Consumers are Reigning Spending In

From the WSJ:

As the U.S. economy entered into crisis mode in September, so did the retail sector, ramping up discounts and special offers to entice reluctant shoppers.

But the retailers who reported September sales results Wednesday -- with the exception of Wal-Mart Stores Inc. and other discounters -- are indicating the promotions hardly helped. Many retailers reported worse-than-expected declines, with some -- such as Target Corp. and J.C. Penney Co. --- issuing downbeat estimates for the quarter.

.....

For the most part, the discount sector has been the only one to perform well amid recent economic troubles. Shoppers increasingly have been turning to warehouse and big-box discounters as they try to get the most for their money. Most other sectors have been suffering as shoppers continue to pull back on discretionary items, despite retailers' efforts to lure the bargain-hungry shoppers with greater discounts.

A rise in discount sales at the expense of all other stores is a bad development. It's worse when you consider that 70% of US growth comes from consumer spending.

Consider the following charts.



The simple line chart tells us that real retail sales (inflation-adjusted) have been stalling for some time).



The year over year percentage change shows that retail sales have been dropping hard for some time.



Personal consumption expenditures -- which also include durable goods -- shows the same decline.

The bottom line is the consumer is definitely pulling in his spending.

Round 2 Of the Credit Crisis

I say round 2 because this is the first step of a coordinated effort by all the central banks in the world (or at least the really big ones) to make a coordinated effort to stave off the credit crisis. Why the coordinated effort? Because the problems are now worldwide. Consider the following news from last week:

Fortis nationalized:

The governments of Belgium, the Netherlands and Luxembourg took partial control late Sunday of struggling bank Fortis NV, while Britain seized control of mortgage lender Bradford & Bingley early Monday.

Germany injects 50 billion euros into Hypo Real Estate:

The German government and the country's banks and insurers agreed on a 50 billion euro ($68 billion) rescue package for commercial property lender Hypo Real Estate Holding AG after an earlier bailout faltered.

Germany's financial industry agreed to double a credit line for Hypo Real Estate to 30 billion euros, Torsten Albig, a spokesman for Finance Minister Peer Steinbrueck, said late yesterday in an e-mailed statement. The federal government's guarantee for the credit line remains unchanged, Albig said.

The government and the Bundesbank have said that Hypo Real Estate, Germany's second-biggest property lender, is too big to fail. They met with banks and insurers in Berlin all day yesterday to discuss a revamped rescue package after private banks on Saturday withdrew their support for a 35 billion-euro rescue package brokered a week ago.

The Fed and ECB doubled their credit lines:

Additionally, the European Central Bank joined with the U.S. Federal Reserve in doubling the credit swap line that makes dollars available to cash-hungry banks from US$120 billion to $240 billion. The Bank of England doubled dollar availability to US$80 billion, while other central banks offered smaller amounts.

Yesterday, the Fed announced it would now start lending to private companies:

The Federal Reserve Board on Tuesday announced the creation of the Commercial Paper Funding Facility (CPFF), a facility that will complement the Federal Reserve's existing credit facilities to help provide liquidity to term funding markets. The CPFF will provide a liquidity backstop to U.S. issuers of commercial paper through a special purpose vehicle (SPV) that will purchase three-month unsecured and asset-backed commercial paper directly from eligible issuers. The Federal Reserve will provide financing to the SPV under the CPFF and will be secured by all of the assets of the SPV and, in the case of commercial paper that is not asset-backed commercial paper, by the retention of up-front fees paid by the issuers or by other forms of security acceptable to the Federal Reserve in consultation with market participants. The Treasury believes this facility is necessary to prevent substantial disruptions to the financial markets and the economy and will make a special deposit at the Federal Reserve Bank of New York in support of this facility.

And today Britain announced a very bold plan:

Britain's banks will get an unprecedented 50 billion-pound ($87 billion) government lifeline and emergency loans from the central bank after the freeze in credit markets threatened to bring down the financial system.

