Friday, March 20, 2009
Weekend Wiemer and Beagle
About that Nationalization Idea....
The Federal Deposit Insurance Corp. said late Thursday that it has completed the sale of IndyMac Federal Bank FSB, the firm it took over last year, and that it took a $10.7 billion loss on the deal, far more than originally expected.
The FDIC said OneWest Bank, FSB, a newly formed Pasadena, California-based federal savings bank organized by IMB HoldCo LLC, would assume IndyMac's deposits.
"As of January 31, 2009, IndyMac Federal had total assets of $23.5 billion and total deposits of $6.4 billion. OneWest has agreed to purchase all deposits and approximately $20.7 billion in assets at a discount of $4.7 billion. The FDIC will retain the remaining assets for later disposition," the FDIC said in a press release.
I mention this for the following reasons:
1.) Nationalization advocates seem to think it's the best thing since sliced bread (at least to my ears). Yet three are no panaceas -- no easy answers to the questions faced by the financial sector right now.
2.) This is in line with the Swedish experience. While advocates point to the Swedish model as one to emulate Sweden still lost approximately 2% of thier GDP on the deal.
3.) I still think the best idea is to use the remaining TARP money to make one giant bank, transfer good assets to it and let the bad assets sit in the remaining shells.
A Closer Look At Inflation
From the BLS:
The Producer Price Index for Finished Goods advanced 0.1 percent in February, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 0.8-percent increase in January and a 1.9-percent decline in December. At the earlier stages of processing, prices received by manufacturers of intermediate goods decreased 0.9 percent in February after falling 0.7 percent in the previous month, and the index for crude materials declined 4.5 percent following a 2.9-percent decrease in January. (See table A.)
There has been a some virtual ink spilled over the question of deflation -- that is, are we going into a period of deflation somewhat like that of the Great Depression. So far the evidence is a bit mixed. First, The change from the preceding month in core PPI has only been negative once in the last 12 months. This was November's -.1 decline. This tells me that so far the decline has to do with the commodity deflation over the last 9 months as this chart shows:
However, we have seen one of the biggest drops in overall PPI in an incredibly long series of data:
In addition, the year over year number is still scary:
But also note in the above chart that prices have dropped at this level before -- in 2001 -- without the fear of deflation emerging.
In addition, so far the rate of decline in both intermediate and crude goods as decreased over the last two months. Intermediate goods decreased at a roughly 4%/month clip in the October, November and December of last year, but fell at a .7% and .9% clip in January and February of this year. Crude goods show a similar pattern: they fell at (approximately) 16%, 14% and 5% in October, November and December of last year but at a 3% and 4.5% clip in January and February of this year.
In other words, from the PPI perspective, I'm leaning towards the "there isn't a deflation problem" conclusion.
From the BLS:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in February, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The February level of 212.193 (1982-84=100) was 0.2 percent higher than in February 2008
Like the PPI data, the CPI data shows drop in 4Q of 2004 and increases so far this year. For October, November and December of last year there were drops in overall CPI of -.8%, -1.7%, -.8%, respectively, but in January and February of this year we saw increases of .3%, .4% respectively. More importantly, this appears to be a commodity related situation. The month over month rate of increase in core CPI for October - February was .0%, .1% , .0%, .2%, .2% respectively.
That does not mean there shouldn't be cause for concern. Consider this chart of CPI data
That's one of the largest drops in CPI the data has seen over the last half century. In addition,
The year over year chart of CPI is ugly, and its far too early to tell if we're at the beginning of an upswing or not.
In general, it looks to me as though the price drops of the last 5 months are related and confined to the energy/commodity drops of the last 9 months. That does not mean we shouldn't keep an eye on these numbers. But the latest upticks in overall data and the lack of spreading to core numbers gives me the impression the "deflationary spiral" argument is losing steam.
The rally that started at the end of last year is now over; prices have convincingly moved through the upward sloping trend line that started in December of last year. Prices have also moved through all the SMAs which will pull them lower. Additionally, the 10 day SMA has moved through the 20 day SMA and the 10 and 20 day SMA are both moving lower. Finally, the MACD shows momentum has moved downward and the RSI tells us prices are weakening.
