Market comments for Sept. 29, 2011: Still in a tight range!

Initial Jobless Claims dropped this week to 391K, which was lower than expected. This data gave the market a boost in premarket. Also reported this morning was a revised GDP number for Q2. The final number reported GDP grew at 1.3%. Both pieces of data were better news than expected and traders are hoping to time the bottom of the market as many are venturing in the past few days. This stems form "hope" the EU has a plan for solving the sovereign debt problem for Greece and that their strategy will be a template for Italy should it be necessary. It's the same action Bernanke is taking, print more money.

A good friend of mine dropped me an email early this morning with an article from ZeroHedge worth reading. Here is the link. The article discusses Fed Chairman Bernanke's speech last night and his concerns about stemming deflation it seems at all costs. This is worth the read. The article is titled, "Goodbye Operation Twist, Hello QE X+1" and was written by Tyler Durden very early this morning.

Now that we recently retested Dow 11,000 and it held, even tough we went below 11,000 for a couple of days, it looks as though we are going to retest Dow 11,500 again for the 3rd time in several months. We seem to be more volatile lately, but we are still holding this tight range of between 11,000 and 11,500. Traders love the daily volatility, but long term investors don't and are looking for a guide to market direction.

UPDATE: 6:00am PST
Germany's lower House of Parliament has approved the expansion of the bailout fund needed for the sovereign debt crisis. Read the news by clicking here.

Crude Oil versus Gasoline prices

An Anonymous reader asked in my last post on Gold and Silver, why does there appear to be such a lag in the drop in price of Crude Oil versus the cost of gasoline at the pump? I said I would check it out and report back if I found anything relevant. So this morning I have posted 2 charts. One is on Crude Oil prices over the past 2 years and the other tracks Gasoline prices over the same period. Here are the charts:


There does appear to be a longer lag time most recently as gasoline prices should be lower. I can't explain it so as my reader suggested, maybe the Oil companies are trying to gut us to improve their profits as he suggested. Another possibility is that because demand has dropped significantly with the slowdown in world GDP, the Gasoline available today was produced using higher priced Oil and that it will take more time to use this Oil up, hence the lag in Gasoline prices. You wouldn't lower the prices of something you paid higher for until you sold it and then might drop your price of that product. The same is most likely true for Gasoline as well. The real gouging may take place on the front end when Oil prices rise rapidly. They most likely feel justified to raise prices then as everyone knows Oil prices were going up, hence the rise in the cost of Gasoline. It's a psychological game played with Consumers the losers. You can bet on that.

Thanks Anonymous for the question.

Market comments for Aug. 26th 2011 (UPDATE)

This morning, the second estimate for GDP for Q2 came in at 1.0%. The first estimate was 1.3%. Also, Michigan Sentiment data will be released just before Bernanke speaks at 10:00am. Expectations are for 55.8% and I will update this post at that time. Gold is up in European trading $23/ounce. All European markets are down about 1% or more at this time. Dow Futures as well as the S&P and Nasdaq are also down in premarket.

Germany’s DAX Index (DAX) ended the day yesterday with a 1.7 percent loss, recovering from an amazing 15- minute plunge of 4 percent.

Ahead of Bernanke’s speech today, traders hedged their investments by selling DAX futures, lifting volume to a quarter of the daily average within a 30- minute period. That dragged down the index, pulling equities in the U.S. and throughout Europe lower, and drove Treasuries and the dollar higher yesterday.

European markets closed yesterday, then French, Italian and Spanish stock-market regulators extended bans on short selling introduced this month. Lots of nervousness out there.

Federal Reserve Chairman Ben S. Bernanke begins a speech in Jackson Hole, Wyoming, at 10 a.m. New York time.

UPDATE 6:24am PST

The Put to call ratio has been up over 1.0 for 20 consecutive days. The last time it was below 1.0 was July 26th, one month ago to the day. To me this says that the markets have been very bearish, even though there has been rallies, and that the trend is believed to continue to be bearish and the market will go down. That's where the money is now! Where's yours?

Come back for the Michigan Sentiment data in about a half hour.

UPDATE 655am PST

Michigan Sentiment came in close to expectations. The reading was 55.7 versus an expectation of 55.8, so not much difference and much better than last month's reading which came in at a 54.9 reading.

Market comments for Aug. 19th, 2011: Options Expiration for August

It looks like another leg down at the open today as European markets are down 1-2% at this hour. Important day today as it is Options Expiration for August. Volume today should exceed yesterday's high volume. No other financial news here to announce this morning with the exception of J.P. Morgan's prediction lower growth of GDP in the 4th quarter of 2011 and first quarter of 2012. To quote Bloomberg news: "The U.S. economy may expand less than previously thought in the next two quarters as consumer sentiment drops and the housing market fails to gain momentum, JPMorgan Chase & Co. wrote in a report.

