Weekend Weimer and Beagle

It's almost the close and it's time to stop thinking about the market and economics and think about anything else except those two things. To that end, here are some pictures of the kids. I'll be back on Monday

Treasury Yields Hit Record Lows`

From IBD:

Treasuries raced higher Thursday, driving government debt yields down to historic lows, as recession fears pummeled stock markets and powered a frantic rush to the safety of bonds and cash.

The gains in bonds, which benefit from economic hardship, were almost inversely proportional to the plunge in stocks. The benchmark S&P 500 index slid to its lowest since 1997, erasing more than a decade of stock market gains.

The fall of longer-dated note and bond yields to five-decade lows marked a new extreme of risk aversion among investors, many of whom have not experienced such tumultuous financial market turmoil in their lifetimes. Many analysts are now starting to worry that there is at least an outside chance of a depression, not just a recession.

That is a serious flight to quality and deep concern about the stock market.

Philly Fed Looks Terrible

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From Bloomberg:

Manufacturing in the Philadelphia region shrank in November at the fastest pace in 18 years, a sign that the credit crunch and weak demand are causing companies to cut back.

The Federal Reserve Bank of Philadelphia's general economic index was minus 39.3 this month, weaker than forecast and the lowest reading since October 1990, from minus 37.5 in October, the bank said today. Negative readings signal contraction. The index averaged 5.1 last year.

The deepening credit crisis and economic slump are forcing companies to trim payrolls, investment and production. Slowing global demand is weighing on manufacturing, which accounts for about 12 percent of the U.S. economy.

``Manufacturers are getting hit by several different forces,'' Dean Maki, co-chief global economist at Barclays Capital Markets in New York, said in an interview with Bloomberg Television. ``Real exports are being hit pretty hard because the slowdown is heading abroad as well.''

Why is this important?

-- The NBER uses manufacturing activity as an indicator for when a recession starts.

-- Exports were a bright spot for the economy last year and part of this year. Europe's and Asia's slowdown along with the US consumer slowing his spending is obviously having an impact

-- Manufacturing employment has been declining since the beginning of 2007.

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Forex Friday

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Notice the following on the weekly chart:

-- Prices have rebounded from a low of 72 at the beginning of July to a current high of 88. This is a rebound of 22% in 5 months.

-- Prices are above all the SMAs

-- All the SMAs are moving higher

-- The shorter SMAs are above the longer SMAs

BUT

-- The RSI is overbought and

-- The MACD is is overbought



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Notice the following on the daily chart

-- Prices are clearly in an uptrend that has lasted for 4 months

-- Prices have continually moved through previously established resistance levels

-- All the SMAs are moving higher

-- The shorter SMAs are above the longer SMAs

-- Prices are above all the SMAs

BUT:

-- Prices are consolidating in an upward sloping triangle

-- The 87-88 handle has proved difficult for prices to move through

-- The MACD is sloping downward

-- The RSI is overbought

Bottom line: the rally looks like it is petering out.

As an added bonus, notice that commodity prices started to drop when the dollar started to rally.

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Remember that commodities are priced in ... dollars.

Today's Markets, Part II

Several people have asked if I still think the market is bottoming. Frankly I don't know at this point. I need to think about this and write on it when I have an answer.

Today's Markets

Big news today. The market's technical position is now terrible. Let's look at the charts.



On the multi-year chart, notice that prices are now below the 2002-2003 lows. That means the entire rally of 2003-2007 is now completely gone.



On the daily chart, notice the following:

-- Prices have moved through lower trend line of the triangle

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

It doesn't get more bearish than this.



On the 10 day, 5-minute chart, notice the market has lost 20% over the last 10 days.



On the two day chart, notice that volume increased as the session wore on. And volume increased to big levels at the close.

Bottom line: There is nothing good on these charts; all of the technical signs are bad.

Job Market Looking Grim

From the AP:

New claims for unemployment benefits jumped last week to a 16-year high, the Labor Department said Thursday, providing more evidence of a rapidly weakening job market expected to get even worse next year.

