Credit Market Tightening

From the WSJ:

Banks are tightening lending standards for businesses and consumers -- even beyond real-estate loans -- and companies' demand for credit has weakened, a new Federal Reserve survey of senior bank-loan officers shows.

The January survey offers the hardest evidence yet that the credit crunch is spreading. Although banks also reported some tightening of lending requirements on credit cards and other consumer loans, commercial and industrial loans have been the most severely affected.

One-third of the U.S. banks and about two-thirds of the foreign banks responding told the Fed they had tightened lending standards on commercial and industrial loans during the three months ended Jan. 31. About half the banks said they have widened the spread between their cost of funds and what they are charging borrowers.

"Bankers are becoming more cautious," said Keith Leggett, economist at the American Bankers Association in Washington, "but also borrowers are getting more cautious."

About a third of the banks participating in the survey reported weaker demand for commercial and industrial loans, while about one in 10 reported strong demand. Among those that saw a reduced appetite for loans, "a decrease in customers' needs to finance inventories and investment in plant and equipment" was cited frequently. Additionally, 70% of the respondents cited a drop in businesses' needs for merger-and-acquisition financing as a reason for lower demand.

Remember that banks stand in the middle of the US economy; they take funds from consumers and lend them to borrowers. Or, they provide financing via the financial markets. But either way, the smooth working of the financial sector is imperative to a growing economy. But right now lenders are getting stingier and borrowers are decreasing (Here is a link to the entire Fed report).

Let's look at some of the charts and graphs from the reports to see exactly what is happening. On a technical note -- instead of using Photoshop, these graphs are simply stuck into the blog so you have to click them to get a bigger image.



Above is a chart of how many financial institutions are tightening their standards for consumer loans. While credit card loan standards started to tighten in mid-2007, other forms of consumer loans started to tighten at the beginning of 2007. In other words, it appears that banks probably had an idea their standards were too loose a while ago. However, also notice the number of lenders who are tightening non-credit card loans are higher than in the last recession.



Above is a chart of the number of respondents who are willing to make consumer installment loans. Note the number has decreased to a level below that of the last recession. It is also near the lowest level of the last 15 years -- not a good sign.



Above is a chart of the number of institutions who are tightening standards for commercial loans. Notice this number has spiked very high and is currently at its highest level of the last 15 years. It is currently higher than in the last recession as well.



Above is a chart for the number of respondents who tightened standards for residential mortgages. Notice this number is the highest it has been for the last 13 years.

The bottom line from these charts is really clear: lenders are tightening their standards for a variety of loans. For an economy like the US that is heavily dependent on credit, this is a very ominous development.

I also have to wonder how long it will be before the financial players start to lower standards again. Considering we're still in the middle a a ton of financial writedowns I think it's going to be awhile. And that means the pain could last far longer than we would like.

A Closer Look At the Russell 2000/IWMs

And now for the last big average I'll look at in my post-vacation market wrap-up -- the Russell 2000 or the IWMs.

I use the Russell 2000 as a proxy for risk in the market. The Russell 2000 is made up of "growth" companies -- companies who typically don't pay a dividend and therefore rely on strong earnings growth to increase their share prices. As such, these companies are far more reliant on a strong underlying economy. When traders start to worry about the economic fundamentals, these shares will probably get dumped first.



The above chart is what really caught my attention when I started to think we were moving into a bear market. Notice the index broke a clear three and a half year uptrend at the end of last year. Remember -- the longer the trend, the more important its break.



Here's a closer look at the trend break. Also notice the index tried to rally through the previous support level twice last year only to fall back.



Just like the SPYs and the QQQQs, notice the IWMs have a clear down, up, down, up pattern, additionally making lower lows and lower highs -- a classic bear market formation.



Assuming the market is in the above mentioned pattern, here are the Fibonacci levels for a possible rebound.



The moving average picture isn't pretty. Notice the following:

-- Prices are about 9% below the 200 day SMA

-- The 20, 50 and most importantly, the 200 SMA are all moving lower.

