Net Capital Outflow From US in December

From CBS Marketwatch:

U.S. monthly capital flows reversed in December to an outflow for the first time since June 2005, the Treasury Department reported Thursday.

The U.S. recorded an outflow of $11 billion in December, compared with an inflow of $70.5 billion in November, the Treasury said.

The U.S. economy has required big inflows of capital of about $70 billion every month to fund its large current account deficit, which totaled $225.6 billion in the third quarter -- about 6.8% of gross domestic product.

The large inflows of foreign capital have kept U.S. interest rates lower than they would otherwise be, boosting the real-estate sector and other asset markets with cheap money.

The dollar fell against yen and the euro following the report, which, according to Action Economics, "didn't sit too well" with the markets after Tuesday's report on the nation's growing trade gap and a Wall Street Journal report that China is considering shifting some of its $1 trillion in foreign reserves into riskier assets, such as corporate bonds, stocks and even commodities. See full story on currency markets.

The December flows data include both long- and short-term securities. The outflow resulted from total sales of $42.5 billion in securities by private investors, partially offset by $31.5 billion in purchases by official institutions.

Here's a link to the official data.

Let's look at this in a bit more detail.

The grand total of outflows was $11 billion. In the big scheme of things, this is not large number and could be adjusted to a positive figure in the coming months.

The one figure that jumps out from the Treasury release is the net 11.1 billion sale by private foreigners of equities. This was the first negative number in the last few months. It could easily have been simple, year-end profit taking.

We're still seeing large purchases of corporate bonds at the expense of US Treasury bonds. This is probably for two reasons. First, Corporate bonds have a higher yield. Secondly, it could be simple portfolio diversification.

We also see a net sale of foreign official institutions selling of US Treasury Bills, although not by much.

Again, given the US trade deficit (which set another record this year) this number should raise eyebrows. However, it could just as easily beenb the result of year end profit taking in equities.

New Home Prices Decrease 2.7% in 4Q

From the National Association of Realtors in PDF format

The link has a list of prices in various US cities.

The NE decreased 2.5%, the South decreased 3.7% and the Midwest Decreased 4.2%. The West increased .4%.

Florida is a bloodbath right now. We're seeing big declines.

California is mixes. San Diego and San Francisco are down while Los Angeles and San Jose are up. Go figure.

It takes a great deal of downward pressure to move the national number lower. That means this number is significant.

Retail Sales unchanged in January

From the Department of Commerce.

This is in PDF format.

The DOC revised the December figure higher from a .9% increase to a 1.2% increase.

Motor Vehicles, electronics stores, and restaurants and bars were all down slightly.

Gas stations were down big, but then again so were oil prices for the first half of January.

Building materials, home furnishings and clothing/apparel were up slightly.

Basically, it looks like the consumer stopped spending on more extravagant purchases (autos and wide screen TVs) and bought more of the traditional needs based items. This shouldn't surprise anybody coming after Christmas.

Industrial Production Drops .5%

From the Federal Reserve:

Industrial production decreased 0.5 percent in January after an increase of 0.5 percent in December. Output in the manufacturing sector declined 0.7 percent in January; about one-half of the decrease was a result of a drop of 6 percent in motor vehicles and parts. The output of utilities rebounded 2.3 percent, as temperatures moved back toward seasonal norms, while the output of mines moved down 1.2 percent. At 111.9 percent of its 2002 average, overall industrial output for the month was 2.6 percent above its January 2006 level. The rate of capacity utilization in January fell 0.6 percentage point, to 81.2 percent. Even so, it was 0.1 percentage point above its year-earlier level and 0.2 percentage point above its 1972-2006 average.

OK -- let's break these numbers down a bit.

1.) Auto production accounted for half of the decline. That means we have a 1-time factor disproportionately hitting this number. While the decrease still means something important for this number, it's doubtful we'll see auto production drop that much again in the near future. The drop occurred in autos and trucks. Even without the auto numbers, overall production decreased .2%.

2.) Energy products increased in production. While the 4th quarter still saw a big drop, this large increase may bode well for this sector in the future.

3.) Computers, semi-conductors and communication equipment all saw increases. Excluding high-tech, non0energy production decreased 1.1%. That indicates technology production is really important to the industrial base right now and negative news from that sector will be doubly important.

4.) Industrial capacity decreased in a big way. This should help the Fed continue t argue that inflationary pressures are lessening.

Import Prices Decrease 1.2%

From the Department of Labor:

Import prices fell 1.2 percent in January after increases of 1.1 percent and 0.5 percent, respectively, in December and November. A 7.3 percent decrease in petroleum prices drove the overall January drop, as petroleum prices resumed a recent downward pattern after increasing 4.6 percent in December. Nonpetroleum prices were unchanged in January after a 0.5 percent advance the previous month. Prices for nonpetroleum imports rose 1.6 percent over the 12 months ended in January.

Let's look at a chart of oil to see if this trend will continue:



Oil bottomed in mid-January around $52/bbl. Since then it has broken through technical resistance in the $57/bbl area. Currently it's still in an uptrend and appears to be consolidating its gains in the $58-$60 area.

In other words, so long as oil remains at or near current levels we can't expect this inflation number to repeat. In addition, this month's increase more or less canceled out last months increase, so we'll be back to square one next month.

However, this news should add fuel to the "inflation is decreasing from natural factors" bulls from yesterday.

NY State Manufacturing Index Rebounds

Here's a link to the full report:

Short version: The overall situation jumped up. New Orders, shipments and unfilled orders all increased. Prices paid decreased while prices received increased.

The last ISM index has hovering around recessionary levels. Since that time, we've had a moderately positive Philly Fed report and a very strong NY report. That should help to ease some concern about the manufacturing sector of the economy for now.

As with all things economic, we'll have to wait and see if the trend continues. We're not out of the woods yet, but we're making a start.

Weekly Unemployment Increases 44,000

From the Department of Labor:

In the week ending Feb. 10, the advance figure for seasonally adjusted initial claims was 357,000, an increase of 44,000 from the previous week's revised figure of 313,000. The 4-week moving average was 326,250, an increase of 17,500 from the previous week's revised average of 308,750.

Watch the 4-week moving average.

What's interesting about this report is that despite a large increase, there are only two states in the 1,000+ layoff category.

According to CBS Marketwatch

The unemployment lines grew longer last week, in part because of bad weather in the Midwest and Northeast, the government reported Thursday. The number of people collecting unemployment benefits rose to the highest level in a year.

So at least some of this is weather related. We'll have to see if the trend decreases over the next few weeks.

Greenspan: The Worst of Housing Is Over

First, welcome to all the people referred by Crooks and Liars:

From Reuters:

The worst of the U.S. economic adjustment to the housing slowdown is in the past, although housing starts and prices likely still have room to fall, former U.S. Federal Reserve Chairman Alan Greenspan said on Wednesday.

"The worst is behind us," he told a C$400-a-plate luncheon audience in Toronto via video conference, according to a source who was in attendance.

Greenspan had been expected to deliver his speech in person, but his flight was canceled due to snowstorms across much of eastern Canada and the United States.

There are some important points to remember here.

1.) As a former Central Banker, Greenspan is playing the, "I'm the voice of reason" card. He probably doesn't view his position as someone who should issue warnings of concerns. If memory serves, only did that one with his "irrational exuberance" statement in the mid-1990s.

2.) I disagree strongly with Greenspan's statement. Over the last two months, we've seen two waves of sub-prime mortgage (SPM) defaults and bankruptcies. The first included Ownit Mortgage which at the time was the 11th largest SPM lender. The second started at the beginning of this week when HSBC announced it was increasing its loan loss reserve and NEW said it was restating earnings for the last year and was reporting a loss for the latest quarter. UBS securities has said the 2006 SP mortgages were going into default at a record pace. The same article notes that delinquencies are above 2000 levels. That means delinquencies in an economic expansion are higher than delinquencies during the last contraction. Housing vacancies are over 2% -- the highest ever on record. None of these factors indicate housing is at a bottom.

I predicted a recession in 4Q 2006 or 1Q 2007 based on the assumption the housing market's problems would bleed into consumer spending. That assumption was wrong as housing problems have been contained so far. But it also looks like we have a long way to go before housing bottoms.

Bernanke's Inflation Statement

From today's testimony:

I turn now to the inflation situation. As I noted earlier, there are some indications that inflation pressures are beginning to diminish. The monthly data are noisy, however, and it will consequently be some time before we can be confident that underlying inflation is moderating as anticipated.

