Today's Market

Prices stayed in a very narrow range today, which is to be expected. Everyone is waiting for the employment report on Friday.

A.) Note that prices stayed right above the 200 minute EMA.

Also consider the following chart:

ADP Sees Employment Drop of 22,000

From ADP:

Nonfarm private employment decreased 22,000 from December 2009 to January 2010 on a seasonally adjusted basis, according to the ADP National Employment Report^®. The estimated change of employment from November to December 2009 was revised by 23,000, from a decline of 84,000 to a decline of 61,000. The January employment decline was the smallest since employment began falling in February of 2008.

January’s ADP Report estimates nonfarm private employment in the service-providing sector increased by 38,000, the second consecutive monthly increase. However, this employment growth was not enough to offset continued losses in the goods-producing sector. Employment in the goods-producing sector declined 60,000, with employment in the manufacturing sector dropping 25,000. The employment decline in the manufacturing sector was the lowest since January of 2008.

Here is a chart from the report:


Manufacturing/goods producing is still taking a big hit -- down 60,000. However, service employment grew for the second month. Also note that it's the small and medium service firms hiring rather than the large firms. The following charts shows the service sector employment pace in more detail:


And in an interesting, "I wonder why" vein:



Medium size firms are adding to payrolls.

The Face of US Manufacturing is Changing

From the WSJ:

America's industrial base is undergoing its most radical restructuring in decades as manufacturers rethink their businesses in the wake of the recession.

From Dow Chemical Co. to Intel Corp., iconic companies are telling stories of wrenching change—both contraction and recovery—as they report their earnings for 2009.

Dow Chemical said Tuesday it is aiming to shed some $2 billion worth of basic-chemical factories and other assets this year as it moves into more-profitable specialty chemicals. Appliance maker Whirlpool Corp. said it cut about a tenth of its capacity in 2009 as it struggled with a 9.6% drop in sales. Intel, by contrast, is investing billions of dollars in its U.S. plants as demand for computer gear recovers.

"We are emerging from one of the most challenging economic environments we've seen in decades," said Whirlpool Chief Executive Jeff Fettig, in a conference call Tuesday. "We view 2010 as a full year of recovery for our company."

The latest moves are accelerating the U.S. manufacturing economy's longer-term decline, as well as its shift away from heavy sectors, such as automobiles and basic chemicals, toward higher-tech products like super-fast computer chips. In some cases, as with auto makers, companies are shrinking to adjust to diminished U.S. demand or investing in smaller, more efficient facilities. In others, companies such as chemical makers are relocating labor-intensive operations to countries where workers are cheaper.

Consider the following charts:

On a seasonally adjusted basis, total employment has dropped by about 7 million jobs. Of that total

About 61% (about 22.5 million to 18.25 million) of those losses is from goods producing industries. That means the big areas of loss for this recession is in manufacturing. Underseath the surface we see the following changes:

The restructuring now under way offers insights into what kinds of goods the U.S. should produce, and in what volumes. In industries such as automobiles, housing and appliances, the move to shed capacity is at least partly correcting distortions that built up over many years of easy credit and profligate consumer spending. Companies now are adjusting to lower demand.

.....

The situation is different for semiconductor makers, which saw U.S. demand recover sharply as computer makers scrambled to catch up with a pickup in business investment toward the end of 2009. Intel, which produces chips in Chandler, Ariz., Rio Rancho, N.M. and Hillsboro, Ore., boosted its capital investments to $1.08 billion in the fourth quarter, up 15% from the previous quarter and part of a two-year, $7 billion program to upgrade its U.S. plants.

"Jingle Mail" for ARM resets: a Good Thing?

- by New Deal democrat

There's a lot of buzz this morning about a NY Times article documenting the increasing number of homeowners who are "doing the math" and deciding it makes no sense to continue paying the mortgage. They are simply letting the bank have their property, and walking away, a/k/a "jingle mail."

[B]y the third quarter of 2009, an estimated 4.5 million homeowners had .. their home’s value dropping below 75 percent of the mortgage balance.
....

[A] growing body of research indicates that significant numbers of borrowers are declining to live under what some waggishly call “house arrest.”

