy out of its current 0%-2% growth range into a higher rate of activity.

Revised estimates indicated that households' real disposable income declined in the second and third quarters, and the net wealth of households decreased in the third quarter. Nonetheless, overall real personal consumption expenditures (PCE) rose modestly in October following significant gains in the previous month, as spending for consumer goods continued to increase at a strong pace while outlays for consumer services were roughly flat. In November, nominal retail sales, excluding purchases at motor vehicle and parts outlets, expanded further, and sales of light motor vehicles stepped up. But consumer sentiment was still at a subdued level in early December despite some improvement in recent months

Overall, the consumer has been performing about how I thought he would perform in this "new economy" -- he's been spending, but at a historically lower rate. However, the Fed noticed the basic problem with consumer spending right now: real DPI is declining, median incomes are stagnant and overall wealth has taken a hit. This is to be expected when unemployment is 8.6% and has been at high levels for over two years. However, to maintain current spending levels, consumers have had to start dipping into savings -- a process that can't last forever.

Activity in the housing market continued to be depressed by the substantial inventory of foreclosed and distressed properties and by weak demand that reflected tight credit conditions for mortgage loans and uncertainty about future home prices. Starts and permits for new single-family homes in October stayed around the low levels that prevailed since the middle of last year. Sales of new and existing homes remained slow in recent months, and home prices moved down further.

While new homes sales are still very low by historical standards, inventory levels are now in line with historical norms. Existing home sales have been stable (at low levels) for the last few years, but inventory levels are still high, so we need more clearing out here. What I find really interesting is that home prices have more or less stabilized. Consider this chart of the Case Shiller home price index:

While there has been some bouncing around over the last few years around the 150 price level, there has not been a major crash through that level.

Real business spending on equipment and software seemed to be decelerating. Nominal orders and shipments of nondefense capital goods excluding aircraft edged down in October, and the slowing accumulation of unfilled orders suggested that increases in outlays for business equipment would be muted in subsequent months. Also, survey measures of business conditions and sentiment remained at relatively downbeat levels in November. Real business spending for nonresidential construction moved up in October but was still at a low level, reflecting high vacancy rates and restricted credit conditions for construction loans. Inventories in most industries looked to be reasonably well aligned with sales, although motor vehicle stocks continued to be lean.

There are two ways to look at this data:

The total, real dollar amount of investment is now at higher levels than the height of the previous expansion. However,

The YOY percentage change has been declining (although it's still a good levels). Finally,

The continuously compounded annual rate of change is still good.

The above chart is the total, real amount of non-residential structure investment from the GDP report. Notice is hasn't moved in any meaningful way for the last 2 1/2 years. Like the residential market, we're just not seeing a big move in commercial real estate right now.

In the government sector, real federal defense purchases appeared to have stepped down in October and November from their level in the third quarter. At the state and local level, real purchases seemed to be decreasing at a slower pace in recent months than earlier in the year.

This is a huge problem -- the contraction in government spending. Consider the following chart (which I've shown before):

Austerity is in fact subtracting from overall economic growth. For anyone that knows anything about GDP and how its calculated (which eliminates anyone in Washington and most political pundits) this should be no surprise.

The U.S. international trade deficit narrowed in October, as imports decreased more than exports. Declines in imports of petroleum products (reflecting lower prices and lesser volumes), non-oil industrial supplies, and automotive products more than offset increases in capital goods, consumer goods, and food. Reductions in exports of industrial supplies and consumer goods, led by a few particularly volatile components, outweighed the gains in capital goods.

Let's look at three graphs for the above data.

The US is still a net importer. However, the level of the overall rate is actually better than it was at the height of the last expansion.

Given that we are still a net importer, consider the above chart -- the US' net exports. Exports are doing very well right now.

The above 5-year chart, with data displayed on a quarterly basis, shows how well exports are doing in the current economy. Total, real exports surpassed their last peak over a year ago. In short, exports are a success story in the current environment.

Inflation continued to decrease relative to earlier in the year. Indeed, the PCE price index edged down in October. Consumer prices for energy decreased, and survey data indicated that gasoline prices declined further in November. Increases in consumer food prices in October were substantially slower than the average pace in the preceding months of this year. Consumer prices excluding food and energy also continued to rise at a more modest pace in October than earlier in the year. Near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers declined in early December, and longer-term inflation expectations remained stable.

