Video of The Day - Twin Peaks!

Super stock market technician Louise Yamada breaks down the current market turmoil and presents a far less than optimistic outlook.

And note the "twin peaks" reference... hmmm....

Question(s) of The Day - Fog of War?

Are all the bailouts and market interventions just the result of an economic “fog of war?

Can government officials simply not see that all their interference is making matters worse?

Will Bernanke and Paulson (and Geitner) be doomed to years of post traumatic stress disorder?

Unemployment Mashup – MA vs. RI October 2008

As I had noted in my prior posts, historically it has been very unusual for there to be more than a 1.5% difference (either more or less) between the unemployment rates if Massachusetts and Rhode Island.

Lately though, we are seeing a historically unusual spread between Rhode Island’s high and accelerating rate and Massachusetts’ far lower but rising rate.

In fact, the current 3.8% spread now significantly exceeds all spreads seen in at least 40 years.

This indicates that either Rhode Island’s current rate would need to fall dramatically or the Massachusetts rate would need to increase sharply…. My sense, especially in light of the financial turmoil seen since September, is that Mass will be the one playing catch-up.

Today’s state and regional unemployment report shows that, in October, the Rhode Island unemployment rate rose dramatically to a stunning 9.3% while the Massachusetts rate jumped to 5.5%.

Although Massachusetts experienced the largest year-over-year gain since the recessionary environment that followed the tech-led dot-com bust, the spread between Rhode Island and Mass has opened even wider, to 3.8%, further indicating that Mass may be poised for explosive unemployment growth over the next several months.

The Almost Daily 2¢ - Twin Peaks?

Subtitle: Capitulation is Not a One Day Trading Event!

It finally happened…

We have significantly broken through the “dot-com” lows and soon, I believe, there will be a wider realization that the two bust periods (2000 to today) are actually one… one long secular bear market fraught with delusion and systemic speculation that will inevitably grind down to a much more humble yet fundamental level.

Yet, as the subtitle alludes, some will feel we have reached capitulation.

But, capitulation is NOT a one day trading event... Anyone who studies the charts below can plainly see that to be fact.

So one might ask, “Why is it that consensus on Wall Street still accepts phony simplistic notions?”

The answer, in my opinion, can best be expressed with more questions…

Why did it take Wall Street, the Fed and Treasury two years to (barely) accept the obvious severity of the uncontained housing decline?

Why did it take over a year for consensus to accept that we might be experiencing a significant economic contraction?

Why did Wall Street not see that the emerging markets, whose bread and butter was exporting cheap junk to U.S. consumers (who consumed on credit), would plunge along with us?

Why were there streams of charlatans (Kudlow, Ben Stein, Brian Wesbury, Jerry Bowyer, Don Luskin, Abby Joseph Cohen) spinning endlessly in the business media about the “Goldilocks Economy”, “Soft Landings” and S&P 1600 by year end?

Why, as late as March 2008, did Barney Frank not see that Fannie and Freddie would collapse this year?

America is currently a leaderless land of competitive mass delusion.

We take something as dry and certain as collected macroeconomic data (home sales, home prices, retail sales, unemployment claims and industrial production) and breathe fiery partisan ideology into it.

It’s not enough to interpret the data in order to extrapolate curves and forecast likely economic trends… no… forget the data… we need to determine, based on your reading of the data, if you are pro-growth and pro-America… a pessimist (code words for lefty) or an optimist (code for righty)?

Worse yet, when we begin to finally see that the “writing on the wall”, another delusion takes over… we turn to government as if stimulus checks, bailouts, housing rescue bills and nationalization of our finance industry is the answer to all of our troubles.

It’s just disgraceful.

As a result, this decline will likely run much longer than many think as these delusions wind down and we collectively accept that we are in a very difficult position.

To date, I believe we have merely lowed some of our expectations … not yet have we truly acknowledge the depth of this decline and how long and hard it will be to “right the ship” and rebuild both economically and politically.

As regular readers know, I have been following along the stock market decline for about a year now with this 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.

Be sure to study the charts well as they present several different ways of capturing market volatility and together compare past market performance to what we are seeing today.

I will continue to post the comparison to the “dot-com” era bear market for posterity but now that we have broken through the 2002 lows all technical similarities going forward have ceased… we are firmly in uncharted territory as the two bust eras are now one.

The “Percentage Up-Down” chart clearly shows that we have just entered a period of REAL volatility BUT also leads one to believe that we may have a long way to go in this market shakeout.

The “Up-Down Daily Closings” chart seems to indicate that although we have seen increased volatility and significant declines, we have yet to match the distribution of daily up closings and down closings (inverted red line).

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.





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)
• H. It’s over Johnny… OVER! (Uncharted Territory)

Question(s) of The Day - Bounce or Bust?

