Yes It Is a Recession; No, It Won't End Soon

From the UK's Telegraph:

The United States remains firmly in an economic recession in spite of economic growth figures to the contrary, a leading economist has warned.

Merrill Lynch’s David Rosenberg, the first economist from a major bank to declare a US recession was underway back in early January, argues that recent unemployment figures show yet more evidence that the US economy is a deep recession.

Pointing to last week’s news that employment has now declined for six months in a row, Mr Rosenberg, Merrill’s chief North American economist, says that “at no time in the past 50 years has this happened without the economy being in an official recession.”

.....

However he argues that this is only a matter of time, given that all four recession determinants “have peaked and rolled over.”

He points to widespread decline in economic activity, noting that real sales in manufacturing and retail, employment, industrial production, and real personal income – the four determinants – are all way below their peaks.

Looking at the numbers, Rosenberg is dead-on accurate.

Anyone who is currently arguing that we are not in a recession is simply proving how little they know about economics. The underlying facts and figures are clearly pointing otherwise.

There is one measure that the "there is no recession" (or as Barry Ritholtz calls them the Pervasive Pollyannas of Prosperity or PPP) crowd points to: we have not have two consecutive quarters of negative GDP growth. Therefore, we're not in a recession. The official organization that dates recessions (the NBER) answers that observation thusly:

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. Our procedure differs from the two-quarter rule in a number of ways. First, we consider the depth as well as the duration of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in economic activity." Second, we use a broader array of indicators than just real GDP. One reason for this is that the GDP data are subject to considerable revision. Third, we use monthly indicators to arrive at a monthly chronology.

In other words, using one statistic to describe a system as complex as the US economy is pointless. What we're really looking for is a fairly widespread decline in activity that lasts a fairly long time. To that end, the NEBR uses the following criteria

The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

Why are these particular indicators important? Let's look at each one in detail.

1.) Personal income tells us if there is wage pressure in the economy. Wage pressure occurs at full employment which is a sign of an economic expansion. When unemployment is low, people can go to their boss and say, "I want a raise, and you'll give me one because you can't find a replacement for me that will work at a lower rate." A lack of wage pressure indicates there is slack in the labor market, which in turn tells us we're not at full employment, which in turn tells us things might not be that good.

Transfer payments are the eco-geeks way of saying "government assistance." In other words, the stimulus checks that went out over the last few months don't count. All that being said, here is a chart from Econoday of personal income's year over year change:



But, remember -- that nice big jump doesn't count (The same thing happened a few years ago when Microsoft declared a special dividend). As Marketwatch noted:

Personal incomes rose 1.9% in May, the largest gain since September 2005, when insurance payments from hurricane damage flooded into bank accounts. The increase was close to the 1.5% gain expected by economists surveyed by MarketWatch.

Real disposable incomes (after taxes and adjusted for inflation) increased 5.3%, the biggest increase since 1975, when the government also sent out rebate checks.

Excluding the impact of the rebates and inflation, real disposable incomes were flat.

In other words, without government help, incomes didn't increase at all thanks to the stimulus checks. That tells us there is no wage pressure, indicating we're nowhere near full employment.

Now let's look at personal consumption expenditures (adjusted for inflation) to see how healthy consumers feel.



That charts tells us one thing. Consumers have not been feeling healthy about spending since the end of last summer. In fact, they have continually decreased their consumption expenditures over the last year. That is a very negative sign, especially for an economy that is dependent on consumer spending for 70% of its growth.

2.) Employment growth tells us if business is feeling healthy or not. If business sees blue skies on the horizon they add employees. If business sees storms, they "downsize" (or fire people).

To that end, business sees a lot of storms ahead.



The year over year rate of job growth has been dropping for the last two years. In addition:



The unemployment rate has been increasing for a year and a half. That is definitely a very bad development.

But there are deeper issues in the employment report which are highlighted very nicely in a recent article by Chris Puplava. He writes at a website called Financial Sense.



The chart above places the year over year change in employment in long-term perspective. The point is clear: every other time the year over year chart has been at current levels, the US economy has been in a recession.



The chart above shows the number of people who have had their employment hours cut back involuntarily. In other words, the business where they work is decreasing the number of hours each person works. Again note that when this statistic was at similar levels in 1980 and 1990, the country was in a recession.



The chart above shows that the number of people who thing jobs are hard to get is increasing at a quick pace. That is helping to lower consumer sentiment and confidence, which in turn is lowering personal consumption expenditures.

So on the employment front we are clearly in a downtrend. Several important indicators are at levels usually seen during recessions.

3.) I explained the current situation regarding industrial production in this article. None of the indicators has changed sign I wrote that article. The short summation is this: national industrial production has been decreasing since the last quarter of 2007. Capacity utilization is decreasing, indicating we're using less of our manufacturing capability, and several regional indexes are showing contraction.

Regarding the manufacturing sector, there is a new development that is troubling. Exports have been one bright spot of the current economic situation. However, several regions of the world are now reporting a slowdown:

Singapore cut its 2008 growth forecast for a second time this year, joining its Asian neighbors in signaling a deeper slowdown.

The island's economy will expand between 4 percent and 5 percent, from an earlier estimate of 4 percent to 6 percent, Prime Minister Lee Hsien Loong said yesterday. Growth was 7.7 percent in 2007.

.....

Governments from South Korea to Thailand have lowered their 2008 growth forecasts since the start of this year as the impact of the U.S. slowdown spreads and soaring oil and food prices hurt spending.

Japan's government this week said the world's second- biggest economy is ``weakening'' for the first time since 2001. Gross domestic product in Japan probably shrank an annualized 2.3 percent in the three months ended June 30, according to a Bloomberg News survey.

.....

In China, economic growth slowed for a fourth straight quarter in the three months to June 30, expanding 10.1 percent. Growth below 9 percent would be ``unacceptable'' for a government targeting 10 million new jobs a year, Credit Suisse Group said this month.

South Korea's finance ministry on Aug. 7 said growth in Asia's fourth-largest economy is easing as consumer spending slows and higher fuel costs stoke inflation. An expansion of 4.8 percent last quarter was the weakest annual pace since the start of 2007.

