Sunday, March 30, 2008

Michigan sentiment lowest since 1992. Some very interesting comparisons to that recession.

- Market slides lower on no volume as no shorts rush to cover.
- Income up, spending lower: so what's new when the consumer is worried?
- Core annual PCE falls to 2%
- Michigan sentiment lowest since 1992. Some very interesting comparisons to that recession.
- The stage is set. Time to step up and rally.

Week ends down as buyers are on vacation and shorts see no reason to cover.

The economic data was not bad with income higher than expected and the PCE inflation indicator in line. Throw in an LEH upgrade and investors were feeling pretty good even with JCP (department store) warning on its Q1, providing more evidence of a pensive consumer (along with the 17 month low in spending). Stocks opened higher and rallied into the Michigan sentiment number that was also a low, the lowest since 1992.

After Michigan the market peaked and headed south, starting a long, steady descent through the close without any attempt to rally. The buyers were out for the weekend, and with no bids the shorts had no compulsion to cover. So much for getting the short covering pre-weekend bounce we wanted.

Financials were once more the hardest sellers. Oil (104.95, -2.63) and gold (930.60, -18.20) sold rather sharply, but there was no solace taken; even the transports slumped on lower prices for fuel feedstock. The market sagged to the close and the indices undercut the 18 day EMA. Not great action, but it was no implosion, no dive back into the chasm.

TECHNICALLY the intraday action was modestly higher to losses in the 0.6% to 1% range. High to low action is not great, but you have to look at the other indicators to see if the action has any fire inside.

INTERNALS: Breadth ran modest all session before falling off right at the close to -2:1 on both NYSE and NASDAQ as they again matched each other. It was modest enough to indicate there was no widespread exit. Volume told the same story, i.e. no sellers dumping shares in any quantity, just a lack of bids to end the session.

CHARTS: The indices did not hold the 18 day EMA, did not bounce. The move through that level is disappointing, but it was no breakdown. All of the indices are still in a range they can hold, make a higher low, and continue the rally attempt. SP500 and NASDAQ turned back at the 50 day EMA where SP500 failed in late February, just a month back. As noted Thursday, this is the point where they need to put up.

LEADERSHIP: This remains the most interesting aspect of the market. It was bifurcated on the week, but not a bad bifurcation where some leaders hold up and others break down. Some of the early runners are pulling back after good surges such as in transports and retailers. They are coming back but still holding support. At the same time, other solid companies see their stocks forming up nicely despite the overall market pullback. Tech is an example. These are really a positive as it shows money is still moving into these stocks despite the market pullback. Groovy.

IN SUM: This is the kind of drop that gets most everyone assuming another selloff is coming. People are not that comfortable with the market action given no signs of upside life after Monday. Friday we heard some old hands on the floor fearing another collapse lower for a number of reasons, e.g. a low volume rise off the lows. There were no less than six commentators Friday who said this was the toughest market, the scariest market, the most unpredictable market they had ever witnessed or had encountered over the past thirty years.

We have to admit that you always have doubts about a move that sells and then sells some more when the market is trying to recover. This pullback still seems too short and too shallow to account for all of the problems with housing and credit. Just doesn't seem to be enough of a flush out even with the Fed in the game. What you have to look at, however, is what the market is telling you. Is there anything more than just the sag back (yet again) that has everyone glum?

In this case, yes. The last rise off of the March lows was not on lighter volume. NYSE volume moved above average on that run, showing there was real buying off of that low. NASDAQ volume was spotty, but NASDAQ stocks are still setting up for leadership; NYSE stocks were definitely leading and that is where the money was going. Leadership as noted is not caving in, just pulling back to test while at the same time other leaders are developing for a break higher. Breadth shows no widespread selling, just parts of the market pulling back, some to test, others (such as financials) to try and find themselves again.

This is one of those times it is hard to be positive given the selling preceding the current pullback, but the market is not distributing after the bounce off the last March low. There is the big positive of leadership; even as the market pulls back the early leaders and the newly minted ones are holding up well as other stocks set up for upside moves. That completes the picture: higher volume on the move off the March low, lower volume on this pullback, and leadership holding the line, still setting up nicely. That means we are looking for the market will to soon turn from this pullback and continue the break higher . . . barring some big extraneous news story. With the credit issues still out there, that is always possible.


