Saturday, January 6, 2007

Markets - Looking a Bit Weaker

All of the charts below are from stockcharts.

Here's the QQQQ's

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This chart looks a little better than it did last week. We had a strong bar on Thursday and the market closed above $43.26 on Friday of decent volume. The 3-day upward/downward volume ratio is in an upswing, but the New high/new low ratio didn't move upwards. The lack of confirmation of new highs/lows makes the rally slightly suspect and lends credence to the argument this upward move is a continuation of the reaction rally started in late December.

Here's the SPY:

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On Friday, the market closed below the support line at $140.67, but only slightly over. A standard rule of thumb from Gann is the market must move at least a point over support or resistance to be a change of trend. However, the downward rend is pretty strong with two solid bars and big volume. Finally, we have still have the possibility of a double top forming. While not the strongest formation on record, it is there.

Here's the Russell 2000

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Like the SPY's, the IWM's closed below support at $76.77, but only slightly over the line. But Friday's bar was a solid downward move on solid volume. We still have the possibility of a head and shoulders topping formation, with the right shoulder almost completed.

Finally, the 3-day NYSE Up/Down volume ratio was down for the week, while the New High/New Low line has been decreasing slightly since mid-December.

Housing Bottom? Highly Doubtful.

This chart says it all

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Let's look at it in more detail

1.) New and existing home sales have steadily decreased over the last (roughly) year and a half.

2.) Building permits started to drop at the beginning of 2006 as well.

3.) Year over year home price appreciation has fallen into negative territory.

Here's how the Dallas Fed sums up the graphs:

Today, signs of a housing market slowdown are unmistakable. New and existing home sales have been declining since mid-2005, although they remain high by historical standards (Chart 1A). Building activity has begun to cool a bit, while single-family housing permits have fallen 34 percent from their peak, settling back to pre-2002 levels (Chart 1B). The building permits data suggest further declines in single-family construction are likely, given the usual six to eight months it takes to complete a home.

Housing prices are rising more slowly—perhaps even beginning to decline outright. In the second quarter, the Office of Federal Housing Enterprise Oversight’s measure of home price appreciation registered its biggest year-over-year slowdown since recordkeeping began in 1975. Even so, home-price gains remain solidly positive at 10.1 percent by this measure, which partly controls for changes in home quality by tracking only prices from repeat sales (Chart 1C).


Let's look at two charts from the WSJ courtesy of the Big Picture Blog:

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Sales are down and inventory is up. Simple econ 101: increased supply = lower price. Decreased demand = lower price. Put the two together = lower price.

Now -- can people afford any more mortgage debt right now? Probably not. Total household debt is at record levels:

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And the financial obligation ratio is also at record levels:

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What does this mean for the economy?

Lower equity withdrawals:

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And Lower consumption expenditures:

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As the Dallas Fed notes:

The limited U.S. econometric evidence indicates that the strong pace of MEW may have boosted annual consumption growth by 1 to 3 percentage points in the first half of the present decade.[8] This implies that a slowing of home-price appreciation into the low single digits might shave 1 to 2 percentage points off consumption growth and 0.75 to 1.5 percentage points from GDP growth for a few years.

While these estimates provide an idea of housing’s potential economic impact, considerable uncertainty exists about how much a slowdown in MEW might restrain consumption growth. Key issues include how much home-price appreciation might slow, how much the deceleration would affect MEW and how much a slowdown in MEW would restrain consumer spending.

Friday, January 5, 2007

Did the Jobs Report End Rate Cut Speculation?

From CBSMarketWatch:

U.S. stocks ended sharply lower on the day and mixed on the shortened three-day trading week Friday, after news of surprising strength in the labor market in December fueled concerns that the Federal Reserve won't cut interest rates anytime soon.

A downgrade of Intel Corp. and a profit-warning from Motorola Inc. weighed on the technology sector.

"The jobs number has the market scared to some extent," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "The market has been happy with weak numbers recently, as it looked forward towards a possible rate cut at the Fed's March meeting."


