Poor Economic Data Plus Poor Financial Stock Charts Raise the Question of Further Bond Rally

Please consider clicking to this linked chart of Bank of America (BAC).

This defines ugly.

Meanwhile the administration's Recovery Summer is panning out as follows.

Gallup reports U.S. Consumers' September Spending Matches 2010 Low:

Americans' self-reported spending in stores, restaurants, gas stations, and online averaged $59 per day during the first four weeks of September. Consumer spending is down from August ($63) and July ($68), and now matches its lowest level of 2010. Current spending is lower than that of a year ago and far below spending in September 2008, at the start of the financial collapse.

Click on graphic to enlarge.

Discretionary spending completely stinks. The country is getting poorer. These data are not adjusted for the obvious rise in consumer prices going back to early 2008. Thus they are worse than they appear, and they appear dismal.

Well, did small business participate in Recovery Summer?

Rasmussen on behalf of Discover(R) has an answer, having released its September survey data of small business, results of which include:

-Forty-six percent of small business owners report having cash flow issues this month, down from 53 percent in August; 50 percent said they do not have cash flow issues and 5 percent aren't sure.

-Despite this, a record 68 percent of small business owners rate the economy poor, up from 62 percent in August; 26 percent rate it fair, 4 percent rate it good and only 2 percent rate it excellent.

-In September, intentions for spending on business development in the next six months produced two record numbers. A record low 16 percent of small business owners plan to increase spending, down a percentage point from last month's then record low of 17 percent. Fifty-seven percent of small business owners report plans to decrease spending, the highest in the history of the Watch, while 24 percent report no changes to their spending plans and 3 percent aren't sure.

-55 percent of small business owners report economic conditions are getting worse for their businesses, equaling the record high percentage from last month; 23 percent expect them to stay the same and 20 percent see them getting better.

So, in addition to the widely reported U. of Michigan consumer confidence surveys, the ABC weekly confidence survey and so on, current data are ugly. This rich country is getting poorer.
Meanwhile the financial leaders at the Fed prattle on about the desirability of 2% price rises--for a country where money on deposit in the bank yields next to nothing, where except for giveaways from the government Social Security recipients receive no cost of living increases, and where the rate of price increases is systematically understated.

Almost everyone I know understands that the stock market is fully divorced from the economic reality of themselves and their friends and family. Thus, the lack of palpable economic progress and no major foreign policy successes all but ensure a major rebalancing swat on the nose to the Dems in the election.

The low expectations of the public of the Republicans they may well grant control of the nation's pursestrings to might just allow for upside surprises in the financial markets. Since the federal deficit has now moved to #1 in national concern in at least one recent poll, we might just see the pols here do the same sort of deficit reduction that the Brits achieved with their new coalition government this year. There is, after all, nothing so persuasive to a pol than a poll. Might the unthinkable happen, and the 10 year Treasury revisit its 2008 post-Lehman panic low around 2.10% in the next few months?

If anything can do that, the combination of troubles at BofA, as the chart suggests; further economic weakness (double dip or no almost does not matter) and deficit reduction measures could be a trifecta that accomplishes that while restoring some faith in and strength to the benighted U. S. dollar.

Copyright (C) Long Lake LLC 2010

Gallup Reports Real Consumer Discretionary Spending Hits or Ties Multi-Year Lows

Gallup is reporting today that self-reported discretionary spending by consumers has essentially tied its low point from March, 2009. A total of 21,000 phone interviews over the prior 14 days shows that outside of normal bills/mortgage/auto payments etc., respondents spent $55/day. The margin of error is 3%, which I take to be $1.65. The low point I can find by scrolling over the data through the beginning of 2009 is $54 in March 2009. Given that this data is not adjusted for price increases, which the government says have occurred when housing costs are excluded, real consumer spending may actually be down over almost any time period one wants to use. This apparently was not a Recovery Summer for American consumers.

The same survey showed daily discretionary spending about $75 this past spring. Not shown is the data from the first part of 2008, when the recession was on but was just a mild slowdown so far as consumers knew. My recollection from following this survey then is that this number that is now in the $50s was in the $100-130 range.

This is one of the reasons why I feel this is a depression. Yes, all the money-printing and cyclical factors, plus 1% per year population growth, help keep some economic matters growing, but in the real world, the normal vitality of the American economy has yet to show itself. And truth be told, aside from the housing and credit bubble, said vitality was lacking all through the prior decade.