Translation: The recent numbers have been down, but we don't know if the trend will continue.

Recent declines in overall inflation have primarily reflected lower prices for crude oil, which have fed through to the prices of gasoline, heating oil, and other energy products used by consumers.

Inflation's decrease is commodity specific. If oil goes up, we will have inflation problems again.

After moving higher in the first half of 2006, core consumer price inflation has also edged lower recently, reflecting a relatively broad-based deceleration in the prices of core goods. That deceleration is probably also due to some extent to lower energy prices which have reduced costs of production and thereby lessened one source of pressure on the prices of final goods and services.

Oil rears its ugly head again.

The ebbing of core inflation has likely been promoted as well by the stability of inflation expectations.

People aren't freaking out about inflation.

A waning of the temporary factors that boosted inflation in recent years will probably help foster a continued edging down of core inflation. In particular, futures quotes imply that oil prices are expected to remain well below last year's peak. If actual prices follow the path currently indicated by futures prices, inflation pressures would be reduced further as the benefits of the decline in oil prices from last year's high levels are passed through to a broader range of core goods and services. Nonfuel import prices may also put less pressure on core inflation, particularly if price increases for some other commodities, such as metals, slow from last year's rapid rates.

Right now, the trend in oil prices is down. That's good.

But as we have been reminded only too well in recent years, the prices of oil and other commodities are notoriously difficult to predict, and they remain a key source of uncertainty to the inflation outlook.

Remember -- we're talking about oil.

The contribution from rents and shelter costs should also fall back, following a step-up last year. The faster pace of rent increases last year may have been attributable in part to the reduced affordability of owner-occupied housing, which led to a greater demand for rental housing. Rents should rise somewhat less quickly this year and next, reflecting recovering demand for owner-occupied housing as well as increases in the supply of rental units, but the extent and pace of that adjustment is not yet clear.

Here, Bernanke is talking about owner's equivalent rent, which is used in calculating the official inflation rate. Instead of using the actual price of a house, the Bureau of Labor Statistics uses OER, hoping to get a measurement of the investment value of the home. Yes, this is an economic way of saying, "we're basically rigging the number with a heavily downward bias, especially in an overbuilt real estate market."

Upward pressure on inflation could materialize if final demand were to exceed the underlying productive capacity of the economy for a sustained period. The rate of resource utilization is high, as can be seen in rates of capacity utilization above their long-term average and, most evidently, in the tightness of the labor market. Indeed, anecdotal reports suggest that businesses are having difficulty recruiting well-qualified workers in certain occupations. Measures of labor compensation, though still growing at a moderate pace, have shown some signs of acceleration over the past year, likely in part the result of tight labor market conditions.

Econ 101: when demand is greater than supply, prices increase.

The implications for inflation of faster growth in nominal labor compensation depend on several factors. Increases in compensation might be offset by higher labor productivity or absorbed by a narrowing of firms' profit margins rather than passed on to consumers in the form of higher prices; in these circumstances, gains in nominal compensation would translate into gains in real compensation as well. Underlying productivity trends appear favorable, and the markup of prices over unit labor costs is high by historical standards, so such an outcome is certainly possible. Moreover, if activity expands over the next year or so at the moderate pace anticipated by the FOMC, pressures in both labor and product markets should ease modestly. That said, the possibility remains that tightness in product markets could allow firms to pass higher labor costs through to prices, adding to inflation and effectively nullifying the purchasing power of at least some portion of the increase in labor compensation. Thus, the high level of resource utilization remains an important upside risk to continued progress on inflation.

If companies start raising prices to make-up for an increase in wages, we could have more inflation.

Monetary policy affects spending and inflation with long and variable lags. Consequently, policy decisions must be based on an assessment of medium-term economic prospects. At the same time, because economic forecasting is an uncertain enterprise, policymakers must be prepared to respond flexibly to developments in the economy when those developments lead to a re-assessment of the outlook. The dependence of monetary policy actions on a broad range of incoming information complicates the public's attempts to understand and anticipate policy decisions.

This whole thing could change at a moments notice.

Personally, I don't think this is a very bullish statement. It seems like Bernanke is saying the same thing he always says. The Fed is data dependent. Things can change. Oil's a huge wild card.

Obviously, the market thinks differently. And the market's actual reaction is more important than in individual's interpretation.

It's Valentines Day

I am in court this morning. I may get back to the office after that or not. It all depends on the judge. Here's the first rule of being a lawyer: in court, the judge wins.

Starting in the early to mid afternoon, I am spending the rest of the day with my girlfriend. It is Valentine's Day which should bring out the romantic in all of us.

In other words, posting will be light today. As it should be for us all.

Happy Valentine's Day.

Foreclosures Up 25% in January

From CBS Marketwatch:

The number of U.S. homes entering the foreclosure process because of nonpayment on mortgages rose to 130,511 in January, 25% more than in January 2006, according to data released Monday by Realtytrac Inc.

The foreclosure rate was one for every 886 U.S. households.

The 130,511 foreclosures is the highest monthly total since the firm began tracking national foreclosures two years ago. Foreclosures were up 19% compared with December.

This data set is only two years old, so reading too much into it is a bit dangerous. But, 25% is a big jump and too large to be considered statistical noise.

I also wanted to add that if memory serves, the national foreclosure rate is still pretty low by historical standards. If someone has a chart on an exact figure, please chime in.

Title And Surety Sector Looks Vulnerable To Short Sellers

As I mentioned below, the local biz radio network was talking about how to play the sub-prime mortgage (SPM) break-up. They mentioned the surety/title insurance sector would be the next to get hit. Here's a chart of that sector from Prophet.net.



The sector has not been able to get above the 260 market, despite three different tries. That indicates it may be vulnerable to short selling or investors who are nervous about the SPM market.

Here's a 1-year chart (sorry about the size. I'm cheap, so I use their free site).



Notice how the last few days have really hammered the sector. There's an area of congestion in the 258 - 261 area that should provide some technical support. But if the sector breaks through that area there's a lot of downward room to move.

For those of you who are interested in looking in more detail, go to the Prophet.net site. There's a link on the right. I think it's one of the best sites out there.

Another Sub-Prime Lender Files For Bankruptcy

From Bloomberg:

ResMae Mortgage Corp., a U.S. home lender to people with bad credit, filed for bankruptcy protection and said Switzerland's Credit Suisse Group agreed to buy most of its assets for $19.1 million.

``The subprime mortgage market has recently been crippled,'' ResMae said in its Chapter 11 filing yesterday. The company didn't have enough reserves to cope with an ``enormous'' surge in loan defaults, it said.

Closely held ResMae is at least the 20th mortgage company to be sold or closed as delinquencies rise and the market for home loans to risky borrowers contracts at the fastest pace ever, according to a Bloomberg tally of company announcements. Credit Suisse rivals Merrill Lynch & Co., Morgan Stanley and Barclays Plc are swooping in, buying home lenders to produce more revenue from packaging the loans into bonds.

WOW -- I had not realized the number of SPM lenders to either be sold or closed was at 20. I've followed the big stories of the last few months, but I have obviously missed a few.

I was listened to the Biz radio network today, and they mentioned the next domino to fall would be the mortgage insurers. That makes a lot of sense.

Trade Deficit Expands and Sets Another Record

From Bloomberg:

he U.S. trade deficit increased more than forecast in December as the price of imported petroleum rose and purchases of foreign cars and consumer goods reached records.

The gap between imports and exports widened 5.3 percent to $61.2 billion in December, from a 16-month low of $58.1 billion in November, the Commerce Department said today in Washington. For all of 2006, the trade imbalance expanded to a record $763.6 billion.

Higher petroleum prices in December increased the value of oil and gas imports into the U.S. Prices have since receded, and economists expect economic growth overseas, combined with the continued weakness in the dollar, will boost demand for U.S. products and keep the trade gap in check.

``The big picture is exports are growing, but in '06, imports grew faster, particularly consumer goods from China,'' said Chris Low, chief economist at FTN Financial in New York. ``We are looking for a small downward revision'' in fourth- quarter economic growth based on today's figures, he said.

Now we understand why the dollar chart for the last 4-years is in a big downtrend.

Housing Bottom? Not This Year

From CBS Marketwatch:

"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."