The long debate about whether the market was forming a double top is now over. Thanks to the Fed saying it will basically print tons of dollars prices have dropped.
Thursday, March 19, 2009
A few points:
-- The 10 day SMA has moved through the 20 day SMA
-- Prices moved through the 50 day SMA today, but couldn't close above the level
-- The 20 day SMA is now moving sideways
-- Prices are still in a confirmed rally.
The Credit Crisis Explained
The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.
Thanks to Matt Register at Corporate Finance Associates
Federal Express Issues Ugly Report
FedEx Corp. said net income dropped 75% in its fiscal third quarter, below even Wall Street's grim predictions for a company considered a bellwether of the national and global economy.
The shipping company also said it plans to cut $1 billion in expenses in the coming fiscal year, mostly from its Express unit, which generates nearly two-thirds of the company's overall revenue. Revenue at the Express unit was off 18% for the quarter ended Feb. 28. Overall, the company saw a 5% drop in its Express daily package volume for the quarter.
The company said its cost-cutting plans will include job cuts, though it didn't provide specifics. It will also reduce network capacity at its express and freight segments, cut back work hours and expand its compensation reductions to non-U.S. workers, where allowed.
From a Dow theory perspective, this is terrible news.
The Treasury's Plan
From the WSJ:
The Treasury's bank strategy is twofold. One, get enough capital into the 19 biggest banks so everyone believes each can withstand a really bad recession. Two, get toxic assets off their books so banks will pick up the pace of new lending, and savvy big-money investors will put money into the banks and help achieve the first objective.
The unfortunately named "stress test" -- which conjured up images of Citigroup collapsing on a treadmill -- was meant to be a confidence builder, though announcing it seems instead to have magnified doubts and uncertainty about the banks. The notion is to figure out by the end of April how much capital cushion each of the 19 big banks needs to survive a bad recession (that's the "stress test") and then give those that need more capital six months, until Oct. 31, to raise it privately or take a bigger taxpayer investment on different terms than former Treasury Secretary Henry Paulson offered. Until then, the Federal Deposit Insurance Corp. will guarantee bank debt so no one need worry about lending to them, or so the Treasury hopes. None of the 19 banks will flunk the test; the only question is which will need taxpayer capital in the fall.
Let's think this through.
The Treasury plan wants the individual banks to act privately before more taxpayer money comes into the equation. On the pro side, this will prevent the use of more taxpayer money if its successful. On the bad side, its takes time to raise capital during which a number of bad things could happen. In addition, who would invest money in these banks? However, I think the third quietly implied option of this part of the plan is there will be mergers between weak and strong banks of one sort or another in reaction to the "stress test".
The last piece of the Geithner plan comes soon: Buying toxic loans and securities, mostly linked to real estate, from the banks and others. One challenge is putting a fair price on them. The Paulson Treasury spent months trying to fashion auctions in which the government would buy these assets. It never bought any. The Geithner Treasury decided that approach wouldn't work. What's more, it hasn't nearly enough taxpayer money to buy enough of the assets to make a difference.
So the plan is to form joint ventures between the Fed and money managers like Pimco or BlackRock. The Treasury kicks in, say, $1 for every $1 the private guys put in. The private investors, not the government, decide what securities to buy from the $1 trillion or so in securities linked to real estate or consumer loans. The private guys decide what price to pay. That's their business. Taxpayers and the investors would share the profits, if any. If the Fed lends to these ventures, they'll be able to buy more securities and pay more for them.
A separate set of joint ventures will shop among the $1 trillion or so in toxic loans on bank books. This effort will be leveraged by FDIC lending. The hope is that some banks will make themselves more attractive to private investors by selling toxic assets to the new joint ventures, and thus ease both parts of the banking problem simultaneously.
The central problem with this plan is the central problem with all plans dealing with the bad assets: will the banks be willing to sell and at what price? There is no guarantee anyone will be willing to sell or buy at a rate the market would like. I think this plan has an OK chance of working, but that is hardly a ringing endorsement.
I will think the best idea we've had so far is to make one big bank out of the remaining taxpayer funds, use that bank to buy the good assets from the troubled institutions and then let the banks keep the bad assets to manage. That still makes the most sense to me, largely because it only involves the creation of one structure which would be easier to monitor.