While some of these growth rates are still strong, they are weakening. In other words, the PPP's arguments about "decoupling" (meaning the US can slowdown and the rest of the world can continue to grow at high rates) is bunk. But the problems aren't just in Asia:

Europe's economy will grow 1.2 percent next year, with growth in Germany, the largest of the 15 nations that share the currency, slowing to 1 percent from 2 percent this year, according to the International Monetary Fund.

Italy's economy unexpectedly shrank in the second quarter, edging it closer to a fourth recession in a decade as households and businesses struggle to cope with more expensive oil.

The economy, the fourth-largest in Europe, contracted 0.3 percent after expanding 0.5 percent in the first quarter, the Rome-based statistics office Istat said yesterday. Economists expected stagnation, according to the median of 22 forecasts in a Bloomberg News survey. From the same period a year earlier, the economy didn't grow at all.

Europe is also slowing down.

So -- two regions of the world that have been important US exports are now seeing lower growth. This will slow the rate of growth in US export sales, which in turn will hurt overall US GDP growth.

Now -- I haven't even mentioned the continuing problems in the credit market or the continuing fallout from the housing market which is still nowhere near a bottom. Neither of these two areas of the economy are helping growth. In fact, both are adding to the problems.

So, according to the NBER's far broader measure of economic activity we have the following facts:

1.) Personal incomes adjusted for inflation and not including the transfer payments are decreasing

2.) The year over year percentage change in job growth has been decreasing for several years, every time the year over year number has been at current levels over the last 50 years the economy has been in a recession, the unemployment rate has been increasing for a year and a half, and the number of people who are involuntarily working fewer hours are increasing.

3.) Industrial production has been decreasing for the last 9 months, capacity utilization is decreasing and several regional manufacturing indicators are at recessionary levels.

4.) Two important export markets -- Asia and Europe -- are experiencing slower growth. This will negatively impact US exports which have been one of the only bright spots over the last year or so.

5.) We haven't even discussed the continual deterioration in the financial or housing sector.

The conclusion is clear: we're in a recession and have been for a bit.

Market Mondays

Let's start with a really long-term look at the market -- a 5 year look. This will give us an indication of where we are in the bull/bear cycle.

The market started to rally in 2004. It maintained an upward sloping channel until the beginning of 2007 when it broke through the upper trend line. The market used the upper trend line for technical support all during 2007. In addition, the market formed a double top in 2007, with the first top occurring at the beginning of the third quarter and the second top occurring at the beginning of the third quarter. This was also when we started to hear about problems in the financial sector (which started with news that Bear Stearns hedge funds were losing big sums of money). As a result, the market started to drop.

Since the market top in 2007, notice the following:

-- Prices have moved through upward sloping trend lines

-- Prices are now below the 200 week SMA

-- The 10 week SMA has crossed below the 200 week SMA

-- The 20 week SMA is about to cross over the 200 week SMA

-- With the exception of the 200 week SMA, the shorter SMAs are below the longer SMAs, and

-- All the SMAs are headed lower

In other words, the long term picture is bearish. The only good news on this chart is the 200 week SMA is positive.



Above is a two year chart. I put this chart up without any indicators to clearly demonstrate the market is in a clear down up down trading pattern.



On the daily chart, notice the following:

-- Prices have been in an uptrend since early July

-- The 10 and 20 day SMA are both positive

-- Prices are clearly looking for move higher.

BUT

-- The 20 and 200 day SMA are heading lower, indicating the longer-term trend is down.

Placing all of these charts together we get the following picture emerging.

The long-term trend is down and has been for awhile. The market is in a clear lower low/lower high pattern.

The shorter term trend is for a rally, which means this is most likely a bear market rally.

Why is the Dollar Rallying?

Below is a chart of the dollar which is still rallying today. The question is, why?

Let's look at the reasons a currency rallies.

1.) The country's interest rates are increasing. Here is the money quote from the latest Fed statement:

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

To me, this statement leans towards an increase. But, it doesn't say we're going to increase rates. Instead, it says the "upside risks to inflation are high." But also note the Fed has been saying for some time they expect commodity prices to decrease (which they are right now). So that might take some of the bite out of this statement.

So long as commodity prices continue to decrease or remain where they are for now, there is no reason from a policy perspective (price stability) of increasing rates.

2.) A growing economy. Do I have to lay this done again? The economy is in the early stages of a recession. If you don't see that then you're an idiot.

So -- the two primary fundamental reasons for a currency to increase are gone. That means there is a non-fundamental reason for the dollar's rally.

And indeed there is. There has been a fundamental change in the European interest rate outlook.

The euro fell the most in almost eight years against the dollar as traders pared bets the European Central Bank will raise interest rates as the economy slows.

The euro is poised for its biggest weekly loss since January 2005 after ECB President Jean-Claude Trichet yesterday said economic growth will be ``particularly weak'' through the third quarter. An index that tracks the dollar against the currencies of six U.S. trading partners touched the highest since February. Crude oil fell to a three-month low, silver reached its cheapest since January and copper headed for its biggest weekly drop since March, easing inflation concerns.

``This is the beginning of a new chapter for the dollar as Trichet and other central banks are paying more attention to the downside risk to growth,'' said Dustin Reid, a senior currency strategist at ABN Amro Bank NV in Chicago. ``The decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

In other words, there is nothing that has changed regarding the US economy or the Federal Reserve. There is a big change in the EU area. That means the dollar isn't increasing but the euro is falling. That's a big difference then a dollar rally.

We Didn't Do Anything Wrong -- Still...

From the WSJ:

Pushing to put one of the biggest debacles of the credit crisis behind them, Citigroup Inc. and Merrill Lynch & Co. agreed to buy back $17 billion in auction-rate securities.

The moves were aimed at defusing a regulatory and legal showdown about their sales practices for securities that were touted as safe but then couldn't easily be sold and in some cases lost value after the auction-rate market froze in February. The agreements also reflect Wall Street's growing determination to climb out of the morass left by a variety of soured securities, even if that comes at a steep cost.