The above chart shows the percentage YOY percentage change in total and core CPI. This is where I disagree to a point with the FED. First, I'm not an alarmist who thinks we are facing a bought of hyper-inflation that will kill the economy and turn us into a Weimar republic. However, because I watch the futures markets on a regular (read daily) basis, I've seen both oil and agricultural commodities spike massively over the last few years. While I don't see hyper-inflation, I do see commodity price spike possibilities in both the oil and agricultural markets this year, which could have a deleterious effect on an already low consumer sentiment.

Measures of labor compensation indicated that nominal wage gains continued to be subdued. Compensation per hour in the nonfarm business sector increased moderately over the year ending in the third quarter, while the 12-month change in average hourly earnings for all employees remained low in October and November. Unit labor costs edged up over the past four quarters.

I also highlighted this in the employment link above. The decline in DPI has led consumers to dip into savings. While a lowered DPI is to be expected when unemployment is high, at some point a lowered DPI and household wealth situation combined with a declining savings rate will lead to depressed consumer spending.

Foreign economic growth, especially in the euro area, appeared to weaken in recent months. Real gross domestic product (GDP) in the euro area barely edged up in the third quarter. Moreover, industrial production in the region fell sharply in September, and indicators of manufacturing activity in October and November pointed to lower output. Measures of business and consumer confidence in the euro area continued to decline in recent months. In other advanced foreign economies, real GDP in Japan rebounded in the third quarter from the effects of the earthquake in March, and real GDP recovered in Canada as oil production picked up after several months of shutdowns; however, available indicators of manufacturing activity in both of these economies pointed to declines during the fourth quarter. Among emerging market economies, real GDP in Brazil was flat in the third quarter, while exports from China slowed in recent months, although Chinese domestic demand appeared to remain strong.

The EU area is the big wild card in the room. The latest data indicate that if they're not already in a recession, than they soon will be. That could have a very negative impact in the US. Asia is slowing, but all signs are that it is in better shape than the EU.

In conclusion,we're pretty much where we've been for the last year. The consumer is spending, but not at fast enough rates to kick the economy into higher growth. Businesses continue to invest and exports are growing. However, austerity is really hurting as is the housing market.

Morning Market -- Still Not Sold on the Rally (Although I'm Closer)

2012-01-09T05:00:00.000-06:00

From this week's Barrons'

Investors blew off the uncertainty of 2011 and plowed into the new year of 2012 with gusto, sending stock prices up almost 2% in the first week of trading. Volumes, though, remained light in a holiday shortened week.

Although stocks dropped Friday, traders said they were heartened by the market's ability to hold on to the big gains made early in the week, particularly after a volatile 2011, in which such early-week gains often disappeared by Friday.

The Dow Jones Industrial Average rose 142.6, or 1.2%, on the week, to close at 12359.92, while the Standard & Poor's 500 index rose 1.6%, to 1277.81. The Nasdaq Composite gained 2.7%, to end at 2674.22. The biggest rises were seen Tuesday, the first day of trading in 2012.

"The fact that, coming out of the gate, we have been able to hold on to Tuesday's big gain is constructive," notes Michael Marrale, head of U.S. sales trading for RBC Capital Markets. Now that the calendar page has turned, hedge funds, many of which sat out much of 2011, might be induced to return to buying stocks, particularly if there is another 1% to 2% gain relatively soon, he says. Fears of missing out on a rally will increase, and they won't want to start the year already 2% to 4% in the hole, he adds.

Here's why I'm not entirely in agreement -- although I do think the "ice is cracking" in the equity markets.

Above is a 30 minute chart of the SPY. Riddle me this: where's the follow-through? Yes prices gapped higher, but then they just stayed there. Taking solace in the lack of a decline -- especially in light of last week's positive economic news -- doesn't make me any happier.

And the fact that the IWMs haven't made a convincing move above their resistance level is also a problem. This market should be moving strongly higher on the signs the US economy is starting the year with a bang; instead we're seeing an average trapped by highs established early last November.

That does not mean all the news is bad, however.

Both the utility and consumer staple sectors of the market -- which had been strong performers the previous week -- sold off. And,

Both the financial sector and the consumer discretionary sectors made good advances last week.

But

A big problem I still have is with the treasury market, which is obviously catching a bid from the EU situation. However, if investors were really sold on the idea of a strongly advancing stock market, I'd expect to see a much stronger sell-off in the treasury market.

Europe is still the big wild card in the deck. So long as there is a fear the EU will break up -- or that there will be a big problem from that area -- I don't see how stocks can have a strong rally that lasts more than a few weeks at best.

