Trade Protection = Economic War on Yourself

The chart displays the volume of U.S. exports of goods and services, in inflation-adjusted dollars, annually from 1929 to 1945 (data from Global Financial Data, subscription required), showing that U.S. exports fell roughly the same percentage amount from the combined effects of the Great Depression and the Smoot-Hawley Tariff Act of 1930 (-46% from 1929 to 1932) as from the effects of WWII (-44.3%).

"
Protectionism is doing to ourselves in peacetime what our enemies do to us in wartime (cutting off trade and moving a country in the directon of self-sufficiency)."

The MSCI Emerging Markets Stock Index Closes Out the Year At 17-Month High, +108% from March Low


The Morgan Stanley Capital International (MSCI) Emerging Markets Index closed out the year today at a new 17-month high, going above 989 points for the first time since August 11, 2008.  From the early March low of 475.08, the Emerging Markets Index is up by 108.3%, and from the first of the year by 74.50%. 

Labor Market Turns a Corner: New Jobless Claims Fall to 18-Month Low, Lowest Since July 2008


1. The number of people filing new claims for unemployment benefits in the U.S. unexpectedly fell in the latest week to its lowest level in 18 months, a sign the labor market may be turning a corner. Initial claims for unemployment benefits fell by 22,000 to a seasonally adjusted 432,000 in the week ended Dec. 26, the lowest level since July 19, 2008. Economists surveyed by Dow Jones Newswires had forecast claims would rise by 3,000.

2. Meantime, the Labor Department said in its weekly report Thursday that the number of people collecting jobless benefits for more than a week also continued to decline.The tally of continuing claims, or those drawn by workers collecting benefits for more than one week, fell by 57,000 to 4,981,000 in the week ended Dec. 19.

3. The four-week average of new claims, which aims to smooth volatility in the data, dropped by 5,500 to 460,250 -- marking its 17th consecutive drop. That was the lowest level since Sep. 20, 2008 (see chart above).

Wall Street Journal

WSJ's "Chinese Slapped in Steel Dispute" Rewrite: "Americans Slapped in Steel Dispute"

WALL STREET JOURNAL -- U.S. steelmakers won U.S. consumers who purchase products made with steel and American companies (and their employees) that purchase steel as an input lost a case over Chinese steel imports, as the U.S. International Trade Commission voted that the domestic industry has been damaged industries that use steel have been subsidized too generously by cheap steel from China Chinese producers.

The ruling Wednesday will result in duties of taxes on American companies (and their shareholders, employees and consumers) of between 10% and 16% on future imports of Chinese steel pipes used to extract natural gas and oil. It is the latest in a string of trade decisions against China, the U.S.'s largest trading partner the American consumer and U.S. companies that voluntarily purchase products from China for their low cost and high quality.

On Tuesday, the U.S. imposed preliminary antidumping duties taxes on Americans who purchase steel-grate products imported from China, prompting strong reaction from the Chinese, who said it sent a "wrong, protectionist signal." Earlier this year, the Obama administration imposed tariffs taxes of 35% on middle- and lower-income American consumers who purchase tires from China, which was answered by a Chinese probe into whether U.S.-made autos were being dumped in China at unfairly low prices.

Markets in Everything: Refrigerators $69 to $15k

Possibly the world's cheapest refrigerator, the $69 ChotuKool refrigerator above is being taken for field testing in rural India (it's scheduled for release in March 2010). The portable, top-opening unit weighs only 17 pounds, uses high-end insulation to stay cool for hours without power and consumes half the energy used by regular refrigerators. To achieve its efficiency the ChotuKool doesn't use a compressor, instead running on a cooling chip and a fan similar to those used in computers, so like computers it can run on batteries. It's engineering credentials are further boosted by the fact that it has only 20 parts, as opposed to more than 200 parts in a normal refrigerator. The ChotuKool was co-designed with village women (a "reverse engineering of sorts,” according a spokesman for the manufacturer) to assure its acceptability.

The quality and quantity of power these people have access to is very poor and consequently the country has very little development happening in rural areas. The power situation in rural India cannot be fixed overnight and until it is, products like this are needed to make people's lives a little better. Effective refrigeration in rural areas can help people extend their access to not only food, but also essential drugs.

-----------------------

Possibly the world's most expensive refrigerators, the LG Internet Refrigerator pictured below has the coolest set of features ever seen in the kitchen. It is a 730 litre, stainless-steel, side-by-side fridge, with an in-built computer which can be accessed via a 15-inch touch-screen LCD monitor mounted on the fridge door. Users can watch TV, listen to MP3 music, take and store digital photos, make a video phone call, use the fridge as a message board or surf the web.

It also has VCR and DVD ports, a microphone and speakers. Information about food in the fridge can be stored and a map of the fridge allows the owner to keep an inventory of what foods are in each section and how long they have been there. It's biggest advantage will be its functionality as a food management system. It also has an inbuilt hard drive and modem, so that the appliance can be 'connected' by simply running a phone connection into it. $15,000 is the anticipated RRP when it's released later this year.

I Wonder What Satan and Saddam is Doing Now?


"-I love you, Satan!
-I love you too, Saddam!"

See also the transcript of these two South Park episodes:
Do The Handicapped Go To Hell?
Probably
(Btw: no, I don't believe in the existence of Satan or Hell, but it is an amusing thought....)

Bronze Age Orientation Day: Creative Destruction


The forces of Schumpeterian creative destruction have been around for thousands and thousands of years.....
HT: Lee Coppock

Everything's Amazing but Nobody's Happy


I've featured this before, but it's a classic and worth viewing again - comedian Louis C.K. on Conan O'Brien.

Thursday Oil Market Round-Up

Let's start with the charts.



On the daily chart, notice the following:

-- Prices have twice broken through resistance to make new highs.

-- The shorter SMAs are above the longer SMAs

-- Prices are currently at the 20 day SMA. Prices have dropped through this number before and rallied again

-- Prices have consolidated their gains are each advance.