Citigroup's settlement with the Securities and Exchange Commission and state regulators includes the repurchase of about $7.3 billion in auction-rate securities from about 40,000 individuals, charities and businesses with assets of less than $10 million. Citigroup also vowed to use its "best efforts" to help institutional investors sell roughly $12 billion of auction-rate securities they hold.

Several hours after the Citigroup deal was announced, Merrill Lynch said it would buy back an estimated $10 billion of auction-rate securities at full value -- but not until January. The one-year offer will apply to individuals, charities and small-business clients of Merrill.

Over the last few months, we've seen stories that at least 4 states (NY, MO and two others) and at least four firms (UBS, Wachovia, Merrill and Citi) were being targeted because of abusive/misleading sales tactics in the auction rate debt markets. Essentially, the firms continued to sell the bonds to investors (an recommend them strongly) even though the firms knew the market was collapsing.

The firms will issue a statement and the AG's will agree that "this is not an admission of guilt" (or some other such nonsense). But ask yourself this question: if they didn't do anything wrong why the quick settlement?

In addition, at a time when these firms are trying to unload bad debts they are now purchasing more bad debt they will have to unload in some way. That's not good for two institutions that are already really suffering from the credit crunch.

It also leads to this point: these firms clearly lied to investors to make a buck. How can we now trust them when they say, "we don't need to raise capital"?

In other words: the credit crunch isn't anywhere near over.

You Know Things Are Really Bad

When Paris Hilton makes sense:

See more Paris Hilton videos at Funny or Die

OK -- I usually stay away from politics on this site, but considering everyone in Washington is acting like a bunch of idiots, maybe we should listen to the celebrity who has a really good idea?

Forex Fridays -- the Dollar

Wow -- big week in dollar land



The dollar broke out of a trading range. The dollar has been meandering between 72 and 74 since May. This is a standard trading range which happens when traders are waiting for firm news to send the security in one direction or the other. This week we had news from central banks around the world.

The dollar was higher against most major currencies Thursday after the Bank of England and the European Central Bank decided to leave key interest rates unchanged.

The 15-nation euro slipped to $1.5328 in late New York trading, below the $1.5420 it bought late Wednesday. The pound was weaker at $1.9436, compared with $1.9475 the previous day.

The European Central Bank left its key interest rate unchanged at 4.25 percent Thursday, while the Bank of England kept interest rates steady at 5 percent for the fourth month running, as they both grapple with slowing economic growth as well as rising inflation.

In other words, this was less about the Fed's policy and more about the ECB keeping rates stable with the possibility of lowering later in the year because of slower growth.

Also on the daily chart, notice the following:

-- Prices are about all the SMAs

-- The shorter SMAs are starting to rise about the longer SMAs

This chart is starting to move into bullish territory.



On the longer (weekly chart) notice the following:

-- Prices have printed the strongest upward moving bar they have printed in a long time (as in years).

-- Prices have moved through all the SMAs

But

-- There is still a downward trend from the chart with the upside resistance.

Today's Markets

The markets opened lower in a big way, and then moved lower touching the 200 minute SMA. Prices rallied from this level until they ran into resistance at the 20 minutes SMA before moving lower, again touching the 200 minute SMA a bit after 11 AM> Prices rose again, this time breaking through the 20 minutes SMA. But they couldn't maintain the momentum and they fell starting about 1PM. They took a big drop about an hour before the close, and then it was Katy bar the door.



On the 4 day chart notice that today's action took out about half of the Tuesday and Wednesday rally. Also note that prices fell below the 200 day SMA



On the daily chart, notice the following:

-- Prices are still in an uptrend.

-- Prices are above the 10 and 20 day SMA

-- The 10 and 20 day SMA are both heading higher, although at an extremely low angle.

-- Prices and SMAs are in an incredibly tight range right now, indicating a lack of direction.

Read This Now

Yes Virginia, there really is a recession going on.

And some great logic to boot.

The Detroit Death March

From the AP:

General Motors, Ford, Toyota and other automakers said Friday that their U.S. sales fell by double-digits. Nissan Motor Co. was the only major automaker to report a gain, with truck sales up 18 percent thanks in part to the new Rogue crossover and a boost in incentives. Nissan's overall sales rose 8.5 percent.

Automakers were expecting a slide in July as high gas prices continued to cut into sales of trucks and sport utility vehicles and new troubles in the auto leasing sector further wrecked consumers' confidence. July's seasonally adjusted sales rate -- which shows what sales would be if they continued at the same pace for the full year -- was 12.5 million vehicles, according to Autodata Corp. That's down from 17 million as recently as 2005.

Automakers expect things to get worse before they get better.

Again -- none of this should be a surprise. The US automakers are run by idiots. That means they will continue to make really stupid decisions for the foreseeable future.

Here's a really important question. Somewhere between $3.50/$4.00 gallon (on the national average) we hit an inflection point where prices started to negatively impact consumer behavior. Now that oil is coming down, will we see a reversion to previous behavior? Will consumers now want SUV's? Or have people permanently changed their attitudes? More importantly -- has Detroit permanently changed their ways where they are going to make more fuel efficient cars?

Only time will tell.

The Credit Crisis Isn't Anywhere Near Over

Every few weeks we get a new wave of "the bottom exists" in the financial shares happy talk. And then as if on cue, we get another wave of really bad news from the financial sector. Consider the following news we've seen this week so far.

From Marketwatch:

HSBC Holdings on Monday reported a 29% drop in first-half net income as bad-debt charges surged to more than $10 billion and write-downs continued to mount, though the banking giant increased its payout as profits in Europe and Latin America grew.

Loan-impairment charges and other provisions jumped 58% to $10 billion, with the majority of those bad-debt charges stemming from its U.S. business in personal financial services.

Overall, its North American operations reported a $2.89 billion pretax loss, compared to a profit of $2.4 billion in the first six months of 2007.

Loan impairment charges increased 58%. That is s huge increase. And the North American market is responsible for big losses. That means this segment of the world market isn't that great a place to be.

But here's the worst part:

HSBC, which bought U.S. lender Household International in 2003, is shrinking its U.S. mortgage book and said it will stop making new finance loans for vehicles.

The $13 billion vehicle-finance portfolio will be reduced by around 80% over three years, leaving the consumer-finance business mainly focused on credit cards and consumer loans.

