Housing Won't Get Us Out of the Recession

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Both building permits and housing starts are at record lows.

The good news is the absolute number of new homes in inventory is moving toward a statistical median amount. Take a look at this chart:


It looks as though 300,000 at the national level is about normal. But there's a problem with that number:


Home sales are down to such a degree that the months of available inventory is at sky high levels.

In other words, there is little reason to build more houses right now.

Dear God The Financial Press is Stupid

And from Bloomberg nonetheless. Consider this headline: Home Prices in 20 U.S. Cities Declined at Slower Pace

The decline in home prices in 20 major U.S. cities slowed in February for the first time since 2007, amplifying signals that the market may be stabilizing.

The S&P/Case-Shiller index’s 18.6 percent decrease compares with a record 19 percent decline the month before. The gauge has fallen every month since January 2007, and year-over-year records began in 2001.

Declining prices, Federal Reserve efforts to bring mortgage rates down, and government tax credits for first-time buyers may continue to support sales after an almost four-year slide. Still, mounting unemployment means purchases are unlikely to rebound quickly.

“We’re probably getting close to an inflection point,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who correctly forecast the drop in the index. Still, he said, “if we are indeed going to see a recovery in the second half,” the double-digit price drops will need to abate in the next few months.

Now -- let's look at the chart from the report, shall we?



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Yeah -- that's an inflection point if I ever saw one. And here is the opening paragraph from the actual report:



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Let's break this information down.

Declines are Broad Based.

50% (10 of 20) cities are showing a record decline

15 of 20 (75%) are showing declines of over 10%.

Here's what everybody is excited about




16 of 20 cities saw monthly improvements -- meaning they weren't declining as fast. 9 of 20 saw year over year improvements. And here's the glory hallelujah -- this is the first time since October 2007 when the decline did not set a record. My God -- we're saved! The recession is over! Start celebrating!

I don't know about you guys -- but the year over year chart tells me we're still in deep trouble.

A Closer Look At the Financial Sector

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The financial sector got us into this mess and many people continue to say the financial sector has to get us out. Interestingly enough, financials are now 10.81% of the S&P 500, so they have come down in importance over the last year.

Let's look at the highlighted areas of the chart

First, prices formed a double top in 2007. In the late summer they fell below the 200 day SMA

1.) Prices rallied about 12.5%, but ran into upside resistance at the 200 day SMA. The 200 day SMA is considered a dividing line between bull and bear markets, so when prices can't get about this technical level it's usually trouble.

2.) After falling about 20%, prices attempted to rally. But notice that prices ran into upside resistance at the low from the previous rally.

3.) Prices form an upward sloping triangle pattern and rally about 21%.

4.) Prices again run into upside resistance at the previous low.

5.) Prices form a triangle consolidation pattern.

Notice that throughout this sell-off, prices fall into a standard lower low, lower high pattern which is indicative of a bear market.


Note that prices are over-bought according to the MACD. Also note the MACD is on the verge of giving a sell signal.


The RSI is giving us a luck-warm reading right now; 56 is right in the middle of the RSI's range.



On the three month chart we have a great example of the "which trendline is the real trendline?" Notice there are two viable trendlines. If the first is the "real" trendline -- meaning that is the line that prices follow -- then prices have already broken thrend and are running into upside resistance. If the second line is the real trend line then the rally is still intact. I think the first line is the primary trend line because it has the most actual contacts with price.

Fundamentally I don't think we're anywhere near out of the woods with the financial sector. First, we've just started the clock ticking on the stress test time period of 6 months. There is a news story today that Citigroup and Bank of America will have to raise more capital (if they can). In addition, we're right at the beginning of a possible second wave of meltdowns in the commercial real estate sector. The latest Quarterly Banking Profile from the FDIC shows a continuing deterioration:

Expenses associated with rising loan losses and declining asset values overwhelmed revenues in the fourth quarter of 2008, producing a net loss of $32.1 billion at insured commercial banks and savings institutions. This is the first time since the fourth quarter of 1990 that the industry has posted an aggregate net loss for a quarter. The -0.94 percent quarterly return on assets (ROA) is the worst since the -1.10 percent in the second quarter of 1987. A year ago, the industry reported $575 million in profits and an ROA of 0.02 percent. High expenses for loan-loss provisions, large writedowns of goodwill and other assets, and sizable losses in trading accounts all contributed to the industry’s net loss. A few very large losses were reported during the quarter—four institutions accounted for half of the total industry loss—but earnings problems were widespread. One out of every three institutions reported a net loss in the fourth quarter. Only 36 percent of institutions reported year-over-year increases in quarterly earnings, and only 33 percent reported higher quarterly ROAs.

