Saturday, September 29, 2012

Weekly Indicators: surprising strong September rebound edition

  - by New Deal democrat

In the rear view mirror, 2nd Quarter GDP was revised down to a miserable +1.3% annualised, and households deleveraged substantially in that quarter as well. Industrial production and durable goods orders for August plummeted, and manufacturing in the Chicago region contracted in September. Spending rose, but was competely consumed by inflation. Income failed to keep up. Housing prices rose, new home sales went sideways, and consumer confidence rose or fell depending on what index you used.

Watching high frequency weekly indicators should show turns or continuations in before they show up in monthly or quarterly data. The message this week is that they do not confirm a continuation in the punk trend established by the August monthly data.

Let's start this week with Employment related indicators, which surprisingly were all strongly positive this week.

The Department of Labor reported that Initial jobless claims at 359,000 declined -23,000 from the prior week's unrevised figure.   The four week average fell another 4,000 to 374,000, about 3% above its post-recession low.

The American Staffing Association Index rose by two to 95. This is a typical seasonal bump, but does return the index to its high reading for the year. It has generally been flat at 93 +/- 1 since March. This week's increase is enough to at least temporarily remove the red flag from this indicator.

The Daily Treasury Statement showed that 18 days into September, $125.0 B was collected vs. $118.4 B a year ago, a $6.6 B or a 5.5% increase. For the last 20 days ending on Thursday, $133.2 B was collected vs. $126.7 B for the comparable period in 2011, a gain of $6.6 B or +6.7%.

Same Store Sales and Gallup consumer spending were all solidly positive:

The ICSC reported that same store sales for the week ending September 8 were up0.6% w/w and were also up +2.9% YoY.  Johnson Redbook reported another solid 2.0% YoY gain. The 14 day average of Gallup daily consumer spending as of September 27 was $76, compared with $65 last year for this period. Gallup's YoY comparison has been strongly positive for 8 of the last 10 weeks.

Bond yields were mixed and credit spreads narrowed:

Weekly BAA commercial bond rates fell .06% to 4.88%. Yields on 10 year treasury bonds rose .05% to 1.81%.  The credit spread between the two remained at 3.07%, which is close to its 52 week minimum. This is an excellent move.

Housing reports were all positive:

The Mortgage Bankers' Association reported that the seasonally adjusted Purchase Index rose about 7% from the prior week, and is up 8.6% YoY. Generally these remain in the middle part of their 2+ year range. The Refinance Index also fell about -9.9% for the week, with higher mortgage rates.

The Federal Reserve Bank's weekly H8 report of real estate loans this week fell 7 to 3548. The YoY comparison also decreased slightly to +2.0%, which was also the seasonally adjusted bottom. This is just slightly off of last week's mulit-year best numbers.

YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker  were up +2.2% from a year ago.  YoY asking prices have been positive for 10 months.

Money supply remains quite positive:

M1 declined -2.1% for the week! But it was up +2.5% month over month.  Its YoY growth rate fell from last week's +14.3% to 13.0%. As a result, Real M1 also rose to +11.3% YoY.  M2 increased +0.1% for the week, and was up 0.7% month over month.  Its YoY growth rate also rose again to +7.1%, so Real M2 rose to +5.4%. The growth rate for real money supply is still quite positive, despite the summer 2011 incoming tsunami of Euro-cash having disappeared from the comparison.

Rail traffic was negative YoY for the first time in a long time, but still due primarily to coal:

The American Association of Railroads  reported that total rail traffic was down -0.9% YoY.  Non-intermodal rail carloads were again off a huge -4.1% YoY or -12,500, once again entirely due to coal hauling which was off -16,500.  Negative comparisons declined from 12 to 11 types of carloads.  Intermodal traffic was up a miniscule 1,800 or +0.7% YoY.

Finallym the price of oil declined slightly last week, but gasoline prices and usage still show the choke collar engaged:

Gasoline prices finally fell last week, down $.05 from $3.80 to $3.84. Gas prices had risen $0.53 since their early July bottom.Oil prices per barrel fell slightly from $92.89 to $92.17. Gasoline usage remained negative on a YoY basis. For one week, it was 8770 M gallons vs. 8964 M a year ago, down -2.3%. The 4 week average at 8819 M vs. 8907 M one year ago, was down -1.0%.