Weekly Indicators: 2012 starts out strong edition

2012-01-07T08:07:00.008-06:00

- by New Deal democrat

Happy New Year! In 2012 I am making some additions and improvements to this weekly recap of high frequency indicators designed to capture an up to the moment snapshot of the economy. First of all, many of the data series have seasonality and so must be tracked YoY. But one problem reporting simple YoY data is that it will lag turning points. To capture those turning points better, I am reporting new 4 month high or low YoY comparisons where applicable. Secondly, because of the concern that global weakness may itself cause a US recession, I am adding several indicators of global strength or weakness: two credit stress indexes, and two shipping indexes. Finally, I hope shortly to introduce a Shadow Weekly Leading Index, designed to replicate that ECRI series as much as possible from public data.

Before turning to the high frequency weekly indicators, let's as usual briefly check out the monthly reports. All of the monthly data reported this week was positive, although a few came in lighter than expectations. Construction spending, ISM manufacturing, ISM services, factory orders, vehicle sales, and most importantly of all, payrolls, all were positive month over month. Further, all of the leading indicator components of the ISM, factory order, and payroll numbers, also showed improvement. These numbers show an ongoing solid, if not stellar, recovery.

There are still a couple of weeks left where holiday seasonality can strongly influence the high frequency weekly indicators.

Weekly employment-related data continued positive:

The BLS reported that Initial jobless claims fell by 9,000 to 372,000. The four week average declined by 1750 to 373,250. This is the lowest level since mid-2008. Seasonality will remain significant for a couple of more weeks, so caution is still warranted in reading too much into these extremely good numbers.

The American Staffing Association Index fell by 7 to 86 last week. This is entirely due to seasonality, and in fact, the index is back above year ago levels, after stagnating in mid-2011.

Adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that withholding for the full month of December was $164.0 B vs. $169.9 B a year ago. Since there were two more reporting days for December 2010 vs. 2011, however, this is not a concern. For the last 20 reporting days, $150.3 B was collected vs. $142.4 B a year ago, a gain of +5.5%.

Housing data was mixed:

The Mortgage Bankers' Association reported that seasonally adjusted purchase mortgage applications decreased -9.7% from two weeks ago. While they did not report a YoY figure, it is nevertheless clear that YoY purchase applications were down, continuing a decline that began about a month ago. The overall trend remains flat since over 18 months ago. Refinancing also fell -1.9% from two weeks ago.

For the sixth week in a row, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were positive, up +2.1% YoY. This is the best reading in close to 5 years. An absolute majority of metro areas -- 29 -- had YoY price increases. Since the issue in 2012 will be whether the sales price trend catches up with asking prices, or whether asking prices will "catch down" with YoY Case-Shiller data, my downside metric is changing from -10% YoY to -5% YoY. While I believe asking prices are leading sales prices, if I am wrong sellers should start to capitulate and the number of areas with -5% or greater declines should increase. Nine metropolitan areas had YoY decreases in excess of -5%. In the meantime, Chicago remained the only area with a 10% YoY price decrease.

Sales and transportation continued strong:

Retail same store sales continued to perform well. The ICSC reported that same store sales for the week ending December 31 increased strong +5.3% YoY, and were also up 1.2% week over week. Shoppertrak, did not report, however, Johnson Redbook also reported a strong 4.9% YoY gain.

The American Association of Railroads reported that total carloads increased 4.7% YoY, up about 19,100 carloads YoY to 426,900. Intermodal traffic (a proxy for imports and exports) was up 14,400 carloads, or 8.6% YoY. The remaining baseline plus cyclical traffic increased 4,600 carloads or 1.9% YoY. Total rail traffic has staged an impressive rebound in the last 4 months. This made a YoY high one week ago.

Money supply and credit spreads were tepid:

Money supply has been flat or down since its Euro crisis induced tsunami of late summer. M1 increased +1.5% last week, but only +0.5% month over month. It is still up 17.3% YoY, so Real M1 remains up 13.9%. This is about 8% under its peak YoY gain at the end of summer. M2 was flat week over week, but also up +0.5% month over month. It remains up 9.6% YoY, so Real M2 was up 6.2%. This is about 4% less than its YoY reading at the crest of the tsunami.

Weekly BAA commercial bond rates declined .03% to 5.21%. Yields on 10 year treasury bonds fell .01% 1.94%. Spreads in the last couple of months have generally widened slightly, representing increasing weakness. This spread had a 52 week maximum difference in August and tied that within the last month.

