Finally On the Path

Hallelujah! The downgrade is finally here and while to many, celebrating such an event is borderline un-American, let’s take a moment to remember that this shift to AA+ from AAA represents a healthy step (however slight) in the direction of reality and away from the fantasy created by the scores of dimwits that have held seat in Washington DC over the past many decades.

From the absurd bailouts and extraordinary measures taken during the recent downturn to the failures of the massive and fraudulent “government sponsored enterprises” to ever expanding social safety net obligations and the preposterous and flatly un-fundable liabilities of archaic “New Deal” era policies, the Federal Government created a vast series of problems that, at this point, have no easy solutions.

But at the very least, the downgrade may initiate a definitive start down a path that could ultimately lead to the resolution of our fiscal woes by forcing major restructuring (i.e. significant austerity) in light of the repercussions that the degraded sovereign credit rating will bring for the macro-economy and as an effort to stave off future additional downgrades.

In short, the downgrade is a clear signal to all with a pulse that things MUST change.

In the meantime we may see a new bear market shape up for stocks, interest rates may begin to increase in the already fragile mortgage market, pessimism and fear may abound leading to a notable decline in household and corporate confidence with all outcomes working to worsen our economic slump.

The key is to recognize that this turn of events had to happen and is but one small step down the only path that can possibly lead to a stronger and solvent nation.

You will likely hear the president, like his treasury department before him, opine about the “math error” or the fact that S&P played a major role in the housing debacle but these are just efforts to discredit S&P’s action which clearly represents a substantial failure for the administration.

The fact is, the downgrade was inevitable, it was logical and wholly deserved for a nation that long ago cast any form of prudence and caution aside in favor of outlandish policy action, wholesale fraud and conceit.

Double Entendre: Light Vehicle Sales September 2010

While many of the latest auto manufacturer reports on recent auto sales appear fairly positive, looking at latest release of the Department of Commerce light vehicle sales series you can see that for the better part of the last decade auto sales have been terrible, stuck in a perpetual declining trend since the late 90s with the current level of sales last seen way back in early 1983.

With the tightening consumer credit conditions, structurally high unemployment and a decade long disappointing sales trend, recent auto sales results offer an interesting data-point but essentially paints a stark picture of significant economic weakness.

Where Is The Multiplier?

It appears we are nearing a critical juncture with respect to the fate of the “recovery”.

Was it really a recovery at all or just the combined effects of financial panic fatigue and a resurgence of speculative animal spirits mixed with a touch of retail therapy fueled by a giant government bamboozle of zero rate money and a trillion or two in stimulus?

Whether it was “cash for clunkers”, the housing tax credit, the massive purchase of mortgage securities, the never ending unemployment compensation, thousands of road projects and other government contracts, etc. etc… the government sought to force money through the system at a frenzied pace that can only be described as nearly comparable to the rate at which the economy collapsed during the worst of 2008.

But what was achieved for all the effort?

There was a notable jump up in stocks of course and a few transitory pops in auto sales and home sales with home prices feeling the effects of the increased buying activity.

The unemployment rate appeared to be in the process of forming a peak and consumer confidence improved resulting in some better than expected retail sales earlier in the year.

Something seems askew… Where is the multiplier?

The government embarks on a crusade of Keynesian monetary and fiscal stimulus the likes of which has never been seen before… a move that is sure to be judged by history to be outright recklessness and all we see is a pop in stocks, some additional auto and home sales, a peak in epically high unemployment and a tick up retail spending.

Worse yet, the stock market has been on the down low seemingly slumping into another “sell into the rally” bear trend since the near simultaneous end of the purchase of mortgage backed securities by the Fed, the end of the housing tax credit and the ramp up in financial regulation (Goldman debacle and Fin-Reg) back in April.

Is that it? Have we reached the end of the “shock and awe” simulative effects?

If so, what's next? What could the government possibly do next to sponsor the economy? Is there the political will to keep sponsoring the economy? Are we headed for another crisis in confidence?

