Inflation Overview

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From the BLS:

The Producer Price Index for Finished Goods increased 0.3 percent in April, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This rise followed a 1.2-percent decline in March and a 0.1-percent increase in February. At the earlier stages of processing, prices received by producers of intermediate goods moved down 0.5 percent following a 1.5-percent decrease a month earlier, and the crude goods index advanced 3.0 percent after declining 0.3 percent in March.

Here is the relevant chart:


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On a year over year basis, prices have been dropping hard. In addition, observe on this chart from the report:


The 12-month price changes in crude and intermediate goods are accelerating. But


The month to month change in crude goods is moderating, as is the month to month change in intermediate goods (if you look back to October of last year). In addition,


The 12 month percentage change in producer prices is still positive, indicating most of what we're seeing is the massive drop in commodities:



Also note it appears commodity prices have hit bottom and are currently inching higher right now.

From the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in April before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This index has fallen 0.7 percent over the last 12 months, due primarily to a 25.2 percent drop in energy prices. The year-over-year declines in March and April are the first since 1955.

Here's the chart from the release:



Core increased 1.9% indicating that food and energy costs aren't impacting overall inflation. These charts from the St. Louis Fed demonstrate this:


The total CPI measure has dropped and


The year over year rate is now negative. But


The core rate is moving higher and the core's year over year rate is


Also moving higher and has never been negative although -- like PPI -- it had a major drop at th end of last year.

Forex Fridays

On the weekly chart, notice the clear double top formation along with the lower RSI and MACD reading on the second top. Prices fell from that level and formed a bear market flag pattern. However, prices have now fallen from that level and are moving towards support at the 50 week SMA. Finally, the RSI and MACD continue to move lower, indicating this trend will most likely continue.


On the daily chart we see the downward move from the bear market flag more clearly. In addition, prices are below all the SMAs, the shorter SMAs are below the longer SMAs and all the SMAs are moving lower. Finally, the RSI and MACD are moving lower. Bottom line -- we have a very bearish pattern developing on both the weekly and daily chart.

Today's Markets

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The 10 day chart gives us a nice anatomy of the correct.

1.) Prices gapped lower on Monday.

2.) Prices broke the upward sloping trend on Tuesday

3.) Prices gapped lower on Wednesday

4.) Prices moved higher Today

5.) The overall trend of the movement is lower; the highs can be connected with a downward sloping trend line.

We're Nowhere Near a Bottom in Housing Real Estate

From Marketwatch:

U.S. foreclosure filings in April rose to a record, affecting one in every 374 housing units, and bank repossessions in particular may spike in the next few months, RealtyTrac reported.

Foreclosure filings -- defined as default notices, auction-sale notices, and bank repossessions -- were reported on 342,038 U.S. properties in April, up less than 1% from March and up 32% from April 2008, the Irvine, Calif., real-state consulting firm reported.

.....

"Much of this activity is at the initial stages of foreclosure -- the default and auction stages -- while bank repossessions ... were down on a monthly and annual basis to their lowest level since March 2008," Chief Executive James J. Saccacio said in a statement.

"This suggests that many lenders and servicers are beginning foreclosure proceedings on delinquent loans that had been delayed by legislative and industry moratoria."

A lot of these foreclosures are not included in the inventory of homes available for sale (existing home inventory). This creates a problem from a measuring perspective because the under count in homes available for sale means its harder to estimate guess the rate of price declines. And my big data point with housing is the rate of price declines -- so long as they are in the double digits we are nowhere near a bottom in housing.

And then there is this:

Delinquency rates and defaults on office and retail buildings and hotels have more than doubled in just six months. For apartments and industrial buildings, the rates have increased more than 80 percent, according to Reis Inc.

That is an incredibly fast rate of acceleration; statistically it is far more than just a blip. It indicates there a big problem somewhere.

The risk to the economy is unknown, but likely underestimated in the government's stress test of 19 major banks. The results released last week projected that should the recession worsen, the losses from commercial real estate loans could hit $53 billion, or 8.5 percent of their overall loan losses over the next two years.

The exercise notably left out the majority of the regional and local lenders, which hold a big chunk of the nation's $3.5 trillion commercial property loans on their books and remain vulnerable.

Looks like a regional and local stress test are in order, eh?

Treasury Proposed New Derivatives Rules

From the WSJ:

Under a proposed raft of reforms, regulators could be given authority to force many standard over-the-counter derivatives to be traded on regulated exchanges and electronic-trading platforms. That would make it easier to see prices and make markets more transparent.

.....

The move, the latest step to tighten federal regulation of finance, is designed to address markets such as those for credit-default swaps, which many say exacerbated the financial crisis. Any such moves would require congressional approval.