On the weekly chart, notice the following:

-- Prices have been advancing for over a year

-- After each advance prices have consolidated their gains

-- This is a very bullish chart

Although the oil market dropped last Wednesday, traders pointed to a weak dollar as a primary driver of the market:

``The weakness of the dollar is a great driver here,'' said Francisco Blanch, head of commodities research at Merrill Lynch & Co. in London. ``Oil has become a little bit of a monetary phenomenon, where low rates boost demand for oil in emerging markets.''


That theme continued intolast Thursday:

Crude oil fell more than $2 a barrel after the dollar rose the most against the euro since December, reducing the appeal of commodities to investors.

The dollar strengthened after a report showed German business confidence dropped more than expected in April. Commodity prices also fell because U.S. stocks rallied. Nigeria's white-collar oil workers union halted a partial strike that began earlier today at Exxon Mobil Corp.'s operations in the country, Reuters reported, citing a union official.

``You are seeing a move away from commodities because of the rally of the dollar and in equities,'' said John Kilduff, vice president of risk management at MF Global Ltd. in New York.

``The news from Nigeria is also helping a little bit but this is mostly about the dollar and equities.''

Crude oil for June delivery fell $2.24, or 1.9 percent, to settle at $116.06 a barrel at 2:47 p.m. on the New York Mercantile Exchange. Prices are up 80 percent from a year ago.

Oil reached a record $119.90 a barrel on April 22 after the dollar touched an all-time low against the euro. The euro fell 1.3 percent to $1.5676 per dollar at 3:14 p.m. in New York, from $1.5889 yesterday.

``The weak dollar has been the key driver of the reality in commodities,'' said Tom Bentz, a broker at BNP Paribas in New York. ``Lately there has been a direct correlation between the dollar and crude-oil prices, which hasn't always been the case.''


The dropping dollar has been a key reason for the spike in commodity prices. Commodities are denominated in dollars. Therefore, a dropping dollar is by definition a price decrease as well. Traders have to bid up the commodity just to tread water.

An oil strike on Monday helped to send the market higher.

BP PLC on Sunday shut down the Forties Pipeline System that carries more than 700,000 barrels of oil a day to the U.K. because of a 48-hour walkout by employees at a refinery in central Scotland. Workers walked out of the Grangemouth refinery vowing not to give ground in their dispute with refinery owner Ineos over plans to close a generous pension scheme to new employees. Ineos Chief Executive Tom Crotty said it could take a week for the plant to return to production once the strike ends on Tuesday. BP said its pipeline could be up and running within 24 hours. BP's Kinneil plant, the onshore processing center for the pipeline system, is powered from the Grangemouth site.

"With the refinery being shut down, it will affect supplies from the North Sea and that has a potentially significant impact," said David Moore, a commodity strategist with the Commonwealth Bank of Australia in Sydney. "That comes at the same time that there's production disruptions from Nigeria. So the combined effect of those is the immediate factor that's put pressure on oil prices."

In Nigeria, the Movement for the Emancipation of the Niger Delta, or MEND, on Friday said its fighters hit an oil pipeline late Thursday, the fourth conduit the group has attacked in the past week. MEND said the pipeline belongs to a Royal Dutch Shell PLC joint venture. A Shell spokesman confirmed one of its pipelines had been hit, but provided no additional details.

Separately, workers at an ExxonMobil Corp. joint venture in Nigeria cut production by an unspecified amount to demand more pay.


The strike in the British Isles led to some of the highest prices of all time:

Crude-oil futures closed slightly higher Monday after hitting a new record near $120 a barrel, as a strike at Scottish refinery forced a pipeline closure, while rebel attacks in Nigeria and tension in Persian Gulf also fanned concerns about supply disruptions.

Crude oil for June delivery climbed more than $1 to a new high of $119.93 a barrel in overnight electronic trading, surpassing the previous high of $119.90 hit last week. It ended up 23 cents, or 0.2%, at $118.75 a barrel on the New York Mercantile Exchange.

The gains were driven by supply concerns after hundreds of oil workers at Ineos PLC's Grangemouth refinery started a two-day strike Sunday, forcing the closure of a BP -operated pipeline which transports 700,000 barrels of oil a day, or about 40% of the U.K.'s daily crude production.


The strike ended on Tuesday.

On Wednesday, Goldman Sachs said the window for oil dropping on Spring weakness was "closing fast"

Goldman Sachs Group Inc., the most profitable Wall Street bank, said the window for a decline in oil this spring is `closing fast,' as prices rise to records and the summer period of peak gasoline demand approaches.

U.S. crude imports are likely to rise because of lower inventories and the strength of local oil prices relative to the rest of the world, Goldman analysts led by Giovanni Serio said in their Energy Weekly report.

``Looking into the second half of this year, given the fundamental tightness, we believe the risks are substantially skewed to the upside,'' the report said.


The central issue here is there is a ton of money flowing into the oil market right now; it's the latest boom area of the market. And so long as that situation continues, we'll be experiencing high oil prices.

Goldman isn't the only grop that thinks oiloil will keep rallying for a long time:

Surging crude prices, which could surpass $200 a barrel in four years on tight supplies, could push gasoline prices to as high as $7 a gallon, CIBC World Markets analysts said Thursday.

Crude supplies are actually lower than some official estimates indicate, while demand is unlikely to fall anytime soon, according to a statement by analysts led by Jeff Rubin at CIBC, an investment bank. They forecast that these tighter supplies and continued strong demand will drive oil and gasoline prices to roughly double their current levels by 2012.

"It is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin. "Despite the recent record jump in oil prices, oil prices will continue to rise steadily over the next five years."


Oil's increase in price is the most important of the last 30 years:

Demand in China continues to fuel demand, along with flare-ups in oil-exporting nations and a weaker dollar. But U.S. demand, after rising for years, is not a key contributor, Alliance Bernstein economist Joseph Carson says today in a note to clients. Domestic oil demand has dropped 1.6% over the last year as the economy weakens. He calls a price increase due to non-domestic factors “an exogenous shock, similar to to the supply shortages of the mid-1970s, early 1980s and briefly in the early 1990s.”