Turning now to the high frequency indicators for the global economy:

The TED spread held steady at its new 52 week low of 0.27. The one month LIBOR  declined again to 0.2142, setting another new 52 week low. Both are well below their 2010 peaks and in the middle (TED) or low end (LIBOR) of their respective 3 year ranges.

The Baltic Dry Index fell slightly from 774 down 8 to 766, still well above its recent 52 week low of 662. The declining trend in shipping rates for the last 3 years remains fully intact. The Harpex Shipping Index fell yet again, down 8 from 386, and is now only 3 above its February 52 week low.

Finally, the JoC ECRI industrial commodities index declined 0.22 for the week to 124.4. It is still down slightly YoY. This number has improved sharply over the last month.

Almost all of the high frequency data this week was positive, much of it strongly so. Only the three transportation-related metrics were negative: rail traffic, shipping rates, and gasoline usage. All of these suggest considerable coincident weakness in the economy. But the positives were legion: gas prices declined, credit spreads narrowed, corporate bond prices increased, money supply remains strongly positive, overnight rates have sunk into a deep sleep, the recovery in housing continues, employment tax withholding has rebounded, temporary staffing has bounced, and the US consumer continues to spend like a champ! These positives suggest that the coincident weakness will pass rather than deepen. As always, energy prices are a wild card and bear close watching.

Have a nice weekend.

Friday, September 28, 2012

Weekend golden retriever

- by New Deal democrat

This is the time of week when Bonddad normally posts photos of his doggies. Since at the moment he is medicated and probably smiling and singing "la la la la la la la" somewhere, here is a photo of a golden retriever instead, doing what it loves to do the most: play with children:

This was mine's favorite time of year because of Halloween. He thought it was a holiday made just for him, because all the kids in the neighborhood would come pay a visit. Of course, when the little kids' "trick or treat!" was answered with an 85 pound lunk bounding out the door, sometimes there was a little extra shreiking!

I'll have Weekly Indicators tomorrow. Bonddad will be back next week.

ECRI's recession call 1 year anniversary: pending revisions, still wrong

- by New Deal democrat

One year ago this Sunday Lakshman Achuthan of ECRI appeared on WSJ television and announced that the US was "tipping into recession."

At the 30 second mark, one of the hosts asks, "When?" and Achuthan responds "Now."

At the 50 second mark, he gets more specific: "It might have started last month. It might start next month. But sometime I think it's going to wind up in the 3rd or 4th quarter."

Unless someone thinks a recession started 11 to 13 months ago, Achuthan's boast at about the 20 second mark that "On recessions we have never made a false alarm" is completely busted.

Subsequently in December ECRI revised its call to "by mid-year" 2012. While it is certainly possible that the data for a number of series could get revised down significantly for the second quarter, as of now that call remains wrong as well.

With real personal income declining in August (as reported this morning), industrial production down sharply, and real retail sales not making a new high, it is certainly possible that August could mark the beginning of a new downturn. Nevertheless, one thing that should be clear is that "Now" is not "11 months from now."

On a related note, there has been some consternation about the readings of ECRI's Weekly Leading Index, which recently has turned significantly positive no matter how it is measured. In fact, the index has never been at its current 6 month growth or YoY levels during a recession, but only after coming out of recession into recovery.

ECRI's founder, Prof. Geoffrey Moore, proposed three separate indexes: a Long Leading Index, a Short Leading Index, and a Weekly Leading Index. The Weekly index would be somewhat less reliable than the other two, but would have the virtue of being updated in very timely fashion. For example, the Weekly index includes mortgage applications, but these are not thought to be as reliable as housing permits - but permits are only reported monthly, so some of the data is close to two months old. Similarly, initial jobless claims are somewhat less reliable than unemployment from zero to 5 weeks. But the 0 - 5 weeks metric is only reported monthly in the employment report.

So the WLI should be taken with a few grains of salt. ECRI used to share its Long Leading Index as well, but that has been taken behind a wall for nearly three years. Three of its likely components, however - housing permits, real money supply, and corporate bond interest rates (inverted)- have generally been strengthening for the last 18 months. Only the fourth - corporate profits - is faltering.

So while I am willing to agree that manufacturing may be in a recession (sparked mainly by the global downturn), unless the consumer is further beaten down by declining real wages and spiking gasoline prices, and is unable to refinance debt at lower rates, I don't yet see more than a "recessionette" a la the first half of 2001.

New stock market highs = unlikely new recession has started

- by New Deal democrat

Yesterday I said it appeared likely that manufacturing - but not necessarily the economy as a whole - had slipped into recession. One reason is that the stock market continues to make new highs.