Berson said he expects the home-price index calculated by the Office of Federal Housing Enterprise Oversight will show a nationwide decline in values for 2007, the first time that will have happened since the data began being collected in 1975. Unlike other measures, the OFHEO data measure the price changes on the same homes over time, meaning the index is less likely to be skewed by the types and locations of sales.

"It won't be a big decline, maybe 1%. And the declines will be far more centered in areas that have had the most investor activity," he said. "Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."

One of the big problems with national housing statistics is they group low-activity areas with high-activity areas. So the national number includes Boise Idaho and Southern California. These two areas are not comparable, but we lump them together in the national number. However, that means a drop at the national level would be pretty severe because the hot areas are seeing a large enough drop in price to lower the national, macro-statistic.

It's also very telling that the statistics have not declined in 30 years.

The biggest problem the housing market faces is "a seriously large inventory situation," said David Seiders, chief economist for the National Association of Home Builders, which is hosting the International Builders Show here this week. Seiders said the housing boom in 2004 and 2005 produced at least 400,000 more housing units than demand could support, and builders are having to push hard to move those homes off the market.

There is a ton of inventory on the market right now. The amount of vacant houses on the market is at record levels by a large margin.

Here's a weekly chart of the homebuilders ETF from Stockcharts:



The sector consolidated in a triangle bottom in August before participating in the last 2006 rally. Here's a closer look at the late 2006 rally.



We have a primary trend ling with a few minor supporting trend lines. There was an article in the latest edition of Barons asking of the homebuilders rally had run its course. We'll have to wait and see how that plays out.

Market Hammers Mortgage Lenders

From Bloomberg:

Countrywide Financial Corp. and New Century Financial Corp. led shares of mortgage companies down for a third day as rising defaults drove the perceived risk of owning bonds backed by ``subprime'' loans to a record high.

Shares of Irvine, California-based New Century, the second- largest company that specializes in lending to people with low credit ratings, fell $1.01, or 5.5 percent, to $17.21 in New York Stock Exchange composite trading. Countrywide, based in Calabasas, California and the nation's biggest home lender, fell $1.37, or 3.3 percent, to $40.84.

Subprime loans that have gone bad are at the highest level in at least six years, according to a Friedman, Billings, Ramsey Group report. The U.S. Mortgage Bankers Association said payments were late on almost 13 percent of subprime loans in the third quarter of 2006, and Bear Stearns Cos. President Warren Spector predicted last week problems will get still worse this year.

``There's just a lot of uncertainty,'' said Richard Eckert, an analyst at Los Angeles-based Roth Capital Partners. ``The market reacts a lot more hostilely to uncertainty than it does to bad news.''

13% of loans were late. That's an extraordinarily high amount of loans going bad. And we are just beginning to see the problems with the 2006 vintage loans. I would expect those numbers to really hit home in the next 9-12 months.

Here's where this will really start to hit home: jobs. If memory serves, the Blog Calculated Risk has projected construction job losses in the 200,000 - 400,000 range. Let's look at job growth in two other areas:

Financial services (mortgage lenders):



And Professional jobs (real estate brokers)



Let's assume for a minute that 10% of the above created jobs are related to real estate (actually, I have no idea what the actual percentage is). Eyeballing the professional services chart gives us about 1.8 million jobs and doing the same for financial services we get 500,000 from trough to peak. Neither of these areas has seen any major downturn in the last year. 10% of each sector gives us a total of 230,000 jobs. That's not good going forward.

America's Workers: Boxed In

Committee hearings on Capitol Hill focusing on the abuse of taxpayer funds, Iraq re-construction process and wrangling in the Senate over non-binding resolutions on Bush’s Iraq war have understandably taken center stage in recent media coverage. But there’s another set of congressional hearings under way equally as important for America’s workers.

Rep. George Miller, head of the House Committee on Education and Labor, on Jan. 23 launched hearings on Strengthening America's Middle Class: Finding Economic Solutions to Help America's Families.

The committee is considering three main items:

• Creating a competitive economy that includes good new jobs that pay well.
• Restoring workers' rights—including their freedom to bargain for better wages and benefits.
• Making health care more affordable and accessible.
  

Or, as AFL-CIO Secretary-Treasurer Richard Trumka summarized when the hearings reconvened Feb. 7:

Why, in the richest country in the world, is it so difficult for so many families to make a living by working?

It’s safe to say that in the Republican-controlled Congress of recent years, this committee—which under Republicans was renamed the Committee on Education and Economic Opportunities, in a deliberate slap at unions—never considered the growing economic distress of the middle class.

When hearings opened Jan. 23, William Spriggs, an economics professor at Howard University in Washington, D.C., told committee members the economic recovery, which began six years ago, has not benefited working families. Instead it has meant more money for the rich while working people and the poor have seen their standard of living stall or drop.

One cause of the widening gap, says Spriggs, is the failure to raise the minimum wage for 10 years. But that’s only one source of the problem. Says Spriggs:

The other source is the redistribution of corporate income, from wages to capital income. The latest data from the Bureau of Economic Analysis shows that the share of corporate-sector income going to wages is down to its lowest share in over 25 years….The latest CBO [Congressional Budget Office] figures show that almost 60 percent of capital income goes to the top 1 percent in the U.S. income distribution.

Behind the unequal distribution of the nation’s wealth is a much more fundamental change in our country’s economic policies, according to Trumka. He told the committee:

The shift in economic policies in the late 1970s from a “Keynesian consensus” to what George Soros has called “free market fundamentalism” explains much, in my view, about changing corporate behavior, the imbalance of power between workers and their employers, stagnating wages and the growing divide between productivity and wages.

Describing “free market fundamentalism” policies as a box that systematically weakens the bargaining power of America’s workers and drives the growing inequality of income and wealth in our country, Trumka continued:

On one side of the box is “globalization,” unbalanced trade agreements that force American workers into direct competition with the most impoverished and oppressed workers in the world, destroy millions of good manufacturing jobs and shift bargaining power toward employers who demand concessions under the threat of off-shoring jobs.

On the opposite side of the box are “small government” policies that privatize and de-regulate public services and provide tax cuts for corporations and the wealthy, all to “get government off our backs.”

The bottom of the box is “price stability.” Unbalanced macro-economic policies that focus exclusively on inflation and ignore the federal government’s responsibility to “maximize employment,” even out the business cycle and assure rapid economic growth.

The top of the box is “labor market flexibility,” policies that erode the minimum wage and other labor standards, fail to enforce workers’ right to organize and bargain collectively and strip workers of social protection, particularly in the areas of health care and retirement security.

Climbing out of this box won’t be easy.

Bottom line, Trumka told committee members: We need to follow three important economic values that resonate powerfully with all Americans:

• Anyone who wants to work in America should have a job.
• Anyone who works every day should not live in poverty, should have access to quality health care for themselves and their family and should be able to stop working at some point in their lives and enjoy a dignified and secure retirement.
• American workers should enjoy the fundamental freedom to associate with their fellow workers and, if they wish, organize unions at their workplace and bargain collectively for dignity at work and a fair share in the value they help create.
  

We took a step in recent days toward achieving the last goal with the introduction of the Employee Free Choice Act in the House, which I discussed here in detail last week.

And in coming weeks, we are looking forward to a robust discussion on creating policies that encourage family-supporting jobs stay in this country and developing new strategies for ensuring working families have access to quality, affordable health care. Economists in a new progressive network, the Agenda for Shared Prosperity, will publish issue papers on these and other critical topics for America’s working families.

In its debut media conference, the Agenda for Shared Prosperity, a project spearheaded by the Economic Policy Institute (EPI), highlighted a paper by EPI economist Jeff Faux on globalization and economist Jacob Hacker’s plan for health care reform. The next series of papers will be released Feb. 22 in an event that may include New York Times columnist Paul Krugman, and we’ll be back here with the details.

A Tale of Two Currencies

I wanted to follow up with charts of the post I cross-posted from the Forex Blog, because that post concisely explained the current situation in the currency markets.

First, here's what the FB said about the euro:

The British Pound and Euro represent suitable alternatives to the USD. Both are strong currencies backed by political and monetary stability, as well as strengthening economies and rising interest rates. Risk-averse investors can already earn comparable returns from the side of the Atlantic opposite the US. In addition, as European capital markets expand and develop, foreign investors are discovering new assets to scoop up. Private equity and other forms of alternative investing are booming in Britain and the EU, which means even investors in search of risk have options in Europe.

