Today's Markets

There was a lot of back and forth in the market today until about 2:30. The markets opened with a move higher, but then fell back starting about 10:00. Prices moved back to the opening level and them moved higher. However, about 1:30 prices retreated again. Note they didn't get quite up to the 10:00 AM level. Then they retreated again. I've drawn what could be the bottom line of a triangle formation -- it sure looks like it wants to be a triangle, doesn't it? Prices gapped lower with about 20-25 minutes left in the day and prices closed near lows for the day.



On the 4 day chart (the chart of the week's action so far), notice that prices have been rising since the opening on Tuesday. But today they broke trend and are now consolidating in a sideways move.



On the PAF chart, notice the triangle that is forming after the long downward move. Basically, the market is waiting for the next news item to move it one direction or the other.

GDP Disappoints

From CNBC:

The Commerce Department reported Thursday that gross domestic product, or GDP, increased at an annual rate of 1.9 percent in the April-to-June period. That marked an improvement over the feeble 0.9 percent growth logged in the first quarter of this year and an outright contraction in the economy during the final quarter of last year.

Remember this number is heavily influenced by the rebate checks that went out in the second quarter. Here's how the BEA noted the big changes:

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in imports, an acceleration in exports, a smaller decrease in residential fixed investment, and an acceleration in PCE that were partly offset by a larger decrease in inventory investment.

So, we're importing less (which probably means the price of oil really started to hit) and exporting more (thanks to the cheap dollar). Exports have been and will continue to be one of the bright spots of the economy as we go forward. They are the one saving grace from the dollar's long drop.

I'm particularly interested in personal consumption expenditures because these would be the biggest beneficiary of the stimulus checks that went out. These increased 1% in 4Q07 and .9% in 1Q08. They increased 1.5% in 2Q08. In other words, we saw a bump up from the checks.

PCEs contributed 1.08 to the 1.9% increase. However, this number was .67 in the 4Q07 and .61 in 1Q08. So using the highest of the preceding two quarters numbers as a proxy for the non-stimulus contribution rate we would we a 1.49% rate of growth for the overall economy, all other things being equal in the current report.

Also note the BEA made downward revisions to the 2005, 2006 and 2007's total GDP. That tells me there may be further downward revisions coming, does a very important revision within the numbers:

Annual benchmark revisions showed consumer spending slowed more than previously estimated and the housing slump worsened. The economy shrank 0.2 percent in the fourth quarter last year, compared with a previously reported 0.6 percent gain.

In other words, the beginning of the recession was probably sometime within that time.

12 Major currency pairs

Well to be honest there is no such thing as 12 major currency pairs, there are actually about 7 (depends on how you count) major currencies, and well ... many major currency pairs.

So what's with your title, you maybe wondering? Let me justify myself, like i said there is no such thing as 12 major currency pairs, this is my list of currency pairs i like to trade, all my currency pairs are made from major currencies thus the name "12 Major currency pairs", however i do not advice you to use this name in group of professional forex traders, in best case they will get confused ... i do not want to tell what can happen in the worst case here :).

I will give you the list shortly but let me first explain why i choosed this currency pairs. There are few reasons, there are quite big moves on them in short periods of time, small spread, and i find it easy to apply technical analysis to those currency pairs.

Ok here it is:

• EUR/USD - well obvius, there is not a single trader who does not trade this currency pair
• GBP/USD - pretty similar pair to EUR/USD however it is quicker, and the moves are about 50% bigger, 150 PIPs daily is not uncommon for this pair.
• USD/JPY - quite predictible lately, notice that most of the time USD/JPY is bullish it moves slowly up, when there is a correction on this pair, it moves few hundreds pips down in just few days.
• EUR/JPY - pretty much the same as USD/JPY but moves are less predictible
• AUD/USD - good alternative where you have no idea where EUR/USD will go, however moves on this pair are smaller then on EUR/USD
• USD/CAD - pretty predictible, mainly because CAD is highly correlated with oil price, and you know what oil price chart looks like right?
• USD/CHF - very strong correlation between this pair and EUR/USD
• EUR/CHF - the same as USD/JPY slowly moves up and then quickly falls down
• EUR/CAD - high spread, well i do not know i just like to trade, i always find it easy to predict where will it move and how much
• EUR/GBP - very slow currency pair, however sometimes spread can be low on it
• EUR/AUD - this is very personal pick, i like to trade, but spread is very high so i only use it for long term trades
• NZD/USD - yes NZD is not really a major currency, but i like to trade this pair because it has low spread, easy to predict and has weak correlation to any other pair on this list

Well that is all, if you have your own private currency pairs list feel free to share it here in comments section, also i will be happy to answer any of your questions.