These rules are obviously targeted at credit default swaps. For those of you who want to get some more basic information on these derivatives, here is a link to the International Swaps and Derivatives Association.

Here is the text from the Treasury's website:

* The Commodity Exchange Act (CEA) and the securities laws should be amended to require clearing of all standardized OTC derivatives through regulated central counterparties (CCP):

o CCPs must impose robust margin requirements and other necessary risk controls and ensure that customized OTC derivatives are not used solely as a means to avoid using a CCP.

o For example, if an OTC derivative is accepted for clearing by one or more fully regulated CCPs, it should create a presumption that it is a standardized contract and thus required to be cleared.

The margin requirements are critical. There have been stories in the press that some companies like AIG were writing naked credit default swaps. This is incredibly stupid, especially at the level AIG was playing.

* All OTC derivatives dealers and all other firms who create large exposures to counterparties should be subject to a robust regime of prudential supervision and regulation, which will include:

+ Conservative capital requirements
+ Business conduct standards
+ Reporting requirements
+ Initial margin requirements with respect to bilateral credit exposures on both standardized and customized contracts

The devil will be in the details above. For example, what is a "conservative capital requirement" or "initial market requirement?" We won't know until the law gets written. I'm assuming the reporting requirements will fall in line with standard SEC regulations.

* Amending the CEA and securities laws to authorize the CFTC and the SEC to impose:

+ Recordkeeping and reporting requirements (including audit trails).
+ Requirements for all trades not cleared by CCPs to be reported to a regulated trade repository.
# CCPs and trade repositories must make aggregate data on open positions and trading volumes available to the public.
# CCPs and trade repositories must make data on individual counterparty's trades and positions available to federal regulators.
+ The movement of standardized trades onto regulated exchanges and regulated transparent electronic trade execution systems.
+ The development of a system for the timely reporting of trades and prompt dissemination of prices and other trade information.
+ The encouragement of regulated institutions to make greater use of regulated exchange-traded derivatives.

The point of the above information is to develop some kind of standard record keeping system which will be used for the industry and regulators. One of the big problems faced over the last few years is we had no idea who had written when contracts to whom. This is critical information what must be maintained.

Again -- this is general information. We'll need to develop the details before we know whether this will work or not.

Thursday Oil Market Round-Up

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Oil's weekly chart is still very bullish. The MACD and RSI have been rising for some time. Prices formed a triangle consolidation pattern at the end of a long sell-off and are now moving higher. Prices recently broke through a key resistance area.


The daily chart is in a new upswing. First, note that prices have been rising since the end of February. In addition, the MACD recently gave a buy signal and is now moving higher and the RSI has been advancing as well. Finally, the price/SMA picture is bullish: prices are above all the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are moving higher.

This is in the face of bearish/neutral fundamental developments:

Crude oil supplies are still at high levels. In other words, we don't need to buy a lot of raw material right now.

Gas stocks are falling but are still well within norms. This means we need to convert more oil, but as mentioned above, we already have enough supply.


Gas prices ticked up last month. We need at least 3-4 more weeks of data to determine if this is the beginning of a new trend or not. This chart of demand


Tells us demand increased in March, but is still below 2007-08 levels.

Today's Markets

The SPYs have broken the upward sloping trendline. The next line of support is the 10 day SMA


The QQQQs -- which started the sell-off -- are now looking for the horizontal trend line or the 10 day SMA as support for this move lower.


The IWMs have broken through the 10 and 20 day SMA and have moved through the 10 day SMA.

We are now firmly in a correction.

Retail Sales Drop

From the Census Bureau:

The U.S. Census Bureau announced today that advance estimates of U.S. retail and food services sales for April, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $337.7 billion, a decrease of 0.4 percent (±0.5%)* from the previous month and 10.1 percent (±0.7%) below April 2008. Total sales for the February through April 2009 period were down 9.2 percent (±0.5%) from the same period a year ago. The February to March 2009 percent change was revised from -1.2 percent (±0.5%) to -1.3 percent (±0.3%).

Retail trade sales were down 0.4 percent (±0.7%)* from March 2009 and 11.4 percent (±0.7%) below last year. Gasoline stations sales were down 36.4 percent (±1.5%) from April 2008 and motor vehicle and parts dealers sales were down 20.7 percent (±2.3%) from last year.

Let's look at some of the individual data points.

1.) March to April sales were down.

2.) Year to date sales are down

3.) February to March sales were revised lower.

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The above chart is from the Census report. Notice that in February there was an overall increase. March and April saw a downward move BUT April's move lower was less severe.



This chart is from Econoday. Notice that we have two different areas. The first occurred at the end of last year when the month over month rate of decline was severe . However for the last three months we have seen a less severe rate of decline. In addition, the year over year chart appears to be forming a bottom.