Here's a chart of the euro, courtesy of stockcharts:



Notice the euro has been in an uptrend for the last year. It is currently testing support at roughly 129. Looking at the chart, 129 looks like an important number for the euro. If it successfully tests this level another solid rally looks very possible.

Here's what the FB said about the dollar:

The USD has begun 2007 in neutral, idling against most of the world’s currencies, even gaining a few PIPS. However, this current period most likely represents a respite-rather than a reversal-from the USD’s long-term downward trend. The fundamentals behind the USD haven’t changed; if anything, they have worsened. Meanwhile, as the price of oil sinks back to sustainable levels and Central Banks move to diversify their reserves, governmental demand for USD-denominated assets may begin to stall.

And here's a chart for the dollar that represents everything the FB said about the dollar.



Starting from the end of 2005, the dollar has been on a clear downward trajectory. Given the clusters of small candles at the top of the latest upward move, it's doubtful the dollar will be able to break the downward trend.

More on Today's Oil News

From CBS Marketwatch:

The world oil market is in "much, much better health and balance" now and, if trends hold, there will be no need for further production cuts or increases in supply when members of the Organization of Petroleum Exporting Countries meet in March, Saudi Arabian Oil Minister Ali Naimi was quoted as saying in a media report.

Naimi said the kingdom's production is now 8.5 million to 8.6 million barrels a day, confirming its reduction by 1 million barrels a day from its output about six months ago, The Journal said. Mostly mild winter weather, heavy selling by financial funds and falling oil use among developed nations have contributed to prices dropping from the record $77.03 a barrel settlement price last summer, The Journal said.

Saudi Arabia's 1-million-barrel-a-day reduction, reported in The Journal in January, is nearly double what it agreed to under two OPEC output cuts hammered out by the cartel at meetings in Doha, Qatar, in October and in Abuja, Nigeria, in December.

We have two major oil producers lowering supply by 1 million BPD each. At the same time we had a mild winter in the US, lowering supply. In other words, we have lower supply and lower demand, at least for now.

According to the latest This Week In Petroleum oil stockpiles are above average and gasoline stockpiles are spiking. This may mean a lowered short-term demand from the US, further lowering prices.

However, we still have India and China growing at a quick pace. This may ameliorate the drop-off in US demand.

And remember we are dealing with oil -- a commodity located in a geopolitically unstable region.

So -- short version, $60/bbl still seems to be the line where certain energy stocks may start to rally. That's a completely arbitrary line on my part. So while the short-term pull-back in oil makes a move into the energy sector unwarranted today, a return to that level in the oil market may still be attractive when and if that level comes.

Saudi And Qatar Say They Probably Won't Cut Oil Production Further

Over the weekend, I discussed how to play the energy market. That theory was based on oil rising about and staying about $60/bbl. This news obviously hurts that play a great deal.

Oil tumbled $1 to $59 a barrel on Monday after the oil ministers of Saudi Arabia and Qatar said OPEC may well keep output unchanged at its March 15 meeting.

Ali al-Naimi, oil minister of the world's biggest exporter, said in an interview with the Wall Street Journal the oil market was in "much, much better health and balance".

U.S. crude was down 79 cents at $59.10 a barrel at 1024 GMT, having fallen as low as $59.61.

London Brent crude slid 81 cents to $58.20.

"If you are asking me are we going to make additional cuts or increase supply I do not know...But, most probably if the trend is like it is today with the market getting in much, much better balance, there may not be any reason to change," he said.

The remarks were consistent with comments Naimi made on Jan. 16, when oil was nearer $51. The Saudi view won immediate backing on Monday from Qatari Oil Minister Abdullah al-Attiyah.

Only On the Web -- Sub Prime "Implode - o- meter"

Keep up with all the defaults in the sub-prime mortgage business.

Sub Prime Mortgage Bond Risk Rises

From Bloomberg:

The perceived risk of owning low-rated subprime mortgage bonds surged today after the two largest U.S. lenders reported growing problems stemming from the loans, an index of credit-default swaps suggests.

An index used to create swaps based on 20 BBB- rated bonds sold in the second half of 2006 and consisting of home loans to the riskiest borrowers fell 1.7 percent to about 89.05 today, the lowest since it was created Jan. 18. Before today, the so-called ABX index was down 10 percent since its introduction.

We had the second round of sub-prime mortgage (SPM) problems last week with NEW and HSBC having to restate earnings and increase their loan loss reserve, respectively.

In December we had OWNIT mortgage, Sebring Capital and Mortgage Lenders Network all either close, seek bankruptcy protection or both.

Redfish posted this link that noted Merrill Lynch is calling in some loans:

Merrill Lynch & Co. -- which has been stung by two high-profile subprime bankruptcies in six weeks -- is conducting margin calls on certain B&C originators that receive financing through the firm's warehouse group.

If Merrill is pulling up the liquidity ladder, expect other brokers who financed sub-prime mortgages to do the same.

Forex Blog on the US Dollar

This post from the Forex Blog sums up the basic problems the US dollar faces. It also explains why the US dollar is probably headed lower. I think this commentary explains the basic problems facing the dollar, which are structural in nature. Therefore, they can't be cured with quick fixes.

The USD has begun 2007 in neutral, idling against most of the world’s currencies, even gaining a few PIPS. However, this current period most likely represents a respite-rather than a reversal-from the USD’s long-term downward trend. The fundamentals behind the USD haven’t changed; if anything, they have worsened. Meanwhile, as the price of oil sinks back to sustainable levels and Central Banks move to diversify their reserves, governmental demand for USD-denominated assets may begin to stall.

The British Pound and Euro represent suitable alternatives to the USD. Both are strong currencies backed by political and monetary stability, as well as strengthening economies and rising interest rates. Risk-averse investors can already earn comparable returns from the side of the Atlantic opposite the US. In addition, as European capital markets expand and develop, foreign investors are discovering new assets to scoop up. Private equity and other forms of alternative investing are booming in Britain and the EU, which means even investors in search of risk have options in Europe.

Moreover, Asia and the Middle East are in early stages of developing regional currencies, which would also pose a threat to the dominance of the USD as the world’s reserve currency. As the global economy becomes more stable and as European and Asian capital markets surpass their American counterparts in size and clout, investors will no longer feel compelled to pool their wealth in American securities.

As former Treasury Secretary Robert Rubin recently noted, the only thing that is propping up the USD is that the demand for US assets (i.e. stocks and bonds) still exceeds supply. However, as equity prices approach levels never before seen and as the supply of bonds either dries up or yields are driven down to completely unattractive levels, the US will certainly lose its appeal to foreign investors and the USD will follow the foreign demand for US assets downward.

The Week Ahead

It's going to be a busy week:



A few points:

I've been critical of the retail sales numbers for the last two months because the official number did not jibe with the news on the ground. I was right regarding November's number, which was revised down. Now we'll see about December's number.

The NY Fed and Philly Fed numbers will be very important. Most of the Fed manufacturing districts had lower numbers in their latest report. In addition, the Chicago PMI has been decreasing for the last year and dropped below 50 in the latest survey. This also ties in with industrial production. Although it rose .4% in December the 4th quarter number was negative.

Housing starts -- let's see if the builders are going to continue to add to an already overbuilt situation.

PPI -- All of the Fed governors have warned on inflation in their latest public speeches. That makes this number perhaps a bit more important.

Bernanke address Congress on Wednesday.

Will Energy Stocks Rebound?

This is a chart of the overall energy industry via Prophet.net



Notice how the sector has sold-off from the highs of late last year. This may be the type of blow-off the industry needed to clear out the dead weight. The index has pulled back to within the Fibonacci retracement levels (roughly between 38% and 62% of the preceding rally).

Here's a chart of oil -- actually the OIL tracking stock.



A break-out about $60/bbl for oil or $37 on the chart could signal a new upswing. If that happens, oil will become more profitable making the energy sector more attractive.

This strategy is based on oil. So wait for oil to move above resistance by at least 2-3%.

Another Look at Sub-Prime Mortgages

From the Street.com

Nationwide, the subprime default rate soared to 10.09% in November 2006 -- it stood at only 6.62% a year earlier). Despite a growing economy in early 2007, November's industry default rate exceeded the level of November 2001, which was recorded at the bottom of the last recession. However, the problem runs deeper than 5 1/2 years ago because nearly 15% of the mortgages made in 2006 were subprime. That is almost triple the penetration of subprime compared to 2000-01.

