Today's Markets

On the daily chart, notice that prices have remained in a roughly three point range for the last 4 days. Also note the bars are getting smaller over the last three days. However, all the EMAs are moving lower and the shorter EMAs are below the longer EMAs.



The question on the 5 minute chart is has this chart reversed? Prices broke through the downward sloping trend line that started over a week ago. In addition, prices have moved through the 200 minute SMA. But coordinating this chart with the daily chart tells us we haven't fully reversed yet -- and won't until we move through the lower SMAs on the daily chart.

Will The Consumer Ever Come Back?

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Above is a chart of the US savings rate. Notice its been declining for the last 20 years or so until it eventually started hovering around 0% and that it has recently spiked up. There are some people who are now arguing the consumer is retrenching completely; meaning, the consumer will no longer be the engine of growth. There are two strong fundamental reasons that support this conclusion.

1.) First, the best reading of job growth during the last expansion is for a total of approximately 8.2 million. In other words, job growth was extremely weak. In addition, we've seen fast rates of job loss over the last year along with real estate and stock market collapses. In other words, the macro environment is such that consumers may be paying a lot of attention to their bottom line and thinking, "I don't need to buy that right now."

2.) Total household debt outstanding has increased from 47% of GDP in 1981 to 96% of GDP in the third quarter of 2008. While there is no bright line in economics that says "above this level the household debt/GDP ratio is bad" I feel fairly certain in saying that when there is almost as much household debt as there is GDP in an economy there are serious problems. The point is the possibility that we are at a saturation level with household debt is pretty high. This leads to the conclusion that the consumer will start to pay his debt down leading to lower consumer spending.

Don't Expect Consumer Spending to Rebound Soon

From Reuters:

The Conference Board, an industry group, said its consumer confidence index fell to 25.0 in February, the lowest since the index began in 1967, from 34.7 in January.

Consumers' gloomy outlook showed no sign of turning around, according to the report, boding ill for the consumer spending that drives some two-thirds of the U.S. economy.

The data "suggests, unfortunately, that we still haven't found the bottom for the economy," said Zach Pandl, economist at Nomura Securities International in New York.

There are a lot of reasons for this drop.

1.) The job market is terrible. In January 2007 there were 138,080,000 total non-farm jobs in the US compared with 134,580,000 in January 2008 for a total loss of 3.5 million jobs in a 12 month period. 1.77 million have occurred since the October numbers. In other words, job losses are accelerating.

2.) There are two sources of wealth for Americans: stocks and real estate. Stocks are in a bear market. Home prices continue to drop:

The day's U.S. housing data also offered little reason for optimism. Prices of U.S. single-family homes fell 18.5 percent in December from a year earlier, with the pace of decline speeding up, according to the S&P/Case Shiller home price index.

That was the biggest drop since the data series began 21 years ago and suggested prices will probably continue falling in the months ahead, extending a 13-month-old recession.

The S&P/Case Shiller composite index of home prices in 20 metropolitan areas fell 2.5 percent after dipping 2.3 percent in November.

"There are very few, if any, pockets of turnaround that one can see in the data," said David Blitzer, chairman of S&P's index committee. "Most of the nation appears to remain on a downward path."

A separate report from the Federal Housing Finance Agency said single-family home prices fell a record 4.5 percent in the last three months of 2008 compared with a year earlier, though the pace of decline slowed.

Housing will not be anywhere near a bottom until we see the rate of year over year price declines slow. As a result, we can expect to see a continued drop in housing prices over the new 6 months (and probably longer).

As a result of the drop in housing real estate prices, household net worth has dropped 11% since the third quarter of 2007. In short, between real estate and the stock market, people are feeling poorer. That's leading to lower consumer spending:


Overall personal consumption expenditures are dropping at fast rates on a year over year basis.


A big reason for this a a drop in durable goods purchases (cars and houses).



But non-durable rates are dropping as well.

To reverse this swoon in spending we need a stronger jobs market and a stable stock and real estate market. Neither is going to happen anytime soon.

However, even when that happens, there are serious questions about whether or not consumer spending will return to pre-meltdown levels. I'll touch on that in the next post.

