Retail Sales Close-Up

For reasons unknown the St. Louis Federal Reserve has yet to update their real retail sales graph. So I pilfered Calculated Risks:



This chart is verified by the drop in personal consumption expenditures from the BEA's national income report:



Notice the following points:

-- Retail sales have been declining since the beginning of 2005 on a y/o/y basis.

-- Retail sales rate of y/o/y change has been negative for the entire year (that's 7 months). Remember that includes the stimulus checks. So even with free money, consumers aren't spending in strong enough patterns to raise retail sales into positive y/o/y territory. Let that sink in.

Let's add some possible reasons to the mix -- why aren't people buying more stuff?

Inflation is eating a larger percentage of their paychecks:



And today we learned that:

U.S. consumer prices climbed more than forecast in July, reducing the ability of the Federal Reserve to lower interest rates should the economic slowdown deepen.

The consumer price index climbed 0.8 percent, twice as much as anticipated, the Labor Department said today in Washington. The cost of living was up 5.6 percent in the year ended in July, the biggest jump in 17 years. So-called core prices, which exclude food and energy, also rose more than projected.

It's important to add that with the CRB index dropping (along with oil's price) this number should be coming down over the next 3-6 months. However, that raises a second set of questions. At what point is the price decline enough to warrant consumers increasing their purchases? Note that CPI's increase has taken a bigger and bigger bite out of paychecks over the last 6-12 months. At what point is a price drop sufficient to warrant an increase in confidence? Have the dynamics of the CPI's impact changed to where the drop has to be more pronounced and prolonged to increase retail spending?



The jobs picture has been deteriorating for the last two and a half years (and that's before we start to critique the birth/death model's laughable impact on the employment report). When jobs become less plentiful, people lose confidence and start to pull in their spending. Not only has the employment picture been declining for some time, but



The unemployment rate has been increasing for the last year and a half. And the situation is deteriorating:

More Americans than anticipated filed initial claims for jobless benefits last week, signaling further weakness in the labor market.

The number of first-time applications decreased by 10,000 to 450,000 in the week ended Aug. 9, from a revised 460,000 the prior week that was higher than previously estimated. The total number of people receiving benefits climbed to an almost five- year high.

Also note there has been wealth destruction in the US over the last year. We've seen the stock market drop along with the housing market. Neither of these developments encourages confidence. In fact, all of these events are leading to a big drop in consumer confidence.





So -- let's assume the best going forward. Even if the CPI starts dropping in the next 3-6 months (which it will if the CRB continues to weaken or remains at current levels) we still have a deteriorating situation in

-- employment (leading to a decline in income),

-- the real estate market (leading to an overall decline in wealth), and

-- the stock market (leading to a decline in wealth).

None of the preceding three situations will positively impact consumer sentiment going forward.

Therefore, retail sales probably won't be doing that well over the next few months.

Thursday Oil Market Round-Up

The P&F chart is very revealing. Looking carefully at the rally that led to the recent top in oil prices we see a clear pattern of rising bottoms and tops. Prices continually broke through key levels of upside resistance and then moved lower, consolidating gains.

Now look at the the last three columns. Notice we may be in a period where the market makes lower lows and lower highs -- a bear market pattern. Now, this is still very early in the correction so making bold predictions is pointless. However, it's also important to be aware what the chart may be saying in order to keep an eye out in future price movements.



On the weekly chart, notice the following technical developments:

-- Prices have moved through the 10 and 20 week SMA

-- The 10 week SMA has turned negative. Because this is a weekly number it takes longer for trends to develop. Therefore, this number turning negative is a significant development

-- Prices are at a technically important level, bumping into the upward sloping trend line that started a year and a half ago



On the daily chart, notice the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The 10 and 20 day SMA have moved through the 50 week SMA

-- The 10 week SMA has provided upside resistance in the latest market sell-off.

The real question now is what is happening -- why are prices dropping like they are? It seems like a few weeks ago we were looking at record oil prices (and it was just a few weeks ago).

There are several reasons for the drop. The first is the realization that high prices are taking a bite out of demand. Note the following developments that have lowered demand:

"It looks like the high price has done its job in destroying demand," said Muhammad-Ali Zainy, senior energy economist at the Center for Global Energy Studies in London.

