Treasury Tuesdays

Remember the macro environment we're working in. The IEFs have formed a long-term head and shoulders pattern. A break through the trendline makes sense given the overall interest rate environment right now.


Looking at the last few weeks worth of data we see the following:

a.) Prices took a big gap down

b.) The down bar is very strong, indicating there is a lot of momentum in the downward move.

c.) Prices consolidate in a triangle pattern right at the long-term head the shoulders neckline. Consolidation at or near long-term trends is pretty standard

d.) After gapping lower, prices formed an upward sloping triangle consolidation pattern

e.) The EMA picture is negative. The long-term trend line (200 day EMA) is moving lower, as is the 50 and 20 day EMA. While the 10 day EMA has started to turn up we need to see a lot more action from the 10 day EMA to say the overall trend has changed. Far example, we would need to see at least a move through the 20 day EMA and probably more given the fundamental macro environment. So far, what we probably have is a reaction trend.

Inventory Build Continues

From the Census Bureau:

Total inventories of merchant wholesalers, except manufacturers’ sales branches and offices, after adjustment for seasonal variations but not for price changes, were $393.5 billion at the end of February, up 0.6 percent (+/-0.5%) from the revised January level, but were down 7.4 percent (+/-1.1%) from a year ago. The January preliminary estimate was revised upward $1.0 billion or 0.3 percent. End-of-month inventories of durable goods were up 0.5 percent (+/-0.7%)* from last month, but were down 12.3 percent (+/-1.2%) from last February. Inventories of computer and computer peripheral equipment and software were up 2.5 percent from last month and inventories of lumber and other construction materials were up 2.0 percent. End-of-month inventories of nondurable goods increased 0.8 percent (+/-0.5%) from January and were up 0.7 percent (+/-1.8%)* compared to last February. Inventories of petroleum and petroleum products were up 3.1 percent from last month and inventories of chemicals and allied products were up 2.9 percent.

This development is in line with how I predicted the economy would recover back in August of last year, when I wrote:

Inventories have dropped like a stone for roughly a year. At some point these will need to be replaced. While there is no indication the bottom has occurred yet at some point it will. And when that happens, another item of growth will be added to the equation.

In addition, the inventory to sales number is extremely lean:


This tells us the most likely scenario going forward is a further inventory build.

This bodes well for future growth:

Companies from Tiffany & Co. to Home Depot Inc. are restocking shelves in a move that will boost economic growth and may keep the recovery on track through 2010.

Tiffany, based in New York, is planning for a “high single-digit percentage increase” in inventories this year as the world’s second-largest luxury jeweler retailer opens new stores, Chief Financial Officer James Fernandez told analysts March 22. Home Depot, the largest U.S. home-improvement retailer, “will be building inventory” this year in support of stronger sales, Carol Tome, chief financial officer of the Atlanta-based company, said on a Feb. 23 analysts call.

“We’re moving into the restocking phase,” said David Hensley, director of global economic coordination for JPMorgan Chase & Co. in New York. “We’ll see successive additions to growth in the first quarter, second quarter and third quarter.”

JPMorgan advised clients in an April 2 note to stick with a “recovery trade” that favors stocks over bonds and is overweight “cyclical” shares that will rise in an economic rebound. The XLY, or Consumer Discretionary Select Sector SPDR Fund, has risen 112 percent since the March 9, 2009, low. The exchange-traded fund includes Home Depot and Beaverton, Oregon- based Nike Inc., the world’s largest maker of athletic shoes.

“The particular area of the economy which people are not putting enough focus on is how significant this rebound of inventories is going to be,” former Federal Reserve Chairman Alan Greenspan said in an April 4 interview on ABC’s “This Week” program, adding that the odds of a double-dip recession “have fallen very significantly in the last two months.”

The Era of Easy Credit is Over

From the NY Times:

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

This is an incredibly important point going forward. First, consider this chart:


The 10-year Treasury yield has been declining for the last 30 years -- an incredibly long rally. However, it's also important to remember there are several economic events that have an impact on interest rates.

1.) The amount of debt entering the market. This is decidedly negative going forward because the US government is issuing a ton of debt going forward -- and will be issuing this debt for at least another year and probably longer.

2.) Inflation: inflation is not an issue right now, so this is a net positive for the bond market

3.) Inflation expectations: I would place this at a neutral level right now. There is a camp that is incredibly concerned about inflation right now. Consider this chart of the gold ETF:



4.) Location in the business cycle: there are times when bonds sell-off and times when they rally. Right now we're in a place where bonds sell-off because investors have a larger risk appetite.