The government said new applications for jobless benefits rose to a seasonally adjusted 542,000 from a downwardly revised figure of 515,000 in the previous week. That's much higher than Wall Street economists' expectations of 505,000, according to a survey by Thomson Reuters.

That is also the highest level of claims since July 1992, the department said, when the U.S. economy was coming out of a recession.

The four-week average of claims, which smooths out fluctuations, was even worse: it rose to 506,500, the highest in more than 25 years.

In addition, the number of people continuing to claim unemployment insurance rose sharply for the third straight week to more than 4 million, the highest since December 1982, when the economy was in a painful recession.

This is not good news. However, there is a silver lining in a somewhat reverse psychology way (or at least I think so).

Remember, I'm working from the assumption that the worst we'll see in job losses is a 50% loss of all jobs created during the last expansion. Accelerating job losses indicate we're moving into phase 2 of the recession -- the period when companies start laying off larger numbers. Compounding this issue is we're at the end of a fiscal year for most companies. Management is thinking, "let's just get this over with before the end of the year so it's reflected on this year's earnings." It's akin to ripping the bandage off quickly simply to get it over with.

I still think we're going to see the recession end by the third quarter of next year. A fair amount of that thinking is based on an aggressive response from the incoming administration. In a recent column I advocated for a massive fiscal stimulus. Assuming this occurs I think we'll be alright.

For more on my thinking regarding this subject see this article

A Note On SMAs

I use the phrase SMAs an awful lot, don't I? But I've realized that I have never explained why I use them so much or why I think they are so effective. To that end I have added this explanation. Warning: there is some math involved.

"SMA" is "simple moving average." Here's a working definition:

A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.

I use the 10, 20, 50 and 200 day SMAs. So in real time the lines are a two week line (half a month), a four week line (one month), a two and a half month line and the line everybody uses to differentiate between bull and bear markets.

SMAs are like line charts for prices. But because they are averages they smooth the price action which helps to block out the day to day noise. This is what makes them incredibly valuable. They allow us to see what the overall trend is in a variety of time frames.

There are two very significant developments regarding SMAs.

1.) When a shorter SMA crosses over a longer way in either direction (either up or down). Let's think this through. Suppose the 10 day SMA crosses below the 20 day SMA. That means the two week average price moves below the one month average price. What do you think that means for the one month average price? It's going lower. Why? Consider the math involved. The numbers used to calculated longer SMA contain the shorter SMA. So as the shorter SMA decreases the longer SMA decreases by simple definition.

So a cross-over not only means short-term prices are moving lower, it also means prices for the next higher time frame are moving lower. The reverse of this is also true.

2.) Where are the shorter SMAs in relation to the longer SMA? A phrase that I write a great deal is something like, "the shorter SMA is below the longer SMA." Why is this important? Remember -- the longer SMA contains the shorter SMA, so if the shorter SMA is below the longer SMA that means the longer SMA is probably moving lower. The reverse is also true.

These two reason are the primary reasons I rely so heavily on moving averages in my technicla analysis.

Hope this helps.

Thursday Oil Market Round-Up

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Notice the following on the weekly chart:

-- Prices are at levels not seen since the beginning of 2007

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

BUT

-- The RSI is oversold, and

-- The MACD is oversold



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Notice the following on the daily chart:

-- Prices have been dropping for four and a half months

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

BUT:

-- The MACD is rising

Bottom line: The rising MACD on the daily chart indicates prices want to move higher. Add to that the oversold RSI and MACD on the weekly chart and the possibility of a bear market rally emerges. But there is tremendous downward momentum in the market right now that may thwart the rally.

Today's Markets

The market broke though key technical support today. More importantly



Notice the action on today's 5-minute chart.

-- Prices continually pushed lower, first to 83, then 82.60 then 82.

-- Volume increased as prices moved lower.

In other words, the consolidation is over.

CPI Takes a Nosedive

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From Bloomberg:

The consumer price index plunged 1 percent last month, the most since records began in 1947, the Labor Department said in Washington. Commerce Department figures showed housing starts tumbled to an annual rate of 791,000, indicating the industry’s contraction may extend into a fourth year.