Spending continues to slow but is not off the cliff.

Income beat growth expectations at 0.5%, pushing annual income to 4.6% year/year. Spending was up the 0.1% expected. Even with that more modest rise, annual spending growth rose 5.1%. The PCE rose 3.4% annually overall, and the core 2.0% year over year, back at the top of the Fed's target range.

With oil surging out of control still and food prices still rising, there is little solace from the lower annual core PCE. Those are of course beyond the Fed's control and its monetary policy reach, and with the Fed in full 'prime the pump' mode there is no concern about the Fed using those as a wedge to get back into the tightening game.

What is a sign of the times and worrisome is inflation adjusted spending (70% of the GDP) that was flat in February and indeed flat for the last three months. That high energy cost, weakening home prices, and general worries about jobs are wearing on consumers. When it costs $60 for 20 gallons of gas that is hard on consumers. I hire college students to help do some of the office work and to train them and groom them for later on, and to a man (or woman as the case may be) they are complaining how the rising gasoline costs are eating away their earnings. It is a real hardship, and on top of that, with more money going into the tank, less money goes elsewhere.

Michigan sentiment at recession levels. Well, at least one recession level.

Even with that, spending is still remarkable, holding flat even as prices climb and confidence falls. The latest read on the consumer mindset was Friday with the March revised Michigan report. Sentiment fell to 69.5 from 70.8 in February, less than the 70.0 expected. Still stronger than the Conference Board's read but it is at a level not seen since the 1992 recession.

Interestingly, when confidence was at this low level the economy was pulling out of the recession. Indeed, in the spring of 1992 the economy was on the comeback from a quite light recession even though, during a political year, it was characterized as the worst recession since the Great Depression. A lot of manure is thrown in a presidential campaign year, and that was one of the biggest buckets ever. Of course, the electorate bought it even as there were robins on the yard as far as the economy is concerned.

Interesting Recession Comparisons.

The similarities to past financial-based recessions are intriguing. Of course sentiment is heading lower still, but it doesn't take much to turn it if things improve. The stock market shows building leadership as it tries to build off of a nascent double bottom after five months of selling. There are hardly robins on the yard in terms of the economy, but the Fed is in full inflation gear and the Feds have already passed a stimulus package. There are also some tall tales being told with respect to how to handle the mortgage issues (e.g. 5 year moratoriums), trade protectionism, etc.

If the market can continue higher and leaders continue to build, it is a leading economic indicator, and perhaps this recession will be as shallow as in 1992 and the bear market of 1998. I noted at the end of 2007 and in January 2008 that this could be a shallow recession. P/E ratios were pretty tame heading into this recession, the Fed and the Feds were in quickly as noted, and financial crises can end quickly as seen in 1998 with the Russian meltdown that saw the SP500 plunge 22% in 4 months, making a double bottom and rallying higher. The current decline that is trying to double bottom is 5 months long and sports a 20% decline. DJ30 lost 21% in the 1998 recession; the decline on this low was 18%. NASDAQ is not as close; it collapse 33% in 1998, but is down 'just' 24.7% on this drop. P/E ratios, as noted however, were already in a reasonable range heading in, and thus the losses are plenty to support a recovery.

Financial crisis helped trigger this decline as in 1998. There is more here what with housing, so it is not a one to one comparison. The percentages are a bit off, but they are close. The Fed was a big actor back in 1998, and it is a big actor right now, and, despite the complaints, it acted in rather short order. Leadership fell hard, but it recovered with good bases in 1998, and we are seeing similar action here. There are parallels, there are some differences. There are enough of the former to make this very interesting, and this attempt to double bottom will tell the tale as to just how similar.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, March 16, 2008

It's a bird, its' a plane, no it's the Fed rushing in to make some more history and bail out a brokerage.