There has been a fair amount of speculation the Fed would lower rates fairly soon. However the jobs report indicates the economy is doing at least fairly well. More importantly, the wages information may raise concern at the Fed about inflationary pressures.

In short, this may put the idea of a rate cut off a bit longer. The question is, "will this effectively put a ceiling on the markets?"

Solid Employment Report , +167,000

From the BLS:

Nonfarm employment increased by 167,000 in December, and the unemployment rate was unchanged at 4.5 percent, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Job gains occurred in several service- providing industries, including professional and business services, health care, and food services. Average hourly earnings rose by 8 cents, or 0.5 percent, in December.


This is a solid number, especially when the consensus was lower. Let's look at the details.

Construction was -3000. I have a hard time squaring this number with all of the 1000+ layoffs the DOL reported in their weekly unemployment claims. Yesterday alone we have 12 states that reported more than 1000 layoffs in manufacturing and construction. I am guessing they will revise this number higher.

Manufacturing was -11,000: One of the untold stories of this expansion is the incredible inverse relationship between manufacturing output increases and manufacturing employment decreases. Manufacturing output is now above the 2001 pre-recession level, but employment has not followed suit. In short, the productivity increases have seriously eaten into manufacturing employment growth.

Retail was -9000. This jibes with the weak retail numbers we saw yesterday. Obviously retailers were either expecting a slower season or were trying to cut costs to increase profits during a slow season, or a combination of both.

Employment in retail trade was little changed over the month after rising by 39,000 in November. Building and garden supply stores lost 8,000 jobs in December. Over the year, retail trade employment edged down.


Translation: Home Depot and Lowe's laid people off. Interestingly, retail employment has trended down this year, despite an increase in consumer spending. Any thoughts on why?

Professional and Business +50,000. Another solid gain in this area. We have seen these numbers perform well for awhile now. Here is some more detail from the report:

Job gains occurred in services to buildings and dwellings (13,000) and in management and technical consulting services (7,000). Employment continued to trend up in architectural and engineering services and in computer systems design and related services.


There seem to be a fair amount of real estate related gains here.

Education and Health Services, +43,000. This has also been a constant trend for this expansion. I would expect this trend to continue for a long time as the US population grows older. I do wish the BLS would break these numbers out -- that is, separate education from health services. Here is more from the report:

Employment rose in ambulatory health care services (14,000), hospitals (11,000), and nursing and residential care facilities (7,000).


Leisure and Hospitality, +31,000. This is another area where we have seen a large amount of job growth. While people do have to eat somewhere, I have to wonder who is filling these jobs. 23,000 of these jobs were in food services and drinking places -- bars and restaurants.

The .5% increase in wages may scare the Fed, which is still very concerned about inflation.

One final note. In late 2006, the BLS revised jobs created by +800,000 plus (or somewhere near that number). In other words, there was a serious methodological flaw somewhere in the BLS' system. I do not know if they have taken care of that issue.

Thursday, January 4, 2007

Weekly Unemployment Claims

Each Week's Claims have a list of 1000 or more layoffs. There were 12 states with 1,000 or more lay-offs in the construction or manufacturing sector.

Earlier in December we saw a ton of 1,000+ layoffs in construction.

We don't have a trend yet, but we're getting nearer to a nasty upswing. That makes tomorrows employment report very important. Aside from the macro-number, look at the subparts -- especially manufacturing and construction.

Also, we'll have to watch these figures in the coming weeks to see what February's number looks like.

Oil Breaks Through Lower Support

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Who would have thought we'd see that? I certainly didn't.

And why is this happening?

Oil prices shed more than $2 Thursday to settle at their lowest level since June 2005, after the U.S. government reported higher-than-expected inventories of gasoline, heating oil and diesel fuel amid warm winter temperatures.

An unseasonably mild winter in the Northeast and Midwest has led to a buildup in inventories and, as a result, weaker prices.

"There is no winter at all, thus we have a lot of supplies with no home and prices have nothing to do but fall," said James Cordier, president of Liberty Trading Group in Tampa, Fla.


So we have an unseasonably warm winter. In addition, we also have higher stockpiles. Oil is still higher than average and gas and distillates and gas are all increasing.