The government will offer to buy preference shares from Royal Bank of Scotland Group Plc, Barclays Plc and at least six other banks, and provide about 250 billion pounds of loan guarantees to refinance debt, the Treasury said in a statement today. The Bank of England will make at least 200 billion pounds available. The plan doesn't specify how much each bank will get.

The emergency action came after the FTSE 350 Banks Index fell almost 20 percent in the past month. Prime Minister Gordon Brown is following U.S. President George W. Bush, who approved a plan last week to spend $700 billion to prop up financial institutions with untested measures as equities plunged around the world.

``The global market has ceased to function,'' Brown said today at a press conference in London. ``The banking system must be sounder, and that is why we are putting the capital in.''

None of these plans/efforts is doing what it is supposed to do: calm the markets and bring a sense of confidence back to the market. The bottom line is clear: despite all of these efforts, the short-term lending markets have completely frozen because no one trusts anyone's officially stated balance sheet numbers regarding what they are worth. This is called "counter-party risk." It simply means that lenders are so concerned about a borrowers solvency even in the short-term that no one is making even the shortest loan.

We've seen a lot of one-sided action. But now the central banks are doing things together:

Joint Statement by Central Banks

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank, and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

The Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1-1/2 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

From the US perspective this is largely symbolic. US Interest rates are already 0% ofter adjusting for inflation. However, this is important for the European Central Bank, as Trichet has been very hawkish on inflation until very recently.

I say round 2 because there are now a number of coordinated policy measures various central banks could take together. For example, The ECB could create its own bail-out fund to match the US' and then coordinate the two funds actions to really start helping the battered institutions.

Either way I do think this is good news because the big policy makers realized one very important thing: we're in this thing together now.

Wednesday Commodities Round-Up

On the weekly CRB chart, notice the following:

-- Prices are below all the SMAs

-- The 10 and 20 week SMA are nose-diving

-- The 10 week SMA has moved through the 50 week SMA

-- The 50 week SMA is neutral. It will turn negative soon so long as prices remain on their current trajectory



On the daily chart, notice the following:

-- Prices are below all the SMAs

-- Prices have continually moved through previously established lows to make newer, lower lows

-- The SMAs are all moving lower

-- The shorter SMAs are below the longer SMAs

-- The 20 day SMA has provided strong upside resistance for the average.

Bottom line: this chart has become extremely bearish over the last few months. There are no bullish indicators. I would expect relief rallies to occur -- rallies where traders come in because they think prices are overly cheap -- but I would not expect a sustained rally at this point.

Today's Markets

On the SPYs, notice the following:

-- Prices are below the 200 day SMA

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- The SPYs have lost approximately 22% since the beginning of September



-- Prices are below the 200 day SMA

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- The QQQQ s have lost approximately 32% since the beginning of September



The SMA picture for the IWMS has been somewhat cloudy for the last few days, but a clear picture is starting to emerge. And it isn't good.

-- Prices are below the 200 day SMA

-- The shorter SMAs are all moving lower

-- The 50 day SMA is about to move below the 200 day SMA

-- Prices are below all the SMAs

Commercial Paper Primer

From Bloomberg:

The Federal Reserve will create a special fund to purchase U.S. commercial paper after the credit crunch threatened to cut off a key source of funding for corporations.

The Treasury will make a deposit with the Fed's New York district bank to help set up the new unit. The central bank will also lend to the program at policy makers' target rate for overnight loans between banks. The Fed Board invoked emergency powers to set up the unit, the central bank said in a statement released in Washington.

Today's action follows a slide in the commercial-paper market to a three-year low of $1.6 trillion last week as investors fled even companies with few links to the subprime mortgage crisis. Companies from newspaper firm Gannett Co. to electricity producer Southern Co. have been forced to tap credit lines or forego raising debt because of the market's disruption.

The Fed's efforts are aimed at ``stemming the bank-run-like panic,'' said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. ``The immediate threat to the real economy is that large corporations are having difficulty obtaining funds via the commercial paper market.''

So -- the Fed is going to but commercial paper. So -- what does that mean exactly?

