Back on Tuesday

We have a long weekend coming up. Plus, Mr$. Bonddad and I are going to Austin for her nephew's graduation from UT. Until then, have a happy and safe weekend.

Today's Markets

The markets opened lower with a big gap down. Right around 12:30 the markets ran into the 50 minute SMA and then moved lower. But at the end of the day, prices moved higher on strong volume. Prices moved through the 10, 20 and 50 minute SMA on this last run.


Are the SPYs forming a double top? Notice the 10 day SMA has turned lower and prices are again right at the 20 day SMA.




The 10 day SMA is moving lower and has crossed below the 20 day SMA. Also note the latest high was below the first high.



The 10 day SMA is moving below the 20 day SMA and the second high is below the first high.

A Look at the Federal Budget Part III

Click on all images for a larger image

Mandatory spending has been steadily increasing as a percentage of all spending.


Mandatory spending has been steadily increasing as a percent of GDP

While social security has been dropping as a percentage of total spending, both medicaid and medicare have been increasing -- offsetting the decrease is social security spending.


In addition, while social security spending as a percent of GDP has held remarkably steady over the last 30 or so years, the increase in medicaid and medicare spending has increased.

A Look at the Federal Budget Part II

S0 -- where do we get out money from? Click on all images for a larger image.


The source of government revenue has been remarkably consistent over the last 40 years. It comes mostly from individual income taxes. However, notice the large percentage increase in social security taxes as a source of revenue.


And as a percent of GDP, the source of revenue has been pretty consistent as well with the big increase occurring in social security taxes.

A Look at the Federal Budget Part I

Today I'm going to be running charts from the CBOs historical data series spread sheet. This is simply the nuts and bolts of the nation's finances. Click on all images for a larger image.


Despite the fact that total federal outlays as a percent of GDP have been remarkably constant since 1969 fluctuating around 20%.
The country as a whole has been running deficits. In fact, we're only run a surplus in four of the last 40+ years. That means we've been issuing a lot of debt. But interestingly enough...

Interest paid as a percent of total federal expenditures dropped at the beginning of this decade thanks to record low interest rates. In addition,

Interest paid as a percent of GDP has dropped as well.

Thursday Oil Market Round-Up

On the weekly chart we see a bullish scenario. The MACD and the RSI are both rising. Prices -- which fell hard at the end of last year -- formed a triangle consolidation pattern at the bottom and have risen through upside resistance. Also note the 10 and 20 week SMAs are now moving higher with the 10 about the 20. Finally, prices are above the SMAs.



Inside the big triangle consolidation mentioned above we see two consolidations. Prices started to move higher at the end of February and have been rising since. Notice that prices are above the SMAs, the shorter SMAs are above the longer SMAs and all the SMAs are moving higher. This is the most bullish orientation possible. Finally, the RSI is at high levels and the MACD is rising.

Bottom line: these charts are bullish.

Let's take a look at some fundamentals:


Crude oil stocks are still at incredibly high levels.

Fuel prices are starting to move higher, even though


Demand is lower than 2007-2008 period.

I still think the market is getting ahead of the fundamentals. But I've been wrong before.

Today's Markets

Click on all images for a larger image

Are we heading lower? A look at a single chart says no, but a collection of pieces from a series of charts tells us its a much higher probability.




The MACD on the SPYs has given us a sell signal.

The OBV is moving lower and has also given us a sell signal


The QQQQ's MACD has given us a sell signal and its 10 day SMA has moved below the 20 day SMA
The IYTs (transportation average) are already below the 10 and 20 day SMA and the MACD has given us a sell signal.

Finally


Notice that on the daily chart prices have been unable to maintain the technically important level of 91.30. Also note today's heavy selling at the end -- which is not a good sign.

Asia Needs to Change Its Model

From the FT (hat top to Mark Thoma):

The recent upturn in Asian economies is creating a dangerous optimism that almost wilfully ignores the difficulties ahead. Future historians will mark 2008 as the year that the development model that has driven much of Asia’s rapid growth for the past two decades went bankrupt. While the next decade will represent a difficult transition towards a new development model, unfortunately many Asian countries are responding to the economic crisis with policies that may temporarily boost growth but that are only likely to make the transition more difficult.