While this is not the best plan, we're left with a question of "what else can be done?" While there are still calls for nationalization of the banks, the current problems with the TARP plan -- that is, the increasing number of politically motivated bailouts -- indicates that my fears the process will be politicized are well founded. If we can get rid of that problem I think it would be appropriate. But until that question is answered, I still don't think it makes sense.
Thursday Oil Market Round-Up
The weekly chart shows that oil has clearly broken through the upper trendline of the triangle consolidation pattern hat started in the 4th quarter of 2008. Also note the MACD gave a buy signal in late January and the RSI has been rising for several months. Prices are also above the 10 and 20 week SMA and the 10 week SMA has turned positive.
The most important development is the movement of prices and the SMAs into a more bullish configuration. Note that prices are now above all the SMAs, the shorter SMAs are now above the longer SMAs and all the SMAs are rising. This is very bullish. Also note we have gains in the RSI and a rising MACD.
Bottom line: this is a bullish chart.
Wednesday, March 18, 2009
This is a really nice looking chart. Notice how prices have risen and fallen in a nice pattern. In addition, prices have consolidated gains in bull market pennant patterns and then gone on to rise some more.
Prices have moved through the 10 and 20 week SMA with strong bars. The 10 day SMA has turned positive and is approaching the 20 week SMA. Prices now have two SMAs of support. The only problem is volume should be stronger for this to be a bona-fide rally. But, I think most people would take the gains so far.
I added chart of Fibonacci levels to show where a pullback from today's highs could go to. This way we know where sell-off target levels are.
The Fed's Statement
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.
In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.
First paragraph: there is nothing good mentioned here. Job losses are mounting, the decline in housing and stock values have lead to decreased consumer demand. Businesses have also cut back on investment and exports are decreased. bottom line -- things are not good.
However, all of the policy proscriptions taken -- record low interest rates, all the Fed's programs and the stimulus bill -- should help to slow the decline and eventually stabilize the economy. My guess is the committee is thinking sometime at the end of the year or beginning of the next one.
The decline in capacity utilization indicates inflation won't be an issue for some time.
As a result, the committee can continue to use aggressive measures to try and get the economy out of the recession.
Personal Consumption Expenditures and Recoveries
From 1947 - 1967 there were 4 recessions. In the first recession, PCES went higher first and GDP was very late in following. In fact, people kept spending throughout the recession. My guess is this is an anomily, as post-WWII pent up demand kept consumers spending as the country retooled its industrial base. PCEs increased in advance of the next recession and advanced in lock-step with GDP growht in the last two recessions.
In the middle two recessions, PCEs increased a bit before GDP changes. In the first recession, PCEs increased at the same time as GDP and in one recession -- the seond dip recession of the early 1980s -- PCEs increased way before GDP.
In one recession PCEs and GDP bottomed at the same time and in the second PCE bottomed before.
So -- since 1947 we have the following statistics.
PCES increasing before GDP: 4
PCEs increasing at more or less the same time: 4
PCEs not really paying attention to GDP at all: 2
So what conclusions can we draw?
1.) The possibility of the economy turning around without a YOY increase in PCEs is non-existant.
2.) PCE lead GDP 40% of the time
3.) PCEs increased at the same time as GDP 40% of the time
A Floor For Housing?
Housing starts shot up 22.2% from January's all-time low to an annualized 583,000 units, the Commerce Department said — thanks to a spike in new apartment and condo activity. Analysts expected another fall. Starts were still down 47.3% vs. a year ago.
Building permits, a future activity gauge, rose 3% to a 547,000-unit rate, 44.2% below a year ago.
The housing data, along with higher retail sales excluding autos in January-February, give optimists some hope that the recession, which began in December 2007, may be starting to ease.
Pessimists note that single-family starts — up just 1.1% — are essentially at record lows, consumer spending has been helped by one-time factors, and industrial activity shows no glimmer of recovery.
Please. One month does not a trend reversal make. We need a lot more data before we even think about making that call. Just take a look at the chart above. Does that look like its a bottom?
