What Mish Said

From Mish:

Prices of things we need (food and energy) continue to rise. Prices of most everything else are dropping. If you do not eat, drink, or drive, or need medical care you are in great shape. Then again, perhaps that makes you a robot.

Read the whole thing.

Alan -- STFU Already

Dear Alan --

You are not the head of the Federal Reserve anymore. In addition, your easy credit policies got us in this mess.

Please, shut the f(^k up, already.

I now return you to your regularly scheduled blog.

Is the Dollar Making A Comeback?

From the WSJ:

A combination of factors has helped to stabilize the dollar, though it remains quite weak. Some recent data have given comfort to those expecting the broader economy to escape the housing crisis with a slowdown in growth rather than an actual recession -- typically defined as two consecutive quarters of contraction. The Federal Reserve is taking new steps to tame the credit crisis. Countries in the Persian Gulf, which appeared on the brink of breaking their currency pegs to the U.S. dollar, have refrained from making any changes.

.....

One recent challenge to the gloomy view on the economy came Thursday, when data showed retail sales in November were more resilient than predicted. The figures suggested "we don't really have a freefall in the U.S. economy," says Adnan Akant, a currency specialist at money manager Fischer Francis Trees & Watts. "It's slowing down but not falling out of bed."

Then on Friday, government data showed inflation last month was stronger than expected. That generated a fresh wave of dollar buying, pushing the greenback up about 1.4% against the euro in a day. Since late November, when the dollar weakened to a record low versus the euro, it has strengthened about 3%. Still, the dollar remains 8.5% weaker against the euro since the start of the year. Late Friday in New York, one euro fetched $1.4423.

The retail sales figures for November were countered by two weeks of weak December sales, so I wouldn't go hanging my hat on those numbers.

However, the inflation story is far more important. Simply put, the Fed is now really hemmed in policy wise and may not be able to lower rates much more in the wake of the recent inflation numbers. And that could be dollar bullish -- or at least dollar neutral.

But, it's also important to remember the overall US economic picture isn't that solid. Corporate profits are weakening, job growth is fair but not great and housing problems aren't going away anytime soon.

Let's go to the charts:



On the daily chart, notice the dollar has clearly rallied from it's late November lows. It moved through the 20 day SMA, consolidated in a triangle pattern and then rallied through the 50 day SMA. Both of these are technically significant events because the SMAs will now provide technical support in the event of a sell-off. In addition, the 20 day SMA has turned positive as well -- for the first time in a long time. This indicates the shorter term trend is moving positive as well. Plus, with prices now above this number, this SMA will now get pulled higher.



However, on the weekly chart we still have a pattern of lower lows and lower highs. The index is going to have to move through 80 before we can start to think about a trend reversal. This means that we could merely be looking at a standard bear market rally instead of a rebound.

Let's Review the Markets

Whenever I find the markets confusing -- which I definitely do now -- it's really helpful to look at multiple time frames. So let's look at the five year, one year and 3 months charts of the SPYs, QQQQs and IWMs to see what they say.



On the five year SPY chart we have a clear upward sloping channel that started in early 2004. The SPYs broke out of this channel in late 2007 and have used the upper channel line as support. What's important about this chart is the existence of two long-term trend lines that provide lower support for the average.



On the one year chart, we can better see how the average has used the upper channel line for support. What's important here is the possible formation of a double top. This would make sense considering the fundamental economic background. While we've seen some wild price swings over the last few months, the index has enough strength to keep from falling too far below the trend line. However, also notice that prices have stayed below the 200 day SMA for some ling periods of time.



The 3-month chart gives us a better view of the moving average picture, and it is a mess. No SMA gives us any idea of a possible direction. The 50 day SMA is moving lower, the 10 is jumping around and all of the SMAs are within close proximity of each other. In short -- this index has no idea where it wants to go.