But most importantly, the bottom line is interest rates realistically can't go any lower. That means there is only one place to go -- namely, up. And that means we'll see a negative impact on the following areas of consumer spending:

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

.....

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

.....

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

I don't think the run-up in rates will be fatal. In fact, we've already seen a combination of decreasing consumer credit and increasing PCEs over the last 12 months. Consider these two charts:




Note the almost inverse relationship between household debt and PCEs over the last year; they have both literally moved in opposite directions.

However, I do think there will be a difference in the way consumer's spend. For example, it use to be that so long as you even had credit, you'd go out and buy anything. That era is over. I think this new trend would be best explained by an increase in delayed gratification.

Oil Prices and the Recovery

- by New Deal democrat

Back in January, I wrote that this year could be divided into two parts, the first half which would witness stronger GDP growth than most were projecting, and a second half which would depend on the price of Oil. A low enough price and growth would continue, but if there were a spike in price followed by another bursting of Oil speculation, then there could be a double dip.

So far, the scenario has unfolded as I thought. Leading Indicators have continued to improve, albeit more slowly, which has almost certainly caused YoY GDP to grow by more than 2% (we won't find out till the end of this month, when first quarter GDP is reported), and is consistent with the actual job growth that has begun and will probably continue for the next few months.

With the important qualifier that this works *so long as there is no deflation*, a positive sloping yield curve where long term interest rates are higher than short term rates, always has coincided with economic growth and not contraction one year later. This metric goes back at least 100 years and does include the Great Depression. Since long term rates have been ~4% and short term rates have been near 0%, economic growth is going to continue. The Joker in the Deck is another Oil price spike and collapse, which would cause another deflationary bust (as we had in late 2008 through mid-2009).

With Oil going up over $85 a barrel in the last coupe of weeks, the issue of whether Oil may derail the recovery is getting a lot of attention. The Financial Times is worried that Oil Prices Could give the Kiss of Death to Recovery, noting

Jeff Rubin, a former CIBC chief economist and author of a book on oil and globalisation, told the FT: “Triple-digit oil prices are going to threaten a world recovery.”

My co-blogger Bonddad said much the same thing last week:

If there is one thing that could really kill the expansion quickly, it's oil prices.

So let's take another look. Let me start by just repeating what I said back in January:

if consumers once again have to pay over $3 a gallon for gas (which ~$90 Oil would give us), it will have a psychological as well as economic impact on consumers, and I would expect them to cut back in other areas. This looks likely to be the case. We are just 6 months into renewed economic expansion, and at the seasonal low for Oil prices, and already Oil is at $80 a barrel. It is a near certainty that the expansion will continue for at least 3-6 more months. Does anyone see any reason for Oil prices to decline in that period? Of course it could happen, but it doesn't seem likely. It seems much more likely that Oil prices will continue to increase, but slowly this time as opposed to the skyrocketing speculative blowoff that led to $147 Oil in July 2008.

Whether $90+ Oil will lead to a full-blown double-dip economic contraction, or just a slowdown later in the year, is almost impossible to gauge. It depends upon how far over $90 Oil shoots, and how long it stays there. If there is a dramatic overshooting a la 2007, there will be a double-dip. If there is a gradual increase over $90 that does not last that long before consumers cut back and the feedback loop causes price declines, then there may just be a slowdown, or if there is a contraction, it may be shallow and only last a quarter or two -- which is my best guess, and only a guess, at this point.

So far, there has been a gradual increase and no spike. A week ago I wrote Prof. James Hamilton of UCSD and asked him if he could update his forecast of Oil's impact on the economy, and he responded with a very detailed discussion Sunday at Econbrowser, which is well worth your bookmarking and reading in full. But before I look at that in more detail, let me summarize for you the previous work of Prof. Hamilton and also that of Steve Kopits, an expert Oil analyst whose work can be found at The Oil Drum among other places.

Prof. Hamilton has previously noted that past Oil shocks (pdf) reached the point of maximum statistical impact on consumer behavior 12 months after the shock.