* Subprime has never been more levered -- just as the housing cycle has peaked. Loan-to-value ratios have risen from about 78% in 2000 to 86% today.

* Subprime has never been more dependent on the candor of borrowers. Low-documented loans have doubled to 42% of subprime loans over the last six years.

* Creative loans -- non-interest paying, option ARMs, etc. -- represented nearly half of all loans made over the last 12 months. At the turn of the decade these loans represented less than 2% of total mortgage loans!

Notice the really large jump in sub-prime mortgage (SPM) delinquencies. This is not a simple statistical anomaly; it's a really big jump that should raise a lot of eyebrows.

Now combine that with the increased penetration of SPMs + the increase in low documentation loans and the problem looks worse.

Now add to that the fact that an economy growing at 3.5% has a default rate above the level recorded during a recession.

One of the stock boards I watch and participate in was speculating that yesterday's news from NEW and HSBC was the watershed event of this quarter, signaling the beginning of a downturn. I'm not sure I would go that far in my prognosis, but I do believe we are just seeing the beginning of this problem. Up until now housing has only damaged housing; we haven't seen the housing downturn bleed into consumer spending. Once we start to see that in a major way, we'll have serious problems.

A Second Reason for the Market's Ceiling?

I have speculated that the Fed's still very Hawkish stance on inflation is one of the primary reasons the markets have traded in a range for the last few months. Yesterday's hawkish statements from three Fed governors (see below) certainly didn't help that scenario.

Now we have a second possible ceiling: declining earnings expectations:

Fourth-quarter earnings rose to 10.8% from 10.3% last week, according to Thomson Financial.

More than 360 companies in the S&P 500 index have reported results as of late Thursday, and 66% of the results have surpassed Wall Street's expectations;16% have matched; and 18% have missed.

"The earnings so far have been in line with expectations," said Metz. "The real issue is guidance."

We have seen strong earnings growth for the last few years. However....

John Butters, senior research analyst at Thomson Financial, said the outlook for the first quarter has turned bleaker, he said. The first-quarter growth rate is now 4.7%, down from the projection of 8.7% at the beginning of the quarter.

Butters said the bulk of that decline comes from analysts cutting their earnings forecasts for the energy sector, which had been dealing with a fall in crude-oil prices and higher productions costs.

Also, companies are not raising their financial forecasts as much as he's seen in the past. He said 14 companies have currently lifted their forecasts for the first quarter; he usually sees higher outlooks from 25 companies at this point in the reporting cycle.

If this analyst is correct that a drop in energy earnings is a prime reason for the overall decreased guidance then we might see some surprises in the second quarter. Here is a chart of the crude oil tracking ETF. Right now the market is consolidating.



The cold US weather has helped to contribute to the recent rally. In addition, OPEC production cuts are now working their way through the oil market. And China and India are still growing at a fast pace which will increase overall demand.

The Market's Last Week

All of the charts are from Stockcharts.com

Here's the Russell 2000



This index broke out of a trading range last week and continued moving up until Friday. The index rose 2.46% above the early December high before Friday's sell-off. The latter part of the rally lacked a strong amount of volume, making that move a bit suspect. However, sell-offs in rallies aren't necessarily a bad thing as they clear out some dead-weight. If this index reaches support at 81.23 and bounces off the index will be in good shape for another move up.



The SPY's rally for the week of 29 January to 2 February was suspect because of the declining volume of the move up. The market had four spinning top candle's before Friday's sell-off. There was ample news to move the market higher -- solid earnings and strong GDP. However, there just isn't enough buying enthusiasm right now. As a result the market was ripe for a pull-back. The higher volume total on Friday indicates selling pressure is very much alive in the markets.



The QQQQs tried to continue the rally of 28 January - 2 February, but just didn't have enough buying interest. The index has been trading in a loosely defined range of roughly 43-45 with one run above and below that number. Trading ranges indicate supply and demand are in balance as traders are unwilling to commit one way or the other.

3 Fed Bankers Warn on Inflation

Richard Fisher from the Dallas Fed

If you’ll permit me to again use a meteorological metaphor: We have some disinflationary tailwinds assisting us. There was a series of monetary policy tightenings by the FOMC that preceded the latest series of pauses that began last August. Also, moderation in energy prices proved beneficial, while continued productivity gains, although less than we had expected, should keep labor costs in check. And spillovers from the unwinding of excessive housing market speculation, including softening in the price of lumber and such commodities as zinc and copper, have all added force to the tailwinds we’ve been seeing. I find it instructive that, other than from corn farmers, I no longer hear business leaders muttering about “pricing power,” which not too long ago was an ever-present part of inflation discussions.

Yet, we do have some inflationary headwinds to overcome. For example, economists use a theoretical metric that attempts to measure the costs of housing—something they refer to as “owner’s equivalent rent,” or OER. OER makes up the largest individual component of the core price index for consumer expenditures, with a 14 percent weight in the index. The way the math works, when the price of the nation’s housing stock declines, this rent equivalent increases. At year end, it was rising at a rate of 4.3 percent, adding to inflationary pressures. Also, the substantial demand for skilled and some semiskilled labor is driving up wages in those important labor pools. And rapid growth in foreign economies—from China and India to our southern neighbors and our friends across the Atlantic—increases global resource utilization, tightening the availability and prices of inputs and labor that American businesses use to control their cost-of-goods-sold and enhance their productivity.

We will monitor the net effect of these headwinds and tailwinds.

I wouldn’t rule out further increases in the federal funds rate if inflationary winds gain the upper hand. Indeed, if increases are needed, I would aggressively advocate for them. But for now, I am as comfortable with the inflationary outlook as a prudent central banker can be. No central banker can ever be smug about containing the risk of inflation, but I am pleased with the current direction of inflationary impulses. To quote from the FOMC statement released after our meeting last week: “Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time.” That said, I will rest a heck of a lot easier when we get the core rate down well below 2 percent and keep it there.

The St. Loius Fed's William Poole:

Regarding the outlook for inflation, I’ve said for quite some time that it might take a while for underlying price pressures to recede. Recent inflation data themselves, and other information relevant to judging the inflation outlook, suggest that the inflation rate is likely to fall into a reasonable range this year. If, however, core inflation seems to be settling at a rate above 2 percent, then such an outcome would be unacceptable to me. I put a very high weight on the Fed’s responsibility to maintain low and stable inflation.

Sandra Pianalto of the Cleveland Fed.

The most recent inflation statistics have improved. The core Consumer Price Index - which excludes food and energy items - rose by about 2-1/2 percent last year. However, during the last three months of the year, this index increased at an annual rate of only about 1-1/2 percent. I regard this movement as an encouraging sign, but I am not yet convinced that the inflation trend is shifting down.

The national inflation picture has been clouded in the past few years by large swings in energy, commodity, and housing prices. As these markets normalize, and as we gain a clearer picture of the underlying inflation trend, we may see that some inflation risks remain. In that case, some additional policy firming may be needed - depending, of course, on the outlook for both inflation and economic growth.

Short version: There is no rate cut in the near future.

An Overview of The Last Few Days Sub-Prime News

From Seeking Alpha:

Investors received a rude wake-up call Wednesday when instead of reporting earnings as scheduled, New Century Financial Corp., the nation's second-largest sub-prime lender, announced it was pushing off its earnings release, and that shareholders should expect a surprise loss in 4Q06 instead of the $1.06 EPS the Street was expecting. Research firm First American LoanPerformance says that in November, payments were overdue on 12.9% of sub-prime loans packaged into mortgage securities, vs. 8.1% a year earlier. New Century's announcement came less than a day after HSBC reported its sub-prime division was also under significant pressure from rising defaults.

I hadn't realized the New was expected to report income of $1.06/share. That makes their reporting a loss that much more surprising.

In addition, notice the huge jump in late payments indicates there are serious problems in the sub-prime market. This issue isn't going away anytime soon.

Circuit City To Close 69 Stores

From the Houston Chronicle

Circuit City Stores Inc., the nation's No. 2 consumer electronics retailer, said Thursday it plans to close seven domestic Superstores, a Kentucky distribution center and 62 company-owned stores in Canada to cut costs and improve its financial performance.