Today’s CPI report signals deflation, or a prolonged price slide, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen the economic downturn by making debts harder to pay off and countering the impact of Fed interest-rate cuts.

“The economy’s really just in horrific shape,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York. Fed officials will “take rates as low as they have to” to avoid “a deflation-type scenario, which now all of a sudden is very possible.”

LaVorgna predicts the Fed will cut its main rate to 0.5 percent from its current 1 percent when it meets on Dec. 16.

Fed Vice Chairman Donald Kohn said today that while the risk of deflation is “still small,” policy makers must be “aggressive” in fighting the danger. The economy “is declining right now” and will record a couple of quarters of contraction, he said in answering questions after a speech in Washington.

Prices plunged the most since records began. That is one hell of a slump.

There is more and more talk of deflation right now. While an extended period of lower prices sounds good, here is the reason that has people concerned:

Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity - contributing to the deflationary spiral.

Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. The solution to falling aggregate demand is stimulus, either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and borrow at interest rates which are below those available to private entities.

How Cheap is the Market?

From Barron's:

FOR A FLEETING TIME TUESDAY AFTERNOON, the stars in the stock market were aligned in a configuration not seen in a half-century: shares yielded more than bonds.

Specifically, the dividend yield on the Standard & Poor's 500 stock index touched 3.57% at 1:13 PM Eastern time, exceeding the 3.54% yield on the benchmark Treasury 10-year note, according to Bloomberg News. That's something that hadn't happened since 1958.

This is a big reason why I think the market is bottoming right now.

Car Market Round-Up

There are several news stories on the car companies today. First, it's not just Detroit:

Reeling from a relentless sales slide, Toyota Motor Corp (7203.T) said on Wednesday it would stop all of its North American factories for two days next month, while rival Nissan Motor Co (7201.T) renewed its pessimism over the industry's near-term prospects.

.....

Ghosn told CNBC that U.S. industry-wide sales falling to 11-11.5 million vehicles next year was a "realistic" assessment. Sales totaled 16.15 million in 2007.

According to the article car sales have dropped almost 30% year over year. That's a huge drop. Here are the factors that led to the drop:

1.) The credit crunch. Car are bought on credit. Tighter credit means fewer buyers.

2.) A massive drop in consumer confidence caused by a worsening job market, crashing stock market and continued weakness in housing. Those factors were essentially a Tsunami that guaranteed any durable good purchased would be hammered really hard.

Also leading to big problems for Detroit are the low resale value of US cars:

Detroit's auto makers continue to lag behind Asian and European competitors in car resale value, an important consumer gauge.

Kelley Blue Book, a well-known vehicle appraiser, plans to announce Wednesday its annual ranking of the top 10 brands for projected resale value -- and not a single one will be American. Kelley, which ran its calculations before the big car makers began pushing for government financial help, defines resale value as the amount of a vehicle's sticker price that is retained after five years of ownership. The typical Chrysler car, for example, is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The typical Chrysler car is expected to retain just 24.2% of its original cost. By comparison, the top-rated Honda brand's vehicles are expected on average to retain 44.5% of their value.

The U.S. industry's poor showing bodes poorly for its ability to win back consumers to American brands after years of slipping market share. Resale value, also known as residual value, is a factor consumers consider closely when buying or leasing a new car. Because monthly lease payments cover the difference between a vehicle's sticker price and its expected value at the end of the lease, cars that hold their value better have lower lease payments.

After the Honda brand, made by Honda Motor Co., Kelley Blue Book's top picks include the Toyota brand, made by Toyota Motor Corp.; Volkswagen AG's Volkswagen brand; the Subaru brand by Fuji Heavy Industries Ltd.; and Toyota Motor's luxury Lexus brand. Rounding out the top 10 are BMW AG's BMW brand; Nissan Motor Co.'s Infiniti brand; Honda's Acura brand; Volkswagen's Audi brand; and the Nissan brand.