At a time when the value of any of these bonds is highly questionable HSBC has to sell them. That's going to be murder on their bottom line until the process is complete. And then they get to time the best time in a bear market to sell these assets. Won't that be a whole lot of fun.

And then there is Freddie Mac:

Look past the devastating $821 million loss it reported for the quarter—nearly three times what Wall Street analysts had forecast. Ignore the $1 billion writedown the government-sponsored enterprise took on subprime and other risky mortgages, only the latest in a painful series. Disregard the rising rate of foreclosures, which grew 20% in the June quarter from the preceding quarter. Drill down to its fair value—a measure of the total worth of the assets on its balance sheet, minus its total liabilities. What do you see?

It looks an awful lot like a gaping hole. Freddie's fair value as of June 30 was a negative $5.6 billion. Based on this particular measure of its financial condition, if it had to sell its assets today, Freddie Mac would be worth less than nothing.

One of the largest players in the US mortgage market has a negative net worth. And they only wrote down $1 billion? Please. There is absolutely no way they only had $1 billion in losses on their mortgage portfolio -- not unless they were a whole lot smarter than everyone else in the mortgage market (and PS -- they weren't).

But, here's the news of the week that should indicate we're nowhere near bottom.

Mortgages issued in the first part of 2007 are going bad at a pace that far outstrips the 2006 vintage, suggesting that the blow to the financial system from U.S. housing woes will be deeper than many people earlier estimated.

An analysis prepared for The Wall Street Journal by the Federal Deposit Insurance Corp. shows that 0.91% of prime mortgages from 2007 were seriously delinquent after 12 months, meaning they were in foreclosure or at least 90 days past due. The equivalent figure for 2006 prime mortgages was just 0.33% after 12 months. The data reflect delinquencies as of April 30.

.....

Data on other classes of mortgages suggest the same trend. Freddie Mac reported Wednesday that 1.38% of the 2007-vintage loans it purchased were seriously delinquent after 18 months compared with 0.38% of 2006 loans at the same point in their life. Freddie Mac generally purchases loans made to creditworthy borrowers.

Last month, J.P. Morgan Chase & Co. said it expects losses on prime mortgages that weren't securitized and remain on its books to triple from current levels. The increase in bad loans is driven mostly by jumbo mortgages originated in the second half of 2007, a company spokesman said.

.....

Until these bad loans are fully digested, "foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter," said Mark Zandi, chief economist of Moody's Economy.com. One piece of good news, he said, is that loans originated in the fourth quarter of 2007 and early 2008 appear to be performing better.

We're about 12-18 months into the 2007 vintage. This means we have at least another 12 months to go before we are through the initial problems of the portfolio. Until we are through these particular issues we can expect to hear about writedowns and the need to raise capital. That means the earliest we'll be out of the woods is next summer.

Thursday Oil Market Round-Up

On the weekly chart, notice the following:

-- The primary trend that started at the beginning of 2007 is still in place. Oil will have to drop below $115/bbl for that trend to break. In other words, the primary trend is still in place.

-- Prices have dropped below the 10 and 20 week SMA

-- The 10 and 20 week SMAs are turning neutral.

-- Prices have printed some incredibly strong downward bars over the last few weeks.

-- There is strong technical support in the %110 and $100 area. This support comes not only from previous price points, but the fact these are solid round numbers.



The P&F chart shows some other interesting developments.

-- The break of long-term P&F support

-- There is plenty of support at the $100/$102 level and some support in the $110/$112 area



On the daily chart, notice the following:

-- Prices are below all the SMAs

-- The 10 and 20 day SMA have moved below the 50 day SMA

-- All the SMAs -- including the 50 day SMA -- are now moving lower

-- Prices moved into the 10 day SMA and bounced back. In other words, the 10 day SMA is now resistance rather than support

Today's Markets

Let's go all the way back to Monday because the market has had a major rally since then.

On Monday, the market opened lower then went into an upward sloping channel before selling off at the end of the trading day

On Tuesday, the market gapped higher and then continued to rally for the entire day. Notice how the market used the 10 minutes SMA as technical support for the entire day. Also note how the market closed at the high of the day on strong volume. The main news on Tuesday was the FOMC meeting where the Fed kept rates neutral. This has led the market to thing the Fed will be on the sidelines for the foreseeable future. A lack of a rate increase means low rates for the foreseeable future.

The market opened a bit lower today and then retreated to the 50 minute SMA. Then prices recovered and continued moving sideways until 1PM. Prices bounced off the 50 minute SMA and continued to move higher. Notice the strong move higher and then the fall back to 20 minute SMA.

The market has moved higher by 3.46% since the close on Monday.

FOMC Statement

This is from the Federal Reserve's website:

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters. Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Let's take this one piece at a time.

Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports.

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.9 percent in the second quarter of 2008 (that is, from the first quarter to the second quarter), according to advance estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent

So the economy limped along in the second quarter. Without the impact of the stimulus checks, the economy would have increased about 1.5%. So it's not great but not terrible.

However:

Real disposable income decreased 2.6 percent in June, in contrast to an increase of 5.2 percent in May. Real PCE decreased 0.2 percent, in contrast to an increase of 0.3 percent.

Real -- inflation adjusted -- spending decreased in June despite the impact of the stimulus checks. That does not bode well for the future. It indicates that even with a huge influx of money, consumers are pulling back from spending any money.

The Fed continued by noting:

However, labor markets have softened further and financial markets remain under considerable stress.

Year-over-year job losses continue:



And the unemployment rate is continuing to increase:



At the same time, the amount of asset-backed paper being issued is dropping, and



Short-term rates are still high.



Also note LIBOR is still above the Fed Funds rate, indicating a lack of liquidity.

The Fed continued:

Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters.

For tight credit conditions, see above.

Housing is nowhere bottom. The Case Shiller home price index is still dropping at record year over year rates. This indicates the market is nowhere near equilibrium.

The Fed continued:

elevated energy prices are likely to weigh on economic growth over the next few quarters

These is good news on this front. As noted in today's CRB post, commodity prices are starting to drop. Energy prices are included in this price drop. Should this continue, then a major pressure on the economy will be off. While we're not out of the woods yet, we're better off than we were a a few months ago.