- Futures are down, no up, no down. Market whipsaws on every news story but the sellers win out another session.
- It's a bird, its' a plane, no it's the Fed rushing in to make some more history and bail out a brokerage.
- CPI is not bad, showing no increase, but again you have to wonder where this data is coming from.
- Michigan sentiment improves, showing more resiliency than investor sentiment.
- Many are talking about a bottom, and while there are definitely positives, VIX, $110 oil are standing in the way.
- Worries about the next shoe to fall after BSC slaps the pavement. Maybe the market can finally test the lows and try a bottom.

Market sells off to end the week, but it started out Friday as a tennis match.

We were up early to get a fix on just how the market was going to react to the up and down week and the Thursday reversal. Futures were down 10 points plus on S&P, not chicken feed. Then the CPI pulled off a pair of flat readings for the overall and the core, and that reversed the losses and futures were solidly higher, indeed higher than they were lower before the inflation number.

Then a story hit about the Fed authorizing BSC to go to the discount window via member bank JPM. That has not been done since the 1960's and before that in the 1930's. The story is that so many rumors were flying about BSC's solvency that no one wanted to do business with it. From solvent to teetering on bankruptcy in 48 hours. Thus the Fed action to backstop it just so it could do business. Similar to allow the primary lenders to come to the discount window, the Fed authorized BSC, a broker/dealer, to do the same. History making week for sure.

That story did not initially impact the positive reaction to futures, and indeed at the open NASDAQ was looking at a 20+ point gain and DJ30 over 50 points. They did not open that strong, however. As the Dow stocks opened, things did not improve. Indeed they started to turn south. The BSC news and the implications of what the Fed had to do weighed heavily, and within 20 minutes the market was negative and it was going negative in a big way.

The indices did not plow any new ground, but DJ30 was down over 300 points in a quick 15 minute run lower. The indices were all red and sporting 2+% losses. There was a rather quick bounce that suggested maybe the quick selloff was too much. Stocks rallied back sharply with DJ30 cutting its losses in half. Not bad. Then the sellers came back, however, and that was it. The indices resumed selling and started a long, steady decline into the last hour, surpassing the early session lows.

It was Friday, however, and a 300 point loss begs some short covering, particularly when the feds told major banks and brokerages to huddle over the weekend and fix the BSC problem. In short, there may be no BSC on Monday. The concern over potential good brought the shorts back to cover, worried that some good news might come out over the weekend. Again DJ30 and company cut the losses in half in a short but strong 40 minute surge. Even that was not immune to sellers. They came back to smack the indices around a bit before the close keeping the losses significant in the 2% range though still well off their lows. Even with a rebound the indices lost a lot of ground. Pretty tough selling.

TECHNICALLY the action was the bearish high to low as the early buyers were overrun. The late bounce was not much, just some covering ahead of the weekend and some potential good news (and of course, some potential bad news). Definitely a negative session.

INTERNALS: Not surprisingly the internals were skewed to the downside. Stronger, above average volume on NASDAQ. NYSE volume was lower, but just a hair so and still well above average on both. There was plenty of selling as financial stocks again took the brunt of the investor angst. -5:1 breadth on NYSE and -3.5:1 on NASDAQ speak for themselves. New lows did not ratchet much higher, however, on this next test lower. They didn't explode higher earlier in the week either, at least not to the extent in mid-January. A silver lining hiding in there.

CHARTS: SP500 touched down close to the prior lows, but NASDAQ and DJ30 didn't really test those levels. That doesn't mean the losses weren't significant, they just didn't have enough time before the weekend to really get ugly. That is not totally true; they sold hard early and bounced. Some are calling this action a bottom of some sort, and it may turn out that way. Each time the market tried to get there last week to make that full test and perhaps set a bottom the feds, either the Fed itself or Congress, issued a statement or held a conference about what needed to be done. The Fed upped its Taffy to $200B; selloff reversed. Barney Frank proposed the feds being the backstop for mortgages; another selloff reversed just in the nick of time, i.e. before it finally made its test. If no one comes out to save them and just let them sell maybe then we get the VIX spiking, the January lows tested, and enough capitulation to turn the market, at least for now.