There are two trends on the 5 year QQQQ chart. The first is an upward sloping channel and the second is a rally that started in late 2006. So we have three trendlines that can provide technical support for the average.



On the year-long chart, we have a weakening rally. Note that prices have not moved higher after their peak in late October. That is a troubling development because it indicates upward momentum may not be there anymore.



The three month chart shows the SMAs, and they are a big mess. While prices are above the 200 day SMA, the other SMAs are bunched together. The 50 is the highest which is not a good development. In short -- and like the SPYs -- this index is looking for a direction right now.



This is the chart that causes me the greatest concern. The Russell 2000 was in a good four year rally, but has fallen through support. And it gets worse.



The index has bounced off the lower channel of the four year uptrend. In addition, we have a bearish lower lows and lower highs pattern developing, starting in early July.



On the 3 month chart, note the average is below the 200 day SMA, the 200 day SMA is heading lower along with the 20 day SMA, the shorter SMAs are below the lonoger SMAs and prices are below all the SMAs. This is not a good chart.

A Closer Look at Utilities

If ever there was a sector that got people excited -- utilities ain't it. But over the last few months, utilities have staged a very impressive rally. My guess is there are two reasons. First, these are considered safe investments, which are very attractive during crazy market times. Secondly, interest rates are dropping, which benefits any industry that typically relies on borrowed money.

Let's take a look at some charts.



Above is a chart of the utilities ETF, XLU. The index has risen about 13% since late August.



Above is a chart with the moving averages. Note the following:

1.) The index is above the 200 day SMA

2.) All of the moving averages are moving up.

3.) The shorter SMAs are above the longer SMAs.

In short, this is a bull market chart. The only drawback is prices are currently below the 10 day SMA. But a closer look at the latest rally indicates the index is using the 20 day SMA as technical support, so this move is not fatal right now.



On the year long chart, notice that prices have moved above previous highs established in late May of this year.

In short, this chart looks very impressive. Now, let's look at some sectors within utilities, courtesy of prophet.net



Diversified utilities are in the middle of a five year rally. There have been two prolonged periods of consolidation -- one in the second quarter of 2004 and the other in late 2005 to early 2006. But in general, this index has been quietly moving upwards. The only negative to this chart is the possible double top it may be forming over this year.



Electric utilities are also moving up over the last five years. However, they had a big drop earlier this year. But the index has risen about 10% since then in a nice, quiet rally. Also note the index bounced off the long-term support after the sell-off, keeping the long-term uptrend intact.



Foreign utilities look very impressive. They have been rising for five years. But they had a really big move starting in mid-2006. They have been consolidating for most of this year and may be forming a double top. If they successfully bounce off the shorter support line from this year's consolidation it will be a good sign.



Water utilities are a bit messier. While this chart has been rising, it is prone to prolonged periods of consolidation. It has had five such periods over the last five years. In addition, the index is now consolidating in a triangle pattern.



Gas utilities are somewhere between water and foreign utilities in terms of attractiveness. While they are also prone to prolonged periods of consolidation, they have moved up more consistently over the last five years, making them somewhat attractive.

Last Week's Markets

One of the great things about taking a day or two off is the gaining of perspective. When I'm caught up in the middle of the markets on a daily basis, I see the next 5 minutes. But after a day off, I get to see things with a bit more clarity.



The SPYs consolidated until the Fed meeting, after which the markets showed their displeasure with the Fed's decision. The SPYs jumped at Wednesday's open, but couldn't maintain the momentum and spent the rest of the day selling off. The SPYs consolidated on Thursday and Friday, but ended the week on a high-volume sell-off -- which is never a good development.

Notice the SPYs couldn't keep the upward momentum going on Wednesday or twice on Friday.



The QQQQs analysis mirrors the SPYs. However --


The IWMs reveal what appears to be a big fundamental problem in the markets right now.

First, notice the very clear three day downtrend. On Thursday the IWM formed a rounding bottom -- a clear reversal pattern. But, they tried to rally from this twice and couldn't maintain upward momentum.

