Economy Makes for Mixed Market

Major indexes came off earlier lows Friday February 20th after the Dow reached a six-year low in the previous session. Big banks remained in the spotlight amid nationalization fears. U.S. stocks were mixed in early trading Friday amid market volatility as February options contracts expire. Major indexes came up from earlier lows following Thursday’s skid in the Dow Jones industrial average through its Nov. 20 bear market low to a six-year low. The Dow is off 47% in the 16-month slide.

Today the 30-stock Dow Jones industrial average was lower by 44.21 points, or 0.59%, at 7,421.74. The broad S&P 500 index fell 5.66 points, or 0.73%, to 773.28. The tech-heavy Nasdaq composite index was up 1.81 points, or 0.13%, to 1,444.63.

On the NYSE, 21 stocks were lower in price for every six that advanced. Nasdaq breadth was 14-8 negative. Trading was relatively active.

The financial sector remained in the spotlight Friday amid concerns that big banks may be nationalized. Bank of America (BAC) Chairman and Chief Executive Kenneth Lewis told Bank of America executives at a senior leadership meeting on Thursday that Washington policy officials have assured him that the possibility of nationalizing the largest U.S. bank by assets is not on the table, the newspaper said, citing a person at the meeting.

Separately, Lewis was subpoenaed last week by New York Attorney General Andrew Cuomo, who is investigating whether the bank violated state law by withholding information from investors, the Wall Street Journal said. Investigators took testimony all day Thursday from former Merrill Chief Executive John Thain, the newspaper said. Thain was asked about $4 billion in bonuses paid to Merrill employees, and in particular why Bank of America’s merger agreement with Merrill contained a nonpublic attachment outlining the maximum Merrill could pay, the newspaper said.

The troubled newspaper industry remained in the headlines. The New York Times Co. (NYT) said its board voted to suspend the quarterly dividend on the company’s Class A and Class B common stock. In November, 2008, the company reduced the payout level of its fourth quarter to $0.06 per share from $0.23 per share in the 2008 third quarter. Let’s further look at the analysis of the US Economy here below:

Shares of Chiquita Brands International (CQB) tumbled Friday after the company posted a $0.74 fourth-quarter non-GAAP loss per share vs. $0.02 EPS on flat sales, higher costs including flood impacts, a weaker euro, and lower performance in salads. The company expects to deliver improved full-year results in 2009.

In recent economic stock news, U.S. CPI rose 0.3%, with the core rate up 0.2% in January. That follows a revised 0.8% decline in December headline index (was -0.7%), and a flat reading on the core. Gains were widespread following several months of declines and should help unwind deflation fears. Energy prices rose 1.7%, rebounding from a 9.3% December decline. Gas prices rose 6.0% after a 19.3% drop in December. Food prices edged up 0.1%. In the housing sector, the owners’ equivalent rent measure rose 0.3%. Apparel prices rose 0.3%. Medical care costs are up 0.4%, and tobacco prices are up 0.8%. The data are close to expectations and should have little effect on the markets.

The euro headed lower vs. the U.S. dollar Friday as worries about trouble in Eastern Europe encouraged investors to flee to safer assets. Traders were nervous about damage to the European banking industry from struggling economies on the euro zone’s periphery and in Eastern Europe, says S&P.

US Economy November Analysis

Global business sentiment is as dark as it has ever been since the 1930′s, although the free fall in confidence may be temporarily truncated by the Obama cabinet selections. Some are even fearing the worse of the glooming fear of the stock market crash of 1929.  Our survey results have been broadly unchanged since early November. Pessimism is pervasive across the world, with the only distinction being that Asian businesses are somewhat less nervous than elsewhere. Equipment and software investment did fall last week to a new record low, as did demand for office space and sales strength. Pricing pressures and interest rates are falling rapidly, although they are not yet consistent with outright deflation. The global economy is suffering a severe recession according to the business confidence survey results.

There was nothing but gloom and doom in the release of November U.S. economic reports. Economic headwinds are expected to have retailers expecting a slow holiday shopping season. But early indications per Black Friday only 1.6% lower than 2007. These are numbers we hope to see consistent through the remainder of the holiday shopping periods.

Construction spending for September came in at $1.060 trillion, a decline of 0.3% from August and down 6.6% from September 2007 as total construction—particularly for residences—continues to decline in the wake of a declining economy. We can expect the continued ripple effect of the home mortgage crisis to continue to hit the construction sectors.  Private construction increased by 0.1% for the month, but private residential construction fell by 1.3% from August to September. Total public construction also fell for the month. With the financial crisis still restricting credit to new projects, total construction will most likely decline in the coming months also. Expect construction related sectors to feel the first blow of initial first year recession waves.