(The Gallup survey apparently includes all respondents, not just ones with jobs or who are retired. In other words, it presumably includes spending due to transfer payments, including those "paid for" by expansion of governmental deficit spending. Thus the underlying trend based on real earnings is yet worse than shown.)

This data dovetails with much other data and supports the view that in the "Japanecian" duality of the U. S. economy and financial system potentially going Japanese and/or Grecian, right now it is still in the "going Japanese" mode. Unless the recent data is a true outlier, this recent collapse in spending supports the investment strategy of being long assets perceived as being very safe or non-dollar-related. This is not, however, a short-term timing tool in any way, shape or form.

Nonetheless, I continue to put cash "to work", as the talking heads like to say, in long Treasuries on price weakness for a trade, betting that the Treasury bubble has more bull market moves ahead of it, long in the tooth though said bull market is. The yield spread between 10 and 30-year Treasuries is near its all-time peak, currently 120 basis points. On a ratio basis of the 30-year yield divided by the 10-year yield, that ratio of 3.80/2.60 is clearly at an all-time high except perhaps for several days last month.

The only view one has to take to be bullish on long Treasuries for a trade is that cyclical factors plus Fed actions will keep 10-year yields relatively low, and then that reversion to the mean of the 10-3o spread will occur. Of course, assumptions such as the ones I just made led Long Term Capital and many others to failure, so there are several ways for this reasoning not to hold water. Nonetheless, I like the odds here.

Copyright (C) Long Lake LLC 2010

Gallup Confirms New Normal Stinks for Almost Everyone Who Didn't Get Bailout Money

Just in case you were feeling too cheery today, Gallup reports Consumer Spending Across All Income Groups Down in August:

Americans' self-reported average daily spending in stores, restaurants, gas stations, and online averaged $63 per day during August -- down $5 from July, and down $2 compared with August 2009. Consumer discretionary year-over-year spending is thus running just slightly below the depressed "new normal" rate of a year ago.

Despite the victory in the presidential election who would appear to be ideologically very comfortable in a Democratic Socialist party were he a European, please note what a disaster things have been for what should be his core constituency:

Middle- and lower-income Americans spent an average of $54 per day during August -- down from $64 in July and $62 in June, and lower than the $57 seen in August 2009. Americans in these income groups had been spending at the higher end of last year's "new normal" range of $52 to $61 but are now back to the lower end of that range.

Matters were no better in early September:

This year's somewhat disappointing back-to-school spending has been followed by few added expenditures for Labor Day. Consumer spending for the week before Labor Day averaged $61 per day -- the same as during the prior week, and down from a $70 average during the same week in 2009.

What Gallup does not say is that in the first part of 2008, discretionary spending was well over $100/day.

This is consistent with a modern-day depression.

Copyright (C) Long Lake LLC 2010

Is the Hated Long Bond Ready to Rally?

The 10-year Treasury bond's yield advantage over the 2-year and the 3-month T-bill is at or near record amounts in absolute terms. Other similar spreads were seen in spring 1992, August 2003, and June 2009. All cases were positive for the bond market as well as the stock market.

What matters is not only the absolute yield differential but the ratio of yields. In 1992, Treasuries were yielding almost 7%, so the ratio of the 10-year to a short-term yield was not nearly so great as now. Taking this to an absurd case, what if the short term rate were 100% and the 10-year were 105%? That would be an even greater spread, but the yield curve would be flat.

Contrarians can once again buy long bonds for a trade. The Gallup hiring/not hiring difference just went to negative 6. This is consistent with a jobless recovery and is of a piece with recent non-seasonally adjusted unemployment claims (rising) and Q3 GDP downward revisions X 2 (old "news" of limited importance to be sure).

Whatever complacency about the course of this recovery exists-- with some very high GDP numbers for the quarter just now ending and early next year in the ether-- and with the VIX under 20, a lot of fear is for certain out of the market, any excuse to take profits may do. A weak jobs report next month could be that excuse.

Copright (C) Long Lake LLC 2009

Focus on the Trade-Weighted Dollar Index, not the DXY

Much is made of the weakness of the Euro and perhaps the yen vs. the dollar. OK, these are frail currencies.

So the DXY artificial, limited dollar index is rising. Reflexively perhaps, gold and stocks have fallen today. However, the real world has currencies to exchange in trade in goods and services. The St. Louis Fed keeps track of the broad, trade-weighted index. The nearby chart shows this visually (click on it for greater detail).

