Is This a Sucker's Rally?

From the WSJ:

Here are three reasons why this isn't a sustainable rally:

- Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

.....

- Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

.....

- Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

I would add that I'm guess there has been a ton of short-covering as well, adding to upward momentum.

These are all good points. I should add that so far, the last three days of trading indicate the rally is weakening. Considering the length of the run we've had I would expect a sell-off that would be a profit taking venture.

A Quick Look at Market Sectors

Below are 1 year charts of all the major ETFs. Take a close look at each chart and you'll notice a very important point: all of them have broken through key resistance levels in one way or another. Some are even above the 200 day SMA. The point to all this is we are out of the severe oversold conditions that were prominent for the early part of this year. A pull back from these levels would not be a bad thing.

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Central Bankers See "Inflection Point"

From the WSJ:

Central bankers see an economic turnaround coming -- though not just yet.

"We are, as far as growth is concerned, around the inflection point in the cycle," European Central Bank President Jean-Claude Trichet said at a news conference on Monday after a regular meeting of global central bankers in Basel, Switzerland. Mr. Trichet is chairman of the group.

Bolstering that view, data from the Organization for Economic Cooperation and Development on Monday showed that some of the world's leading economies may be on the path to recovery.

The link to the OECD data is here.

Here is the table of the various countries and regions:



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Notice that four countries are highlighted -- France, Italy, China and the UK. Here are the charts for their respective leading indicators:





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NOW -- let's be very cautious about this information as there are still big problems out there. The leading indicators for other parts of the world -- like the US -- are still heading lower. So we are no where near out of the woods yet. For example:

Across the 16-nation euro zone, dismal industrial-production data Monday underscored the severity of the first-quarter slowdown.

Italian industrial output fell 24% in March from a year earlier, while French industrial production fell 16%, their national statistics offices reported. The German statistics office said German steel production plunged 53% in April from a year earlier on slumping orders from the automotive and machinery industries.

Treasury Tuesdays

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Last week, the Treasuries were right at the 200 day SMA. They are in the exact same place today. The primary different is

1.) Prices have dipped below the 200 day SMA and moved above the average since.

2.) All the SMAs are moving lower and the SMAs are now in a bearish position -- the shorter SMAs are below the longer SMAs, all the SMAs are moving lower and prices are below the 10, 20 and 50 day SMA.

So -- will the sell-off continue?


The on balance volume indicator tells us that people have been leaving the Treasury market since right before the end of last year. But


The MACD has been heading lower for awhile and is at an incredibly ow reading indicating we might be ripe for a reversal. In addition,


The RSI just crossed above a trend line. Aslo note the current reading shows increasing price strength.

The bottom line is there are good reasons for both directions right now. However, I would keep an eye on the stock market as it appears to be the primary driver right now. So long as stocks are moving higher I would expect the Treasury market to remain weak and vica versa.

Today's Markets

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This morning I noted the QQQQs were moving lower -- contrary to the other markets on Friday. Let's start there:


Today prices started out at the 200 day/20 day SMA and moved into the 10 day SMA. More importantly:


The QQQQs look like they're in the middle of a bear market flag pattern.




The SPYs are still in an uptrend on their 5 minute chart. But prices broke down today by gapping down at the beginning of trading. In addition, today's price action forms a nice triangle pattern with prices alread breaking lower. In addition,



The IWMs are right at important technical levels.

The markets have been rallying for two straight months with no sell-off. Some type of correction is warranted. Over the last two trading sessions we've seen some preliminary moves towards a correction, but nothing definitive. These are just inching moves.

Credit Cards Defaults and Consumer Credit

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From the NY Times:

Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.

Within the card industry, all eyes are now focused on the sharp increase in unemployment. At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.

American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months. Even Chase Card Services, which charged off just 7.7 percent of its card loans in the first quarter, expects its loss levels to surpass unemployment by the end of the year.

Consider that with this table of consumer credit from the Federal Reserve:

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Consumer credit contracted in 4Q08 and is on track to do so in 1Q09.

And these charts from the senior loan survey:



Finally, here is a chart of consumer loan demand:



Here's what the survey said about the information portrayed in the charts:

Consumer lending. Large percentages of domestic banks again reported a tightening of standards and terms on both credit card loans and other consumer loans over the previous three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey. About 50 percent of respondents, down from 60 percent in the January survey, reported tightening standards on other consumer loans. About 50 percent of respondents reported having reduced the extent to which credit card accounts were granted to customers who did not meet their bank's credit-scoring thresholds, and a similar fraction reported pulling back from granting other kinds of consumer loans to such customers. Roughly 55 percent of the respondents, a somewhat higher proportion than in the January survey, reported having raised minimum required credit scores on credit card accounts over the previous three months. About 45 percent of respondents reported having raised minimum scores on consumer loans other than credit cards, and about 65 percent of banks, compared with 45 percent in the January survey, indicated that they had lowered credit limits to either new or existing credit card customers. In contrast to the substantial net tightening reported for consumer loan standards and terms, only about 5 percent of domestic banks, on net, indicated that they had become less willing to make consumer installment loans over the previous three months; this proportion is down from 15 percent in the January survey and 45 percent late last year. Regarding demand, about 20 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the previous three months-substantially less that the percentage so reporting in the January survey.