Wednesday Commodities Round-Up
Agricultural prices have been in a triangle consolidation pattern since the end of last year. But there are signs they might be coming out of that. First, note the RSI is rising, indicating prices are increasing. Also note the MACD is increasing, indicating momentum is picking up. There is also some upside room on the STOs, which are a better indicator when prices are trending as they are within the triangle. However, prices and the SMAs are in a tight range, telling us the market is still "making up its mind", as it were.
Industrial metals are in the same position as agricultural prices -- consolidating in a pattern. Prices and the SMAs are in a tight range, indicating some indecision. However, there is upsid eroom on the STOs, the MACD is rising and the RSI is rising. There are a lot of reasons for prices to move higher right now.
Underlying both of these sectors is the anticipation the economy will rebound, meaning there will be an increased demand for both food and the raw materials of industrial production (industrial metals). The question is when will the rebound happen? We'll get to that a bit later.
Tuesday, March 17, 2009
Although the markets opened lower they continued higher for the rest of the day. Notice that prices advanced, then pulled back on a regular basis until at the end prices simply spiked higher on solid volume.
Although prices pulled back on Monday, they are right back into rally mode today.
This is looking like a rally. Notice the strong bars moving higher and the solid move through the SMAs. The only issue is the lack of solid volume compared with the sell-off of over the last few weeks. But, everything else is looking bullish right now.
Empire State Borrowing Report
Notice the following:
Question 2: Notice the increase from "same" to "tighter" from the last survey. However, also note the number of firms who responded "same" in the latest survey was 57% for the last 12 months and 60% for the last three months. That's a clear majority of firms.
Question 3: The number of firms who said banks' credit requirements were "much tighter now" increased to 25.5% of respondents. But again a majority 53% said the requirements were the same.
Question 4: The number of respondents who said the cost of borrowing increased rose, but so did the number of respondents who said the cost decreased.
Question 5: 69.9% of all respondents said the limits on the lines of creased were the same.
My guess is the firms that need money are the ones who are answering that credit is tightening and harder to get while the firms who have some type of cushion are responding things are OK. Again -- that's a guess.
Industrial Production Drops -- Again
Industrial production fell 1.4 percent in February; the overall index has now declined for 4 consecutive months and for 10 of the past 12 months. At 99.7 percent of its 2002 average, output in February was 11.2 percent below its year-earlier level and was the lowest level since April 2002. Production in the manufacturing sector moved down 0.7 percent, with broad-based declines among its components. An increase in the production of motor vehicles and parts after the extended plant shutdowns in January, however, added nearly 1/2 percentage point to the change in manufacturing production. Outside of manufacturing, the output of mines moved down 0.4 percent, while a swing to above-average temperatures contributed to a 7.7 percent drop in the output of utilities. The capacity utilization rate for total industry fell to 70.9 percent, a rate 10 percentage points below its average from 1972 to 2008. This rate matches the historical low for this series, which was recorded in December 1982; the data for total industrial utilization begin in 1967.
Let's take this apart, piece by piece.
-- IP has declined 4 consecutive months. That's called a trend. And this trend is not very good.
-- IP has declined 10 of the past 12 months. That's also called a trend. And this trend is not very good.
-- Industrial production is now below the 2002 level. Here's a relevant graph from the St. Louis Federal Reserve:
Here's a chart of utilization from the report:
We're now at the lowest level of utilization in over 40 years.
There are two areas that stand out as the main culprits of the drop: construction and autos (consumer durable goods):
However, that does not mean everything is hunky-dory in other areas. It simply means those two areas are especially bad.
The year long chart simply shows that Treasury's have retreated since they peaked at the end of last year.
Notice the Treasuries are still in a triangle consolidation pattern. Prices are tied together with the 10 and 20 day SMA.
Taking a look at the 10 day chart, notice that last week's rally was a really solid move upward. Prices continued to move through previous levels of resistance and formed some solid bull market pennant formations to consolidation gains. However, all things must come to an end and prices yesterday broke through the upward sloping trend line.
Notice that prices have moved through the 10 and 20 day SMA. However, yesterday's volume was very weak compared to the volume of the rally.
Monday, March 16, 2009
Ben On 60 Minutes
Anyway, here are the videos.
Economy, 1,874,112 Bonddad 0
Click for a larger image
On November 18 of last year I wrote the following:
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. [this figure is wrong; it should be 8.2 million] 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.