With the price shock of 2007-08, spending on energy as a share of wage income has shot up above 6%, topping the 1974-75 and 1990-91 shocks to be the worst since the 1980-81 runup. Comparing the additional cost of energy to income growth (especially sluggish in recent years), the current shock is far worse than any of the three prior ones, Mr. Carson says.


The figures “suggest that energy costs will crowd out other spending components because income growth is being stifled by weakness in payroll employment,” he writes. “Moreover, relatively thin saving flows offer consumers little cushion against the rising oil prices.”


Finally, yesterday's This Week in Petroleum report showed retail prices are still spiking.





For the fifth consecutive week, the U.S. average retail price for regular gasoline moved higher, reaching yet another all-time high price of 360.3 cents per gallon. The average price has spiked 21.4 cents since April 14. On a regional basis, while prices increased throughout the country, they did so at a somewhat slower pace than was the case during the previous week. The largest increase occurred on the East Coast where the average price jumped by 11.7 cents to 360.1 cents per gallon. This was the only region of the country to experience an increase greater than 10 cents. The price in the Midwest increased by 9.8 cents to 356.8 cents per gallon, up by 64.3 cents from a year earlier. The average price in the Gulf Coast was up by 9.4 cents to 350.5 cents per gallon. The average price in the Rocky Mountains, the lowest of any region, rose to 347.8 cents per gallon, up 6.2 cents from the previous week. Once again, the West Coast average price increased the least of any region, moving up by 5.2 cents to 378.6 cents per gallon. Nonetheless, despite the relatively small increase, the average price was the highest of any region. The average price in California increased by 4.6 cents to hit 389.2 cents per gallon.


Short version: The only bearish news of the week was a possible pause in the Fed's interest rate policy of lowering rates. That should help the dollar rise in value which should lead to a drop in oil prices. Hopefully. However, there are plenty of fundamental drivers to the demand side of the oil market right now, starting with China and India.

Today's Markets

The big news today was the Fed, whose statement had the following paragraph:

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.


The markets interpreted this as a sign the Fed would pause on the rate cuts. As a result, the markets tanked hard after the announcement. More importantly, the need for confirmation from the SPYs or IWMS of the QQQQ rally didn't happen again.



Note the QQQQs are still in a strong upswing.

But....





The SPYs and the IWMs are still trying to break out from consolidation patterns into a place where they can get some strong bull market style running going on. But they haven't broken past key resistance areas. And until they do, we've got a problem.

My True Nature Revealed...:-)

The Simpsons character ( via Redheadmaniac) that most closely resemble me is.....



You Are Mr. Burns



Okay, so you're evil...



You have big plans to rule the world, and you'll destroy it in the process if necessary!



You will be remembered for: the exploitation of the masses



Life philosophy: "One dollar for eternal happiness? I'd be happier with the dollar."

Markets in Everything: Free Econ/Bus. Textbooks

Free and Open Content Textbooks now available on the Internet:

Economics.

Business.

Saddam is Dead-Great Opportunity to Get Out

So Saddam Hussein is finally dead-more than 3 years after he was captured. Given his obvious guilt, this was amazingly slow.

This provides Bush with his perhaps last chance to get out of Iraq semi-honorably. Now he can say: "OK, now the old dictator and his sons are all dead. The reign of the Hussein clan is thus irrevocably finished. Now it is up to you Iraqis to run your own country. Whatever threat Saddam may have posed to us is over so our mission is now accomplished (if you pardon my repetition of that phrase). We wish you good luck, but we are not going to sacrifice ourselves in a vain effort to prevent you from killing each other. That is your business, not ours, so we will now leave".

By again narrowing the definition of success to ending whatever threat Saddam allegedly posed in the past, it is possible for America to get out of Iraq with only a limited degree of lost prestige. The fact that the Bush administration greatly exaggerated the alleged threat and then broadened the mission to the naive naive neoconservative fantasy of transforming Iraq to a western-style democracy, makes some loss of prestige inevitable. But by again limiting the mission to Iraq to ending whatever threat Saddam may have posed to America, the loss of prestige will also be limited.

Unfortunately though, the Bush administration shows no signs of giving up the naive and impossible neoconservative fantasy of turning Iraq into a western-style democracy and are thus making preparations for an honorable withdrawal. This means at least 2 years (until Bush leaves office in January 2009) more of sacrifice of thousands of american soldiers and hundreds of billions of dollar in the futile endeavor of establishing a system of government incompatible with the strong tribalist and jihadist sentiment prevalent among most Arab Iraqis.

Since it is incompatible with Iraqi culture, the neocon project will continue to fail no matter how many years America stays. The only difference between leaving now and leaving a few years from now is that by leaving now, losses of American lives and taxpayers' money will be limited.

Moreover, an American departure would actually be bad news for both Sunni and Shiite jihadits. The Shiite jihadists currently running Iraq would no longer be able to use American troops as cannon fodder in their war against the Sunnis and would instead be forced to sacrifice themselves to a higher extent. The Sunnis on their hand have no real chance of regaining power with Saddam's army dissolved and with the Shiites greatly outnumbering them and receiving support from fellow Shiite jihadists in Iran.

2,000 Pages: Is it the New 25 Pages?

Nick Schulz at the Enterprise blog reports on the number of pages in various pieces of important U.S. legislation from the 1800s (Homestead Act with 9 pages) through the current heathcare bill (about 2,000 pages), see summary in the graph above.

By the way, here's what 2,000 pages looks like, it's Ford's 2007 master contract with the UAW and totals 2,215 pages:

Compare that to the 24 page 1941 Ford-UAW contract below, which coincidentally was about the same size as the National Labor Relations Act of 1935 (25 pages):

Anatomy Of Fraud

The WSJ has a great story on how fraud at Countrywide started and spread. It starts with the Fast and Easy program

Fast and Easy borrowers aren't required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn't even require loan officers to verify employment, according to an October 2006 presentation by Countrywide's consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.


First -- naming a lending program fast and easy? That just doesn't sound right, does it? It reminds me of a late night TV commercial. And there was no oversight of the brokers who obviously needed some serious oversight.