With the positive news, the Oil choke collar tightened again:

Oil closed at $101.81 a barrel on Thursday. This is above the recession-trigger level calculated by analyst Steve Kopits. Gas at the pump rose $.04 a gallon to $3.30. Measured this way, we are just about at the 2008 recession trigger level. Gasoline usage, at 8556 M gallons vs. 8853 M a year ago, was off -3.4%. The 4 week moving average is off -4.9%. Since March the YoY comparisons have been almost uniformly negative, and substantially so since July.

Now let's turn to new high frequency indicators designed to track the global slowdown/recession:

The TED spread is at 0.5723 down from 0.5800 week over week. This index is slightly above its 2010 peak, and has been increasing since summer. The one month LIBOR is at 0.295, even with one week ago. While it too has been increasing since summer, it remains below its 2010 peak.

The Baltic Dry Index at 1426 continues to decline from its October 52 week high of 2173. The Harpex Shipping Index has been declining for a full year, and at 389 is at a 52 week low. Please note that these two indexes are influenced by supply as well as demand, and have generally been in a secular decline due to oversupply of ships for over half a decade. The Harpex index concentrates on container ships, and has been leading at recent tops and lagging at troughs. The BDI concentrates on bulk shipments such as coal and grain, and has been more lagging at the top but has turned up first at the 2009 trough.

While global worries generally continue to increase, in the US with the sole exception of mortgage applications there is no hint of any present or imminent downturn in any of the data as we begin 2012.

Have a good weekend.

1951, Employment and Income

2012-01-06T14:30:00.000-06:00

Thanks to the economy being on a war footing, unemployment was incredibly low - coming in below the 5% most economists consider to be full employment.

Total non-farm employment grew by over 1 million jobs during the year.

However, despite the need for durable goods, total goods producing actually added less than 200,000 total jobs during the year.

The real job gains occurred in the service industries, which saw about 900,000 jobs added, and

government employment, which saw large increases (around 300,00).

Thanks to near full employment, disposable personal income increased:

On a continuously compounded annual rate of change basis,we see a slight gain in the first quarter, a big gain in the second and then more moderate increases in the third and fourth.

And on a percentage change from the previous year, we see strong increases in the second, third and fourth quarter.

The following charts are from the 1951 Economic Report to the President, and are included because I think they're really interesting.

1951, Exports and Imports

2012-01-06T11:30:00.000-06:00

This post is part of the Bonddad Economy History Project

From the 1952 Economic Report to the President:

December employment report: you're reading the right blog

2012-01-06T08:20:00.000-06:00

- by New Deal democrat

Yesterday I said, based on trends in initial jobless claims, to expect an increase in private jobs by about +200,000, and a slight decrease in the employment rate. This morning the BLS reported that private jobs increased by +220,000 and the unemployment rate declined to 8.5%. Total nonfarm payrolls increased by +200,000. November's number was revised down by 20,000, but October's was revised up by 12,000. As I like to say from time to time, you're reading the right blog.

Here's the BLS's graph of monthly job changes. While 200,000 is nice, and about 75,000 more than needed to accomodate population growth, we're still not adding jobs fast enough to put a dent into the losses from trend due to the Great Recession:

In fact, both the participation rate and the employment to population ratio were unchanged. These have not moved upward significantly since the end of the recession.

Unemployment is certainly trending down:

Workers involuntarily working part time decreased by 371,000 to 8.1 million.

Generally the internals of the report were also quite good. Almost all of the leading indicators in the report fared well. Manufacturing hours were up .1 to 40.5 hours. Jobs in manufacturing were also up, +23,000. Construction added +20,000. Only manufacturing overtime declined, -.1 to 3.2 hours.

One of the other coincident indicators used by the NBER to measure expansion vs recession, aggregate hours, also increased strongly, up .5 to 94.8. Aggregate hours continue to increase more strongly than actual job additions. Once these have "caught up" to their pre-recession trend, I expect job growth to be more robust.

The diffusion index - a measure of how many sectors were adding vs. subtracting jobs - also registered strong improvement, up to 61.2%.

One item of continuing concern, however, is that real wages still aren't keeping up with inflation. While they were up .2% in December, they were only up 2.1% for the year 2011, over 1% less than the inflation rate.

In summary, so long as you weren't suckered by the ADP report yesterday, this is a very good report. It's just still not good enough to make a significant contribution to an improvement in the trend.

____________
Silver Oz adds:

1) The summary states: "Among the marginally attached, there were 945,000 discouraged workers in December, a decrease of 373,000 from a year earlier."