The Fed continued:

Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities, and some indicators of inflation expectations have been elevated. The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain

See today's post on the CRB. There may be good news on the inflation front over the next 12-18 months.

The Fed continued:

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the Committee. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

In other words, the Fed isn't doing anything. There are still downside economic risks and upside inflationary risks. This is the equivalent of the economic perfect storm. The Fed is still between a rock and a hard place.

Wednesday Commodities Round-Up; CRB

I'm back. Edouard came and went. Frankly, it was really more of a day with a lot of rain and a bit of wind then anything else. I wanted to mention that our Mayor Bill White was great -- as usual. It's amazing what happens when people do their jobs well without a lot of fanfare. I wanted to thank all those who wished me well. That was also appreciated.

And now -- I present some charts of the CRB!



There's some extremely important news on this chart. The CRB was in a rally from the end of August of last year until the beginning of July this year. However, prices have since:

-- Broken the uptrend

-- Moved through price support established in March of this year

-- Moved through the 10 and 20 week SMA

-- Also note that prices have been using the 10 week SMA as technical support for the rally, yet have now moved below that level as well.

In other words, there have been some incredibly important technical developments on this chart that signal a change in direction.



On the daily chart, notice the following:

-- Price have broken through both upward sloping trend lines

-- Prices have moved below the 10, 20 and 50 day SMA

-- The 10 and 20 day SMAs are moving lower and have moved below the 50 day SMA

-- Last week prices ran into resistance at the 10 day SMA and couldn't move higher.

This is now a bearish chart.

Closed Today For Tropical Storm

I live in Houston, Texas. In about an hour the outer bands of Edouard will start to hit the city. I am expecting that we will lose electricity at some point.

The storm is supposed to move through the area by early tomorrow morning. I will be up and blogging again tomorrow.

Today's Markets

The markets opened to the downside on some pretty heavy down volume. They continued to move lower until a little before 11 AM when they popped on a heavy volume spile. They ran into upward resistance at the 50 minute SMA and then moved sideways eventually crossing the 50 minute SMA. Then they moved lower until about 1 PM. At this point there was another volume spike with upward action, but prices couldn't hold again. Prices sold-off until the end of the day, with two solid downward moves on volume spikes in the last 10 minutes.

Today's action was bearish, as prices could not hold on to any gains they made. Also note the end of the day sell-off, indicating traders were not willing to hold positions overnight.

What Inflation?

From CNBC:

Consumer spending, after adjusting for inflation, fell in June as shoppers were hit with the biggest increase in prices in nearly three decades.

The Commerce Department reported Monday that consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February.

The higher prices reflected a big surge in gasoline costs and helped to drive an inflation gauge tied to consumer spending up by 0.8 percent in June, the biggest increase since a 1 percent rise in February 1981.

The big rise in inflation ate up a part of the billions of dollars in stimulus payments delivered during the month. Personal incomes rose by a tiny 0.1 percent in June following a giant 1.8 percent increase in May.

So -- with the effect of the stimulus checks consumer spending decreased .2% thanks to the largest price increase since 1981. This is very bad news because it indicates consumer spending will drop hard when the rebate check effect wears off.

Housing is Nowthere Near a Bottom

From the NY Times:

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

Let's think about those figures for a minute. Alt-A loan arrears increased 4 times in a year. That's a huge pop. It indicates there are serious problems in that market from a variety of perspectives. For example, loose underwriting standards are combining with a weak job market, lagging wages and a lot of homes underwater to hit this are of the market hard.

But we're also seeing an increase in prime defaults -- which doubled over the year. There are people who have goo jobs and (probably) solid incomes. And they're having a problem getting their loans paid-off in increasing numbers.

This isn't over by a long-shot.

Market Monday's

The SPYs had a down/up set of days on Monday and Tuesday, with Tuesday essentially wiping out the losses of Monday. Tuesday also market the beginning of a two and a half day rally that sent the market higher by 4%. The market formed a triangle consolidation on Thursday and then fell at the beginning of the day on Friday before moving sideways for the remainder of the day.



On the daily chart, notice the following:

-- Prices are forming a triangle consolidation pattern right now.

-- The 10 and 20 day SMA are both moving sideways.

-- The 10 day SMA is over the 20 day SMA, but just barely.

-- Prices and the short-term SMAs are tightly bunched, indicating a lack of direction.

-- The 50 and 200 day SMA are both heading lower

This chart is short-term neutral because of the tight arrangement of prices and the SMAs and the neutral position of the SMAs and prices. However, the long-term position is negative with the 50 and 200 day SMA heading lower.

Weekend Weimar and Beagle

It's the end of the week. Go and think about anything except the markets. I'll be back on Monday. Until then....



Somehow this is comfortable



The girls totally crashed.

Employment Report Stinks

From the BLS:

Both the number of unemployed persons (8.8 million) and the unemployment rate (5.7 percent) rose in July. Over the past 12 months, the number of unemployed persons has increased by 1.6 million, and the unemployment rate has risen by 1.0 percentage point.

Great news, huh? It gets better...

In July, the number of persons who worked part time for economic reasons rose by 308,000 to 5.7 million and has risen by 1.4 million over the past 12 months. This category includes persons who indicated that they would like to work full time but were working part time because their hours had been cut back or they were unable to find full-time jobs.

So, instead of getting fired, we'll just get people to work less. That means lower overtime payments and it also might mean a cut in benefits. however, because the overall employment situation is weak, these people have a harder to getting a second job. That means they have to make do with less pay.

There are no bright spots in the jobs created areas of the report. There are only three sectors of the job market that created jobs: government employees, healthcare/education and leisure and hospitality (which added a whopping 1,000 jobs). In other words, unless you work for the government or take care of sick people you're out of luck.

And the year over year number continued to drop:



And the unemployment rate continues to increase:

The Detroit Death March

From Bloomberg:

General Motors Corp., the largest U.S. automaker, reported a second-quarter loss of $15.5 billion because of strains from truck leases, costs from labor disputes and plunging U.S. sales.

......