And get this:

A spokesman for Countrywide says that Fast and Easy loans are not plagued by defaults. As of March 31, about 3% of Fast and Easy loans were 30 days or more overdue, compared with 3.5% for Countrywide's fully documented prime loans, he says. Fast and Easy borrowers, he says, had to meet credit standards that were tougher than those for prime loans requiring full documentation.


BUT:

During a conference call with investors last July, Countrywide acknowledged that Fast and Easy loans were riskier than fully documented prime loans. A chart provided to investors showed that a borrower who wasn't required to document income would be at least 50% more likely to fall behind on payments than a similar borrower who did provide documentation.

.....

The quarterly financial results, which included $3.05 billion of credit-related charges, did not provide details about the performance of the company's "no-doc" loans, including the Fast and Easy ones. Late payments increased across the board: About 36% of "subprime" loans to people with weak credit records were at least 30 days overdue, up from 20% a year before. For all loans serviced by Countrywide, a category mostly made up of prime loans, the delinquency rate was 9.3%, nearly double the year-earlier 4.9%.


So -- Countrywide just says there are no problems with the loans, but doesn't release the figures to back that up. And during another conference call, the company admits the possibility of problems are a lot higher. Now I'm really suspicious, especially considering Countrywide's deteriorating reputation.

And here's a great story about a loyal and trustworthy employee:

In late 2001, mortgage broker Kourosh Partow got a job in Countrywide's Anchorage, Alaska, office, despite being under investigation for lending abuses in Wisconsin, where his license was revoked several months later. Mr. Partow began writing Fast and Easy loans for another person who was speculating in real estate, federal prosecutors later said.

"In each instance, Partow simply falsified the borrower's income and often bank accounts so as to make it appear that the borrower easily qualified for the loan program offered by Countrywide with no further internal checks necessary," the Justice Department said in a filing last summer in federal district court in Anchorage.

Countrywide sold some of the loans originated by Mr. Partow to Fannie Mae, and neither firm detected the fraud for years, according to documents filed in the case.


So -- the guy is under investigation for fraud. Let's hire him! Yeah, and then we'll put him in a position where he can make more loans. And the best part? The US taxpayer gets to foot the bill! What a deal..

A Great Explanation Of the Current Market

From the WSJ:

Whenever the Fed eventually ceases its series of rate cuts that began last year, it will effectively stabilize the supply of dollars sloshing through the world economy. In particular, analysts say much of so-called "cheap money" available in recent months has flowed into speculation in various assets, including commodities, which many investors have used as an alternative to the volatile stock market.

Peter Cardillo, chief market economist at Avalon Partners, said many of those commodity bets seemed to be unwound Tuesday as speculators bet that the Fed is about to turn off its spigot of cash.

"I wouldn't call this a panic selloff, but it's very clear people are taking some money off the table," said Mr. Cardillo. "They're betting that the Fed is going to surprise us," possibly by not cutting rates at all Wednesday.

Commodity Wednesday's

Let's take a look at the charts to see what they say.



The overall CRB chart is bullish. Notice the following:

-- Prices have bounced off the SMAs for the last 4 months, using them as support

-- The shorter SMAs are higher than the longer SMAs

However, also note the possible top forming; I have circled both tops.



On the weekly chart, notice the following:

-- Prices have been rallying since August

-- Prices have moved through resistance on a regular basis and continually made new highs

-- But, the possible double top is very clear on this chart.

So -- what is going on here? There is growing speculation the Federal Reserve is near the end of its rate cuts -- or will at least pause after today. If this happens, the dollar's slide may stop (at least for now). Because most commodities are priced in dollars a drop in the dollar's value is a de facto increase in a commodity price. So traders are waiting to see what happens with the dollar right now.



I use gold as a proxy for inflation expectations. Notice the following on the chart above:

-- Prices have dropped below the trend line that started in late December

-- The shorter SMAs have dropped below the longer SMAs -- a bearish signal

-- Prices are below all the shorter SMAs, which will pull these SMAs lower.

-- Prices are now consolidating below the shorter SMAs

This is a chart that says a reversal is occurring in the market.



On gold's weekly chart, notice prices have clearly broken the long-term trend line that started at the end of last summer. Again, assuming gold is a valid proxy for inflation (which I think it is), this chart tells us traders are thinking inflation may have peaked, or is about to peak.



On the agricultural prices daily chart, notice the following:

-- Prices have broken below the trend line started last November

-- Prices are below the SMAs

-- The shorter SMAs have crossed below the longer SMAs

This is a chart that says a reversal may be occurring.



On the agricultural prices weekly chart, notice the following:'

-- Prices have been in a strong rally for about a year, continually breaking through previous resistance to make new highs. BUT,

-- Prices have dropped below the trend line, indicating prices may be in a reversal right now.

So, what's causing this? Several commodities have grabbed the headlines lately. Rice is at the top of that list. Food riots have been reported in some countries and some governments have halted exports. As a result, we get charts like this:



Rice is moving higher in a big way, with little stopping it from the upside right now. So long as we continue to have the same type of news stories expect this chart to continue along its upward trajectory.



Corn is still rallying. It started a new upward move at the beginning of October and is still moving higher. It has broken through hey resistance levels as well.

BUT,



Wheat has broken its uptrend and is clearly looking for a new low right now. This is what is keeping the agricultural prices a bit lower right now.

Nov. Trucking Volume Highest Level in a Year

ARLINGTON, VAThe American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index increased 2.7% in November, following a 0.2% contraction in October. The latest gain boosted the SA index from 103.6 (2000=100) in October to 106.4, its highest level in a year. Compared with November 2008, SA tonnage fell 3.5%, which was the best year-over-year showing in twelve months. In October, the index was down 5.2% from a year earlier.

ATA Chief Economist Bob Costello said that tonnage is moving in the right direction. “Slowly, but surely, truck freight has started the recovery process and November’s solid increase is a very positive sign,” Costello noted. He said that November’s tonnage levels were pushed higher by improved economic activity, as well as by an inventory correction that is near completion. “Truck freight had been hurt by both slow economic output and bloated inventories; however, we now have evidence that the inventories are in much better shape, which will not be such a drag on truck freight volumes.”