I have to wonder is there is something more to this decrease though. Much like the copper sell-off, is this also the markets telegraphing their perception of slower US growth?

Retail Sales Disappoint

From AFX News:

The International Council of Shopping Centers-UBS sales tally posted a 3.1 percent gain in December, in line with its original expectations. That means for the November-December period, same-store sales averaged a 2.8 percent gain, slightly below the original forecast of 3 percent. The tally is based on same-store sales, or sales at stores open at least a year; these sales are the industry's standard for measuring retailers' health.

Michael P. Niemira, chief economist at ICSC, said, "The tone was more pessimistic than optimistic. I think when you look back, November-December may be a good bellwether for the industry performance for this year."

...

"Clearly, this was a promotional Christmas," he said. "Consumers clearly waited until the last minute."

Such aggressive discounting led a number of merchants including Zale Corp., BJ's Wholesale Club Inc., Gap Inc. and AnnTaylor Stores Corp. to cut their profit outlooks.

Based on 51 stores that reported, Perkins said 23 retailers beat sales expectation, 25 missed estimates and three stores matched projections.


Something I have noticed over the last five holiday sales cycles is the last-minute nature of shopping. There has been an interesting cycle of consumers waiting for stores to lower prices closer to the holidays. Now I think consumers are expecting discounting closer and closer to Christmas. Therefore, it seems people are waiting for those discounts to emerge.

A little under 50% of retailers missed expectations. That's a big number of misses -- especially considering corporate earnings have been very strong for most of this year.

Also consider that an industry economist made the following statement: "The tone was more pessimistic than optimistic. I think when you look back, November-December may be a good bellwether for the industry performance for this year." That's a refreshing amount of honesty from someone who you would think would be a complete industry shill.


From Bloomberg:

U.S. retailers including Wal-Mart Stores Inc. and Target Corp. posted December sales that rose less than a year earlier as stores lowered prices to lure holiday shoppers.

Federated Department Stores Inc. said sales at stores open more than a year increased 4.4 percent, falling short of estimates. Gap Inc.'s sales declined and the company lowered its profit forecast by 18 percent. Wal-Mart, the world's largest retailer, reported a 1.6 percent increase.

Declining sales growth bodes ill for holiday-season profits, which make up about a third of the industry's annual earnings. Price cuts on flat-screen televisions and leftover cold-weather clothes following weeks of warm weather probably undermined fourth-quarter profits, analysts said.


This is not good news. Remember that Circuit City announced lower Christmas sales in early December. Wal-Mart substantially cut a specific flat screen television early in the season and all the retailers had to follow suit. This hurt margins at electronics stores.

From Reuters

U.S. retailers posted disappointing December sales on Thursday, hurt by warm weather and procrastinating shoppers who waited for deep discounts before wrapping up their holiday shopping.

The lackluster sales put prospects for the fourth quarter in jeopardy, with retailers like Federated Department Stores Inc. (FD.N: Quote, Profile , Research), Chico's FAS Inc. (CHS.N: Quote, Profile , Research) and Cache Inc. (CACH.O: Quote, Profile , Research) warning their results could be less than expected.

"This is going to be the third month in row ... that the majority of retailers in our index have missed expectations," said Ken Perkins, president of Retail Metrics, which tracks 57 retailers. "That's a little bit concerning as we head into '07"


Three months in a row that retailers have missed expectations. That means tow things. First, the Census Bureau's last consumer spending number -- which was up 1% -- is probably off. Second, three months of a slowdown indicates we probably have a trend in place. Considering that consumer spending comprises 70% of GDP growth, the trend in most definitely not our friend right now.

ISM Decreases Slightly

Just got back from court, so I thought I would relax by looking at economic numbers. (Now you know I am a complete economics geek.)


From the Institute For Supply Management:

Business activity in the non-manufacturing sector increased at a slower rate in December 2006, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

...