Using credit bureau data, consultants at Oliver Wyman calculated ... that about 17 percent of owners defaulting in 2008, or 588,000 people, chose that option [of walking away] as a strategic calculation.

I'd like to challenge the conventional wisdom (I know, you're shocked) and suggest that this is probably a good development, placed in larger context.

One of the most widely used graphs in the blogosphere a few years ago was this one, dating from January 2007 ("month 1" in the description) showing an initial wave, now passed, of subprime ARM resets, and a subsequent wave of option-ARM and jumbo resets and recasts (picking up steam now and really taking off later this spring):



The typical argument, set forth among other places in a leading article at the place where I used to blog, is that this means that foreclosures are about to explode, more homeowners will be living out of cardboard boxes and we are all Doomed!!!

My rejoinder has been that these homeowners presumably did not spend the last 3 years like deer in the headlights, but did occasionally notice the housing implosion happening all around them, and many if not most may have already taken action, such as selling the place early for as much as they could get. The Times article suggests I've been right:

Mr. Koellmann ... bought a small, plain one-bedroom apartment for $215,000.... He put down 20 percent and received a fixed-rate loan from Countrywide Financial.

Not quite four years later, apartments in the building are selling in foreclosure for $90,000.

“There is no financial sense in staying,” Mr. Koellmann said. With the $1,500 he is paying each month for his mortgage, taxes and insurance, he could rent a nicer place on the beach, one with a gym, security and valet parking.

Don't know about you, but to me Mr. Koellman's actions look perfectly rational. And as the article mentions, there are a burgeoning number of people just like him.

Undoubtedly this will drive the price of houses down even further, but as this graph of Case-Schiller house prices shows, they need to drop further to get back to a more normal valuation:


So in other words, the series is: homeowner walks away ---> gets cheaper, better apartment or house ---> housing prices go down further, becoming more affordable ---> foolish (bank) creditors take the haircut, debtors can increase new spending and stimulate the economy.

I'm trying to figure out what the downside is in all this ....

Wednesday Commodities Round-Up

Over the last few weeks we've had some interesting developments in the commodity markets. The big development was the Chinese tightening their lending standards. In addition, the dollar has rallied. As a result, commodities have dropped. Consider these charts that show commodities breaking important trend lines:

Today's Market

A.) Prices retreated to the 50% Fibonacci level and then rallied. But




A.) Prices haven't been this far below the 50 day EMA since the Spring.

Federal Reserve Releases Senior Loan Officer Survey

Yesterday, the Federal Reserve issued the Senior Loan Officer Survey. Here is a summation of the reports findings:

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years. The net percentages of banks reporting tighter loan terms continued to trend lower.2 Banks reported that loan demand from both businesses and households weakened further, on net, over the survey period.

For many major loan categories covered by the survey, the net percentages of respondents that tightened standards in the fourth quarter of 2009 were close to zero. However, banks continued to tighten a number of terms on loans to both businesses and households, although the net fractions of banks that reported doing so in the January survey generally stepped down again. Banks' policies on commercial real estate lending were an exception, as large net fractions of respondents further tightened their credit standards during the final quarter of last year. In addition, banks reported that they had tightened terms on CRE loans substantially over the past year.

Demand from both businesses and households for all major categories of loans weakened further, on net, over the past three months. The net fractions of banks that reported weaker demand for business loans continued to decline, while changes in the comparable readings on demand for loans to households were mixed.

Here are the relevant charts from the report. Click on all charts for a larger image:


The percentage of lenders tightening standard for commercial and industrial loans (C and I loans) is now at 0. However, loan demand is still weak.

The percentage of lenders tightening standard for commercial real estate (CRE) loans is decreasing, but loan demand is still weak.
The percentage of lenders tightening standards for consumers loans is now at 0, but demand is still weak.


The percentage of lenders tightening lending standard for residential real estate loans is decreasing, but demand also dropped last quarter.

Personal Savings and the Expansion

- by New Deal democrat

When the personal income and spending reports came out yesterday, I remarked to Bonddad that it was about as good as could be hoped for in one month's data in the current environment: spending was up enough to keep the expansion going, income was up even more, and savings were also up - a long term benefit.