At the centre of the Asian development model, with China providing a steroid-fuelled example, were policies aimed at mobilising high levels of domestic savings and channelling massive investment into productive capacity. These policies boosted savings by constraining consumption even while they forced rapid growth in domestic production. One of the consequences of the Asian development model has been that production outgrew consumption for decades. When a country produces more than it consumes, it must run a trade surplus to export its excess capacity. The Asian model consequently required high and rising trade surpluses that allowed Asian producers to produce far in excess of what Asian consumers could afford to absorb.

But there cannot be trade surpluses without trade deficits elsewhere. A fundamental requirement for the Asian model was that foreigners were able to run the requisite trade deficits. In practice, only the US economy and financial system were large and flexible enough to play this role. The Asian model, in other words, implicitly involved a massive bet on the willingness and ability of the US to continue to run large and rising trade deficits.

For nearly two decades US households borrowed recklessly to finance the consumption binge that allowed Asian exporters to continue exporting excess capacity but, as household balance sheets in the US became vastly overextended, it was just a question of time before a long deleveraging process would occur. The global financial crisis is part of this very process.

Very thought provoking.

Housing Starts and Construction Employment

From the Census:



Click for a larger image.

Let's take a look at this data and coordinate it with some other data points.

First, here is a chart of housing starts:


We are now at the lowest level in over 40 years. This is actually good news as Barry pointed out yesterday. Let's flesh out why (From Calculated Risk).


While the new home inventory is approaching realistic levels from an absolute number perspective...



The months of available inventory is at sky high levels right now. And who is going to buy these homes?


The US consumer is already in debt up to his eyeballs.

In other words, we already have plenty of homes to buy.

Let's add more dimension to this information.

Here is a chart of total construction employment from the St. Louis Federal Reserve:



The maximum rate of construction employment occurred in January 2007 when there were 7,737,000 jobs in the US. In the latest report there were 6,348,000 or a total loss of 1.389 million construction jobs. That's a ton of jobs. What are the possibilities those jobs are coming back? We already know that new housing construction is at a record low. How about commercial real estate?



Above is a chart of residential and nonresidential investment per quarter. Notice that nonresidential picked up some of the slack as residential fell. Now that number appears to have topped out.

So, while the news about new home buildings is actually good news because we already have enough homes, it does not bode well for the employment situation where it could take a long time to heal.

Japan Shrinks 15.2%

From the Associated Press:

Japan's economy contracted by a 15.2 percent annual pace in the first quarter — its sharpest drop on record — as exports plunged, companies slashed production and families cut back on spending, the government said Wednesday.

.....

Wednesday's data confirmed what many had been dreading. The drop in gross domestic product was the steepest since Japan began compiling such statistics in 1955. Compared to the previous quarter, GDP fell 4 percent. That's the fourth straight quarter that the economy shrank.

.....

Like its Asian neighbors, Japan has been been pummeled by the unprecedented collapse in global demand triggered last year by the U.S. financial crisis. Manufacturers have had to suspend production, shut down plants and lay off thousands of workers, and the possibility of a rising jobless rate could drag on any nascent recovery.

This is a huge drop. It also indicates the problems inherent in the current order of things. Asia is built on an export model -- that is, the economies' primary method of growth comes from selling "stuff" to other countries. When the other countries stop buying (like in a workwide recession) the economy takes a massive hit.

This also has ramifications for the US. One of the good stories coming from US GDP reports was exports. But when other countries have problems this severe, US exports will also suffer.

Wednesday Commodities Round-Up

Click on all images for a larger image

Like all commodities, industrial metals took a nose-dive at the end of last year. Since then prices have consolidated in a sideways moving rectangle pattern and risen through the upside resistance line of that pattern. The MACD and the RSI are still rising, although the RSI has moved sideways for the last few weeks. Finally, prices are moving into the 10 week SMA and the 10 and 20 week SMAs are moving higher.