The Detroit Death March

I have a pet theory that before all of this is over we're going to see the following: at least one Detroit bankruptcy, at least one airline bankruptcy and several large banks go into bankruptcy. My feelings about this are based on the complete stupidity of Detroit executives. Oil started to move up in mid-2004 after establishing a long, multi-year base.



This alone should have raised some eyebrows and sounded the alarms. But this wasn't all. At the same time, the US was invading Iraq adding to middle eastern turmoil, China and India were growing at strong clips (Russia wasn't that far behind) and there was talk everywhere of the global commodities boom. By this time Toyota had introduced the Prius which has now sold over 1 million cars indicating there is a strong demand for energy efficient vehicles. Yet Detroit continued giving us the Hummer and various other forms of inefficient vehicles. Bottom line, Detroit is full of idiots who deserve to fail. And fail one of them will.
Consider this news about Chrysler over the last few days:

From Reuters:

Fitch Ratings downgraded Chrysler LLC's debt further into the junk category and warned that the struggling U.S. automaker could face difficulties in financing unless U.S. auto sales recovered in 2009.

Chrysler, which lost $1.6 billion in 2007, could struggle to finance operations in the second half of 2009 if industry volumes remained at this year's depressed levels or dropped further, according to a Fitch report released on Tuesday.

Fitch, which cut Chrysler's ratings from B- to CCC, just two notches above default, said the decision last week by Chrysler's finance arm Chrysler Financial to stop financing vehicle leases for U.S. consumers would depress already sluggish sales.

It rated Chrysler's outlook as negative, indicating a further rating cut is likely in the next six months.

Considering how easy it is to buy good credit ratings from the ratings agencies (CDO, anyone?), the fact that Fitch has downgraded debt to these levels should tell you how bad things have gotten.

From the WSJ:

Chrysler LLC is scrambling to slash costs and line up partnerships with foreign auto makers to shore up its finances amid a painful downturn in sales and a deteriorating outlook for the company, people familiar with the matter said.

In other words, Chrysler's debt is near worthless and they're scrambling to cut costs. But they're not alone.

Consider GM. They've lost money three years in a row. More importantly, their book value (total assets - total liabilities) has been negative for the last two years. Their sales record is inconsistent (at best), and their cash flow is weak. In short, this is a terribly run company. And the stock chart shows it:



That's a chart that inspires confidence, isn't it?

Ford isn't much better. Their book value has been moving around 0 for the last three years. Their sales record is inconsistent. About the only good thing about this company is they have had a positive cash flow for the last three years. But their chart is terrible as well:



So -- why is all of this important? Because as these companies continue to flounder, I'm expecting either GM or Ford or both to hit Congress up for money. Ford has 229,000 full-time employees and GM has 266,000 full time employees. I don't have a break down of their geographic location. Let's assume at least half of them are somewhere in the US. That means 247,500 are US based. There will also be a great call for the need to help an American icon out. Plus -- Congress did it before with Chrysler and it worked out just fine. Finally, the Federal Reserve back-stopped the Bear Stearns deal, so why not the car industry?

Thursday Oil Market Round-Up

On the weekly chart, we can clearly see the bull market run that started in early 2007. Prices continued to move higher, breaking through resistance levels and then consolidating gains. There are two legs to this rally. The first occurred throughout 2007. This one ended with a sideways rectangle consolidation pattern that lasted about three months. The second move came during 2008. But that move is over. Notice that prices have broken through the trend line that supported the 2008 rally. Prices now stand at the 20 week SMA.



On the daily chart, notice the following:

-- Prices have broken the support line

-- The 10 and 20 day SMA are moving lower

-- The 10 day SMA has moved through the 50 day SMA, and the 20 day SMA is about to

-- The 50 day SMA is leveling off

-- Prices are below all the SMAs

This chart is now short-term bearish and longer term neutral.

Today's Markets

The markets opened higher, then moved sideways to the 10 minute SMA. They rallied agian, but then started a very slow and gradual descent that led to the formation of a double bottom. The first bottom occurred around noon and the second one occurred around 1. Then prices spiked higher on a strong volume surge, moving through all the SMAs. Prices then traded sideways until a bit after 2 when they again spiked higher on a volume surge.