Today's Markets

First, the QQQQs are clearly in a rally



Notice the following:

-- Prices are above the SMAs

-- All the shorter SMAs are moving higher

-- The shorter SMAs are higher than the longer SMAs

-- Prices have been in a clear uptrend since mid-March

However, we're still waiting for the two other averages to confirm.



Notice the IWMs are still looking to break out



And looking at the 1 month chart, we're having a tough time getting through the 72 area with anything looking like some strength



On the SPYs daily chart, notice we've had 8 days of spinning tops. That means there is no momentum in the average moving higher.

The bottom line is we need the SPYs or IWMs to confirm in a big way. And we're just not getting it right now.

3 Good Dilbert Strips

Dogbert provides tech support. Opening phrase "This is Dogbert's tech support. How may I abuse you?" gives a good clue of what follows.

The value of elections is explained here.

Here it is explained why it is important to donate blood.

Higher Money Supply Growth-Stronger Currency

The ECB reported that money supply (M3) growth rose to a record high 9,3% in November. The market reaction? The euro rose against the dollar, the yen and the pound.

This mirrors the market reaction to higher than expected U.K. inflation numbers, which lead to a stronger pound.

These reactions may seem strange given the common sense view that a higher supply of a currency will lead to a lower price of it. But this assumes that demand for the currency is unchanged. And as higher money supply growth will likely cause the ECB to raise interest rates more, demand for European securities is likely to rise.

In the long run, we should still expect the currency to fall as the increase in demand for European currencies is not likely to permanently increase as a result of this. But today's foreign exchange markets clearly cause a lot of distortions that means currency value deviate from purchasing power parity even of traded goods.

Read This Now

Son of We're Nowhere Near the Bottom in Housing




From the AP

Housing prices dropped in February at the fastest rate ever, a widely watched index showed on Tuesday, reflecting that the housing slump is gaining momentum and showing no signs of letting up.

The Standard & Poor's/Case-Shiller home price index of 20 cities fell by 12.7 percent in February versus last year, the largest decline since its inception in 2001. Seventeen of the 20 metro areas reported record annual declines.


Here's the short version to how I am reading the housing market right now. There is already a ton of supply. With foreclosures increasing at incredibly high rates supply will obviously increase. At the same time, US consumers are faced with record levels of household debt and payments on that debt, a tanking job market and declining income. In other words, supply and demand of the housing market is seriously out of whack which will lead to declining home prices for the foreseeable future. (here's a link with tons of charts)

As a result of all this, home prices will have to drop in a big way -- which they already are.

Here's a link to the Case Chiller Press Release.

Markets Fail. That's Why We Need Markets.

This seemingly paradoxical view is based on several overlapping strands of research in economics as it pertains to development, history, technology, business expansion, and new-firm formation. According to this view, entrepreneurs at work in the economy – in finance, high tech, manufacturing, services, and beyond – are constantly experimenting, creating new business models, techniques, and technologies that upend the established order of things.

Some new technologies and innovations are genuine improvements and are long-lasting welfare enhancers. But others are the basketball equivalent of pump fakes – they look like the real deal and prompt market actors to leap hastily into action, only to realize later that their bets were wrong.

Given this dynamic, markets are unpredictable, prone to booms and busts, characterized by bouts of exuberance that are rational or irrational only in hindsight. But markets are also the only reliable mechanism for sorting out this messy process quickly. In spite of the booms and busts, markets drive genuine long-run innovation and wealth creation.

When innovation-driven excesses and imbalances are recognized in the marketplace, the system can correct itself quickly. This is less the case when government policy failure occurs. Because political failure is less publicly tolerable than market failure, the temptation becomes for policymakers to avoid acknowledging their role in creating or perpetuating problems. Or they double down on bad bets. So rather than recognize the government’s central role in the housing boom and bust and quickly changing its ways, we see the federal policy apparatus continuing to throw good money after bad in the mortgage market and on Wall Street.


Markets fail; but they learn from their failures. That’s why we need markets. Government can promise to guarantee our prosperity; but only markets can really deliver.

~Arnold Kling and Nick Schulz in the
Christian Science Monitor

Related: In today's WSJ,
Gregg Easterbrook reminds us that "capitalism is the only economic system in history that is rendered stronger by its own instability." In other words, markets fail; that's why we need markets.

Income Inequality, Monetary Policy & The Left

The New York Times reports that income inequality in America rose sharply in 2005, to its highest level since 1928. This was also noted by the leftist Economic Policy Institute.

What is missed is why inequality has increased. Leftists typically blame foreign trade and Bush's tax cuts, while paleoconservatives , in addition to trade, often blame immigration. Yet while there may be some limited truth in these explanations, the perhaps most important explanation is left out. What explanation, you might wonder. Well, ask yourself, what was special about 1928? The answer is that it was the peak of a stock market bubble and strong cyclical boom. Income inequality then fell sharply during the great depression. Similarly, income inequality previously peaked in 1999, at the height of the tech stock bubble, and then fell back in 2001-2003.Only to rise again in 2004-2005. See the pattern here? Income inequality rises during booms and falls during busts, as the prices of assets mainly held by the wealthy rise druing booms and falls during busts.

This is the way it has always been, and it is predictable from a theoretical perspective. Because newly created money tends to affect asset prices before product prices and product prices before wages, monetary driven booms will tend to increase relative income for the wealthy and reduce it for the poor.

So if the left really thinks rising income inequality is so bad, why don't they fight for hard money? In reality, Economic Policy Institute and other leftists typically supports inflationary monetary policy, see for example here.
The idiots at EPI in fact seems to be under the illusion that inflationary monetary policies will reduce income inequality, when basic economic theory and all historic evidence shows that it will increase it.

We're Nowhere Near the Bottom In Housing

From CNBC:

U.S. home foreclosure filings jumped 23 percent in the first quarter from the prior quarter, and more than doubled from a year earlier, as more overextended borrowers failed to make timely payments, real estate data firm RealtyTrac said Tuesday.

....

"I'm more convinced that we haven't seen the peak of foreclosure activity yet, and the wave probably won't crest until late third or fourth quarter of 2008," he added.