What does this tell us? Traders were eager to sell into rallies last week, indicating they are looking to dump positions rather than accumulate new positions.

This week could be very interesting indeed.

Weekend Weimar and Beagle

I've got a very busy weekend ahead, so I'm not going to post anything until Sunday night. That's when I'll post a "week in review" of the markets with (what else) plenty of charts to get ready for next week.

Until then, here are three new pictures of my and the future Mr$. Bonddad's kids -- the four legged variety.



This is me holding a bone out of sight and getting Kate to look really alert.



This is Scooby wondering where Mom is.



And this is Sarge, who comes into the office on a regular basis and stares at me until I pet him.

OK -- take a break from the markets and economics for a few days. I know I will.

What Inflation?

From the BLS:

The Producer Price Index for Finished Goods rose 3.2 percent in November, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This gain followed increases of 0.1 percent in October and 1.1 percent in September. At the earlier stages of processing, prices for intermediate goods moved up 3.7 percent after rising 0.1 percent in the prior month, while the crude goods index increased 8.7 percent following a 2.4-percent advance in October.

.....

Before seasonal adjustment, the Producer Price Index for Finished Goods advanced 1.6 percent in November to 171.3 (1982 = 100). From November 2006 to November 2007, prices for finished goods rose 7.2 percent. Over the same period, the finished energy goods index climbed 23.6 percent, prices for finished consumer foods increased 7.3 percent, and the index for finished goods other than foods and energy moved up 2.0 percent. For the 12 months ended November 2007, prices for intermediate goods increased 8.1 percent, while the crude goods index jumped 22.4 percent.

From the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in November before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The November level of 210.177 (1982-84=100) was 4.3 percent higher than in November 2006.

.....

During the first eleven months of 2007, the CPI-U rose at a 4.2 percent seasonally adjusted annual rate (SAAR). This compares with an increase of 2.5 percent for all of 2006. The index for energy, which increased 2.9 percent in 2006, advanced at an 18.1 percent SAAR in the first 11 months of 2007. Petroleum-based energy costs increased at a 30.8 percent annual rate and charges for energy services rose at a 3.2 percent annual rate. The food index has increased at a 5.3 percent rate thus far in 2007, following a 2.1 percent rise for all of 2006. Excluding food and energy, the CPI-U advanced at a 2.4 percent SAAR in the first 11 months of 2007 after increasing 2.6 percent in 2006.

The Fed is now in a really terrible bind. The economy is clearly slowing so they want to lower rates. But look at the yearly increase in food and energy costs at both the wholesale and consumer level -- those are big jumps. These charts --

for agricultural prices



and oil



are really starting to hurt. That means the Fed is pretty much hemmed in. If they lower rates further they run the risk of getting seriously behind the inflation ball. But if they don't lower rates, the stand the chance of getting behind the economy ball.

I think these inflation figures are one of the reasons the Fed signed up with all those other central banks. That would allow the Fed to add liquidity without lowering rates and possibly stoking inflation further.

Either way, Bernenake and company have a really terrible policy choice ahead of them.

A Closer Look at Energy

With oil recently making news highs -- and the possibility of further highs on the horizon -- it seems appropriate to look at the energy sector to see how the charts look.

First, here's a chart of oil:



Oil has been rallying all year. It came a breath away from hitting $100/bbl within the last month. Notice the clear pattern of higher highs and higher lows.

Let's take a look at various energy sectors. The charts are from Prophet which is a great sight for industry charts.



This is the only "bad" chart in the group. Notice this area has a habit of trading in ranges. It consolidated in 2006, rallied in early 2007 but now appears to be either forming a double top or another trading range.



Major integrated oil (think Exxon) is in the middle of a five year rally with two primary uptrends. However, the spike the index had over the last year may need some time to dissipate before another move up happens.