The Institute for Supply Management’s manufacturing index fell 4.6 points to 38.9 for October. The larger than expected fundamental analysis decline puts the ISM index at its lowest level since the early 1980s. Conditions for manufacturing were very restrictive in October. Businesses’ and consumers access to credit was essentially cut off, leading many to reduce overhead, employment and production. The ISM index is consistent with an economy in a severe recession and opens the door for the Federal Reserve to lower interest rates below 1%. 

The U.S. personal income report revealed a bigger-than-assumed 0.3 percent October gain, although the increase followed sizable downward third-quarter revisions that were revealed in the third-quarter GDP report released Nov. 25. We also saw the expected 1.0 percent drop in October consumption, but a much-weaker-than-expected -0.5 percent figure in real (inflation-adjusted) terms, as personal consumption expenditure (PCE) chain prices fell “only” 0.6 percent in October. The real consumption shortfall implies a hefty 2.4 percent fourth-quarter rate of decline alongside a 7.1 percent rate of decrease for nominal spending, and a much-stronger-than-assumed 4.2 percent pop in the fourth-quarter GDP chain price measure, as falling import prices are slow to “pass through” to consumption. We now project a big 4.0 percent real GDP decline in the fourth quarter.

In summary the US Economy is right where we would expect it to be during this quagmire, and the Obama administration has done much to put a tunicate around the financial and stock market bleeding. But we can expect unemployment to grow to 11-12% and slowly start feeling the stronger waves of recession until consumer confidence and fundamentals have been restored. The NASDAQ and other majore indices are showing a modest recovery.

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US Economy

The Economy: Oil has new life after a break.

Just over a week ago, oil tapped at $120/bbl, surging higher in what appeared to be something of a near term climax run. It was close to term. Without much of a push it was back up to $119 Friday, and jumping $2.87 on the session to $118.93 after a quick dip to the 114 level it held. During the week, the dollar moved up and so did oil, defying the ‘stronger the oil, weaker the dollar’ relationship. Oil is less dependent on the value of the dollar.

Prices for everything are rising, including gasoline and meat. The government tried to play favorites with its ethanol, but like is always the case, when pressure is applied in one area it goes to another area. This situation immediately calls for rectification a real disaster has to be averted ahead of any possible mishap that will kill off an attempted economic recovery.

Housing problems and credit issues are hard, and have caused a lot of problems. Government decisions are ready to hurt consumers further. We need gas to get to work, and food to eat. The reasons behind the deep recession not brought about by housing and credit could be due to unchecked Federal policies or the lack of energy alternatives that is creating the high gas prices.

Bond yields rising, gold fall, the days of the weak dollar may be over.

The dollar is staging its best move against the euro in months without any help from the administration. Surely, it is coming off the mat to do so, considering the long and deep slide, but it is to be appreciated that at least it is making some effort. The dollar is still on its way down, and the end of this trend is not close. It is not found to have even broken its 50 day EMA, but just reached that level on Friday and then again, failing to hold a move through it. That leaves it in the basement, and looking for the steps back up.

During these past two weeks, the bond yields were up sharply. Moreover, the 2-year yield broke from 1.8% to over 2% on its first move. The market delayed near 2.2%, which then further entered into a break during the end of last week followed by another major move indicating a jump of 2.44% on Friday. Even the 10-year broke higher up to 3.86%, although its movements remained modest range in comparison to the surge of short ends.

Bonds are showing that the dollar is getting stronger. There is a recovery starting to occur. Some people explain it as inflation. As we previously discussed, the rising interest rates do not mean inflation. Inflation can account for a part of the rise, but yields from bond raise more due to economic recovery reasons than those of inflation.

Look at what is happening with gold. Oil is trending up and looks to continue that streak while gold is at its peak and is getting ready to slide back down. Last month it ran to 1000 and that was the top. It sold off nicely and rebounded, but found a lower high, rolling back over the previous week’s position. Its closing price was below $ 900 for the entire week, in what can be considered an amazing reversal from the highs registered just a month ago. It is ready to go a lot lower, and this is not a signal that there is inflation. Inflation is not related to the rising interest rates, but instead an economic recovery that is to come.

US Economy

Is this the end of the economic crisis and financial market disintegration?

After the initial FED reaction, it was followed by hesitation as the credit markets froze, causing the markets to lose confidence and chaos ensued within the financial world. BSC, which had been solvent as soon as the previous week, was victimized after the first quarter scare took center stage. It was voided with assistance from Fed since it went bankrupt and could not effectively conduct business.

The financial crisis of 1998 triggered a bear market, which ended relatively quickly (14 weeks between crisis peak and recovery) with the Fed support of foreign currencies. How many weeks has this one gone on? From the August peak of 26 weeks this one has lasted significantly longer yet fourteen weeks have elapsed from the first low to this week’s breakout. Although there is more to it than just the mortgage issues, they greatly caused the financial problems that even spread to other countries.