Gross domestic product will grow 1 percent in the fourth quarter rather than the 2.5 percent previously forecast and 0.5 percent in the first quarter of 2012 instead of 1.5 percent, Michael Feroli, JPMorgan’s chief U.S. economist in New York, said in an e-mailed note to clients today."

I have included 4 charts this morning. Three of these 3 month charts are as follows: One of the Dow, one of the S&P 500, one of the German DAX Index. The other chart is of Germany's DAX Index over a 5 year period. In this last chart I have drawn several support levels which are now possible given the recent downward trend. This chart is very similar to our Dow chart for the same period, which I did not include. But the lows happened at the same time. Our low hit 6,400 before it finally turned up again. I believe we will ultimately have to test that level on the Dow, because the economic news looking forward does not look bright for all of 2012, not only for the US but for Germany as well and much of Europe. I wish I could tell you something else, but I don't believe a different scenario will occur. Let's just get through today and see where we are. next week, but at the first signs of a further new low in the Dow or S&P, consider the probability higher for this major decline to continue for the foreseeable future.




Come back over the weekend so I can show you some charts on the Dow/Gold ratio and where Gold may be headed. And also some data on the Gold/Silver Index.

Several US Indexes drop below 200 day Moving Average. (UPDATE)

Many US Indexes are now below their 200 day Moving Averages. These include the S&P 500, the Russell 2000. The Dow's 200 day MA is currently at 11,995, so we aren't far from it now. The Nasdaq 200 day MA is at 2710 and we are not far from that as well. So look for these 2 indexes to get there this week. Whether the 200 day MA proves to be a strong resistance to climb back above will have to be seen. Much depends on the outlook for GDP for this 3rd quarter. But the trend now is not good and it appears the market and the Dow will not have its expected strong rally to 14,000 any time soon.

UPDATE: 10:50am PST

The Dow and Nasdaq have both now gone below their 200 day Moving Averages. The Dow has hit a low at 11961 while the Nasdaq has gone as low as 2696, which means all major US Indexes are below their 200 Day moving average.

Market comments for Aug. 2nd

First, an apology for not posting the past few days during our Debt Ceiling crisis. My computer crashed 4 days ago and I had it looked at and found out I had a bad Video card and board. It is in repair being replaced. Normally it would cost $1,000 to fix, but because it is a manufacturers problem, I am getting it fixed for free! Hooray! Thank you Apple! The last post I made was from my cell phone.

I wanted to comment about yesterday's low ISM Manufacturing number at -0.2% and today's Personal Spending number at -0.2%. Both of these numbers show a trend that is not good and plays off the 2nd quarter GDP number, which was very low coming in at a 1.3% reading. Also disturbing was the revision to 1st quarter at a 0.4% reading. So that was 1/2 of the year with an average GDP of 0.6%. What makes this important is that it shows we are standing still in this economy, at best, and may be slipping back into a recession. The low ISM adds more evidence as does a low Personal Spending. And we evaluate the level of debt we have in terms of a percentage of GDP. So if GDP goes down, our debt level looks worse.

WE will be getting a read on the July Unemployment rate at the end of the week and it doesn't look good for a reduction in the Unemployment rate as we had 4 weeks above 400K Initial Jobless Claims. Yes, we are going to have the Debt Ceiling raised but what a mess it was to watch. And it proved we are so divided as a country now, there is little hope for a bipartisan plan for future reductions.

2nd Quarter GDP really disappoints!

This morning the Commerce Department released its numbers on the economy. Gross domestic product rose at a 1.3% annual rate in the second quarter following a 0.4% gain in the prior quarter that was less than previously estimated. What's even more striking to me than the 2nd quarter low number of 1.3% is the revision to 1st Quarter numbers. The 1st quarter numbers previously reported were 1.9% and now have been revised downward to 0.4%. That's a very large difference. In fact, for all practical purposes that's basically close to negative growth and if this quarter gets revised downward by Sept, it may have shown we are in a Recession right now.The official definition of a Recession is 2 consecutive quarters of negative growth.

If it smells like a recession, feels like a recession, and speaks like a recession, it most likely IS a recession!

In the mean time, the Futures markets are predicting today to be a significant stock market drop again. Hold on to your hats!

Consumer Sentiment data for July was also released and came in at a 63.7, which compares to a 63.8 reading for June. Again, not in the right direction for a recovery.

Watch the rise in those TZA Call Options today for October Expiration at a Strike price of $41. I said we could see $6.00 for those which you could have bought for $2.69 just last week.

