What Percentage Subprime?

This chart is from the WSJ's Marketbeat blog. Notice the large percentage of loans written last year to either subprime borrowers or second homebuyers.



I'm not saying this is good or bad. What I am saying is it seems like a fair amount of mortgage loans were made to people who either had questionable credit or already had a home.

Debt Growth, Equity Prices and Consumer Spending

The following is from an email I received that comes from an options group I belong to. The article is written by Dr. Marc Faber.

First, it is important to understand that mortgage debt has begun to grow at a slower pace largely because home prices are no longer appreciating. The growth in the mortgage market was about equal to nominal GDP growth between 1980 and 2000. But, in the 2000 to 2006 period, a massive breakout from the trend occurred and, combined with a decline in the saving rate, drove consumption and GDP growth. But, as home prices began to decline in 2006, and as problems in the subprime lending market became evident, lending standards were tightened to their highest level in 15 years. Declining home prices and tighter lending standards brought about a slowdown not only in mortgage debt growth but also in overall debt growth. Mortgage debt, which grew at an annual rate of 10.2% in the second quarter of 2006, declined to an annual growth rate of 8.6% in the third quarter and to 6.4% in the fourth quarter. It is likely that mortgage debt growth slowed down further in the first quarter of 2007, and will decline even more in the second quarter given the problems in the sub-prime lending industry and the tight lending standards.

In the meantime, household debt growth in the United States has declined from a peak of 11.9% in the third quarter of 2005 to 6.6% annual rate in the fourth quarter of 2006. According to David Rosenberg, the fourth-quarter 2006 annual credit growth was the slowest since the third quarter of 1998 and the sixth consecutive quarterly deceleration, “which hasn’t happened since 1956” (emphasis added). Now, ceteris paribus, this significant slowdown in mortgage and household debt accumulation would have already brought about a significant slowdown, or even a decline, in US consumption. However, because of the stock market rally in the fourth quarter of 2006, equity wealth increased by 4.2%, or an annual rate of 18%.

......

Now, this deterioration in household debt growth hasn’t yet led to a consumer spending decline; but, very clearly, retail sales are now growing more slowly. Continuous consumption growth was therefore driven less by household debt growth in the fourth quarter of last year and the first quarter of this year, than by the continuation of an increase in household wealth and the selling of US equities by the household sector. But herein lies the problem. If declining home prices are now joined by equity prices that are either declining or no longer rising, it will only be a matter of time before consumer confidence declines and the consumer either slows down their spending further or stops spending altogether.

Let's look at two strands of thought Dr. Faber puts together.

The growth in the mortgage market was about equal to nominal GDP growth between 1980 and 2000. But, in the 2000 to 2006 period, a massive breakout from the trend occurred and, combined with a decline in the saving rate, drove consumption and GDP growth.

Consider the following debt statistics which are from the Federal Reserve's Flow of Funds report and information from the Bureau of Economic Analysis:

Household Debt/GDP

2000. $6.999/$9.817 = 71%

2005. $11.803/$12.455= 94%

2006. $12.815/$13.246 = 96%

Household Debt/Disposable Income

2000. $6.999/$7.194 = 97%

2005. $11.803/$9.036= 130%

2006. $12.815/$9.522 = 134%

Notice the mammoth jump over the last five years. This indicates that record low interest rates were a prime driver of consumption.

However, although debt acquisition has slowed, consumer spending has not shown a similar decline (although it is weakening after adjusting for inflation). I believe that Faber makes a correct observation about what has driven consumption for the last 6-9 months:

Continuous consumption growth was therefore driven less by household debt growth in the fourth quarter of last year and the first quarter of this year, than by the continuation of an increase in household wealth and the selling of US equities by the household sector.

According to the Federal Reserves Flow of Funds Report total household positions in equities increased from $14.829 trillion in 2005 to $16.275 in 2006. In other words, Faber is arguing (and I believe correctly) that the equity markets are responsible for the latest cash infusion into consumers pocketbooks and therefore their spending habits.

If this thesis proves correct, then a sustained decline in equity prices will be the driver of declining retail sales and personal consumption.

I would add that as long as job and income growth remain at current levels, they may provide a mitigating factor to the above mentioned downturn.

Food for thought.

A Note on Core Inflation

OK -- raise your hand it you DO NOT

- Buy food

- Eat at a restaurant

- Cook food

- Drive a car

- Use electric power

- Consume energy in any way, shape or form.

For those of you who raised your hands, put them down because you're lying.

There was a lot of talk about the tame CPI number yesterday. That's all well and good, but the last time I checked everybody eats food and uses energy in one form or another. That means the total CPI number is the most relevant to all consumers.

End rant.

Sub Prime Problems Start to Hit Bank Earnings

From the WSJ:

Of the six banks that reported earnings yesterday, four -- SunTrust, U.S. Bancorp, Comerica Inc. and M&T Bank Corp. -- saw net income fall from the year-ago quarter. KeyCorp, of Cleveland, posted a 31% gain in quarterly profit, helped by the sale of its McDonald Investments unit.

...

Wells Fargo cited higher losses on home-equity loans in the Midwest and in central California. Howard Atkins, Wells's chief financial officer, said deterioration in certain markets was caused by rising interest rates on some mortgages combined with falling home prices, creating very high loan-to-value ratios that made it difficult for borrowers to refinance out of high-cost loans.

...

Minneapolis-based U.S. Bancorp said net income fell 2% from a year ago, citing higher credit costs and operating costs of acquired businesses and lower net-interest income, which offset growth in fees.

SunTrust saw net income fall 2%. While revenue grew 1% and outpaced growth in expenses, it wasn't enough to overcome an increase in the provision for loan losses. SunTrust said nonperforming loans rose to 0.57% of total loans from 0.25% a year ago, largely due to slipping credit quality on low-documentation, or "Alternative A," loans.

Detroit-based Comerica said net income fell 2%, despite a tight rein on expenses, due to a higher loan-loss provision.

M&T Bank, based in Buffalo, said profit fell 13% due to previously disclosed declines in mortgage revenue. The bank said buyers of Alternative A loans are getting scarce, forcing M&T to keep more loans on its books.

This is the kind of news that leads to the following development:

1.) Banks tighten their lending standards. There is already tightening going on in the subprime market. Don't be surprised to see this trend extend to other, better quality loans.

2.) Expect banks to begin slipping loan loss provision increases into statements. They will try to minimize the effect of these statements, so you have to keep an eye out for the odd announcement here and there.

3.) Expect to hear more stories about people with exotic mortgages having trouble refinancing.

4.) Foreclosures are already increasing. This is the end result of all this news. As banks tighten their credit standards, people with problems loans will be less able to refinance their loans. This will more than likely lead to an increase in foreclosures.