On the daily chart, notice the following:

-- The 10 day SMA has moved through the 20 day SMA

-- The 10 day SMA is moving higher

-- Prices are above the 10 day SMA

This means the short term trend is positive

However

-- Prices are below the 200 day SMA

-- the 20, 50 and 200 day SMA are all moving lower

-- With the exception of the 10 day SMA, all the SMAs are moving lower.

The long-term trend is negative.

The Credit Crisis is Far From Over

From Bloomberg:

The Federal Reserve extended its emergency lending programs to Wall Street firms through January after policy makers judged that markets are still ``fragile.''

The Fed also plans to give securities dealers options for tapping one of the loan programs to ensure financing through the ends of quarters, when funding needs can jump. Commercial lenders will be able to borrow from the central bank for a longer period, and the Fed boosted its swap line with the European Central Bank.

Today's action reflects continued financial turmoil, with premiums banks charge each other for three-month funds over the Fed's expected benchmark rate little changed since May. It's the latest step in officials' efforts to combat the yearlong credit crisis, after the Fed's March rescue of Bear Stearns Cos. and the Treasury's backstop for Fannie Mae and Freddie Mac this month.

``The U.S. is pulling out all the stops here to make sure we don't have a terrible downturn or a collapse in the financial system,'' said Allen Sinai, chief global economist at Decision Economics in Boston. ``There isn't anything else the Federal Reserve can do but to keep pumping liquidity into the system.''

The Primary Dealer Credit Facility for direct loans to securities firms and the Term Securities Lending Facility for loans of Treasuries, both begun in March, will now extend through Jan. 30. They would then be canceled if the Fed judges that markets ``are no longer unusual and exigent,'' the Fed said in a statement today in Washington.

And yet, we still have people calling for a bottom in financial shares. Folks -- this ain't over by a long shot.

Think About This....

I've seen this blurb on Bllomberg several times.

We've seen about $450 billion of writedowns in the financial sector.

About 85%-90% have come from the US and Europe.

Either:

1.) Asian banks were really smart and avoided this altogether, or

2.) We've got some problems to look forward to.

Wednesday Commodities Round-Up; Agricultural

The last few times I have posted this chart, I have speculated it was forming a double top. While this is still looking like a strong possibility, there is also the possibility that prices are consolidating in a rectangular/triangle top. We won't know until we see prices break up or down. However, the good news from an inflation perspective is that prices have at least stopped their upward move and are consolidating.



On the daily chart notice the following:

-- Prices are below all the moving averages

-- The 10 day SMA has crossed below the 50 day SMA

-- The 20 day SMA is about to cross over the 50 day SMA

-- The 10 and 20 day SMA are both heading lower.

The SMA picture is bearish, but for this chart to turn completely bearish, we need to see a strong break below the low point between the double tops -- roughly 400 or so.

Wednesday Commodities Round-Up; CRB

On the weekly chart, notice the CRB has been in a rally since the end of last summer. Prices have continually moved higher, broken through key resistance areas and then consolidated gains after moving higher. However, prices dropped hard starting in July of this year. This is thanks to a variety of commodities dropping.



On the daily chart, notice the following:

-- Prices have dropped through the support line that started at the beginning of April

-- Prices are below all the SMAs

-- The 10 day SMA has moved below the 50 day SMA

-- The 20 day SMA is about to move below the 50 day SMA

-- The 50 day SMA is turning negative

-- Over the last 5 days, prices have leveled off

This chart is turning (or is) bearish now.

Today's Markets

The markets gapped up at the opening and then dropped a touch until they hit the 10 minute SMA. Then they shot higher from 124 to 128.80. Prices traded sideways until they hit the 50 minute moving average a little before 11 AM and then shot higher again. Prices consolidated until noon when prices once again hit the 50 day SMA and shot higher. From 1 to about 2 prices moved lower until they hit the 200 day SMA and then prices moved higher again, closing near the high of the day on strong volume.

This was an incredibly strong day, completely wiping out the losses from yesterday. And just think -- all this happened on the day Merrill Lynch announced a fire sale of assets....

Treasury Tuesdays

Sorry for taking so long to get to this. There were some other stories that I thought were a bit more important.