The bottom line is I think the rally in this sector has run its course for now.

Treasury Tuesdays

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Little has changed with the IEF chart since last week; we are still in the middle of a triangle consolidation. Prices have been moving generally lower since mid-March, but the percentage drop is 2.76% which is hardly an exciting move. Note that prices and the SMAs are still in a tight range indicating a lack of conviction to move prices in either direction.



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When prices are consolidating oscillators are better technical indicators. Therefore, it makes more sense to look at the stochastics right now. Notice that both the slow and fast stochastics are at the lower end of their technical range indicating a move higher from here is a bit more likely.

From a fundamental standpoint remember the following points:

1.) The Federal Reserve is buying Treasuries which will put a floor under prices.

2.) While the market has rallied since early March, Treasury prices have not had a huge drop-off. Considering the magnitude to the stock rally (over 25%) I would expect a sharper sell-off in Treasuries as traders reallocate funds. This isn't happening, adding further questions to the validity of the rally.

3.) The economic fundamentals are still extremely questionable. Despite the "green shoots are appearing" language we've heard, the fundamental picture is still murky at best.

Today's Markets

The markets sold off today in reaction to the flu scare. But there is more to the situation than that. Notice how both the IWMs and the SPYs have run into upside technical resistance at previous levels. That is not a good sign for future rallies. Also note both the SPYs and IWMs are forming a consolidation pattern (either a triangle ar a rectangle) and the QQQQs are running into upside resistance from their previous upward sloping trend line.

New York Times Profile of Geitner

From the NY Times:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’ ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward. Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription. Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

I would highly recommend reading the whole article as it is very informative.

Mass Lay-Offs Still Increasing

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Above is a chart of seasonally adjusted mass lay-off events, which occur when an employer lays off at least 50 people. That that the number has been increasing since the beginning of 2007.

And consider this from the latest mass lay-off report:

The number of mass layoff events in March increased by 164 from the prior month, while the number of associated initial claims increased by 3,911. Over the year, the number of mass layoff events increased by 1,348, and the number of associated initial claims increased by 137,891.

The number of mass lay-offs is increasing, indicating continued stress in the labor market. That is leading to a high level of unemployment claims:



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While employment is a lagging indicator, the current situation does not bode well for a possible end to the recession.

Goodwill Impairments Increasing

From the NY Times:

Companies are taking billions of dollars in losses as they write down the value of assets known as good will — the amount they overpaid for a business compared with the sum of its parts. As the economy sinks lower and businesses struggle, that good will is going bad.

The losses from these write-downs have already been in the tens of billions of dollars, and analysts say they are likely to continue as companies reassess the value of old deals in the light of faltering stock markets, declines in real estate and weak corporate revenues.

Goodwill is:

Goodwill is an accounting term used to reflect the portion of the book value of a business entity not directly attributable to its assets and liabilities; it normally arises only in case of an acquisition. It reflects the ability of the entity to make a higher profit than would be derived from selling the tangible assets. Goodwill is considered an intangible asset.

.....

* Goodwill = Purchase Price – Fair Market Value of Net Assets
* Fair Market Value of Net Assets = Net Tangible Assets + Write-up of Net Assets
* Net Tangible Assets = Assets – Target's Existing Goodwill – Liabilities

In other words, Goodwill is the amount a company paid beyond the target's tangible book value. Some companies are worth the premium. For example, if you were going to purchase Coke a premium is guaranteed. But it's also really easy to pay too much for an asset when times are good. And that is exactly what happened:

Before it was scooped up in a merger with Wells Fargo last year, the Wachovia Corporation cut the value of its good will by $18.7 billion, largely from its purchase of the troubled mortgage lender Golden West Financial and other acquisitions that took on water as housing markets sank and the economy hurtled lower.