IBM Warns of Lower Tech Spending

From the WSJ:

International Business Machines Corp. reported first-quarter earnings rose 8% but said slow U.S. capital spending held down results, raising concerns about leaner times ahead for companies like IBM that depend on robust business spending

...

The numbers were in line with expectations. But IBM's comments that it saw an unexpected U.S. sales slowdown in March caused analysts in the company's conference call to probe for hints about whether business spending is slowing broadly, with implications for the overall economy.

"Everything was going great until they started talking about weakness in U.S. enterprise spending, especially in financial and telecom which are economically sensitive," said Chris Whitmore, an analyst with Deutsche Bank. "It created a lot of concerns about that big-spending group." Mr. Whitmore noted that storage giant EMC Corp. also cited U.S. revenue weakness in reporting earnings yesterday.

And from CBS.Marketwatch

Goldman Sachs downgraded IBM to neutral from buy, citing a slowdown in U.S. tech spending

While this is just anecdotal evidence, IBM had $91 billion in revenues in 2006. That means paying attention to what they say might be a good idea.

Housing Starts Up .8%

From Bloomberg:

Housing starts in the U.S. unexpectedly rose for a second month in March, bolstering expectations the worst housing slump in 15 years may be easing.

Builders broke ground on new homes at an annual rate of 1.518 million last month, an increase of 0.8 percent from February, the Commerce Department said today in Washington. Building permits, a sign of future construction, also rose 0.8 percent.

Unusually warm temperatures last month encouraged builders to start work on more homes, along with signs that demand is starting to firm as prices moderate. The Federal Reserve predicts the economy will pick up in the course of the year as the drag from housing diminishes, while warning that a wave of mortgage defaults poses a risk to their forecast.

Let's coordinate this report with a few other data points.

1.) Homebuilder confidence is low

The National Association of Home Builders/Wells Fargo index of sentiment fell to 33 from 36 in March, the Washington-based association said today. A reading below 50 means most respondents view conditions as poor.

2.) There is already an 8.1 month supply of new homes on the market. This number has increased from 6.1 months in December 2006. According to the same report, the actual number of new homes on the market has increased 1% over the last year, from 538,000 to 546,000.

Is this really the time to be increasing inventory?

The Fed On Inflation

From Bernanke's most recent testimony:

Let me now turn to the inflation situation. Overall consumer price inflation has come down since last year, primarily as a result of the deceleration of consumers’ energy costs. The consumer price index (CPI) increased 2.4 percent over the twelve months ending in February, down from 3.6 percent a year earlier. Core inflation slowed modestly in the second half of last year, but recent readings have been somewhat elevated and the level of core inflation remains uncomfortably high. For example, core CPI inflation over the twelve months ending in February was 2.7 percent, up from 2.1 percent a year earlier. Another measure of core inflation that we monitor closely, based on the price index for personal consumption expenditures excluding food and energy, shows a similar pattern.

Overall consumer price inflation has come down since last year, primarily as a result of the deceleration of consumers’ energy costs.

Problem: Oil prices are increasing. They are in an uptrend and have broken through resistance.



The consumer price index (CPI) increased 2.4 percent over the twelve months ending in February, down from 3.6 percent a year earlier.

Problem: That number is now 2.7% according to the latest CPI news.

Another measure of core inflation that we monitor closely, based on the price index for personal consumption expenditures excluding food and energy, shows a similar pattern.

Core prices were only .1% in the latest report. But, the more volatile elements of inflation - food and energy have strong upward price pressures, and will for the foreseeable future. I explain those pressures here and here

It looks as though Bernanke's ideal situation -- the economy naturally slowing inflation for the Fed -- isn't going to happen.

CPI Up .6%

From Bloomberg:

A measure of prices paid by U.S. consumers rose less than forecast last month, supporting the Federal Reserve's call that inflation will subside as the economy slows.

The 0.1 percent increase in core consumer prices, which exclude food and energy costs, was the smallest this year and follows a 0.2 percent February gain, the Labor Department said today in Washington. Prices overall rose 0.6 percent in March, led by a jump in fuel costs.

Less inflation may give Fed Chairman Ben S. Bernanke and his colleagues more latitude to lower interest rates to reinvigorate the economy in coming months, economists said. Cheaper clothing and hotel stays and a smaller gain in medical care costs restrained price gains last month, suggesting a slowing economy is starting to help alleviate price pressures.

Here's how Reuter's reported the number:

A surge in gasoline costs helped drive overall U.S. consumer prices up at the sharpest

rate in nearly a year during March, though so-called core prices that exclude food and energy items rose at a muted pace, the Labor Department said on Tuesday.

The Consumer Price Index climbed at a 0.6 percent rate, up from 0.4 percent in February. It was the largest monthly increase since a matching 0.6 percent rise last April.

A 10.6 percent jump in gasoline prices last month eclipsed a 0.3 percent gain in February and was the largest increase in 1-1/2 years since a 17.4 percent gain in September 2005.

Here is the news release from the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.9 percent in March, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The March level of 205.352 (1982-84=100) was 2.8 percent higher than in March 2006.

.....

For the first three months of 2007, consumer prices increased at a seasonally adjusted annual rate (SAAR) of 4.7 percent. This compares with an increase of 2.5 percent for all of 2006.

Let's cut through all of this static.

1.) Everybody talks about the core rate, but almost no one explains why the Federal Reserve looks at the core rate. The Fed looks at the core rate to see if the more volatile price components of CPI (food and energy prices) are bleeding through to other areas prices. If core CPI is tame, it usually means the more volatile prices are not impacting other prices. This is what has given the Federal reserve the confidence to continually state price pressures should subside over time.

2.) All that being said, outside of this policy perspective, the core rate is practically useless. Everybody consumes gas and food so the overall rate is what is important from an individual's perspective. And this number is not good. It indicates prices are increasing at an uncomfortable rate.

3.) Notice the year-over-year number increased 2.8%. That is .8% above the Fed's preferred level of 1%-2%. Translation: the Fed isn't lowering rates anytime soon (barring clear signs the economy is tanking hard).

4.) There are some very scary 3-month compound growth rate numbers in this report. Food: +7.4%, Transportation, +8.3%, Energy +22.9%, Medical Care +5.6%.

Short version: this report further solidifies my conviction that the Fed is on the sidelines for the foreseeable future, barring evidence the economy is tanking hard.

Another Look at Retail Sales

The government sharply raised its estimate of February retail sales, saying they rose 0.5%, instead of the previously reported 0.1%.

"It was a decent report, especially when you take into account the revisions," said Haseeb Ahmed an economist with J.P. Morgan Chase & Co. "It basically points to a consumer that is doing OK."

The latest numbers on consumer spending indicate that personal-consumption expenditures are growing at a rate of about 3%, slower than the 4.8% rate recorded in the first quarter of 2006.

