Friday, January 16, 2009

Weekend Weimer and Beagle

Bonddad's $i$ter in law gave us a great present for Christmas. Each dog has their own blanket. And in the corner of each blanket is the following:




This is just way too cool. So, a special thanks for Bonddad's $i$ter-in-law for this incredibly great present. And in case you were wondering how cool the dogs look ....



Industrial Production Is Cratering

From the Fed:

Industrial production fell 2.0 percent in December, and declines were again widespread. Output was revised up in October, but it was revised down in November; for the fourth quarter as a whole, total industrial production decreased 11.5 percent at an annual rate. At 103.6 percent of its 2002 average, output in December was 7.8 percent below its year-earlier level. In December, manufacturing production dropped 2.3 percent. The output of mines moved down 1.6 percent, and the output of electric and gas utilities was little changed. Capacity utilization for total industry fell to 73.6 percent in December, a level 7.4 percentage points below its average level from 1972 to 2007.

Those are some huge losses in the year over year numbers. Let's see what the charts say:

That chart is what economists call cliff diving, meaning the number is just falling head over heels into lower territory.

This is also a very important number from a future GDP perspective. Remember that total private domestic investment is a component of GDP growth. This chart tells us that part of net private investment will not be moving higher anytime soon.

Intel's Earnings Announcement is Terrible

From FT:

Intel declined to predict future sales in an uncertain economic environment on Thursday and warned of rapidly deteriorating margins as its production lines ran on reduced capacity.

The world’s biggest chipmaker kicked off what seems certain to be a grim earnings season for technology companies by reporting a 90 per cent fall in profits and a drop in revenues it said was unprecedented in the past 20 years.

Intel said fourth-quarter profits were $234m, down from $2.3bn a year earlier. Revenues of $2.8bn were in line with a second warning on the quarter it delivered last week but were 19 per cent lower than third-quarter sales.

“This is only the second time in 20 years that our fourth-quarter revenues were below the third quarter, the last being the year 2000 when revenues declined less than 1 per cent,” Paul Otellini, chief executive, told an analyst conference call.

“The pace of the revenue decline in the quarter was dramatic and resulted from reduced demand and inventory contraction across the supply chain,” Mr Otellini said. He said Intel was assuming inventory reductions in the current quarter.

Intel is the largest semiconductor company by market cap -- in fact by market cap it is nearly twice as large as its nearest rival. That makes this an important announcement. So let's take this piece by piece:

Intel declined to predict future sales in an uncertain economic environment. Translation: we have absolutely no idea what the hell is going to happen. But it's probably not good. If things were good we would be telling you repeatedly to get people to buy our stock.

.....warned of rapidly deteriorating margins as its production lines ran on reduced capacity. Translation: we've got some big problems. As a big company we rely on out ability to scale our costs. But when orders dip below level x we've got problems. And orders are below that magic level, so we've got problems.

.....and a drop in revenues it said was unprecedented in the past 20 years. Translation: we've never seen it this bad before. As a result, we're probably going to become extremely cautious over the next two quarters. That means lack of capital investment, lack or hiring ... you get the idea. And if we're doing that, you can bet our competition is as well.

“The pace of the revenue decline in the quarter was dramatic and resulted from reduced demand and inventory contraction across the supply chain,” Translation: the economy is falling off a cliff right now.

Highlights of the Recovery Plan

From the WSJ:

Highlights of Economic Recovery Plan
$32 billion Funding for "smart electricity grid" to reduce waste
$20 billion + Renewable energy tax cuts and a tax credit for research and development on energy-related work, and a multiyear extension of renewable energy production tax credit
$6 billion Funding to weatherize modest-income homes

Science and Technology
$10 billion Science facilities
$6 billion High-speed Internet access for rural and underserved areas

$32 billion Transportation projects
$31 billion Construction and repair of federal buildings and other public infrastructure
$19 billion Water projects
$10 billion Rail and mass transit projects

$41 billion Grants to local school districts
$79 billion State fiscal relief to prevent cuts in state aid
$21 billion School modernization