The closings will take place over the next six months at an expected total cost of $85 million to $105 million, all to be incurred in the current fourth fiscal quarter, which ends Feb. 28, Circuit City said.

"Because of the intensified gross margin pressures that we saw in the third quarter within the flat panel television category, we launched efforts to accelerate the timing of planned initiatives to improve sales and gross margin, as well as improve the efficiency of our expense structure," chief executive Philip J. Schoonover said in a statement.

If memory serves (and please correct me if I am wrong), Wal-Mart started the Christmas season with a big discount on a specific flat panel TV. The other electronics retailers followed this with similar cuts in their inventory. The Big Picture mentioned this in their analysis of the Christmas season, pointing out the actual cost of the Christmas season in terms of decreased business margins.

This is the end result. While the Christmas season was fair but not great, the overall cost appears to be extreme margin pressure at one of the largest consumer electronics stores in the country.

Same Store Sales Up 3.9%

From MarketWatch:

Same-store receipts at 55 of the nation's top chain-store retailers climbed 3.9% last month, according to Thomson Financial. That's above the 3.1% forecast. Same-store sales, considered the best measure of retail growth, are gleaned from the receipts rung up at stores open longer than a year.

At the International Council of Shopping Centers, which calculates same-store sales in a slightly different manner, the results were 3.7% higher, exceeding the 3% projection.
"Overall, the tone was pretty good," said Michael Niemira, ICSC's chief economist. "It was certainly a nice finish to the fiscal year -- and a nice start to the calendar year."

I'm still at a loss for the disconnect between the problems in the housing market and the continued strength of consumer spending. One of the reasons I thought there would be a recession at the end of 2006 or early 2007 was the expectation of the housing market problems bleeding into consumer spending. That hasn't happened. At least not yet.

Yield Curve Inversion Continues

From Caroline Baum of Bloomberg:

Depending on what measure of short- and long-term rates one uses, the slope has been negative for either six months (using the 3-month Treasury bill and 10-year note) or seven months (using the federal funds rate and 10-year Treasury note). A yield curve that slopes upward, with long rates higher than short ones, encourages financial institutions to borrow short, lend long and pocket the difference, promoting economic growth in the process.

An inverted yield curve has been a harbinger of recession in the past. Unless this time is different -- a popular way of dismissing the spread's stellar history -- real gross domestic product growth of 3.5 percent in the fourth quarter may turn out to be the outlier, not the trend.

This is a really long time for an inversion to continue. And it begs the question, "is this inversion different than past inversions?" After all, 4th quarter GDP came in at 3.5%, and unemployment is low, indicating a recession isn't on the horizon yet. Or it's been averted for awhile.

I don't have an answer for the above statements. What I think is the "this time is different" argument does not play well with historical evidence. As Baum also notes this indicator is not the "hemline indicator". There's a fundamental reason for the inversion. And until the inversion goes away, we should pay attention to the yield curve.

Home Builders Lose Billions on Land Speculation

From Bloomberg

The worst housing slump in 16 years made a lot of smart money vanish. D.R. Horton Inc., Pulte Homes Inc., Lennar Corp., Centex Corp. and Toll Brothers Inc., the five biggest U.S. homebuilders, said plummeting land prices cost them a combined $1.47 billion in the fourth quarter.

Builders paid more for land during the boom because home prices were rising, too. They didn't realize speculators were pumping up demand by buying houses to sell quickly. When prices reached a point where speculators quit buying, homebuilders were forced to abandon so much property they helped create a glut that drove down land prices more than 9 percent last year, according to data compiled by New York-based research firm Real Capital Analytics Inc.

``Homebuilders allowed their own enthusiasm for price increases on houses to affect their decisions on what they would pay for land,'' said Mike Inselmann, president of Metrostudy, a real estate research firm in Houston.

The decline in land values reveals the role short-term buyers played in the housing boom, when the median U.S. home price rose to $276,000 last June from $177,000 in February 2001. Industry executives, including Toll Brothers Chief Executive Officer Robert Toll, estimated that about a quarter of their houses were bought by people interested only in flipping them -- buying and selling quickly rather than moving in.

This is a very unflattering portrait of the homebuilders management teams. Either,

1.) They didn't know the role of speculators, which indicates they didn't know their own market very well, or

2.) They knew and didn't care about thinking the market would go up forever -- implying they were basically willfully blind to the situation

or a combination of the two.

Either way, we have executives who weren't being that smart.

Toll Brothers Revenue Drops on Cancellations

From Bloomberg:

Toll Brothers Inc., the largest U.S. builder of luxury houses, said fiscal first-quarter homebuilding revenue dropped 19 percent as customers canceled contracts. The company said land writedowns will exceed previous forecasts.

Homebuilding revenue declined to $1.09 billion in the three months ended Jan. 31 from $1.34 billion a year earlier, Horsham, Pennsylvania-based Toll said today in a statement.

Orders for Toll Brothers, whose houses cost three times the U.S. median, have fallen as its inventory of unsold homes swells. That has led many luxury-home buyers to balk at making a purchase on the expectation of falling prices or higher sales incentives. Lennar Corp. and D.R. Horton, the two largest U.S. home builders, have reported profit declines as incentives failed to stem cancellations and sales slumped the most in 15 years.

``It appears that the pace of cancellations is starting to abate,'' Chief Executive Officer Robert Toll said in the statement. ``However, we are still well above the company's historical average of about 7 percent.''

"Incentives are failing to stem cancellations". That's a big deal. For the last 9-12 months, home builders have offered incentives to encouraged purchasers. Some of these incentives have been pretty big. But these aren't working as well as expected. Basically, homebuilders are having trouble paying people to purchase homes.

In addition, Toll Brothers caters to the high-end market -- the part of the market that shouldn't be bothered by a recession. Even this part of the market is slowing down. That's a big deal as well.

Housing bottom? Very doubtful at this point.

Russell 2000 Breaking Out

Volume is a bit weak, but you can't have everything, can you?

Fed Chair Plosser On Inflation

From his speech today:

Let me close with a few thoughts about the outlook for inflation and the proper stance of monetary policy. As I mentioned at the outset, I considered inflation to be uncomfortably high in 2006, and inflation remains a primary concern of mine for 2007. While we got some encouraging inflation numbers toward the end of last year, I am not convinced that underlying inflation is on a downward trend. We may simply be seeing the temporary effect of recent declines in the price of oil, which seems just as likely to rise as to fall in the future.

Short version: I'm not going to vote for lower rates anytime in the near future.

In addition, Fed Chair Yellen made similar comments a few days ago.

There is no rate cut in the foreseeable future.

Productivity Inreases; Labor Costs Decrease

From the BLS:

In the fourth quarter, productivity increased 2.4 percent in the business sector and 3.0 percent in the nonfarm business sector. In both sectors, the fourth-quarter productivity increases reflected faster growth in output than in hours worked. When the annual averages for 2006 were compared with annual averages for 2005, productivity rose 2.2 percent in the business sector and 2.1 percent in nonfarm businesses--slightly less than the 2.3-percent gains in both sectors from 2004 to 2005.

This number was higher than expected. And while the 2006 number was slightly less than the 2005 number, it was not off by much. Higher productivity helps to remove inflationary pressure in the economy.

In addition:

Unit labor costs, which relate hourly compensation to output per hour, increased 1.7 percent in the fourth quarter and 3.3 percent in the third quarter, after falling 2.5 percent in the second quarter of 2006.

This is very good news on the inflation front.

I should add, I don't think this news is enough to push the Fed to lower rates. Historically, rates are still low and just yesterday a Fed President stated inflation was still too high. However, these numbers help to remove any possibility of a rate increase in the near future as well.

Fed President Yellen Warns On Inflation

From Reuters:

Fed speakers were out in force for the first time since voting on Jan. 31 to leave benchmark U.S. interest rates unchanged at 5.25 percent, as the traditional "cone of silence" after Fed policy-setting meetings was lifted.

Chairman Ben Bernanke focused on income inequality in Omaha, Nebraska, while 2007 Federal Open Market Committee voter Michael Moskow offered prescriptions for revitalizing the Chicago economy.

That left San Francisco Fed President Janet Yellen to deliver the policy message du jour at an event in Los Angeles.

Inflation "is a little higher than I would like it to be; I wouldb like inflation to come down," Yellen said in a question-and-answer session after a speech to the Asia Society of Southern California.