Consumer spending, which accounts for about 70% of U.S. economic activity, has taken on greater importance in recent months because it is one of the economy's few remaining areas of strength. The decline in housing construction has taken a huge bite out of the economy over the past year and rising foreclosures are also expected to hurt economic growth.

Here are two charts from the Wall Street Journal. Let's look at them in a bit more detail.



I have drawn a fairly arbitrary line on this graph of retail sales that separates two growth trends. Section A has a strong upward movement and is a very strong trend. While section B is also moving upwards, notice the slope is less steep, indicating growth is weakening a bit.

Here is a chart from IBD that shows the change in the slope



This next chart shows the impact of that less steep slope:



The last few months could be a slight reprieve from the downtrend or the start of a new uptrend. We won't for a few months.

What's keeping consumer spending going is employment and wage growth.

"Consumers may not be happy with high energy prices right now, or weakness in the housing market. But as long as the job situation is still really good they have the income to spend and they're spending it," said Gary Thayer, chief economist at A.G. Edwards.

But when talking about job growth, remember this chart:



The job market is a lagging indicator. And this chart indicates employers act quickly when trouble emerges.

Homwbuilder Confidence At a Yearly Low

From Bloomberg:

An index of U.S. homebuilders' confidence fell to the lowest level of the year this month amid concern that an increase in mortgage defaults is resulting in tighter lending standards that are discouraging would-be buyers.

The National Association of Home Builders/Wells Fargo index of sentiment fell to 33 from 36 in March, the Washington-based association said today. A reading below 50 means most respondents view conditions as poor.

According to today's report, single-family home sales have fallen this month and builders' outlooks for the next six months are at the lowest level since October. That, along with rising defaults on subprime mortgages and excess inventory levels, suggests a greater drag on construction this year.

Of course -- housing has bottomed, right?

Seriously, I think this is a very important number because these are people who are familiar with the market -- intimately familiar. Most importantly, as CEOs they are paid to put on a solid public face. When they are actually saying things aren't that good it's very important to listen.

A suspect rally?

I exaggerated the 1-year charts of the SPYs, QQQQs and IWNs to highlight the volume of the post-China rally. Notice how the volume's 20-day EMA has been decreasing for the duration of the rally. While this is usually a bearish sign, keep in mind volume levels are coming down from high levels from the China sell-off.

Retail Sales Increase .7%

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for March, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $371.6 billion, an increase of 0.7 percent (±0.7%)* from the previous month and up 3.8 percent (±0.7%) from March 2006. Total sales for the January through March 2007 period were up 3.2 percent (±0.5%) from the same period a year ago. The January 2007 to February 2007 percent change was revised from 0.1 percent (± 0.7%)* to 0.5 percent (± 0.2%).

Retail trade sales were up 0.6 percent (±0.7%)* from February 2007 and were 3.6 percent (±0.8%) above last year. Clothing and clothing accessories stores were up 8.0 percent (±1.5%) from March 2006 and sales of general merchandise stores were up 5.8 percent (±0.2%) from last year.

Here's the chart from the same report:



Let's look at the numbers in a bit more detail.

1.) These are preliminary numbers; they could be restated in the future.

2.) The only area to see a decrease was electronics and appliance stores, which decreased 1.9%.

3.) Building materials/supplies increased 1.4%. My guess is this is a spring cleaning/repairing increase. Also note that sales dropped .2% in the February from January category, implying some of this months increase might be a make-up from the lost sales.

4.) Gas stations saw a 3.1% increase. I'm not sure how much of this is due to the increasing cost of gasoline, but I would guess that plays a part.

5.) All other categories look at worst pretty good. In short, this is a good report for the market.

The main reason for this increase is probably the personal income increased over the last few months:

Personal income increased $65.4 billion, or 0.6 percent, and disposable personal income (DPI) increased $53.8 billion, or 0.5 percent, in February, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $55.5 billion, or 0.6 percent. In January, personal income increased $110.5 billion, or 1.0 percent, DPI increased $74.2 billion, or 0.8 percent, and PCE increased $50.2 billion, or 0.5 percent, based on revised estimates.

Trucking Firms Lower on Profit Warning

From the AP

Truckload carrier US Xpress Enterprises Inc. said it would likely post a loss in the first quarter, which compares with a profit last year, citing lower-than-expected freight demand, severe winter weather and rising fuel prices. The news was not entirely unexpected, as the company usually experiences a rough start to the year and carriers throughout the sector have complained of similar headwinds.

The sector also witnessed a downgrade of J.B. Hunt Transport Services Inc. by Edward Wolfe at Bear Stearns, who took the stock to "Peer Perform" from "Outperform," due mostly to the 37 percent it has gained since the start of the year.

Dow theory relies on confirmation of a move by at least two averages. The theory is simple. If business is really doing well, then they will have to ship their goods to market. This in turn is good for transportation companies.

However, the above news is not good for transportation companies. We'll have to see how this news plays out in the big scheme, but for now consider it food for thought.

More on Food Prices

From the WSJ:

Americans face sizable increases in their grocery bills this year as a boom in ethanol production diverts more corn from the nation's dinner table to its gas tank. Indeed, their pocketbooks could feel the pinch for years to come.

High corn prices, bad weather and steep energy costs have combined to make food a bigger potential contributor to inflation this year than it has been at least since 2004, when a cutback in dairy production boosted dairy prices and beef prices rose as mad-cow disease disrupted trade.

The Agriculture Department says that retail food prices are likely to climb by 2.5% to 3.5% in 2007, fueled in part by strong demand for corn-derived ethanol. But Michael Swanson, an agricultural economist at Wells Fargo & Co., thinks the rise could be an even sharper 4.5%.

I wrote about this topic here

About That Low Unemployment Rate....

One of the main arguments against the recessionary forecasts is the low unemployment rate. The chart below illustrates a few points about that argument.

1.) The unemployment rate is always very low just before a recession.

2.) The unemployment rate typically moves up pretty strongly after the recession starts as employers stop hiring pretty quickly. In other words, the tide changes very quickly.

Two Solid Reasons For the Bull Market

From an interview in Barron's with Jason Trennert (subscription required):

Corporate balance sheets, by almost any standard, couldn't be in much better shape than they are right now. If anything, you could make the case that corporate balance sheets aren't leveraged enough. There is too much cash on the balance sheet, there is not enough debt. It is hard to get a recession when corporate balance sheets are this clean. No. 2, employment is generally a lagging indicator, but the employment situation is so good. The unemployment rate is 4½%. When I got out of college, full employment was considered 5½% to 6%. It is hard to get a recession when both corporate and consumer balance sheets are as strong as they are and when people are employed.

These are both very solid points. According to the Federal Reserve's Flow of Funds Report, nonfarm, nonfinancial corporate business has a very clean balance sheet. Assets are over twice the amount of liabilities and there is plenty of cash on the books. This is one of the main reasons for the large amount of corporate stock buy-backs in the the market right now. In addition, corporations are the only economic sector actually saving any money right now.