"Non-manufacturing business activity increased for the 45th consecutive month in December," Nieves said. He added, "Business Activity increased at a slower rate in December than in November. Employment, Inventory, Exports and Imports all increased at a faster rate. The Prices Index increased 3.5 percentage points this month to 59.1 percent. Nine of 18 non-manufacturing industries reported increased activity in December. Members' comments in December are generally positive concerning current business conditions. The overall indication in December is continued economic growth in the non-manufacturing sector, but at a slower pace than in November."


Here are the comments from the comments section:

* "Business activity remains strong and is on the upturn." (Finance & Insurance)
* "Housing sales slowing, affecting all areas of business." (Construction)
* "The economy is starting to slow a little bit." (Professional, Scientific & Technical Services)
* "Market remains stable." (Information)
* "Business is steady, some seasonal increases." (Wholesale Trade)


Let's look at these comments in a bit more detail. Over the last month three sub-prime mortgage lenders have either declared bankruptcy or stopped accepting new applications. But these problems have not bled over into other financial services -- at least not yet. In addition, construction is still slowing but with no bleed-through to other areas of the economy. I have to admit, the lack of an impact by the housing slowdown on non-construction economic areas is very perplexing right now.

The overall business activity index has fluctuated between 57.1 and 58.9 over the last three months. That indicates expansion. This month's slight downturn could easily be considered statistical noise.

The prices index has increased for the last three months. This is in-line with the PPI information. This may be another inflation indicator the Fed is worried about.

Imports increased each month for the last 4 months. That's interesting.

That's about it. This report looks pretty good.

Yesterday's Wild Ride

Wow -- what a trading day. Here's a daily chart of the QQQQs, followed by a daily chart of the SPYs.

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They both say the same thing. They opened higher, added a few ticks a little after 10AM EST, cruised for a bit, sold off a touch and then....the FOMC minutes came out and wham. The inflation statement -- which came out at 2 EST -- was a clear selling catalyst for both markets.

These are 5-minute bar charts and the inflation paragraph in the FOMC statement is near the end -- about 10-minutes into the statement. There has been some speculation about when and if the Fed will lower rates. However, the Fed's statement was pretty clear -- inflation is still on their radar screen so rates aren't coming down for a bit. Not what the markets wanted to hear.

Going forward you have to wonder if this statement will provide a psychological trading ceiling on the market.

Wednesday, January 3, 2007

New WSJ Page

This page kicks ass. There is no other way to describe it.

Fed Still Worried About Inflation

Here's the money quote from the FOMC minutes:

All meeting participants remained concerned about the outlook for inflation. Although readings on core inflation had improved modestly since the spring, nearly all participants viewed core inflation as uncomfortably high and stressed the importance of further moderation. Participants expected core inflation to edge lower over time, in part as the pass-through of higher prices for energy and other commodities ran its course and as the moderate growth in aggregate demand likely led to a modest easing of pressures on resources. Some participants also highlighted the impact that movements in the prices of individual components of the price index, such as owners' equivalent rent and medical costs, could have on near-term readings on core inflation. More generally, participants stressed there was considerable uncertainty as to the probable pace and extent of the moderation in core inflation and that the risks around this desired downward path remained to the upside. Moreover, participants expressed concern that a failure of inflation to moderate as expected could entail significant costs if an upward drift in inflation expectations ensued.


OK -- let's translate this eco-geek talk.

1.) Everybody -- each Fed Governor -- was concerned about the inflation outlook. That means everybody from the most dovish to the most hawkish governor.

2.) Nearly everybody -- which I translate as more than a simple majority and most likely at least a super-majority (2/3) -- don't like the current inflation level.

3.) Individual CPI components -- Owner's equivalent rent and medical costs -- are raising eyebrows.

4.) The Fed has used language to the effect of "inflation will moderate over time" for the last few meetings. The problem is, "when"? We know inflation is on everybody's mind and most governor's don't like the current level. Despite the recent downward movement in CPI, the governors are still concerned.

So -- what are the Fed governors looking for? Looking at the latest CPI report, we see a gradual decline in core CPI. For overall CPI, September and October we see declines of .5% and in November we see a 0% advance. The bottom line is the raw numbers don't look half bad.