LEADERSHIP: It didn't really matter where you were Friday, you got dinged a bit. Stocks tried to come back after that initial plunge lower, but they couldn't make it stick. Nonetheless, though down, energy, commodities and agriculture were still solid as they tested back but roundly held near support. There is, however, still a dearth of new leadership needed to come to the fore. A lot of these ag and commodities stocks have run for months and months and months; sure they are in a bull run, but even bull runs need to retrench from time to time. While they do that a new crop needs to show up. There are some possibilities in tech as one example, but a lot more work has to be done. Many tries at rebounds in the 2000 to 2002 selloff flared out and crashed because no leaders stepped up. And there is an old adage, when energy leads the market for any length of time, trouble tends to follow. That was underscored in red this past week as oil moved above $110/bbl (closed just under $110 Friday). That is an awful burden on the consumer and businesses, and it is only getting worse after a year of pressure already.


CPI takes a respite, but with oil and gasoline showing declines, you have to wonder about the data.

Both the overall and core CPI were flat for February, a nice respite from the monthly increases and the 0.3% and 0.2% expected. It was the first reading below 0.3% since August 2007 and its flat reading. That lowered the annual core to 2.3% from 2.4% in January. After big gains in January, February basically offset them. Apparel fell 0.3% after rising 0.4%; transportation -0.7%. Gasoline was reported as a 2% decline.

After showing a 2% year over year gain in August, the overall rate of increase has doubled thanks to energy costs and rising food prices. We won't go into the whys and what for's; we have done that before. The question is, with prices doubling it is hard to believe that gasoline costs fell that much during the month.

Maybe they did, but that does not break the trend in higher prices a trend that is driven more by the decline in the dollar and our poor choices for use of our food supply than with any shortage of supply. Indeed, as seen Thursday, business inventories are on the rise as sales fall. No the issues for prices are poor policy decisions relating to the dollar and using food for fuel, and I don't mean fueling your body.

Thus while the pause in the overall rise in prices is welcome, it is dubious in fact and deceptive in practice. We are going to have to address the dollar and wasting our food supply in order to get prices, that were relatively nicely in control, back in control. Every time the dollar falls against other currencies our prices rise because we buy less and less with each dollar and thus the prices are raised by those controlling the products to make up for the loss.

Michigan Sentiment tops expectations but no barn burner.

Michigan sentiment for March was 70.5 and that topped the 69.5 expected. Moral victory. It did not reverse the trend as it slid in still lower than Februarys 70.8, and that was a substantial break from 78.4 the month prior. Getting to the point where it can become an issue, particularly with jobless claims rising the past two months, the jobs report falling, and those in the work pool shrinking. Worries about the paycheck are the biggest catalysts when the consumer pulls back. The sentiment reports show how worried, and while not at a panic stage they are not growing in strength.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Sunday, March 09, 2008

Stock Market Covers Ahead of Weekend

- NASDAQ sells below January lows then market covers ahead of the weekend
- Jobs report continues the string of bad economic data
- Fed sense of timing second only to
- Looking for a few good stocks . . . to hold the line.

Bad news provides a platform to sell, and stocks do, but it is not the rout needed.

The jobs report was weaker then expected but in line with what should have been expected given the weekly jobless claims and flagging economic data the past two months. That was a surprise to investors yet not; the market was getting used to worse than expected data during its lateral range; thus more bad news is not really surprising even though of late it has started to break the camel's back as the indices sell lower.

As if that was not enough, the Fed announced it was raising its TAF (a.k.a. Taffy) auction amounts to $100B and is taking a lot more different kinds of securities with a 28-day turn versus overnight. I have a few obsolete computers and printers I want to unload; wonder if the Fed would take them now? After all they seem to be bent on doing anything in the hope that it will in somewhat help alleviate the once again increasing spreads in corporate bonds and the lack of interest in commercial paper. If I could get rid of those old computers I know the markets would start to calm down.

What the Fed is doing is not a bad idea; it cannot continue running rates down at 50 to 75BP pops and expect to end the credit issues on its own. As discussed last week, the last time this scenario started to unfold the response that worked involved fiscal stimulus in the right places and some higher interest rates. If the Fed had some real help instead of the $600 handouts that worried consumers will save instead of spend (or they spend it on $3/gallon gasoline) it could concentrate on its TAF-like programs that don't fuel inflation as directly as tax cuts yet get money into the system. It worked initially, but the need for more rate cuts worked to undo the narrower spreads and lower LIBOR rates initially achieved. Without the real help it needs from the fiscal side (as evident by the way the market responded to the fiscal stimulus, i.e. selling further) the Fed is locked into its course of action as it has to promote economic growth and stabile prices. It can sit and do nothing or it can try to use the tools it has and Bernanke's speeches pre-Fed indicate that he will act versus sit.