UPDATE: 6:53am PST

The Chicago PMI came in at 58.8 this morning for July. The month of June came in previously at a 61.1 reading.

Initial Jobless Claims improved.

Expectations were that we would actually have 440K Initial Jobless Claims when the data was released this morning for the previous week, but instead, the data released showed only 398K were in fact what was recorded. That is the first time we have been below 400K in almost 2 months. However, it should be noted tha the week before this data's release was revised upwards from 418K to 422K. Still, today's release showed an improvement and at least is in the right direction.

Meantime, the debt ceiling standoff is approaching a critical moment for the Congress and the markets. Stay Tuned.

Tomorrow an important piece of data will be released, which may have a major impact on markets, a first look at 2nd quarter GDP, as well as the Chicago PMI and Michigan Sentiment.

GDP: Are we in decline and, if so, who's to blame?

I have wondered, as many of my readers have, about the apparent decline of our economy in recent years. Many, especially the far right in the Republican Party, have blamed President Obama for this and many on the left have blamed George Bush for this. Are these points of view true? Let's look at the facts over time. The fact is that our economy has been in decline now for many years. The first chart below shows GDP for the period of 1960 to 2011. I have drawn red lines at the top GDP levels after eliminating the highest value for each line segment. So for the period of 1960 to 1979, I did not draw the line at the one highest point of 15%, but rather of the several lower ones at 10%. Imagine that, a several quarters of 10% GDP or greater. back then we were just like China today!

You can see from the 3 red lines that we have steadily dropped in GDP and that the years from 2000 to 2011 are the lowest GDP periods in the past 50 years. In fact the lower GDP period has mostly been for all of the years of the Presidency of George W. Bush and the years with President Obama. The facts are still unknown whether President Obama will be any better or worse than President George Bush was. Right now they look the same to me, but there isn't enough data to be conclusive. Let's look a little closer at the years from 2000 to 2011 and see more closely where we are. The next chart below shows this period. I'll let you interpret what you are observing here. But before you look, be aware that your point of view will determine what you see! Be honest with yourself here, as it is a great learning point.

What have you learned? Can you be honest with yourself and be an objective observer or are you biased to your original point of view. I say this to both Republicans and Democrats. Dare to make a comment on your learning? I invite you to make a comment below. But let us know if you are a Republican or Democrat in those comments. It makes the comment so much richer and interesting.

One last chart. below, I just had to post and this one is of GDP since 1947. It is similar to the chart from 1960. Charts constructed from data fromTradingEconomics.com.

Thanks! And while you are at it, take my Mini poll on the right margin.

Market comments for May 26th

Initial Jobless Claims for the week of May 21st unexpectedly rose to 424K, while expectations were for only 400K, and the previous week's data was revised higher from 409K to 414K. This recent rend over 400K is going in the wrong direction for a sustained recovery, but the Futures market seems to be shrugging off the news. Dow Futures are up in premarket +21 points for the Dow.

Next Thursday we will see what these 4 weeks of numbers back above 400K Initial Jobless Claims ha done for the May Unemployment rate, but I suspect it is going to tick up to 9.1%.

The 3 Month chart of the Dow below, shows that, while the market gained yesterday, we are still below the 50 day Moving average. Notice yesterday's volume was lower than Tuesday's volume. On a rising day, if you are a Bull, you want the volume to exceed the previous down days.

GDP for the 1st Quarter came in again at only 1.8%, which is far below what is needed for a sustained recovery. I think the facts are starting to emerge that the Fed's QE2 has not done much more than to keep us from sliding back into a recession, but just barely this past year.

European markets are mixed this morning, so that it seems their debt issues don't appear to be taking down their markets today, so we may follow suit. There is less than 0.5% movement in any of the European exchanges at this time.

Monday the markets here are closed, as it is the Memorial day weekend. And remember this about the debt level, it has not been resolved. Politicians on both sides seem to be locked in their positions, with Republicans saying they will not accept any tax increases as part of debt reduction and the Democrats saying they will not accept any reductions in the debt regarding entitlements without some tax increases. All this while the clock is ticking for our government to face default by August. What madness!

Market comments for May 24th

Today I have added a little something different to the mix. I have found an interesting piece of news about the economy and where we are right now that I thought I should repost here. It is from Haver Analytics and includes a chart. Here it is and the title:

Chicago Fed Index Provides Further Evidence of Momentum Lost
BY TOM MOELLER MAY 23, 2011

The list of indicators suggesting that the economy's forward momentum has waned continues to lengthen. The Chicago Fed reported that its National Activity Index (CFNAI) retraced its earlier improvement and fell to -0.45 in April from a little-revised 0.32 in March. The three-month moving average of the index, which smoothes out some of the series' volatility, slipped to -0.12, the first negative reading since December. During the last ten years there has been an 81% correlation between the index and the Q/Q change in real GDP.

