Today's Economic News ..... Stinks

First, home prices are still dropping:

Home prices in 20 U.S. metropolitan areas fell in April by the most on record, signaling the housing recession is far from over, a private survey showed today.

The S&P/Case-Shiller home-price index dropped 15.3 percent from a year earlier, less than forecast, after a 14.3 percent decline in March. The gauge has fallen every month since January 2007. The group began keeping year-over-year records in 2001.

Mortgage defaults and foreclosures are adding to the glut of properties on the market, while stricter loan rules are making it more difficult for prospective buyers to get financing. The prolonged real-estate slump, along with higher fuel prices and a shrinking job market, is taking a toll on consumers and the economy.

``There's such an excess of inventories that we certainly expect to see more price declines,'' said James O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut. ``The economy is still weakening and housing still looks pretty weak.''

.....

All of the 20 cities in the index showed a year-over-year decrease in prices for April, led by a 27 percent drop in both Las Vegas and Miami. Charlotte, North Carolina, showed a decline for the first time.

One bright spot in the report was that more cities showed a gain in prices in April compared with the previous month. Houses in eight areas rose in value, compared with just two in March. Month-over-month gains were led by Cleveland and Dallas.

``There might be some regional pockets of improvement, but on an annual basis the overall numbers continue to decline,'' David Blitzer, chairman of the index committee at S&P, said in a statement.

This index has been dropping for a year and a half. That's called a trend. And it's not a good trend.

In addition, this isn't going to end anytime soon. Inventory is still sky high and consumer demand is still hampered by massive debt and low confidence.

Speaking of which...

Confidence among Americans dropped to the lowest level in 16 years and house prices fell the most on record, raising the risk that consumers will cut back on purchases after spending their tax rebates.

The Conference Board's confidence index fell to 50.4 in June, lower than forecast, from 57.2 in May. Home prices in 20 cities dropped 15.3 percent in April from a year earlier, according to S&P/Case-Shiller, the most since the group began collecting data.

Consumers, whose spending accounts for more than two thirds of gross domestic product, are being hurt by the housing slump, rising unemployment and higher food and fuel bills.

Short version: this is bad news all the way around. Period.

The Fed's Problem

As the Fed meets today and tomorrow, let's take a look at the central problem they face (from IBD):

The economy has limped along at an annual growth rate below 1% for each of the past two quarters, and lenders continue to restrict credit.

Yet energy and food prices continue to soar. May consumer prices rose an uncomfortable 4.2% vs. a year earlier.

.....

But the Fed is worried about inflation expectations. Consumers in June expect inflation at 5.1% over the next year, just below May's 26-year high, according to the latest Reuters-University of Michigan survey.

The concern is that workers will demand bigger pay increases to keep up with prices, sparking a 1970s-style wage-price spiral. Inflation expectations, once entrenched, are hard to change.

"Certainly the Fed is scrutinizing inflation expectations because they don't want to get a wage-price spiral going, and so far it has not," Johnson said, adding that "the weak economy is preventing that from developing."

Over the last few weeks, we've seen increased "tough talk" from the Treasury and Federal Reserve about the dollar. This helped to give the dollar a bump up in overall price. But the basic problem still remains. First, growth is slowing:



While the year-over-year number is steady, the last two quarters have shown a sharp decrease. This is expected to continue as the combination of the housing market slowdown and credit contraction lower consumer confidence, which in turn lowers consumer spending.





At the same time, he year-over-year change in CPI and PPI are uncomfortably high putting pressure on inflation hawks. So long as oil remains at an elevated level expect this situation to continue.

Short version: being a central banker would stink right now.

A Closer Look At the Transports

I'm a big fan of Dow Theory, which in a nutshell is:

A theory which says the market is in an upward trend if one of its averages (industrial or transportation) advances above a previous important high, it is accompanied or followed by a similar advance in the other.

Basically, more than one average has to advance for the market to be in a rally. This makes basic economic sense. When the economy is expanding, businesses have to ship more and more stuff from point A to point B. The converse is also true; when the economy is slowing, businesses have to ship less and less stuff from point A to point B. That's why the following news items have caused me some concern:

United Parcel Service Inc (NYSE:UPS - News) warned on Monday that second-quarter earnings would be below expectations, blaming high fuel prices and a sluggish U.S. economy.

.....

UPS estimated earnings of 83 cents to 88 cents a share for the quarter, down from a prior view of 97 cents to $1.04 per share.

In a statement, UPS said U.S. package volume had been lower than expected, while demand for higher-priced air delivery services had seen a particular drop.

Keith Schoonmaker, an analyst at Morningstar, said the warning from UPS was hardly a surprise, given the monstrous head winds the industry faces.

"This just shows that in a challenging economic environment, with high fuel prices, that some customers are shifting to slower, cheaper shipping alternatives" within both UPS and its rivals, he said.

And add this to the mix:

FedEx(FDX - Cramer's Take - Stockpickr) says it will miss analysts' estimates for the current quarter and for fiscal 2009, as the continuing impact of high fuel prices and a weak economy drag on.