Wednesday Commodities Round-Up

On the yearly chart for gold, notice that gold broke through upside technical resistance in the early part of this year and has continued higher ever since. Prices have run up against highs established in July of last year on strong volume.

The MACD states prices are moving higher. However, note the MACD is at its highest point of the last year. Also remember the chart above which shows prices are running into upside resistance at levels established last summer.


On the three months chart, notice the following:

-- Prices are above all the SMAs

-- The shorter SMAs are above the longer SMAs

-- All the SMAs are moving higher

-- The horizontal line at current price levels is the price level from last July.

Today's Markets

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Let's look at a longer chart to put today's action in perspective.

-- The current downtrend started with a big gap down last Tuesday.

-- Prices levels out for a few days.

-- But prices started to move lower on Thursday, Friday and Monday continually moving through old lows

-- Today, prices moved through previous resistance and are now on top of all the SMAs. Prices are are above the 200 day SMA.

However:



On the daily chart, notice that prices have some room to move higher before they hit resistance (namely, the 10 day SMA). If prices hit this and then continue to move higher, we'll be in a trend reversal. However, until that happens, we're still in a downtrend.

The Treasury Market In A Nutshell

From IBD:

In the very near term, Treasuries are faced with a lot of supply, which suggests a concession will have to be built into the market, but demand for safer securities is likely to remain high as we move toward the end of the month," said Robert Tipp, chief investment strategist at Prudential Investment Management's public fixed-income group.

It's All About Housing

From the WSJ:

The Obama administration has launched a multipronged effort to arrest the economic downturn, but its success likely depends on how quickly the banking sector regains its footing. Despite its $787 billion stimulus package, any fiscal boost would be temporary if credit markets remain dysfunctional. The government is already largely standing behind much of the banking sector, insuring unprecedented levels of deposits and even guaranteeing new debt issued by many banks.

A weakened banking industry makes it harder and costlier for businesses and consumers to get loans. But restoring confidence in the banking sector is proving one of the trickiest parts of the economic plan. Banks are still heavily exposed to the housing market, and rising foreclosures combined with falling house prices are putting enormous strain on banks and making it hard to determine how much money they have.

Regulators are bracing for dozens of additional bank failures. Federal Deposit Insurance Corp. officials are pushing Congress to raise the amount of money the agency can borrow from Treasury to $100 billion, more than triple its current limit, with talks intensifying in recent days, say people familiar with the discussions.

And housing isn't coming back anytime soon.

A Long-Term Look At the Markets

From the WSJ:

A slide in small-capitalization health-care and energy stocks pushed the Russell 2000 index below 400 for the first time since the bear-market lows of November.

For the session, the Russell 2000 index of small-capitalization stocks lost 16.38 points, or 4%, to 394.58. The Russell has fallen six days in a row. The last time the Russell closed below 400 was Nov. 20, when it ended at 385.31.

Because the Russell 2000 is composed of smaller companies that rely on growth instead of an existing client base, the index is a great proxy for risk. And right now people are running from risk in a big way. Here is a long-term chart of the IWM -- the ETF that tracks the index.



The chart uses monthly bars. Notice that prices are currently in the same price range as the 2003 - 2003 market bottom. In other words, we're essentially back to where we started. The only good thing on the chart is the decrease in volume over the last 4 months. This tells us that few people are dumping shares.


Notice the SPYs have formed a double top with the first top occurring in 2000 and the second occurring in 2007. Also notice that price wise we're now moving below the 2003-2003 price levels. Like the IWMs, the one good thing with this chart is volume is dropping off over the last few months indicating fewer people are selling.

From the WSJ:

Financial markets shuddered Monday with the Dow Jones Industrial Average falling 3.4% to 7114.78 -- or nearly half the peak it hit just 16 months ago -- even as the Obama administration tried to quell fears about the viability of major U.S. banks.

The decline in the stock market was unusually broad and went well beyond the jittery financial sector, with technology and other economically sensitive categories driving major indexes to their lowest closing levels in more than 11 years.

Notice the Dow is at it's lowest levels in over 10 years. But like the other charts, notice that volume is down over the last few months again indicating a declining number of sellers.