Timing is everything, however, and this action, as the 75BP cut on the heels of the market dive in January, looks to be reactionary as opposed to calculated. Thus over the past couple of weeks the talk has switched to how the ECB is more in control and resolute in its plan of action than the US Fed. As with professional sports fans, monetary policy is a 'what have you done for me lately' game. Friday it looked once more as if the Fed was chasing a bus. Not very dignified considering all of the academic firepower on the committee.

Nonetheless, after a weaker open stocks rebounded in the first hour, turning from negative to positive across the board. We didn't think that would last. The early downside should have been worse but it was not. There was no real spike in fear and the early selling was not ferocious. After that initial rebound a 4 hour selloff ensued that took the indices to new session lows. The Dow came within 200 points of its January low, SP500 just 12 points, while NASDAQ undercut its January low by 15 points. We watched the indices rollover, but anticipated a bounce on some short covering ahead of the weekend given two big back to back downside sessions. When we saw the Russell 2000 hold its early session lows after the other industries undercut, we figured the short covering bounce was read to start. We issued some alerts to take some gain on the downside positions and then watched the market rebound. NASDAQ turned positive; an undercut of support to green. It did not completely stick, but the indices did bounce off the lows.

TECHNICALLY it was not the blowout downside session we were looking for. The market started lower then recovered with relative ease, turning positive midmorning. It did not hold the gains and sold off to new session lows, but it bounced again in the last hour. Did not turn positive but the short covering move ahead of the weekend took some of the downside pressure off. In short, no downside blow off, just more selling that did not provide the catharsis the market needed to put in a bottom.

INTERNALS: The internals were not at the massively negative levels of Thursday with breadth at a more palatable -1.8:1 on NYSE, -1.6:1 on NASDAQ. Volume was up and back above average on both NYSE and NASDAQ. Makes sense that the volume was up on the sorry jobs report, but it was more distribution as the market sold lower. That indicates more selling to come with SP500 and DJ30 heading down toward the January intraday lows.

CHARTS: The big move of the session was NASDAQ undercutting its January intraday lows, then rebounding to hold over those levels. Some will calls this a 'successful' test of the January lows and it may turn out to be that. With SP500 and DJ30 still above those lows, however, NASDAQ is likely going to at a minimum have to wait for them before it can try a sustained upside move.

LEADERSHIP: There was not a whole lot of leadership, at least in terms of stocks posting solid upside gains. There were stocks that showed relative strength, i.e. holding position above near support, weathering the selling, hunkered down and waiting for the test to end and trying to hold support all the while. Indeed those are the stocks we are looking for at the end of this selling; if they are still holding up or are at key support and in buy positions after SP500 and DJ30 test their January lows, then we can look at them to at least play to the upside when the market makes the bounce off of that test. There will likely indeed be a bounce off that move even if the market ultimately sells further, something that is hardly out of the question given the continued weakening economic data and the market's resumption of the downside.


February jobs report posts first back to back declines since early 2003.

The last time the jobs report posted its first 2 consecutive months of declines the US economy was in recession. It was not officially known at the time, but recession was upon us when that report hit. Thus just as then, we are likely in recession given the varied issues facing the economy (housing, credit issues, $100+/bbl oil), the train of falling economic data, and the selling in the market that is forecasting the recession.

The numbers: non-farm payrolls fell 63K, a swing of 88K from expectations at 25K. Hourly earnings were in line at 0.3%, matching the 0.3% rise in January. Private payrolls fell 101K while government added 38K. Services fell 12K well down from the 100K average in Q4. Construction fell 39K and manufacturing fell 52K.