[W]hen energy prices go up, consumer spending falls. But there are two surprising things about the quantitative character of this response. The first surprise is the delay-- energy prices go up at time t, but the biggest consequences for consumption spending aren't seen until [ ] 12 months later. The second surprising feature of these results is the magnitude. If consumers continued to purchase the same number of gallons of gasoline as they had before, a shock of the size analyzed in this graph would require them to reduce spending on other items by 1%. Yet eventually they historically would be predicted to reduce spending by 2.2%. ... [C]onsumers cut spending by [ ] much more than the shock itself."

The same idea, that it is the shock of sudden price changes, as well as some threshold figure of consumer spending, has been posited by Oil analyst Steven Kopits, who in summary says [note: google document] that in the past, when the cost of Oil consumption has risen to 4% of GDP, which has also coincided with a 50% increase in the price of Oil YoY or more quickly, there has always been a recession. Here are the two critical graphs. The first shows the correlation between Oil prices as a share of GDP and recession:

The second shows the correlation between spikes of 50% or more YoY and recessions (note that in 1990-91 there was not that great a YoY change, but there was a brief 50%+ increase in a 6 month period following Saddam Hussein's invasion of Kuwait):

Recently Prof. Hamilton's and Mr. Kopit's views have diverged sharply, due to their differing interpretations of how the two measures, (1) Oil prices as a percent of GDP, and (2) the rate of increase, or shock, in Oil prices. In a piece last September, Oil Prices could keep US in Recession, Kopits has put more emphasis on the first aspect:

The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession.

Last November, however, Prof. Hamilton placed more emphasis on the effect of a price shock to consumers:

What do these estimates imply looking forward, with oil prices now back up to $80 a barrel? The relation used to produce the figure above assumes that there is a threshold effect before the next oil price shock would begin to do its damage. According to that relation, oil has to get back above $130 before it would matter again for GDP growth. On the other hand, the original research on which that relation is based acknowledged that there's really not a very compelling basis in the data for choosing among various plausible nonlinear possibilities. The other approaches surveyed in my Brookings study assume a simple linear relation, according to which the recent resurgence in oil prices would already begin to exert a drag on spending.

Another magnitude that I think is important to watch is the share of the budget of an average U.S. consumer that is devoted to energy purchases. This had fallen considerably in the 1990s, making it easier for many consumers to largely ignore modest energy price fluctuations. When this share rises above 6%, it seems to become a more significant factor. The consumer energy expenditure share peaked last summer at 6.8%, but collapsing energy prices subsequently brought it back down to 4.7%. The resurgence in oil prices this summer had pushed that share back up to 5.4% in September [as shown on the graph below:].

[N.B.: Kopits measures Oil prices as a percent of GDP. Hamilton measures Oil consumption as a percent of consumer spending. Since consumer spending is about 2/3 of GDP, Kopits' 4% figure and Hamilton's 6% figure are virtually identical.]

A most interesting corrolary was brought up by Spencer of the Angry Bear blog in the comments:

If you do consumer spending on energy as a share of consumer spending plus spending on autos you get a very stable ratio. This suggest one of the biggest ways consumers adjust to higher oil prices is to delay buying a new auto.

Kopits said that $80 Oil would derail the recovery. Hamilton suggested it would take $130. Where do we stand now?

Let's look now at the price of Oil. This is a graph of Oil prices per barrel for the last 12 months (up to one week ago):

Note that the price of Oil doubled from its low of about $35 a barrel at the beginning of 2009, to over $70 a barrel by June. That's a 100% increase, and according to Kopits, should have put us back into recession. Obviously, it hasn't worked out that way. According to Prof. Hamilton's work, we are right now in the period ~12 months after the major increase of early 2009, and so are at the time of its maximum impact. Since both the LEI and GDP are still increasing, that spike has not derailed the recovery. A price spike from a very low percentage of GDP to a rate that is still under 4% of GDP does not appear to create a recession. Crossing the 4% threshold looks like the decisive determinant.

Note secondly that the price of Oil has climbed gradually since last June at a rate that is less than 50% a year. Oil hit $75 last June and is presently about 15% higher. So in the second half of this year, i.e. 12 months after this gradual increase, there is no "shock" that consumers would be reacting to.

That brings us back to Prof. Hamilton's update yesterday. While again I encourage you to read his entire piece (and his two prior pieces, they are treasure troves of information), here is the summary:

With gas prices now about a dollar per gallon higher than they were a year ago, that leaves consumers with $12 billion less to spend each month on other things than they had in January of 2009. On the other hand, the U.S. average gas price is still more than a dollar below its peak in July of 2008. Changes of this size can certainly provide a measurable drag or boost to consumer spending, but are not enough by themselves to cause a recession.