"We're pressured by serious economic difficulties," said CEO Fred Smith, on an earnings conference call. "Record high fuel prices and the weak U.S. economy dampened volume growth and substantially affected our bottom line."

Smith added that the "economic headwinds" the company is facing this year will continue into fiscal 2009. But he noted that results during this year and next "will be anomalies" that will "hopefully set the stage for fiscal year 2010."

That makes this an opportune time to take a look at the Transportation average.



On the 6-month chart, notice the average has been rallying since the first part of the year. There are two important trend lines. The first is from the extreme bottom in mid-January. While this is technically a place to draw a trend line from, I'm always reluctant to draw a line from a point this extreme on a chart. I think the more accurate line is the second line started just after the extreme point.

Using the first trend line (the one from the extreme point) notice the average broken trend in mid-May. Using the second line, notice prices are right at the trend line. Also note the broadening formation that formed in May, which is usually indicative of a market top.



On the SMA chart, notice the following:

-- Prices are above the 200 day SMA

-- The 10 and 20 SMA have moved lower

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

-- The 50 and 200 day SMA are still positive

-- Prices are SMAs are bunched in a close range

What does all of this tell us?

-- The short term trend is down as indicated by the declining 10 and 20 day SMA

-- The overall trend is still higher

-- Whenever prices and SMAs are bunched together in a tight range it indicates the market is looking for a direction about where to move.

Treasury Tuesdays

Let's start with the most important chart in the Treasury market -- the 7 - 10 year chart.



The middle part of the curve started rallying at the beginning of July. This was a flight to safety caused by the start of the credit crunch. Prices rallied until early March of this year when they started to move lower.



On the 3-month chart, notice the following:

-- Prices have moved below the 200 day SMA

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

-- The 10 and 20 day SMA has move below the 200 day SMA

-- Prices are below the 20 and 50 day SMA; prices are just above the 10 day SMA



The long end of the curve (20+ years), is a bit different. They consolidated from the end of November/beginning of December to mid-May of this year. That's when they fell below support and moved lower.



On the three month SMA chart, note the following:

-- Prices are below the 200 day SMA

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

-- The 10, 20 and 50 day SMA have all moved below the 200 day SMA

-- Prices are in a clear downward sloping channel

-- Prices are just above the 10 and 20 day SMA. But prices have used the 20 day SMA as a pivot point for the last few months.



The short end of the curse (1-3 years) really benefited from the credit crunch. They rallied hard for nearly a year as traders parked their money in short-term bonds.



On the short-tern SMA chart, notice the following:

-- Prices are below the 200 day SMA

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

-- The 10 and 20 day SMA have both moved below the 200 day SMA

-- Prices are in a clear downward sloping channel.

All of these charts have clear downward sloping channels that have been in place for a few months. All also have downward sloping short-term SMAs (10, 20 and 50 day SMA). The bottom line the Treasury market has been correcting for a few months and the charts indicate we're in for more of the same.

Today's Markets

-- There was a lot of negative employment news today. Citigroup announced it would cut 10% of its workforce. GM will cut truck production by 170,000 units. United will cut 950 pilots

-- Although Saudi Arabia said it would increase production, oil still rose in price.

-- Harvard released a study that says the housing market will take a long time to recover.



The SPYs opened with a quick bump but trended down until a little after 11 CST. Then they rallied until a bit before 1 CST before starting a fall into the close. Short version -- with the market waiting for the Fed's decision on Wednesday expect the next day and a half to be like this.



The QQQQs opened strong but quickly fell. They hit one bottom a bit before 11 CST, traded sideways, and then rallied until a bit before 1 PM. They sold off to the 50 minute SMA and tried to rally but couldn't maintain the momentum. They sold off into the close. Note especially the high volume of the last two bars and the gap down.



The IWMs -- like the SPYs and QQQQs -- had a nice opening spike. They sold-off to the 20 minute SMA and then tried to rally from that level. However, they couldn't maintain the momentum and fell. They traded sideways until a little after 11 when they rallied a bit. But they couldn't maintain their upward momentum and they eventually sold off into the close. Note the increasing volume on the sell-off.

Market Mondays

I wanted to finish out the weekly look at the markets by looking at the daily chart of the QQQQs and IWMs



On the QQQQs, notice the following:

-- Prices broke an uptrend in early June.

-- Prices are below all the SMAs

-- The 10 and 20 day SMA are headed lower

-- The 10 day SMA broke through the 200 and 50 day SMA

This chart is neutral right now, although it is becoming more and more bearish.



On the IWMs, notice the following:

-- Prices are below all the SMAs

-- The shorter SMAs never broke through the 200 day SMA

-- The 10 day SMA is headed lower and is about to cross through the 50 day SMA

-- Prices punched through the 200 day SMA, but couldn't keep their upward momentum going.

-- Also note the possible head and shoulders formation.

-- Like the QQQQs, this is a neutral chart, but it's getting more and more bearish.

WOW -- Just WOW

There was a blurb on the Bloomeberg television screen a minute ago.

Total worldwide writedowns so far? $397 billion. Think about that for a minute.