Pipelines are also in the middle of a five year rally, but they too may be experiencing a double top. However, even if this index pulls back there are two uptrends it can trade to for technical support.



Independent oil and gas is also in the middle of a strong rally, but like the majors it too has had a recent spike. These can be tricky from a trading perspective. While some indexes continue to rally, others stall a bit after a big move up. Considering oil's fundamental move, it seems unlikely we'll see a big drop.



Oil and gas equipment is also in the middle of a long rally. Notice this index consolidated for most of 2006 so a further sideways consolidation wouldn't be out of the question.



Drilling and exploration is also in the middle of a rally. It recently hit a high and is backing off a bit as traders take profits.

Bottom line: the energy sector looks good, with the exception of the refiners. But even they look like a good store of value should the market become volatile.

The Flight to Safety is Underway

Below are some charts that illustrate the market is moving into a capital preservation mode.



The health care ETF has been consolidating over the last year. It has recently broken out of the upper channel of this pattern. Considering the economy may be slowing, this is a sector that could benefit from a flight to safety.



The utility ETF has been rising since mid-August. It recently reached a new high but has sold off since then. This sector is benefiting from the flight to safety and the Fed's interest rate cuts. Utilities need a lot of capital and when the cost of capital drops it's easier for the sector to get financing.



Consumer staples are in a clear uptrend as well.



Despite their recent sell-off, the 7-10 year treasury market is doing very well.



The 20+ year sector of the market is still in an uptrend, but this is more suspect now. Prices have moved through resistance established in early March. However, there is still the uptrend that started in late June.



As the dollar has dropped, gold has clearly benefited. Right now it is consolidating in a triangle consolidation pattern.

Today's Markets

Did the market turn a corner today? Let's look at the charts. I'm going to use three day charts because they illustrate what I was just mentioned.



Notice on the SPYs there was a strong downward trend line that the index broke about 2 PM EST. Also note the triangle consolidation at the beginning of the day. This is important because the index didn't continue to move lower; instead it consolidated. Also note the rally coming out of the consolidation; it follows the 10 day SMA.



The QQQQs had a clear downtrend, but they didn't have a solid multi-day trend line like the SPYs. However, the QQQQs consolidated this morning and rallied about the same time as the other markets.



With the IWMs (Russell 2000) we have a triangle consolidation and a rounding bottom, followed by the afternoon rally.

So -- will the rally continue? A lot hinges on tomorrow's CPI report. If that number comes in hot, then traders may worry that the Fed can't lower rates any further. However, a tame number may spark more "the Fed can now lower rates" talk. So, tune in tomorrow at 7:30 AM for the CPI release.

Retail Sales Were Up, But ....

From the WSJ:

Retail sales increased by 1.2%, the Commerce Department said Thursday. Sales went up an unrevised 0.2% in October.

.....

Excluding gas and auto sectors, demand at other retailers last month increased by a robust 1.1%. Sales climbed by 2.5% at electronic stores; 0.6% at health and personal care stores, 1.0% at food and beverage stores; 1.2% at building material and garden supplies dealers; 2.6% at clothing stores; 0.3% at eating and drinking places; 1.9% at mail order and Internet retailers; 1.0% at furniture store sales; 2.2% at sporting goods, hobby and book stores; and 0.9% at general merchandise stores.

But.....

U.S. retail sales dropped for the second straight week as consumers postponed holiday gift purchases during what may be the worst holiday shopping season in five years.

Sales fell 2.7 percent in the seven days through Dec. 8, following a 4.4 percent decline a week earlier, Chicago-based research firm ShopperTrak RCT Corp. said yesterday. About 12 percent fewer shoppers visited stores last week compared with the same period last year, ShopperTrak said.

Consumers are completing their holiday shopping later than usual, and they're trimming purchases as they pay for $3-a- gallon gasoline and higher food costs. The National Retail Federation in Washington forecast a 4 percent increase in holiday sales this year, the smallest gain since 2002.