While it has happened that stocks have made new highs after a recession has begun, it is unusual, and the lag time has been brief. Here are two graphs showing the S&P 500 in log scale, first from 1957 to 1982:

And here it is from 1988 to the present:

In case you can't tell from the graphs themselves, of the 9 recessions that have happened during that period, the stock market has peaked first 7 times. In both cases where it did not, 1980 and 1990, the market made its final high within 45 days of the recession starting. Although it does not involve the S&P, in 1929 the DJIA made its final high 3 months into the recession.

The bottom line is , while it is possible that a recession may have already started, it is unlikely by this metric, and it is almost certainly the case that any such downturn did not start in June or before.

Thursday, September 27, 2012

OUCH! Did durable goods just jump off the fiscal cliff?

- by New Deal democrat

There's no getting arouind the ugly durable goods numbers this morning, shown below in blue, and "core" capital goods ex-military and transportation (mainly Boeing plane orders) in red:

It looks nearly certain at this point that manufacturing is in a recession.

But note the difference between 2000-01 and 2007-08. The "great recession" was a consumer-led recession, brought about by as energy spike together with a collapse in housing construction, and too much consumer debt. Durable goods did not meaningfully decline until well into that recession. By contrast, in the business investment led recession (internet bubble, anyone?) of 2001, durable goods spending declined well before a recession started.

The four week average of unemployment claims as of this morning is only about 3% above its March low, an unlikely event if a recession had already begun. Meanwhile the stock market just made new highs within the last couple of weeks, also not typical after a recession has already begun (more on that in another post).

So I am not convinced that, even if we have entered a manufacturing recession, it has bled over into the general economy enough to be consistent with a consumer recession as well. As I noted a few days ago, sadly it appears that the terrorist attacks of 9/11 were what pushed the economy in 2001 into enough of a tailspin to qualify as a recession. In the present case, one potential culprit is the "fiscal cliff," which must be factored into business decisions as to ordering and building early next year. Do we really have confidence that this Congress and this President will not repeat the debt ceiling debacle of July and August 2011? If we don't, should businesses?

A look at employment since the recession, measured 2 ways

- by New Deal democrat

A few months ago, Karl Smith of Modeled Behavior showed that there has been a stark bifurcation in the recovery of private sector service employment vs. the complete non-recovery of goods producing and government employment. Even with the generally poor employment reports of the last half a year, that stark difference remains.

First, here is the update of the comparison as of the most recent payrolls report. Blue is private sector service employment, red is manufacturing, construction, and government:

Private sector service employment has almost completely recovered since the recession. While there is no certainty that the trend will continue, if it does the recovery will be complete by early next year. Meanwhile, there has been no recovery at all in goods producing jobs and public sector jobs.
UPDATE: The above graph does not take into account the preliminary benchmark provisions announced by the BLS this morning. Once we take those into account, instead of still being down -770,000 jobs, the private services sector is down only -378,000 jobs, so the entire decline could be reversed by the end of this year.

Unfortunately, even the good news about service sector private jobs doesn't look nearly so good when we adjust for population:

Adjusted for population, there has only been a modest improvement in private sector service jobs, and the hemorrhaging in goods producing and public sector employment has continued relentlessly.

Wednesday, September 26, 2012

EVERY house price index has now turned positive

- by New Deal democrat

Last month I wrote that It isn't just Case Shiller: almost every house price index has bottomed, specifically noting that in addition to the Case Shiller index, 9 of the 11 other indexes had also turned positive YoY.

The remaining two with negative YoY comparisons were the Census Bureau's new home sales report, and the FNC repeat sales index.

Not any more. This morning the Census Bureau report on new home sales also showed that both median and mean prices for new home sales in August 2012 were positive YoY.

Further, last week FNC reported that:
Nationwide, July home prices – based on recorded sales of non-distressed properties (existing and new homes) in the 100 largest metropolitan areas – were up at a seasonally unadjusted rate of 0.9% from the previous month. They were up 0.7% from a year ago in July 2011. Year to date, home prices rose more than 4.6% since January.

So that's it. EVERY house price index has now turned positive YoY. Of course, these are nominal and not real, inflation-adjusted prices (although housing itself is about 1/3 of the entire measure of inflation, so I'm not sure how instructive that is). And yes, of course foreclosures blah blah blah shadow inventory blah blah blah. I've heard all about it for two years and it hasn't stopped the trend yet during all that time. Those who continue to advocate for that position need to explain, Why hasn't it already happened?