China reported Monday that its crude imports swooned 7% in July to a seven-month low. The Chinese government joined several other Asian nations in June, gently loosening federal subsidies to refiners and raising caps on retail gasoline prices.

Also consider this news from the US (hat tip: Calculated Risk):

Americans drove 4.7 percent less, or 12.2 billion miles fewer, in June 2008 than June 2007. The decline is most evident in rural travel, which has fallen by 4 percent – compared to the 1.2 percent decline in urban miles traveled – since the trend began last November.

Also consider this overall drop in US demand:

U.S. consumption fell by 800,000 barrels a day in the first half of '08 vs. the prior year, the largest drop in 26 years, the Energy Information Administration said Tuesday.

In addition, there has been an increase in overall supply:

The International Energy Agency said Tuesday that production rose nearly 900,000 barrels a day in July, bringing supply and demand, for the time being, into what appears to be a balance.

However, let's not forget the big picture (hat tip, the Big Picture):



In other words, the overall supply/demand situation is still very much out of whack and will be for some time.

Today's Markets

I'm going to use the daily chart today in order to clear out the noise of the day to day chart.

Notice the following:

-- Prices are still in the uptrend that started on July 15

-- The 10 and th 20 day SMA are moving higher

-- The 10 day SMA is higher than the 20 day SMA

-- Prices are running into resistance at the 50 day SMA. If they move over this level look for some upside running in the market.

However, this is still a bear market rally in action. Let's look at the longer term chart:



Notice we are in a clear pattern of lower lows and lower highs with the 200 day SMA providing upside resistance.

A Closer Look At the Latest Loan Officer Survey

The financial sector stands at the middle of the economy. They take individual savings and investment, pool it, and then make loans or underwrite security offerings for the business sector. This is why the "ex-financial" reporting is such crap. Because it stands at the center of the economy, the health and overall attitude of the financial sector to its business is vital to the economy's current and future prospects.

In addition, it's clear from a deeper analysis of the data that the US is in a recession which started at some time in the last quarter of 2007. (If you want to see some really great analysis regarding GDP, read this article from Chris Puplava). That being the case, the economy will need the financial sector to become more active in the loan market in order to get out of its current hole.

But that won't be happening anytime soon. First we've learned that total financial sector losses are now over $500 billion dollars:

Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms rose after UBS AG reported second-quarter earnings today, which included $6 billion of charges on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half its forecast of $1 trillion for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini predicting losses to reach $2 trillion.

Now the IMF's estimate of $1 trillion doesn't seem that far-fetched (it's not as though they are the only organization making that estimate. PIMCO recently made the same prediction).

And there's a good reason for that. The latest Quarterly Banking Profile from the FDIC was a wake-up call to anyone who cared to listen:

Deteriorating asset quality concentrated in real estate loan portfolios continued to take a toll on the earnings performance of many insured institutions in first quarter 2008. Higher loss provisions were the primary reason that industry earnings for the quarter totaled only $19.3 billion, compared to $35.6 billion a year earlier. FDIC-insured commercial banks and savings institutions set aside $37.1 billion in loan-loss provisions during the quarter, more than four times the $9.2 billion set aside in first quarter 2007. Provisions absorbed 24 percent of the industry's net operating revenue (net interest income plus total noninterest income) in the quarter, compared to only 6 percent in the first quarter of 2007. The average return on assets (ROA) was 0.59 percent, falling from 1.20 percent in first quarter 2007. The first quarter's ROA is the second-lowest since fourth quarter 1991. The downward trend in profitability was relatively broad: slightly more than half of all insured institutions (50.4 percent) reported year-over-year declines in quarterly earnings. However, the brunt of the earnings decline was borne by larger institutions. Almost two out of every three institutions with more than $10 billion in assets (62.4 percent) reported lower net income in the first quarter, and four large institutions accounted for more than half of the $16.3-billion decline in industry net income.

Looking at that paragraph we see phrases like "deteriorating asset quality...higher loss provisions...losses taking a larger percentage of revenue....lower return on assets...broad-based declines in profitability...phrases all investors want to see about a vitally important sector of the economy.