``High gas prices and oil costs are definitely taking money out of people's wallets,'' Michael McNamara, vice president of research and analysis at Mastercard Advisors in Purchase, New York, said yesterday.

So -- what is going on?

1.) My guess is the heavy discounting and extended holiday hours over Thanksgiving helped to drive sales and traffic. However, I have to wonder what this will to retailer's margins.

2.) The consumer is now heavily conditioned to expect massive Christmas incentives. In my opinion, retailers have really shot themselves in the foot over the long run by continually offering lower and lower prices and more and more incentives over the holiday season. Consumers are now use to these massive incentives from retailers and consumers will no longer do a big Christmas buy without them.

3.) Let's not forget about gas prices.



Notice that gas prices typically decline after the "summer driving season." However, they haven't done that this year. Instead, gas prices are approximately 70 cents higher this year than last year. That is probably having a negative impact.

4.) Financial market turmoil isn't helping consumer confidence. Remember the Fed lowered interest rates a few days ago and issued a bearish statement with the announcement. In addition, there is continued talk about a credit crunch among lenders.

5.) Housing still sucks. At some point, the decrease in mortgage equity withdrawals and declining home prices will start to seep into consumer sentiment.

PPI Up 3.2%

From the BLS:

The Producer Price Index for Finished Goods rose 3.2 percent in November, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This gain followed increases of 0.1 percent in October and 1.1 percent in September. At the earlier stages of processing, prices for intermediate goods moved up 3.7 percent after rising 0.1 percent in the prior month, while the crude goods index increased 8.7 percent following a 2.4-percent advance in October. (See table A.)

This is the biggest increase since 1973.

The big issue was energy (imagine that when oil prices surged to nearly $100/bbl last month) which increased 14.1%. Ex-energy, the increase was .4%. Guess it's time to go back to "core" inflation; it looks so much better.

Exports Up Again

While the trade gap widened last month, the untold story (and one of the few bright spots in the economy right now) is that exports continue to grow:

The deficit has widened for two consecutive months after narrowing in the previous three. But the monthly gap remains well below the $67.6 billion deficit recorded in August 2006. The falling dollar has been a boon for exporters, making their products more affordable in global markets.

Export growth in the late summer helped offset the housing sector's drag on gross domestic product in the third quarter. Exports contributed 1.4 percentage points to GDP's annualized growth rate of 4.9%.

Some economists say exports will keep the economy from contracting in the current quarter. Morgan Stanley economists said in a note to clients that their "meager" forecast for growth in gross domestic product, now at 0.2%, would be negative if not for export growth. "The domestic economy already appears to be in mild recession in the fourth quarter," they wrote.

According to data from the Census Bureau, exports have increased 11.07% since January.

Wow -- it's nice to write something positive. I haven't had the opportunity to do much of that lately.

The Fed's New Plan Isn't Going to Work

From the WSJ:

In the biggest coordinated show of international financial force since Sept. 11, 2001, the Federal Reserve yesterday joined four other central banks in a plan aimed at coaxing banks to lend more readily at a time when fear has seized up world credit markets.

Just a day after it cut its key rate for the third time this year, the Fed introduced a new tactic, saying it will extend up to $40 billion in special loans in the next eight days to banks. To stoke banks' appetite to borrow and lend, the loans will carry less interest than Fed loans to banks usually do, and still can be backed by a wide range of collateral -- including the high-risk home mortgages at the heart of the current financial crisis.

.....

The central bank has cut interest rates three times since August by a total of a full percentage point, with the most recent quarter-point cut coming just on Tuesday. But bankers and investors nevertheless have become increasingly jittery, and more reluctant to lend to businesses, consumers and even to each other. Meanwhile, signs continue to spread that the American housing-market meltdown, the related turmoil in money markets and high energy prices are pressing on the U.S. economy. The Fed fears that reluctance to lend could push an already stalled economy into recession.