First, here is a definition of commercial paper:

An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities on commercial paper rarely range any longer than 270 days. The debt is usually issued at a discount, reflecting prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, so only firms with high-quality debt ratings will easily find buyers without having to offer a substantial discount (higher cost) for the debt issue.

A major benefit of commercial paper is that it does not need to be registered with the Securities and Exchange Commission (SEC) as long as it matures before nine months (270 days), making it a very cost-effective means of financing. The proceeds from this type of financing can only be used on current assets (inventories) and are not allowed to be used on fixed assets, such as a new plant, without SEC involvement.

So -- why would a corporation need to issue this paper? There are lots of reasons. For example, a retail store (like Sears) has two big sales periods -- Christmas and back to school. So twice a year they get a big cash infusion and the rest of the time their sales are hit and miss. Let's suppose a store like Sears wants to get ready for back to school. But for whatever reason they've drained their Christmas profits. How can they buy merchandise to sell? They issue commercial paper.

This market is vital for all sorts of reasons -- inventory and payroll being two of the biggest.

Let's add another concept to the mix: time. Ever wonder why the yield curve is shaped like this?



Time. If you lend money to someone short-term there are fewer things that can go wrong that would prevent them from not paying you back. But if you lend someone money for a long time there are more things that can go wrong. To compensate you for the increased risk of lending someone money for a longer period of time, lenders demand a higher interest rate for longer loans.

So, commercial paper should carry a really low yield because it is issued for a short period of time. With me so far?

Lately, short term rates have been spiking. This seems odd, especially when short term rates are supposed to be lower that long-term rates. Why are short-term rates spiking? Lenders are concerned that borrowers won't be able to pay back a loan even in the short-term. Hence they are asking for a higher interest rate to pay them for a short-term loan. In addition, people are unwilling to buy this paper. In market terms "there is no bid." People are so concerned that even top quality credit risks will announce a writedown in their assets -- and therefore be unable to pay back a loan -- that no one is buying any commercial paper.

At the same time, commercial paper is vital to the economy; every large company depends on it for one reason or another. Therefore, this market has to work.

That is why the Fed is now buying commercial corporate paper:

Opening up another front in the battle to end the credit crunch, the Federal Reserve announced Tuesday it will buy unsecured commercial paper in an effort to restart a market that's ground to a virtual halt in recent weeks over concerns about the financial sector.

"This is a transparent step that should help to pump liquidity into a mature market that had seized alarmingly fast in just a week," according to Harm Bandholz, UniCredit economist.

Will this move work? Is it even legal? There are questions that will be answered in time. Right now the Fed is trying to do anything it can to keep the economy from slipping further into a recession.

Credit Problems -- The US' Leading Export

From the NY Times:

The crisis that began as a made-in-America subprime lending problem and radiated across the world is now circling back home, where it pummeled stock and credit markets on Monday.

While the Bush administration’s bailout package offers help to foreign banks, it seems to have done little to reassure investors, particularly in Europe, where banks are failing and countries are racing to stave off panicky withdrawals after first playing down the depth of the crisis.

Far from being the cure for the world’s ills, economists said, the rescue plan might end up being a stopgap for the United States alone. With Europe showing few signs of developing a coordinated response to the crisis, there is very little on the horizon to calm rattled investors.

The vertiginous drop in stock markets on both sides of the Atlantic on Monday reflected not only those fears, experts said, but also a growing belief that the crisis could tip the world into a global recession.

Ah yes -- the gift that keeps on giving: credit problems. Last week was extraordinary. Ireland the Germany moved to guarantee bank deposits. Several other European countries nationalized various banks. The bottom line is the problems are spreading.

Sometime over the last year or so the theory of "de-coupling" was advanced. This theory said that US problems would remain contained in the US. Well, that theory went out the window last week.

Let's take a look at some stock charts from around the world.



-- Australia formed a head and shoulders top from 2007 to 2008.

-- Prices are below the 200 day SMA.

-- The 10, 20 and 50 day SMA are all moving lower.

-- The 10 week SMA is now below the 200 week SMA

-- Prices have clearly broken below the uptrend stared in 2003.



-- Germany also formed a head and shoulders pattern in 2007 and 2008.