As luck would have it, it was the Fed’s action with respect to BSC as well as its opening the discount window to non-primary dealers, and jumping the size and content of its auctions that finally led to the unfixable. This allowed markets to see that Fed was ready to backstop the problem. Also, it demonstrated that this Fed was different from the Greenspan Fed, for example continually meeting one financial issue after another with the inevitable rate cut. Instead, this Fed was thinking outside the box, looking at how to provide liquidity without resorting to endless rate cuts and associated dollar liquidation. As soon as the market received the memo, there was a halt in the decline of the dollar. There wasn’t a sudden rebound since the administration didn’t help. In the past five weeks it has only moved laterally.

The direction of bond yields is another sign. Interest rates for bonds rose, especially short-term ones. After remaining at 1.8%, on Friday yields rose to 2.2% during trading and closed the day at 2.13%. Prior to landing at 3.71%, the 10-year escalated from 3.4% to more than 3.8% on Friday. Breakouts occur on both ends but especially the short. This could suggest inflation as discussed on Thursday, the elevated rates are not inflated. The Fed says that they do not depend on the constant rate cuts. The dollar has firmed as noted and that, and even though we have those exporting, means a better economic outlook for the US. Bond yields reflect economic strength, and rising yields in the past have shown a firming economy.

Gold is also showing well and indicating that the Fed has done something right, since gold hit its high in the middle of March; giving up 15% off the peak, bounced, but then gapped lower Friday, falling 28 clicks and is now at a key junction a little above 900. There is an indication of a problem since the gold has fallen since the recession and the inflation trade is slowing. The Fed won’t cut rates so the gold inflation is over.
This indicates that the credit crisis and accompanying economic slowdown may be at an end. Leadership and stock market bounce are good leading indication but not fully conclusive in themselves. The action in bonds, the dollar and gold add weight to the favorable story, but even those are not conclusive as the dollar is still basing and gold has not broken down completely. More of the story will be revealed in the next few weeks.
As always there is a rub; LIBOR (London Interbank Offered Rate) rate spreads are increasing again. When spreads are high banks are less willing to loan money to the other banks. At the start of the credit freeze they were at 90+ points, but as a result of the Fed actions they fell back to an understandable 5 to 10 points. Although the economic outlook had improved, they have returned to the 94 basis point level. Borrowing cost higher than bank are indicating means profit impact yet undisclosed

Oddly, banks are not running to participate in the Fed auctions. Indeed, the participation has declined, indicating that liquidity levels are improving and quite livable. They would go to the Fed if they could not access funds.

In any case, today’s market allows us to profit from the moves as long as leading stocks and the indices show the right kind of action.

You think prices are high now?

According to a recent survey, the summer months are going to start with national gasoline prices soaring to the $3.60 mark. During the last few weeks we’ve seen an increase of approximately 20 cents. By summer $4/gallon gasoline is expected. The price last summer was $3.

Prices of gas are affected by the ethanol. Above all else, it’s caused wild regions to overflow, destroying wildlife habitations on the edges of farmland and tarnished streams with fertilizer surplus and the lands are gaining ground all the way up to the water’s edge. Minimal amounts of ethanol are being produced by using hundreds of gallons of our limited water supply resulting in very little or no gain at all. Severe environmental effects.

Food costs have skyrocketed because of this. The prices of animal feed are inflating just like stated by the CPI and PPI. That is causing price increase on top of a price increase. In what way? Corn is now being used for ethanol so food costs are going up. Rice is the basis of the Asian diet, corn syrup is the basis of our food. Diverting corn from food production to fuel production raises food prices Food prices are skyrocketing worldwide, causing riots, unrest and starvation and we continue to use food staples for fuel, CAT’s CEO wondered at the folly of this Friday in an CNBC interview.

There are issues besides the increasing prices for corn-based foods. Feed corn is so much higher that ranchers are slaughtering cattle and chickens to prevent themselves from buying the high-priced feed in a losing proposition as it costs too much to raise the animals. Therefore, we will have an insufficient supply of beef and poultry in a matter of months. As an example, we are hearing prices for ground beef as high as eight dollars per pound.

Once again, the US government has blundered foolishly into market manipulation, with its ill-conceived policies impacting both its own citizens and consumers around the globe. With the ethanol plan they have fused together food and energy prices and as a result there are increases in both.  Saying there had to be a start somewhere, one of my clueless senator’s staffers discussed energy issues with me.   Yes, but looking at the past it is evident that failure occurs over and over again when the government picks the method of solving a problem rather than providing incentives for anyone to find the best solution. People will uncover the top solution, so long as they are provided with the incentive. When the government picks the solution the only ones benefiting are those who basically receive the government monopoly. For instance, corn, our main food source. Nice move. We need to undo this decision yesterday or we are going to see a price explosion in food, and that is going to escalate unrest across the globe at a time that we simply don’t have the resources to meet it. Our enemies can only benefit from this course of events.

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Recession History

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