Now consider these inventory charts from Calculated Risk and ask yourself, "is housing getting better or worse?"





Need I say anything more?

We're Nowhere Near the Bottom In Banking/Finance

From the WSJ:

Deutsche Bank AG Tuesday reported its first quarterly net loss in five years, reflecting additional asset write-downs, lower revenue and a trading loss in a deteriorating market.

Germany's largest bank by market capitalization said its net loss was €131 million compared with a net profit of €2.12 billion a year earlier. Reflecting fallout from the global financial crisis, quarterly revenue tumbled 52% to €4.6 billion from €9.6 billion, and the bank swung to a trading loss of €1.58 billion from a €3.97 billion trading profit in the year-earlier quarter.

The bank marked down assets by a net €2.7 billion for the quarter. The write-downs included around €1.77 billion on leveraged finance loans and loan commitments and €885 million on commercial real-estate and residential mortgage-backed securities, including Alt-A mortgages, which are a step above subprime quality.

First-quarter write-downs were slightly higher than the approximate €2.5 billion the bank had anticipated April 1 when it warned that its quarterly result would be weak.


From the WSJ:

The United Kingdom's largest mortgage lender, HBOS PLC, said Tuesday that it would launch a £4 billion ($7.96 billion) rights issue to reinforce its capital and bolster the bank against a worsening market.

It also cut its dividend payout to 40% for 2008 from 46% in 2007,
saying this reflected the bank's ongoing capital requirements. "In future years, the board intends to pursue a progressive dividend policy, growing dividends in line with underlying earnings," HBOS said.

The rights issue offers investors two new ordinary shares at 275 pence each for every five held, 45% below the lender's closing share price of 496 pence Monday.


From IBD:

Morgan Stanley (MS) warned that difficulties in the credit markets are only in their "third inning," and urged shareholders to sell financial stocks that have rebounded off March lows. "We think it's a mistake to chase this rally," it said in a investors note. It predicted dividend cuts at Bank of America, (BAC) SunTrust Banks, (STI) U.S. Bancorp (USB) and Wells Fargo. (WFC) It also expects Citigroup (C) and Wachovia (WB) to further cut their payouts. SunTrust and Citi rose, while the others dipped.

Treasury Tuesdays

The bottom line story of the last few weeks in the credit market is traders are moving into riskier areas of the bond market.

The major U.S. indexes have been rallying since hitting a trough in mid-March. The difference between corporate bond yields and ultra-safe Treasurys has narrowed, as has the spread between mortgage agency bonds and Treasurys. And the cost of buying a type of insurance against corporate defaults has plunged.


While the previous points are good news, they look an awful lot like bottom fishing by money managers to me. They are less indicators of intra-credit market sentiment and more indicators of speculative sentiment. As a result, I still think the LIBOR issues are troubling as the represent what banks are thinking -- especially about each other. And increasing LIBOR rates indicates banks are still concerned about other banks ability to repay loans.

Same point, different article:

Investors are turning to riskier investments that had been all but abandoned earlier this year, such as corporate bonds, where last week a record $40.1 billion in new debt came to market, including issues from embattled companies such as Citigroup Inc. and Merrill Lynch & Co. Meantime, the premium that investors are demanding on corporate debt -- even low-quality speculative grade, or "junk," bonds -- is coming down as fears subside.

"We established that the Fed was going to backstop the markets, keep things stable and slowly but surely nurse the markets back to health," says Daniel Shackelford, a portfolio manager at T. Rowe Price Group Inc. As a result, "risk-taking has come back in the market."


Another article made the same point:

While they are diving into riskier corporate debt, investors have been pulling away from safer Treasury bonds, especially among short-term securities most sensitive to Federal Reserve policy.

Many now believe that when the Federal Open Market Committee meets Tuesday it will lower the benchmark federal-funds rate by a quarter of a percentage point to 2% but will signal a pause in additional moves until the economic outlook becomes more clear.

The recent selloff in the market for Treasury bonds was fast and furious. Yields on U.S. Treasury two-year notes rose to 2.42% Friday from 2.17% the week before and substantially above the 1.33% low hit on the day after the Bear Stearns deal was announced. Yields rise as bonds' prices fall.

Mortgage-backed bonds, one of the hardest-hit corners of the market, also have improved, especially those backed by government agencies Fannie Mae and Freddie Mac. The spread on these bonds has narrowed by almost a full percentage point from March levels.

In the market where investors buy and sell insurance against corporate defaults, fears of a financial institution collapse also are abating. Insurance against default on $10 million of Merrill Lynch debt for five years now costs $167,000 annually, down from a high of $335,000 in mid-March, though it is still much higher than it was last June, when it was $25,000, according to pricing service Markit.





In the short term treasury market, notice the upward trend of last 6 months has been broken. That means traders are more comfortable with what is happening in the credit markets overall.

The short end of the Treasury curve was not the only part of the curve to see some selling. The 7-10 year also experienced some selling:



The 7-10 year area of the market has clearly seen some selling as well, as it has also broken an uptrend.



And the 20+ year is in an obvious trading range.

But we know that all is still not well in the credit markets, as LIBOR is spiking again:

An interest-rate based on what banks charge each other for loans has risen in the last week, sidestepping a general improvement in credit sentiment and acting as a reminder of the still-severe hurdles facing U.S. banks.

The London inter-bank offered rate, or Libor, has risen 23 basis points since April 1 to 2.91%, according to three-month U.S. dollar Libor rates quoted by FactSet Research. It's risen 33 basis points since mid-March, when several other market indicators instead started to show signs of improvement. One basis point is 1/100th of a percentage point.

"The stress in the money markets is still acute," said BNP Paribas economist Gizem Kara and colleagues in a note Thursday.

A higher Libor rate means banks are charging more for short-term loans to each other, suggesting they are more nervous about the borrowers' ability to pay back. It may also indicate banks, struggling with billions in bad loans, are hoarding capital and less likely to loan to each.


There were two auctions last week. Last Wednesday's auction went well:

Yields on two-year Treasury notes held near an almost two-month high after the U.S. sold a record $30 billion of the securities, indicating investors are more willing to buy debt even as expectations fade for interest-rate cuts.