This does not mean we are out of the woods yet. In fact, we are far from out of the woods. The consumer is still losing jobs at a rapid rate, his hours of work are decreasing, he is heavily in debt and his net worth is taking a nosedive. Simply put, this is not the time when consumers will start a new spending binge. But, there are indications the bleeding is stopping, or at least slowing down.

China Expands Global Role

While IBD is not know for their reporting and writing, they are trying to make strides in that area. To that end, they have a long article today on China's use of the global recession as a way to increase its global economic reach an power.

Officials at cash-flush Chinese sovereign funds make the rounds in Indonesia, meeting with the president and other power brokers, and lending out billions to build ports, rails and power plants to support more exports.

Brazil's national oil company gets a $10 billion Chinese loan to finance crude facilities. Oil-rich Venezuela holds talks on China sinking billions more into a development fund. And Argentina, a major exporter of iron ore, gets access to more than $10 billion in Chinese currency.

.....

The goal, experts say, is to secure long-term access to resources, bring prosperity to rural China by continuing to grow its industrial economy and hone the country's economic edge.

Along the way, China aims to expand its clout by offering a cornucopia of financial capital and other aid to nations, such as Indonesia, that are hard-pressed for cash from other sources.

.....

"At high levels (in China), there is a definite recognition that the world has changed and that China's position in the world is stronger and needs to be asserted — not for any expansionist purposes, but just to protect their own economy," said Robert Lawrence Kuhn, a senior Citicorp adviser on China and a biographer of former Chinese President Jiang Zemin. Kuhn is the author of a forthcoming book, "How China's Leaders Think."

.....

Lieberthal says China has stepped up its pace to exploit depressed commodities prices and shown a thirst for investment and credit in developing countries.

"China is one of the few countries with a lot of cash to spend now" on a large-scale "go out strategy," Lieberthal said in an e-mail interview. China holds more than $1.7 trillion in foreign-exchange reserves, mainly in U.S. Treasuries and other fixed-income assets.

.....

Sources close to China's ruling party say Beijing is moving more overtly now to nail down long-term resource deals on a global basis.

These sources say it boils down to an attempt to build a "parallel trade universe" with resource-rich developing nations that will ensure access to oil, ore, food and other resources to feed China's growing economy.

The investment and trade footholds are long term and meant to be developed gradually over the next 10 to 20 years.

....

Sources close to China's ruling party say the aid-for-trade deals target developing nations that aren't part of the Organization for Economic Cooperation and Development, which is mostly made up of developed nations.

This means the trade deals are done outside OECD guidelines that try to level the playing field in officially supported export credits, cash payment requirements, repayment periods and other terms. China is not an OECD member.

Median Home Prices Still Dropping

I usually cite directly to the press release. However, the NAR's releases are so full of spin that 90% is pointless. Here is the salient point:

134 out of 152 metropolitan statistical areas1 reported lower median existing single-family home prices in comparison with the first quarter of 2008, while 18 metros had price gains.

Everything else in their press release is so intermixed with spin that it's pointless.

Here are the relevant regional charts. Click on all images for a larger image:






Remember -- housing won't be at a bottom until we see stabilization in the year over year rate of decline in home prices.

Wednesday Commodities Round-Up

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Industrial metals dropped hard at the end of last year (in conjunction with all commodities). However, prices consolidated at a bottom for about 5-6 months and have since risen through key resistance areas. The RSI and MACD have been rising along with the rally. The 10 and 20 week SMAs are now moving higher and are both below prices.



On the daily chart we could have an issue. Note that prices have formed a double top, with the first top occurring in mid-April and the second occurring in early May. But also note both the RSI and MACD printed a lower number than on the previous high. This could indicate the rally is stalling -- or at least moving sideways for now. To that end, I've included the stochastics which are a better indicator for a sideways moving market and they are giving a short-term sell signal right now.


Agricultural prices are in a good bull market position right now. After falling at the end of last year, prices consolidated. Now they have moved out of that position and are moving higher. Both the MACD and RSI are confirming the upward trend. However, the SMAs are still bunched together -- we need them to form a more bullish pattern for this rally to kick into high gear.

On the daily chart, notice we're at the end of a consolidation period. Prices rallied from the beginning of December to January, made a disciplined move lower until early March followed by a rally. Now prices have moved through upside resistance with a confirmation coming from the MACD and RSI. Notice that on the weekly chart, the RSI and MACD have a long way to go, indicating this rally might have legs.

Today's Markets

Today we got more evidence that the rally is breaking down. Click on all images for a larger image


The SPYs are still above their upward sloping trendline.