For the past 3-4 months, the Fed has been very consistent in their public statements on inflation. Every Fed president making a speech that deals with the Fed's inflation policy has had a similar statement. Inflation is still a bit above the Fed's comfort zone.

Can we stop talking about a rate cut now?

How's the Dollar Doing?

So -- how is the US dollar doing? Here's a longer chart from Stockcharts.com



Starting in December last year, the dollar rallied from 82.35 to a bit over 85 -- a bit over three percent. But this rally occurred during a downtrend that started in early April 2006. There was an initial bear market rally from this downtrend that started in May. And while the December rally has broken through some resistance levels, the dollar is now trading in a range:



The dollar hasn't been able to break through to the up-side, even after a really good initial 4th Quarter GDP number of 3.5%. That indicates that traders are just not happy with the overall US economy -- at least not enough to bid up the US currency.

America’s Workers Need the Employee Free Choice Act

If your employer tries to cut your health care and pension by 98 percent, what do you do?

As a rule, not much.

Unless you’re in a union.

When 2,800 workers at the Harley-Davidson plant in York, Pa., were faced with that appalling ultimatum last week, the members of Machinists Local 175 knew they didn’t have to keep their mouths closed and swallow whatever the employer dictated. As union members, they spoke with their feet and now are walking the picket line. The company closed the plant after the last shift Friday.

Analysts disagree on the cost of the strike for Harley. One predicts the walkout could cost $11 million a day; another estimates $3 million per day. The York plant assembles the most profitable Harley-Davidson models. Other plants in the Milwaukee area and Kansas City make parts for assembly in York.

But let’s face it. Most workers aren’t in unions. In fact, the percentage of U.S. workers in unions declined last year, from 12.5 percent in 2005 to 12 percent in 2006. Yet some 60 million workers say they would join a union if they could.

So why don’t they? The primary reason is that our nation’s labor laws are outdated and so full of holes some employers get away with illegal actions like firing workers who express an interest in joining unions. U.S. labor laws, which date back to the 1930s, are skewed in favor of corporate giants who spend big bucks to harass and intimidate workers. And their techniques work—after all, how many people want to lose their jobs? (Although, as I noted, it’s illegal to fire workers for forming unions, management does it anyway, counting on the fact that it often takes years for a worker’s appeal to wind its way through the regional and national labor boards and even the courts.)



Workers represented by unions earn, on average, 30 percent more than nonunion workers: $833 in median earnings a week compared with $642. Some 80 percent of union members have employer-provided health insurance, compared with 49 percent of nonunion workers.

And as for those pensions, 68 percent of union members have guaranteed (defined-benefit) pensions—and only 14 percent of nonunion workers.

I noted here last week how the nation’s middle class—and increasingly, professional and technical workers—worry about their economic future as jobs become less stable or more difficult to attain and the quality of work life slides downhill. A growing number of professionals find their middle-class life threatened by economic forces that, without a union voice at work, they can’t control.

Yet when they try to form unions, the deck is stacked against them. Why is Harley- Davidson willing to lose millions of dollars in profits instead of trying to negotiate a contract that doesn’t decimate pension and health benefits?

AFL-CIO Organizing Director Stewart Acuff puts it this way:

[There is a] direct correlation between 25 years of stagnant, flat-lined wages and the assault on unions. Forty-seven million of us are without health care and 40 million with inadequate health care, [and] 20 percent more of us [live] in poverty now than when this decade started.

A few years ago, we in the union movement began pushing for a bill called the Employee Free Choice Act that would level the playing field for workers and help rebuild America’s middle class and restore the freedom of workers to choose a union. It would restore workers’ freedom to choose a union by:

• Establishing stronger penalties for violation of employee rights when workers seek to form a union and during first-contract negotiations.
• Providing mediation and arbitration for first-contract disputes.
• Allowing employees to form unions by signing cards authorizing union representation.
  

Even in the unpleasant 109th Congress, we got 215 co-sponsors in the House and 44 in the Senate. But with a new, worker-friendly Congress, we now have 231 House co-sponsors—and the bill, H.R. 800, was introduced Monday night.

The last time legislation to change U.S. labor laws was introduced was in the late 1970s, and it didn’t get very far.

We have a list of the House co-sponsors here. Check it to see if your lawmakers have signed on. E-mail them and ask them to support the bill, H.R. 800.

The Employee Free Choice Act isn’t just about unions. It’s about raising the standard of living for all of us in this nation. By leveling the playing field for workers seeking to form unions, the Employee Free Choice Act will improve the wages, working conditions and job security for workers who want to sign on. By ensuring that workers who want to join unions don’t experience employer harassment, the Employee Free Choice Act can replicate the experience of workers like Asela Espiritu, a registered nurse at Kaiser Permanente who didn’t have to endure harassment and intimidation to win a voice on the job through her union.

Espiritu works at the Kaiser Permanente Medical Center-Orange County in Anaheim, Calif., which was the only hospital—out of Kaiser’s 13 hospitals in Southern California—in which the workers didn’t have a union.

She and her co-workers formed a union in 2000 with United Nurses Associations of California/Union of Health Care Professionals-AFSCME at Kaiser under their company’s national neutrality and majority sign-up agreement. Requiring employers to follow a code of conduct in union campaigns and allowing more workers to use the majority sign-up process are both part of the Employee Free Choice Act.

The employees formed a union quickly—three months after they had started their organizing effort. Under the current National Labor Relations Board process, it can literally take years for workers who want to join a union to do so. Says Espiritu:

The 2000 negotiations gave us a lot of power and the voice to speak up on behalf of our patients. It’s not perfect, but we are on the road to solving the issues that affect the rank and file day in and day out. We have stability, and we have become a very desirable workplace.

Everyone wants to work here now. Nurses say, ‘I want to be a nurse at Kaiser.’ Our vacancy rate is at an all-time low. We are the highest-paid nurses in the county. It’s not just about the benefits either; it’s about the nurse-to-patient ratio we were able to get through Kaiser and the union working together.

We stand a good chance to get the Employee Free Choice Act passed in the House. The harder part will come in the Senate. But we’re making progress getting co-sponsors there as well, and when we get a firm list, you’ll see it here.

New Kodak Printer Uses 50% Less Ink

From Reuters

Eastman Kodak Co. (EK.N: Quote, Profile , Research) is introducing a line of desktop printers and low cost replacement inks on Tuesday, as the photography company takes on a market dominated by Hewlett-Packard (HPQ.N: Quote, Profile , Research).

For the camera maker, the long awaited launch of inkjet printing products kicks off a year in which it hopes to end the tough and expensive three year transformation that has seen the company shed tens of thousands of workers.

Kodak said it will in March start sales of 3 EasyShare All-in-One printers, ranging from $150 to $300, which will print, scan and copy document and photos. Black replacement ink cartridges will sell for about $10, and a color one for about $15, about 50 percent less than its rivals, Kodak said, adding that it will profit on sales of both printers and ink.

If this product:

1.) Works as advertised

2.) Produces good quality documents

3.) and the ink prices remain at these levels

I will be a very happy man.

Anyone who has a link to a review of this product, please post it in the comments.

Housing Bottom? I Don't Think So

From the WSJ

Amid brightening hopes that the U.S. housing market is stabilizing, some economists are zeroing in on a piece of data that could augur badly for the consensus view: the homeowner vacancy rate.

That figure, an often-overlooked measure of how many homes for sale in the country are empty, has climbed to its highest level since the Census Bureau began tracking it four decades ago. Last week, the bureau said that in the final three months of 2006 there were about 2.1 million vacant homes for sale.

That brought the national homeowner vacancy rate to 2.7%, up from 2.0% a year earlier. Before 2006, the number had never risen above 2.0%. Like the housing economy more broadly, the measure varies by region: The South had a homeowner vacancy rate of 3.0%, the Midwest had a rate of 2.9%, the West had a 2.4% rate and the Northeast had a rate of 2.0%.

Let's ponder those figures for a minute.

The figure is at it's higher point .... EVER. That's not a good sign in any market.

The figure jumped .7% in a year. And the number had never been above 2% ....EVER.

So, the total number of vacant homes available for sale

1.) Has never been this high

2.) Has never even approached this level since the Census started tracking this figure

3.) Got to this level really quickly.

Housing bottom? Not with numbers like this.