To read the entire article on Haver Analytics click here.

While yesterday's market was down and broke below the previous support line, as seen in yesterday's post on the Dow, the final Volume for the day was not that strong and indeed was less than the previous day's volume. Given this fact, today's market may bounce up somewhat, as Futures indicate. Watch today's volume for clues as to future direction.

Market comments for April 28th

Yesterday, Fed Chairman Bernanke had the first ever News Conference for the Federal Reserve, which was not covered by many cable stations like CNN, as they were consumed by the news the President released his long form birth certificate, but nevertheless Bernanke made some news to me. We have been told for a long time that the recovery is "Moderate, but Main St. doesn't believe it. It seems very slow to Main St. So during yesterday's news conference , several times Bernanke commented that the "recovery" was moderate and moments later called the "recovery" slow. So all this time over the past 6 months to a year, the Fed was using language to imply the economy was growing faster than we all knew was false, but more encouraging to those on Wall St. who wanted to believe it was faster than we all experienced on Main St. Today's release of the GDP numbers and the Initial Unemployment Claims verify that the Emperor has had no clothes on.

Initial Jobless Claims released today showed that 429K new claims were filled against an expectation of 390K Initial jobless Claims. That make now several weeks in a row where these claims have exceeded 400K. Last week the number came in at a revised 404K Initial Claims. And the week before, on April 14th that it was 412K. Not since April 2nd have the claims been below 400K, coming in at 390K.

GDP numbers released today for Q1 came in at only 1.8% versus the prior period reading of 3.1%, which shows the economy is in a very significant slowing. In order to have more jobs for the unemployed, we need about a 4% GDP. Also, having a low GDP number is bad for the debt we carry, because overall debt % is compared to % GDP to determine whether we can pay back our debt as promised.

Today's numbers were not good no matter all the hype you hear to the contrary. The Dow Futures are down this morning following the data release.

The recovery is just coming along nicely as he had foreseen, says the Emperor Ben Bernanke in Star Wars

Today's post should get you to think about your investments in a way maybe you hadn't before. Do you remember the Public Service announcement which used to say, "Do you know where your kids are?" Well I ask you the same today about your investments. never has this question been more important. The market has had an extraordinary recovery in 2010 and it appears has in this first quarter of 2011. Many analysts and critics alike have professed the Bull market has returned. Could this be true? Let's take a look at the news and data coming out this first quarter and enjoy the recovery to its fullest.

Let's start with the Unemployment rate. According to the Bureau of Labor Statistics (this sounds mathematical doesn't it? ), the Unemployment rate is now at 8.9% having come down from a high of 9.8%. That is real progress, wouldn't you say? I don't think you have a PhD in Mathematics, but I think you can do a minor calculation. Here's the question, how should you calculate the Unemployment rate? Should it be calculated by counting the total labor force divided by the number of people not working? If you answered yes, you would be correct. But that is not how it is calculated. It is calculated by taking the number of people receiving unemployment benefits divided by the total labor force. So if people have run out of Unemployment benefits they are not counted as unemployed, nor are people who have given up looking for work, nor those who can only work part time as there are no full time jobs available. Interesting isn't it. It used to count anyone not working back in the 1930's and it too was reported by the Bureau of Labor Statistics. Back then the Unemployment rate was about 20-25%, depending on which month you are talking about. But that was during the Great Depression. If you use the same formula for today's calculation, it has been reported the real unemployment rate is around 18-20%, not that far from the same rate during the Great Depression. Here in the chart below is the reported Unemployment rate since 1950.

OK, let's be more optimistic and focus on some world news that would give us a sense that things are getting better. Oil prices have surged in recent weeks to over $106/barrel. Many believe it is a temporary spike. After all there are a few minor concerns in the Middle East right now. The latest concern is of Libya and Gaddafi. His people have grown tired of him, are feeling little to no hope for a better life since prices for food have soared in recent months as have prices for many goods and precious metals like Gold and Silver. Oh, and besides Libya, there were riots and the ensuing departure of several other Middle East leaders in Tunisia and Egypt who also succumbed to their uprising of the citizens call for their ouster. In recent days, riots have occurred in Bahrain, Syria, and now Jordan and it appears that instability has taken hold of the entire Middle east over rising prices and the lack of any opportunity for the citizens of these countries to have a better life for themselves. They feel hopeless. Remember the protests in Iran last year and the brutal attacks of that government by its people? More protests will happen there as the Iranians see country after country seeking to remove their leaders. And yes, even Saudi Arabia has seen protests and the government has tried to appease the people by giving workers raises and bonuses. Where do you think Oil prices are going to go? I'll bet not down!