Back in summer of 2007, before the "Great Recession" officially began, I used to describe what was about to happen as a "s l o w m o t i o n bust," meaning it was going to be a 19th century style deflationary bout, but would occur as the 20th century bulwarks gave way one by one, kicking and screaming, although there would undoubtedly be some very bad days (September-October 2008, anyone?). I believe Paul Krugman refered to it as "not your father's recession." Indeed, it could be called your great grandfather's recession.

But those 19th century panics did repair themselves, although some of them, like the Panic of 1873, took the better part of a decade to really abate. Once they hit bottom, as consumers repaired their balance sheets suddenly and in unison, spending and expansion slowly resumed.

Yesterday's data calls that to mind, so let me show you how the consumer, in the aggregate, is faring.

Consumers are paying down or refinancing debt at lower rates and/or amounts, and have reversed the entire last decade of debt service expansion:

Consumers are a little over halfway to the more normal level of debt service from the 1980s and earlier 1990s.

Their real disposable income has been increasing slowly over the past year:


With increased disposable income, and decreasing debt service obligations, Americans are saving more. As of December, the personal savings rate was 4.8%:

meaning that, on a per capita basis, consumers are a little less than half the way back to their longer term savings rate before the middle class gutting commenced.

In the aggregate, personal savings rose from $126.3 Billion in the 1st quarter of 2008 to $595.7 Billion in the 2nd quarter of 2009 (blue line), and are at $516.9 Billion now, which can be compared in "real" terms by factoring in the inflation rate (the red line):

-- meaning that at its peak in spring of last year, as much personal savings was available to be spent in the economy in real terms than at any point since early 1984.

Courtesy of the St. Louis Fred's new toy, we are able to divide aggregate personal savings by the inflation rate, and graph "real personal savings":

-- confirming that there is more "fuel" for continued economic expansion than at any time in nearly 30 years.

Of course, the "average" includes a huge skew savings and wealth towards the uppermost portion of wealth, so much so that Andrew Kaplan suggeted half a year ago that “The Savings Rate Has Recovered…if You Ignore the Bottom 99%”, by which he meant that the entire amount of savings above could potentially exist entirely in the top 1% of society. That's not the case, but as Lakshman Achuthan of ECRI pointed out a few months ago:

If you are earning over $100,000, then your plans are to spend over 50% more than last year. That’s stunning. Equally stunning was that if you are making less than $30,000, then you are going to cut your spending by a third.

In a related backdrop, the wealthiest consumers, say those in the top decile of earnings and net worth – and this is not something new – account for almost half of all spending. The lower 90% account for the other half.

In other words: personal savings have improved to the point where it can power at least a modest expansion -- but it is still a "Gilded Recovery."

Treasury Tuesdays

A.) Prices dropped in December, falling from 93.10 to 88.6 -- a drop of nearly 5%.

B.) The dashed diagonal line in the Fibonacci calculation also serves as a trend line. Prices broke this line at point B.

C.) Prices have risen to the 50% Fibonacci retracement level and have falled back to the 38.2% Fibonacci level.

Notice the EMA positions.

-- Prices are below the 200 day EMA

-- The 10 and 20 day EMA have moved sideways indicating a neutral price path

-- Prices and the EMAs are in a tight range, indicating traders don't know where to send prices next.

Today's Market

Prices are below all the EMAs.

The 10, 20 and 50 day EMA are moving lower

The 10 day EMA has crossed below the 20 and 50 day EMA

the 20 day EMA is about to cross below the 50 day EMA.

Personal Income Increases

From the BEA:

Personal income increased $44.5 billion, or 0.4 percent, and disposable personal income (DPI) increased $45.9 billion, or 0.4 percent, in December, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.6 billion, or 0.2 percent. In November, personal income increased $61.1 billion, or 0.5 percent, DPI increased $60.7 billion, or 0.5 percent, and PCE increased $69.1 billion, or 0.7 percent, based on revised estimates.

Let's take a look at the report's details. Click on all images for a larger image.