The mounting losses are siphoning resources Chief Executive Officer Rick Wagoner, 55, needs to develop fuel-saving cars to replace the pickup trucks and sport-utility vehicles being abandoned by U.S. buyers. Wagoner, now in his 9th year as CEO, won't project when GM will restore profit as he cuts costs by an additional $9 billion annually and carries out a plan to boost cash by as much as $17 billion.

``The trends that are out of their control, those are the things that have the potential to overwhelm them,'' Robert Schulz, a debt analyst at Standard & Poor's, said yesterday. He was referring to record gasoline prices that have transformed consumer behavior while a weakened U.S. economy drains auto sales to 15-year lows. ``We don't see the macro environment anywhere near on the mend,'' Schulz said.

.....

S&P yesterday cut GM's credit rating one level to B-, or six steps below investment grade, because falling U.S. sales are causing the automaker to use more cash than anticipated. With the U.S. auto slump expected to carry into next year, GM faces a risk of further cuts, Schulz said. GM had the highest rating, AAA, from 1953 until 1981.

Declining sales, increasing impairment costs and a drop in its credit rating. What great news. It couldn't get much better.

The real question is cash flow. This is the second time I've seen a news story that said the real concern was GM is burning cash faster than anticipated. As a result, their ability to fund the turnaround is inhibited. For the quarter ended March 31, they burned through $3.2 billion in cash. They also had $28.9 billion in cash and short term investments. At that pace and all other things being equal, they've got 9 quarters of cash on hand. If we add in $9.6 billion in receivables, then we increase their available cash to 12 quarters or three years. In addition, with the drop in their credit rating borrowing for that will be more expensive. And who will want to lend money to a company that has negative book value and stagnant sales?

Forex Fridays -- the Dollar

Is the bottoming continuing? On the weekly chart, notice the dollar has been in a decline for the last two years. Prices have continually moved lower, breaking through technical support and then consolidating those losses before moving lower still.

However, over the last 4-5 months, the dollar has moved sideways. While it hasn't rallied, it also hasn't moved lower -- and there has been plenty of reason for it to do so. I've seen several analysts on TV suggesting the long-term bear market is over and that it is time to buy dollars.



On the daily chart, notice there is a slight upward tilt to the last few months of price action. While this isn't a strong rally, it's also not a bear market situation either. However, also note that prices and SMAs are in an extremely jumbled position. They are close together, and have been that way for the last three months. In order for this to turn into a bullish chart the SMA picture has to become clearer.

Today's Markets

There was a lot of back and forth in the market today until about 2:30. The markets opened with a move higher, but then fell back starting about 10:00. Prices moved back to the opening level and them moved higher. However, about 1:30 prices retreated again. Note they didn't get quite up to the 10:00 AM level. Then they retreated again. I've drawn what could be the bottom line of a triangle formation -- it sure looks like it wants to be a triangle, doesn't it? Prices gapped lower with about 20-25 minutes left in the day and prices closed near lows for the day.



On the 4 day chart (the chart of the week's action so far), notice that prices have been rising since the opening on Tuesday. But today they broke trend and are now consolidating in a sideways move.



On the PAF chart, notice the triangle that is forming after the long downward move. Basically, the market is waiting for the next news item to move it one direction or the other.

GDP Disappoints

From CNBC:

The Commerce Department reported Thursday that gross domestic product, or GDP, increased at an annual rate of 1.9 percent in the April-to-June period. That marked an improvement over the feeble 0.9 percent growth logged in the first quarter of this year and an outright contraction in the economy during the final quarter of last year.

Remember this number is heavily influenced by the rebate checks that went out in the second quarter. Here's how the BEA noted the big changes:

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports, an acceleration in exports, a smaller decrease in residential fixed investment, and an acceleration in PCE that were partly offset by a larger decrease in inventory investment.

So, we're importing less (which probably means the price of oil really started to hit) and exporting more (thanks to the cheap dollar). Exports have been and will continue to be one of the bright spots of the economy as we go forward. They are the one saving grace from the dollar's long drop.

I'm particularly interested in personal consumption expenditures because these would be the biggest beneficiary of the stimulus checks that went out. These increased 1% in 4Q07 and .9% in 1Q08. They increased 1.5% in 2Q08. In other words, we saw a bump up from the checks.

PCEs contributed 1.08 to the 1.9% increase. However, this number was .67 in the 4Q07 and .61 in 1Q08. So using the highest of the preceding two quarters numbers as a proxy for the non-stimulus contribution rate we would we a 1.49% rate of growth for the overall economy, all other things being equal in the current report.

Also note the BEA made downward revisions to the 2005, 2006 and 2007's total GDP. That tells me there may be further downward revisions coming, does a very important revision within the numbers:

Annual benchmark revisions showed consumer spending slowed more than previously estimated and the housing slump worsened. The economy shrank 0.2 percent in the fourth quarter last year, compared with a previously reported 0.6 percent gain.

In other words, the beginning of the recession was probably sometime within that time.

The Detroit Death March

I have a pet theory that before all of this is over we're going to see the following: at least one Detroit bankruptcy, at least one airline bankruptcy and several large banks go into bankruptcy. My feelings about this are based on the complete stupidity of Detroit executives. Oil started to move up in mid-2004 after establishing a long, multi-year base.



This alone should have raised some eyebrows and sounded the alarms. But this wasn't all. At the same time, the US was invading Iraq adding to middle eastern turmoil, China and India were growing at strong clips (Russia wasn't that far behind) and there was talk everywhere of the global commodities boom. By this time Toyota had introduced the Prius which has now sold over 1 million cars indicating there is a strong demand for energy efficient vehicles. Yet Detroit continued giving us the Hummer and various other forms of inefficient vehicles. Bottom line, Detroit is full of idiots who deserve to fail. And fail one of them will.
Consider this news about Chrysler over the last few days:

From Reuters:

Fitch Ratings downgraded Chrysler LLC's debt further into the junk category and warned that the struggling U.S. automaker could face difficulties in financing unless U.S. auto sales recovered in 2009.

Chrysler, which lost $1.6 billion in 2007, could struggle to finance operations in the second half of 2009 if industry volumes remained at this year's depressed levels or dropped further, according to a Fitch report released on Tuesday.