All of these events -- the increasing losses and writedowns -- have led to an overall credit tightening. When losses increase, loan's are harder to find. Hence the bearish news from the latest loan officer survey:

About 60 percent of domestic banks—a slightly larger fraction than in the April survey—reported having tightened lending standards on commercial and industrial (C&I) loans to large and middle-market firms over the past three months. About 65 percent of those institutions—up notably from roughly 50 percent in the April survey—also indicated that they had tightened their lending standards on C&I loans to small firms over the same period. Significant majorities of domestic respondents indicated that they had tightened selected price terms on C&I loans to firms of all sizes: About 80 percent of banks—up from roughly 70 percent in the April survey—noted that they had increased spreads of loan rates over their cost of funds on C&I loans to large and middle-market firms, and about 70 percent of respondents—a somewhat higher fraction than in the April survey—reported having widened spreads on loans to small firms. In addition, considerable fractions of domestic respondents reported having boosted non-price-related lending terms on C&I loans to firms of all sizes over the survey period, and the fraction of banks that tightened such terms on loans to small firms increased significantly relative to the April survey.

Strong majorities -- as in 60% are increasing the cost of loans to mid-level and higher borrowers. Credit is tightening in a bigger way for small firms as indicated by more banks tightening lending standards to there borrowers. In short, banks are making it harder for the big guys to get loans and more harder (if that's a phrase) for the smaller firms to get a loan.

Here's some more troubling news:

Substantial majorities of domestic institutions that experienced weaker loan demand over the past three months cited a decrease in customers’ needs to finance investment in plant or equipment as well as firms’ decreased need to finance inventories. In addition, about 65 percent of domestic and 70 percent of foreign respondents pointed to a decrease in customers’ needs for merger and acquisition financing as a reason for the lower demand for C&I loans. Regarding future business, small domestic and foreign institutions, on balance, reported that inquiries from potential business borrowers were about unchanged during the survey period. In contrast, about 15 percent of large domestic banks, on net, reported an increase in the number of inquiries from potential business borrowers over the past three months.

The speed of business is slowing down in a big way -- there is less need to finance investment and inventory. There are not good developments for the macro-economy.

And what about the future?

Concerning loans to businesses, about 55 percent of domestic and 45 percent of foreign respondents indicated that they expected their banks to tighten credit standards on C&I loans in the second half of this year, and about 45 percent of domestic and 30 percent of foreign institutions, on net, anticipated tightening their lending standards on these loans in the first half of next year. Regarding commercial real estate loans, about 70 percent of domestic and 45 percent of foreign respondents believed that their institutions would tighten their lending standards on these loans in the second half of 2008, and roughly 50 percent of both domestic and foreign banks anticipated doing so in the first half of 2009.

A majority will tighten C&I loans this year. That pretty much sinks a second half recovery right there. Combine that with a slowdown in investment and inventory building and you've got a recipe for some serious problems. And finally, we're learning the Europe and Japan are slowing down (Japan's economy contracted last quarter). That means exports -- a sole bright spot in the US economy - will probably start decreasing.

None of this is looking good.

Wednesday Commodities Round-Up

First, let's start with a P&F chart as this type of chart shows pure price movement. This will give us an idea of where we really are without a bunch of noise.



First, notice the pretty extreme volatility in this chart. Remember, prices have to move at least 12 points for a row of X's or O's to be added to this type of chart. At a price of 400 that means prices have to move at least 3%. Also notice the following:

-- 420 provided a great deal of resistance on the way up; prices ran up against this level three times before it broke through. On the way down, notice this level provided upside resistance in the row of x's just before the latest downward move of O's. Finally, prices had no problem moving through 420 on the way down, indicating strong downward momentum.

-- Prices consolidated gains in a triangle pattern at the top of the movement.



On the weekly chart, notice the following:

-- Prices have clearly broken the uptrend that started in mid-2007. That indicates the latest reversal is very strong and important -- breaking a long-standing trend is a very important technical development.

-- Prices are below the 10 and 20 week SMA which will pull these SMAs lower

-- Prices are standing right at the 50 day SMA -- a move below this level would be a very important development

-- The 10 day SMA is starting to turn negative. Because this is a weekly SMA it will take longer for the line to move in one direction or the other.