As for employment, I'm a bit more sanguine. Two months ago, construction shed 63,000 jobs. Most of these were replaced last month, but I have to wonder how often we will see this type of pattern. In addition, last months employment report showed a net loss of service sector jobs. This is an economic area that has provided strong growth for the duration of this expansion.

However, my gripes with employment are two nicks in the picture. We have yet to see a sustained loss of jobs. Instead, we have seen nicks and cuts in the overall landscape.

Banks Coming Under Pressure?

From Barron's (subscription required):

With the Fed on hold, banks' net interest margins continue to come under pressure. "The dramatic loan growth banks have enjoyed also will slow, especially in consumer- or mortgage-related segments," Bagley says. Another direct hit to earnings could come from the greater reserves banks set aside for rising defaults or credit deterioration. While big banks with thriving investment-%banking operations might hold up well, smaller regional lenders will have a harder time.

The KBW Bank Index has slipped 4% since March 21 even as the market advanced, as inflation stayed firmer than investors hoped. The index fell Wednesday after minutes from a recent policy meeting showed the Federal Reserve still vexed by inflation and none too likely to begin cutting interest rates soon.

The potential for economic deceleration, a worsening housing market and inflation that keeps the Fed's hands tied could prove to be a "perfect storm" for banks, says Dan Jones, who runs Blue Water Asset Management. As a hedge, he suggests buying June put spreads on the bank index.

This is not the most comforting news around. It's important to remember that banks are not invulnerable to a housing slowdown. The Streetlight Blog did a nice overview of the situation and came to this conclusion:

It may indeed be the case that banks will dodge any incoming bullets from the growing number of mortgage defaults, as many people argue. But evidence like this tells me that banks have a lot to lose if mortgages go bad.

Here are the links to the articles.

Link 1

Link 2

What's Causing Inflationary Pressures? Pt. II

In part one, I showed how oil and gas prices are increasing, which in turn will keep the Fed on the sidelines. Below, I will discuss agricultural prices which are also increasing:

From the blog, Financial Sense

Thanks to Federal mandates and subsidies, corn used for the production of corn ethanol is expected to increase from ~ 700 M Bushels in 2000/2001, to 3.2 B bushels in 2007/2008 – an increase of 357 percent. On December 11, 2006, the USDA estimated 2006-2007 U.S. ending stocks would be 935 million bushels, down from 1.97 billion bushels in 2005-2006. That decreases the ending stocks by more than 50 percent and puts the ending stocks to use ratio at 8%, - the lowest in 11 years. It should be obvious to all, we are going to need a lot more acreage and big yield improvements if corn production is going to keep up to demand. Prices could exceed $4.50 per Bu by the end of 2008. That’s a price increase of 125% over 2005/2006 season prices.

Let's take this one point at a time.

...corn used for the production of corn ethanol is expected to increase from ~ 700 M Bushels in 2000/2001, to 3.2 B bushels in 2007/2008 – an increase of 357 percent.

In other words, demand hasn't just increased; it has spiked off the map. Econ 101: increased demand equals increased price.

On December 11, 2006, the USDA estimated 2006-2007 U.S. ending stocks would be 935 million bushels, down from 1.97 billion bushels in 2005-2006. That decreases the ending stocks by more than 50 percent

Supply is contracting as well, and not by a little. By a lot. Econ 101: decreased supply = increased price.

It should be obvious to all, we are going to need a lot more acreage and big yield improvements if corn production is going to keep up to demand. Prices could exceed $4.50 per Bu by the end of 2008. That’s a price increase of 125% over 2005/2006 season prices.

To respond to the increased demand farmers planted more corn this year. This is why the daily agricultural prices dropped a few weeks ago. But notice prices are right back up to to where they were a few weeks ago.

This situation in the corn market is impacting all other agricultural products as well -- everything is going up in price. Here's the daily chart.



Also notice that on the long-term chart we have a two year bull market. It's hard to stop a trend like this, especially with the above mentioned supply/demand situation. Also note the price rebound from the news of increased corn plantings is apparent on this weeklychart -- that's how strong the rebound was.



And it's not just corn that's increasing in price. Remember corn is a basic ingredient in a ton of food.

If corn prices increase by ~ 55 percent, year over year, then will the corn used for hog, cattle, chicken, turkey and fish feed go up 55 %? Doesn’t that increase the price of meat, poultry, fish, milk and eggs? If corn is used in corn meal, corn flakes, corn oil, and hundreds of other food items goes up 55%, doesn’t that increase the price of all these foods? Maybe. Since 2000, the price of beef is up 31%, eggs up 50%, corn sweeteners up 33%, wet corn milling up 39%, and corn flakes are up 10%. Chicken prices haven’t changed very much. Yet. Food producers are predicting higher prices.

So, here's the summation. Food prices are going up. The ethanol mandates are increasing demand. Although farmers planted more corn this year, supplies are still dwindling. Econ 101: increased demand plus decreased supply = increasing prices.

What's Causing Inflationary Pressures? Pt. I

From the most recent FOMC statement:

Members agreed the statement also should indicate that inflation pressures seemed likely to moderate over time, but that recent readings on core inflation had been somewhat elevated and the high level of resource utilization had the potential to sustain inflation pressures. A persistence of inflation at recent rates could eventually have adverse consequences for economic performance. All members agreed the statement should indicate that the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming.

Yeah, I know -- this is very much a, "we want our cake and eat it too" kind of statement. However, once you get beyond the Fed double-speak, it's actually pretty obvious what they're saying:

The Committee agreed that further policy firming might prove necessary to foster lower inflation, but in light of the increased uncertainty about the outlook for both growth and inflation, the Committee also agreed that the statement should no longer cite only the possibility of further firming.

Let me explain why. Right now there are two really strong upward trends on prices that aren't going away anytime soon.

Gas Prices

According to the Department of Energy:

Gasoline prices saw another significant increase for the week of April 2, 2007, jumping 9.7 cents to 270.7 cents per gallon. This is the ninth consecutive week of increases; prices are now 11.9 cents per gallon higher than at this time last year. All regions reported higher prices. East Coast prices were up 9.6 cents to 267.1 cents per gallon, while Midwest prices rose 9.6 cents to 261.4 cents per gallon. The Gulf Coast saw the largest regional increase, with prices up 12.3 cents to 256.5 cents per gallon. In the Rocky Mountains, prices increased 8.1 cents to 261.9 cents per gallon. West Coast prices were up 8.0 cents to 309.6 cents per gallon, with the average price for regular grade in California up 7.6 cents to 322.8 cents per gallon, 48.5 cents per gallon above last year's price.

Here's a chart from the same report. The red line -- which is higher -- represents this years prices.



One of the primary reasons for the decease is a declining inventory of gasoline. Here is a chart of gasoline stockpiles represented by the orange line.