Health Care
$39 billion Subsidies to health insurance for unemployed; providing coverage through Medicaid
$90 billion Help to states with Medicaid
$20 billion Modernization of health-information technology systems
$4 billion Preventative care



* $500 per worker, $1,000 per couple tax cut for two years, costing about $140 billion
* Greater access to the $1,000-per-child tax credit for the working poor
* Expansion of the earned-income tax credit to include families with three children
* A $2,500 college tuition tax credit
* Repeal of a requirement that a $7,500 first-time homebuyer tax credit be paid back over time


* An infusion of cash into money-losing companies by allowing them to claim tax credits on past profits dating back five years instead of two
* Bonus depreciation for businesses investing in new plants and equipment
* Doubling of the amount small businesses can write off for capital investments and new equipment purchases
* Allowing businesses to claim a tax credit for hiring disconnected youth and veterans

Let's review where we are.

According to the latest Beige Book things are pretty grim. This information is confirmed by the latest FOMC Minutes release. That means we are in a situation where we should do something. The proper question then becomes, what?

On one side, the Federal Reserve has been doing everything it can (and then some) to keep the financial sector afloat. The Fed has expanded its balance sheet enormously to deal with the financial crisis. Whether or not you agree with that expansion is a different question than whether or not it has been effective. The answer to the latter is yes -- credit spreads have come down. Lending won't return to pre-recession levels for awhile because, well, we're in a recession when lending naturally slows down anyway.

Then we have the consumer side of the equation which is in terrible shape. The US economy needs an active consumer, which is responsible for about 70% of out economic growth. But those expenditures have not been coming as fast lately. In fact -- the US consumer is pretty much going on strike right now:

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The main goal is to increase consumer demand through government spending. The logic goes like this: the government spends more money. In spending this money they hire people to do things either directly (by directly hiring them) or indirectly (by having government contracts go to private firms who then hire people etc...). This puts more money in people's pockets which they in turn go out and spend.

The big question is will it work? The basic GDP equation (consumer spending + investment + exports + government spending = GDP) says so. But it's important to remember that the best laid plans of mice and men can run afoul too. In other words -- this is not a guarantee and should not be sold as such. There are still a ton of risks involved with this move.

Forex Fridays

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Notice the following on the weekly chart

-- In the second half of last year prices rallied to technical resistance levels established in 2006, but then ran into selling pressure

-- Prices fell to just below the 20 week SMA and have since rallied to just below the 50 week SMA

-- The RSI is neutral and

-- The MACD looks peaked out

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Notice the following on the daily chart

-- Prices fell in December but have since risen

-- Price have moved through all three SMAs, although they are just above the 50 day SMA

-- The RSI is rising

-- The MACD is rising

Thursday, January 15, 2009

Today's Markets

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Notice there is technical support right around the 84 level. Prices moved through that level today, but bounced back. Also note the increasing volume since the end of December -- the volume was increasing as prices moved lower.

Also note there is technical support at/around the 82 level.

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Prices dropped hard in the morning, then rallied into the 20 minute SMA. Prices moved to the 81 level and then rallied hard. Note the increased volume on the rally. Prices moved just above the 200 minute SMA and then retreated, but rallied again into the 200 day SMA.

This is what a reversal looks like. Note the intra-day turnaround, the increasing volume on the rally and then the close on higher volume. That's a big move.

Bernanke's Speech

Bernanke made a speech on Tuesday to the London School of Economics. The opening line is especially important.

However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking.

This is an incredibly important point that needs further discussion.

Above is a chart or real (inflation adjusted) median household income from the Census Bureau. Note that during this expansion income dropped and then increased but is not higher now than at the start of this expansion. Also note that while there has been an increase over the last 30 years, the increase is (roughly) $8000. In other word, it's not that big an increase.

At the same time, here is a chart of real (inflation adjusted) GDP

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Notice that real (inflation adjusted) GDP more than doubled for the years 1980 onward. That leans an interesting question: where did the money for consumer purchases come from to expand GDP?

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Household debt. The bottom line is people are spending money they don't own. But at the same time, it's understandable. While their family income isn't increasing with the nation's product, people in general want more stuff. So they borrow money to get it.