There has been NO rebound in the dollar as a currency when measured in terms of trade balances. It remains a flawed currency with dangerous fiscal policies and a Fed whose balance sheet contains an unknown quantity of impaired assets.

The zero interest-rate policy is suppressing value of the dollar where it counts, in trade. This is one of the sources of the fake boom/boomlet now underway that economists/personalities such as Larry Kudlow tout and serious players such as ECRI point out.

The downside of all this is price inflation. It's a classic trade-off. Now that the trade-weighted dollar index is around 100, where it was 2 years ago, recall what inflation was doing 2 years ago. Gold was surging to hit above $1000/ounce in March 2008; it is only up another about 10% since then despite all the financial chaos and money-printing.

If the economy has actually turned and employment is going to finally rise significantly (something not noticed by ordinary workers per the Gallup.com poll as recently as today's report), price inflation is going to far exceed interest rates paid by money market funds or most bank accounts. This will lead to more and more speculation in financial instruments. Only tight regulation (absent) and/or much higher real interests is likely to prevent said speculation.

The speculation here is that precious metals will be a beneficiary of price inflation that exceeds prevailing short-term interest rates, and that should inflation equal or exceed the 5-10 year Treasury interest rate, all heck could break loose, including new records in a variety of commodities.

Copyright (C) Long Lake LLC 2009

Pressure on Tim Geithner Increasing

Courtesy of Naked Capitalism comes the good news that liberal/progressive Dems are catching on that Mr. Timother Geithner is a catspaw of Big Finance. Click HERE for the link to that post, which itself has a link to a video clip of Representative DeFazio of Oregon.

Sometimes the world just has to come to you. While TG is not a goner, his rep keeps declining.

When this blog began late 2008, Tim Geithner was a target because of this ties to Big Finance, with the tax troubles felt at EBR to be a sign of the inner water-carrier coming through.

Meanwhile, Gallup.com reports absolutely miserable polling data re hiring/not hiring and daily elective spending. For most people, it may be that the depression has not really ended. If the economy can't soar with a zero-ish Fed funds rate, that would be a Japan scenario. The real winner given the one-dimensional thinking of the Dems: gold, because then more "stimulus" would be baked in the cake.

Copyright (C) Long Lake LLC 2009

Employment Galluping Nowhere Good Yet

In 2003, every month CNBC commentators would anxiously await the monthly unemployment numbers, as the jobless recovery moved along. The anxiety was focused primarily on the "establishment" numbers, a survey of numerous generally large to midsize employers (establishments, in other words), which performed as usual in an economic expansion and lagged the clearer jobs growth seen in the telephonically-performed survey of households.

This cycle, matters are different, assuming that an economic expansion has indeed begun. Over 1.1 million jobs are estimated to have been lost in September and October alone, more than double the 2-month total establishment job losses.

People watch initial unemployment insurance claims, which are dropping slowly and are clearly valuable, but those claims do not apply for people who were not covered by unemployment insurance to begin with. Such people include the young, housewives looking for a job either to supplement a husband's income or because of job loss by said husband, older people who suddenly don't have the assets or interest income they counted on, and those in the country illegally or otherwise working for cash.

There is a simple, free way to keep a finger on the employment pulse.

Gallup publishes the results of almost real-time polling data for free at http://www.gallup.com/Home.aspx.
(Registration may be required.) It's software does not let me link to a graph, however, so I shall describe the survey, which polls people daily. They report whether to their knowledge their employer is increasing, decreasing or not changing the workforce number. On March 9-11 (three-day rolling average), those numbers were, in %:

Hiring 39
Letting go 17
No change 38.
http://www.gallup.com/poll/110134/Gallup-Daily-US-Job-Market.aspx

Other dates throughout late winter and spring showed similar numbers. Yet the recession was already on.
It wasn't till almost a year ago that the percent "letting go" equaled the percent hiring.

Today, the rolling average reported by Gallup was 24% letting go, 22% hiring. The unemployment rate was rising rapidly last summer with much better numbers.

Bottom line: the household survey is likely correct. Larger companies, with more staying power, are keeping their profits up and are gradually moving toward a hiring mode. Smaller companies are struggling more.
They are looking at higher governmental fees and taxes and some are not hiring because of the health reform effort in Congress.

This is not a time to invest in any companies than those of very high quality; and of course regular readers know that I believe that we are probably not finished with the secular bear market that began either in 1997-8 or, more conventionally, in 2000.