[I]t is not just the level of consumer spending but also a sudden change in its composition that sometimes contributes to an economic recession. When oil price increases are sufficiently sudden and dramatic, we see abrupt drops in consumer sentiment, postponement of purchases of consumer durables, and important changes in the kinds of vehicles consumers buy. Because labor and capital can not costlessly shift out of the affected industries, the result is unemployment in those sectors which is an important additional factor bringing the economy down.

....

[W]ith retail gasoline prices still a dollar a gallon below what consumers have recently seen, I'm doubtful that gasoline prices have the ability to induce as much consumer anxiety as we observed two years ago. Although recent increases in prices have brought energy expenditures back up as a share of total consumer spending, they're still below the 6% level at which consumers historically have started to make dramatic adjustments.

Prof. Hamilton's analysis looks correct to me at this point. Remember that, in his analysis, Oil price increases first show up as increased spending, or decreased savings, and indeed the personal saving rate has declined again in the last few months:

And the Oil consumption statistics of the Department of Energy show that the increase in energy consumption YoY that took place in 2009 has virtually stopped. Since the beginning of this year, consumption has generally been no more than equal to that of last year.

The same indication of constricting demand has shown up in YoY miles driven, which turned negative in January as indicated in this graph:

But retail sales, and in particular Spencer's metric of new auto sales, have not declined at all and if anything continue to look like they are increasing:

h/t Calculated Risk

In summary and conclusion, it appears that in order to trigger a recession, there must be a large price spike that swiftly causes Oil consumption to be 4% or more of GDP. On the other hand, a very gradual price move, such as we have had since last June, causes consumers to alter their behavior in a way that results not in a recession, but enough of a slowdown in growth that Oil consumption declines and Oil prices follow, having never risen higher than 4% of GDP. That's what is suggested by Oil futures prices at the Chicago Mercantile Exchange, which remain in "contango" (i.e., prices rising as we go further out into the future), but do not reach $90 until the December 2011 contract, and the 2018 contract sells for $95.08. This suggests to me that the futures market believes that higher prices now would not be sustainable.

There are other forces in the economy pushing it towards another deflationary bust in the future, chief among them downward pressure on wages, which rose at the rate of about 1% a year when last measured. House prices look to begin to decline again. And the Atlanta Fed notes that

the moderation in price changes was widespread across many categories of spending [last year]. This moderation was evident in the appreciable slowing of inflation measures such as trimmed means and medians, which exclude the most extreme price movements in each period.... {So] It's not just the housing sector that is driving the recent disinflation trend.

Nevertheless, if those other factors do not push the system back into outright deflation, barring a spike in the price of Oil prices, as of now it appears more likely that the economy will slow down its growth later this year enough to cause a gradual decline in Oil prices with renewed economic growth.

Market Mondays

a.) On Monday, prices advanced to their highest level by 10 AM. This level provided upside resistance for the remainder of the session.

b.) Prices were in a rally all day and closed above Monday's resistance level.

c.) Prices opened lower, dropped then rallied, but dropped hard (d) in the afternoon.

e.) Prices opened lower on Thursday, but then spent the rest of the day rallying.

f.) Prices spiked at the end of trading on Friday on high volume (g).

However, consider these daily charts.



The SPYs have broken their uptrend but have also rebounded and appear to be moving back through the uptrend. In addition, prices have broken through important areas of resistance.


The QQQQs never broke their upward trend line.



The mid-caps broke their upward sloping trendline but have also started moving higher.














Both the IWMs and the IWCs have broken their trend lines but are also resuming their upward trajectory.



And finally, the transports are moving higher. They broke their trend line, consolidated and are moving higher.

Simply put, the averages are all saying a higher move is the most likely probability.

It's important to remember that a trend will most likely move a lot farther than you think it will.

Weekly Indicators: late edition

- by New Deal democrat

March retail sales were a blowout compared with last year (a very easy comparison):

ICSC, Retail Forward, Retail Metrics and RetailSails have all crunched the numbers from the publicly-traded retailers that report same-stores sales and the figures show that the post-holiday shopping period went well for most firms. Retail Forward and RetailSails recorded the gain as 9.2 percent. ICSC said sales rose 9.0 percent. Retail Metrics said same-store sales rose 8.7 percent.