On the 6 month chart, we see the ned of the year long rally that ended at the end of March. Money flowed into treasuries because they are attractive during economically difficult times. However, when the Fed back-stopped the Bear Stearns deal, it signaled the Fed would take a far more aggressive role in preventing a financial meltdown. So money flowed back into the stock market and out of treasuries. Hence the price drop from the end of March to mid-June.



The three month charts shows the latest action, which has come conflicting signals.

-- Prices rallied from mid-June to mid-July, but they have backed off since then.

-- Prices are below the 200 day SMA, but not by much

-- Prices and the other SMAs are bunched together big time, indicating a complete lack of direction from the bulls and the bears.

The Housing Crisis is Far From Over

The Mess That Greenspan Made had some interesting charts up last week that got me thinking. First, here are the charts:











On both of these charts, note that the pace of sales as stabilized. In the case of new homes for a few months and in the case of existing homes for about 10 months. So, do these charts mean the housing market is starting to stabilize? Not yet:



This graph is from Calculated Risk:







So long as prices are in free fall (or cliff diving) we're nowhere near out of the woods.

The Credit Crisis is Far From Over

From Bloomberg:

Merrill Lynch & Co., the third- biggest U.S. securities firm, will sell $8.5 billion of stock and liquidate $30.6 billion of bonds at a fifth of their face value to shore up credit ratings imperiled by mortgage losses.

Note the phrase: Merrill is selling their bonds for a fifth (that's 20%) of their face value. Can you say fire sale? Or -- and here's the really scary part -- is that what things bonds are actually worth on the open market? Is this the best deal that Merrill can get for them?

Those figures alone should tell you there are some serious problems out there -- as ini systemic issues that will not be easily resolved.

Let's add one more Tums inducing statement. There was a blurb on Bloomberg a few days back that showed where these writedowns were coming from. About 90% are from the US and Europe, with about 10% (roughly) coming from Asia. Think about that for a minute.

Finally, go to the Big Picture right now and read this story and this story. Barry lays it out as only he can.

Treasury Tuesdays

I'll hit the charts later today. For now, consider the following:



From the WSJ:

Projections suggest the federal budget deficit could exceed $500 billion next year, complicating the debate between Barack Obama and John McCain over how to strengthen the economy while not worsening the nation's finances.



Deficit projections are ballooning because of lower tax receipts and government spending on economic-stimulus programs. The gap increasingly is threatening to play havoc with the two presidential candidates' domestic-policy plans, particularly Sen. McCain's big tax cuts and Sen. Obama's promised health-care expansion, and could force major changes in the winner's agenda.



On Monday, Sen. McCain, the Republican candidate, sought to turn the new deficit numbers to his short-term political advantage, without conceding much to those longer-term realities. Democratic rival Sen. Obama sought to keep the focus on the current shaky economy, economic inequalities and worries over job and retirement security.



The sparring came as the White House budget office boosted its estimate of the federal deficit for fiscal 2009 to $482 billion. With the full costs of the wars in Iraq and Afghanistan added in, the deficit for 2009 likely would exceed $500 billion, analysts said. The deficit projection for 2008 fell somewhat from the last official estimate in February, to $389 billion from $410 billion. Fiscal 2008 ends Sept. 30.

Expect to hear more of these stories come out as the economy worsens.



I wrote an article a few weeks back called My Conversation With the Next President. In the article I highlighted the basic problem the next president faces. Here is the short version. The Bush administration has mis-managed the federal budget situation to an alarming degree. Although they inherited a budget surplus, they have continually spent more then they have taken in. As a result, the US is issuing debt like its going out of style. Total debt outstanding has increased from $5.8 trillion in 2001 to the current total of $9.5 trillion.



As a result of this problem, the currency markets have sent the dollar lower for six years straight.







If you were wondering why commodities in general and oil specifically have bee rallying for some time, you can thank the cheap dollar as a primary cause. While a stronger dollar alone would not solve the problem of expensive oil, it would definitely help. Consider the dollar chart above. Note it has gone from peak to trough from 130 to its current level of $72.75 -- or a drop of 44%. Also note that most world commodities (like oil) are priced in dollars. As the dollar has dropped in price, so have these commodities. One of the primary reason traders are bidding them up is as an inflation hedge. While that appears to have waned for now, the damage has already been done in the form of higher prices being passed on to the consumer.