Goods producing industries are seeing wage declines. This is to be expected, as this area of the economy is still seeing large job losses.




However, wages in the service sector -- the largest employment sector of the economy -- are increasing, and have been since May.

In addition,


Overall disposable income is increasing.


PCEs -- personal Consumption Expenditures -- continue to increase on a month to month basis.


Above is a chart of the percentage change from the preceding period in the various sub-parts of the PCE number starting in May.





The savings rate in hovering right around 4.5% - 4.8%.

The Fits And Starts Expansion Begins

In two articles titled the Fits and Starts Expansion (here and here) I argued there were five areas of growth for the upcoming expansion. These areas were consumer spending (although at a slower pace than we were use to), exports, inventory rebuilding, stimulus spending and manufacturing would all contribute to the expansion, although none would dominate. Here is a chart that shows what parts of GDP contributed the most to growth in the 4Q.

ISM Manufacturing Index shows Strong Expansion

- by New Deal democrat

If there was any doubt as to whether manufacturers (as opposed to consumers) were experiencing a V-shaped recovery, today's ISM Manufacturing Indices should have put that to rest.

Here's the summary from the ISM:

Manufacturing growth accelerated in January as the PMI registered 58.4 percent, an increase of 3.5 percentage points when compared to December's seasonally adjusted reading of 54.9 percent. This is the sixth consecutive month of growth in the manufacturing sector, and the highest reading for the Index since August 2004 when it registered 58.5 percent. Prior to this recent growth trend, the PMI declined for 13 consecutive months. A reading above 50 percent indicates that the manufacturing economy is generally expanding; below 50 percent indicates that it is generally contracting.

Until today, since the end of 1982, the ISM Manufacturing index had registered readings of 58.0 or higher in only 36 of the ensuing 205 months: July 1985 - June 1986, August - December 1987, June and July 1988, May - November 1994, and November 2003 - August 2004.

All of the sub-indices moved in the right direction as well. New Orders, Production, and Employment all grew faster, increasing to 65.9, 66.2, and 53.3, respectively.

With regard to employment, the ISM noted:

This is the second month of growth in manufacturing employment, and the highest reading since April 2006 .... An Employment Index above 49.8 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) data on manufacturing employment.

Supplier Deliveries are sill slowing. Inventories are contracting as are Customers' Inventories.

The Backlog of Orders, at 56.0, started to grow again. This is one of the Leading Economic Indicators, and will register a positive in January.

Evidence that the "hoarding" of jobs may be reaching a breaking point can be found in the Employment sub-index, where 15% of the employers reporting hiring plans and 73% were planning to stay the same. Only 12% had plans to lay employees off. Previously where the first two categories reached 75%, that meant payrolls were set to expand. We are now at 88%. This dam of hoarded jobs must be breached soon.

In the last few months, both the ISM Manufacturing and Non-Manufacturing employment reports have been at odds with the BLS's nonfarm payrolls report, so I won't make any prediction about what this may portend. But it certainly isn't bad!

Will The Inventory Rebound Continue

Inventory restocking added about 50% of the growth from the 4Q09. However, as these charts indicate that trend could continue.


Inventories have dropped smartly over the course of the recession. In addition,


The inventory to sales ratio is now very low, indicating that inventories are probably at their leanest possible levels.

Market Mondays

A.) Price have broken through a lot of support on strong volume. They are currently resting on the lowest level of support from prices established in early November. If this level does not hold the next level of technical support from a previously established price is 105.5 -- and that is not a very strong level.


A.) The 10, 20 and 50 day EMAs are all moving lower. The 10 has crossed below the 20 and 50 and the 20 is about to cross below the 50. These are also bearish developments.


A.) Momentum has left the market as has

B.) Volume.

The market is in a full-blown correction.

In Which I Repair Prof. DeLong's Broken Okun

- by New Deal democrat

In a post yesterday in response to the Q4 2009 GDP report, Berkeley Prof. Brad DeLong asks, "Where Oh Where Is My Okun's Law?" and includes the following graph:

The circled area to the upper left is the most recent GDP and unemployment rate data which the Professor suggests have broken Okun's law.