But wait, there is good news, the recovery has been steadily improving, just look at the facts. The stock market has gone up, thanks to Fed Chairman Ben Bernanke intervening to support the stock market. How has he done this? By printing money out of thin air. Now I know this has devalued the dollar but I am told that the dollar is strong by the main authority on this matter, Treasury Sec. Tim Geithner. That should be good enough, right? Well there has been a run-up in Gold and Silver to record highs, There must be some correlation there to our currency value. The chart below shows the value of an average home in terms of ounces of Gold needed to purchase it. You will notice that this index has dropped significantly in recent years. What it means is that it takes the same number of ounces to buy your home today as it did back in 1983. That's because the value of Gold in U.S. Dollars has soared and the value of your homes has dropped. Scary, isn't it!

And all this talk about changing the U.S. Dollar from remaining as the Reserve currency of the world must be idle chatter, even though it has been discussed at the IMF (International Monetary Fund) as well as by countries like Japan, Russia, China and some Middle Eastern countries as well. Remember $0.42 of every dollar we spend is for the interest on our debt. That is unsustainable and is part of the reason there is talk of changing the status of the US. Dollar as the Reserve Currency of the world. The Chinese have stopped buying our short term debt as have the Japanese with all the problems they face now because of the Earthquake, Tsunami and now Nuclear reactor meltdowns. Our supplies from japan will significantly be impacted which will affect 2nd, 3rd and 4th quarter GDP here in the U.S. We haven't yet been impacted as the shipments to the US have only begun to stop. All electronics from there will be affected as will the auto industry as many parts are made in Japan for the US Auto manufacturers.

But wait, our recovery has been making steady progress and we are doing well, according to Fed. Chairman Ben Bernanke. Of course he says that we must reign in the debt at the appropriate time and has asked law makers (politicians) to set in place a plan to get serious to reduce the debt as it is unsustainable for the long run. But politicians and the President alike have refused to do anything meaningful to address entitlements like Medicare and Social Security or the gigantic Defense Budget Spending, so here we are as we enter election year politics. See, things are better! Fourth quarter 2010 GDP was reported yesterday to be 3.1%, revised up from the previous estimate of 2.8%. That was 6 months ago and they still are playing with the numbers to show us we did good last year. Let's look at the chart below of GDP since 1950 and see how we are doing now.

As I look at this chart on GDP, I am not impressed. It is clear that during the Bush years, and especially the latter years of his Administration, we were not expanding and we haven't been doing that well for a very long time.

Last but not least, I thought I would show the chart of the Dow focusing again on the volume of this latest rise. You will see in the chart below that this week had prices rising with an unconvinced investor as the volume dropped sharply this week. So much for the bullish case. When prices rise and volume drops this is definitely a bearish sign that the market is about to turn down sharply and that the Bull is tired. So much for Bernanke's manipulation of the market. He has made it much worse. But in the end, the Emperor loses if you remember your Star Wars stories. FAIR WARNING!!!

Market comments for Jan. 28th

There was plenty of news in the world yesterday to get investors rattled, including riots in Egypt, but the Futures were up in pre-market. Also in business here, Ford had a bad 4th quarter, adding to the real data about the economy. Their profits plunged 79% unexpectedly, commentators said. I don't think the Consumer has been spending much money on cars and trucks so it didn't surprise me. Did it surprise you? I doubt it.

This morning more data was added on the heap of news. Advanced GDP number for the 4th Quarter came in at only 3.2%. Expectations were for 3.8%, so this validates the 4th Quarter was indeed weak. When this number gets revised, I will bet it is revised downwards. The markets have all reached their peaks recently with the Dow hitting 12,000, the S&P 500 hit 1300, the Russell 2000 has previously hit 800 and only the Nasdaq has fallen short of 2800, its high back in 2007.

Now what? How about you tell me what you think where we are now headed! You try this for a while. :) Seriously, Bernanke may want to continue to inflate the stock market as he has recently admitted to, but then it is just another bubble to deal with that will burst and hurt everyone. I can't say when it is going to burst, but when it does watch how surprised and scared everyone will be, including you if you don't take the right actions now. If you have stayed in this market for the past year and haven't taken your profit, what are you waiting for? Only greed can be driving you at this point is my guess. If you have been short this market for a while and hurting form doing so, why throw in the towel now, especially since you have already endured the pain of this manipulated market. Hang in there and you will be rewarded soon. I hope you have been buying more shorts lately to average down your costs and improve your profitability when this market turns. If you are in cash and have been in cash for a while, why are you reading this Blog? Get a life and go outdoors and enjoy the sunshine.