Aside from dwindling gas stockpiles, oil supplies are also dropping:

The International Energy Agency warned Thursday that output by the Organization of Petroleum Exporting Countries had hit its lowest level in over two years on production outages and self-imposed cuts, a factor likely to drain global oil stocks in the coming months.

In its monthly oil market report, the agency, the energy security watchdog for the Organization for Economic Cooperation and Development, highlighted unexpected product-led reductions in world oil stocks and what it described as "astonishing" demand growth in China, where it was forced to revise up its growth expectations for this year.

Unexpected production outages in Nigeria and maintenance in Saudi Arabia contributed to OPEC's daily output in March falling to a little over 30 million barrels, the lowest since January, 2005.

Let's look at the price of oil. First, here's the daily chart. We had a nice dip when the Britain/Iran situation calmed down, but prices spiked back up to the $64 area the next day. In addition, we have two upward slanting trend lines to deal with. Finally, oil prices are using the 20 and 50 day SMAs for technical support.



On the weekly chart, we appear to have a head and shoulders formation with prices now moving above the neck line.





So, what does all this mean?

We're probably going to have higher gas prices as the summer progresses. And the higher those prices go, the less likely the Fed will cut interest rates. Remember the Fed has been hoping the economy would do the Fed's job of lowering inflation. But, that's not happening right now.

The Markets Last Week

The bottom fell out of the SPYs on the Fed's announcement on Wednesday, but they more than made that up on Thursday and Friday. The SPYs had a strong rally over the last two days. The SPYs also ended up the most of the three averages.



While the QQQQs did end the week on a high note, they didn't get there by the best technical path. While the QQQQs shook off the Fed news on Thursday, they fell a bit on Friday morning, and only closed at decent levels after a sharp spike. My guess is there was a program trading reason for that move.



The IWNs chart was similar to the SPYs. They ended the week on a solid note with a strong upswing after the Fed's announcement.

PPI Up 1%

From the BLS:

The Producer Price Index for Finished Goods increased 1.0 percent in March, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This advance followed a 1.3-percent rise in February and a 0.6-percent decrease in January. The index for finished goods excluding foods and energy was unchanged in March after moving up 0.4 percent in February. At the earlier stages of processing, prices received by producers of intermediate goods increased 1.0 percent in March following a 1.1-percent advance a month earlier, and the crude goods index rose 3.2 percent after climbing 8.9 percent in February.

Once again, agricultural prices were a big reason for the jump; they increased 1.4%. This is the 4th straight month of increases over 1%. Energy was up 3.6%. Outside of food and energy, prices were up 0%. But - is there anybody out there who doesn't consume food or energy?

This is not good news from a Federal Reserve Perspective, as it adds further fuel to the inflation hawk's argument for either keeping rates where they are or possibly raising rates.

Remember this paragraph from the FOMC minutes:

In light of the recent economic data and anecdotal information, the Committee agreed that the statement to be released after the meeting should note that economic indicators had been mixed, that the adjustment in the housing market was ongoing, and that the economy seemed likely to expand at a moderate pace over coming quarters. Members agreed the statement also should indicate that inflation pressures seemed likely to moderate over time, but that recent readings on core inflation had been somewhat elevated and the high level of resource utilization had the potential to sustain inflation pressures. A persistence of inflation at recent rates could eventually have adverse consequences for economic performance. All members agreed the statement should indicate that the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected.

Capital Spending -- Not Housing -- Biggest Threat

At least according to a survey of economists:

A new WSJ.com survey found that 20 of 54 economic forecasters responding to a query cited soft capital spending as the chief risk to their forecast that the U.S. economy will grow slowly but avoid recession this year.

Only 11 of the economists cited housing; the rest cited other threats, including inflation and oil prices.

Capital spending "scares me more than anything else because I can't explain the weakness," said Stephen Stanley of RBS Greenwich Capital.

The Federal Reserve has similar worries. "The magnitude of the slowdown [in capital spending] has been somewhat greater than would be expected given the normal evolution of the business cycle," Fed Chairman Ben Bernanke told Congress late last month. And the International Monetary Fund, cataloging the risks to the U.S. economy this week, noted "concerns that the current softness of business investment could be extended."

The softness extends across industries. Semiconductor maker Advanced Micro Devices Inc. said this week that it is reducing planned 2007 capital spending by $500 million to about $2 billion amid sharply lower first-quarter revenue and difficulty in taking market share from rival Intel Corp. That spending would, however, still be up from last year's $1.86 billion.

This is potentially a big issue because a slowdown in capital spending was the reason for the last recession. The general theory as to why this is happening is simple: profits are still positive, but they are falling. Companies are tightening their belt to keep profits up for one or two more quarters.

The problem is if a bunch of companies do this at the same time, we're in trouble -- big trouble. I'm not sure the economy could handle a capital spending slowdown and a housing slowdown.

China's Reserves Increase

From the WSJ:

China reported a massive increase in its huge pile of foreign currency in the first three months of this year, a gain that includes as much as $73.3 billion in unexplained new funds that has confounded experts on the Chinese financial system.

The Chinese central bank, which already controls more financial assets than any other single institution in the world, said that its foreign-exchange reserves rose $135.7 billion in the first quarter -- more than half the increase for all of last year. That raised the total to $1.2 trillion by the end of March.

The rise is far more than economists had expected -- and than can be explained by the flows of money into the country reported already. An increase in foreign reserves shows that more money is flowing into China than out of it, with the excess ending up on account with the central bank. And plenty of money is coming into China, owing in part to its export prowess.

This is getting really interesting -- and a touch scary. First, the sheer size of China's currency reserves is, well, really damn big. They have started their own "money managing" department to handle some of the account, but even then this is a ton of money.

Secondly, when money starts "appearing", I get really suspicious. While I wish that was the case (that money magically appeared), we all know better.

Bulls v Bears

Donald Luskin and Barry Ritholtz are debating on US News and World Report's Capital Commerce Blog. It's a very good read and is highly recommended.

The Markets Today

The markets had a nice upward move today, which is especially good considering they started in negative territory. They rallied until 12:30, moved sideways a bit, then added a bit more. My guess is the retail sales numbers were a big reason for the advance. Right now the consumer is the main economic actor moving the economy forward. Any news indicating the consumer is alive and well helps to alleviate recession concerns.

The Fed on the Economy

Here are some bullet points on the economy that come from the FOMC minutes.

1.) Employment gains moderated in early 2007

2.) Industrial production rose strongly in February and was revised up for both December and January.

3.) Real consumer spending appeared on track to rise at a robust pace in the first quarter, buoyed in part by a weather-related surge in spending on energy services and by a jump in sales of light motor vehicles. Outside of these areas, however, real consumer spending moderated

4.) Housing starts declined in January, extending the downward trend that had been in place since early 2006, but bounced back in February. However, adjusted permit issuance in the single-family sector continued to step down, suggesting that builders were still slowing the pace of new construction to work off elevated inventories.