The unemployment rate actually fell to 4.8% from 4.9%. Now when the economy was turning up, the unemployment rate, also known as the household survey (are you working or are you not?) was falling even as non-farm jobs were falling. In other words, the household survey showed more people were working despite what non-farm payrolls said because after the implosion in tech, many people started their own businesses because the big companies were laying off all through the recession and the start of the recovery. Thus in order to put food on the table a lot of former employees turned entrepreneur. Thus the falling unemployment rate was an indication of a recovery in progress.

Does it mean the same this month? No. What pushed the rate lower was an exodus from the jobs pool. The labor force contracted 450K in January. If enough workers give up and leave the work force, i.e. more than the number of lost jobs, then it can look as if the unemployment rate is improving. In that situation, however, all it means is that people are giving up for now and collecting unemployment. Look at the weekly jobless claims trend; it tells that tale.

Earnings versus unemployment rate show an interesting trend. When you chart hourly earnings versus the unemployment rate over the past 20 years you see they move inversely. When hourly rates peak unemployment rates trough. Over the past two quarters hourly earnings growth matched the rates hit in 2001. At the same time the unemployment rate hit its lows both then and now. Hourly earnings are starting a decline the past three months and the unemployment rate has started to creep higher. The recovery starts in earnest soon after the unemployment rate peaks and the hourly rates drop sharply. While both are starting to move in that direction they have not made definitive moves. Thus we are likely to see more of the same movement in these numbers over the next few months before they make the turn. As discussed all last week, however, the market will turn before. Thus after a run lower once more that has the DJ30 and SP500 test the January lows and likely a bit lower.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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Monday, March 03, 2008

Friday economic data closes out a week and month showing a weakening picture.

- Typical pullback on Thursday becomes a typical tail kicking on Friday.
- Friday economic data closes out a week and month showing a weakening picture.
- Market trying to discount an economic recovery, but will have to hold the January lows to do so.
- Commodities take a breather, setting up a new buy opportunity.

Bad news, end of month, end of the recent leg higher.

Whatever was typical about Thursday's pullback is academic. Friday was a rout. Okay, that is out of the way. After leading the market with a surge higher, energy, agriculture and commodities were ready to take a breather after their run. That took a major upside force in the past week's rally off the table. Strike one. There was some bad news from the mortgage sector in the pre-market as USB predicted another $600B in write-downs still to come versus the $160B expected. The ABK bailout deal that sparked last Fridays short covering rally and the start of this week's rally hit . . . surprise . . . a snag. That started things on the downside. Strike two.

After the open some weak Michigan sentiment data (70.8 was better than the 70.0 expected though less than January's 78.4) and some really bad Chicago manufacturing data (44.5 versus 49.5 expected, 51.5 prior) really got the selling going with a dive right off a cliff. Strike three.

That was not the end of the action, however. The market tried a three hour lateral consolidation, even moving up and showing signs it might make a run into the close. Nope. With a couple of hours left the selling renewed with another big leg lower. Another bounce attempt, another leg lower. Then it got really ugly in the last hour.

The sellers finally came out from hibernation, pushing the market lower on rising volume and quite negative breadth. Of course it was the end of the month and that usually has one of two effects: an exaggerated move to the upside or an exaggerated move to the downside. Pretty clear what it opted for Friday. Maybe a leap year thing.

TECHNICALLY it was as ugly as it seemed. A lower open, some selling, a consolidation attempt, then some more selling. Little doubt this is what you would classify as a negative session, more bearish than bullish.

INTERNALS: Massively negative, and if they keep doing this you could start calling it extreme. -6.3:1 breadth on NYSE, -3.6:1 on NASDAQ. When the leaders of late took a break, the negatives really piled up. Volume jumped as well, moving above average for the first time in three weeks. Just had to be on a downside session, meaning some distribution, i.e. the sellers were stronger than the buyers. They were a lot stronger than the recent buyers. As noted above, some of this had to do with the end of the month jacking up the trade. Keep that in mind as next week unfolds; if things recover nicely then chalk it up to end of month activity. If it doesn't, well then it really won't matter.

CHARTS: A hard break lower but even with the 2.5+% losses the indices still maintained their trading ranges and are above the February lows. Sure they gave up the break higher out of the short lateral consolidation, not to mention the consolidation itself, but they are still in the trading range above the February lows, at least for now. A big chunk to the downside was taken, and it is interesting to note that the large cap indices all made a short double top the past three weeks immediately preceding the Friday break lower.