-- Prices are below the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- The 10 week SMA is about to move through the 200 week SMA

-- Prices have clearly broken through the uptrend started in 2003



-- Hong Kong topped out in late 2007 and has been cliff diving since

-- Prices are below the 200 day SMA.

-- The 10, 20 and 50 day SMA are all moving lower.

-- The 10 week SMA is now below the 200 week SMA

-- Prices have clearly broken below the uptrend stared in 2003.



Japan is a mess. It has been falling for the last two years

-- Prices are below the 200 week SMA

-- The 10, 20 and 50 week SMA are all below the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- Prices broke the uptrend started in 2003



The UK market is clearly breaking down

-- Prices are below the 200 week SMA

-- The 10 and 20 week SMA have moved through the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- Prices have clearly broken the uptrend in 2003



Brazil is a great example of the phrase "cliff-diving"

-- Prices are below the 200 week SMA

-- The 10, 20 and 50 week SMA are all moving lower

-- Prices have clearly broken the uptrend started in 2003.


Something else I will note with extreme caution: where is the news from Asia? We're heard a scant nothing from any Asian banks on this. Were they that much smarter then the rest of us? Or is there something else we should know?

Tuesday Treasury Round-Up

On the yearly chart, notice the following:

-- Prices rallied from the end of October to March of this year as a reaction to the credit crisis.

-- Treasuries sold-off from March until the end of June. This corresponds to a stock market rally that occurred after the Federal Reserve back-stopped the Bear Stearns deal

-- Treasuries started rallying again at the end of June as it became apparent that the credit crisis was deepening an spreading.



On the three month/daily chart, notice the following:

-- Prices have been in a general uptrend for the last three months

-- Prices recently bounced off the 200 day SMA

-- All the SMAs are moving up

BUT

-- They are bunched together withing 1 point of one another. This is a sign of confusion on the part of market participants.

Compare this to the SHYs (short-term paper market)



-- Prices are above the 200 day SMA

-- The 10 and 20 day SMA are above the 50 and 200 day SMA and both are moving higher

-- Prices are above all the SMAs

-- The 50 day SMA has just crossed over the 200 day SMA

This is a much more bullish chart. The main problem is yields are incredibly low -- there is only so far a fixed-income security can rise before yield starts to limit further upside potential.

Media Appearance

I'll be on KTLK tonight from 9-10 CST to talk about this situation.

Today's Markets

Wow. What a day. Let's look at this from the yearly chart to put it in complete perspective:



On the SPY's note the following:

-- Prices are below all the SMAs

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below the 200 day SMA



-- Prices are below all the SMAs

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below the 200 day SMA



On the IWMs, note that prices finally broke through the 64 level.

With all of the above charts note that prices gapped down today on high volume.

While I would expect a relief rally over the next few days, this is a terrible way to start the week.

If It Walks Like A Recession and Talks Like A Recession ....

I've got jury duty today. I'm guessing they probably won't pick me (I'm a lawyer, I've got a masters degree and I'm extremely opinionated) but you never know. I should be back in time to do the market wrap at the end of the day.

The standard press definition of recession is two consecutive quarters of negative GDP growth. However, the National Bureau of Economic Research -- the organization that officially dates recessions -- uses a broader definition:

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. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.

Let's look at each of these items:



Remember we're looking at the change without transfer payments. That makes the spike in May of this year meaningless. Note the year over year trend line has been dropping since July of 2007. Also note the percentage change is nearing 0% over the last few months. In other words -- personal income isn't looking that good.



Note the year over year percentage change in employment growth has been dropping since April 2006 and is now negative.



Note the unemployment rate has been increasing since January of last year.



Industrial production's year over year rate of change has been dropping all year.



Capacity Utilization has been dropping since the end of the third quarter of 2007, although the last three months have seen incremental increases.



The ISM manufacturing number has been dropping since 2004 and recently took a big drop into recessionary (below 50) territory.


The Chicago NAPM number has shown two strong months although the readings for the rest of the year have been borderline recessionary.