However -- let's look at the Cleveland Fed's median CPI:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (3.0% annualized rate) in November. The median CPI is a measure of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.


Then there is the Dallas Fed's Trimmed Mean PCE:

The trimmed mean PCE inflation rate for November was an annualized 1.2 percent. According to the BEA, the overall PCE inflation rate for November was 0.1 percent, annualized, while the inflation rate for PCE excluding food and energy was 0.5 percent.


The 12-month rate of change was 2.4%. While the 12-month number has decreased for the last 3 months, it is still at an uncomfortable level for the Fed.

I am beginning to suspect these alternate inflation measures carry a bit more weight with the Fed than they are letting on.

Chicago PMI Expands in December

From Bloomberg

Manufacturing in the U.S. unexpectedly expanded and construction spending fell less than forecast, signaling the worst of the economic slowdown is over.

The Institute for Supply Management's manufacturing index rose to 51.4 in December from 49.5 in November, when activity contracted for the first time in more than three years. Spending on construction dropped 0.2 percent in November after a 0.3 percent drop in October that was smaller than originally reported, the Commerce Department said today in Washington.

The figures suggest the economy will extend the five-year economic expansion into 2007, weathering a slump in housing and a factory downturn that weakened growth in the past three quarters. The dollar rallied, stocks extended their advance and bonds pared gains.


Let's go to the report to get the complete picture.

New orders and production increased. This is a good sign. Prices paid decreased, which should help ease a bit of the Fed's inflationary worry. Employment is an area of concern, as it is still registering a contraction. Also, exports are decreasing faster than imports. This will not help the trade deficit if it continues.

Overall, however, this is a good report. Next month will be very important as it will indicate if the drop below 50 was a 1-time situation or not.

Construction Spending Drops .2% in November

I made a mistake with the original post. While October numbers did decrease 1%, today's release was the November number. I apologize for any inconvenience this may have caused.

Total construction spending dropped .2% in November.

Residential spending was a big part of the reason for the drop,, as it decreased 1.63%.

Total public construction increased slightly. Remember the last Congress did not pass a final budget resolution. So this number might get a nice injection of public funds when a final budget resolution is passed. Non-residential construction increased 1.43% Most nonresidential subareas (lodging, commercial, power etc...) saw increased. Remember that nonresidential is slightly more than half the size of residential, so nonresidential will really have to pick-up the pace to absorb the decrease in residential construction.

Residential construction has decreased continually since July. It has dropped 6% since than. Total nonresidential construction has increased 4.46% since July.

Tuesday, January 2, 2007

Third Sub-Prime Mortgage Lender Stops Making Loans

From Bloomberg

Mortgage Lenders Network USA Inc. became the third company in a month to stop issuing loans as U.S. housing sales slowed and defaults by borrowers rose.

The company, known as MLN, is ``not currently funding loans or accepting new applications,'' according to a statement on its Web site. Middletown, Connecticut-based MLN, which caters to borrowers with low credit scores, said it is ``exploring strategic alternatives'' for its wholesale unit, which typically means a company is seeking new backers or a buyer. MLN also handles billing and collections for $15.6 billion of loans.

Lenders including Ownit Mortgage Solutions Inc. and Sebring Capital Partners LP that specialize in ``sub-prime'' mortgages closed operations and cut staff in 2006 as more loans to high- risk customers soured. Nationwide, late payments on sub-prime loans rose during the third quarter to 12.56 percent of the total, the most since the first quarter of 2003, the U.S. Mortgage Bankers Association said.


This is not good news for the housing market. The last few years have seen a large increase in "sub-prime" mortgage lending. These loans are already performing poorly. More importantly, they are doing poorly earlier in the mortgage's life. This leads to what brought Ownit Mortgage down. They sold their sub-prime mortgage loans to banks and broker dealers, who in turn packaged the loans into larger pools. However these sales had a caveat that if the loan performed poorly, the purchaser could sell the loan back to Ownit mortgage. Ownit was flooded with these buyback situations, which forced them to close their doors.