LEADERSHIP: Most of the leadership for the past two weeks decided to take a break. Energy, metals, agriculture and commodities in general tested back. They had held the market up, and when they went off their feed the market struggled. It did more than that as described above. The selling snowballed with the end of month effect. Leadership is making a pullback, something it needed to do. If the market can hold above the prior lows in February or even January then the leaders in commodities, ag, etc. will present us some good buys. If the indices cannot hold then even the leadership is going to be tested.


Friday data caps a week of continued eroding economic activity.

The PPI was hot thanks to our boondoggle into ethanol that is taking wheat acreage out of production to feed ethanol, consequently helping triple the price of wheat. Even without food and energy (after all, man cannot live by wheat bread alone) PPI was still stoked. While the PPI was hot, consumer sentiment was not, still above surefire recession levels, but declining at a pace that that indicates recession is coming. Durable orders were down 5%, housing sales were lower than expected, and jobless claims jumped to 373K, showing the rise is not a fluke due to adjustments.

Friday data presents good and not so good.

Friday the personal spending and income figures were better than expected, and the PCE rose in line with expectations leaving the year over year core at 2.2%. Something of a relief given the stronger CPI and the jumping PPI on Monday.

After that the data was not so friendly. Michigan sentiment final showed 70.8, a bit better than the 70.0 expected, and rebounding from the 69.6 previously reported. Still heading too low, too quickly.

Manufacturing is struggling.

While the US economy is not the manufacturing giant it used to be, it is still no slouch. Thus when the manufacturing sector climbs or falls it is worth taking notice. Back in 2002 manufacturing was a key leading indicator. It started to firm and even improve ahead of most anything, other than the market.

Over the past four months the regional reports and the overall ISM have softened considerably. Sub-50 readings started to surface. There were the usual suspects that were weak, namely the Philly Fed. The weakness has spread, however, with the national index showing a month below 50 and now Chicago moving below that level as well.

It was not just a move lower, it was a plunge from 51.5 (hanging on) to 44.5. That is the lowest level since late 2001 when the economy was trying to bottom. Every component to the report was at contraction levels except the prices paid (of course). New orders actually rose to 48.8 from 44.7. Production fell to 46.5 from 51.3. Employment continued tanking, falling to 33.5 from 47.0. It has been below 50 for three months now.

Chicago is considered a harbinger of the national number, and after that 50.7 showing nationwide in February, expectations are the national number will fall below 50 again. Again, manufacturing is key as we learned in the last recession when the consumer remained healthy but businesses, burdened by a huge overhang with inventories and a collapse in venture capital, did not invest for three years.

Thus we don't want to see business sentiment (that is what the PMI reports are) become firmly entrenched. That would mean a longer recession and that the economy is still on the downswing and not ready to bottom.

Market discounting economic improvement or just a bounce higher in continuing selling?

That is what is being decided right now. The market sold hard in January and then bottomed into this lateral trading range here in February. Some believe the January lows were the bottom brought on by unusual circumstances relating to the rogue trader in Europe. Right. Nothing to do with the mortgage crisis, credit crisis, slowing economies, surging oil, food or commodity prices.

The market made a recovery, but as we have noted, the move was on low volume. Not bad for a consolidation, and even with the Friday selling the indices are still in their trading ranges for November. Moving toward the bottom of those ranges, but still holding in them for now.

They are also still well above the January lows though with this kind of selling they will get there without too much effort. If they hold and can move back up and continue the base, that indicates the recession is not going to be that deep and the market is already discounting the bottom of the rather shallow decline. If the prior lows give way with a serious break lower, then the clock starts again for a market recovery, and it also indicates the economy has not bottomed and has further to decline.

Either way there is more work to be done near term before the current market condition and thus the economy show there hand. It is a stretch to believe that the slowdown seen thus far and maybe a bit more through summer is all we are going to get out of such a huge housing bulge that is deflating, a credit freeze, inflation, surging oil prices, and election, and worries of protectionism, tax hikes and more regulation.

By: Jon Johnson, Editor

Jon Johnson is the Editor of The Daily at

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