And that's not all. The US has been issuing a ton of debt every year during the good economic years. This means that going into the bad years we have a ton of more debt on our books and a culture of not making the tough political decisions (like, for example, raising taxes on the upper-income levels to help pay for a war). As a result, the US is entering a period of economic hardship with both hands tied behind its back.



Theoretically, a government should help to mitigate the effects of a recession with increased spending on programs like unemployment insurance extensions, job retraining, tax credits to start new economic sectors and the like. This goes a whole lot better if the government managed the budget well during the times of growth. However, the US has not done that. Instead, we have loaded up the federal government with a large amount of debt which has helped to devalue our currency which is increasing inflation. Issuing more debt will add further downward pressure on the dollar adding to the current inflationary pressures. In short, doing what the government should do during this time is exactly what the government has been doing for some time and it has led to problems.



It's not a pretty picture, is it?

Day Trading Forex Currency

Right, day trading today. People are very interested in the concept of day trading. And i think there are at least few reasons for this. Before i will go into details, let's define day trading, what it really is.

On Forex day traders are guys who make a lot of trades (like over 10) in a single. Each of the trade is closed by the end of trader trading session, on Forex it usually means turning your computer off. Note that this is not the same as scalping. The only similarity between scalping and day trading is that, a lot of traders fail there.

Main resaon for this is that traders are tempted with huge profits, when doing day trading people are almost always using huge lavereages, like 100:1, it means buying 10 Lots with 10 000$. I think you can easily see how much one PIP is worth then, yeah it is 100$. It seems great at first, looks like a quick cash, but consider the fact that you only need 100 PIP move in the wrong direction to meet mr. Margin Call.

In reality when you trade on such high leverage it looks like everything is happening with a speed of light, while in fact it all happens with a normal speed, it is this ridiculous leverage that makes things harder.

Next thing you need to consider when you want to do day trading on forex currencies, is that not every broker will be happy with what you are doing, they may close your account or limi your leverage if ... you will start making money. So chose your broker wiseley checkout Forex forums and read brokers reviews make sure they allow day trading.

You may now think, wow day trading is hard. Well in fact it really is harder then you think. I am not saying it cannot be done, i am not saying you cannot earn like 200% a month. I am just saying that success with day trading want happen overnight, if you focus on it and commit to becoming day trading the success will come with time and experience.

Today's Markets

The markets opened with a quick upswing but couldn't maintain momentum. Prices started to drift lower after 9 AM, slowing falling below all the SMAs. Around 10 AM prices took their first big downward tumble, moving from 125.40 to 125. Then prices moved sideways until they hit the 20 minute SMA a bit after 11 AM, again moving lower. They hit 124.40 about noon and moved sideways with a slight downward bias until about 25 minutes before closing. Then they dropped hard in increasing volume until the close.

Notice the market continued to move lower, breaking through key support levels until they hit the low point near the close. Today was entirely bearish, plain and simple.

It's looking as though the bloom may be off last week's rally.

Natural Gas Dropping

IBD highlighted the above chart on their front page today. It's very interesting. Notice the following:

-- Prices were in a confirmed and strong uptrend from the beginning of 2008 to early July. Prices kept moving higher, breaking through resistance and consolidating gains. For two periods of time, the SMAs were aligned in the most bullish way imaginable: shorter SMAs above longer SMAs, prices above all the SMAs and prices using the 20 day SMAs as technical support.

-- Prices dropped hard after the first week of July. By mid-July prices were below the 50 day SMA (and all other short-term SMAs). Prices have dropped about 30% since early July. This is in line with the drop we've seen in the oil market.

From an inflationary perspective, this is incredibly good news. Energy inflation has been a driving force of rising prices over the last year or so, so any relief is welcome.

Earnings Lackluster

From IBD:

Halfway through earnings season, banks are still a drag, tech firms are doing OK while the overall outlook remains cloudy.

With 249 of the S&P 500 companies reporting results, second-quarter profits are on track to decline 17.9% vs. a year earlier, according to Thomson Reuters.

"I'd rate (earnings so far) as pretty bad," said Sam Stovall, chief investment strategist at S&P Equity Research. S&P forecast a 10% drop at the start of the quarter but now sees about a 20% shortfall, he said.

Financial firms' profits are forecast to dive 85%. The consumer discretionary sector, including automakers and home builders, also is a big loser.

But excluding banks, S&P 500 earnings should rise a respectable 7.7%, Thomson Reuters said.