On the daily chart, notice the following:

-- Prices have broken the trend line started in March

-- Prices are below all the SMAs

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

-- All the SMAs are now moving lower

There has been a fair amount of discussion about why this is happening -- why the sharp sell-off in commodities. Weren't these the hot areas of the market?

The real answer lies in the global slowdown that is going on. For example, from today's WSJ:

Japan's economy shrank for the first time in a year in the April-June quarter, confirming fears that the world's second-largest economy has entered a slump at the same time as some other major countries.

Gross domestic product, the widest measure of economic activity, fell 0.6% from the previous quarter on a seasonally-adjusted basis, the government said early Wednesday. That translates to an annualized rate of decline of 2.4%, and it represents the first quarterly contraction in a year.

The decline was the largest in nearly seven years, coming as rising prices of energy, food and raw materials hit consumers and corporations. Many Japanese companies are suffering from higher costs of materials at the same time as their sales decline around the world, and they are responding by cutting production. Japan is particularly vulnerable to higher energy prices, as it relies nearly entirely on imported oil.

And Asia isn't the only one. Consider this story from July 2:

European recession fears grew Tuesday as Denmark became the first European Union country to slip into a technical recession and a raft of weak data indicated others could soon follow.

The Purchasing Managers Index for the euro zone's manufacturing sector contracted in June for the first time in three years, dropping to 49.2 from 50.6 in May, research group Markit Economics said. A PMI reading above 50 signals an expansion in manufacturing, while a level below 50 indicates a contraction.

Europe's economies are currently facing a toxic combination of elevated inflationary pressures, higher oil prices, strong exchange rates, weakening global growth and tight credit conditions. Denmark, Spain, the United Kingdom and Ireland also face falling housing prices after a recent boom, trailing a trend set in the U.S. after a two-year lag.

So we have one economy that is in a technical recession, and three other countries face problems related to a housing market correction. This picture was highlighted in the latest ECB interest rate decision where Trichet changed from inflation hawk to at least a neutral stance on rates:

The dollar has bounced sharply higher against the euro in the wake of the European Central Bank head’s press conference, after the ECB elected to maintain its current 4.25% base rate for the eurozone. However, a few tweaks in the ECB’s statement, as well as acknowledgement by Mr. Trichet of weakness in the economy, have brought out the dollar bulls, who are selling the euro against the greenback.

The point of the preceding articles on Japan and the EU is this: demand is slowing down. Therefore, there is less need for commodities of all stripes. Traders are taking this confluence of events and dumping long positions

Today's Markets

The market has been in a rally for the last week, so now's a good time to take a look at the longer minute charts to see what they look like.



So far we've had two upswings followed by sell-offs. The first occurred from the beginning of last Tuesday to the beginning of last Friday. The second occurred from the beginning of last Friday to today's close. Notice the importance of Fibonacci patterns to these swings, as prices retreat to key Fibonacci levels.



Notice the following with this chart:

-- The uptrend is firmly intact.

-- Prices have retreated below the 200 minute SMA and bounced back.

-- 128.50 is a key technical level.

Half a Trillion Dollars Later

From Bloomberg:

Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms exceeded $501 billion after UBS AG reported second-quarter earnings today, which included $6 billion of marks on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half the total for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini forecasting losses to reach $2 trillion.

But the financials are bottoming -- I can just feel it! Let's plow some money into the XLFs!!!!!!!

Half a Trillion Dollars Later

From Bloomberg:

Banks' losses from the U.S. subprime crisis and the ensuing credit crunch crossed the $500 billion mark as writedowns spread to more asset types.

The writedowns and credit losses at more than 100 of the world's biggest banks and securities firms exceeded $501 billion after UBS AG reported second-quarter earnings today, which included $6 billion of marks on subprime-related assets.

The International Monetary Fund in an April report estimated banks' losses at $510 billion, about half the total for all companies. Predictions have crept up since then, with New York University economist Nouriel Roubini forecasting losses to reach $2 trillion.

But the financials are bottoming -- I can just fell it! Let's plow some money into the XLFs!!!!!!!