What we're going through right now is the great unwinding of the giant, 30 year debt acquisition binge we've been going through for the last 30 years. And it isn't pretty.

Beige Book Paints A Dim Picture

The Fed Released the Beige Book a yesterday. I paints a very grim picture of the economy. Here are some highlights:

District reports indicate that retail sales were generally weak, particularly during the holiday season. A majority of Districts noted deep discounting during the holiday sales season. Vehicle sales were also weak or down overall in the Districts reporting on them. Manufacturing activity decreased in most Districts. Declines were noted in a wide range of manufacturing industries, with a few exceptions. Services sector activity generally declined across the Districts, with exceptions in some sectors of the Boston, Richmond, and Chicago Districts. Additionally, several Districts noted weaker conditions in transportation services and slow or decreased demand in tourism activity. Conditions in residential real estate markets continued to worsen in most Districts. Reduced home sales, lower prices, or decreases in construction activity were noted in many Districts. Commercial real estate markets deteriorated in most Districts, with weakening construction noted in several Districts. Overall lending activity declined in several Districts, with tight or tightening lending conditions reported in most Districts. Credit quality remained a concern in several Districts. Agricultural conditions were mixed in response to varying weather conditions across the Districts. Mining and energy production activity generally declined since the previous report.

Read the whole report -- but only if you have a strong stomach.

We're Nowhere Near a Bottom in Housing

From the WSJ:

More than 2.3 million American homeowners faced foreclosure proceedings last year, an 81% increase from 2007, with the worst yet to come as consumers grapple with layoffs, shrinking investment portfolios and falling home prices.

Nationwide, more than 860,000 properties were actually repossessed by lenders, more than double the 2007 level, according to RealtyTrac, a foreclosure listing firm based in Irvine, Calif., which compiled the figures.

Moody's, a research firm, predicts the number of homes lost to foreclosure is likely to rise by another 18% this year before tapering off slightly through 2011.

There is a bit of good news here:

Foreclosure activity did slow in the fourth quarter overall, declining 4 percent from the third quarter, but jumped nearly 40 percent from the fourth quarter of 2007.

And foreclosure activity last year was up 225 percent from 2006, the year home prices began a deep slump that prevented many homeowners from selling or refinancing.


"State legislation that slowed down the onset of new foreclosure activity clearly had an effect on fourth-quarter numbers overall, but that effect appears to have worn off by December," Saccacio said. "The recent California law, much like its predecessors in Massachusetts and Maryland, appears to have done little more than delay the inevitable foreclosure proceedings for thousands of homeowners."

The bottom line is the economy is creating a ton of stress, which is leading to this problem. And the real problem is underwater mortgages -- mortgages that are worth more than the house. So long as that problem persists the housing market will be in trouble.

Thursday Oil Market Round-Up

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Notice the following on the weekly chart

-- Prices fell hard after July, but appear to be consolidating

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

-- The RSI is oversold

-- The MACD appears to be turning

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Notice the following on the daily chart

-- Prices are above the 10 and 20 day SMA

-- The 10 day SMA has crossed above the 20 day SMA

-- From the end of December to early January, prices rallied to just below the 50 day SMA, but backed off

-- The MACD has been rising for the last two and a half months

-- The RSI is neutral

Bottom line: The weekly chart says this market is done selling and maybe wants to rally. The daily chart says maybe.

But consider these two charts from the latest This Week in Petroleum:

Oil and gas stocks are increasing -- and oil stocks are at the top of a historical range. This indicates there is less demand for oil from the market right now.

Wednesday, January 14, 2009

Today's Markets

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There are some incredibly important points on this graph

1.) Note that 92 (line 1) provided incredibly strong resistance to an upside move. As prices moved higher, the average volume also increased. Granted this was weaker volume because of end of the year trading, but an increase in volume should not be overlooked. But -- prices fell.

2.) Since being rebuffed at 92 prices have continued to move lower on increasing volume. Now prices are approaching line 2, another important technical level

3.) Prices have moved below all the SMAs

4.) The only good thing about this chart is the SMAs are bunched together in a tight range.