The Fed has faced two intertwined challenges since the financial crisis hit in August. One has been to cut rates enough to cushion the economy from a collapsing housing bubble, without igniting inflation. The other has been to overcome the credit crunch that stems from the housing woes -- and has muffled the impact of the rate cuts.

So far, the medicine isn't working. The rates banks offer to consumers and each other have stayed stubbornly high. The Fed tried to encourage financial institutions to borrow from its "discount window" but there were few takers. Separately, the Bush administration has prodded big banks to create a new entity to buy some mortgage-linked securities that aren't selling, and has pressed for mortgage-servicers to freeze interest payments on perhaps hundreds of thousands of homeowners whose mortgage payments are set to rise.

First, let's give Bernanke a hand because this is a really good idea in the current environment. In addition, Bernanke has lined-up support from other Central Banks, indicating Ben has some seriously good diplomatic skills. Bottom line -- it's good to see the monetary authorities working together to try and solve the problems in the credit market.

But it's not going to work. Why? Because liquidity isn't the issue; it's confidence. When a lender doesn't think a borrower is going to be around in 90 days -- or that the borrower is going to announce a major write-down to capital within the next 90 days -- the lender isn't going to lend. It's that simple.

The other problem is there has already been $76 billion in writedowns (see the post below). And we're just getting started:

Some of the nation's largest banks on Wednesday warned of higher losses in the fourth quarter as the turmoil in the credit and mortgage markets continues to weigh on the financials sector.

Bank of America Chief Executive Ken Lewis said the firm would have to write down a larger amount of its investment in some debt securities than previously planned.

.....

Also Wednesday, Wachovia Corp., said it expects to report fourth-quarter earnings is the range of 60 cents to 75 cents a share, and adjusted earnings between $1 and $1.15 a share. Analysts polled by Thomson Financial are looking for profit of $1.39 a share, on average.

In a separate regulatory filing Wednesday, PNC Financial Services Group Inc. The PNC Financial Services Group, Inc said it expects to report fourth-quarter earnings in the range of 60 cents to 75 cents a share, and adjusted earnings between $1 and $1.15 a share. Analysts polled by Thomson Financial are looking for profit of $1.39 a share, on average.

So long as we have announcements like this happening pretty regularly, no one is going to lend to anyone else. Everyone is going to horde cash because no one knows if they are going to be the next financial institutions to announce a write down. My guess is the Fed and the other central banks know this but they have to try and do something.

This is Not Good

Consider these two facts:

The biggest act of international economic cooperation since the Sept. 11 terrorist attacks is being put in place after demand for cash caused borrowing costs to rise. Banks and securities firms around the world have written down about $76 billion of assets this year after the market for mortgage-backed securities disintegrated.

The market for U.S. asset-backed commercial paper backed by assets such as mortgages and credit-card loans has shrunk for 17 straight weeks to $801 billion, falling 33 percent from its peak on Aug. 8, as structured investment vehicles continued winding down, according to data compiled by Bloomberg.

Those two pieces of information should scare the snot out of everyone.

Today's Markets

Wow -- what an interesting day. All of the charts say the same thing. The SPYs, QQQQs and IWMs all gapped up at the open, but then traded down for most of the day. However, at the end of the day there was a high volume buying spree on all of the indexes. This tells us that traders saw some type of bargain at the levels late in the day. It also tells us traders may have thought the selling was overdone.







On all of the daily charts we have an inside day -- a day when the highs and lows are inside the previous days highs and lows. This is like a mini-triangle pattern.







Today was extremely volatile. Anytime there is a change in sentiment of the degree we saw today you have to wonder what is going on. Instead of there being a more uniform view of the market -- that is, a majority of traders think the market is going firmly in one direction or the other -- today was extremely varied. The bears were in full force until the very end when the bulls took over.

Traders are trying to figure out exactly what is going on. And no one is really sure just yet.