The Economy Looks Terrible

Below is a compilation of posts on my blog. They're not pretty pictures. Let me add that these are my observations, and mine alone. Other people see a different picture.

Below I make the following observations.

The dollar is still in a downtrend, oil is still high and the Federal Reserve is looking like they are behind the curve. Housing is still a huge problem, corporate earnings are not good, and confidence is low

Here are some charts to demonstrate those points:

The dollar has been dropping for almost two years. With the Fed loosening monetary policy I wouldn't expect this trend to change.

Oil's been rising for about three years. The Fed mentioned the effect of high oil prices in their statement yesterday.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

While I didn't mentioned food prices, they've been rising as well.

That's three years of price increases.

Do I really need to go into housing? OK -- how about home prices?

'Nuff said.

Corporate profits are dropping

Here are some confidence charts.

The above is a chart of CFO confidence.

There is no silver lining in any of these data points; they are each negative in their own right. Combined they paint a very disturbing picture.

Onto the markets:

Considering all of the craziness we've seen the markets over the last few weeks, let's fall back to the long-term picture to see where we are in relation to the big, over-all trend.

Starting in 2004, the SPYs began a multi-year trend channel. The SPYS broke out of this channel in late 2006 and have used the upper trend channel as support for a rally ever since. The SPYs are currently on top of this trend line still and have use it as support three times in the last year (see chart below).

So long as the SPYs stay on top of this upper trend line they will be in decent technical shape. Even if they fall through this line they will still have the lower trend line as support. The lower trend line is about 8% below the SPYs current level.

The QQQQs have two primary trends sill in place. The first is an upward sloping channel that started in early 2004. The second is a rally that started in mid-2006. However, the second rally no longer has a pattern of higher lows and higher highs. However, the QQQQs have not broken major long-term support for either rally yet. So the QQQQQs are still in good technical shape.

Like the QQQQs and SPYs, the IWMs started a long-term uptrend in early 2004. However, the IWMs have broken the long-term lower trend line and have since run into resistance at the lower trend line. This should concern traders. The Russell 2000 is an index of smaller cap stocks. These companies need a growing economy to increase their respective earnings. When this index declines, it is probably a sign that traders are not happy about the economy's prospects. In addition, the index's finding resistance at previous support is a technically concerning event.

The Transports broke a three and a half year uptrend last summer. They tried to rally beyond this trend line and failed. In addition, they have been in a clear downtrend since mid-summer. In other words, the transports are not confirming any upswing in the broader market. For those of us who still think Dow theory is relevant, this is a very troubling development for the broader markets.

The New York Advance/Decline line has been increasing since late November. This is a good development.

The new high/new low line may be bottoming. Considering the length of time this index was decreasing it's understandable it would take awhile to turn around.

However, the NASDAQ advance/decline line is very troubling. This index has been rising far about two weeks, yet the A/D line is still stuck in a rut. This may indicate that a small number of companies are responsible for the last few week's upward move which is not the sign of a healthy advance.

And the NASDAQ new high/new low index is still decreasing, which is another troubling sign.

A few weeks ago I wrote a long article titled Is a Bear Market Developing. While the New York A/D line has gotten better since them, the Russell 2000 and Transports have at best treaded water. In addition, the NASDAQ's new high/new low index is very troubling, as is the NASDAQ's A/D line. The dollar is still in a downtrend, oil is still high and the Federal Reserve is looking like they are behind the curve. Housing is still a huge problem, corporate earnings are not good, and confidence is low. In short, there is still a ton of negativity out there in the economy. The fundamental picture is weakening and I would still expect the technical picture to follow-suit at some time. In essence, I expect the Russell 2000's and the Transport's moves to recur in the SPYs and QQQQs.

Comments

[kasa5400]

Forgot to add this,

Came across this commentary the other day on an economics and finance site:

"How do we keep our foreign investors happy? With a rapidly depreciating currency, there is but one way to keep them enticed: higher interest rates. You heard it: higher interest rates. With the housing and credit markets swimming in turmoil, the idea of higher interest rates sends shivers down the backs of homeowners facing foreclosure, and rightly so.

I think you can see the predicament we face: One part of our economy demands lower interest rates to bail out the housing debacle, and foreign investors who finance our massive spending habits demand higher interest rates to forestall the dollar's demise. "

and this little it of nerve rattling data:

"Since 1990, non-mortgage household debt has gone up more than threefold, outstripping economic growth and inflation."

So what happens now?

[kasa5400]

"Macroeconomic Advisers, which prepares one of the most thorough estimates of gross domestic product, now sees it contracting in the current quarter."