Market comments for Aug. 27th (UPDATE)

While I was waiting for the GDP numbers to be released this morning and knowing September was just around the corner, I was wondering how this Sept. markets were going to be compared to other years. Then I got the Chart of the Day from chartoftheday.com and see they have answered my question with today's chart. It isn't looking pretty is it.

The GDP number came in at +1.6% Revised from 2.4% previous estimates and they had expected the number to come in at +1.3%. Before the release of the number the Dow Futures were up +27 and after the release of the data it is at +68. There is a definite upward bias going into the open this morning. European markets are mixed with not much movement up or down at this point. Think about this for a moment. When is a 1.6% revised GDP worth it for the markets to go up? Answer: When they thought it would be much worse! That's where we really are in this economy!

Only 3 trading days left in August. As you can see from the chart above that August usually is barely over +0.2% gains for the month. The Dow closed July at 10,466, so we are significantly down form that going into today's trading. We started off the year at a Dow of 10,428, so we are definitely down for the entire year so far and I don't see any recovery in the market before the end of the year and as I have stated many times I see us going a lot lower into the next year. So hang on to your hats today as it is difficult to guess whether the market will be pumped up or trashed. VIX should be something to watch today. Yesterday it closed at 27.37 and for the past it has stayed above its 50 day Moving Average for the first time in about a month and a half.

Fed Chairman, Bernanke, will be speaking today in the Jackson Hole, WY gathering of business leaders and is expected to take questions from them. His comments will move the markets.

With the Dow set to move back up today, expect Gold to also go up so that the net Dow to Gold ratio stays low. It has been recently in an 8.1 to 8.3 range and I don't see this ratio going higher any time soon. In fact I see it going lower. The net is that when the Dow does rise, its real value as measured by Gold is less.

UPDATE: 7:00am PST
While the Fed Chairman was releasing his speech to the press, the Univ. of Michigan Consumer Sentiment number was released and it came in lower than expected at 68.9 vs an expectation of 69.6 for August. Last month the data came in at 69.6, so this is even lower and marks a number of months it has slipped.

The Economy and Discretionary Spending

Since the Q2 GDP numbers are to be announced tomorrow, I thought it would be appropriate to write something on the economy. Many are wondering when the economy will be coming back to pre recession levels. I gave this some thought and when you look at the math, it looks dismal. Let’s take an analytical look at it.

First, let’s begin with the Consumer. The Consumer has been responsible for 70% of the spending in the country. The other 30% comes from the Business community buying from each other. Since nominal GDP (Gross Domestic Product) of the United States was $14.2 Trillion dollars in 2009. Assuming the Consumer contribution, of 70%, that comes to $9.94 Trillion dollars. Ok, now let’s assume that even though the numbers I presented are for 2009, let’s assume there was no recession that year. (The reason I say that was because the nominal GDP for 2007 was $13.8 Trillion dollars, not far off from 2009.)

The Unemployment rate in 2007 was only 4.6%, while today it is 9.5-9.7%, and was as high as nearly 20%, if one counts those not collecting benefits and have given up looking for work. There are about 237 Million people in the Civilian non-institutional population and the Civilian Labor Force has about 153 Million people. The officially unemployed total about 15 million people.

In 2006, total discretionary income totaled $1.7 Trillion dollars in 2006. Nearly 78% of all discretionary income is held by households earning more than $100,000. “While the percentage of households with discretionary income has risen over the past several years, purchasing power remains concentrated in the wallets of the affluent,” said Lynn Franco, director of The Conference Board Consumer Research Center.

So if you take approximately $10 Trillion spent by Consumers, and then figure in the unemployment rate of approximately 10%, you have about $1Trillion less dollars for Consumers to spend. Add in the fact that 78% of all discretionary spending is from households earning more than $100,000, and it is even a higher number than $1 Trillion. That doesn’t include the businesses that don’t have money to spend buying other’s equipment, which represents the 30% of spending done by business. There could be another $1 Trillion less spending by business. That’s a huge hit on the economy.

If you put the $2+ Trillion out of the economy and then add in the Governments $0.8 Trillion Stimulus package, you can see we still are a long way off to making up the difference. As long as we continue to have 9-10% Unemployment rate and higher real Unemployment, we will not come out of this mess anytime soon. This implies to me not to believe the stock market will continue to rise. As a matter of fact, when these inferences become more recognized as truth, the markets will sell off. We will know by September/October this year whether that plays out. Oh, and by the way, conveniently, this is just before the November mid term election, where the Republican Party hopes to make much gains and take over the Congress. It will be the time when Democrats are most vulnerable.