The ISM Non-Manufacturing Index rose from 53.0 to 55.4 in March, and every component with the exception of supplier deliveries also rose. Neew orders in particular rose to 62.3, a very strong showing. The Employment component also rose to 49.8, meaning very slight contraction. The trend is very positive, however, as the percentage of firms planning to hire increases every month (16% in March) and the percentage planning to lay off workers decreases each month (19% in March).

The wholesale inventory to sales ratio declined ever so slightly. This ratio is still at a very low, i.e., tight, level.

Turning to the high frequency weekly numbers ...

The ICSC reported that seasonally adjusted weekly same store sales we up 4.7% YoY and up 2.1% from the previous week. Some of this was due to the change in the week of the easter holiday this year vs. last. ShopperTrak reported that sales "increased for the seventh consecutive week, rising a strong 15.6% compared to a year ago, while sales rose 15.1% on a week-over-week basis."

The E.I.A. reported that gasoline cost $2.80 a gallon. Oil was near $85/barrel late in the week. Usage for last week slightly above last year, as was the 4 week average. In general, however, for the last month usage has been approximately equal to that of 2009. Oil moved above $85 a barrel for most of the week. While Oil futures remained in contango (prices rising as we go further out into the future, prices do not reach $90 until the December 2011 contract, and the 2018 contract sells for $95.08. This suggests to me that the futures market believes that higher prices now would not be sustainable.

The BLS reported that new jobless claims were only 460,000, the highest number in six weeks. Despite some pessimism from the usual sources, the 4 week average only moved up to its second lowest reading in over 18 months.

Railfax again showed another strong week in cyclical goods, although intramodal loads, typically imports, slowed, making for a sideways overall reading.

The Daily Treasury Statement shows that for the first six reporting days of April, 2010 is running behind 2009, $45.9B vs. $47.5B. The 4 week moving average of tax receipts continues to show this year ahead of last year, $139.6B vs. $136.2B, or a difference of +2.5%.

In short, the weekly numbers show the Recovery is continuing to advance, with Oil a significant problem going forward.

Weekend Weimar and Beagle

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

Weekly (-end) Indicators

- by New Deal democrat

Just a quick note. I am all jammed up in the real world, so I will post these over the weekend. In the meantime, rumor has it this week we have doggies!

More on Yesterday's Retail Sales Numbers

From the LA Times:

The nation's retailers had a blowout month in March as shoppers went on a spending spree that increased sales by a record 9.1%, providing the best monthly showing in at least a decade and offering bold new evidence that a strong economic recovery could be ahead.

.....

More than a dozen major chains posted double-digit gains, including discounter Target Corp., department store Kohl's Corp., luxury chain Saks Inc., mid-priced seller Gap Inc. and teen retailer American Eagle Outfitters Inc. Results are based on sales at stores open at least a year, known as same-store sales, which are considered a reliable measure of a retailer's health.

.....

Of the 28 retailers whose results were tallied by Thomson Reuters, 92% beat sales expectations. The group's 9.1% sales gain was significantly better than the 6.3% increase analysts had been expecting and marked the best month on record since the company began tracking data in 2000.

Although sales results were helped by an earlier Easter and comparisons with a weak March 2009, when sales declined 5%, analysts said the gains reflected real underlying strength. Pent-up demand, warmer weather and broader economic improvement helped drive spending, they said.

"The fact that retailers vastly exceeded already raised expectations suggests to us that there is more going on here," said Ken Perkins, president of research firm Retail Metrics Inc. "The consumer is feeling better about their situation and is more willing to make discretionary purchases than at any time that we've seen in the last couple of years, since the onset of the recession."

A few points.

1.) These numbers are very good and should be viewed in that context. But

2.) They are one months worth of numbers. In addition,

3.) We've only had one month of good employment data, which is probably a big factor in low consumer expectations data. We need at least a few more months of good employment data to say we're seeing a trend of better news. And ever then, there is a tremendous amount of slack in the labor market which will keep wage growth depressed for some time.