This appears to be a tough situation indeed… one punctuated by the fact that all eyes now turn to China to look for signs of life in the global economy and a lead out of this epic mess.

Have we completely lost our marbles?

Index of Stress

The Federal Reserve Bank of St. Louis recently began publishing a new weekly index that seeks to track the general level of financial stress.

As periods of financial stress come and go a whole host of fundamental economic indicators immediately adjust to meet the near and long term expectations of market participants

Interest rates, yields spreads, popular market volatility indices all move in real time giving observers unequivocal evidence of changes general sentiment.

The St. Louis Fed has devised a method of crunching eighteen of these sensitive indices down into one convenient index it calls the St. Louis Fed Financial Stress Index (STLFSI).

The latest results of the STLFSI indicates that the level of financial stress is continuing its trend down from the epic levels seen during the fall of 2008 but remains elevated with respect to typical levels.

At a value of 0.31 the current level of financial stress is roughly equivalent to mid-2003 following the Enron/WorldCom debacle and remains nearly as elevated as period surrounding the 1998 Russian debt crisis and Long Term Capital Management.

Confidence Game: Consumer, CEO and Investor Confidence January 2009 (Final)

This post combines the latest results of the Rueters/University of Michigan Survey of Consumers, the Conference Board’s Index of CEO Confidence and the State Street Global Markets Index of Investor Confidence indicators into a combined presentation that will run twice monthly as preliminary data is firmed.

These three indicators should disclose a clear picture of the overall sense of confidence (or lack thereof) on the part of consumers, businesses and investors as the current recessionary period develops.

Last week’s final release of the Reuters/University of Michigan Survey of Consumers for December showed a continued slump for consumer sentiment with a reading of 61.2 and dropping 21.94% below the level seen in January 2008.

The Index of Consumer Expectations (a component of the Index of Leading Economic Indicators) increased to 57.8 remaining 15.12% below the result seen in January 2008.
As for the current circumstances, the Current Economic Conditions Index declined slightly to 69.2 or 26.69% below the result seen in January 2008.

As you can see from the chart below (click for larger), the consumer sentiment data is a pretty good indicator of recessions leaving the recent declines possibly predicting rough times ahead.

The latest quarterly results (Q4 2008) of The Conference Board’s CEO Confidence Index declined dramatically to a value of 24, the lowest reading in the history of the index.

The January release of the State Street Global Markets Index of Investor Confidence indicated that confidence for North American institutional investors increased 21.2% since December while European confidence increased 6.7% and Asian investor confidence declined 0.3% all resulting in an increase of 12.1% to the aggregate Global Investor Confidence Index which now rests 13.24% below the result seen last year.

Given that that the confidence indices purport to “measure investor confidence on a quantitative basis by analyzing the actual buying and selling patterns of institutional investors”, it’s interesting to consider the performance surrounding the 2001 recession and reflect on the performance seen more recently.

During the dot-com unwinding it appears that institutional investor confidence was largely unaffected even as the major market indices eroded substantially (DJI -37.9%, S&P 500 -48.2%, Nasdaq -78%).

But today, in the face of the tremendous headwinds coming from the housing decline and the mortgage-credit debacle, it appears that institutional investors are less stalwart.

Since August 2007, investor confidence has declined significantly led primarily by a material drop-off in the confidence of investors in North America.

The chart below (click for larger version) shows the Global Investor Confidence aggregate index.

GDP Report: Q2 2008 (Final)

Today, the Bureau of Economic Analysis (BEA) released their third and final installment of the Q2 2008 GDP report showing better than expected growth at an annual rate of 2.8%.

Looking at the report more closely though it appears that much of the growth was fueled by unusually large increases in exports, unusually large decrease in imports (inverse… declining exports adds to GDP), an unusually large increase in disposable personal income (likely fueled by the tax rebate checks) and fairly strong government consumption expenditures.

Still, fixed investment, both residential and non-residential continued to come under pressure with residential investment declining 13.3% and non-residential experiencing only tepid growth of 2.8% weighed down by a 5.0% decline in equipment and software.