Treasury Tuesdays

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Notice the following on the IEF chart:

-- Prices are consolidating after a move down from 100

-- Prices are still making lower lows and lower highs

-- The 20 day SMA is moving lower, while the 10 day SMA is about to move through the 20 day SMA.

-- The 50 day SMA is neutral

Bottom line: this chart looks to be consolidating. From a fundamental perspective, I'm guess there is a balance between the new debt coming on the market and concern about the stock market. In other words, new supply is getting trumped by "the sky is falling".

Today's Markets

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Notice the strength of this downward swing today. First, prices spent the vast majority of the day underneath the SMAs. Also note the SMAs were all moving lower for most of the day. Also notice several bear market formations -- the pennants and triangles. Also note that prices continually ran into upside resistance from the SMAs. Finally, note that prices end at a low point on increasing volume. Bottom line: this is a damn ugly chart.



On the daily chart, notice that prices are still moving lower. Also note that today's bar was really big. About the only good thing is today's volume was wearer than Friday's price action.

More Problems From the Transportation Sector

I still love the simplicity of Dow theory. In a nutshell -- when the economy is doing well we need to ship more and more stuff. Therefore, we need more transportation services. This increases transportation company earnings which should increase the transportation sector. Simply reverse the process in a downturn. In other words, the Transportation average should confirm the broader market movements. The above video tells us we're nowhere near that point in the market.

This is the Way to Deal With the Banks

From the WSJ:

Given the limited scope U.S. authorities have for increasing the public debt burden without adverse asset market responses, it is best to forget about tax cuts or public spending increases. Instead, the available fiscal resources should be focused on restoring the flow of credit to nonfinancial enterprises and, to a lesser extent, to households (most of which are already over-indebted and should not be encouraged to spend more).

Rather than wasting the $1.4 trillion of public funds it would take to restore (according to NYU economist Nouriel Roubini's estimate) the capitalization of the U.S. banking sector to its fall 2008 level, it would be better to use public money to capitalize new banks that don't suffer from an overhang of past bad investments and loans -- and to guarantee new borrowing or new loans and investment by these banks. This "good bank" model achieves this by identifying the systemically important banks that are kept afloat only by past, present and anticipated future public financial support ("bad banks") and taking their banking licenses away.

The "stress test" proposed by Mr. Geithner for major banks (assets in excess of $100 billion) could be used to gather the necessary information to identify the bad banks. New banks, capitalized by the government (possibly with private co-financing) would take the deposits of the bad banks and purchase the good assets from the bad banks. Future government support, through guarantees or other means, would be focused exclusively on new lending and new borrowing by the new good banks and those old banks that passed the stress test.

The legacy bad banks would not be allowed to make new investments or new loans and would simply manage the inherited stocks of assets in the interest of their owners. They sink or swim on their own. If they fail, their unsecured creditors can figure out what to do with the bad assets

I have several issues with nationalization: who do you nationalize, how do you do it to minimize market disruption and how do you prevent political corruption from entering into the picture after you do it. The above plan comes much closer to addressing my concerns.

First, I always liked the stress test idea. The Treasury has to go into all of the big banks and take a look at all their books in detail. And no party involved can pull any punches. In addition, the more a party tries to obfuscate the truth, the more trouble they are in. I've always thought this was the best way to figure out who gets help. In other words -- we know how to find out who.

How is a big issue. The markets are already reeling from the threat of nationalization. Every time it gets brought up, the markets tank. This was cited as a primary reason for last week's market instability. In other words, the actual process of shifting from private to public ownership is an issue.

Now enter the above plan. I would personally use the remaining TARP money to make one big bank. Then I would stress test all the money center banks at the same time and come out with a report on all of them at the same time. Force them to sell their good assets to the one good bank and let the dregs remain in the old banks. If you do this over a short time period -- say 2-4 weeks -- you can end this problem pretty quickly.

The main reason I like the idea of one big bank is there is only one bank to monitor. That's been a huge issue for me with the idea of nationalizing the banks -- the idea that we would still have all of these banks to perform oversight on. With one big bank we just have one bank to monitor which is a much easier task. For me, it makes much more sense.