The notes were sold at a yield of 2.225 percent, below the 2.2336 percent average estimate of nine bond-trading firms surveyed by Bloomberg News. The group of investors that includes foreign central banks bought a bigger share than their average over the past six auctions.

Indirect bidders, the category that includes foreign central banks, bought 33.6 percent of today's sale, the most in seven months. At the past six auctions, the group bought 23 percent on average.

That makes the horrible result of Thursday's 5 year auction that much more important:

``It was a horrible, horrible auction,'' said David Ader, head of U.S. government bond strategy in Greenwich, Connecticut, at RBS Greenwich Capital, one of the 20 securities firms required to bid at Treasury sales. ``An auction result like this is going to push people to say, `I'm going to step aside.'''

At today's sale, the biggest since February 2003, the bid- to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was $1.65 for every $1 sold. That was the lowest since February 2003, and down from $1.98 in March.

Indirect bidders, a group of investors that includes foreign central banks, bought 29 percent of the securities, down from 34 percent in March.

Traders pushed two-year note yields to the highest level since Jan. 18 on speculation the central bank won't lower borrowing costs further after this month. The losses pushed the securities' yield above the Fed's benchmark rate by 14 basis points, the most since June 2006.


Remember -- the US government is bleeding debt right now (and will be for the foreseeable future). Consider the following:

The Treasury's deficit for the month of February totaled $175.6 billion, making for a fiscal year-to-date deficit of $263.3 billion -- up 62 percent from this time last year. Outlays are on the rise, up 10.2 percent year-to-date and reflecting rising spending on defense and higher interest payments, which are a result of the rising debt. Receipts are up this fiscal year, but only by 1.3 percent. Individual income taxes are barely higher and corporate taxes are 15 percent lower. Rising spending and falling receipts, and the risk that receipts will fall further as the economy weakens, are making the budget deficit a bigger and bigger issue for the economy and for the value of the dollar.


One of the main reasons for the decline in foreign interest is the slumping dollar:

The Japanese, who own $586.6 billion, or 12 percent of U.S. government debt, had their worst quarter in Treasuries this decade, losing 7 percent in the first three months of the year as the dollar fell to the lowest since 1995 versus the yen, Merrill Lynch & Co. indexes show. Dai-ichi Mutual Life Insurance Co., Meiji Yasuda Life Insurance Co. and Sumitomo Life Insurance Co., three of the nation's four-biggest insurers, would rather accept the world's lowest bond yields in Japan than buy U.S. debt.

``It's too early to say the dollar will stop falling,'' said Masataka Horii, head of the investment team in Tokyo for the $53.1 billion Kokusai Global Sovereign Open, Asia's biggest bond fund. ``The U.S. economy will be slow for a while.''

Japan owns more Treasuries than any other nation. After raising their holdings by $9.2 billion to $620.6 billion between March and July 2007, Japanese investors trimmed that stake by $34 billion through February, the Treasury said April 15.

America relies on foreign investors, who own more than half the U.S. government debt outstanding, to finance a deficit that New York-based Goldman Sachs Group Inc. predicts will expand to a record $500 billion for the year ending Sept. 30, after a $163 billion gap last year. Without their support, long-term interest rates would be 0.9 percentage point higher, a 2006 Federal Reserve study found.


In Thursday's market summary, IBD noted that inflation concerns were taking their toll on prices:

With oil prices approaching the $120-per-barrel mark and soaring food costs, worries about inflation hit the longer end of the bond market. The benchmark 10-year Treasury note yielded 3.74%, up from 3.71% late Tuesday.

Longer-dated bonds are among the most sensitive investments to inflation expectations, since rising prices diminish the cash flow from fixed income and erode the overall value of the investment over time.

"The market is worried about inflation — that seems to be new story," said Thomas di Galoma, head of government trading at Jefferies & Co. in New York.


The market is not the only one worried about inflation -- the Federal Reserve may actually be more concerned about that now.

The Federal Reserve is likely to cut its short-term interest rate by a quarter of a percentage point next week -- but then may be ready for a breather.

The Fed, meeting Tuesday and Wednesday, is likely to make what would be its seventh cut in eight months. The reason: Some officials see a case for more insurance against a deeper recession.

But others are concerned a cut could contribute to inflationary pressure with little benefit for growth. That means the option of standing pat will likely also be on the table. If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts, which have lowered the federal-funds rate to 2.25% from 5.25% since last year.

Officials say the case for lowering rates further rests primarily on the value of additional insurance against a worse-than-anticipated economic scenario.


Here are three charts of the year over year change in three inflation levels -- CPI, PPI and Import prices.



The year over year change in CPI is hovering around 4%.



PPI's annual YOY change is running at around 7%.



Import/Export prices are increasing to 8% YOY.

So, we have the following points to keep an eye on.

-- Inflation is heating up and will probably impacting bond traders sentiment for some time

-- Because of a high deficit, there will be a big supply of Treasury bonds hitting the market. Increased supply means there will probably be upward pressure on interest rates

-- There is growing speculation the Fed is nearing the end of rate cuts. That may lead to increased rates as well.

-- Traders are selling Treasuries and moving into riskier assets.

Why We Have a Health Care Cost Problem and Why It Will Only Get Worse: Other People's Money

The chart above shows why we have a health care cost problem. Patients have little direct connection in paying for their care, and their role has fallen significantly. Meanwhile, the government's involvement has grown, as has that of the insurance industry.

Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. When a visit to the doctor's office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket — or there is no charge at all — cost has little impact on their decision to see a doctor. "By not knowing the full costs associated with health care, consumers demand more and 'overuse' it," Kenneth E. Thorpe explained a few years back in Health Affairs.

Americans would be more judicious in seeking health care — they would self-ration — if the right incentives were in place. An effective way to cut overuse and bring down costs would be to encourage through public policy the use of health savings accounts. If consumers used HSAs to pay the full amount for medical care at the point of service rather than letting employer-funded insurance or a government program pay the bills, the demand would fall.