IBD makes a solid point -- that earnings are bad and then (again) tries to spin furiously. They mention that without financial firms things would be better.

1.) We already knew that. Thanks.

2.) Let's just not report any bad news -- or take out those parts of the statistical analysis that in some way skew numbers negatively. Then everything will be OK! This is garbage, plain and simple. If you don't like a number, too bad. In order to properly analyze the numbers we must look at all the numbers dispassionately and (hopefully) without bias. This is right out of the Business and Media Institutes's method of reporting business news -- ignore bad news; only report good news.

3.) If we were talking about a really tiny sector to the economy then ignoring the earnings reports would be prudent. But this is not a small sector to the economy. In fact, it's one of the most important areas of the economy because it provides the lubrication (in the form of money and credit) for the rest of the economy. Therefore their earnings are incredibly important and must be taken very seriously.

Market Monday's

Let's take a look at the charts to see where we are.



For all the craziness from last week, we would up pretty much where we started. The markets were in a downward sloping channel on Monday and rebounded on Tuesday with a strong rally at the end of the day. The rally continued on Wednesday as the market consolidated in a triangle pattern, but prices fell hard on Thursday. Finally on Friday we see a triangle consolidation at the bottom. Sure seems like an awful lot of energy to get nowhere, doesn't it?



On the daily chart, notice the following

-- Prices have clearly bounced off the bottom. The question now is do they have the momentum to continued upward?

-- The 10 day SMA is about to cross over the 20 day SMA

-- The 20, 50, and 200 day SMA are still heading lower

-- Prices are using the 10 day SMA as technical support.

I would say the short-term trend is bullish so long as prices stay above the 10 day SMA. If prices fall below that level then we move into neutral/bearish territory.

Weekend Weimar and Beagle

It's that time of the week. Stop thinking about the market or the economy for awhile. Go to something -- anything else. I'll be back on Monday.

Here's Scoobey enjoying a view



And Sarge enjoying the wood floor



And Kate in a new "Weimar Spot"

Forex Fridays -- the Euro

Finally -- we have the euro.



On the P&F chart, notice the following.

-- The euro has been rallying for the last 7 years. That's one hell of a rally.

-- The chart may be forming a double top.



On the weekly chart, notice the strength of the multi-year rally. Prices have continually moved higher, going through levels of resistance and then consolidating gains. Also note that prices are consolidating or topping right now.



On the daily chart, notice that prices have had a hard time getting about the 160 level, which is providing a fair amount of upside resistance.

Forex Fridays -- the Yen

Let's continue with a look at the yen:



From mid-2007 until a little bit ago, the yen was in the middle of a strong rally. It continually moved through resistance and consolidated gains in a downward sloping pennant formation. Prices used the 20 week SMA as support until prices moved through this support level in March of this year. Now prices are moving sideways consolidating gains.



The daily chart shows the the latest downward sloping pennant formation in better detail. Prices peaked in mid-March and moved down until mid-June. Now they are in a slight upward sloping move, but it is a very slight movement; it can just as easily be characterized as a sideways move.

We're Nowhere Near A Bottom in Housing

From CNN:

Sales of existing homes in June slowed more than expected and hit their lowest level in 10 years, according to an industry trade group report released on Thursday.

The National Association of Realtors reported that sales by homeowners dipped in June to an annual pace of 4.86 million, down 2.6% from a pace of 4.99 million in May.

That's the lowest rate on record since the first quarter of 1998, when existing home sales fell to an annual pace of 4.83 million, according to Walter Molony, spokesman for NAR.

The existing home sales rate - including single-family, town homes, condominiums and co-ops - is down 15.5% from the 5.75 million units sold in June 2007.

.....

But with inventory still on the rise, home prices are falling further. The number of homes available for sale at the end of June rose 0.2% to 4.49 million, which represented an 11.1-month supply of inventory at the current sales pace, up from a 10.8-month supply in May.

Meanwhile, the median price of a home sold in June fell to $215,100, down 6.1% from $229,000 a year earlier.

So -- prices are dropping, sales are dropping and inventory is rising. This is not a good combination.

And adding to that inventory is the rising tide of foreclosures:

foreclosure filings more than doubled in the second quarter from a year earlier as falling home prices left borrowers owing more on mortgages than their properties were worth.