And on the topic of dropping sales:

Gleaming new Mercedes cars roll one by one out of a huge container ship here and onto a pier. Ordinarily the cars would be loaded on trucks within hours, destined for dealerships around the country. But these are not ordinary times.

For now, the port itself is the destination. Unwelcome by dealers and buyers, thousands of cars worth tens of millions of dollars are being warehoused on increasingly crowded port property.

And for the first time, Mercedes-Benz, Toyota, and Nissan have each asked to lease space from the port for these orphan vehicles. They are turning dozens of acres of the nation’s second-largest container port into a parking lot, creating a vivid picture of a paralyzed auto business and an economy in peril.

“This is one way to look at the economy,” Art Wong, a spokesman for the port, said of the cars. “And it scares you to death.”

The backlog at the port is just part of a broader rise in the nation’s inventories, which were up 5.5 percent in September from a year earlier, according to the Commerce Department. The car industry has been hurt particularly, with sales down nearly 15 percent this year.

The drop in sales is now causing a huge build-up of inventory conveniently parked in a giant lot in California. Not a good sign.

All of this is leading up to a giant case of political theater:

WASHINGTON -- The chief executives of Detroit's Big Three auto makers appealed in dire language for U.S. taxpayers to help their industry, but couldn't dispel doubts in Congress that have clouded prospects for a government-led rescue.

In appearances Tuesday before the Senate Banking Committee, the leaders of General Motors Corp., Ford Motor Co. and Chrysler LLC, together with the head of the United Auto Workers union, argued the shaky U.S. economy couldn't withstand a collapse of any of the companies.

The chief executives of GM and Chrysler said they could run out of funds without the government's support. GM CEO Rick Wagoner said the package is needed to "save the U.S. economy from a catastrophic collapse."

The question is can Detroit survive until January?

Wednesday Commodities Round-Up

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Notice the following on the weekly chart:

-- Prices are at or near their lowest level in three years

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

BUT

-- The RSI is oversold, and

-- The MACD is oversold



Notice the following on the daily chart:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- Prices have been dropping for nearly 5 months

BUT

-- The MACD is rising and

-- the RSI is bordering on oversold territory

Bottom line: The market is technically oversold and wants to rally

Today's Markets

I've been carping on the consolidation triangle occurring in the market. Notice that today me moved below that level and then rallied above. Technically that is very important because it indicates 84 is an important level for traders.

Also note this is now the fourth time the SPY's have tested that level only to rally from it.



On the two day chart in 5-minute increments notice the following:

-- Prices consolidated around the 84 level.

-- Prices broke through this level.

-- Prices rallied from this level on increasing volume.

Very positive move technically.

We're Nowhere Near A Bottom In Housing

From Bloomberg:

Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by distressed foreclosure sales across the country, the Chicago-based National Association of Realtors also said today. The median price of a U.S. home fell 9 percent from a year earlier and sales of properties with mortgages in default accounted for at least a third of all transactions.

“We are in a crisis situation,” NAHB chairman Sandy Dunn, a builder from Point Pleasant, West Virginia, said in a statement. “Tremendous economic uncertainties have driven consumers from the housing market, and it’s going to take some major incentives to bring them back.”

When the year over year rate of price declines starts to level off we'll be near a bottom -- but not until then.

PPI Drops Most on Record

From the BLS:

The Producer Price Index for Finished Goods fell 2.8 percent in October, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed a 0.4-percent decline in September and a 0.9-percent fall in August. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 3.9 percent in October after declining 1.2 percent in September, and the crude goods index dropped 18.6 percent subsequent to a 7.9-percent decrease in the previous month.

.....

For the 12 months ended in October, finished goods prices advanced 5.2 percent. Over the same period, prices for finished consumer foods climbed 6.5 percent, the index for finished energy goods increased 5.5 percent, and the index for finished goods other than foods and energy rose 4.4 percent. From October 2007 to October
2008, prices received by intermediate goods producers advanced 10.2 percent, while the crude goods index decreased 1.4 percent.