All of these numbers tell the story of an economy in a recession. My guess is the NBER will date it from the beginning of this year.

Monday Market Round-Up

Given all of the action we've seen over the last few weeks I'm going to do a more in-depth post on the markets and cover the SPYs, the QQQQs and the IWMs.



On the 10 year chart notice the following:

-- The SPYs have clearly formed a multi-year double top. This corresponds to the end of the internet bubble in 2000 and the end of the housing bubble last year.

-- Also note the latest sell-off is not approaching the 61.8% Fibonacci retracement level. That means we have at least a point and a half more to go, assuming the market is targeting Fib levels.



Regardless of the trend line you use, the SPYs have clearly broken the upward sloping trend line supporting the market for the last 5+ years.



On the 1 year chart, notice the SPYs are in a clear pattern of lower lows and lower highs. This is a classic bear market formation. Also note:

-- The market has lost almost 30% since its high in October of last year

-- Prices are below the 200 day SMA by almost 16%

-- All the SMAs are moving lower

-- The lower SMAs are below the longer SMAs

-- Prices are below the longer SMAs

Bottom line: this is a bearish chart, plain and simple.



On the multi-year QQQQ chart, notice the current price level has broken all three important uptrends that supported the latest, multi-year rally. In other words, the rally is over.



On the one year chart, notice that prices have consolidated in two triangle. The first lasted two months and occurred at the end of 2007. The second lasted for most of 2008 but prices broke through the lower support line at the beginning of September. Prices have fallen almost 32% from their high at the end of the summer in 2007. Finally, note that prices are at their lowest point of the last year.



On the three month chart, notice the following:

-- Prices are 19% below the 200 day SMA

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

Bottom line: This is a bearish chart.



On the multi-year IWM chart, notice that prices have broken the uptrend the supporter the multi-year rally. Since breaking the rally, the IWMs have moved in a roughly 10 point range between 64 and 74 (with a few spikes up to 76).



On the yearly chart we can better see the trading range that has occurred. 64 has provided incredibly important technical support.



On the three month chart, notice the following:

-- Prices are below the 200 day SMA

BUT

-- All the SMAs are bunched up within a very narrow range. This indicates a lack of direction.

BUT

-- Prices have dropped below the key 64 level.

Bottom line: bearish when considered in line with the other charts.

Weekend Weimer and Beagle

Earlier this week, Mr$s. Bonndad and I went out to dinner. She asked me if there was anything on the counter that would be attractive to Sarge the Weimer. I said no. So we left.

When we came back we found a chewed can on the floor that use to be a can of Bush's baked beans.







Sarge is fine.

Have a good weekend.

This Week's Economic News Stinks

From the BLS:

Nonfarm payroll employment declined by 159,000 in September, and the unemployment rate held at 6.1 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Employment continued to fall in construction, manufacturing, and retail trade, while mining and health care continued to add jobs.

With the exception of education and health care and government employees, every other job sector was down. If we take out this months total birth/death model adjustments we get a total job loss of 201,000 (yes, the birth/death model is still adding jobs to the total number of jobs created).

This report represents an acceleration of the trend we have been seeing -- job losses are getting worse. We see that in the new jobless claims:

The number of U.S. workers filing new claims for jobless benefits rose to their highest in seven years due to the impact of hurricanes Ike and Gustav, the government said in a report on Thursday.

The number of initial jobless claims was 497,000 in the week ended September 27, the highest since 517,000 in the week ended September 29, 2001 and above Wall Street economists' forecasts of 475,000.

"It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 45,000 claims to the total," the Labor Department said in its weekly report.

While the numbers from the hurricanes may seem to be distorting the totals, this chart from Calculated Risk says otherwise (click on the chart for a larger image):



As a result of the weak employment situation car sales are tanking:

Toyota, Chrysler, Ford and Nissan Motor Co. reported U.S. sales declines of more than 30% for the month compared with September 2007, while Honda Motor Co. and General Motors Corp. showed sharp downturns as well.

Overall, the industry sold only 964,873 vehicles -- a 26.6% slide from a year earlier and its biggest percentage drop in 17 years, Autodata Corp. said Wednesday.