The QQQQs fell below their upward trendline a few days ago. Yesterday they ran into upside resistance from the 10 day SMA. Today they fell from that point and is now right at the 200 day SMA

Today, the IWMs moved through two important levels of support (breaking those two trend lines) and are currently at one over (the 10 day SMA).

Is This a Sucker's Rally?

From the WSJ:

Here are three reasons why this isn't a sustainable rally:

- Armageddon is off the table. It has been clear for some time that the funds available from the federal government's Troubled Asset Relief Program (TARP) were not going to be enough to shore up bank balance sheets laced with toxic assets.

.....

- Zero yields. The Federal Reserve, by driving short-term rates to almost zero, has messed up asset allocation formulas. Money always seeks its highest risk-adjusted return. Thus in normal markets if bond yields rise they become more attractive than risky stocks, so money shifts. And vice versa. Well, have you looked at your bank statement lately?

.....

- Bernanke's printing press. On March 18, the Federal Reserve announced it would purchase up to $300 billion of long-term bonds as well as $750 billion of mortgage-backed securities. Of all the Fed's moves, this "quantitative easing" gets money into the economy the fastest -- basically by cranking the handle of the printing press and flooding the market with dollars (in reality, with additional bank credit). Since these dollars are not going into home building, coal-fired electric plants or auto factories, they end up in the stock market.

I would add that I'm guess there has been a ton of short-covering as well, adding to upward momentum.

These are all good points. I should add that so far, the last three days of trading indicate the rally is weakening. Considering the length of the run we've had I would expect a sell-off that would be a profit taking venture.

A Quick Look at Market Sectors

Below are 1 year charts of all the major ETFs. Take a close look at each chart and you'll notice a very important point: all of them have broken through key resistance levels in one way or another. Some are even above the 200 day SMA. The point to all this is we are out of the severe oversold conditions that were prominent for the early part of this year. A pull back from these levels would not be a bad thing.

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Central Bankers See "Inflection Point"

From the WSJ:

Central bankers see an economic turnaround coming -- though not just yet.

"We are, as far as growth is concerned, around the inflection point in the cycle," European Central Bank President Jean-Claude Trichet said at a news conference on Monday after a regular meeting of global central bankers in Basel, Switzerland. Mr. Trichet is chairman of the group.

Bolstering that view, data from the Organization for Economic Cooperation and Development on Monday showed that some of the world's leading economies may be on the path to recovery.

The link to the OECD data is here.

Here is the table of the various countries and regions:



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Notice that four countries are highlighted -- France, Italy, China and the UK. Here are the charts for their respective leading indicators:





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NOW -- let's be very cautious about this information as there are still big problems out there. The leading indicators for other parts of the world -- like the US -- are still heading lower. So we are no where near out of the woods yet. For example:

Across the 16-nation euro zone, dismal industrial-production data Monday underscored the severity of the first-quarter slowdown.

Italian industrial output fell 24% in March from a year earlier, while French industrial production fell 16%, their national statistics offices reported. The German statistics office said German steel production plunged 53% in April from a year earlier on slumping orders from the automotive and machinery industries.

Treasury Tuesdays

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Last week, the Treasuries were right at the 200 day SMA. They are in the exact same place today. The primary different is

1.) Prices have dipped below the 200 day SMA and moved above the average since.

2.) All the SMAs are moving lower and the SMAs are now in a bearish position -- the shorter SMAs are below the longer SMAs, all the SMAs are moving lower and prices are below the 10, 20 and 50 day SMA.

So -- will the sell-off continue?


The on balance volume indicator tells us that people have been leaving the Treasury market since right before the end of last year. But


The MACD has been heading lower for awhile and is at an incredibly ow reading indicating we might be ripe for a reversal. In addition,


The RSI just crossed above a trend line. Aslo note the current reading shows increasing price strength.

The bottom line is there are good reasons for both directions right now. However, I would keep an eye on the stock market as it appears to be the primary driver right now. So long as stocks are moving higher I would expect the Treasury market to remain weak and vica versa.

Today's Markets

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This morning I noted the QQQQs were moving lower -- contrary to the other markets on Friday. Let's start there:


Today prices started out at the 200 day/20 day SMA and moved into the 10 day SMA. More importantly:


The QQQQs look like they're in the middle of a bear market flag pattern.




The SPYs are still in an uptrend on their 5 minute chart. But prices broke down today by gapping down at the beginning of trading. In addition, today's price action forms a nice triangle pattern with prices alread breaking lower. In addition,



The IWMs are right at important technical levels.

The markets have been rallying for two straight months with no sell-off. Some type of correction is warranted. Over the last two trading sessions we've seen some preliminary moves towards a correction, but nothing definitive. These are just inching moves.