Also, I found this link to the Great Depression from a Historical perspective. Check it out and learn what a Depression is really like. Not many living today have any experiences living in Depression times. David Rosenberg, formerly Chief Economist at Merrill Lynch, said this week that we are not in a recession, we are now in a Depression!

I also have a book I enjoy reading about the Great Depression. It is titled, “Only Yesterday and Since Today”. It was written by Frederick Lewis Allen originally in 1931 for Volume 1 and then 1940 for Volume 2, as there are two Volumes in the one book. They did an update of the book in 1986.

The other book I read is titled “The Worst Hard Times” by Timothy Eagan, a NY Times national enterprise reporter. The book was on the NY Times Notable Book list. The author is a Pulitzer Prize winner and has written 4 books. This book is about those who survived the Great American Dust Bowl. It shows the determination of Americans in the worst hard times imaginable. We were once a tough, proud people who were civil to one another even in desperate times. Look at us today.

Market comments for Aug. 24th (Update)

The day was positive but closed negative before all was said and done. Tuesday economic data will drive the market as Existing Home Sales gets released at 10:00am EST or 7:00am PST. Last month June's data came in at 5.37 Million homes sold. We had the tax credit then but no more. Expectations for July are to come in at only 460 Million Home Sales. We all expect a lower number so if the number surprises at all to the up side the market will rally. If it is lower than expected say around 450 Million Homes or less, we may see another sell-off. Also, the Richmond Fed will be announcing their data as well at 10:00am EST. The Philly Fed was negative last report, so many eyes will be trained on these numbers to see if the Richmond Fed is also negative.

In any event, Wednesday we will see Durable Goods Orders for July and New Home Sales. Durable Goods Orders are expected to come in at +2.5% for July. June's numbers came in at -1.2%. If Durable Goods orders come in again with a minus number, the market will sell-off in a big way. We all know it has been slow in the economy but now we are getting just how slow it has been.

Thursday is Initial Jobless Claims. Expectations are for 475K for the week. Remember last week many were shocked with the reported 500K. Lastly Friday we will see the fudged GDP number for Q2. Expectations are for 1.3%. Think about that for a moment. That's almost no growth at all. Last quarter the number came in at 2.4% and I expect that number to be revised down to 1.7% or less.

The S&P 500 closed Monday with an inverted Hammer pattern. Usually this would mean that the trend will be reversed, but it is possible to have a number of days with such patterns before a reversal comes about. And when it does, that reversal could be short lived.

Today I purchased additional shares of TZA at $36.50, and was pleased to see it close higher at $38.70/share, even if just for today. I believe these shares will rise during Sept. and October and surprise many who think the recovery is still ongoing, admittedly while slowing somewhat.

Futures are all down and all European markets are also down about 1.0%-1.3% this morning. Oil is down to about $72.50/barrel and isn't that far from the low of $70/barrel for all of 2010.

One last thing, the Put to Call ratio dropped at the close yesterday to 0.71 which we haven't seen since July 19th. I have posted above, the chart of the Put to Call ratio I had posted a few days ago and you can see the spike down we had back then.

UPDATE: 7:00am PST

Existing Home Sales were down 27.2% for July. Expectations were for 460 Million Home Sales and the actual came in at 383 Million Home Sales. That is a very big disappointment.

5 Year overview of the Dow and S&P500 (UPDATE)

I have posted 2 charts this morning showing where we are relative to the longer term market trend because many of you are wondering whether we are going back up to new highs in the market. The news outlets are full of people who are predicting just that and say that the worst is over and we are ready for as breakout to the upside. My data analysis suggest that is not going to happen any time soon. I believe we are now most likely to drop over the next few months and into October, as we end Q3.

Let's look at both charts above for a moment. There are similarities in the pattern of both charts and I have added a blue downtrend line for each, which we will not go above, and also a red resistance line, also a barrier to moving higher.I know looking at a 2 month chart gives you a sense we might be going up over Dow 11,000, but I am confident that is not going to occur. We closed at Dow 10,466 yesterday. The last 4 days have been down in the Dow, not up and while yesterday's market action for the Dow was impressive, as the Dow was up much of the day in the face of headwinds caused by a lower than expected Q2 GDP number, it still had negative distribution if you look at the Volume chart.

I have been disappointed that so many have been fooled by the media and aren't really giving as much weight to the economic data for the past week. There were many negative readings for the week if you check the previous post. This is not an economy in real recovery. It is weighted down by the Consumer not really seeing things better from their day to day experiences. Until that changes I am sorry but the economy won't really recover as we hope it will. We are unfortunately in this mess for years to come. My guess at least 5 years from a Housing and Jobs point of view. More foreclosures are lining up this Fall, as Adjustable Rate Mortgages must refinance to Fixed Mortgages, over the coming 6 months to a year and which were set 5 years ago. Many of these people borrowed on their equity and assumed prices would continue to go up as they had for many decades. Unfortunately this group is most likely most vulnerable to foreclosure as they are retired people who borrowed the equity on their homes and now their homes are under water. It is so sad.