-- While the 10 day SMA has rebounded and is about to cross the 20 day SMA. This could signal a trend reveral.

-- the 20 day SMA appears to be ready to reverse as well.

So we have the following.

-- A clear long-term trend break

-- A bearish down, up down pattern with lower lows and lower highs.

-- A downward sloping 200 day SMA

-- But, a possible trend reversal with the 10 day SMA about to cross the 20 day SMA and the 20 possibly reversing as well.

However, before we start to get excited about a possible reversal, let's look at the underlying economic fundamentals.

-- employment growth is weak

-- the housing market is still a wreck

-- The Fed is panic slashing interest rates

-- The financial sector has written down at least $100 billion in loans.

In other words, the economic backdrop, well, sucks right now. That does not bode well for an area of the market that really relies on economic growth.

Today's Markets

SPY -1.17%
QQQQ -1.40%
IWM -.91%



A general downward drift existed today. The good news in this chart is there wasn't any panic selling. Instead, the markets moved downward a slow pace and downward moves were accompanied by upward movement. However, the market had a clear downward trend for most of the day. Also note the heavy selling on high volume at the end.



Looking at the 6-day chart, today's action looks more like a general sell-off after a strong rally rather than a day when the bears took complete control of the markets.



The QQQQs also had a downward bias, but this one was more pronounced. Instead of a session of solid give and take between bulls and bears, this session looks more like the bears were in more complete control. Also notice the heavy selling at the end of the session on high volume.



However, placing today's action in last week's perspective, we again have a standard sell-off after a solid rally.



The IWMs have the best profile for the day. While there was heavy selling at the opening, the index made a comeback and then had a pattern similar to the SPYs.



And placing today's sell-off in last week's perspective, we have a very mild sell-off after a strong rally.

A Closer Look at the QQQQs

As a way of getting back on track about what's happening in the markets after my vacation, let's take a closer look at the QQQQs



Above is the 5-year chart of the QQQQs in weekly increments. Notice the index has broken two key trend lines -- the upper trend line of the 4 year channel that started at the beginning of 2004 and the trend line that started in mid-2006.



Above is a 1 year daily chart that shows the severity of the trend break.



The above chart shows that in addition to breaking two upward sloping trend lines, the index is clearly in a lower lows and lower highs formation right now. The arrows show the minor up and down trends.



On the six month chart, notice the following:

-- The index is below the 200 day SMA.

-- The 10, 20 and 50 day SMA are all moving lower.

-- The 10, 20 and 50 day SMA have crossed below the 200 day SMA.

-- The shorter SMAs are below the longer SMAs

-- While prices have moved above the 10 day SMA, they have so far met resistance at the 20 day SMA.



Before I left for vacation, I wrote that I was expecting a bear market rally. The Fibonacci levels indicate possible levels where prices might rebound.

So, the short version of all this is the QQQQs are still in a bear market. Prices are below the 200 day SMAs, prices have sold off pretty heavily since their top last year, and shorter SMAs are below the longer SMAs.

It's the (Lack of) Job Growth, Stupid

Here is a graph from the WSJ:



I've blocked off 2007 and added a darker line to the 100,000 level for job creation. Notice the following.

-- There were only 5 times in 2007 that monthly payroll growth exceeded 100,000.

-- One of those times was a "just barely" number

-- Four of those times occurred in the first half of the year.

-- For five months, job growth came in at 50,000 - 100,000.

-- Two times after a big number, the following month's number was really low (as in barely positive). Two other times, the number came in between 50,000 - 100,000.

In short, the last year's employment numbers have been terrible.

Food Cost Increases Leading To Increased Price Controls

From the WSJ:

Last month, China said it would require producers of pork, eggs and other farm goods to seek government permission before raising prices. When producers do seek permission, it is denied, market participants say. Thailand is taking similar steps on instant noodles and cooking oil, while Russia is trying to cap prices on certain types of bread, eggs and milk.