A look at sales, measured 3 ways

- by New Deal democrat

The NBER defines a recession as a pronounced downturn in production, sales, employment, and income. Although the last three years have by no means been good times for Joe and Jane Sixpack, the fact remains that employment and real income did turn up, and made new post-recession highs as of their last report.

Although, as per the weekly reports of same store sales and Gallup's conumser spending I post each Saturday, the YoY percentage increase in sales has remained positive, the fact remains that YoY data must be used with consideration that it will lag turning points as compared with seasonally adjusted monthly data. And the seasonally adjusted monthly sales data has generally been flat this year.

Monthly sales can be measured three ways: real retail sales, personal consumption expenditures, and manufacturing and trade sales. ECRI focused several defenses of its recession call one year ago on a downturn in the last of these. So let's look at where each stands as of the last report. The graph below shows real retail sales (red), PCE's (blue), and manufacturing and trade sales (green, right scale):

Note that only real PCE's have continued to make new highs. Real retail sales peaked in March and declined significantly until rebounding - but not to a new high - last month (they are still -0.3% below that peak). The comparison here is actually positive, since PCE's tend to decline faster going into a recession than retail sales.

Lakshman Achuthan has indicated that manufacturing and trade sales are ECRI's preferred metric. In the graph above, you can see that they appeared to peak in December of last year, but then made a slightly higher peak in May. They are -0.2% off that peak as of now.

The lack of growth in sales in the last half year is not such a downturn that necessarily means recession. At the same time, it is definitely a concern, since sales lead employment, and more particularly real retail sales (blue below, left scale) are a very good leading indicator for payrolls (red, right scale), as to which here is the most recent comparison:

Note that the blue line (real retail sales) always changes direction before the red line (nonfarm payrolls). An actual negative print in one of the two payrolls reports before the November election is a distinct possibility, and is one of the few things that could change the dynamic of that election profoundly.

Tuesday, September 25, 2012

Bonddad Linkfest and Bonddad's Mini-Vacation

  1. Swiss national bank's bond buying lowers core yields (FT)
  2. Gold hits euro record high (FT)
  3. EU junk bond prices start to sag (FT)
  4. Econo trolls (Noah Pinion)
  5. Coulda Been Worse (Krugman)
  6. The Conservative Mind (Brooks/NYT)
To all -- Bonddad is taking a mini-vacation.  I'll be back early next week.  NDD will be posting some stories.  Until then, consider this from Facebook:

Howdy, strangers

- by New Deal democrat

Hi. allow me to introduce myself. I used to blog here.... Well, at least it seems that way. It's been a few weeks since I posted anything substantial besides my weekly column. Anyway, there are times I have to choose between real life and blogging, and occasionally, blogging has to lose!

Since I haven't had the chance to throw up a bunch of charts and graphs, let me at least give a sense of where I think we are in view of the most recent economic releases.

First of all, on the downside, all of the recent manufacturing data has been negative. I don't think it would be inaccurate to say that we are in a manufacturing recession, at least as of August. Twenty or thirty years ago, that probably would mean that the entire US economy were entering recession. Hundreds of thousands if not more manufacturing laborers would be losing their jobs.

That isn't the case now. Between offshoring and robots, how many more production workers can seriously be laid off? In other words, a manufacturing contraction might not be enough to lead to a downturn in general employment or income.

Second, whether measured as broad sales including industry, PCE's, or real retail sales, sales have gone generally sideways this year. Broad sales and real retail sales are slightly below their recent peaks. That's not good, and it certainly lends credence to the manufacturing recession story, but at the same time with the exception of a few periods during the summer, consumers are continuing to spend on houses, on cars, and general stuff.

Which brings me back to two themes I have mentioned frequently here: real wages and gasoline prices. Real wages have gone nowhere in the last year and a half - in fact they have decreased slightly. Mortgage refinancing and laser-like focus on curtailing energy use seem to be holding up consumer spending. Whether consumers cave in or not is very much up to gasoline prices, it seems to me. The recent suprise $.50 spike certainly hasn't helped the rest of the economy. If we go back down to $3.30 a gallon this autumn, I anticipate consumer spending will pick up. If on the other hand we go back over $4 before spring, I suspect consumers will finally throw in the towel, and a generalized recession is much more likely.