The MA is saying that the GDP for the 4th qtr '07 is going to be - (minus).1%.

Hope this link works:

http://blogs.wsj.com/economics/2007/12/11/macroeconomic-advisers-economy-now-shrinking/


Since the Wall St. experts only declare a recession after it has already being happening for several months - and Main St is usually living it - seems like Main St. is getting it right.

[olephart]

The economy for most people earning below the 60th percentile has not been good for some time. It is worse as you go down and a little better as you go up. Once you get above the 90th percentile it improves rapidly. I think your posts concerning the amount of debt people have taken on to maintain their lifestyles at the expense of good economic sense explains why the economy has appeared to be better than it really was. Credit expansions and debt binges always end badly (see 1929, depression, great). The gains at the top also have a way of masking the drought at the bottom. Certainly the talking heads on business programs and most politicians are completely out of touch with this reality.

Your charts pretty well sum up the financial pulse of the markets. One exercise I would suggest for your spare time would be to plot the first derivatives of the data on your charts of Home Price Indices and After Tax Corporate Profits both verses time. In doing so, it would accentuate these data. This is similar to your plot of the rate of changes in tax revenues demonstrating the true nature of the supply side tax cuts.

Once again I caution the reliance on economic data being put forth by those with a vested interest in the rosy scenario. Real inflation is NOT in the 2% range nor has it been. Real GDP growth is NOT in the 3% range nor has it been. Real unemployment is NOT in the 4% range nor has it been. Real wage growth measured without the gains from the top 10% or housing appreciation has been negative for several years. There are definite parallels to the 1920's here. Farm income fell during the 1020's, credit greatly expanded for consumers, stocks were an asset bubble and were over leveraged to a level greater than all the cash in circulation at that time. Remember, the market continued to rise for six months after the onset of the recession in the Spring of 1929.

Oh, and Glass Steagall has been repealed.

[curiousasheck]

Don't worry a federal bureaucracy that could not even helicopter bottled water to desperate people trapped in plain sight on highway overpasses in New Orleans in 2005 will save us.

[mmckinl]

Where is the chart for the commercial paper market?

What we don't see here is the credit freeze and it is taking a huge toll on new business both consumer and business.

Paulson and Bernanke continue to protect the money center banks at the peril of the US and world economy.

[mrcontinental]

Excellent as always Bondad. We don't shoot the messenger here so keep it coming good or bad.

[oogabooga]

Folks, look at these charts and think for a moment. With every one of these, you can profit, even if you only have a grand to invest. But you have to do your homework, understand markets and profit from their medium and long-term swings, which generally are very predictable, even for self-educated laymen. There's an old saying, "Don't fight the Fed." So when they started the big loosening in the early to mid-2000s, that was the time to buy a house. Loans were cheap and prices were low. When the Fed started tightening a couple of years later, you could predict the top of the realty market and sell in time to catch the rise in home equity. Same thinking applies to other tradeable products, such as bonds, commodities, metals, currencies etc. My point is the average family has to stop playing victim and take charge of their finances. That way, you can escape the dependence on paychecks and the whims of corporate bosses.

[BaltoAman]

Hale, you're such a Negative-Nancy. No silver linings? Let's see:

1) A dropping dollar is great for exporters (though bad for pretty much everyone else.)

2) Loose monetary policies of the Fed stimulate investment (not to mention bubbles.)

3) Dropping home prices mean you can actually afford to buy a house (unless you already bought one in the last 5 years and are currently upside-down.)


All kidding aside, the one piece of data you've provided that sticks out for me is the SPY chart. Clearly the index has been in consolidation all year. The question is "where to from here?" Looking at the recent high volume and volatility at the top of the trend is eerily reminiscent of March 2000 when all hell broke loose. Hope I'm wrong.

[BillZBubb]

The next president is going to inherit a colossal mess. If the public doesn't screw up again, we'll at least have a Democrat in the White House with large majorities in both houses of Congress. Finally the real party of fiscal and economic responsibility will be in charge. The party of Voodoo, "free lunch", borrow and spend economic dilitantism will be repudiated.

The question becomes, will the next administration arrive in time to stop the hemorrhaging?

[ReasonIsMyReligion]

Jeez, Bonddad, that's like scolling through a bad LSD trip. ;-)

Euros-In-A­-Mattress.

Kickin Wall Street's ass, one cheek at a time, for seven years and counting.

I'd slash my wrists, but who can afford healthcare in light of flat wages and despite pushing savings rates into the red? (Can you chart those too for us medianite folk?)

Big fan,
-- IFA-Wannabe-Dad morphing into Mattress-Dad
http://www.ifa.com/