All that being said

1.) The evidence is mounting that the "we're all going to die in the fiery puts of hell" school of economic analysis/presenting information/screaming from a blog headline in order to get attention so that you're cited by other blogs, thereby creating a giant "we're all going to die" echo chamber" -- is dead wrong. Consider the following information from the latest Federal Reserve's Minutes:

Available indicators suggested that the labor market might be stabilizing. Declines in private payrolls slowed markedly in recent months, and, in the absence of the snowstorms, private employment probably would have risen in February. The average workweek for production and nonsupervisory workers fell back in February after ticking up in January; however, the drop was likely due to the storms. The unemployment rate was unchanged at 9.7 percent in February, and the labor force participation rate inched up over the past two months. However, the level of initial claims for unemployment insurance benefits remained high.

After increasing briskly in the second half of 2009, industrial production (IP) continued to expand, on net, in the early months of 2010, rising sharply in January and remaining little changed in February despite some adverse effects of the snowstorms. Recent production gains remained broadly based across industries, as firms continued to boost production to meet rising domestic and foreign demand and to slow the pace of inventory liquidation. Capacity utilization in manufacturing rose further, to a level noticeably above its trough in June, but remained well below its longer-run average. As a result, incentives for manufacturing firms to expand production capacity were weak. The available indicators of near-term manufacturing activity pointed to moderate gains in IP in coming months.

Consumer spending continued to move up. Although sales of new automobiles and light trucks softened slightly, on average, in January and February, real outlays for a wide variety of non-auto goods and food services increased appreciably, and real outlays for other services remained on a gradual uptrend. In contrast to the modest recovery in spending, measures of consumer sentiment remained relatively downbeat in February and had improved little, on balance, since a modest rebound last spring. Household income appeared less supportive of spending than at the January meeting, reflecting downward revisions to estimates by the Bureau of Economic Analysis of wages and salaries in the second half of 2009. The ratio of household net worth to income was little changed in the fourth quarter after two consecutive quarters of appreciable gains.

Activity in the housing sector appeared to have flattened out in recent months. Sales of both new and existing homes had turned down, while starts of single-family homes were about unchanged despite the substantial reduction in inventories of unsold new homes. Some of the recent weakness in sales might have been due to transactions that had been pulled forward in anticipation of the originally scheduled expiration of the tax credit for first-time homebuyers in November 2009; nonetheless, the underlying pace of housing demand likely remained weak. The slowdown in sales notwithstanding, housing demand was being supported by low interest rates for conforming fixed-rate 30-year mortgages and reportedly by a perception that real estate values were near their trough.

Real spending on equipment and software increased at a solid pace in the fourth quarter of 2009 and apparently rose further early in the first quarter of 2010. Business outlays for motor vehicles seemed to be holding up after a sharp increase in the fourth quarter, purchases of high-tech equipment appeared to be rising briskly, and incoming data pointed to some firming in outlays on other equipment. The recent gains in investment spending were consistent with improvements in many indicators of business demand. In contrast, conditions in the nonresidential construction sector generally remained poor. Real outlays on structures outside of the drilling and mining sector fell again in the fourth quarter, and nominal expenditures dropped further in January. The weakness was widespread across categories and likely reflected rising vacancy rates, falling property prices, and difficult financing conditions for new projects. However, real spending on drilling and mining structures increased strongly in response to the earlier rebound in oil and natural gas prices.

The pace of inventory liquidation slowed considerably in late 2009. As measured in the national income and product accounts, real nonfarm inventories excluding motor vehicles were drawn down at a much slower pace in the fourth quarter than in each of the preceding two quarters. Available data for January indicated a further small liquidation of real stocks early this year in the manufacturing and wholesale trade sectors. The ratio of book-value inventories to sales (excluding motor vehicles and parts) edged down again in January and stood well below the recent peak recorded near the end of 2008. Inventories remained elevated for equipment, materials, and, to a lesser degree, construction supplies, while inventories of consumer goods and business supplies appeared to be low relative to demand.

While there are concerns going forward (which always exist in any economy the size of the US') there is plenty of good news. And it's not just one sector. Manufacturing is coming around. Consumer spending is picking up. Exports are growing. Businesses are picking up investment. Other countries are getting better. Most of these factors have been completely overlooked at the expense of over-publicizing the bad news. For example, the US manufacturing sector has staged a remarkable comeback over the last year. Yet there is no new of that. Personal PCEs have rebounded as well -- again, no news. The bottom line is there are some damn good economic numbers out there right now, yet no one wants to acknowledge them.

Yesterday's Market

The real story of yesterday's market was the rally (a) that started at 10:30 and continued until 12:30. Notice the consolidation that occurred along the way (b). After the rally was over, prices consolidated using (c) as support.