5.) Business fixed investment had been sluggish in recent months.

6.) Businesses accumulated inventories of items other than motor vehicles at a slower pace in January than in the previous two quarter

7.) The U.S. international trade deficit narrowed considerably in the fourth quarter. Exports rose, partly reflecting a robust increase in deliveries of civilian aircraft to foreign buyers, while imports were pushed down by a fall in the volume and price of imported oil

8.) Economic activity in the advanced foreign economies accelerated in the fourth quarter.

So, lets sum up with a "good/bod analysis":

Good: International trade deficit decreasing, other countries economies doing well and industrial production. We'll put consumer spending in this category as well, largely because of today's retail sales report.

Bad: Housing and business investment.

In-between: OK - I added a category. Employment belongs here. Although the BLS has revised the last two months higher and the latest report was a pretty good 180,000, growth is slowing and service sector jobs decreased last month by 7000.

So, according to the Fed, we're running lukewarm right now.

Vizier Vic makes a good point in the comments:

Does anyone believe that foreign buyers have suddenly started snapping up all of the industrial production which is theoretically pouring off American production lines. That's the only thing which might account for the purported rise in industrial production given the rest of this report. Business fixed investment and inventory builds and residential construction are down (and house sales too) which all mean domestic consumption of industrially-produced products are down too. Where's the growth source? Can anybody identify it? Is it restricted solely to light trucks and automotive? It sure looks like it and that's a pretty slender reed on which to base an economy. Or, is it restricted to kilowatt-hours and barrels of oil? That's an even more treacherous sink hole.

According to the BEA's latest GDP report, exports totaled $1.523 trillion in the 4th quarter, up from $1.488.3 trillion in the third quarter. That's about 11% of the US economy.

Import Prices Surprise on the Upside

From the BLS:

The U.S. Import Price Index rose 1.7 percent in March, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The increase followed a 0.1 percent rise in February and was led by an increase in petroleum prices. The price index for exports increased for the fifth consecutive month, advancing 0.7 percent in March.

Petroleum prices -- which increased 9% -- were the primary reason for the increase. Non-petroleum prices increased .3%.

Short version -- this report is not good, especially in light of the Fed's FOMC minutes released yesterday.

Realtors Predicting Price Drop

From the WSJ:

The National Association of Realtors, which has long proclaimed that U.S. home prices haven't declined on a nationwide basis since the Great Depression, now says they are likely to do just that this year.

The Realtors, which had been projecting as recently as February a 1.9% increase in the median home price this year, now say prices for previously occupied homes will slip 0.7% this year from the 2006 level.

The trade group's revised outlook, which puts it in line with a growing consensus that home prices will fall at least modestly this year, underlines how quickly expectations about the market have changed in light of a recent tightening of credit by mortgage lenders. Before the subprime mortgage problems blew up recently, said Lawrence Yun, an economist for the Realtors, the group expected the housing market to begin recovering by the middle of this year. Now, he says, recovery is unlikely before late this year.

It's important to remember several things about the housing market. First, this is a slow-moving market. There is a fairly large time lag between a seller putting the house on the market, the buyer signing a contract and closing the deal. That means it takes a bit more time for prices to actually respond to the market.

In addition, so far real estate prices have been fairly "sticky" -- not moving is response to the changing market fundamentals. Sellers just aren't willing to accept the reality that asking prices are simply too high given the decrease in demand.

Also note credit standards are tightening. That means demand will drop further by the end of the year.

The WSJ article had a nice graph as well:

OPEC Production at Two Year Low; Oil Market Update

From the WSJ:

The International Energy Agency warned Thursday that output by the Organization of Petroleum Exporting Countries had hit its lowest level in over two years on production outages and self-imposed cuts, a factor likely to drain global oil stocks in the coming months.

In its monthly oil market report, the agency, the energy security watchdog for the Organization for Economic Cooperation and Development, highlighted unexpected product-led reductions in world oil stocks and what it described as "astonishing" demand growth in China, where it was forced to revise up its growth expectations for this year.

Unexpected production outages in Nigeria and maintenance in Saudi Arabia contributed to OPEC's daily output in March falling to a little over 30 million barrels, the lowest since January, 2005.

This is a classic case of deliberately shrinking supply to drive prices up. And this tactic is working.

U.S. gasoline stockpiles fell 5.5 million barrels to 199.7 million barrels in the week to April 6, the biggest drop since Aug. 22, 2003, the U.S. Department of Energy reported yesterday. Supplies fell 12 percent the past nine weeks.

Here's a chart of US gas stockpiles.



Also note that demand is increasing:

Gasoline demand, which peaks between the Memorial Day holiday in late May and Labor Day in early September, was close to 9.5 million barrels in each of the Energy Department's past two reports, a level not usually seen until June.

Here's the result of all these events:

Gasoline prices were up again for the week of April 2, 2007, increasing 9.5 cents to 280.2 cents per gallon. This is the tenth consecutive week of increases; prices are now 11.9 cents per gallon higher than at this time last year. All regions reported higher prices. East Coast prices were up 8.4 cents to 275.5 cents per gallon. The Midwest had the largest regional increase, with prices rising 13.0 cents to 274.4 cents per gallon. Gulf Coast prices were up 11.0 cents to 267.5 cents per gallon, while Rocky Mountain prices increased 10.0 cents to 271.9 cents per gallon. West Coast prices were up 4.2 cents to 313.8 cents per gallon, with the average price for regular grade in California up 2.4 cents to 325.2 cents per gallon, 44.1 cents per gallon above last year's price.

Speaking of prices, here's a chart of oil.



The market dropped after the end of the Iran/Britain situation, but the market is still clearly in an uptrend. Considering the drop in US stockpiles, decreased oil output and increasing demand, we're in for some price pressures this summer.

The Markets Today

The markets did not like the FOMC minutes. Guess when they sold off?

The Fed basically said inflation was still an issue. Of course, the Fed has been saying that for the last three months but the market has had a wonderful sense of denial going on. So, the Fed clarified again: "No, really, inflation is a big issue for us right now. In fact, we might actually raise rates if the situation gets any worse."

Actually, the Fed was a tough more formal:

Participants agreed that risks around the expected and desired path of a gradual decline in core inflation remained mainly to the upside; some noted that upside risks to inflation appeared to have increased slightly in recent months.