Industry executives blamed public unwillingness to make purchases amid the nation's financial troubles, as well as a lack of credit from lenders.

"It's tantamount, really, to a natural disaster," said George Pipas, chief sales analyst at Ford. Showroom traffic, he added, was at levels associated with "a large storm or the aftermath of 9/11."

According to CNW Marketing Research, visits to auto dealerships in the last 10 days of September declined 51% compared with the same period last year, the largest slide in at least 22 years.

Toyota's U.S. sales last month were down 32.3% from the year-earlier period, while Ford declined 33.7%, Nissan slipped 36.8% and Honda fell 24%. Since January, Toyota's sales are down 10.4%, while Ford's have fallen 17.1%. Maserati and Bentley were the only makers to post gains in September.

Until last month, Honda had been one of the few carmakers to show a net gain on the year, but declines in August and September have now sucked it down to an overall 1.1% downturn through the first three quarters. Truck- and SUV-heavy Chrysler saw a 32.8% decline for the period, and is off 25% on the year.

GM had a relatively modest 15.5% decline, provoking a near celebratory response from the nation's largest automaker.

While I would blame the credit crunch for some of this, I also think there is a huge drop in consumer confidence right now. With an important election a little more than a month away, constant negative economic news and a financial system that is literally in a meltdown there is no inventive to purchase a car (or any other durable good) right now.

Also note this is an across the board hit. The Japanese and US makers are dropping equally. It's not a change of preference from one brand to another. Instead it's a complete boycott.

On Wednesday we learned that the US manufacturing sector is not doing very well:

The nation's manufacturing firms were contracting at a much faster pace than expected in September, one of the clearest signs to date that the economy has entered recession territory, according to a closely watched survey of top executives released Wednesday.

The Institute for Supply Management index fell to 43.5% from 49.9% in August, much lower than the 49.6% expected by economists surveyed by MarketWatch. See Economic Calendar.

This marked the sharpest one-month drop in the index since 1984. The index is now at its lowest level since October 2001. Read full survey.

Prior to September, the ISM has been treading water, hovering around 50. This seen as a signal the economy was muddling along. But now economists said there is little chance that months of negative growth can be avoided.

This shouldn't be surprising either. Not only is domestic demand dropping, but Europe and Asia are also slowing down. Therefore the export story is going away.

And finally, confirming the obvious slowdown in purchases is the drop in consumer spending is this report of, well, consumer spending from Monday:

Hard-pressed U.S. consumers curbed their spending during August despite an unexpected jump in incomes, according to a government report on Monday that implied worry about the economy's direction was deepening.

The Commerce Department said consumer spending was flat in August after barely edging up by a revised 0.1 percent in July, a much weaker outcome than forecast by Wall Street economists surveyed by Reuters who had a 0.2 percent spending rise.

Incomes from wages and salaries and all other sources rose by 0.5 percent in August, largely reversing July's revised 0.6 percent drop and well ahead of forecasts for a smaller 0.2 percent gain. Incomes had been boosted early in the year by payments made under an economic stimulus program but that has largely worn off.

So -- people are spending less as evidenced in the macro spending numbers and auto sales numbers. The reason is the continued weakness in the job markets. And it's only going to get worse.

Friday Forex Round-Up

On the weekly dollar chart, notice the following:

-- The dollar is clearly in a rally

-- The 10 and 20 week SMA are both advancing

-- The 50 week SMA is turning positive

-- Prices are above all the SMAs

-- Prices have broken through more resistance levels established last year



On the daily chart, notice the following:

-- All the SMAs are moving higher

-- The 10 day SMA is between the 20 and 50 day SMA. Aside from that, the SMAs are in a very bullish alignment

-- Prices are above all the SMAs

-- Prices are about to cross over a very important technical level.

Bottom line: these are bullish charts. Both indicate further advances are coming down the pike.

Today's Markets

On the weekly chart notice that prices are in a clear pattern of lower lows and lower highs. This indicates we're in a bear market. Also note:

-- Prices are below all the weekly SMAs

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

This is as bearish as you can get.