There are two things we learn from the above points.

1.) Producer prices are dropping fast, and

2.) Although the year over year is still high I wouldn't expect that trend to continue. Consider this chart from econoday:



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That's a healthy drop. Also consider the following from Bloomberg:

Prices paid to U.S. producers plunged in October by the most on record as the faltering global economy caused demand for commodities to dry up.

The larger-than-forecast 2.8 percent drop followed a 0.4 percent decline in September, the Labor Department said today in Washington. So-called core producer prices that exclude fuel and food rose 0.4 percent, indicating that the declines in raw- material costs have yet to feed through to other products.

Today's figures, along with a U.K. government report showing Britain's inflation rate fell the most in at least 11 years, show a rising threat of deflation. That's likely to spur central banks to keep cutting interest rates, with some benchmarks approaching zero percent, economists say.

``The broad-based softening of prices shows inflation is contained, and disinflation is taking hold,'' John Herrmann, president of Herrmann Forecasting LLC in Summit, New Jersey, said before the report. ``It gives the Fed the ammunition to cut rates further.''

Now we're seeing more and more talk of deflation -- a period of dropping prices. Considering that real estate has been falling for awhile now and companies are doing everything they can to attract a reluctant consumer expect this kind of talk -- and this trend -- to continue.

Job Losses and The Duration of the Current Recession

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Above is a chart from the Bureau of Labor Statistics. It shows total number of establishment jobs starting in 1945 -- essentially right after WWII. Note that we can break this graph down into a few different time periods. Let's look at each of these two eras with an eye to only one data point: job losses and recessions.



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The big period of job losses on this chart occurred in 1957 - 1958 era. According to the NBER, there was an expansion from May '54 to August '57 and a recession from August '57 to April '58. The expansion created 4,163,000 jobs while the subsequent recession destroyed 2,216,000 jobs. In other words, the recession destroyed 53.23% of the jobs created during the expansion.


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The sole reason for including the above graph is this: notice there are no periods where job destruction was more than 53% in the above example.



Above is the remainder of the chart. Again, note the job destruction is nowhere near the 53% level mentioned above.

OK -- so where am I going with this? The best read on total establishment job creation during the latest expansion is 7.2 million jobs. So far the economy has lost 1,179,000 jobs or 16.66%. So let's assume we see a rate of job destruction on parallel with the worst rate in the last 60 years. That would bring total job destruction to 3.6 million.

Now -- remember that we've already lost 1.2 million jobs. This means we have an addition 2.4 million to go. At a 240,000/month clip that means we've got 10 months of heavy job losses left. That places the end of the news of terrible job losses somewhere next summer. And that assumes we'll see a rate of job destruction on par with the worst rate of the last 60 years.

Let me add on final caveat: there are no guarantees in economics. Remember -- home prices always go up? Yeah, me too. The point is the above analysis could be off for a variety of reasons. All I'm trying to do is get a read of when the recession will be over.

Treasury Tuesdays

On the yearly chart, notice the market is still clearly in a trading range between 85.80 and 92.50 (roughly). The market has been in this range for the entire year and there is no reason to think it won't continue. The bulls have the underlying financial situation along with stock market issues. However, the bears have an increasing supply coming to market. Basically there is a healthy balance between both sides creating a stalemate.



On the shorter-term side notice the following.

-- Prices have broken through the upper downward sloping trend line.

-- All the EMAs are headed higher

-- The shorter EMAs are above the longer EMAs

-- Prices are above all the EMAs

BUT

-- Prices are still within the above mentioned trading range, and

-- The EMAs are still bunched together

Bottom line: this market isn't going anywhere soon.

Today's Markets

We're still consolidating. However, there are plenty of reasons to be bearish on this chart. Notice the following technical developments:

First -- note these are exponential moving averages. These moving averages give more weight to more recent data.

-- All the EMAs are moving lower

-- The shorter EMAs are below the longer EMAs

-- Prices are below all the EMAs

HOWEVER

We're still consolidating in the triangle.