One in every 171 households was foreclosed on, received a default notice or was warned of a pending auction. That was an increase of 121 percent from a year earlier and 14 percent from the first quarter, RealtyTrac Inc. said today in a statement. Almost 740,000 properties were in some stage of foreclosure, the most since the Irvine, California-based data company began reporting in January 2005.

``Rising foreclosures are putting downward pressure on prices, increasing the possibility that homeowners will go upside- down on their mortgages,'' said Sheryl King, chief U.S. economist at Merrill Lynch & Co. in New York. ``That will cause more losses in mortgage portfolios and less willingness from investors to securitize mortgages and therefore fewer mortgages.''

About 25 million U.S. homeowners risk owing more than the value of the their homes, according to Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co. That would make it impossible for them to negotiate better loan terms or sell their property without contributing cash to the transaction.

As if that wasn't enough, home vacancy rates are near records:

The percentage of vacant homes available for sale in the U.S. continues to hover at record levels.

Census Bureau figures show 2.8 percent of homes, excluding rental properties, were empty and on the market from April through June. The vacancy rate hit a record high of 2.9 percent in the first quarter of 2008. It was 2.6 percent a year ago.

However, there was some good news on today's new home sales report:

Sales of new homes in the U.S. dropped less than forecast last month as builders offered incentives to reduce a glut of unsold properties.

Purchases decreased 0.6 percent to a 530,000 pace from 533,000 in May, a reading higher than previously estimated, the Commerce Department said today in Washington. A separate report showed orders for durable goods unexpectedly rose in June.

The number of properties on the market dropped by the most in four decades, today's report showed, indicating builders are making some headway in clearing out inventories.

``We may have not touched bottom yet in the housing market, but we're clearly not in any freefall,'' Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania, said before the report.

At least the inventory of new homes is dropping. But the existing home market is much bigger and is therefore more important than the new home sales market. And the problems there the same as we've had for some time: high existing inventory which is increased by rising foreclosures and the high vacancy rates. These combinations are just not good and don't bode well for the future.

Forex Fridays -- the Dollar

Let's start with a P&F chart to see where the price levels are:



Notice the dollar has been in a clear downtrend for the last 6 years. That is a very long-lasting bear market.



On the weekly chart, notice the following:

-- Prices dropped for all of 2007. However,

-- We've seen prices stabilize around the 71-74 level. They have been at these levels for the last four months which is enough time to speculate about a bottom forming. This is a very important development. Why might prices be stabilizing? Here are a few thoughts.

1.) Bear markets only last so long. This one has lasted for the last 6 years. Think of this as the theory of inevitability.

2.) There has been a fair amount of talk about inflation from various Treasury and Federal Reserve officials. Now -- the US has had a "strong dollar" policy for the last 7 years so these statements have to be taken with a grain of salt (or an entire shaker).

3.) The markets might be thinking that given current economic facts and variables this is an appropriate price level for the dollar. After all, it has fallen quite a bit over the last 7 years.

These are all just theories.



On the daily chart, notice the following:

-- There is an overall price range from 71.25 to 74 over the last few months.

-- Prices were in a slightly upwardly sloping channel from the end of April to the end of June, but they have since pulled back.

-- The SMAs aren't giving a firm reading in either direction right now. They are all heading lower but they recently they were all heading higher.

The markets opened near their close but then quickly moved lower. They gapped dwon a little before 9 AM and then gapped down again right after 9 AM. Then they moved sideways omving into the 10 minute SMA before again dropping a bit after 10 AM. By this time they had moved through the 200 minute SMA. The markets continued to move sideways with a slight downward bias until a little after 1 PM when they moved down again. They tried to rally again but ran into resistance at the 20 minutes SMA before moving down toward the close.



On the seven day chart, notice that prices have moved below the trend line started on Tuesday of last week. This is the rally that resulted from the financials getting better (or some such nonsense). Prices are now at levels from the end of last week/beginning of this week when prices are consolidating their weekly gains.

Beige Book Summary

Yesterday the Federal Reserve released the latest Beige Book. Below are excerpts from the report along with relevant charts to further explain some of the points. All charts are from Econoday unless otherwise noted.

Here is the overall summary:

Reports from the twelve Federal Reserve Districts suggest that the pace of economic activity slowed somewhat since the last report. Five eastern Districts noted a weakening or softening in their overall economies, while Chicago characterized its economy as sluggish and Kansas City noted a moderation in growth. St. Louis said activity was stable and San Francisco reported little or no growth. Cleveland and Minneapolis reported slight increases in economic activity, while Dallas described growth as steady and moderate.