I think the markets finally got the message

Fed Concerned About Inflation

From the FOMC Minutes:

Most participants continued to expect a gradual decline in core inflation over the next year or two, fostered by stable inflation expectations, a likely deceleration in shelter costs, and a slight easing of pressures on resources. Nonetheless, all meeting participants expressed concern about the risks to this outlook. The latest readings on core inflation were higher than expected, and it was difficult to discern whether the apparent downward trend in core inflation during the past few quarters was continuing. Also, the recent increases in prices for energy and some non-energy imports likely would boost overall inflation in the near term and might put upward pressure on prices of some core goods and services. Moreover, rates of resource utilization that were near the high end of historical experience suggested a possibility that inflation pressures could build. Participants agreed that risks around the expected and desired path of a gradual decline in core inflation remained mainly to the upside; some noted that upside risks to inflation appeared to have increased slightly in recent months.

Can we PLEASE stop talking about a rate cut now?

A Look At Homebuilders

Here is a chart of the homebuilders ETF. Notice the following:

1.) The chart is clearly in a downtrend.

2.) Prices are consolidating around a technical level established 10 months ago.

3.) Prices are trading below all the simple moving averages.

4.) the 10, 20 and 50 day SMA are all heading lower.

The above 4 factors are all bearish. The only positive element on this chart is the decreased volume over the last 5 or so trading days. That indicates the big selling might be over and the average will limp along for awhile.

KB Homes CEO Still Bearish

From Briefing.com

KB Home's (KBH 41.96) chief executive, Jeffrey Mezger, said Tuesday he expects the housing market to get worse before it gets better, even though sales have improved in some areas of the U.S. Shares of the Los Angeles-based builder were indicated more than 2% lower following the announcement, which comes a day after DR Horton (DHI 21.70), the nation's largest homebuilder, warned of a sharp drop in new home orders, and said the spring selling season is off to a slow start as market conditions remain challenging.

When industry insiders are bearish, you know there's a problem. CEOs are paid to put a good spin on news.

Managing Earnings Expectations

From CNBC:

As earnings season got underway Tuesday with better-than-expected quarterly results from Alcoa, analysts said many other companies are likely to exceed their sharply lowered forecasts.

As we move into earnings season, remember we are dealing with sophisticated people; CEOs are very good at figuring out what to say to the press and how to say it. So when a company beats "lowered forecasts" ask yourself, "is it possible there is something deliberate going on here?"

An Overview Of the Markets

Let's take a look at the 3-month chart for the major ETFs I track -- the SPY (S&P 500), QQQQ (NASDAQ 100), and IWN (Russell 2000).

With the SPY we have an upward trending move for the last 5 days, but on lower volume. In addition, notice how the last 5 days bars are pretty narrow, indicating the markets really didn't move that much. Also notice how the market stopped right at resistance, then moved over resistance but still stayed near the level of resistance. Also notice how volume for the last 5 days is lower than previous days. This is a lukewarm chart. While it is technically bullish because of its overall trajectory, the hesitation around resistance, weak bars and lower volume indicate traders are hesitant to strongly bid this market up.



Most of the SPYs analysis applies to the QQQQs. However, the bars here are stronger -- there is more distance between opening and closing prices. This indicates traders are acting a bit more bullishly. However, because prices are still hovering around resistance, this still qualifies as a lukewarm chart.



This is the weakest of the three charts, largely because the chart is consolidating below resistance. Anytime a chart does not move above resistance it indicates traders are for some reason hesitant to take the market higher.

The Markets Today

The market were split today. The QQQQs were the best performer with a nice spike at the end of the day on solid volume. The SPYs were the weakest with the IWNs trading a higher but still meandering.

My best guess is the QQQQ spike was a program trading move at the end and not the result of a big rush into the market.

The markets have been lackluster so far this week. The news hasn't been strong enough to move them higher or weak enough to move them lower. It feels like the markets are waiting for an extraneous event to move them.

Foreclosures Still Increasing

From CNBC

During the first quarter, foreclosures have jumped sharply across the nation’s top urban markets, according to a PropertyShark.com report released to CNBC.

In Miami, foreclosures are up nearly 31%, in Los Angeles 24%, and in New York City, up 56%, the website said. Properties in the borough of Queens accounted for the bulk of the New York foreclosures, jumping 91% alone.

Miami experienced the highest quarterly foreclosure rate per household. In Miami-Dade County, there were 987 residential auctions in the first quarter, which translates into 127 foreclosures per 1,000 households. Miami typically has foreclosure rates higher than the national average because it attracts investors that buy into properties before they’re developed with hopes of flipping them later at a profit.

And here's more:

The percentage of mortgages in default rose to 2.87%, surpassing the worst levels following the 2001 recession.

“The news is unremittingly bad,” CNBC's Steve Liesman said Tuesday. “Delinquency rates were up in 44 of the 50 states.”

The only states where delinquencies didn’t increase were Kansas, Kentucky, Montana, North Dakota, South Carolina and Utah.

The states with the highest delinquency rates are:

Mississippi, 4.85%
Texas, 4.09%
Michigan, 4.06%
Georgia, 3.89%
West Virginia, 3.83%

It's important to remember we're on the front end of a recession. That means these numbers are that much worse.

Majority Expect a Recession

From Bloomberg:

Most Americans expect a recession within a year and disapprove of President George W. Bush's handling of the economy even though the unemployment rate is at a five-year low, a new Bloomberg/Los Angeles Times poll found.

Six in 10 who were surveyed predicted a recession, similar to the 64 percent who anticipated the economy would contract in a December 2000 poll by the Los Angeles Times three months before the last decline. In the current survey, 71 percent of those earning less than $40,000 said they expect a recession compared with about half for those making more than $100,000.

``We're living on borrowed time,'' said Andrew Herring, 43, a chemical engineering professor at the Colorado School of Mines in Golden, Colorado, who took part in the survey. ``We spend ridiculous amounts of money on the war and now we have issues with the subprime housing market,'' said Herring, a Democrat.

1.) This really brings consumer sentiment polls/readings under serious doubt.

2.) This shouldn't be too surprising. People are aware the government is spending a ton of money on everything under the sun, the subprime mortgage market has problems and the economy is slowing.

3.) I forgot to add increasing gas prices.

DR Horton's Sales Orders Drop 37%

From the AP:

D.R. Horton Inc., the nation's largest homebuilder by deliveries, said Tuesday its second-quarter sales orders fell 37 percent, led by even steeper declines in California and the Southwest.

We continue to sell more homes than any other builder, even though the spring selling season has not gotten off to its usual strong start," Chairman Donald R. Horton said in a statement.

Net sales orders for the quarter ended March 31 totaled 9,983 homes, down from 15,771 homes during the prior-year quarter. The value of the orders dropped to $2.6 billion from $4.4 billion in the previous year.

Net sales orders for the first six months fell to $4.9 billion, or 18,754 homes, from $7.5 billion, or 27,234 homes during the same period in fiscal 2006.

These are some very substantial drops in sales -- as in, "we're not even close to seeing a bottom in the housing market" kind of drop.

Also note the Spring selling season is not going as well as anticipated. This indicates demand is decreasing.