Nortel Files for bankruptcy

From Bloomberg:

Nortel Networks Corp., North America’s biggest maker of telephone equipment, filed for bankruptcy protection in the U.S., a victim of the global credit crunch and declining sales.

Nortel, based in Toronto, had more than $1 billion in assets and debt, according to a Chapter 11 filing of its U.S. subsidiary today in Wilmington, Delaware. Fourteen affiliates of Nortel’s financing unit are seeking similar protection in Delaware. Five units filed for bankruptcy there under Chapter 15. Nortel said Canadian affiliates also will seek protection.

“It’s the end of a saga,” said Benoit Lalonde, vice president of fixed income at Laurentian Bank Securities, a unit of Canada’s seventh-largest bank. Laurentian doesn’t own Nortel debt. “Nortel is a corpse awaiting burial. I’m sad to see it happen but the tears were shed many months ago.”

Wow -- I remember when Nortel was a hot stock that could only go up......

Retail Sales Tank

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Thanks to Calculated Risk for the chart

From Bloomberg:

Sales at U.S. retailers fell more than twice as much as forecast in December as job losses and the choking-off of credit led Americans to cut back on everything from eating out to car purchases.

The 2.7 percent decrease, the sixth consecutive drop, extended the longest string of declines in records going back to 1992, the Commerce Department said today in Washington. Purchases excluding automobiles slumped 3.1 percent.

Today’s figures indicate that the hit to spending in the recession is even deeper than estimated, and spurred a slide in stock-index futures. The loss of 2.6 million jobs and declining home and stock values are squeezing households, hurting retailers from Wal-Mart Stores Inc. to Tiffany & Co., which today said its holiday sales fell 21 percent and cut its earnings forecast.


Sales fell 0.1 percent for all of 2008 compared with the prior year, the first decrease in the Commerce Department’s records. Comparable data only go back to 1992 because government economists reformulated their retail-sales figures earlier this decade, and didn’t revise historical records beyond that year.

November’s decline was revised to 2.1 percent from a previously estimated fall of 1.8 percent.

Today’s report showed declines in 11 of the 13 major categories tracked by the government, led by a 16 percent plunge at gasoline service stations that partly reflected the slump in fuel costs. The drop at grocery stores was the biggest since April 2002 and the decrease at restaurants was the largest since the terrorist attacks in September 2001.

Note some of the data points: the loss is twice as much as estimated ... this is the first year over year loss since 1992 when the Census Bureau started keeping records ... November's decline was revised lower ... this is the longest streak of declines .... etc.. There is not once piece of good news in the release.

Let's take a closer look at the retail sector's charts. The charts below are from

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Notice the following on the retail sector

-- The index was in a rally until the last quarter of 2007

-- Prices formed a double top in 2006 and 2007

-- Prices moved through key technical support in the last quarter of 2008

-- The 10 and 20 week SMAs are both moving lower

-- The 50 day SMA has a slightly negative trend to it

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

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Notice the following on the specialty retail chart

-- Prices were in a rally until the 3Q 2007

-- Prices have continually moved through key technical levels since breaking their rally

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below all the SMAs

These are both incredibly bearish charts

Wednesday Commodities Round-Up

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Agricultural prices were in a strong rally from 2006 - 2008. Prices formed a double top in the first half of 2008, and then dropped hard in the third quarter. Now the upward trend line that started in 2006 is providing upside resistance to prices. Also note the following:

-- The SMAs are in a bearish alignment with the shorter SMAs below the longer SMAs, but...

-- The 10 day SMA is now moving higher

-- Prices found strong resistance at the 20 week SMA

-- The weekly SMA has been falling for the entire year as has the MACD, but

-- The MACD may be bottoming right now

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Notice the following on the daily chart

-- The SMAs are bullishly aligned with the shorter above the longer, but

-- The 10 and 20 day SMAs are both moving sideways

-- All of the SMAs are in a tight price range

-- Prices fell through the 10 and 20 day SMA on Monday

-- The MACD has been rising for the last two months, but

-- the RSI dropped off since the first of the year


Tuesday, January 13, 2009

Today's Markets

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Notice the following on the daily chart

-- The SMAs are bunched together. The 10, 20 and 50 day SMA are less than a point and a half away from each other

-- Prices are below all the SMAs

-- Prices have broken through the uptrend started in late November

-- Prices are below the downward sloping trend line

-- Volume has been increasing as prices have been dropping

Why More TARP Money is Needed

The TARP program has been extremely controversial. However, regardless of which side of the controversy you some down on, consider the following charts before you make your final decision. All of these charts are from the FDIC's recent Quarterly Banking Profile:

The percent of FDIC insured institutions that were unprofitable was at its highest level in the third quarter.