The daily chart better shows the consolidation of the last few weeks. Notice that prices have a slight upside bias but are really mired in a consolidation pattern. The MACD and RSI printed a lower number on the second top of the last month and a half, indicating an overall weakening. But prices have not crashed or moved significantly lower, indicating traders are contemplating their next move. The stochastics -- which are a better indicator in a trending market -- are printing a total right at 50. Although the long-term average is still moving higher (the 50 day SMA), the 10 and 20 day SMA are moving sideways. In addition, prices are tightly bound with the SMA indicating a lack of overall direction.

Like all commodities, agricultural prices took a nose-dive at the end of last year. Since then prices have consolidated in a triangle pattern and risen through the upside resistance line of that pattern. Prices are right below the 50 day SMA. A move through this level would be an important technical development. However, the 10 and 20 week SMA are tied in a tight range and neither is moving higher right now.


The daily chart is very interesting. Prices are consolidating above an important technical level. In addition, the RSI is printing right below 70 and the MACD is still rising (although it may be moving to give a sell signal soon). However, the price/SMA picture is very bullish -- prices are above all the SMAs, the shorter SMAs are above the longer SMAs and all the SMA are moving higher.

Today's Markets

The 10 day chart is very interesting. First, notice the downward movement that occurred starting at the beginning of last week. Prices moved lower, moving through previously established lows, for a majority of the week. On Monday prices gapped higher and continued that trend a bit today. But prices moved lower several times, holding the $91.30 level until the last move of the day.



Notice how today's action stayed right at the Fibonacci level.

Are Things Really Betting Better?

I've been remarkably bullish of late -- which for me is a huge change. The bottom line is I think the numbers are moderating. However, as I hopefully point out on a regular enough basis -- the economy and the markets like to make an ass out of me whenever possible.

To the bullish side we have this article from the WSJ:

After a queasy period when the U.S. economy went from bad to dreadful beginning last fall, a series of improved reports has fueled hopes that the country is on the cusp of recovery. Corporate borrowing costs have fallen. Surveys of businesses and households show increased confidence. The labor market is showing tentative signs of improvement. Investors have seized onto these "green shoots," as Federal Reserve Chairman Ben Bernanke called them, sending the Dow Jones Industrial Average up 30% from its 12-year low in March.

Yet last week's government report that retail sales fell in April sapped hopes that consumer spending is on the rise. And the housing market, where the seeds of recession were sown, remains distressed. In brief, the signs of recovery so far have been inconclusive.

"The shoots are still pretty green and pretty thin," warns economist James Hamilton of the University of California, San Diego.

You can read Hamilton over at Econbrowser.

On the negative side, we have this story:

Commercial real-estate loans could generate losses of $100 billion by the end of next year at more than 900 small and midsize U.S. banks if the economy's woes deepen, according to an analysis by The Wall Street Journal.

Such loans, which fund the construction of shopping malls, office buildings, apartment complexes and hotels, could account for nearly half the losses at the banks analyzed by the Journal, consuming capital that is an essential cushion against bad loans.

Total losses at those banks could surpass $200 billion over that period, according to the Journal's analysis, which utilized the same worst-case scenario the federal government used in its recent stress tests of 19 large banks. Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks

So -- I think the answer is "it depends". However, I still think a big key is the increase in the way people feel. To that end, I think these three polls are compelling:

About the Consumer Driving Growth....

From Barron's:

The core of Keegan's strategy is retrenchment by U.S. consumers as they go from their debt-enabled buying binge of the last decade to balance-sheet repair. He figures the process won't stop until the consumption portion of gross domestic product shrinks from more than 70% now back to its long-term average around 65%.

That process may already be occurring. According to the Federal Reserve, consumers slashed borrowing in March by the largest dollar amount since the government started keeping track in the 1940s.

A few percentage-points worth of spending relative to GDP doesn't seem like a lot, unless you are talking about a $14 trillion economy. "I've always been of the theory that if you get the consumer right, you're going to get U.S. GDP right and you'll get the trend in global GDP right," Keegan says.

This is a common thought among a wide swath of economists -- that the US consumer isn't going to be the engine of growth he's been over the last few expansions.