So, today we bounced off of the dot-com bear market closing low of 776.76 (occurred on 10/10/2002 with an intraday low of 768.63) on the S&P 500… will the rally hold?

Where are we headed next?

UPDATE!! Obviously... we went lower... Ouch!

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey November 2008

Today, the Federal Reserve Bank of Philadelphia released the results of their Business Outlook Survey for November showing a dramatic resumption of deterioration of the regions manufacturing sector with the current activity index indicating substantial contraction at -39.3.

The survey of the Philadelphia regions manufacturing sector has been a pretty solid leading indicator of the overall strength or weakness and recession experienced by general economy.

As you can see by the following chart (click for larger version), during the past three post-recession expansion periods, the “current” diffusion index (more on diffusion indices later) generally vacillated between 0 and 35 while the “future” index left the period of contraction at an elevated level and eventually joining the “current” index.

Finally, as the economy pushes closer to contraction, both indices decline dramatically with a breach of -20 by the “current” index generally indicating that recession is upon us.


As you can see from recent results, -20 had been breached significantly while the “future” index stands at -10.4.

With today’s results there is now near certainty that any recent parallel to the stagflationary eras of the 70s and early 80 have given way to a stronger deflationary force bringing down prices, new orders and employment simultaneously.

The following chart shows the latest results of the “current new orders” “current prices paid” and “future employment” components (click for larger versions).

Notice that that current orders, future employment and current prices paid are all now trending down.

The following chart (click for larger) shows these measures during the last stagflationary era seen between 1976 – 1980. Notice the clear divergence of rising prices and falling growth.

Follow The Leader: Index of Leading Economic Indicators October 2008

Today’s results of the Conference Board’s Leading Economic Indicators continue to indicate troubled times ahead declining 0.8% from September and declining 3.49% compared to October 2007, leaving the index at 99.6.

It’s important to note that a year-over-year decline greater than 1.5% has ONLY preceded EVERY recession that has occurred in the last 59 years so the 11 consecutive and significant year-over-year declines strongly suggests that overall the components of the index are indicating that recession is upon us.

Mid-Cycle Meltdown?: Jobless Claims November 20 2008

Today, the Department of Labor released their latest read of Joblessness showing seasonally adjusted “initial” unemployment claims jumped 27,000 to 542,000 from last week’s revised 515,000 claims while “continued” claims increased a whopping 109,000 resulting in an “insured” unemployment rate of 3.0%.

It’s very important to understand that today’s report continues to reflect employment weakness that is strongly consistent with past recessionary episodes and that this signal is now so strong and sustained that a contraction in the economy is fundamentally certain.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

I have added a chart to the lineup which shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit but as you can see, the pattern is still indicating that recession has arrived.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967 and from 2000.

NOTE: The charts below plot a “monthly” average NOT a 4 week moving average so the latest monthly results should be considered preliminary until the complete monthly results are settled by the fourth week of each following month.

As you can see, acceleration to claims generally precedes recessions.


Also, acceleration and deceleration of unemployment claims has generally preceded comparable movements to the unemployment rate by 3 – 8 months (click for larger version).


In the above charts you can see, especially for the last three post-recession periods, that there has generally been a steep decline in unemployment claims and the unemployment rate followed by a “flattening” period of employment and subsequently followed by even further declines to unemployment as growth accelerated.

This flattening period demarks the “mid-cycle slowdown” where for various reasons growth has generally slowed but then resumed with even stronger growth.

But, adding a little more data I think shows that we may in fact be experiencing a period of economic growth unlike the past several post-recession periods.

Look at the following chart (click for larger version) showing “initial” and “continued” unemployment claims, the ratio of non-farm payrolls to non-institutional population and
single family building permits since 1967.

One notable feature of the post-“dot com” recession era that is, unlike other recent post-recession eras, job growth has been very weak, not succeeding to reach trend growth as had minimally accomplished in the past.

Another feature is that housing was apparently buffeted by the response to the last recession, preventing it from fully correcting thus postponing the full and far more severe downturn to today.

I think there is enough evidence to suggest that our potential “mid-cycle” slowdown, having been traded for a less severe downturn in the aftermath of the “dot-com” recession, may now be turning into a mid-cycle meltdown.

New Residential Construction Report: October 2008

Today’s New Residential Construction Report continues to firmly demonstrate the intensity and completeness of the washout conditions that now exist in the nation’s housing markets particularly for new residential construction showing tremendous declines on both a peak and year-over-year basis to single family permits both nationally and across every region.

Single family housing permits, the most leading of indicators, again suggests extensive weakness in future construction activity dropping 43.28% nationally as compared to October 2007 and an astonishing 71.12% since the peak in January 2005.

Moreover, every region showed significant double digit declines to permits with the Northeast declining 39.5%, the Midwest declining 37.6%, the South declining 42.9%, and the West declining a stunning 49.7% on a year-over-year basis.