Monday Market Wrap

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Last week the market fell out of bed. Prices dropped below the lower trend line of a consolidation pattern that has been forming for about two months. Once prices fell below this line they went for broke with downside momentum. Assuming the chart is in the middle of a "measured move" -- meaning the distance it traveled before the consolidation pattern will equal the distance it will travel after the consolidation pattern -- we've got more downside running to do. Also note the price/SMA relationship is now extremely bearish: prices are below all the SMAs. all the SMAs are moving lower, and the shorter SMAs are below the longer SMAs.



On the EMA chart, notice the EMA picture has been extremely bearish for some time.




Notice that on the MACD may indicate the market has a lot further to drop.

Bottom line: this is a bearish chart that does not bode well for the future.

Industrial Production Drops

From the Federal Reserve:

Industrial production fell 1.8 percent in January. At 101.3 percent of its 2002 average, output in January was 10.0 percent below its year-earlier level. Production in the manufacturing sector dropped 2.5 percent with broad-based declines among its components. A plunge in motor vehicle and parts production that resulted from extended plant shutdowns subtracted more than 1.0 percentage point from the change in manufacturing production. The output of mines moved down 1.3 percent. A swing to below-average temperatures contributed to an increase of 2.7 percent in the output of utilities. The capacity utilization rate for total industry fell to 72.0 percent, a rate 8.9 percentage points below its average from 1972 to 2008.

.....

In January, manufacturing output fell 2.5 percent and was 12.9 percent below its year-earlier level. The factory operating rate moved down 1.7 percentage points, to 68.0 percent, the lowest rate of utilization since this series began in 1948. The index for durable goods dropped 4.8 percent. The output of motor vehicles and parts decreased at a monthly rate of 23.4 percent in January, after having contracted at an annual rate of more than 37 percent in the fourth quarter. All of the remaining major indexes fell sharply in January with the exception of miscellaneous manufacturing, which moved up 0.3 percent. The production of nondurable goods decreased 0.5 percent. The output of food, beverage, and tobacco products rose 0.6 percent after having fallen more than 2 percent in December, but declines were recorded in all the other major nondurable goods industries.

The index for the other manufacturing category, which consists of publishing and logging, decreased 1.5 percent.

There is no good news in this report. Period.

Import, Producer and Consumer Price Round-Up

From the BLS:

Import prices fell 1.1 percent in January and 23.4 percent over the past six months. For the sixth consecutive month, petroleum prices and nonpetroleum prices decreased, falling 2.4 percent and 0.8 percent, respectively, in January. However, prices for both overall imports and petroleum decreased at a smaller rate in January than in each of the previous five months since prices last rose in July. Petroleum prices fell 69.1 percent over the past six months and 55.0 percent over the past year, the largest 12-month decline since the index was first published in June 1982. Overall, import prices fell 12.5 percent for the year ended in January, the largest 12-month decline since the index was first published in September 1982. Nonpetroleum prices decreased 5.7 percent over the past six months and 0.6 percent over the past year.

The 0.8 percent January decrease in nonpetroleum prices was led by a 4.8 percent drop in the price index for nonpetroleum industrial supplies and materials. Falling prices for chemicals and natural gas were the largest contributors to the decline. Nonpetroleum industrial supplies and materials prices decreased 7.6 percent over the past year, led primarily by declining unfinished metals prices.

In contrast, prices for automotive vehicles increased in January, rising 0.2 percent after decreasing the previous two months. For the year ended in January, the index increased 0.7 percent.

The price indexes for consumer goods, capital goods, and foods, feeds, and beverages were unchanged in January. Over the past year, consumer goods prices increased 1.5 percent, capital goods prices advanced 0.9 percent, and prices for foods, feeds, and beverages rose 3.3 percent.

Looking at the BLS' end use tables we see drops in industrial supplies and goods but increases in capital goods, autos and consumer goods. However, all imports excluding fuels and all imports excluding petroleum have been decreasing for the last four months.

Non-manufactured articles dropped 45.9% year over year.

Manufactured articles dropped 3.7% year over year.

Here's the chart from Econoday:



From the BLS:

The Producer Price Index for Finished Goods rose 0.8 percent in January, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This increase followed declines of 1.9 percent in December and 2.5 percent in November. At the earlier stages of processing, the decrease in prices for intermediate materials slowed to 0.7 percent from 4.2 percent in the prior month, and the index for crude materials declined 2.9 percent after dropping 5.3 percent in December.