Macy’s took a good-will charge of $5.4 billion in 2008. In February 2008, the cellular carrier Sprint Nextel wrote down $30 billion from Sprint’s purchase of Nextel.

.....

If nothing else, the decline in the value of good will shows that corporations across the spectrum spent far too much during the merger mania of the last decade, analysts said. As the markets roared higher, companies looked at their rising share prices like lottery money, and deployed their stock to go on a buying binge, eager to show shareholders growth and expanding sources of revenue.

If the mergers were lavish wedding ceremonies, the slumping value of the good will has been the rocky marriages that followed.

Market Monday's

I continue to be very suspicious of the latest rally. First, let's take a look at the charts. Click on all charts for a larger image



The QQQQ continues to be the best performer. Prices have broken through a major trend line. All the SMAs are moving higher, the shorter SMAs are above the longer SMAs and prices are above all the SMAs. Finally, prices have continually moved higher. However notice that volume has been decreasing as prices have moved higher.


The SPYs moved though the downward sloping trend line which is technically important. And the price/SMA picture/relationship is still bullish. But note that prices have not moved above their highs established about a week ago. In addition, volume for this rally has decreased as it has moved forward. Finally, prices have broken the upward sloping trend line that started in early March. In other words, there are technical indications the rally is starting to break down.



The analysis for the IWMs is the same as for the SPYs with the added point that the upward sloping trendline that started in early March has now become resistance.


The DIAs suffer from decreasing volume and a petering rally. Notice the SMAs degree of upward movement has decreased. Finally, prices have broken the upward sloping trend line started in early March, have failed to clear the downward sloping trend line connecting price tops and have not moved above the high established about a week ago.



While the Transportation average is still in an upward sloping rally, notice that prices have not broken through key upside resistance. Also note the spikey volume -- traders are not thrilled by this rally. They are moving in in bits and pieces.

From a fundamental perspective I am deeply concerned with this rally. After looking at GDP in detail last week I see little reason to be excited about the possibility of an economic turnaround. As I am detail in this article on the Huffington Post the consumer is still in a terrible place. Business investment has been low for the last 11 quarters and with capacity utilization at 40 year lows there is little reason to add to existing physical plant.

What really struck me was this article from Bloomberg:

Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

Gap Inc.’s founding family sold $45 million of shares in the largest U.S. clothing retailer this month, according to Securities and Exchange Commission filings compiled by Bloomberg. Daniel Warmenhoven, the chief executive officer at NetApp Inc., liquidated the most stock of the storage-computer maker in more than six years. Sales by the co-founders of Bed Bath & Beyond Inc. were the highest since at least 2001.

While the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.

“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”

Bottom line -- if they saw a bottom right now they'd be buying a ton of stock, not selling.

Weekend Weimar and Beagle

It's that time of the week. Think about anything except the markets or the economy. I'll be back on Monday.

Until then....

Average Inflation Adjusted Wages and Hours Worked

The general trend of hours worked is down. From 1964 to 2008, total hours worked/week has decreased from 38.6 to 33.5 (roughly).

Real weekly wages decreased from 1972 to 1996 and increased slightly after that. However, real average weekly wages are still below their 1964 level in 2008. Let's add two more charts to the mix.






I wasn't sure if these graphs overlap in their data sources. But, considering both are increasing it's a bit moot.

Here's the bottom line: hours are decreasing as are wages on an inflation-adjusted basis but productivity is increase. In other words, we're doing more for less.

My God But the Press is Stupid

From the Census Bureau:

New orders for manufactured durable goods in March decreased $1.3 billion or 0.8 percent to $161.2 billion, the U.S. Census Bureau announced today. This was the seventh decrease in the last eight months and followed a 2.1 percent February increase. Excluding transportation, new orders decreased 0.6 percent. Excluding defense, new orders also decreased 0.6 percent.