Read This Now

Corey at Afraid to Trade is one of the best chart readers on the web. His analysis of the dollar's recent moves is very insightful and is a must read.

Housing is Nowhere Near a Bottom

From Bloomberg:

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Let's think about that for a minute, shall we? 1/3 of the all the mortgages originated in the last five years in the US are larger than the value of the homes they are tied to. According to the Federal Reserve's Flow of Funds Report total mortgage debt outstanding in the first quarter of 2008 was $10.6 trillion and total mortgage debt outstanding in the 1Q 2003 was $6.222 trillion. So over the last 5 years we've see an increase of $4.3 trillion in mortgage debt. Let's assume that 25% of that is home equity, leaving us with $3.321 trillion in first lien mortgages. That means $1.086 trillion of mortgages are more expensive than the properties they are tied to. That's also roughly 10% of all mortgages in the US financial system.

Let's add to the analysis.

Home foreclosure filings rose 14 percent in the second quarter, the eighth consecutive quarterly climb, and more than doubled from the same period a year-earlier, real estate data firm RealtyTrac said on Friday.

Home foreclosure filings during the second quarter were reported on 739,714 U.S. properties, up 121 percent from a year earlier, RealtyTrac, an online market of foreclosure properties, said in a report.

The figure is a total of default notices, auction sale notices and bank repossessions between April and June.

We've seen two straight years of increases in foreclosures and a doubling (as in times two) of the foreclosure rate from last year. That's a mammoth increase. Putting that together with the number of homeowners who are underwater we get a really scary picture.

As those foreclosures increase we'll see an increase in existing homes for sale inventory (chart from Calculated Risk):



And who is going to buy these houses with Credit getting tighter -- at least according to the Federal Reserve's latest survey of lenders:

Large majorities of domestic respondents reported having tightened their lending standards on prime, nontraditional, and subprime residential mortgages over the previous three months. About 75 percent of domestic respondents—up from about 60 percent in the previous survey—indicated that they had tightened their lending standards on prime mortgages.2 Of the 32 respondents that originated nontraditional residential mortgage loans, about 85 percent—up from about 75 percent in the April survey—reported having tightened their lending standards on such loans.3 Finally, 6 of the 7 respondents that originated subprime mortgage loans—a somewhat higher proportion than in the April survey—indicated that they had tightened their lending standards on those loans over the past three months.4

Let's also note the US families are massively indebted. Total household debt outstanding is now $13.9 trillion.

All of this activity -- homes underwater, increasing foreclosures, tightening credit -- is leading to an increasing rate of home price declines:

Prices of U.S. single-family homes plunged at a record pace in May from a year earlier, with each of the 20 regions monitored showing annual declines for a second month, according to the Standard & Poor's/Case Shiller home price indexes reported on Tuesday.

A lot of this is a chicken and egg situations -- are foreclosures leading to price declines, or are price declines leading to increasing foreclosures? At this point it doesn't matter. The bottom line is there are some serious problems in the housing market and there aren't any signs it is ending soon.

Treasury Tuesdays

Let's start with the "super-long" view to get an idea about where we are in the big picture.

Prices meandered from 2003-2005 as money flowed into the stock markets. Traders had not reason to engage in a massive sell-off because inflation was under control. At the same time, there was no reason to rally because the economy was expanding. So sideways was the primary direction.

From mid-2005 to the beginning of 3Q 2006 the market sold-off big time, losing about 10%. Then the market rallied and sold-off again, bottoming at the beginning of 3Q 2007. This was the formation of a double bottom in the IEF chart. Starting in the 3Q of 2007 we get the credit crunch rally, as traders started to move into the government debt market in a big way. Hence the run-up from $80 - $92. Investors were looking for return of capital rather than return on capital. Since the topping of that rally (more on that in a minute) the market has sold-off, originally to the 50% Fibonacci level and now is working with the 38.2% level.



The P&F chart shows the market had a slightly downward moving bias from 2003 - 2007. Note this chart really shows the double bottom along with the strength of the credit crunch rally. Notice in the 2007-2008 rally that price moved higher and the sold-off by a few points, only to then move higher.