The Democrats' health care legislation, however, puts more distance between Americans and the payment process and promotes dependence on government. That will only drive down consumers' out-of-pocket expenses even further and force overall health care spending upward. Under such a regime, the system will be worse off than it is now.


~Investor's Business Daily

Global Bull Market Rally: MSCI World Stock Market Closes at 15-Month High, Up 71% from March Low

The MSCI World Stock Market Index reached 1,176.35 today, the highest closing index value since October 1, 2008, almost 15 months ago. From the March low of 688.64, the benchmark world stock index is up by almost 71%, and from the first of the year by almost 28%.

Today's Markets

Problems from a technical perspective are developing:



The 139/140 area is providing strong upside resistance to the SPYs.



Today was no exception. The markets could not advance beyond these levels.



On the IWMs notice, the markets need to move beyond 72.



But today (again) they couldn't.



The QQQQs are still strong.

Looking at the daily charts of all the averages, we are seeing strong advances with prices above the SMAs and the shorter SMAs pointing higher. These are good signs. But the only average to really get some strong beyond resistance running going on is the QQQQs. We need another average to confirm in order for this to be a real rally. My guess is traders are waiting for Wendesday's GDP number before they send the market higher or not.

VIX Below 20 for 3 Days, 1st Time Since May 2008

The CBOE Volatility Index (VIX) fell below 20 last week for the first time since August 28, 2008, almost sixteen months ago, and closed below 20 for three days in a row for the first time since late May 2008 (see chart above). See Forbes story below:

CHICAGO (Reuters) - The VIX, Wall Street's favorite measure of investor anxiety, ended last Tuesday (Dec. 22) at the lowest levels since before last year's implosion of Lehman Brothers sparked the worst financial crisis in more than 70 years.

The decline in the Chicago Board Options Exchange Volatility Index, which came as the Standard & Poor's 500 index hit a 14-month closing high, underscores how the fear that gripped markets throughout late 2008 and early 2009 has dissipated in favor of a sunny outlook for 2010. "As investors gear up for year-end, they only see good things for the first quarter of 2010 and, as such, see fewer swings in the stock market," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

Housing Is Nowhere Near the Bottom

From Bloomberg:

A record 18.6 million U.S. homes stood empty in the first quarter as lenders took possession of a growing number of properties in foreclosure.

The figure is 5.7 percent higher than a year ago, when 17.6 million properties were vacant, the U.S. Census Bureau said in a report today. The vacancy rate, the share of homes empty and for sale, rose to 2.9 percent, the highest in a series that goes back to 1956. About 2.3 million empty homes were for sale, compared with 2.2 million a year earlier, the report said.

The worst U.S. housing slump in more than a quarter century is deepening as falling values encourage buyers to delay purchases in hopes of getting a better deal. The median U.S. home sale price may drop 5.8 percent in 2008, the most on record, followed by another 4.7 percent decline next year, Fannie Mae, the world's largest mortgage buyer, said April 7.


I wonder how the NAR is spinning this news?

Before We Start Thinking This is Over....

From the WSJ:

"We established that the Fed was going to backstop the markets, keep things stable and slowly but surely nurse the markets back to health," says Daniel Shackelford, a portfolio manager at T. Rowe Price Group Inc. As a result, "risk-taking has come back in the market."

There remain significant trouble spots. The market for short-term loans between banks remains highly fragile. Other markets for complex debt instruments -- such as auction-rate securities, which help finance municipalities and student lenders, or collateralized debt obligations, which bundle together mortgage and other debt instruments -- have been deeply damaged by the crisis. Banks and brokerage firms are still sitting on piles of bad debt that could result in more losses.

"We still have some tough times ahead," says Alex Roever, credit strategist at J.P. Morgan Chase.

In the broader economy, housing, the trigger to the crisis, shows no sign of having hit bottom. Meanwhile, a consumer-spending pullback could be accelerating as households are pinched by rising gasoline prices, falling home prices and a sinking job market.

"The trick for investors is to figure out whether what they are seeing is a mirage," says Jason DeSena Trennert, chief investment strategist at Strategas Research Partners LLC. For example, he says the benefits of $100 billion of fiscal stimulus about to hit the economy could quickly fade.


Since the Fed bailed out provided default insurance for the Bear Stearns deal, traders have bid up the market. Essentially, they have been acting as though the Fed would provide default insurance for the economy as a whole, preventing a meltdown. I think this is a prime reason for the rally in the markets discussed below. But there are some other considerations going forward.

First, housing is nowhere near bottom.

Let's start with supply. First, there are a ton of existing homes on the market -- right around 4 million (charts are from Calculated Risk).



And this is before we get into the issue of foreclosures.



This translates into a little under a 10 months supply. Also note that this number -- months of supply -- has been increasing.

So -- we have a ton of supply on the market. Unfortunately that has not translated into a big enough cut in prices to stimulate demand. Here is a chart of the Case Shiller home price index.



Notice that prices increased about 90% in 6 years, yet have barely dropped in comparison to the massive run-up they had during the early 2000s. Simply put, we have a long way to go before we start seeing prices hit an inventory clearing level.

And who's going to buy these houses?



Job growth has been dropping, which is leading to



Dropping income, and



Dropping consumption. In addition, it's not like Americans can take on much more debt.





The basic economic facts are very straightforward: inventory is really high and demand is dropping. That means we can expect more price drops for the foreseeable future.

The point of all this there are big problems out there in econ land outside of the credit crisis.

But many analysts aren't convinced that the coast is truly clear after nine months of ever-deepening turmoil in the markets.

Even as they raise new capital, banks seem unlikely to open the flood gates to borrowers on new loans. "Banks are preserving their liquidity for their most important banking relationships," says Steven Victorin, Citigroup's head of global loans for Europe and North America. "The use of capital will be a cautious effort."

"I think this is a head-fake," says Strategas's Mr. Trennert. Even if the worst of the turmoil is past, he says, the economy's adjustment from the unwinding of the credit boom could linger for the next couple of years.

Cool Followers

Popular entries

 

Economic times December 2011 © 2012 Info recommended by: Global economics online