Consumer spending was reported as sluggish or slowing in nearly all Districts, although tax rebate checks boosted sales for some items. Tourist activity was mixed, with residents in several Districts choosing to vacation closer to home due to high gasoline prices. The demand for services was also mixed across Districts, with strength in the IT and health care industries offsetting some weakness in other service sectors. Manufacturing activity declined in many Districts, although demand for exports remained generally high. Residential real estate markets declined or were still weak across most of the country. Commercial real estate activity also slowed or remained sluggish in a majority of Districts, although a few Districts noted slight improvement. In banking, loan growth was generally reported to be restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending. Districts reporting on agricultural activity said conditions were mixed, based largely on how June precipitation affected them. Districts reporting on the energy sector said it continued to strengthen.

All reporting Districts characterized overall price pressures as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food, and chemicals. Retail price inflation varied across the country, with some Districts reporting increases but others noting some stability, at least for the present. Wage pressures were generally limited in most Districts, as labor market demand was soft except for highly skilled workers and in the energy sector.

Let's take this piece by piece:

Consumer spending was reported as sluggish or slowing in nearly all Districts, although tax rebate checks boosted sales for some items

Retail sales were dropping on a year over year level since October of last year. However, they did experience a slight increase last month. My guess is the stimulus checks were part of the reason for that.



Personal consumption expenditures have been rising on a year over year basis since the beginning of the year. This figure includes retail sales but also has other expenditures such as services etc... included. The length of this increase is too long to be a statistical aberration. I have no explanation for it.

The demand for services was also mixed across Districts, with strength in the IT and health care industries offsetting some weakness in other service sectors

The ISM services index has been dropping for several years, indicating the overall trend is down. Also note a reading of 50 and below is considered a sign of contraction. The index has printed a reading below 50 in 4 of the last 6 months.

Manufacturing activity declined in many Districts, although demand for exports remained generally high.

Industrial production has been declining on a year over year basis since the end of last year.



As has capacity utilization -- the percentage of manufacturing resources in use.



The Philly Fed has printed some terrible numbers since the end of last year,



As has the empire state survey



The ISM manufacturing survey has increased over the last two months, but has printed a number below 50 5 of the last months indicating a contraction. My guess is the increase over the last few months indicates an increase in export orders caused by the low dollar.

Residential real estate markets declined or were still weak across most of the country

Prices are still falling off a cliff:

Home prices across 20 major U.S. cities have dropped a record 15.3% in the past year and are now back to where they were in the summer of 2004, according to the Case-Shiller home price index released Tuesday by Standard & Poor's.

Prices in the 20 cities are now down 17.8% from the peak two years ago.

Prices were lower in April than they were a year earlier in all 20 of the major metropolitan areas as tracked by the Case-Shiller index.

And today's existing home sales report hows further weakness:

Sales of existing single-family homes declined 3.2 percent to an annual rate of 4.27 million pace. Purchases of condos and coops increased 1.7 percent to a 590,000 pace.

The median sales price fell to $215,100 from $229,000 in June 2007. The median cost of a single-family home decreased 6.7 percent to $213,800, while that of condominiums and co-ops fell 2.2 percent to $224,200.

Purchases decreased in three of four regions, led by a 6.6 percent decline in the Northeast. Sales rose 1 percent in the West, which also showed a 17 percent drop in the median price, the biggest of any region.

The number of previously owned unsold homes on the market at the end of June rose to 4.49 million from 4.482 million in May. The total represented 11.1 months' supply at the current sales pace. The agents' group has said that a five-to-six month's supply reflects a balanced market.

The reason for this drop in sales is the tightening credit conditions mentioned above.

Sky high inventory levels + tightening credit = dropping prices.

I'm going to add two points.

Job growth is terrible:



and unemployment is rising:



And then there are prices:



Import prices are increasing on a year over year basis, as are



Producer Prices.



Consumer prices are at high levels on a year over year basis.

Now, recently there have been some drops in both the prices of agricultural goods and oil. If there continue we may see a decrease in inflationary pressures. But we're not there yet.

Let's review.

Consumers are slowing their shopping

The service sector is contracting.

The manufacturing sector is contracting.

Housing is still deteriorating.

Job growth is deteriorating, and

Prices are increasing.