Wow. It's only Monday and the markets are getting creamed. The SPYs are down 4.34%, the QQQQs are down 3.65% and the IWMs are down 4.75%. The bottom line is the markets are not happy with the way things are going. And there is plenty of reason to be unhappy.
First, let's take a look the economy. What follows is a piece from my blog from earlier today titled, "If It Walks Like a Recession and Talks Like a Recession":
The standard press definition of recession is two consecutive quarters of negative GDP growth. However, the National Bureau of Economic Research -- the organization that officially dates recessions -- uses a broader definition:
The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. We also look at monthly estimates of real GDP such as those prepared by Macroeconomic Advisers (see http://www.macroadvisers.com). Although these indicators are the most important measures considered by the NBER in developing its business cycle chronology, there is no fixed rule about which other measures contribute information to the process.
Let's look at each of these items:
Remember we're looking at the change without transfer payments. That makes the spike in May of this year meaningless. Note the year over year trend line has been dropping since July of 2007. Also note the percentage change is nearing 0% over the last few months. In other words -- personal income isn't looking that good.
Note the year over year percentage change in employment growth has been dropping since April 2006 and is now negative.
Note the unemployment rate has been increasing since January of last year.
Industrial production's year over year rate of change has been dropping all year.
Capacity Utilization has been dropping since the end of the third quarter of 2007, although the last three months have seen incremental increases.
The ISM manufacturing number has been dropping since 2004 and recently took a big drop into recessionary (below 50) territory.
The Chicago NAPM number has shown two strong months although the readings for the rest of the year have been borderline recessionary.
All of these numbers tell the story of an economy in a recession. My guess is the NBER will date it from the beginning of this year.
Now -- let's take a look at the markets to see what they tell us.
The SPYs (S&P 500) has been dropping for the last year. It has fallen roughly 32%. Also note the following:
-- Prices are in a clear lower low/lower high pattern. This is a classic bear market formation.
-- Prices are below all the simple moving averages (SMAs)
-- Prices are below the 200 day SMA by 21%.
-- All the SMAs are moving lower
-- The shorter SMAs are below the longer SMAs
On the one year chart, notice that prices have consolidated in two triangles. The first lasted two months and occurred at the end of 2007. The second lasted for most of 2008 but prices broke through the lower support line at the beginning of September. Prices have fallen almost 35% from their high at the end of the summer in 2007. Finally, note that prices are at their lowest point of the last year.
On the IWMs, notice that 64 has provided incredibly strong technical support for the last year. Now prices have moved through that area.
Also note that all three averages gapped down earlier today -- another bearish signal.
So -- why is all of this happening? Didn't the Wall Street bail-out stop the economy's bleeding?
No. There are plenty of problems across the globe right now. Europe is now in the same situation as the US.
French President Nicolas Sarkozy, whose country currently holds the EU's rotating presidency, on television read out a common statement from the 27 EU nations that said each "will adopt all the necessary measures to protect the stability of the financial system."
In a similar statement to Britain's parliament, Prime Minister Gordon Brown pledged to "look at every aspect -- liquidity, capital and regulation -- with other countries."[Europe races to shore up banks] Reuters
From left to right: Luxembourg's Prime Minister Jean Claude Juncker, Germany's Chancellor Angela Merkel, France's President Nicolas Sarkozy, Britain's Prime Minister Gordon Brown and European Central Bank Governor Jean-Claude Trichet at a summit on the international financial crisis in Paris.
The declarations followed the surprising move on Sunday by Chancellor Angela Merkel of Germany, Europe's biggest economy, to guarantee all individuals' bank accounts, a day after she had criticized Ireland's unilateral guarantee of its banks' liabilities.
Germany's guarantee put pressure on smaller countries to follow suit. On Monday, Austria, Sweden and Denmark joined the list of countries that improved their deposit-guarantee plans. Spain said it would also move if no concerted EU action emerges.
On Monday, Germany's DAX was down 7.1%, while France's CAC-40 fell 9%. The FTSE 100 index of leading British shares slipped 7.9%.
European countries' economies have become deeply intertwined in recent years, including a single market, and a common currency and central bank used by 15 nations. So far, however, EU governments have found little they can do together to react to the crisis.
On Monday, France and Belgium were seeking a way to keep bank Dexia SA afloat as shares in the Franco-Belgian municipal lender fell more than 20%. That followed second attempts to rescue Germany's Hypo Real Estate Holding AG and the Benelux bank Fortis NV over the weekend.
In other words -- the US has exported a ton of toxic mortgages to, well, everybody. Now we're all in this together.
Now -- let's consider something really scary. We haven't heard a damn thing from Asian banks about any of this yet.
I'll be on KTLK tonight from 9-10 CST to talk about this situation.