Keep in mind that these declines are coming on the back of last year’s record declines.

To illustrate the extent to which permits and starts have declined, I have created the following charts (click for larger versions) that show the percentage changes of the current values on a year-over-year basis as well as compared to the peak year of 2004.

Declines to single family permits have contracted measurably in terms of monthly YOY declines, and the fact that we are now seeing declines of roughly 30%-50% on the back of 2006 and 2007 declines should provide a an unequivocal indication that the housing markets are by no means stabilizing.






Here are the seasonally adjusted statistics outlined in today’s report:

Housing Permits

Nationally

• Single family housing permits down 43.3% as compared to October 2007.

Regionally

• For the Northeast, single family housing down 39.5% as compared to October 2007.
• For the Midwest, single family housing permits down 37.6% as compared to October 2007.
• For the South, single family housing permits down 42.9% compared to October 2007.
• For the West, single family housing permits down 49.7% as compared to October 2007.

Housing Starts

Nationally

• Single family housing starts down 39.9% as compared to October 2007.

Regionally

• For the Northeast, single family housing starts down 40.6% as compared to October 2007.
• For the Midwest, single family housing starts down 42.9% as compared to October 2007.
• For the South, single family housing starts down 40.6% as compared to October 2007.
• For the West, single family housing starts down 35.1% as compared to October 2007.

Housing Completions

Nationally

• Single family housing completions down 32.9% as compared to October 2007.

Regionally

• For the Northeast, single family housing completions down 50.4% as compared to October 2007.
• For the Midwest, single family housing completions down 19.4% as compared to October 2007.
• For the South, single family housing completions down 34.5% as compared to October 2007.
• For the West, single family housing completions down 29% as compared to October 2007.

Keep in mind that this particular report does NOT factor in the cancellations that have been widely reported to be occurring in new construction.

Reading Rates: MBA Application Survey – November 19 2008

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased 8 basis points since last week to 6.16% while the purchase application volume decreased 12.62% and the refinance application volume increased 2.63% compared to last week’s results.

It’s important to note that, in the wake of the conservatorship of Fannie Mae and Freddie Mac, the average interest rate on an 80% LTV 30 year fixed rate loan initially dropped significantly but more recently has remained within the range seen throughout 2007.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).


The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).

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

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing dramatic new lows and 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.

Question of The Day - Household Bailouts Futile?

As the bailout focus has now shifted to the country’s millions of insolvent households, particularly households that are already seriously delinquent, how long will it take Congress to realize that their efforts are futile?

Bernanke’s Nightmare: Commercial Paper November 18 2008

This post is a follow up and further elaboration showing the current and historical values for some key interest rates.

These interest rates are for short term (30 day) commercial paper that is typically issued by corporations to “raise needed cash for current transactions”.

A key in reading these rates is to recognize that the AA non-financial is more highly rated than A2/P2 non-financial and that, in general, the AA non-financial tends to track the Federal Reserve’s target rate while the others typically track slightly higher.

Normally, the spread between the weakest quality paper (A2/P2 non-financial) and the highest (AA non-financial) is 15-20 basis points but as of the latest Fed posting, the spread has remained dramatically elevated at 442 basis points… truly a worrying sign.

The first chart shows the spread between the A2/P2 and AA non-financial while the lower two charts show the how all the short term commercial paper rates have tracked since 1998 and mid-2007 respectively.

Notice that prior to mid-2007, the Federal Reserve had been able to keep these rates fairly tight and in-line with the target rate but now we are seeing significant trouble.

In as sense, the current crisis has effectively erased all the rate cuts Bernanke has made this cycle and even added another 75 basis points.

Production Pullback: Industrial Production October 2008

Today, the Federal Reserve released their monthly read of industrial production showing continued weakness to aggregate production with widespread declines across many industries, particularly those related to consumer spending, construction and business vehicles, resulting in a significant year-over-year decline to the total index of 4.06% as compared to October 2007 but a 1.26% increase since September 2008.

It’s important to note that although September showed a particularly strong declines as a result of the impacts of hurricanes Ike and Gustave, the strongly slumping trend that is clearly perceptible in the charts below was firmly in-place prior to those events.

“Final product” consumer durable goods continue to show weakness falling 13.19% as an aggregate on a year-over-year basis, with particularly significant declines coming specifically from home appliances, furniture and carpeting which declined for the thirtieth consecutive month by 17.88% on a year-over-year basis.

Construction supply production has been showing the most severe contraction to wood products seen in at least the last 20 years.

Although automotive production has been showing weakness since the middle of 2004, business vehicle production is now showing a stark contraction.

The following charts (click for larger) show the overall consumer durable component along with the Home Appliances, Furniture and Carpeting sub-component on both a time series and year-over-year basis, construction supply production with the wood products sub-component, and general and business related vehicle production all overlaid with the last two recessions for comparisons purposes.