Archive for January, 2009

A kinder, gentler type of recession?

Friday, January 30th, 2009

The preliminary estimate of fourth quarter GDP came in down -3.8%, a horrible reading, the worst we’ve seen since 1982. So why all the almost smiley faces around what’s left of Wall Street? Since Monday, all I’ve seen have been downward revisions to the expected decline. Yesterday some folks were looking for GDP to collapse at a rate in excess of -6.0%. The consensus developed that we would see a decline well over -5.0%. So, yeah, the number was bad, but not nearly as bad as the market had been braced for. That means not as low as the market had priced in. We’ll find out by the close whether or not a relief rally can take us up to the top of the trading range that has been developing in the last few months since early October.  Regardless of whatever happens today, this diminution of disaster before seeing the second half of the TARP funds or any of the stimulus money, suggests America’s economic resiliency may still be in good working order.  We should certainly all hope so.

Future greed vs. pragmatism.

Thursday, January 29th, 2009

Here is a basic paradigm: Wheat is a commodity grown by a farmer to sell to a processor (such as Pillsbury) to make flour for an end user.  Both the farmer and the mill know how many dollars they will need to make on their product in order to be profitable in the future.  They arrange a deal with each other to price next year’s wheat crop at a mutually acceptable level.  This contract on tomorrow’s wheat helps insure both parties against some adverse fluctuations in crop yields.  It becomes a wheat futures contract traded on the commodities exchange.  If contracts are created by third parties willing to make bets om the factors that affect crop yields, we might consider those speculative.  They were never intended to actually hedge an end-product’s cost at delivery, just generate a trading opportunity.  After the wild swings in most commodities seen in 2008, a clamor of protest is now swelling, asking for an end to the creation of such contracts.  The exchanges stand to lose a bundle if that happens, and are claiming the additional liquidity provided by these contracts keeps everything running smoothly.  Stay tuned, this will be a long, hard-fought battle.  Lobbying efforts and bribes will spread cash all around.  Each of us will be affected by the outcome no matter which way it goes.

China’s Currency Chiropractors

Wednesday, January 28th, 2009

Timothy Geithner, the newly appointed head of the U.S. Treasury department and President Obama’s mouthpiece on matters of economic importance, recently said “China is manipulting its currency.”  The implication was they should stop being unfair to our dollar.  Ironically, since the Chinese keep their Yuan fairly well aligned with our dollar, they prevent import costs on multitudes of items from soaring.  Since they make all this stuff, allowing the dollar to devalue against their currency would hardly benefit the American consumer in these tough times.  Additionally, as the top foreign holder of U.S. Treasuries, we really don’t want to give them a reason to consider those holdings unattractive through such devaluation.  A spokesman at the World Economic Forum currently being held in Davos, Switzerland agreed, saying Geithner’s comments are “a horrible idea.”  Perhaps instead we should thank the Chinese for manipulating our currency as they manipulate their own.

Muddy bottoms

Tuesday, January 27th, 2009

The market indices continue to struggle successfully (at least for the moment) to find their foothold, a support where we believe a bottom may be found.  But the waters are murky, every step slippery, hidden snags abound, and the mud is so thick we wonder with each step if we will ever stop sinking.  Such is the composition of  most bottoms.  This week is a big news week with many important indicators being reported (see the calendar on my website for a list), the Fed meeting today, and earnings reports flooding in.  The news has not been good, yet the bottom still holds, even if it does at times squeeze up between our toes.  It will take a while for the flood to recede and the land to dry.  Until then our steps will remain cautious, but we must all continue forward.  That’s life.

Filling in the gaps

Sunday, January 25th, 2009

Last Friday (the 23rd) we saw the major indices open at levels substantially lower than those at which they had closed the prior day. If you kept a chart of the daily open, high, low, and close of these indices, there would be a gap on the chart between Friday’s opening level and the point marked by Thursday’s low. Significantly, the markets then reversed, with all the majors turning positive by the close except for the DJIA which closed down some, but remained above the 8,000 support level. Technically, such a reversal was to be expected since gaps are generally filled by subsequent trading, though not necessarily on the next day. Happening at this last bastion of support, we might consider trading on Friday as evidence of a key inter-day reversal. I know this is grasping at a slender straw, hardly one that seems capable of holding up under the weight of apparent global economic collapse, but it’s the only one I’ve got, so I’ll keep holding on until it either snaps or builds more confirmation. All said, that 8,000 level on the Dow has been amazingly resilient for the last couple of months.

Strange attractors

Friday, January 23rd, 2009

When mathemagicians delving into chaos theory attempt to describe reality in a succinct formula, they often turn to the stock markets as a real-time laboratory for rigorous proof.  After all, the markets are definitely chaotic and, if the math proves applicable, the theorist stands to make a bundle.  So we find the concept of strange attractors has developed, phenomena that seem to impose an order of sorts upon the random.  Technical analysts of the markets often refer to this as “a reversion to the mean.”  They also draw strange lines on charts, bestowing upon them mystic properties like “support” or “resistance.”  Near as I can tell, these are points that perform a function until they stop performing that function.  Whatever.  The DJIA seems to have found one of those supports at approximately 8,000.  Can it hold?  We’ll see.  It will provide support until it doesn’t.

Who is leading; who’s following?

Thursday, January 22nd, 2009

Employers hate to have mass layoffs; they lose some good, experienced people when one occurs.  They also hate to take on the expense of new employees, delaying hiring until the need is overwhelming.  So empl0yment figures tend to be a lagging indicator, often bottoming well after cyclical economic recoveries begin.  On the other hand, housing starts suggest future demands for labor, materials such as lumber and carpet, durable goods like refrigerators, enough anticipated demand from employed, credit-healthy buyers, and so forth.  They are a leading indicator suggesting the economy’s future trend.  Today we hear unemployment claims are at a 27 year high.  Not good, but a lagging indicator.  We learned housing starts are at the lowest ever recording since the data series began compilation back in the 1950s.  Not good; that one is looking forward.  And Microsoft says they can’t even determine at present what they think business will be like by the end of this year, pulling their formal earnings projection.  Wow!  At least they’re being honest.  We don’t know who’s leading this danse macabre yet, so it’s hard to make bold asset allocation decisions.  At least that seems to be the message coming grom the bond markets with Treasuries still hovering around all-time lows.