2) The non-seasonally adjusted unemployment rate declined to 8.3%, and U-6 declined from 15.6 to 15.2%

3) The yearly private jobs gain is 1.9 million

4) Table A-4 shows big gains in employment for college graduates and some college and the declines for High School grads and less than HS again this month.

From Bonddad:

First, thanks to NDD for covering this report; my schedule is a bit tight this AM, so I only have time to add a few comments.

1.) As I noted in the review of 2011's employment situation, we've seen job growth for the last 12 months. The above highlights that fact clearly. Unfortunately, we haven't had enough job growth, which explains why the long-term unemployment rate is still high.

2.) The lowered readings on labor participation continue to tell a story of the beginning of the boomers retirement; expect this number to stay low for the next decade or so as this trend continues.

3.) Overall -- in conjunction with the lowered initial claims reading of the alst six or so weeks -- this is a very encouraging report.

Morning Market

2012-01-06T07:52:00.002-06:00

There's good and bad news in the equity market situation.

First, the QQQs have broken out. Most importantly, we see a really nice, bullish candle print yesterday. In addition, the MACD is showing an improving momentum situation. While the volume is a bit lacking, you're not going to get everything you want out of a rally. However,

Neither the IWMs nor the SPYs have made any more of an advance since their early week highs. More importantly, neither has advanced with the QQQs, indicating that the QQQs advance was the result of a particular stock issue or sector rather then a good feeling about the economy or markets as a whole.

The daily charts of both the IWMs and SPYs show the weakness of each respective market. The IWMs are back below resistance and the SPYs have not made a strong move yet.

Also consider that the markets should have all moved higher yesterday with the ADP report and the initial jobless claims print -- both of which were extraordinarily good.

The markets may be pausing in anticipation of the BLS report later this AM. However, not rallying yesterday indicates there is serious concern about something right now.

Morning Market

2012-01-05T15:41:00.000-06:00

There's good and bad news in the equity market situation.

Bonddad Linkfest

2012-01-05T14:30:00.000-06:00

Tomorrow's employment report: cross your fingers ...

2012-01-05T12:05:00.004-06:00

- by New Deal democrat

With the last month's decline in initial jobless claims, I thought it would be worthwhile to re-run a couple of graphs.

Here is the most recent graph comparing population-adjusted initial jobless claims with payrolls, from 2009 to the present. A change in the population adjusted initial jobless claims rate is mirrored in the unemployment rate, frequently with a 1 or 2 month delay (note this graph does not include the last 4 weeks' data of claims):

This suggests that it is likely we will see a new post-recession low in the unemployment rate tomorrow.

Similarly, if the trend comparison between initial jobless claims and payrolls holds, with the 4 week average now at about 372,000, we should see about a 200,000 gain (+/- 75,000) in private jobs tomorrow:

Even if both happen, it's still a long, slow, painful slog of a recovery. Cross your fingers ....

This is NOT What Socialism Looks Like

2012-01-05T07:31:00.001-06:00

One of the thing that really infuriates me about our political dialog is how politicians throw words around which have absolutely no basis in fact. Over the last few years, I've heard the word "socialism" used like a comma. However, consider the following chart:

The above chart shows the percentage contribution of overall government spending to overall GDP growth since the first quarter of 2008. For 6 of the last 8 quarters, government spending has subtracted from overall growth. In the preceding months, we see that government spending did contribute to overall growth, but that effect has now worn off.

Let's look in more detail at the above data:

The above chart gives us more detail of government contributions to overall GDP growth. First, notice the blue line, which is defense spending. This number has been a powerful contributor to economic growth over the last three years; it has only contracted in four quarters. Secondly, notice federal non-defense spending -- the red line. Its contribution at the beginning of the chart was actually far weaker than defense spending. In other words, it was the war efforts that really added to overall growth. More importantly, in the 4Q09-2Q10 period we see non-defense spending at higher levels than defense spending -- a situation we also see in 1Q09 and 2Q10. Put another way, out of the last 15 quarters, federal non-defense spending has contributed more economic growth than defense spending in 5 quarters -- or 33% of the time. Finally, notice the green line, which shows the percentage contribution of state and local spending to GDP growth. This number has subtracted from growth 11 of the last 15 quarters -- or 73% of the time. For the quarters it did contribute, it did so at very low rates.

What to these two charts tell us?

1.) Defense spending is actually far more important to overall GDP growth over the last 15 quarters than federal non-defense spending.

2.) State and local governments fiscal issues are hurting overall economic growth.

3.) An economic policy that is contractionary, in fact, leads to slower growth.

Put another way: this ain't socialism.