Elsewhere, Mexico is trying to control the price of tortillas, and Venezuela is capping prices on staples including milk and sugar. Malaysia is setting up a National Price Council to monitor food costs and is planning stockpiles of major foods, as well as a 24-hour hot line for consumers to vent about spiraling food costs.

These measures reflect the mounting pressure on developing economies as food costs rise sharply. Food-price inflation is running at an 11% annual rate in major developing countries, up from about 4.5% in 2006, according to Bank of America Corp. The price rises partly reflect increased demand from emerging markets and higher oil prices, which drive up the cost of growing and transporting food.

In Singapore, inflation accelerated to a 25-year high in December, partly because of food. In Mexico, Malaysia, Pakistan and Indonesia, food-price increases or shortages have triggered protests. Late last year, three Chinese shoppers were trampled to death in a supermarket scuffle over cooking oil. In poor Caribbean nations like Haiti, the situation is especially dire.

There is good and bad news to increased prosperity. The good news is everybody is making more money, which increases the standard of living. The bad news is increased standard's of living increases overall demand for food. Making that situation more difficult is the US' use of ethanol, which has really complicated the corn market -- and not for the better.

I have reprinted the following chart many times over the last year or so, and will continue to do so.



This is a chart of agricultural prices as represented by the Goldman Sachs commodity index. It shows a 133% increase over the last 3 years. In addition, the chart is a clear bull market chart with higher highs and higher lows.

A look at the various components of this chart shows the exact same pattern:



Wheat had a huge price spike last year, nearly doubling in price. While the 950 area is offering strong resistance right now, a move through that area would indicate a continuation of the market's bull run.



Soy has been in a bull run since late 2006, with a clear pattern of higher highs and higher lows.



Corn is showing an strong rally as well, with prices doubling in the period of about a year and a half.

At some point, these price increases have to bleed into prices at the retail level. While governments are attempting to thwart the pain at the retail level, price controls will eventually push producers out of the market as their profits go away -- or encourage them to produce inefficiently, which is the last thing they need right now. The only way to deal with this problem is to increase supply in a big way.

I'm Baaaaaaaaaccccckkkkk -- Or, Last Week In Review

Well -- I'm back. Bonddad and the future Mr$. Bonddad went on a cruise last week and had a ball. We swam with dolphins, went sea kayaking in the Cayman Islands and saw the ruins at Tulum. I didn't read any financial news for a week -- and that was great. I finally broke down and read my email on Saturday. I had 625 messages and 4 were important. That's about the same ratio as I get in my mailbox.

So -- where are the markets after a week?

Let's start with the long term view and work our way towards the short-term view.



This is the chart that led me to state we're now in a bear market. The SPYs have broken through two key long-term support levels. Remember -- the longer the support or trend, the more important the break of the trend. While the markets rallied last week I will show below that this is a bear market rally.



This is a one year chart of the SPYs. Notice the clear break-through of the long-term trend lines. Also note:

-- Prices bounced off the upper trend line four times before falling through. That means the trend line was very important to the market and provided key technical support for the last year.

-- The index is 6% below the 200 day moving average.

-- The 10, 20 and 50 day SMAs are all headed lower.

-- Prices are above the 10 and 20 day SMAs which is a short term positive.



Above is a six month chart of the SPYs. Notice the index is clearly in a down, up, down up pattern. Also notice the market is making lower lows and lower highs, another sign of a bear market.



Now we're into last weeks action. I have been arguing that the market would rebound from its recent lows, largely based on the the Fed's actions. Over the last two weeks, we've seen the Fed lower rates by 125 basis points. That's a huge slashing of rates, and it has led the bulls to argue the Fed's actions would prevent a recession. This is the primary reason we saw the markets rally last week. However, notice we're still within the Fibonacci retracement ranges, indicating we're still well within the possibility of a retracement rally.

In addition, ask yourself a basic question: what makes the stock market go up? Earnings! When to earnings increase? When the economy is growing! Is the economy growing now? Not on your life!

I'll be looking at the other averages as the day progresses.