On the daily chart, notice the following:

-- Prices are below all the SMAa

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are moving lower

Both charts are extremely bearish.

We're Nowhere Near A Bottom in Housing

From Bloomberg:

Home prices dropped in 24 of 25 U.S. metropolitan areas in July from a year earlier, led by declines in Las Vegas and the coastal cities of California, as foreclosures depressed property prices.

Las Vegas had the biggest drop on a per-square foot basis, falling 33 percent, New York-based real estate data company Radar Logic Inc. said in a report today. Los Angeles, Phoenix, Sacramento and San Francisco each dropped about 28 percent. Three of the five worst-performing markets were in California.

``Buyers are increasingly reluctant,'' Radar Logic Chief Executive Officer Michael Feder said in an interview. ``There has been an awful lot of talk about the declining of the housing markets.''

U.S. foreclosures rose to a record 2.75 percent of all mortgages in the second quarter, according to the Washington- based Mortgage Bankers Association. Foreclosed houses tend to sell at a discount of about 20 percent, according to research by Lehman Brothers Holdings Inc. Those discounts are weighing on prices throughout the country, Radar Logic said.

This confirms the information from the latest Case Shiller news release:

Data through July 2008, released today by Standard & Poor's for its S&P/Case-Shiller(1) Home Price Indices, the leading measure of U.S. home prices, shows continued record declines and a continuation in the trend of double digit declines across many cities in the prices of existing single family homes across the United States.

The 10-City Composite and the 20-City Composite Home Price Indices reached new record annual declines of 17.5% and 16.3%, respectively. The 10-City level marked its 10th consecutive monthly report of a record decline, beginning with data reported for October 2007. As depicted on the chart above, during the 1990-92 cycle the record low was -6.3%. While the annual returns of the two indices continue to reach record lows, the pace of the decline has slowed, particularly over the last three months. For the three months of May thru July, home prices cumulatively fell about 2.2%; whereas for the three months of February thru April, and November 2007 thru January, the cumulative rates of decline were closer to 6.0-6.5%.

This is the central problem with the bail-out proposal. At the heart of the economy's problems lie housing prices. As prices drop in value more and more loans wind-up "underwater", meaning the mortgage is worth more than the property. This encourages people to stop paying their mortgage, leading to an increase in foreclosures (which the first article notes are at a record). Banks take these houses and either put them on their balance sheet or sell them at a discount. Either way, the underlying mortgage is not completely paid off, causing the mortgage holder to lose money. Simply put, the only way to stop this problem is to stop home prices from declining. And that's not going to happen anytime soon.

Fed Considers Rate Cut

From the WSJ:

Federal Reserve officials are weighing further interest-rate cuts, even if Congress passes a $700 billion rescue plan, in the face of a deteriorating economic outlook and severely strained financial conditions.

The Fed's willingness to consider additional cuts marks a turnaround from the past few months, when soaring food and energy prices turned its attention to inflation risks. At a regular September meeting, after oil prices had receded, officials still declined to move the central bank's federal-funds target rate from 2%.

A reduction in rates is still far from certain, in part because of inflation worries. But in just the past few weeks, as the credit crisis pummeled the financial system, economic data have become steadily worse, raising fears of a recession.

Rates are currently at 2%. Rates have dropped from 5.25% to 2% and we are currently in a credit crunch. The interest rate isn't the problem. The problem is is confidence in whoever you're lending to. If you think a borrower is about to goo bankrupt -- or may be bankrupt between the time you lend him money and the time he pays it back -- you're not going to make the loan. And that is exactly what is happening right now:

The cost of borrowing in dollars in London for three months rose for a fourth day, signaling that banks haven't started to lend after the U.S. Senate approved a $700 billion plan to rescue beleaguered financial institutions.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 6 basis points to 4.21 percent today, the highest since Jan. 11, the British Bankers' Association said. The corresponding rate for euros advanced 3 basis points to a record 5.32 percent. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record.