Fitch, which cut Chrysler's ratings from B- to CCC, just two notches above default, said the decision last week by Chrysler's finance arm Chrysler Financial to stop financing vehicle leases for U.S. consumers would depress already sluggish sales.

It rated Chrysler's outlook as negative, indicating a further rating cut is likely in the next six months.

Considering how easy it is to buy good credit ratings from the ratings agencies (CDO, anyone?), the fact that Fitch has downgraded debt to these levels should tell you how bad things have gotten.

From the WSJ:

Chrysler LLC is scrambling to slash costs and line up partnerships with foreign auto makers to shore up its finances amid a painful downturn in sales and a deteriorating outlook for the company, people familiar with the matter said.

In other words, Chrysler's debt is near worthless and they're scrambling to cut costs. But they're not alone.

Consider GM. They've lost money three years in a row. More importantly, their book value (total assets - total liabilities) has been negative for the last two years. Their sales record is inconsistent (at best), and their cash flow is weak. In short, this is a terribly run company. And the stock chart shows it:



That's a chart that inspires confidence, isn't it?

Ford isn't much better. Their book value has been moving around 0 for the last three years. Their sales record is inconsistent. About the only good thing about this company is they have had a positive cash flow for the last three years. But their chart is terrible as well:



So -- why is all of this important? Because as these companies continue to flounder, I'm expecting either GM or Ford or both to hit Congress up for money. Ford has 229,000 full-time employees and GM has 266,000 full time employees. I don't have a break down of their geographic location. Let's assume at least half of them are somewhere in the US. That means 247,500 are US based. There will also be a great call for the need to help an American icon out. Plus -- Congress did it before with Chrysler and it worked out just fine. Finally, the Federal Reserve back-stopped the Bear Stearns deal, so why not the car industry?

Thursday Oil Market Round-Up

On the weekly chart, we can clearly see the bull market run that started in early 2007. Prices continued to move higher, breaking through resistance levels and then consolidating gains. There are two legs to this rally. The first occurred throughout 2007. This one ended with a sideways rectangle consolidation pattern that lasted about three months. The second move came during 2008. But that move is over. Notice that prices have broken through the trend line that supported the 2008 rally. Prices now stand at the 20 week SMA.



On the daily chart, notice the following:

-- Prices have broken the support line

-- The 10 and 20 day SMA are moving lower

-- The 10 day SMA has moved through the 50 day SMA, and the 20 day SMA is about to

-- The 50 day SMA is leveling off

-- Prices are below all the SMAs

This chart is now short-term bearish and longer term neutral.

Today's Markets

The markets opened higher, then moved sideways to the 10 minute SMA. They rallied agian, but then started a very slow and gradual descent that led to the formation of a double bottom. The first bottom occurred around noon and the second one occurred around 1. Then prices spiked higher on a strong volume surge, moving through all the SMAs. Prices then traded sideways until a bit after 2 when they again spiked higher on a volume surge.



On the daily chart, notice the following:

-- The 10 day SMA has moved through the 20 day SMA

-- The 10 day SMA is moving higher

-- Prices are above the 10 day SMA

This means the short term trend is positive

However

-- Prices are below the 200 day SMA

-- the 20, 50 and 200 day SMA are all moving lower

-- With the exception of the 10 day SMA, all the SMAs are moving lower.

The long-term trend is negative.

The Credit Crisis is Far From Over

From Bloomberg:

The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still ``fragile.''

The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank.

Today's action reflects continued financial turmoil, with premiums banks charge each other for three-month funds over the Fed's expected benchmark rate little changed since May. It's the latest step in officials' efforts to combat the yearlong credit crisis, after the Fed's March rescue of Bear Stearns Cos. and the Treasury's backstop for Fannie Mae and Freddie Mac this month.

``The U.S. is pulling out all the stops here to make sure we don't have a terrible downturn or a collapse in the financial system,'' said Allen Sinai, chief global economist at Decision Economics in Boston. ``There isn't anything else the Federal Reserve can do but to keep pumping liquidity into the system.''

The Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries, both begun in March, will now extend through Jan. 30. They would then be canceled if the Fed judges that markets ``are no longer unusual and exigent,'' the Fed said in a statement today in Washington.

And yet, we still have people calling for a bottom in financial shares. Folks -- this ain't over by a long shot.

Think About This....

I've seen this blurb on Bllomberg several times.

We've seen about $450 billion of writedowns in the financial sector.

About 85%-90% have come from the US and Europe.

Either:

1.) Asian banks were really smart and avoided this altogether, or

2.) We've got some problems to look forward to.

Wednesday Commodities Round-Up; Agricultural

The last few times I have posted this chart, I have speculated it was forming a double top. While this is still looking like a strong possibility, there is also the possibility that prices are consolidating in a rectangular/triangle top. We won't know until we see prices break up or down. However, the good news from an inflation perspective is that prices have at least stopped their upward move and are consolidating.



On the daily chart notice the following:

-- Prices are below all the moving averages

-- The 10 day SMA has crossed below the 50 day SMA

-- The 20 day SMA is about to cross over the 50 day SMA

-- The 10 and 20 day SMA are both heading lower.

The SMA picture is bearish, but for this chart to turn completely bearish, we need to see a strong break below the low point between the double tops -- roughly 400 or so.

Wednesday Commodities Round-Up; CRB

On the weekly chart, notice the CRB has been in a rally since the end of last summer. Prices have continually moved higher, broken through key resistance areas and then consolidated gains after moving higher. However, prices dropped hard starting in July of this year. This is thanks to a variety of commodities dropping.



On the daily chart, notice the following:

-- Prices have dropped through the support line that started at the beginning of April

-- Prices are below all the SMAs

-- The 10 day SMA has moved below the 50 day SMA

-- The 20 day SMA is about to move below the 50 day SMA

-- The 50 day SMA is turning negative

-- Over the last 5 days, prices have leveled off

This chart is turning (or is) bearish now.