The CEO made no mention of tightening credit standards in his statements. If tighter standards aren't included, then we have a problem -- a big problem -- going forward.

More Subprime Problems

From IBD:

[American Home Mortgage] The lender slashed Q1 profit targets to 40-60 cents a share, below views of $1.01. It struggled to sell mortgages and will stop making some "alt-A" loans due to losses. M&T Bank, which also makes many "liar loans," cut views last week, citing trouble selling mortgages. These warnings raise concerns that lending woes are spreading beyond subprime. American Home fell 15%.

That's two more companies that are having problems thanks to the mortgage market. Interest rate roundup had a nice take on the M&T Bank situation in a post titled, "So much for the lack of Alt-A spillover ..."

Buffet Buys Railroads

From the WSJ:

Warren Buffett is taking a ride on the rails.

Railroad operators have benefited in recent years from a boom in overseas demand for commodities, U.S. hunger for foreign goods and restrained competition from their big rival, trucking. And thanks to earlier waves of consolidation that left only a handful of public U.S. railroad companies, their earnings and their stocks have attracted investor attention.

So, the billionaire investor's bet on Burlington Northern Santa Fe Corp. is the latest sign that the resurgence in railway stocks has some strength over the long haul.

.......

"The business model is a good value at this price, with not much substitute product out there in terms of competition, and it has pricing power," says David Carr, co-manager of the Oak Value Fund, part of Oak Value Capital Management, which has net assets of $148 million. Berkshire makes up 9% of the fund.

The bold sections in the last paragraph are key to Buffet's thinking on this move. He likes companies that have near-monopolies on key products. This is why he purchased the Washington Post a long time ago -- it was the only paper in the nation's capital and it had a strong brand name. The same is true of the remaining publicly traded railroads.

Here is a chart of the railroad sector from Prophet.net:



This is an interesting time to buy, at least according to the chart above. Technically, it appears the railroad sector may by topping out. We've had a long bull run of at least 4 years. The recent high-volume activity at what appears to be a top could be classified as a buying climax -- a market period where there is a ton of selling at a a top, but prices don't move considerably higher. Notice the chart could be forming a double-top, or it could be moving through resistance to achieve higher prices.

China's Trade Surplus Doubles in First Quarter

From Bloomberg:

China's trade surplus almost doubled in the first quarter, adding to friction as the U.S. takes complaints against its second-largest trading partner to the World Trade Organization.

The surplus widened to $46.4 billion from $23.3 billion a year earlier, the customs bureau said on its Web site today. The March gap was $6.87 billion, smaller than economists expected.

.....

Chinese businesses rushed to sell products overseas in January and February in anticipation of government measures to slow exports and because of protectionist sentiment abroad, said Wang Qing, an economist at Bank of America Corp. in Hong Kong.

WOW -- just, wow.

That is one powerful headline. This will do an awful lot to increase protectionist sentiment in the US. Some of this is warranted, especially in light of China's $1 trillion in dollar reserves held by its central bank. That is a pretty good indication the yuan is a touch undervalued in the marketplace.

Oil Drops; Markets Not Impressed

From Bloomberg:

Crude oil plunged $2.77 a barrel in New York, the biggest decline in three months, on speculation that an Energy Department report will show U.S. inventories jumped last week as refiners unexpectedly shut units.

Crude-oil supplies in Cushing, Oklahoma, where oil traded in New York is delivered, surged 12 percent in the week ended March 30, Energy Department figures show. Fires and power outages have forced refiners to shut units, reducing crude-oil demand. Oil prices also fell because release of British naval personnel on April 5 eased concern of a supply disruption in the Persian Gulf.

``Crude oil is pulling everything lower,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois. ``It looks like we will see record inventories in Cushing this week because of all of the refinery outages.''

This makes today's lackluster stock market that much more questionable. Stocks should have loved oil going lower, especially in conjunction with the jobs report from Friday. But the markets obviously weren't impressed enough to rally.

Markets Looking A Bit Weaker

All three markets formed a cup and handle formation over the last few weeks. This pattern is usually considered bullish. However, all three markets have failed to break-out in a strong rally.

While there is a gap in the SPY and QQQQ charts, notice the volume has continually declined for the last four days. This indicates people are less and less excited about this rally, which is a bearish signal.





The IWNs never broke our over resistance. Instead we see three very narrow trading days right below resistance. This could mean a consolidation below resistance before a more up. However, the weakness of the rallies in the other two indexes does not help that theory out.

The Markets Today

The markets see-sawed today. But -- notice the late day sell off on heavy volume. That is a bearish signal.

AMD Earnings Announcement Creates Concern

From Briefing.com

We heard last month from semiconductor company Advanced Micro Devices (AMD 13.40, +0.54) that it expected to fall short of its previous first quarter revenue forecast of $1.6 billion to $1.7 billion. AMD didn't provide any specific guidance at the time, but today, it has offered some granularity saying it expects revenues to be approximately $1.225 billion.

The updated guidance is nearly 25% below the mid-point of its original guidance range and marks a 31% decline form the fourth quarter. In turn, it falls well below the current Reuters Estimates consensus estimate of $1.54 billion.

.....

This isn't good news, yet shares of AMD are trading higher in response to the additional announcement from the company that it will be restructuring to increase operational efficiencies and to lower its operating cost structure. As part of this plan, AMD will reduce 2007 capital expenditures by roughly $500 million, significantly reduce discretionary expenses, and limit hiring to critical positions.

AMD's market capitalization is 7.4 billion. This places it in the top 25 of semi-conductor based companies according to Google Finance. In other words, AMD is a pretty important company.

Notice the train of events. Earnings are decreasing, so the company is cutting back on capital spending. According to the latest BEA GDP numbers, nonresidential investment decreased 3.1% in the 4th quarter of 2006. Investment in equipment and software decreased 4.8%. Also remember durable goods orders have decreased 4 of the last 5 months.



AMDs announcement confirms businesses are decreasing their investment spending because of the slowing earnings picture. That may in turn further hinder GDP growth going forward.

More on the Great Utilities Rally

Here are three charts from Prophet.net that break the utilities sector down into smaller sub-parts. Notice that all three sectors have very nice 5-year charts. Also notice that according to Market Gauge utilities are the second best performing sector year to date and over the last 6 months and are the best performing sector over the last 52 weeks.

Also consider the following. According to S&P, earnings increases are slowing down. Durable goods orders are down as is domestic investment. Consumer spending is the only economic area keep the economy afloat. In other words, there is a reason for people to move into more conservative investments. And on that topic, utilities already have strong upward momentum.

Diversified Utilities:



Electric Utilities



Water Utilities

Jobs Report Rally Doesn't Materialize -- At Least Not Yet

Below are three month charts for the SPY, QQQQ and IWN. Notice that after the jobs report on Friday the markets have failed to rally.

This could change sometime in the trading day.