At the beginning of this year, I thought that the second half would show strong growth fueled by retreating gas prices. I think we can throw that prediction in the trash can. I'm much more concerned about the direction of the economy than I have been at any point in the last 3 years. But I remain very cautiously optimistic that the worst we will see in the immediate future is a "recessionette," that is neither long enough nor deep enough to cross the crucial threshhold of a tailspin - like 2001 except ending on September 10 and without all the factory layoffs.

Thoughts On the Election

While we usually try to steer clear of political discussion here ("just the facts,  Mam"), it's hard to completely avoid what is perhaps the biggest story of the year: the presidential election.  While the outcome obviously has implications for the economy, the way in which the overall events have unfolded is absolutely fascinating.  Frankly, I'm very surprised by the turn of events and am beginning to think we will look back on this election as a watershed election.

When the election season started, I was of the opinion that it was Romney's to lose.  The economy has performing weakly; unemployment was still above 8%, and growth was moderate.  Among economic circles, we've seen discussion about the permanently unemployed for at least a year if not longer.  The deficit had topped $1 trillion for four years running.  In short, the economic backdrop against which the candidates were running was perfect for the challenger.

Romney also had a tremendous monetary advantage.  Thanks to the Citizens United decision, people and companies could donate unlimited amounts of money to a cause.  This led to the creation of the super-pac and limitless amounts of money being spent on campaigns.  Given the Republicans advantage with the upper class, this added to Romney's advantage.

At this point, let me interject what I think the Romney platform was supposed to be.  I have no proof of this; it's simply how I think he should have run the campaign given what I know about his history.  Central to this was Romney's health care plan in Massachusetts.  When he passed that, I really wasn't aware of him.  But I remember reading the story and thinking, "that is something that an aspiring presidential candidate would do."

So, my thought was his platform would be the following: "I was a successful businessman, I retired and devoted myself to public office and I passed a bi-partisan health care bill as governor of Massachusets (I worked across the aisles).  I also successfully turned the Olympic games around in 2002.  I'm a moderate Republican who has the ability to get things done, and who has the experience to get things done."   

The above is someone I could easily vote for.  In fact, the above is someone who I would like to vote for.  There's just one problem: the Republican base has become bat-shit insane.  Think about this: in order to be a Republican presidential candidate, you have to publicly state that you do not believe in evolution.  At one of the debates, a questioner asked if they all believed in creationism or didn't believe in evolution (I forget which).  They all raised their hands.  And one of them (Ron Paul) was a doctor!  That, of course, begs the question: what doctors do these people go to?  Do they use leeches to cure headaches?

And then there is the entire Obamacare argument.  First, let's start with a basic fact: the US health care delivery system is a poorly put together (and that's being charitable).  There is a wide swath of the population that does not have access to health insurance, which obviously lowers their preventative options.  In addition, half of all bankruptcies are caused by medical bills, and over 70% of those had insurance.  I've seen the counter-argument that people can just go to the emergency room for treatment (which is literally the least efficient and most expensive way to deliver primary and preventative care) and that the study has a "liberal bias" (which of course is the standard allegation made to any idea which counters a Republican idea).  Put another way, the counter-arguments are at best factually challenged and at worse, intellectual garbage devoid of fact.

But, the only way to solve the health care problem is to increase the pool of risk to a large enough sample to make it possible to insure everybody.  There are only two options available here: mandatory purchasing of insurance or single-payer.  That's it.  And, the Republican platform included the mandatory purchase of insurance for about 15 years, which is why Romney implemented that idea in Massachusetts.  So, Obama adopted the Republican idea, thinking that in doing so, he'll get Republican support largely because it was their idea.  We know how that went.  The Republicans were more interested in, well, being dicks, then solving the problem.

The moderate Romney (the successful businessman who saved the Olympics and then became the Massachusetts governor with the history of working with people to solve problems) had no chance of appealing to a Republican base that is now to the political right of the Czar's of Russia.  And that's where the problem really started.  The base of the Republican party is nuts and won't accept a moderate, so the moderate had to pretend he was conservative.  And in pretending that he's a "real conservative" he completely alienates half the country at the start.

In addition, I can't think of a time when I have seen a candidate or campaign operation that is this poorly organized and run. Peggy Noonan recently called it a "rolling calamity" and I think she is right.  Frankly, at this point I'm wondering how Romney even made it to the top of Bain Capital; he seems that inept to me.  The level of sheer incompetence is mind-numbing.