Today's Markets

The markets gapped up at the opening and then dropped a touch until they hit the 10 minute SMA. Then they shot higher from 124 to 128.80. Prices traded sideways until they hit the 50 minute moving average a little before 11 AM and then shot higher again. Prices consolidated until noon when prices once again hit the 50 day SMA and shot higher. From 1 to about 2 prices moved lower until they hit the 200 day SMA and then prices moved higher again, closing near the high of the day on strong volume.

This was an incredibly strong day, completely wiping out the losses from yesterday. And just think -- all this happened on the day Merrill Lynch announced a fire sale of assets....

Treasury Tuesdays

Sorry for taking so long to get to this. There were some other stories that I thought were a bit more important.



On the 6 month chart, we see the ned of the year long rally that ended at the end of March. Money flowed into treasuries because they are attractive during economically difficult times. However, when the Fed back-stopped the Bear Stearns deal, it signaled the Fed would take a far more aggressive role in preventing a financial meltdown. So money flowed back into the stock market and out of treasuries. Hence the price drop from the end of March to mid-June.



The three month charts shows the latest action, which has come conflicting signals.

-- Prices rallied from mid-June to mid-July, but they have backed off since then.

-- Prices are below the 200 day SMA, but not by much

-- Prices and the other SMAs are bunched together big time, indicating a complete lack of direction from the bulls and the bears.

The Housing Crisis is Far From Over

The Mess That Greenspan Made had some interesting charts up last week that got me thinking. First, here are the charts:





On both of these charts, note that the pace of sales as stabilized. In the case of new homes for a few months and in the case of existing homes for about 10 months. So, do these charts mean the housing market is starting to stabilize? Not yet:

This graph is from Calculated Risk:



So long as prices are in free fall (or cliff diving) we're nowhere near out of the woods.

The Credit Crisis is Far From Over

From Bloomberg:

Merrill Lynch & Co., the third- biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Note the phrase: Merrill is selling their bonds for a fifth (that's 20%) of their face value. Can you say fire sale? Or -- and here's the really scary part -- is that what things bonds are actually worth on the open market? Is this the best deal that Merrill can get for them?

Those figures alone should tell you there are some serious problems out there -- as ini systemic issues that will not be easily resolved.

Let's add one more Tums inducing statement. There was a blurb on Bloomberg a few days back that showed where these writedowns were coming from. About 90% are from the US and Europe, with about 10% (roughly) coming from Asia. Think about that for a minute.

Finally, go to the Big Picture right now and read this story and this story. Barry lays it out as only he can.

Treasury Tuesdays

I'll hit the charts later today. For now, consider the following:

From the WSJ:

Projections suggest the federal budget deficit could exceed $500 billion next year, complicating the debate between Barack Obama and John McCain over how to strengthen the economy while not worsening the nation's finances.

Deficit projections are ballooning because of lower tax receipts and government spending on economic-stimulus programs. The gap increasingly is threatening to play havoc with the two presidential candidates' domestic-policy plans, particularly Sen. McCain's big tax cuts and Sen. Obama's promised health-care expansion, and could force major changes in the winner's agenda.

On Monday, Sen. McCain, the Republican candidate, sought to turn the new deficit numbers to his short-term political advantage, without conceding much to those longer-term realities. Democratic rival Sen. Obama sought to keep the focus on the current shaky economy, economic inequalities and worries over job and retirement security.

The sparring came as the White House budget office boosted its estimate of the federal deficit for fiscal 2009 to $482 billion. With the full costs of the wars in Iraq and Afghanistan added in, the deficit for 2009 likely would exceed $500 billion, analysts said. The deficit projection for 2008 fell somewhat from the last official estimate in February, to $389 billion from $410 billion. Fiscal 2008 ends Sept. 30.

Expect to hear more of these stories come out as the economy worsens.

I wrote an article a few weeks back called My Conversation With the Next President. In the article I highlighted the basic problem the next president faces. Here is the short version. The Bush administration has mis-managed the federal budget situation to an alarming degree. Although they inherited a budget surplus, they have continually spent more then they have taken in. As a result, the US is issuing debt like its going out of style. Total debt outstanding has increased from $5.8 trillion in 2001 to the current total of $9.5 trillion.

As a result of this problem, the currency markets have sent the dollar lower for six years straight.



If you were wondering why commodities in general and oil specifically have bee rallying for some time, you can thank the cheap dollar as a primary cause. While a stronger dollar alone would not solve the problem of expensive oil, it would definitely help. Consider the dollar chart above. Note it has gone from peak to trough from 130 to its current level of $72.75 -- or a drop of 44%. Also note that most world commodities (like oil) are priced in dollars. As the dollar has dropped in price, so have these commodities. One of the primary reason traders are bidding them up is as an inflation hedge. While that appears to have waned for now, the damage has already been done in the form of higher prices being passed on to the consumer.

And that's not all. The US has been issuing a ton of debt every year during the good economic years. This means that going into the bad years we have a ton of more debt on our books and a culture of not making the tough political decisions (like, for example, raising taxes on the upper-income levels to help pay for a war). As a result, the US is entering a period of economic hardship with both hands tied behind its back.

Theoretically, a government should help to mitigate the effects of a recession with increased spending on programs like unemployment insurance extensions, job retraining, tax credits to start new economic sectors and the like. This goes a whole lot better if the government managed the budget well during the times of growth. However, the US has not done that. Instead, we have loaded up the federal government with a large amount of debt which has helped to devalue our currency which is increasing inflation. Issuing more debt will add further downward pressure on the dollar adding to the current inflationary pressures. In short, doing what the government should do during this time is exactly what the government has been doing for some time and it has led to problems.

It's not a pretty picture, is it?

Today's Markets

The markets opened with a quick upswing but couldn't maintain momentum. Prices started to drift lower after 9 AM, slowing falling below all the SMAs. Around 10 AM prices took their first big downward tumble, moving from 125.40 to 125. Then prices moved sideways until they hit the 20 minute SMA a bit after 11 AM, again moving lower. They hit 124.40 about noon and moved sideways with a slight downward bias until about 25 minutes before closing. Then they dropped hard in increasing volume until the close.

Notice the market continued to move lower, breaking through key support levels until they hit the low point near the close. Today was entirely bearish, plain and simple.

It's looking as though the bloom may be off last week's rally.