The following chart shows real residential and non-residential fixed investment versus overall GDP since Q1 2003 (click for larger version).

Video(s) of The Day - Dodd and Kyl on the Massive Bailout Package

News Hour brings together Senator’s Chris Dodd (D-CT) and Jon Kyl (R-AZ) to discuss some of the legislative goings on related to the Paulson Mega-Bailout initiative.

Dodd confirms that although Congress feels somewhat obligated to protect taxpayers, they are pressed (by the market, etc.) to get this legislation done quickly and done “right”.

The Almost Daily 2¢ - A National Disgrace

Today, the federal government announced its intent to mount the most sweeping and radical incursion of our free markets and the most extensive corruption of our capitalist model likely seen in our nation’s entire history.

The individual should be outraged, disgusted and ashamed.

Wall Street billionaires and government elites together worked to create a fundamental mechanism and regulatory environment for the efficient distribution of debt then strongly encouraged over-consumption while the individual, apparently dissatisfied with the typical lot in life, played along.

Whether it was unregulated retail finance products such as mortgage, credit cards and other loans, all fraught with endless scams, or industry sponsored speculative propaganda from the finance and real estate sectors, or the governments unrealistic and artificial “Ownership Society” and affordable housing initiatives, the machine of consumption was used as an effective tool to finacialize society.

Consumers, home-buyers and housing speculators, in turn, displayed disgraceful conduct shirking even the most obvious of financial fundamentals and ignoring all forms of prudent behavior.

Now, we will all suffer.

Not just the speculators the imprudent and the financial titans … everyone.

And why do we all need to suffer?

Simple… To ensure that Wall Street billionaires can continue to be driven in their Bentley’s to and from their New York offices and their Hamptons Mansions while career politicians continue to wield their seemingly unchecked powers.

How ironic it is that it’s been just a little over a year since the federal government passed sweeping new bankruptcy reforms that dramatically limited the average Americans abilities to seek shelter during personal financial trauma.

Now average Americans are being FORCED to bailout the very same elites that lobbied hard for strong bankruptcy controls and would have NEVER given a single American facing financial distress a break.

All the while, the traditional media is airing self congratulatory interviews with key politicians and Bullish propaganda about the “infinite congressional balance sheet” all under the theme of “Hope is on the horizon”.

This is a sick, disgusting and disgraceful failure… The American system in its current form is a farce and history will surely bare that fact out.

The Almost Daily 2¢ - Twin Peaks?

Subtitle: The Big One?

The S&P 500 has dropped sharply in the last two weeks leaving the broad average at a level first seen in the summer of 1998.

The bear market selloff has, thus far, been fairly orderly yet events of last few days seem to have instigated a dramatic level of urgency and panic.

My take is that given the current state of affairs, it seems altogether possible that instead of bottoming and making a bear-market rally run back up to the 50 or 200 day moving average, we may actually see a dramatic continuation of the decline.

There are REAL reasons to panic and the government’s continuous attempts to postpone the correction has only made the situation worse.

Postponing a full recognition of the economic crisis does nothing to address the actual problems at hand.

As regular readers know, I have been following along with the recurring “Twin Peaks” post whereby I simply charted some very basic technical analytics (somewhat ala the amazing Louise Yamada mixed with a couple of my own inventions) which compared the underlying average movement of the current S&P/500 index to its performance during the unwind of the “dot-com” collapse.

There are a host of very interesting technical similarities (which are noted below) that indicates that we have fully entered into another bear market where on average the S&P 500 index retraces 20 – 30% from its prior peak.

It’s important to keep in mind that, at best, a bear market can be viewed as a transition into an period where there is a prolonged bias to sell into strength resulting in a successive series of lower highs yielding a clear downward trend.

At worst, there are periods (days or weeks) where particular stocks and the index as a whole will crash hard.

Study the following image (click for very large and clear version) of the S&P 500 index from 1995 to today then read below for the technical blow by blow.

Notice also, that I’ve added both the “effective” federal funds rate (light grey line) and an overlay indicating the period of the last recession.