The rate of sub-prime delinquencies has risen over the last few years:

Across the industry, the percent of subprime mortgages in default rose to 7.74 percent in August, up from 5.53 percent in August 2005, said analysts at Friedman Billings Ramsey Inc., who follow the securitized portion of the market.



Ownit recently filed for bankrupcy

While not all mortgage companies have filed for bankruptcy or shut their doors, we have seen an increase in lay-offs:

Ownit joins Ameriquest Mortgage Co., Countrywide Financial Corp., H&R Block Inc.'s Option One, BNC Mortgage Inc. and other lenders in shutting operations or laying off employees as the U.S. housing market slows. Delinquencies are rising, home prices are falling and borrowers of adjustable-rate mortgages are facing higher monthly payments.


If this pace of activity keeps up, the sub-prime market will be in tatters pretty quickly.

Contract Settlement at Goodyear Sets the Pattern for 2007 Bargaining

Days before health care benefits ran out for nearly 15,000 workers at 12 Goodyear Tire & Rubber Co. plants across the nation, members of the United Steelworkers (USW) union approved a three-year contract that USW Executive Vice President Ron Hoover calls “a fair and equitable contract that protects quality health care for active and retired members.” Workers are back on the job today.

The settlement at Goodyear marks the beginning of contract expirations at major U.S. industries, including the Big Three automakers, General Electric, the Las Vegas hotel industry, grocery stores in northern and southern California and Disney World in Orlando, Fla. Major public-sector contracts also will be up for New York City teachers and state workers in Connecticut, Hawaii, Iowa, New Jersey, New York, Pennsylvania, Washington and Wisconsin.

No surprise: Health care and retirement security will be prominent issues in most or all of these negotiations.

The USW action at Goodyear is an indication that union workers are ready to go on strike and do whatever it takes to maintain decent health benefits and job security, while Steelworkers at Goodyear have set a standard of commitment that other employers must live up to at the bargaining table this year.

Union members approved the settlement Dec. 29 by a more than 2–1 margin, following an 86-day strike. The walkout began Oct. 5, after the company refused to budge on its plans to close a 1,100-worker plant in Tyler, Texas, and sought to abandon its obligation to provide health care benefits for 30,000 retirees.

As a result of the strike and the nationwide support of the union and progressive movements, workers won an agreement that requires Goodyear to rescind its demand for immediate closure of its Tyler, Texas, plant and instead provide for a one-year period of transition, during which workers will have the opportunity to take advantage of sizeable retirement buyouts.

Significantly, the contract also requires Goodyear to create a $1 billion health care fund for retirees that will secure medical and prescription drug benefits for current and future retirees and dramatically increases Goodyear’s investments in union facilities. In addition, the contract:
  • Enhances the ability of USW-represented plants to meet the challenges of global competition by having Goodyear triple its capital investments to at least $550 million in those plants.
  • Maintains affordable, high-quality medical and prescription drug coverage for active members and retirees.
Goodyear says the pact will help reduce its costs by $610 million over three years and $300 million a year thereafter—and isn’t the first time workers helped out the giant tire maker. Goodyear sought to close the Tyler plant—its third plant closure in four years—despite making nearly $500 million in profit last year. In moving to close the plant, Goodyear tried to walk away from promises the company made to work in partnership with the USW and not cut jobs after union members came to Goodyear’s aid several years ago by taking wage and benefit freezes when the company experienced financial hardship.

On Dec. 16, thousands of union members and allies rallied in support of the striking workers at Goodyear tire sales outlets across the country, publicly highlighting how Goodyear planned to send jobs to China and abandon its obligation to provide health care benefits for 30,000 retirees. Many gave generously to the USW Strike Fund to help workers and their families through the holidays.

Next up for the USW are negotiations with Bridgestone-Firestone. The Steelworkers represent some 6,000 workers at eight Bridgestone-Firestone plants, including one in Oklahoma City that the tire maker closed earlier this month, putting 1,400 people out of work. No dates have been set for the next round.