To that end, consider this graph (click for a larger image):


This is a chart going back to the first quarter of 1970. It uses chained 2000 dollars to determine the percentage of personal consumption expenditures of GDP. Notice that in the latest expansion, PCEs increased their percentage of GDP by 400 basis points. That's a lot.

Just How Serious is the Credit Contraction?

Click on all images for a larger image

Notice that over the last 30 years we've had three other periods when consumer loan growth stagnated at a far worse degree than we are seeing now.

Consumer loan growth is not even negative year over year yet. Also note there are three other times when the year over year rate of loan growth was negative -- and now is not one of those times.


We've also see three other periods when commercial loan growth occurred at a rate far lower than we are seeing now.


In addition there are six other times when commercial and industrial loans grew at negative rates -- and now is not one of those times.

Treasury Tuesdays

Click for a larger image


The Treasury market is now moving lower. Prices have broken through the lower line of a consolidation triangle and are flirting with the 200 day SMA. Prices rose from the sell-off but ran into upside resistance at the 20 day SMA. Also note the bearish orientation of the SMAs -- the shorter SMAs are below the longer SMAs and all the SMAs are moving lower.


The TLTs have a similar pattern except they broke through the 200 day SMA earlier. This illustrates a key point of market analysis: watch all four markets (equities, bonds, commodities and currencies) and watch the important subparts of each group. It may seem like a lot of information, but one you get use to it it can provide valuable insight into what is happening.

Today's Markets

Today the market opened higher on an upside gap Then the market continued moving higher using the 10 and 20 minute SMAs as technical support. Finally, notice the really large move higher at the end on strong volume. That's very encouraging for tomorrow.


On the daily chart we have a big move up from the 20 day SMA through the 10 day SMA. But let's not get too excited. My guess is we've moving into a consolidation phase at best. The recent sell-off wasn't strong enough or deep enough to weed out some of the longs yet.

Empire State Survey Improving

From the NY Fed:

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers worsened only modestly in May. Although negative, the general business conditions index rose 10 points to -4.6, its highest level since August of last year. The new orders index fell several points and remained below zero, while the shipments index inched into positive territory. The inventories index remained negative, but rose from last month’s record low. Price indexes also continued to be negative, with the prices received index falling 10 points to a record low. Employment indexes indicated further contraction in employment levels and in the average workweek. Future indexes improved substantially for a second consecutive month; the future general business conditions index rose 11 points to its highest level since September.

Let's take a look at the accompanying charts:


The general business index has risen two months in a row and is currently at levels last seen in July and August of last year. New orders spiked last month but retreated this month. This months retreat looks like people backed off after a big increase in the previous month. In other words, it's a natural move lower after increased activity.


The shipments index has increased two months in a row as has the unfilled orders index. The unfilled orders index is a good sign as it indicates there is a backlog of work for people to do.

The bottom line is the last two months of NY Fed reports have been encouraging.

Industrial Production Drops .5%

Click on all images for a larger image

From the Federal Reserve:

Industrial production decreased 0.5 percent in April after having fallen 1.7 percent in March. Production in manufacturing declined 0.3 percent in April and was 16.0 percent below its recent peak in December 2007. The decreases in manufacturing in April remained broadly based across industries. Outside of manufacturing, the output of mines fell 3.2 percent, as oil and gas field drilling and support activities continued to drop. The output of utilities moved up 0.4 percent. At 97.1 percent of its 2002 average, industrial output in April was 12.5 percent below its year-earlier level. The capacity utilization rate for total industry fell further in April, to 69.1 percent, a low over the history of this series, which begins in 1967.

The report has little good news. The best part of the report is the rate of contraction is the lowest in 6 months:



But consider the following charts:

Any gain made in industrial capacity during the last expansion is now gone. In addition, the only time we have seen a drop of this size was in the mid-1970s. The inner chart shows the severity of the drop.

We are now using the least amount of industrial capacity in the last 40 years. This means that when the economy starts back up there is little reason for business to heavily invest because there's so much spare capacity to utilize.

Here is a chart of the year over year (and month over month) percentage change in production. Notice the year over year change in all the numbers is sharp.


Finally, notice the auto industry is taking it on the chin in a big way:


About the only positive is the is the best reading we've gotten in the last 6 months.