I should call this journalistic malpractice 101. Here's how Bloomberg reported this:

Orders for U.S.-made durable goods fell less than forecast in March, adding to signs the economic slump is easing.

The 0.8 percent decrease reported by the Commerce Department today in Washington compares with an anticipated 1.5 percent drop, according to the median of 68 estimates in a Bloomberg News survey of economists. The news was tempered by revisions to February figures that showed a 2.1 percent gain in orders, smaller than the government previously reported.

Economists project any economic recovery in the second half of the year may be muted as government measures to revive growth will take time to gain traction. General Motors Corp. is planning on idling 13 plants for multiple weeks from May through July, and other companies may keep cutting spending and slash jobs until demand here and abroad shows sustained gains.

Let's look at the chart:



Does anyone see a trend? I know it's hard, especially with that really long DOWNWARD SLOPING TREND LINE but just try and make a guess about what's going on. Of course, the report also said "This was the seventh decrease in 8 months" which would also indicate maybe there's a downward trend in place.

Of course, the fact that new orders are down 27% for the year to date relative to last year to date might also indicate there's a problem.

But no -- we beat economist's expectations. So the sun is shining.

When Will the Recession End?

Actually, I think this will wind up being a multi-prong set of articles because the answer will probably evolve over time.

Over the last few weeks there have been calls of a bottom in the economy, or green shoots or signs of hope or whatever. The central message has been things are getting better -- or at least declining at a less severe rate. I have been extremely reluctant to make that call for several reasons. First, the data is at best preliminary and therefore subject to revision in either direction. Second, it's only a few months worth of data at best. In general, the best that can be said of any of the this new information is it is running against a compelling downward sloping trend.

That being said, in recent conversations I've had about the economy two points have come out -- two points that I think must be conclusively resolved before I am comfortable saying we're through the worst.

1.) The problems in the financial system have to be resolved. This will take some time. Under the Geitner plan a bank that gets a poor grade on the stress test will have 6 months to find new capital or get a government injection of cash. The underlying idea here is the bank will try and sell itself during that time if it is possible. However, it still leaves us with a six month period during which the situation will be unresolved.

2.) The auto situation must be resolved as well one way or the other. Frankly, I don't think the US economy could withstand an auto bankruptcy right now. There are so many industries that feed into the auto industry and provide ancillary services that a bankruptcy would threaten a fairly wide swath of the economy and send any recovery into a tailspin. We have to come out of this with a sense of "we're totally out of the woods" before we can say we're coming out of a bottom.

Forex Fridays

The weekly charts shows the dollar made a double top with the first top occurring at the end of last year and the second top occurring at the end to the first quarter of this year. However, also note the second top had a lower RSI and MACD reading making it suspect. The dollar has since sold off but is currently in a bear market flag pattern. Finally, notice that prices and the 10 and 20 week SMA are in a tight formation indicating a lack of overall direction.



The above chart shows more clearly the trend break from the second top and the current bear market pennant pattern. While the MACD and the RSI are rising, notice that prices haven't jumped higher in one direction or the other. Instead, they're in a tightly contained pattern. Also note that prices are the SMAs are in a tight pattern indicating an overall lack of direction.

Today's Markets

A note on yesterday's charts: I was out for the afternoon. When I got back to the office I forgot to refill the background on several charts before I saved them for the blog. Sometimes things get moving a bit too fast.

With all of the charts below note the bullish alignment of all the SMAs -- the shorter SMAs are above the longer SMAs and in most cases the SMAs are moving higher. However, also notice that all the averages have broken the upward sloping trend lines and in some cases are grappling with trying to maintain their position.

In the case of the SPYs and DIA, notice that prices are started to form a downward sloping consolidation pattern or bull market sell-off. Both look as though they are ready to "roll over" -- start to move lower at a considerably faster pace.

While there is still plenty of support from current levels, the news overall does not support a strong and sustained rally. Consider these two charts from the economic news releases today:





While the headlines implied these were good numbers, I just don't see it. Unemployment ticked up and existing home sales are still at low levels. It's way too early with both of these data series to tell whether or not they have topped/bottomed out; we just don't have enough data. An argument could be made that maybe existing homes sales have bottomed. But you could have made that argument over all of last year and you would have been wrong.