So -- lenders are tightening their lending standards but are more willing to make loans. My guess is they simply want to make more prudent loans right now as opposed to the "you have a pulse so you get a loan" philosophy of the last few years. Considering the destruction of the consumer's balance sheet over the last few years (massive debt combined with asset deflation and weak job prospects) it's going to be harder for people to get loans.

Some of this is also the result of a higher savings rate:


All of this adds up to a declining year over year total of consumer credit outstanding, both for revolving and total credit.






Anyone that thinks consumer spending is going to get us out of the recession is sadly mistaken.

Two More Points in Employment

From economicpic data, notice the huge jump in the number of people who are part time for economic reasons.

From Economists Blog we see that household employment increased last month for the first time in 11 months.

What do these mean? I still think they all add up to the following: short term things are easing. This means we'll see a lower rate of job losses. However, it's going to be a long time before we see a pick-up in employment.

More on Employment

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The above chart is from the PDF news release from the BLS. Notice we can break down the graph into three zones. The first is zone 1 where we saw moderate job losses, but no more than 200,000 in a month. Then we see the massive contraction that occurred at the end of last year with escalating losses. Then there are the five months of extremenely heavy job losses from November through March of this year. Finally, we see the peak rate of contraction over the last 6 months.

Let's combine that graph with this one:



The 4-week moving average is clearly forming a top.

However....


The rate of job destruction is the worst we've seen since the last 1950s. This tells us the worst is not over. In addition,


Average weekly hours is dropping, telling us that employers are still trying to limit the amount of people they have to lay-off by first cutting hours.

Bottom line: I still think we've put in a bottom for now. However, I also think it's going to be an extremely long road to economic recovery on the jobs front. I don't see a big wave of rehiring. What I do see is the possibility of another "jobless" recovery on the horizon.

Market Mondays

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The QQQQs have been the leading index for this rally. However, there are some possible problems developing with the QQQQs leading status.


First, notice that prices have clearly broken the 3-month uptrend that started in early March.



Here's a closer look at the trend break. Notice that prices have moved through the trendline and are now sitting right around the 10 and 200 day SMA. Also note the volume spike over the last three trading days -- especially the day when prices fell. That tells us that traders were looking to get out.



A look at the daily chart shows the clear trend break along with the possible formation of a quick double bottom.

The point is on Friday the QQQQs did not advance with the other indexes. That lack of confirmation can be a warning sign that the trend is about to change. Considering the strength of the run we've had so far a sell-off would be welcome. However, there is nowhere near enouch data to make a firm call. So far, this is just an anomily we should be aware of.

Weekend Beagle and Weimar

It's that time of the week. Don't think about the markets or the economy. To that end....


Sham-Weimar --- made in Germany so you know its good



See you on Monday morning

The Stress Tests, Part II

Let's move to the latest report from the Treasury Department. It indicates several problems.

1.) "Each potential BHC (bank holding company) was instructed to estimate potential losses on its loan, investment securities, and trading portfolios." Does anyone see a problem here? The banks estimated the losses. That's a great example of the fox guarding the hen house.

2.) Consider the following table:



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This is the set of assumptions provided to the firms that were "a common set of indicative loss rate ranges for specific loan categories under conditions of the baseline and the more adverse economic scenarios. Firms were allowed to diverge from the indicative loss rates where they could provide evidence that their estimated loss rates were appropriate."

Where available, let's compare these rates to information from the latest Quarterly Banking Profile from the FDIC.



Above is a chart for the non-current rates on loans secured by 1-4 family residences. This is the current experience. The numbers in the table are for the cumulative two year loss rate in percent. Currently, the actual experience of first lien mortgages are right in line with the baseline scenario. The first lien and HELOCS are below. It's extremely important to remember these numbers don't exactly correlate -- one is a quarter over quarter change and one is a cumulative two year scenario.

Above is a chart of non-current C and I loan rates.



Above is a chart for currrent credit card loss rates.

Remember with all of these chart we have to convert the current numbers into a "cumulative 2-year loss rate". But, given current numbers the collateral assumptions aren't bad.

The Stress Tests Part I

Yesterday the Federal Reserve issued the stress test report. This is all I'm going to write about today because it's really important news. But before we get to the results, let's look at the actual stress test used by the Fed to see what the basic scenario was.

Let's start with their GDP assumptions. Here is the chart of their baseline and more adverse GDP projections:




I'm assuming that "4 quarter percent change" is the same as year over year percent change. Notice the economy is already performing worse than expected in the GDP stress tests.




The current unemployment rate is more in line with the worst case scenario






The Fed's worst case scenario of home prices assumes a 22% year over drop this year. That is -- in December of this year prices will be 22% lower than in the 4th quarter of 2008. Prices are already falling at a roughly 18% year over year rate in February. Lots of people were excited when the Case Shiller number didn't set a record low in the latest report.

So

GDP is already performing more poorly than the Fed's stress test.

The worse case scenario for unemployment is the most realistic possibility.

Home prices are already closer to the Fed's worst case scenario than the median baseline forecast.

Bottom line: the worst case scenario is the most realistic scenario.