Although the union is ”not entirely happy with the outcome at Tyler,” says Thomas Conway, USW vice president and chairman of the union’s Goodyear negotiations:
We were able to ensure that as long as Goodyear stays in the market for the tires built at Tyler, those tires will have to be produced at USW-represented plants in the U.S. The company simply won’t be able to outsource that work or service this market segment with imports from China or anywhere other than a USW facility.
After the ratification vote, USW President Leo W. Gerard said “credit really belongs to our members and their families, whose solidarity prevented the company from short-changing them, despite all its attempts. Gerard also said:
Special thanks go out again to all of our AFL-CIO union affiliates, activist groups, community organizations, businesses and public officials who not only understood our struggle, but stood shoulder to shoulder with us.
Negotiations between the USW and Goodyear began in June 2006, and after the July 22 expiration, USW and Goodyear reached a day-to-day extension agreement in which either party could terminate the agreement after a 72-hour notice. Lack of progress in bargaining talks forced the USW to deliver notice on Oct. 2 and 15,000 USW members in 16 plants throughout North America struck on Oct. 5.

The U.S. contract covers workers at Goodyear plants in Akron, St. Mary’s and Marysville, Ohio; Gadsden, Ala.; Buffalo, N.Y.; Lincoln, Neb.; Topeka, Kan.; Fayetteville, N.C.; Danville, Va.; Sun Prairie, Wis.; Union City, Tenn.; and Tyler.

Lennar Posts Loss

From Bloomberg:

Lennar Corp., the fourth-largest U.S. homebuilder by revenue, will post a fiscal fourth quarter loss after taking a pretax charge of up to $500 million to write down land it no longer intends to buy.

The loss in the three months ended Nov. 30 will be between 88 cents and $1.28 a share, the Miami-based company said today in a statement.

``Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery,'' Lennar Chief Executive Officer Stuart Miller said in the statement.

Homebuilders are disposing of land they planned to build on and incurring expenses as customers cancel orders amid a housing slump. While the National Association of Realtors is forecasting that five consecutive quarterly declines of previously-owned homes will end in the first quarter, home construction companies have more land than they need and more homes than they can sell.


It's possible Lennar is loading all of its losses into one quarter. That simply means they knew they were going to take a loss anyway, so they added a bunch of other future losses at the same time, essentially getting the losses over with.

However, note this statement from the CEO: ``Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery,'' That doesn't sound good at all.

For more on the housing "soft landing", go to the Big Picture, where the story Economy poised to shake off housing slump (except Lennar) is at the top of the page. There are two great charts that say it all: sales are decreasing and inventory is increasing.

Monday, January 1, 2007

The Week Ahead

The market is closed tomorrow for the President Ford funeral.

Wednesday we have Redbook and UBS store sales. I am especially interested in the retail numbers to see how Christmas was. Not what people were going to spend, but what they actually spent. This will be a read of the Christmas season. We also get December car sales and the ISM manufacturing index. And finally we get construction spending. This will be a big day.

Thursday we get the ISM service report and jobless claims. Look at the claims numbers to see if there is a bump in construction related losses.

Finally we get the employment situation on Friday. Again pay attention to construction employment. Also keep an eye on professional (real estate agents) and financial services (mortgage brokers). We've had two sub-prime brokers go belly-up in the last month.



In short -- we're going to get a ton of information this week.

It's a New Year -- Where Are the Markets?

On Wednesday the markets will open for the beginning of a new trading year. So -- where are the markets right now?

First -- I really don't like to talk about the DOW. Simply put, 30 stocks in a sea of 10,000 just doesn't make sense. I like far broader averages to gauge the market.

Here's a chart of the SPY's:

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This is the strongest chart of the three I'll look at today. The S&P 500 is still in the middle of a strong uptrend. However, there are two points of concern right now. The first is the decreasing volume totals for December. Starting on December 11, we see a clear decrease in trading volume. This might simply be people leaving the market for an early vacation. Or it might be a decrease in actual buying interest. We don't know the underlying reason for the volume decrease; we just know one occurred. The second cause for concern is the possible formation of a double top for the SPY in December. It's not a particularly strong formation, but it exists nonetheless. It's important to remember we've had a strong uptrend for the better part of 5 months now. Simple baseball logic tells us the market is due.