The biggest issue for banks is the loan loss provisions -- meaning the amount of money banks set aside for losses. These numbers are large -- and they are increasing:

The industry reported year-over-year growth in net charge-offs for the seventh consecutive quarter. Net charge-offs totaled $27.9 billion in the quarter, an increase of $17.0 billion (156.4 percent) from a year earlier. Two-thirds of the increase in charge-offs consisted of loans secured by real estate. Charge-offs of closed-end first and second lien mortgage loans were $4.6 billion (423 percent) higher than in the third quarter of 2007, while charged-off real estate construction and development (C&D) loans were up by $3.9 billion (744 percent). Charge-offs of home equity lines of credit were $2.1 billion (306 percent) higher. Charge-offs of loans to commercial and industrial (C&I) borrowers increased by $2.3 billion (139 percent), credit card loan charge-offs rose by $1.5 billion (37.4 percent), and charge-offs of other loans to individuals were $1.7 billion (76.4 percent) higher. The quarterly net charge-off rate in the third quarter was 1.42 percent, up from 1.32 percent in the second quarter and 0.57 percent in the third quarter of 2007. This is the highest quarterly net charge-off rate for the industry since 1991. The failure of Washington Mutual on September 25 meant that a significant amount of charge-off activity was not reflected in the reported industry totals for the quarter.
In addition,
The amount of troubled loans is still very high. And finally:

Bonddad on the Economy

I am a member of a Facebook group called Speaking of Taxes. I gave a presentation to the group last week. Here is a link. It lasts about half an hour.

Treasury Tuesdays

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Notice the 7-10 year part of the curve is still very high. And....

Prices are really high relative to the last 5 years.

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Let's take a closer look at the three month chart.

-- The 20, 50 and 200 day SMA are all moving higher

-- The 10 day SMA has moved lower and crossed below the 20 day SMA

-- Prices have run into upside resistance at the 20 day SMA

-- Prices are still above the 38.2% Fibonacci retracement level from the rally that started in early November

There is a bid in the Treasury market caused by concerns about stock earnings. Considering we're at the beginning of earnings season and that earnings season is probably going to be pretty bad I would think this bid will be in the market going forward for a bit.

Today's Market

Actually, it's yesterday's market. And this is important so I'm going to keep this up and run the Treasury market charts in a few hours.

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Some very important technical developments occurred yesterday.

1.) Since the end of November, the SPYs have been in an upward sloping trend channel. Yesterday prices fell through the lower support line of that channel.

2.) Starting in early October, there was a downward sloping trend line that acted like the top of a triangle consolidation pattern. Prices broke through this trend line a little over a week ago. Prices broke back through this line yesterday.

3.) While the RSI has been trending higher for the last few months, it is now at a technically important level

4.) Prices have fallen through all the SMAs over the last few trading days.

It looks as though prices want to test the lower 80s levels again. Considering Alcoa's announcement yesterday to kick off the earnings season along with the announcement that banks will announce their first quarterly loss since 1990 a retesting of lows makes sense right now.

Monday, January 12, 2009

Today's Market

I am flying back to Houston today, so when the market closes I will be 30,000 feet above the ground. I will post this in the morning. See you then.