As you can see, entering the last bear market, the Fed cut rate significantly taking it from 6.5% at the start of the bear market to 1.00% in the trough.

It’s important to note that although the Federal Reserve’s response was dramatic, the market still resulted in an over 48% decline.




THEN (1998 – 2000 Top)

• A. October 1998 – S&P 500 gives early warning sign by crossing its 400 day simple moving average (SMA). Notice also that the 50 day SMA breached the 200 day SMA.
• B. October 1999 – S&P 500 gives a second signal by crossing its 200 day SMA after a solid twelve month expansion. 50 day SMA touches the 200 day SMA.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

NOW (Today’s Top)

• A. June 2006 – S&P 500 gives early warning sign by crossing its 400 day SMA. Notice also that the 50 day SMA breached the 200 day SMA.
• B. March 2007 – S&P 500 gives a second signal by falling near its 200 day SMA after a solid nine month expansion. 50 day SMA similarly depressed.
• C. Three prominent but decelerating peaks set up the top.
• D. Between second and third (last) peak S&P 500 index breaches 200 day SMA. After the final peak S&P 500 index breaches the 400 day SMA.
• E. 50 day SMA heads down fast and crosses the 200 day SMA. (Cross of Death)
• F. 50 day SMA crosses 400 day SMA. (Cross of Far More Death)
• G. 200 day SMA crosses 400 day SMA. (Cross of Fiery Gruesome Death)

Question of The Day?

Am I the only one that thinks it’s COMPLETELY BIZARRE and SHAMEFUL that the SEC’s Christopher Cox is investigating short sellers rather than targeting the obvious criminals in charge of the current and collapsed financial giants (Countrywide, Bear Stears, Lehman, Merrill, Morgan Stanley, Golman, Fannie Freddie, WaMu, Wachovia… etc. etc.) that collectively gave us this immense economic crisis?

Video(s) of The Day - Pain, Suffering and Tragedy

Roger Altman, of Evercore Partners, explains how the current financial crisis is the worst since 1932 and will further exact wides-scale human suffering.

Further, Altman argues that the Federal Reserve pulled back from bailing out Lehman in order to avert a domino effect that could have resulted in a spiraling loss of confidence in the US.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings September 2008

National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing continued evidence that the new home market is experiencing a prolonged bout of depression.

Each component of the NAHB housing market index remain WELL BELOW the worst levels ever seen in the over 20 years the data has been being compiled strongly suggesting that the current severe contraction has surpassed all other events seen in the last 22 years and is now firmly in uncharted territory.

The Almost Daily 2¢ - The Close of the Opening Salvo

With all the dramatic breaking news, plunging markets and hand wringing you would almost think that we had reached capitulation day.

Unfortunately though (especially for those caught unprepared), we have only just tipped over the edge of an abyss with a bottom that is many years deep.

It appears pretty clear now that the veil of absurd optimism has lifted significantly and, at least for the moment, has given us a long hard stare at the new reality.

Sure, there will be some who continue to deny the obvious and spin a good tale (Don Luskin, Jerry Bowyer, Brian Wesbury, Mark Perry, Larry Kudlow) but these folks are simply relics of a bygone era with nothing left but empty ideals and misguided philosophy to fluff their egos while attempting to fool ours.

With each passing crisis, each slump of the stock market, each bankruptcy and foreclosure we are getting further and further from a brief economic expansion that now seems all too obvious to have been baked primarily on households and firms confusion of debt with wealth.

As we continue the slide into malaise it’s all but certain that our collective memory will soon forget or otherwise disregard that false boom period as the reminiscence of the tumultuous period of the dot-com collapse washes over and into the deteriorating period we now live.

Eventually, there will be general recognition that we clearly have entered into a secular period of continuous recession with no obvious growth drivers and countless liabilities from the ills of our past.

Make no mistake, unemployment, the one truly destructive economic force, has only just started its ascent with destinations all but unknown but effects all too certainly disastrous.

So, with solemn fanfare let’s all say goodbye to the charade and at least be grateful that soon we will (almost) all be on the same page.