Copyright (C) Long Lake LLC 2009

Surveys of Real People Rather than of Economists Unfortunately Paints an Ugly Picture

The news from real people about the economy just refuses to turn upward in any consistent fashion, despite massive government spending that has to goose up the economic numbers. Apparently larger companies have such high profit margins and those that are international see growth prospects out of the U. S. as more exciting than here that they are currently unwilling to invest for growth; and smaller companies have difficult access to financing and even the ones that carry health insurance are confused about the future cost.

Today (Oct. 20) we had a sudden relapse in two of the Gallup.com poll numbers that I watch daily. The 3-day average index of job creation (hiring/letting go), collapsed after looking stronger the past week, to a dismal -2. This is the number which represents the % of employees seeing their company adding other employees minus the % seeing them shrinking the workforce. Thus, a negative number sees more shrinkage than adding. Zero is not anywhere close to labor force equilibrium, though. When the number was strongly positive--such +20, unemployment was increasing. After all, the workforce is increasing. No matter what massaging of the data the people at the Bureau of Labor Statistics do, the employment situation is miserable. Very likely it will get better, but you know that objectively, the economy is a lot stronger early on in recessions than it is early in significant recoveries.

The other Gallup data with movement in the wrong direction is the U. S. Economic Outlook. Improvement in this number correlated very closely with the stock market up-move in March. The % seeing the economy as worsening has jumped to 60% from a recent low of 50%. The amount seeing it as improving has fallen to 34% from a recent high of 43%.

Separately, the ABC News weekly report of a poll the Consumer Comfort Index came out today and was subtitled "Back in the Dead Zone". Also, click HERE to go straight to the charts.

Last week, I noted that the S&P 500 had finally filled the gap on the chart at 1100 from the major collapse early last October. This theme was picked up by at least one analyst who has had a superb track record the past two years. Given the failure of average people to see any real improvement in the economy essentially two years out from the peak of the economy (most people thought the U. S. was in recession or worse more than 2 years ago), and given the floundering of the recent leading stocks, we are now in a classic time for what is politely called consolidation of gains.

If you click HERE on the two-year chart of GE, you will see that the panic bottom notwithstanding, an obvious downtrend is in force. The rule is that trends continue until they do not. Click HERE, HERE and HERE for similar charts of BofA, Nokia and a 5-year chart) Ford. These are charts that accurately reflect the changing business fortunes of the companies.

Click HERE for the 2-year chart of the S&P 500 (or its ETF = SPY as you prefer). This is the best of the bunch but the 2, 5 and 10 year charts taken together show no trend. Given a dividend yield of 2%, who needs it?

On all of these, the eye can see the downtrend. For all of these, business prospects simply appear to be worse than they were perceived to be in the past. The naked eye can easily see the loss of inventor support revealed by the downtrends.

If you adjust either for gold or for two or ten-year Treasuries, the downtrends are steeper (though in fairness, Nokia pays a good dividend).

Marty Zweig popularized the term, "Don't fight the tape". He was correct.

Yes, I will bravely predict that the above surveys will show rampant optimism in the future. But for now, business conditions are compatible with stock averages much lower than they are now. Federal finances are compatible with interest rates ranging from Japan-style on the low end to much higher. That Team Obama is apparently now planning yet another stimulus package makes me withdraw any optimism for lower rates in the near-term. Things are far too fluid to guess, even forgetting market manipulation.

In the days ahead, we will discuss technical patterns and some fundamental thinking about different asset classes, including individual stocks that may be poised to outperform if past is prologue.

Copyright (C) Long Lake 2009

Treasury Long Bond Refuses to Die

Every time I get ready to toss in my optimism for the chart on the Treasury long bond's price, using the ETF 'TLT' as the proxy, it hands in there despite an allegedly booming recovery. The latest chart pattern is shown here. The green line represents the short-term, 10-day moving average. Coming off a low price/high yield 90 days ago at the left of the chart, what one sees is a strong move up in price , with a peak in the 10-day ma around 95. After a dip in price, the 10-day ma now peaked at 96, had a mild dip, and has begun to point upward.

It's early, but this is how bull moves can begin.

Fundamentally, such non-standard indicators as Gallup's daily polling continue to show miserable reports from real people of hiring/non-hiring at their employers. The Baltic Dry Index hit yet another reaction low, and the Chinese stock market has hit a small air pocket the past few days.

I'm no economist; but . . . If Gallup has it right, a 10% unemployment rate is imminent (barring the technicality of a major shrinkage of the labor force).

Copyright (C) Long Lake LLC 2009