What makes this news less scary is that core PPI has been increasing for the last five months when we've been seeing large decreases in the overall PPI. However, core prices of intermediate goods have been decreasing for the last four months and core prices of crude goods decreased throughout the fourth quarter of 2008 while ticking up slightly last month. In other words, there could be downward pressure on prices over the next few months.

Here are the relevant charts from Econoday:





From the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in January, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The January level of 211.143 (1982-84=100) was virtually unchanged from January 2008.

The good news here is core prices are still positive for the last 8 months. This tells us that price drops are occurring in the food/energy area rather than overall. A big reason for the drop in CPI over the last half of 2008 was transportation costs. Here is a chart of gas prices from that period:



In addition, although agricultural prices have dropped over the same period:



They have remained positive in the CPI numbers over the last half of 2008.

Forex Fridays

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On the weekly chart, the dollar has moved above the triangle consolidation of the last month and is approaching the previous highs established in the fourth quarter of last year. Prices are still above all the SMAs. All the SMAs are also moving higher, although the 10 week SMA is below the 20 week SMA. Also note the MACD is about to give a buy signal with the cross over and the RSI is rising indicating prices are getting stronger. On this chart the main issue going forward is whether or not prices will moved beyond the highs established in the fourth quarter.


The daily chart shows prices have been in an uptrend for two months. They consolidated in a triangle formation for the last few weeks but are once again moving higher. Also note the MACD is rising as is the RSI. The main issue for this chart -- as with the weekly chart -- is whether the dollar will successfully move through the previous high.

Today's Markets

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On the daily chart, simply notice that prices are below all the relevant trend lines from the two month consolidation pattern of the last two months. Also note that today's volume total is pretty weak compared to the past few days.



On the 5 minute chart, notice the following:

-- Prices have been in a fairly narrow range for the last three days. However

-- Prices gapped higher at the open only to fall throughout the day. Also note that prices closed near session lows on increasing volume, indicating the selling momentum was increasing throughout the trading day.

Translating "Fed-Speak"

Yesterday the Fed released the minutes of its latest meeting. I love these types of reports because they show us what the Federal Reserve is seeing. Therefore, it gives us an idea for what they are thinking.

This will be a long post.

Employment continued to contract. Private nonfarm payrolls fell sharply in December, with substantial losses over a wide range of industries. Indicators of job vacancies and hiring declined further, and layoffs continued to mount. The unemployment rate increased to 7.2 percent in December, the share of individuals working part time for economic reasons surged, and the labor force participation rate edged down for a second consecutive month.

Above is a chart of the year over year percentage change in total payrolls. Notice the latest percent change is now lower than the 1990s and 2001 recession. We're in 1982 territory -- a particularly nasty recession. I wrote a longer article on the jobs market after the latest BLS report which has a longer list of data points.

In December, industrial production posted a sharp decline after falling substantially in November; the contraction was broad-based. The decrease in production of consumer goods reflected cutbacks in motor vehicle assemblies as well as in the output of consumer durable goods such as appliances, furniture, and carpeting. Output in high-tech sectors contracted in the fourth quarter, reflecting reduced production of semiconductors, communications equipment, and computers. The production of aircraft and parts recorded an increase in December after being held down in the autumn by a strike and by problems with some outsourced components. Available forward-looking indicators pointed to a further contraction in manufacturing output in coming months.

Capacity utilization -- the amount of our industrial capabilities that we use -- is near the lows of the 1982 recession. Also note it




Durable manufacturing is falling off a cliff as well. It's rate of decline is that of the mid-1970s contraction.



The rate of decline of non-durable manufacturing is also are mid-1970s levels.

Real consumer spending appeared to decline sharply again in the fourth quarter, likely reflecting the combined effects of decreases in house and equity prices, a weakening labor market, and tight credit conditions. Real spending on goods excluding motor vehicles was estimated to have fallen noticeably in December, more than reversing an increase in November. Outlays on motor vehicles edged down in November and December following a sharper decline in October. Early indicators of spending in January pointed to continued soft demand. Readings on consumer sentiment remained at very low levels by historical standards through the end of 2008 and showed little improvement in early January.