ISM Increases A Bit

From the Institute For Supply Management

"Non-manufacturing business activity increased for the 46th consecutive month in January," Nieves said. He added, "Business Activity increased at a faster rate in January than in December. New Orders and Employment increased at slower rates than in December. The Prices Index decreased 4.5 percentage points this month to 55.2 percent. Seven non-manufacturing industries reported increased activity in January. Members' comments in January are mostly positive concerning current business conditions. The overall indication in January is continued economic growth in the non-manufacturing sector at a faster pace than in December."

Let's look at the internals.

First, the overall index increased a few points. That doesn't hurt. But the increase was 2.3. In other words, it's a bit higher than last months survey.

But some of the internals aren't that solid. New orders decreased .2% and employment decrease 1.5%. New export orders decreased 6.5% and imports decreased 10%. These four numbers point to a slowdown, not an expansion. The backlog of orders increased 1%.

On the plus side, prices dropped 4.5%.

Here is the comments section from the report:

* "Revenue is better and costs are starting to come down — especially petroleum-related costs." (Agriculture, Forestry, Fishing & Hunting)
* "Activity continues to exceed plans." (Health Care & Social Assistance)
* "Our sales continue to lag behind expectations, causing plans for deeper cost-cutting measures." (Retail Trade)
* "2007 off to a brisk start!" (Utilities)
* "More requests for services, particularly offshoring." (Professional, Scientific & Technical Services)

Note the highlighted comment from the retail industry -- sales continue to lag. That indicates several points. First, the Census Bureau's new retail model is probably a bit off (still) and rill be revised downward in the next report. Secondly, it indicates the downtrend has been in place a bit longer than the time period of the report (the use of the word "continue").

Also note the offshoring activity is specifically mentioned. That means we may have a further drop in employment over the next few months -- or at least weaker growth.

Again -- while the overall index was up, the internals were down.

Manufacturing, ISM and GDP

The following chart is from the Big Picture Blog:



The last rounds of Federal Reserve District manufacturing reports and Chicago ISM index were weak. They all pointed to a slowing in the manufacturing sector. This chart shows the trend has been in place for some time. As we enter February and a new round a Fed manufacturing district reports, it's important to pay attention to all of the reports various details.

Administration Urged to Challenge Japanese Currency Practices

Japan has become the latest scapegoat for protectionist rhetoric in Washington, as Congress urges Treasury Secretary Hank Paulson to use this week's meeting of G7 finance ministers to accuse Tokyo of fixing the exchange rate of the yen.

With the Democrats keen to make their mark on Capitol Hill after their victory in November's elections, Michigan Congressman John Dingell sent the President a letter last week - publicised on his website under the title, 'Dingell to Bush: You Just Don't Get It' - urging the White House to prosecute Japan for currency manipulation.

The yen has sunk to four-year lows against the dollar, and the 'big three' US carmakers, Ford, GM and Chrysler, have argued that Tokyo is 'manipulating' the currency markets by talking down the yen, making imported Japanese cars unfairly cheap.

Asian governments have been subsidizing their exports with a cheap currency for some time now. How else do you think the Chinese have amassed about $1 trillion in US dollars. At the same time, the US has provided various subsidies to various industries over the same time (just look at all of the special interest tax deductions in the US tax code).

I don't have an exact answer for this situation -- Asian government's intervention. But, expect more along these lines for now.

Link

News of Hedge Fund Loss Hits Copper and Zinc Market

From the Economic Times

According to agency reports, the hedge fund Red Kite lost roughly 20% of its $1 bn fund since the beginning of the year up to January 24, ‘07.

Investors began to withdraw their money in panic causing the market to crash, as they feared a repeat of the Amaranth debacle. US-based hedge fund Amaranth Advisors had lost close to $6.6 bn in September ‘06 after poor bets on natural gas on Nymex.

From Reuters

Hedge fund Red Kite, which posted strong gains in 2006, has suffered a roughly 20 percent loss in the first days of January and is now trying to stall investors who want to pull money out, The Wall Street Journal reported.

Citing one unnamed investor who saw an unofficial estimate of the 2-year-old London-based hedge fund's performance in the first few weeks of January, the newspaper wrote that the fund lost about 20 percent for the year.

Red Kite specializes in metals trading.

The newspaper also said the fund had asked investors to approve an amendment that would require investors to give 45 days notice before pulling their money out. Previously they were able to get their money out at the end of each quarter after giving only 15 days notice.

From the Chicago Tribune:

"The fear is that it's an Amaranth," said Michael Guido, director of hedge-fund marketing at Societe Genearle SA in New York referring to Amaranth Advisers LLP, the hedge fund that lost $6.6 billion last year on natural-gas trades.

The commodities markets have become the high-tech stock market of the early 2000s -- a market ripe with speculation. The number of commodities advisers etc... has ballooned over the last 6 years. This is one of the reasons why the commodities markets have moved a great deal higher. There are also strong fundamental reasons for the increase, largely related to the growth of China and India.

One of the main problems with hedge funds is they fly below the investment radar and they are large enough to impact markets. Because there are no reporting requirements, stories of their problems quickly take-on rumor related reporting issues which is not good for anyone.

Domestic Investment -- Should These Numbers Lead to Concern?

Last week's GDP report was stronger than anyone expected. However, there were a few points in the report that should raise some eyebrows. Chief among them was the level of domestic investment, which fell 11% from the third quarter. Below is a chart from the St. Louis Fed of the year-over-year change of Gross Private Domestic Investment. It does not include this week's GDP numbers, which would have sent the chart lower.



Let's break the gross number down. Once again, residential investment decreased from the preceding month, this time at a 19.2% clip. This is the third quarter in a row of declining residential investment. Below is a chart of the year over year change in residential investment. Again, this chart does not include this week's number which also would have sent the chart lower.



Here is a chart of non residential fixed investment. It shows a a solid year over year change. The year over year change for this figure in last week's GDP report was 7.4%. So, we are still in decent territory here.



Here's a chart that shows residential versus nonresidential year over year change in investment. Notice that in the early 1980s housing investment led business investment but in the 2001 recession business investment declined without a corresponding residential decline. The 2001 situation was the result of the massive Y2K investment. In other words, it was a unique economic event.



It's important to note January's manufacturing numbers. All of the Federal Reserve districts reported lukewarm results. Chicago's PMI moved into a recessionary level. While 4th quarter industrial production increased .4%, the 4th quarter saw an overall decline. In short, manufacturing numbers were moderate at best.

This means that February's manufacturing surveys are very important, so keep your eye on them.

The Market's Last Week

All of these charts tell the same story: a rising market on lower volume does not bode well for the future prospects.

Non-Farm Payrolls Increase 111,000; REVISIONS MAKE REPORT USELESS

From Bloomberg:

Employers in the U.S. added a smaller- than-forecast 111,000 workers to payrolls in January and the unemployment rate rose, evidence of an economy growing at the moderate pace predicted by the Federal Reserve.

The gain in employment followed a 206,000 rise in December that was larger than previously estimated, the Labor Department reported today in Washington. The jobless rate rose to 4.6 percent, the first increase in three months.

Here is the report from the BLS:

First -- note that BLS ONCE AGAIN has raised the originally reported numbers. For God's sake, people, can we get some good timely data? PLEASE

I have a big problem with this report (what else is new?). The report says construction jobs increased 22,000. At the same time, the weekly unemployment reports from the last few months have shown several states with over 1,000 lay-offs in construction (Florida, Minnesota and California were on these lists if memory serves). These two numbers simply don't jibe together.

Manufacturing lost 16,000 jobs. Professional services gained 25,000 and education/health increased 31,000. Leisure and hospitality gained 23,000.

OK, so this is a smaller than expected gain in overall employment. BUT ...

With today's report, the Labor Department officially revised the payroll numbers after reviewing more complete tax data not available earlier from state unemployment insurance programs and making adjustments to its estimates of seasonal hiring patterns.

The revision added 754,000 jobs to the previously estimate for the year ended March 2006, the biggest revision since Labor started adjusting the numbers in 1991.

This is the second time in the last two years we have seen some really big adjustments to the labor report. One of the reasons I have personally been bearish over the last two years is the as reported weak job gains. However, that job weakness was not at the level reported. In fact, the size of the revisions makes that prediction unwarranted. Will someone at the BLS kindly get their act together so the information we use is actually good information?

In addition, the size of these revisions is making the monthly release practically meaningless. And this is a really important number to be made meaningless, people.