Things have gotten much worse since then. We've lost 4.4 million jobs so far, or 53% of the total number of jobs lost in the previous recession. And the above chart of unemployment indicates we're not done yet.
That's why I (hopefully) add the important caveat to my analysis (like I did above). If I don't, please keep it in the back of your mind at all times: the economy will make an ass out of economists whenever possible.
About the Cramer Stewart Dust-Up and The Power of Blogs
That being said, I should also add that I think all analysts are worthless. Consider this from the latest Barron's:
Click for a larger image:
Simply put -- no one did well long-term. And everyone got destroyed over the last year. That means no one -- NO ONE - - advised their clients get the hell out, shift into something safe and wait it out. Part of the problem is none of these guys knew we were in a recession. Consider this:
Back on Oct. 1, analysts predicted Q1 earnings for S&P 500 companies would rise 25.7% vs. a year earlier, according to Thomson Reuters. By Jan. 1, they were predicting a decline of 12.5%. Now the forecast calls for a 34.1% plunge.
That rights -- 9 months into a recession, analysts thought that earnings would increased 25.7% y/o/y. That's how clueless these guys are.
And no -- there were plenty of people who called the problem.
A look at my writings indicates that I wrote an article on November 22, 2007 which concluded:
1.) The multi-year charts indicate the rally is still on, although the high volume over the last year may indicate we have seen a selling climax.
2.) The year chart shows traders have a hair trigger, and will sell on high volume.
3.) The Russell 2000 has broken a 4 year uptrend and is nearing a bear market sell-off point.
4.) The Transports are in bear market territory, preventing a Dow theory confirmation.
5.) Market breadth has been declining, especially on the NASDAQ during its latest rally.
6.) Investors are moving into Treasury debt, indicating a flight to safety may be going on.
This market has some serious chinks in its armor. The Russell 2000 and Transportation average are cause for serious concern. So is the lack of market breadth during the NASDAQ's latest rally and the Treasury market rally. If only one of the preceding facts was occurring we could dismiss it. However, with all four occurring at the same time, it's important to take a close look at the market to see if a rally can continue.
On November 24, I wrote the following:
At the end of every week, I go to the stockcharts.com performance function to see how the major ETFs (using the XL__ series) have performed over various time frames. I look at returns for the following time periods: year, 180 days, 90 days, 30 days, 10 days and week. What I'm looking for are general trends to see how money is shifting in the market. I then look at the charts to see what they are saying.
Here are some observations from that analysis.
1.) The XLEs and XLBs -- which were a prime driver of the latest bull market -- have stopped advancing. This may be a sign that traders who rode these sectors for most of the year are getting out and taking profits.
2.) The financials -- which comprise about 20% of the S&P 500 -- have a negative return for all the time periods.
3.) Consumer discretionary has a negative return for all but one time frame (yearly).
4.) Over the last 30, 10 and weekly period, the best performing sectors are utilities (which performed best over the last 30 days) and consumer staples (which performed best over the last 10 days). Energy popped over the last 5 day period, largely thanks to oil's rally.
In short, it looks as though traders are taking profits in the previously strong areas of the market and are shifting those realized gains into safer, recession resistant areas of the market.
And I am far from the only one who was concerned. Barry at the Big Picture, Mish and Calculated Risk all wrote about their concerned about the economy and the markets as a whole. If you had read the blogs and avoided the financial channels and then acted on the advice you would have done just fine.
Notice the following on the daily chart:
-- Prices have moved through the downward sloping trend line that started in early February
-- Prices have moved through the 10 and 20 week SMA
-- The 10 week SMA is turning more positive
-- The MACD has given a buy signal
-- The RSI is rising
-- The Money Flow index rising
-- The shorter SMAs are below the longer SMAs
-- The 20 and 50 day SMA are still moving lower
Notice the following on the weekly chart
-- The MACD is moving higher
-- The RSI is rising on a longer scale.
-- Prices are still below all the SMAs
-- All the SMAs are moving lower
-- The shorter SMAs are below the longer SMAs
Bottom line: we have a long way to go -- especially on the long term chart -- before we're out of the woods.