The year chart also clearly shows the credit crunch rally. Prices continually moved through previously established price levels and then sold-off to consolidated gains. Notice how prices used the 50 day SMA as support during this rally. Also note the timing of the sell-off -- the Fed's backstopping the Bear Stearns buyout. This event signaled the Fed was not going to let the market "self-correct" but instead the Fed was going to take an active role in the "correction". In other words, the bail-outs were beginning.



The 6 month shows the sell-off. Prices moved lower for three solid months, holding within a trend channel. Also note the shorter SMAs moved below the 50 day SMA in late April signaling a confirmation of the trend reversal. Also note that prices eventually dipped below the 200 day SMA which is typically bear market territory.



The three month chart is sending a very confusing message.

-- Prices are bunched around the 200 day SMA and have been for the last month or so.

-- The SMAs and prices are configured very tightly.

-- The 200 and 20 day SMA are moving higher whereas the 20 is moving a bit lower and the 50 is moving up a bit. In other words there is no clear signal about market direction at this point.

Today's Markets

The market opened a bit lower today, briefly falling through the 50 minute SMA. But it quickly recovered and moved through the 50, 20 and 10 minute SMA before 9 AM. Prices moved along the 10 minute SMA until about 9:30 when they started to moved higher. They continued to move up until a little before 1 PM, when they moved lower. Prices fell through the 10 and 20 minute SMA, and continued to move lower, falling through the 50 minute SMA. Prices staged a rebound but ran into resistance at the 20 minute SMA. Prices fell back and then rallied again, this time getting through the 10 minute SMA. Note how today's price action really highlighted the Fibonacci retracement levels in the market.

Hank Paulson Lies

From Bloomberg:

U.S. Treasury Secretary Henry Paulson said there are no plans to use his new authority to inject capital into mortgage companies Fannie Mae and Freddie Mac, which both posted worse-than-expected earnings last week.

``We have no plans to insert money into either of those two institutions,'' Paulson said in an interview with NBC's ``Meet the Press'' broadcast today from Beijing. He added that their earnings results were ``not a surprise.''

Paulson and Congress last month brokered a plan to bolster the two government-sponsored enterprises that includes giving Treasury the right to buy their shares. Fannie and Freddie, which account for almost half of the $12 trillion mortgage market, reported losses three times worse than estimated, prompting some analysts to predict that Paulson will have to act.

First, Paulson has continually made statements that his later actions directly contradicted. Before he asked for the line of credit for the GSE's he said they were in fine shape and there was nothing to worry about. According to him, the US has had a strong dollar policy for the duration of his tenure at Treasury. In other words, his credibility is a bit lacking in these matters.

Basically, the bail-out bill allows the Treasury to inject funds directly or provide a backstop for the GSE's stock:

First, as a liquidity backstop, the plan includes an 18-month temporary increase in Treasury's existing authority to make credit available for the GSEs. Given the difficulty in determining the appropriate size of the credit line we are not proposing a particular dollar amount. Flexibility is the best means of increasing market confidence in the GSEs, and also the best means of minimizing taxpayer risk.

Second, to ensure the GSEs have access to sufficient capital to continue to fulfill their mission, the plan gives Treasury an 18-month temporary authority to purchase – only if necessary – equity in either of the two GSEs.

Let's look at Freddie and Fannie's balance sheet.

Fannie has lost money for four straight quarters. Here is a link to the last three at Reuter's. They're not pretty. But here's the real problem. According to Reuter's, Fannie has total long term investments of $780 million. The real question is what are those investments really worth. Considering the degree of writedowns we've seen over the last year, I seriously doubt those are really worth that much. The question is how off are the official valuations on the balance sheet?

Freddie has the same problem. According to Reuter's, they had $672 billion in long term assets on their balance sheet at the end of last year. But again -- what are they really worth?

These institutions touch 70% of the mortgage market. In other words, they are vital to out economy -- now more than ever. But just how solid are their balance sheet statements? Considering the mammoth amount of writedowns we've seen so far, I seriously doubt their latest statements are accurate.

And therein lies the problem for Hank Paulson. My guess is he knows there are serious problems lurking under the hood which is why he asked for such massive bail-out provisions which literally amount to a blank check. And that's why his happy talk is patently absurd.

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.