And then there is Romney himself.  I don't think I have ever seen a presidential candidate who really seems so ill-at-ease with both himself and other people.  Compare him to Clinton; Clinton -- regardless of whether you liked him or hated him -- is great with people.  He connected on an emotional level and made you feel part of the conversation.  Romney has literally no personal charm and no warmth at all.  This, in and of itself, really makes me wonder why is he really running for the presidency?  An inherent part of the job is shaking hands and meeting people.   Romney just doesn't seem to like people at all.

And finally, consider this: Romney was the best candidate the Republicans had to offer.  Consider the alternatives:
  • Michelle Bachman is a pure loon (vaccines cause autism?  Really?); 
  • Rick Santorum isn't comfortable with anything that has happened since roughly 1950; 
  • Newt Gingrich somehow claims a family values mantra while continually trading older wives in for younger models; 
  • Herman Caine, well, anyone who's presidential slogan is too close to a Pizza commercial isn't a serious contender; 
  • Rick Perry (ah.... ooops);
  • Ron Paul; at least he's consistent.  Now, he's also a start-raving, Austrian economics loving nut ball, but at least he's always been that way.
Not one of the people mentioned is anywhere near close to presidential caliber.  Romney was the best choice.  The Republican field literally fell out of a clown car and the audience decided that Romney had the least comical shoes to display to the public as a whole.

To get back to my central thesis: this election was the Republicans to lose.  Now, they could still pull a victory out.  There are, after all, about 6 weeks left in the campaign, during which anything could happen.   But the election has already shown how completely dysfunctional the modern Republican party has become.  They have no serious candidates who have the gravitas to be president -- people like Dick Lugar who have been driven out and made to feel completely unwelcome.  Their presidential field included conspiracy theorists, people who are woefully and willingly blind to scientific knowledge,  crank economists who espouse theories that were abandoned (with good reason) after the 1920s, inarticulate figureheads and one of the most wooden and inept presidential candidates in modern history.  This isn't a political party; it's a support group for badly damaged people with a tremendous amount of misplaced anger  and rage.


Morning Market Analysis

Today, let's start with oil, taking a look at the charts along multiple time frames.

On the monthly chart, we see the spike to over 140 that led to the last recession and the subsequent sell-off.  However, for the last two years, oil has traded between the 38.2% and 61.8% Fib lines of those price extremes.  In addition, notice the relative drop in volatility over the lats two years as expressed by the narrowing Bollinger Bands.

The weekly chart also shows that prices are trading between the 115 price level established in early 2011 and the 75 price level established later that year.  Additionally, prices are trading more sideways than trend wise.

The daily chart shows that prices have broken lower, moving through the trend line started at the beginning of August.  Prices are not below the 200 day EMA, along with all the shorter EMAs.  Momentum is dropping and money is flowing out of the market.  The most likely move from here is lower.

The weekly chart of three Asian markets -- Hong Kong, Taiwan and South Korea -- all broke about four weeks ago and have consolidated those gains.  Consolidation after a move higher is a good sign; it indicates that traders are consolidating positions.  The lack of a strong sell-off in any of these markets also bodes well for the future.

However, Malaysia and Singapore have rallied but fallen to support. 

The mixed picture in the Asian markets is a bit concerning, as the weakness in the Malaysian and Singapore markets detracts from the strong gains we've seen elsewhere. 

Monday, September 24, 2012

Bonddad Linkfest

  1. Romney, GOP stuck in old America (Politico)
  2. 60 Minutes interviews with current candidates (CBS)
  3. Romney won't lower taxes (BB)
  4. Markit EU composite manufacturing index drops (Markit)
  5. UK retail sales up 2.7% (NSO)
  6. Brazilian unemployment at 5.3% (Brazil Statistics)
  7. EU consumer confidence drops (Europa)
  8. Philly Fed increases but still negative (Philly Fed)
  9. Housing update (Alphaville)
  10. QE's compared (Alphaville)

Stagnating LEIs, Weak Employment and Moderating Manufacturing Are Really Concerning

Consider the following from the Conference Board's latest LEI press release:

Note that the series have been stuck at a reading of 95 point something for the last seven months.  We've sen one good increase -- the '5 in July -- but that only returned the series to the levels from May.  In addition, we've seen three negative readings in the last seven months.
Let's look at the primary drivers of this slowdown:

 I've circled the big contributors to the slowdown.  There are two big problems.