Real (inflation-adjusted) expenditures are near record lows for the year over year percentage change as well. This figure includes retail sales, which are also abysmal

Single-family housing starts dropped at a much faster rate in those months than they had in the first 10 months of the year. Multifamily starts also fell in those months, as did permit issuance for both categories. Housing demand remained very weak and, although the stock of unsold new single-family homes continued to move down in November, inventories of unsold homes remained elevated relative to the pace of sales. Sales of existing single-family homes dropped less than sales of new homes in November and turned up in December, but the relative strength in sales of existing homes appeared to be at least partly attributable to increases in foreclosure-related and other distressed sales. Although the interest rate on conforming 30-year fixed-rate mortgages declined markedly over the intermeeting period, the Senior Loan Officer Opinion Survey on Bank Lending Practices that was conducted in January indicated that banks had tightened lending standards on prime mortgage loans over the preceding three months. The market for nonconforming loans remained severely impaired. Several indexes indicated that house prices continued to decline rapidly.

The housing market is still a mess (thanks to Calculated Risk for the images)



The months of supply at the existing sales pace is still high. Again, the drop is probably temporary for the reasons cited above.



New home sales continue to drop -- there has been no attempt on the graph to slow the fall.



While the total inventory has been dropping (which is good)



The months of available inventory is still increasing because of the continual drop in sales.

As a result of all this:



Prices are still dropping. Note how far about the standard median of the 1990s prices still are. In other words, we probably have a long way to go.

In the business sector, investment in equipment and software appeared to contract noticeably in the fourth quarter, with decreases registered in all major spending categories. In December, business purchases of autos and trucks moved down. Spending on high-tech capital goods appeared to decline in the fourth quarter. Orders and shipments for many types of equipment declined in October and November, and imports of capital goods dropped back in those months. Forward-looking indicators of investment in equipment and software pointed to likely further declines. Construction spending related to petroleum refining and power generation and distribution continued to increase briskly in the second half of 2008, responding to the surge in energy prices in the first half of that year, but real investment for many types of buildings stagnated or declined. Vacancy rates for office, retail, and industrial properties continued to move up in the fourth quarter, and the results of the January Senior Loan Officer Opinion Survey indicated that financing for new projects had become even more difficult to acquire.

Net investment has decreased in 8 o the last 11 quarters. In addition, note that investment barely increased in one of those quarters.

Here's the bottom line: it's terrible out there.

Thursday Oil Market Roundup

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The weekly chart hasn't changed in some time. Prices are still consolidating in a triangle, while the MACD is oversold and the RSI indicates prices are weak. The price/SMA picture is still bearish: the shorter SMAs are below the longer SMAs, all the SMAs are moving lower and prices are using th 10 week SMA as upside technical resistance.





The daily chart points to consolidation. Prices have been in a triablge consolidation pattern for the last few months and prices and the SMAs are in a tight range. However, note the MACD is is maxed out -- meaning, it hasn't moved higher in some time. This implies there is a possibility of prices moving lower right now.

Bottom line: the technical picture is one of an oversold market. But the fundamental backdrop is driving prices right now: the economy is weak implying demand will be low for some time and inventories are still increasing:

Today's Markets

The good news is the market didn't fall farther today -- that's about it. Notice prices are still below whichever trend line you use.




On the 5 minute chart, today was a day when we moved a bit here and there but when there wasn't much of a move anywhere. I would call it a consolidation day.

Wherein I May Eat Crow

The Issue on nationalizing the banks is once again on the front page as Greenespan (of all people) is backing limited nationalization:

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

”It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring,” he said. “I understand that once in a hundred years this is what you do.”

Mr Greenspan’s comments capped a frenetic day in which policymakers across the political spectrum appeared to be moving towards accepting some form of bank nationalisation.

“We should be focusing on what works,” Lindsey Graham, a Republican senator from South Carolina, told the FT. “We cannot keep pouring good money after bad.” He added, “If nationalisation is what works, then we should do it.”