On the daily chart, notice that prices broke the uptrend and that the MACD has given a sell-signal. However, the A/D line is still strong.

A Must Read

From the NY Times:

The American economy appears to be in a cyclical recovery that is gaining strength. Firms have begun to hire and consumer spending seems to be accelerating.

.....

Usually you can depend on the White House to view the economy with the most rose-tinted glasses available. But it was not until last week, after a strong employment report, that President Obama started to sound a little optimistic.

“The tough measures that we took — measures that were necessary even though sometimes they were unpopular — have broken this slide and are helping us to climb out of this recession,” he said in a speech at a factory making battery components in North Carolina.

Note, however, that he seemed to believe the country remained in recession. It is virtually certain that is not accurate, as least as will be determined by the arbiters of recession at the National Bureau of Economic Research. “The recession is over,” one of those arbiters, Jeffrey Frankel of Harvard, wrote this week.

But the White House is unwilling to make that claim.

Why is good news being received with such doubt? Why is “new normal” the currently popular economic phrase, signifying that growth will be subpar for an extended period, and that the old normal is no longer something to be expected?

It is possible, of course, that I am wrong and the prevalent pessimism is correct. Many economic indicators, including Thursday’s retail sales report, are looking up, but that does not prove the recovery will be self-sustaining. There are issues relating to over-indebted consumers and local governments. The housing collapse will have an impact for some time.

But there are, I think, a number of reasons for the glum outlook that are unrelated to the actual economic data.

First, the last two recoveries, after the downturns of 1990-91 and 2001, were in fact very slow to pick up any momentum. It is easy to forget that those recessions were also remarkably shallow. If you are under 45, you probably don’t have much recollection of the last strong recovery, after the recession that ended in late 1982.

Add to that the fact that the vast majority of the seers did not see this recession coming. Remember Ben Bernanke assuring us the subprime problem was “contained”? In mid-2008, after the recession had been under way for six months, the Fed thought there would be no recession, and the most pessimistic member of its Open Market Committee thought the unemployment rate could climb to 6.1 percent by late 2009. It actually went over 10 percent.

In January of this year — after the recession had probably been over for at least a few months — the most optimistic member of the committee expected the unemployment rate to fall to 8.6 percent by late this year. The consensus was for a rate no lower than 9.5 percent.

Having been embarrassed by missing impending disaster, there is an understandable hesitation to appear foolishly optimistic again.

But even without that factor, it is normal for recessions to make people pessimistic. “Go back and read what people were saying in 1982 or 1975,” said Robert Barbera, the chief economist of ITG. “Nobody was saying, ‘Deep recession, big recovery.’ It is quite normal to expect an abnormally weak recovery. It is also normal for that expectation to be wrong.”

But if that is normal, one factor that brings optimism to some forecasts is absent this time. Both Republicans and Democrats have good reasons to be negative. Republicans are loath to give President Obama credit for anything, and no doubt grate when he points to his administration’s stimulus program as a cause of the good economic news, as he did in North Carolina.

The whole column is worth a read.

Forex Fridays

Notice that over the last three days, the dollar has been trading in a fairly tight trading range.


The overall uptrend (a) is still intact. Additionally, the moving averages are still in a very bullish orientation. However momentum (c) is weak and the A/D line (d) is as well.

Fundamentally, the dollar has risen not because it's strong but because the euro is weak. Traders are concerned that Greece will default on their plans within a year. As a result, they have been selling the euro and buying the dollar.

Initial Jobless Claims Increase

From Bloomberg:

The Labor Department is citing special calendar factors for an unexpected jump in initial jobless claims to 460,000 in the April 3 week vs. the prior week's 442,000 (revised 3,000 higher). The Labor Department is not only citing Easter as a distortion but also the Cesar Chavez holiday in California, and it is further warning that seasonal volatility will shake up the numbers through the next several weeks. Otherwise, according to Market News International, the department reports "nothing unusual."

Special factors give special importance to the four-week average which is at 450,250, up 2,250 from the end of March but down more than 20,000 from the beginning of March. How this month-to-month comparison tracks in the weeks ahead will shape expectations for the April employment report.

Here is a chart of the data:


The initial leg down (a) is a solid move. But we're still in a 450-490 range since the beginning of the year which I don't like.

Retailer's Post Strong Gains

From the WSJ:

U.S. retailers on Thursday reported strong sales gains for March, adding to evidence that consumers are feeling more confident as the economy stabilizes.