UPDATE: Sunday 6:00pm PST


I changed and updated the original S&P chart from what was posted. Notice that on the S&P chart I have drawn 2 blue lines. Notice that when I connect the #2 Blue line under the last "W" pattern and extend it back over the 5 years, you can see it touches all the low points, this before the market had problems in 2008. To me the use of software program trading has resulted in patterns like this. It isn't just coincidence this happened. It is programmed to. This 2nd line does not show a similar analysis for the Dow. It is likely we will stay bound in the S&P between these 2 blue lines although the #1 blue line is not as much resistance as is the solid red horizontal line which crosses the axis at 1,190.

GDP disappoints for Q2 (UPDATE)

GDP came in at 2.4% for the second quarter. I expected this but experts had expected 3.0%. Dow Futures dropped about 80 points. GDP Deflator came in at up 1.8%. They revised Q1 to being up 3.7%. from the previous data of 2.7%. So we have gone from a 3.7% in Q1 to 2.4% in Q2. This proves GDP is going down and making the case for a double dip recession more certain. Finally we have some data which confirms the disconnect which has been going on lately that there is a disconnect between the stock market and the reality of the economy. Now comes the spin from the talking heads on CNBC or just changing the subject so we don't focus too long on the GDP disappointment. Remember our debt as a percentage of GDP is what determines whether we can borrow money or not. This hurts the case for cheaper borrowing to fund our debt.

In just a little while this morning, we will get the Univ. of Michigan Consumer Confidence number, which should be like a hammer to this market. The number will come in much worse than originally expected. The market should not be up today as there is no positive way to look at this data. All the spin in the world can't put lipstick on this pig. The big question is how low the market will go today. It should be significant given the real data.

Come back later for the Updates on Consumer Confidence posted as part of this post. Look for the additional word UPDATE in the title.

Consumer Confidence for July came in at 67.8 versus expected number of 67.5.

Economic Indicators for the week of July 26th

Here's the rundown of data expected this coming week and their relative importance as to where the economy is headed. Three of the more important indicators this week will be Consumer Confidence, Durable Goods orders and GDP. Here's the breakdown by day:

Monday, July 26th
10:00am EST. New Home Sales for June. Forecast is 295K and the prior month reading was 300K.

Tuesday, July 27th
10:00am EST. Consumer Confidence for July. Forecast is 51.0 and the prior month was 52.9.

Wednesday, July 28th
8:30am EST. Durable Goods Orders for June. Forecast is +1.0% and the prior month was -0.6%
8:30am EST. Durable Goods orders ex Transportation. Forecast is +0.5% and prior month was +1.6%
2:00pm EST Fed's Beige Book.

Thursday, July 29th
8:30am EST. Initial Jobless Claims. Forecast is for 450K and the prior week was 464K.
8:30am EST. Continuing Claims. Forecast is for 4.550 Million and prior week was 4.487 Million
2:00pm EST. Fed's Beige Book.

Friday, July 30th
8:30am EST. GDP for Q2. Forecast is for 3.0% and Prior was 2.7%. Market is expecting 2.5%.
8:30am EST. Chain Deflator for Q2. Forecast is 0.7% and prior period was 1.1%
8:30am EST. Employment Cost Index for Q2. Forecast is 0.5% and prior period was 0.6%
9:45am EST. Chicago PMI for July. Forecast is for 58.5 and prior month was 59.1
9:55am EST. Univ. of Michigan Sentiment for July. Forecast is 67.5 and prior month was 66.5

That's the rundown for the coming week. I will try and update my site each day with the actual data. As for the market reaction it is difficult to predict without any actual data but I will give it a try. If GDP comes in 2.0-2.5% the market will react quite negatively. If it comes in at the expected 3.0% or better, it will be claimed as a victory and the market will have a positive reaction. However the Durable Goods orders and Consumer Confidence will have more of an effect as they are predictors of the present and future, not the past. So if I were weighting the data this week, I would tend to weight these later data points more heavily as market direction predictors. Durable goods orders are expected to rise so anything less than that will be negative. As for CONSUMER CONFIDENCE, it is expected to drop only slightly from 52.9 to 51. If we get any reading below 51, the market will react quite negatively. Therefore Tuesday is the most important data this week in my view. Stay tuned for the results and please come back.