Here's a chart of the Russell 2000;

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This chart causes a bit more concern. Notice the volume drop-off starting in late October -- about a month and a half before the drop-off in the SPYs. This makes the rally in late November and early December more suspect for the simple reason fewer buyers caused it. Also notice we have a possible head and shoulders topping formation forming. The market may be working on the right shoulder right now.

Here's a chart for the QQQQs:

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This chart should raise a few eyebrows. First, notice we have another possible double top formation with the first top in late November and the second top in mid-December. Next we have a sell-off from the double top. We have a reaction rally from the sell-off in the last week of December. But, the reaction rally has a very low volume level relative to the preceding sell-off. And we don't have a very strong reaction rally; the sell-ff has some very strong downward bars while the reaction rally has some wimpy, meandering bars. Finally, we have the QQQQ's closing below the 20 day moving average. All of these are bearish signals.

As with all technical analysis, remember this caveat: the markets will always try to humble your analysis. And the markets have a lot of ways to humble you.

Sunday, December 31, 2006

Truck Shipments Down -- Big

In a potentially worrisome sign for the U.S. economy, domestic trucking shipments declined by almost 9 percent in November, marking the largest year-over-year decrease in almost six years, the industry's largest trade association said.

The American Trucking Associations said in a monthly report that its seasonally adjusted truck tonnage index stands at its lowest level since late 2003, following an 8.8 percent decline versus the same month a year ago. The index fell 3.6 percent from the prior month.

Because more than two-thirds of all manufactured and retail goods in the U.S. are carried by truck, the industry is an economic bellwether.


When 2/3 of retail shipments start to drop, you have to wonder about the health of the economy......

From the Houston Chronicle

What Can the Treasury Market Tell Us About Housing ?

Below I wrote on the housing market because I think it is the wildest of wild cards going forward economically. Because mortgage rates are tied to the 10-year Treasury bond it's also important to take a look at the 10-year treasury market to see what direction interest rates may be headed in.

First, let's get a look at the bigger picture to see what the long-term trend is. Here's a weekly chart from stockcharts:

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The chart is very straight-forward. The 10-year treasury had a year-long sell off starting in late June of 2005 until June of 2006. Interest rates rose from 3.98% to 5.25%, or about 125 basis points. Starting in early July of this year, interest rates reversed trending down to about 4.40%, or losing about 85 basis points.

So we have two trends:

1.) A year long Treasury market sell-off from June 2005 to July 2006.

2.) Starting in early July 2006 the Treasury market rallied, lowering interest rates 85 basis points.

We have one current mini-trend from 4.40% to about 4.70%. This is probably a year-end, profit-taking sell-off.

Let's look at a daily chart of the 10-year:

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Note that in early October we had interest rates of 4.55% to 4.65%. We also had low rates for the last week of the month, but bonds sold off in mid-October to reach of high of 4.84%.

November 2006 saw a consolidation in the form of a triangle trading pattern, followed by a two-week decrease in rates to 4.40%.

So -- why this in-depth look at October and November? This is when we started to hear talk of housing "stabilizing". We also started to see some surprises in the new and existing home sales numbers.That means the interest rate during these months is very important for possible future housing market activity.

Simply eyeballing the chart, it looks as though the mean and median interest rate yield in October and November is between 4.55% to 4.65% (I could be wrong here, but remember I said "eyeballing"). That means that interest rates around this level are slightly stimulative to house buying in the current economic environment.

However, in October, rates of 4.84% were not constrictive. They weren't very stimulative either, but they didn't cause a contraction in the housing market either.

So, in the current market it looks as though interest rates below 4.84% help to at least stabilize the housing market.

Finally -- look at the long-term weekly chart again. Note that yields are at the upper-range of a downward sloping decline in prices. A solid break above say 4.75% to 4.80% could indicate the beginning of a new 10-year yield trend, with interest rates heading higher.

As with all technical analysis -- remember this is not a definitive reading of the chart because there is no definitive reading of the chart. All perception is relative and can change at a moments notice. In other words, the market will do everything in its power to humble you. And the market has a hell of a lot of power.