Government Spending and GDP, Pt II

Offered without further comment: a graph of government receipts and expenditures followed by a graph of total government debt. Click for a larger image

How Does the Transport Average Stack Up to Current Price Action?

From Bloomberg:

United Parcel Service Inc., the world’s largest package-delivery company, posted a profit that trailed estimates and forecast second-quarter earnings short of analysts’ projections as the recession curbs shipping.

First-quarter net income fell 56 percent to $401 million, or 40 cents a share, the company said today. Excluding non-cash costs to write down the value of UPS’s 40-year-old fleet of DC-8 jets, profit was 52 cents a share, trailing the 56-cent average of 16 analyst estimates compiled by Bloomberg.

UPS is considered a bellwether for economic health because it handles business and consumer packages worldwide. It said profit this quarter would be 45 cents to 55 cents a share, less than the 66-cent average among analysts surveyed by Bloomberg.

“Economic indicators tell us recovery in the U.S. might begin late this year, but more likely not until 2010,” Chief Financial Officer Kurt Kuehn said in a statement.

Sales slid 14 percent to $10.9 billion, only the second quarterly drop since Atlanta-based UPS first sold shares to the public in 1999.

This data point got me thinking about the Transportation average -- more specifically, whether or not the Transports were confirming or denying the rally. The reason is based on Dow Theory, which is:

A theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other.

The above chart caught my interest because prices are still below an important trend line. While the SMAs are in a pretty bullish configuration (shorter about longer, two of the shorters moving higher and the longer one moving sideways), prices are still below an important trend line.

In addition,



The MACD is a bit over-extended at these levels.



The three months chart shows two very important technical points.

1.) The upward sloping trend line that started at the beginning of March is now resistance as opposed to support.

2.) Prices have approached the downward sloping trend line twice only to be rebuffed.

If this chart is going to move higher it needs to do so soon.

A Closer Look at GDP -- Government Spending

Today I'm going to look at government spending and GDP so see what the numbers tell us. All of the numbers are in chained 2000 dollars. As always, click on all images for a larger image.



Above is a chart of the respective percentage of GDP of state/local and federal spending. Notice that state and local is by far the largest amount of spending. However, this is a but of a misnomer as the Federal government gives money to states in a variety of ways. So,


Let's look at a chart of all government spending as a percentage of chained GDP. Notice the total government spending as a percentage of chained 2000 GDP has fluctuated between 17.4% and 18.4%. Whether this is good or bad is a matter of opinion and -- more importantly -- political ideology.

The BEA breaks down federal spending into defense and non-defense spending. Above is achart of defense and non-defense spending in chained 2000 dollars. Notice that defense spending is roughly twice as large as non-defense spending.



Finally, we have a chart of defense spending as a percentage of federal spending in chained 2000 dollars. Bottom line: defense spending comprises the bulk of federal spending.

Thursday Oil Market Round Up

First, an update on yesterday's "Today's Market" post. For reasons unknown to me, my daily charts did not fill in the late in the day price action. As a result, my IWM and QQQQ chart were inaccurate. I will check to see what caused this and am sorry for any confusion.


The weekly chart shows that prices dropped hard at the end of last year. Then they consolidated the losses for the first three or so months. Prices then broke out of the triangle consolidation pattern. Note that before this happened there was a rising MACD and RSI. However, prices have since fallen back to the 10 week SMA, although the RSI and MACD are still in a bullish configuration.




The daily chart shows the action in more detail. Prices rallied from the middle of February to the end of March but have since moved sideways. However, notice the MACD and RSI have printed a lower number on the second price peak in the consolidation pattern, indicating a weakening of the trend. Also note the prices and the SMAs are in a tight pattern indicating a lack of direction in the overall market.

Fundamentally we are still in a vastly oversupplied market:


This is probably one reason keeping prices at the pump subdued:



For more on oil, gas the economy, read this article from New Deal Democrat