CBO Releases Economic Projection

From the CBO Blog:

  • A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent, a steep decline from a historical perspective.
  • A slow recovery in 2010, with real GDP growing by only 1.5 percent.
  • An unemployment rate that will exceed 9 percent early in 2010; the unemployment rate has been that high only twice in the past 50 years (in 1975, for one month, and in 1982-1983).
  • A continued decline in inflation, both because energy prices have been falling and because inflation excluding energy and food prices—the core rate—tends to ease during and immediately after a recession; for 2009, CBO anticipates that inflation, as measured by the consumer price index for all urban consumers (CPI-U), will be only 0.1 percent.
  • A drop in the national average price of a home, as measured by the Federal Housing Finance Agency’s purchase-only index, of an additional 14 percent between the third quarter of 2008 and the second quarter of 2010; the imbalance between the supply of and demand for housing persists, as reflected in unusually high vacancy rates and a low volume of housing starts.
  • A decrease of more than 1 percent in real consumption in 2009, followed by moderate growth in 2010; the rise in unemployment, the loss of wealth, and tight consumer credit will continue to restrain consumption— although lower commodity prices will ease those effects somewhat.
  • A financial system that remains strained, although some credit markets have started to improve; it is too early to determine whether the government’s actions to date have been sufficient to put the system on a path to recovery.

The CBO has released a full, accompanying report which I recommend everyone read as well. This report is going to be used as supporting evidence for a big plan. What's important to remember about this plan is the following assumption:

Under the standard assumption CBO uses for its estimates—namely, that current laws and policies regarding federal spending and taxation remain the same—we forecast the following:

In other words, this is without a stimulus plan, FYI. If there is no plan, then I agree with this scenario.

I should also add the following important caveat: there is no guarantee the fiscal plan will work as advertised, planned or desired. It's simply the best shot we have right now at solving the problem.

More Barron's

I'm going to continue with on more excerpts from the Barron's interview along with some commentary:

Mario Gabelli: In 15 days we will have a new leader who is going to re-brand America. His first priority as CEO of the country is to create jobs and insure that no adult is left behind in this economic system. ..... The missing element is confidence. New tax laws are going to help with that. The working person is going to get a financial stimulus, and even under the most bearish scenarios 91% of those who can will be working in December 2009. You're going to see an investment-tax credit and a change in depreciation, encouraging small businesses to make capital investments. On Sept. 15 somebody shut off the lights for the business person. It has been hell since. We need to go from this hell for businesses to a kind of purgatory. More spending on investments and the possibility of a lower tax rate for corporations would send an interesting message to the business world.

That's nice, but what happens now?

Gabelli: Come April or May, the numbers will be a lot better than in the fourth quarter. Car dealers tell us they are starting to sell cars, but the buyers still need financing. Yes, unemployment is going to rise. But once a new president comes in and enacts fiscal stimulus and promises tax cuts, things will start changing. Once businesses see some stability, they can start planning and looking at cost efficiencies.

As far as corporate earnings go, an enormous tsunami hit the economic world. It is no different than labor strikes in the 1960s. When the steelworkers struck, did you base stock multiples on the absence of earnings, or step back and ask what normalized earnings would be over an economic cycle. And shouldn't the P/E multiple expand to account for depressed earnings?

This really hits the new administration's top priority on the head: right now there is no confidence in much of anything. This situation started in the credit markets and has now spread to the economy as a whole. I personally think it was a primary reason why McCain lost the election: people were simply sick of the way things were and wanted something different.

Now the new administration has to deliver. Assuming they start to make good on their promises the consumer could start feeling better. Personally, I still think we'll see a weak first half followed by a fair second-half. But that assumes that Washington gets on track and actually does something positive. Without that, we've got serious problems.

Barron's Round-Table Excerpt

At the beginning of the year -- and at the mid-points -- Barron's has a round table with a group of money managers. Love them or hate them, this is a very savvy group of people and their insights are valuable. Here are some notable excerpts:

The whole process of deleveraging is deflationary. It will last several years. Where most economists will probably err is in how the corporate and household sectors react to this. They probably have built into their models expectations that private households and corporations react to fiscal stimulus as they always did. That is wrong. In previous deep recessions the household sector lost about 5% of its net worth. This time around, it has lost about 20%. Households will become much more cautious for years. Instead of spending, they will save.

This was a consistent sentiment. The US consumer will now start saving more and spending less. Part of this is the result of deleveraging -- US Households have a ton of debt on their books and the current recession is forcing them to look at that in more depth. The decrease in spending will have profound ramifications for years to come. US growth is predicated on consumer spending. A drop in spending therefore implies lower growth unless something else picks up the pace.