1.) Employment: weekly initial unemployment claims are still at weak levels.  Consider this chart:

I've drawn a black rectangle around the current level of claims and a red circle around levels we're used to seeing in a recovery.  Notice that claims usually move down closer to the 300,000 level when the economy is healthy -- at least that's the level we saw in the 1980s, 1990s and early 2000s.  However, now we're seeing claims above 350,000 -- not a health sign.

In addition, we're seeing a weaker manufacturing level.  First, this is something both NDD and I have been highlighting pretty frequently over the last few months (see here, here, here, here, here and here).  In addition, consider the following charts:

The top chart shows that new orders for machinery are weakening.  The middle charts shows that industrial production has stalled, which the bottom chart shows that ISM new orders are showing a contraction.

A lot of the reason for this manufacturing weakness is the EU's recession bleeding over into the US market.  But, regardless of the cause, it's not something we need to see right now.

Morning Market Analysis

All of the major averages have broken through resistance established at the end of the summer and all consolidated gains last week.  We see a strong EMA picture -- the shorter EMAs are above the longer and all are rising; prices are using the EMAs for technical support.  However, note the weak MACD QQQ picture; it is moving sideways has has been moving sideways for about a month.  Also note the rise in potential volatility as evidenced by the rising Bollinger Band width.

On the weekly charts, the SPYs and QQQs have moved through resistance, but the IWMs have retreated to levels established in the spring of 2011.  All three markets have strong, underlying technicals; we see rising MACDs and CMFs and strong EMA trends.  However, after breaking through resistance, it's standard practice for markets to at least fall back on some profit-taking and turn previous resistance into support going forward.

In addition to the rising stock market, remember that the weekly treasury charts are showing several markets that have broken through long-term support.  The most striking example is the long-end of the market (bottom chart), when fell to the 50 week EMA two weeks ago.  However, the 5-7 part of the curve (top chart) broke trend nearly two months ago, leading the charge.  Also note the declining momentum and CMF readings. 

Sunday, September 23, 2012

Liveblogging World War 2: an appreciation

- by New Deal democrat

On of my very favorite reads on the entire internet is Prof. Brad DeLong's continuing series, Liveblogging World War 2. The series is a day-by-day description of the war in the present tense from a variety of contemporaneous sources on all sides of the war.

While we know the outcome of the hostilities, those who wrote in the moment obviously did not, and so we get to experience the war as they did: chronologically, without knowing what is to come next - in other words, as close as we could possibly come to experiencing the war without living through it.

For the last 3 years, there has been an almost unrelenting series of victories and conquests by the Axis powers, as they invaded or scored smashing victories against China, Poland, the Benelux countries, France, Indochina, north Africa, Russia, Pearl Harbor, the Phillipines, Burma and Malaysia, Singapore, Indonesia, and New Guinea. The victories of the Allies have only been in blunting Axis advances: Britain saved itself from invasion in 1940, Russia has defended Moscow and Leningrad, and in June of this year the US prevented the Japanese from taking over the mid-Pacific in the Battle of Midway, in which they sank 4 Japanese aircraft carriers.

By now Germany and Japan have agreed to split Asia along a line roughly on the border of present day Iran and Pakistan. Germany is advancing east through the Sahara and intends to capture and cross the Suez canal and then conquer Arabia. They have also conquered the entirety of the Ukraine and are virtually at the shores of the Caspian sea, stopping along the way to the critical Caucasus oilfields to advance on Stalingrad on the Volga River. Japan is at the doorstep of India, and has continued to advance south to threaten Australia, the northernmost of which has seen at least one Japanese bombing raid.

In response, during the last month the British have established a defensive line in Egypt at a place called El Alamein. The Russians have launched a fierce and desparate counterattack to cling to Stalingrad. The US has sought to stop the Japanese and launch a counterattack at a nondescript island in the Solomons about 1000 miles northeast of Australia called Guadalcanal. The Japanese navy still has the advantage as the US has just lost the aircraft carrier Wasp, and now has exactly one carrier, the Enterprise, left in the entire Pacific. At each of the three locations, the enemies are pouring more and more resources into the battle.

There is no knowledge as to how any of these battles will turn out. Neither the Axis powers nor the Allies have reason to know that the long line of Axis victories are about to end, almost simultaneously, at each of the three obscure locations - El Alamein, Stalingrad, Guadalcanal.

We must stay tuned to find out.