Speaking to the FT ahead of a speech to the Economic Club of New York on Tuesday, Mr Greenspan said that “in some cases, the least bad solution is for the government to take temporary control” of troubled banks either through the Federal Deposit Insurance Corporation or some other mechanism.

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

I originally came out against nationalization. I wrote about the problems in detail in this article. However, here is the central thrust of my concerns:

In addition, we now have the same problem involved with all processes involving politicians -- undue influence. Within five years I am betting all of the following will happen:

1.) A person in government (elected or not) leans on a bank to make a sweetheart loan to someone/an entity/a group not qualified to take out the loan

2.) A major campaign contributor gets a sweetheart "consulting" contract to service a financial institution.

3.) A major campaign contributor gets a special loan package

4.) The issue of patronage enters the picture: campaign workers/politically connected people who are unqualified to work in the financial field or are minimally qualified get jobs in the financial field

5.) A bank that shouldn't have qualified for government assistance gets government assistance. Actually - that's already happened:

Troubled OneUnited Bank in Boston didn't look much like a candidate for aid from the Treasury Department's bank bailout fund last fall.


The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate.


Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives' use.


Nonetheless, in December OneUnited got a $12 million injection from the Treasury's Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.


Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging thatOneUnited be considered for a cash injection.


.....


On Dec. 3, Rep. Spencer Bachus (R., Ala.) forwarded a Dec. 2 letter from Alabama bank regulators complaining about the complexities of applying for federal funds. Alabama banks later received billions in funds.

6.) Less than 50% of the banks return to profitability.

7.) Of the remaining 50%, none of them achieve better than 80% of the previous institutional high of ROE. In other words -- the previous management made more money for shareholders

8.) Lending does not increase to pre-meltdown levels -- or to acceptable levels.

In short, my concerns were primarily that we would trade one form of stupidity, ignorance and gross incompetence for another form of stupidity, ignorance and gross incompetence.

However, I am left with a dilemma: what in the hell are we going to do to solve the problem? Simply put, I cannot find any answer that I like to any of these questions. Which leaves nationalization on the table. That does not mean I like the idea. In addition, I am still deeply concerned about the possibility of all the above scenarios happening in some way. And -- I should add -- I am not saying we need to nationalize (largely because I am an incredibly stubborn pain about such things). But I am also thinking it's back on the table if for no other option then there aren't many other options out there.

OECD Economies Shrink Most on Record

From Bloomberg:

The economy of the member states of the Organization for Economic Cooperation and Development contracted the most on record in the fourth quarter as the global crisis hit investments and consumption.

Gross domestic product in the OECD area fell 1.5 percent from the previous three months, the largest decline since the series began in 1960, the Paris-based organization said in an e- mailed statement today. GDP contracted 0.2 percent in the third quarter from the second.

With consumers and companies unable to secure credit for purchases and investments, sales of cars and machinery are declining, forcing producers across the globe to reduce their workforces.

Wednesday Commodities Round-Up

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Soybeans have tumbled in a big way. Notice that from their highs of last summer prices have dropped by about half. Also note the declining RSI indicating prices are continually weaker and the declining MACD indicating declining momentum. The SMA picture is weak as well. The 20 and 50 week SMAs are both moving lower. While the 10 week SMA has recently moved through the 20 week SMA, prices have dropped below all the SMAs indicating further weakness is ahead.



Gold has re-attained its safe have nluster. Note on the price chart that prices broke through the upper trend line of a consolidation pattern. This indicates buyer enthusiasm. Also note the rising MACD and RSI, indicating stronger moemntum and stronger prices. The SMA picture is interesting. First -- prices are above all the SMAs indicating all the SMAs will continue to move higher. The 10 week SMA just crossed the 50 week SMA while the 20 week SMA is still below the 50. In other words, we've got a ways to go before the SMAs line up into an extremely bullish alignment. Given the global uncertainty right now, gold may be the primary bull market going forward.

Today's Markets

It's days like this that make me think the market just doesn't like me.


No matter which lower trend line you are using prices today went through all of them on solid volume. That means the probability of testing the lows from the end of last year just increased in a big way.



On the daily chart, notice that prices just died at the opening and stayed there all day long. Prices also closed at or near their low point of the day on solid volume. so much for the market moving higher with the mortgage plan, huh?