Gross: Typically we think of financial leverage, but corporations have been levered in two additional ways. The lower tax rates of the past 10 to 20 years have to [go] back up. Then there is operational leverage, which is no more obvious than in the auto industry. Corporations have been geared to a high level of global consumption, and now they must eliminate plant, labor and such. Based on tax, financial and operational leverage, the outlook for corporate profitability and profit margins isn't good.


Zulauf: There will be changes in the corporate sector, too. S&P earnings peaked at about $100 or so. This year they could slump to $20 or $40. The consensus estimates are way too optimistic. Much depends on whether the problems in the real economy hit the financial industry, causing it to relapse. The behavior and thinking of corporate executives will change dramatically. Companies will repair their balance sheets instead of spending and expanding, and that's why the deleveraging process will take years and years and years. Government and central-bank stimulus won't have the multiplier effects we used to see. Economic growth will be much lower in the next five or six years.

This is an interesting observation and it dovetails nicely into the previous statements about consumer spending. As consumers spend less through the deleveraging process corporations will make less money. As a result, their investment plans etc... will be negatively impacted.

MacAllaster: I can't believe you people can't find one good thing to say about the market, and at its low last year the market was down more than 50%. The bad news is in the market. Earnings are going to come down hard, but the market has come down even harder. Some bargains are out there, though they are hard to find because P/Es are difficult to determine. Still, a lot of companies are selling for well under book value, and some have high yields. The stock market is probably the place to be, particularly financials. Leverage is coming out of companies, and that will continue. But the process has created bargains.

This is a good point. Valuations are cheap, and yields are good. Over at the Big Picture Blog, Barry has noted that investor sentiment has been this low a few other times and the market rallied afterwords. But Ii should add that valuation is terrible timing method. Just because something is cheap today, don't think it will rise tomorrow.

We're Nowhere Near a Bottom in Housing

From this week's Barron's:

I agree with a lot of what Bill says. The economy is experiencing a rain delay. Nothing is going to happen for a while. Although the government's spending efforts will help, they won't be enough to cure the two biggest problems. The first is housing. Unsold inventory of houses is more than a year's worth, and prices could go down another 10%-plus. Mortgages have been reduced and prices are down, but 68% of the public still owns a home, versus 64%, the historical trend. The mortgage-equity withdrawals of recent years are over. Consumers spend 14% of their after-tax income on housing, more than they pay for food. No matter what the government does, it may not help housing, and in turn, the consumer.

Oscar Schafer provides some good context for what the central issues are:

1.) Massive supply:

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There are a ton of houses on the market both in an absolute number and in the months of available inventory at the current sales pace. In addition

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Sales are dropping because

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Job losses are increasing leading to

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Lower consumer confidence

Additionally -- do people really need all of these houses on the market?

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Homeownership is declining

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And the number of home vacancies is at multi-decade highs.

On top of that total household debt is $13.9 trillion (which is about the same size as total US GDP) and

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Households are heavily in debt (although they are decreasing that level lately).

Therefore, we have established that

1.) Inventory is incredibly high
2.) Sales are dropping
3.) Overall home ownership is now decreasing
4.) The US consumer is heavily in debt and is paying off his debt right now
5.) There is little reason to buy a home when consumer confidence is this low.

As always, thanks to Calculated Risk for the great graphs.

Market Monday's

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Notice the following on the weekly chart:

-- All the SMAs are moving lower

-- The shorter SMAs are below the longer SMAs

-- Prices are below the 20 and 50 day SMA, but have risen above the 10 day SMA and are currently using the 10 day SMA as technical support

-- The RSI is rising

-- The MACD is turning around

-- The OBV is terrible

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Notice the following on the daily chart

-- Prices and the SMA are bundled together in a tight range, indicating indecision

-- The 10 day SMA is rising through the other SMAs

-- The MACD is increasing

-- The RSI is increasing

-- The OBV is neutral

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Notice the triple top break-out failed miserably. That is not a good sign for the future. In addition, look at the lack of volume in the second half of the chart relative to the first half of the chart. There is just not a lot of excitement.