Sales at stores open at least a year rose 9.1% last month, according to Thomson Reuters, the best monthly showing since the firm began tracking the figures a decade ago.

From discounters to luxury apparel stores, retailers surpassed bullish analyst expectations and pointed to broad demand for merchandise that didn't carry the kinds of markdowns that were so common just months ago.

Retailers benefited not only from improved consumer confidence but also from easy year-ago comparisons, warmer weather and increased Easter shopping. Indeed, an earlier Easter this year could lead to less-robust April results, and the verdict is still out on an economic recovery.

Read this in conjunction with yesterday's article from the NY Times.

Let's take a look at some relevant charts:

Prices are in a general up/down/up equal measurement rally. In this scenario, traders look for a move up which is measured in points followed by a correction. When prices move higher again, the assumption is prices will make a measured move (a move of the same amount of points) higher.

In this situation we have a leg up (a) which also has a three fan patter. This is followed by a rounding top which moves into another rally.

The consumer discretionary sector is in a clear upward trend as well. Notice we have a general uptrend (a), an upward sloping channel (b) and a third upward sloping trend line (c).

Will China Let the Yuan Rise?

From the NY Times:

The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday.

While there remains a possibility of a last-minute glitch that could delay the announcement, China’s central bank appears to have prevailed with its arguments within the Chinese leadership for a stronger but more flexible currency, these people said. They insisted on anonymity because of the sensitivity of the issue in Beijing.

The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.

The emerging consensus within the Chinese leadership comes as Treasury Secretary Timothy F. Geithner held meetings on Thursday with senior Hong Kong officials and prepared to fly on Thursday evening to Beijing for a meeting with Vice Premier Wang Qishan.

This would be a very encouraging and important development, if true.

And In Completely Unrelated News

In real life, I'm a tax lawyer. In that vein, IBLS has just published a book I wrote, titled A Practitioner's Guide to US Captive Insurance Law. The book is available from IBLS.com in their April 2010 tax law review.

I also have a website for this area of my law practice.

Yesterday's Market

One of my main concerns over the last few weeks has been the possibility of the markets topping out. Take a look at the charts below -- you will notice that all are showing signs of important trend breaks.



The SPYs have already broken their trend line.



The QQQQs are barely hanging on



The Russell 2000 has already broken its uptrend and



The IWCs have broken their trend line once, move higher and are now above that trend line again.

With the equity markets, it's incredibly important to remember there are several important averages. If one breaks a trend, it's important but if the trend break isn't confirmed by other averages, then it's not that big a deal. The reason is money flows between the markets on a regular basis. For example there is a fair amount of intra-equity market movement from say small caps to big caps and between sectors such as health care and technology. These intra-market movements can effect one average disproportionately. But when you see all the averages make moves, it's time take notice.

Thursday Oil Market Round-Up

a.) Until yesterday, the market was in a strong uptrend. However,

b.) Notice that support became resistance during yesterday's trading.



During the rally, there were four gaps higher, at points a, b, c, and d. That tells us a supply/demand imbalance existed overnight. In addition, notice that on two days the overnight move -- along with a quick, post-opening move higher -- were all that happened during the trading day.



a.) Since February, prices have been in a sharp rally. The degree of the rally is one that can't be maintained -- it's simply too sharp a move higher to have any staying power.

b.) Prices are again at important points of resistance.

They Really Like Us!!!!

From Briefing.com

The $21 bln reopened 10-yrs draw 3.9% with a record 3.72 cover and 43.1% indirect bidders. The market was rallying on the way into results with the market running to tag the 3.92% level. The yield was well under what was anticipated, meaning players were coming in more aggressively, willing to pay up whether they came in through the dealers or not, the direct bidders got a hefty 16.3%. The 10-yr has since swung to tip the 3.888% yield point.

There is understandably a great deal of fretting and nervousness regarding the US' overall debt situation. With a looming supply that is quite large there are a number of people who are arguing that interest rates are heading higher. In fact, it seems that the argument is not a matter of if but when.

However, notice that a4% yield is actually a pretty good yield in the current environment. The German 10 year is trading at 3.12%, the British 4 year is at 4.06, and the Australian 10-year is at 5.85%. So, 4% is actually a fairly attractive yield. In addition, the market took a major nosedive today, adding to the attractiveness of Treasuries.

Gold Breaks Out