``We still see upward pressure on maturities from one week,'' said Patrick Jacq, a fixed-income strategist in Paris at BNP Paribas SA, France's biggest bank. ``The situation is still blocked and we're unlikely to see spreads decline before confidence has been restored.''

Credit markets have frozen as financial institutions hoard cash to meet future funding needs amid deepening concern that more banks will collapse. Libor, set by 16 banks in a daily survey by the British Bankers' Association, is used to set rates on $360 trillion of financial products worldwide, from home loans to derivatives.

This problem has nothing to do with interest rates. With the year over year inflation rate at 5.4% and the compound 3-month rate at 7.2%, interest rates are actually negative. In addition, the Fed has a ton of lending facilities in place that are flooding the market with money.

This is about confidence. And there is nothing the Fed can do about that.

Thursday Oil Market Round-Up

Click on the chart for a larger image.



On oil's weekly chart, notice the following:

-- Oil broke the multi-year uptrend a few weeks ago

-- Prices are below all the weekly SMAs

-- The 10 and 20 week SMA are both moving lower

-- The 10 week SMA is about to mover through the 50 week SMA



On the daily chart, notice the following:

-- Prices have been dropping for about two months

-- Prices are below all the SMAs

-- The 20 and 50 week SMA are both headed lower

-- The 10 day SMA is about to move through the 20 day SMA

-- Prices are having a difficult time getting higher than the 20 week SMA

Bottom line: this is now a bearish chart. The weekly chart has broken the mult-year uptrend and has numerous bear market indicators. The daily chart has been dropping for two months and the longer SMAs are both moving lower.

Today's Markets

Note the following:

-- Prices are below all the SMAs

-- All the SMAs are headed lower

-- The shorter SMAs are below the longer SMAs

Also note that since the market dropped like a stone on the failed bail-out day, the market has been treading at the low end of the week's trading range. The big issue here is the bail-out in the Senate. If we see that go through I would expect a rally. I would also expect the opposite to be true.

Read This Now

Barry nails it.

Make A Crappy Product .... Get A Government Loan!!!

From the WSJ:

President Bush on Tuesday signed into law a low-interest loan package to aid U.S. auto makers, but those struggling companies will still have to wait months to find out how and when they can tap the $25 billion designated to smooth their transition to building more fuel-efficient vehicles.

The loan package was approved last year as a way to help auto makers and their suppliers meet fuel-economy standards set by the federal government. But the funding for the package wasn't passed by Congress until this year. One estimate put the total cost to auto makers at $100 billion to meet stricter efficiency standards that require vehicles to reach 35 miles per gallon by 2020.

General Motors Corp., Ford Motor Co. and Chrysler LLC have argued it was essential to get the loan help as soon as possible to rejigger plants to build smaller cars and infuse money into programs for gas-electric hybrids and other vehicles relying on alternative fuels. The recent credit crunch, along with double-digit declines in U.S. auto sales, have only put additional pressure on the auto makers to gain quick access government-backed loans, according to industry analysts.

"The auto loans can't come soon enough," said Kip Penniman, automotive analyst at KDP investment Advisors. Calling the loans a "lifeline" for GM in particular, Mr. Penniman said each of the auto makers will likely need to access some of that funding next year. Detroit's Big Three, once bullish on a turnaround in the auto sector in 2009, now expect to be another challenging year for auto sales in the U.S.

This infuriates me to no end. These companies relied on the gas guzzler model of business -- build it big, powerful and without any concept of fuel efficiency. Price them at a good price point so we make good money on them. Deny the possibility of peak oil whenever possible. Rinse. Repeat.

When that stopped being effective, they started to give cars away with "employee pricing". That means the car companies started selling cars at really low levels -- just barely enough to make a profit (if that). But there was a problem with this model. Consumers are now conditioned to expect car companies to offer fire sale prices on their models. So they're going to wait until car companies offer these prices again before they buy.

And as profits circled the bowel, the car companies are coming to the US government and saying, "lend me a ton of money, or half a million people will be unemployed withing two years." That's the real leverage in this deal -- the employees.

Seriously -- would you make a low interest loan to companies with the following stock charts?