In my opinion, the Professor already has the answer at his fingertips. Here is a graph he put together last August purporting to show that"Restricting yourself to post-1995 data seems to make very little difference in Okun's Law":


At that time I suggested to Prof. DeLong that he needed to break out 1995-present from 1948-94, and the change would appear. I suggest now that the most recent data circled by Prof. DeLong in the first graph above shows the following change in the relationship from 1995-present:

The two red dots in the upper left hand corner and the amateurish blue line are mine, and obviously aren't meant to convey mathematical precision, but you get the drift.

I submit that Okun's law still prevails, but the slope of the tradeoff has changed, and the point at which it intersects with a zero change in unemployment has shifted slightly to the right compared with pre-1995 data.

Needless to say, I stand by my posts of earlier this week indicating that if we have another good quarter of GDP growth now (which I regard as baked in the cake per the LEI), we are going to see some job growth.

Weekly Indicators: Caution Flag edition

- by New Deal democrat

This week, for the first time, the weekly indicators flashed a warning about the sustainability of consumer spending.

Let me get right to the most important news, which is shown in the graph below. Here's demand for gasoline for the last two years from the E.I.A.:

While gasoline stocks are considerably higher than normal (separate graph,not shown), for the first time, gasoline usage is DOWN from the same time a year ago, indicating that the price of gasoline is taking a toll on the economy. Prices at the pump did back off slightly last week. You may recall a couple of weeks ago I called the Oil the "Joker in the Deck" that could derail growth and cause a double-dip contraction later this year.

Another yellow flag comes from weekly reports of retail sales. The ICSC reported that same store sales decreased 2.5% from the week prior, but more importantly were only up 1.9% from a year ago. For the 4 weeks of January, YoY sales are up an average 2.2% -- about 0.5% less than the likely CPI increase. ICSC itself "expects same-store sales for January to be up by about one percent," which is even worse.

Similarly ShopperTrak "reported that year-over-year ... retail sales slipped 2.5 percent for the week ending January 23 while sales increased 4.5 percent versus the previous week ending January 16."

You may recall that Edmunds.com sounded very cautious about January auto sales last week. We may get an unpleasant January real retail sales number.

The BLS reported that initial jobless claims declined to 470,000, a decrease of 8,000 from the previous week. The 4-week moving average increased slightly again to 456,250. I am not concerned by this as it most likely indicates an overly aggressive seasonal adjustment in the later part of December and in no way compromises the downward trend from last April. Another couple of weeks should tell.

Railfax reported that cyclical rail traffic rose seasonally and is also up about 10% from last year. Intermodal and total traffic are both also up slightly. Baseline traffic remains significantly below even last year's depressed levels. This is similar to the pattern coming out of the 2001 recession.

Finally, the Daily Treasury Statement for the month through January 28 shows $132.8B withholding taxes paid this year vs. $142.9B a year ago, a decline of about 7%. I continue to believe that the seasonally adjusted bottom for withholding taxes was probably in October.

Weekend Weimar and Beagle

It's that time of the week -- it's time to stop thinking about the markets and the economy. So -- don't think about them. See you on Monday

Oh yeah -- a special shout-out to Miss P in D.C. The puppies are back!!!!!!

Weekly Indicators Protest! We can haz doggies???

- by New Deal democrat

I'm swamped. I'll post the indicators over the weekend.

Maybe in the meantime there are a few photos of doggies someone has laying around?

GDP -- A Look At Imports and Exports

Finally, let's take a look at exports and imports. Click on all images for a larger images.



Imports are increasing on a quarter to quarter basis.



As are exports.

The good news is in both areas. The increase in imports means consumption is increasing and the increase in exports indicates that other countries are growing. However, the overall trend is negative because imports are still larger than exports.

GDP -- A Look At Investment

Let's continue out look at the GDP report by looking at the percentage change from the preceding quarter in real (inflation-adjusted) investment. Click on all images for a larger image


Total private investment increased smartly in the fourth quarter, although some of that increase is the result of a bungee like snapping back from a very low level.


Non-residential structures are still contracting. However,


Increases in software and equipment are increasing, as are

investments in real residential investment.