Many analysts are taking the stance that the FED is behind the curve and is not doing enough to fight the inflation that seems to be biting at our heels. This view was substantiated by the sell-off yesterday and the lower lows made today. The Dow Jones Industrial Average moved 14.49 points lower to close at 10456.02. The Nasdaq Composite Index gained 0.88 to 1990.22. The S&P rose 0.76 points to 1172.51. The Russell 2000, made up of small-capitalization stocks, declined 1.1% to 612.06.
Tbonds (30-year) shot higher, while short-term notes lagged behind. That caused the difference between the two-year and 10-year Treasury yields to narrow, a trend that could play havoc with the financial sector that has benefited greatly from this wide spread in recent years through what is called the carry trade - borrowing at short-term rates and lending long.
The annual report of the Trustees of the Social Security Trust Fund showed a slight worsening of the 75-year actuarial deficit, which is now 1.92% of taxable payroll, up from 1.89% in last year's report. Social Security is now projected to be exhausted in 2041, one year earlier than in last year's projections. The trustees, all appointed by President Bush, said the program's annual revenue will fall behind annual expenses in 2017, also a year earlier than their last year's report estimated. These estimates were significantly divergent from the non-partisan Congressional Budget Office, which earlier this month said that the Social Security trust fund will be exhausted in 2052 and that revenue would fall behind expenses in 2020, a year later than its prior estimate.
Social Security faces a long-run funding imbalance because of the of the impending retirement of the baby boomers but the program will continue a cash flow surplus for more than one decade, and can pay full benefits for almost 40 years.
At 8:30EST the Mortgage Bankers Association of America released its weekly MBA Mortgage Applications Survey, a leading indicator of home sales, which gives the financial markets an indication of where the housing market is heading.
For the week ending March 18, the MBA index fell 9.5% to 658.8 and the refi index plummeted 16.5%. Demand for mortgages has dropped off measurably over the last several weeks, mostly due to a drop in the number of households refinancing. But demand for new mortgages, after registering a sharp downturn at the beginning of the year, is holding firm. Actually, housing demand is still strong and the purchase index is back in very strong territory because of steady job growth and 30-year rates remaining below 6%. However, the move up in long-term interest rates will constrain new demand going forward but it is very likely that potential homebuyers will stay in the market and remain aggressive in their quest to lock in an affordable rate.
The proverbial fly in the ointment of this rosy housing market picture is housing affordability. House prices have been rising at a double-digit rate for the past few quarters and buyers are getting priced out of the market. In addition, although rates remain low, the 80+ basis point increase in the ARM rate has discouraged buyers with marginal credit quality from entering the market because these market participants more readily qualify for ARMs over conventional mortgages.
Also at 8:30EST we saw the release of the granddaddy of inflation indicators - the Consumer Price Index for February.
Yesterday the Fed revised his inflation policy fueling the fear of inflation and today the CPI did little to douse those inflation fears. February's consumer inflation was slightly higher than expectations and the core index broke out of its recent trend, rising 0.3% instead of the 0.2% that had become the norm lately. Core inflation is now back to the level it was three years ago and approaching early 2001's peak.
Although inflation was evident across most sectors, the one area that missed the inflation bullet was core commodities, where prices went unchanged for February.
Capacity utilization of capital resources is rapidly approaching a level that will start putting upward pressure on prices, presenting a risk for higher inflation in the near term. Capacity utilization for finished goods production is less than one percentage point lower than the long-term average. This reinforces the idea that inflation risks are skewed toward the high end, with core inflation likely to creep closer to 3% in the near term.
At 10:00EST the National Association of Realtors released their Existing Home Sales report, a report used as a signal of consumer spending on homes, furnishings and other home-related costs.
Existing home sales declined 0.4% in February to 6.79 million units, which was roughly in line with the consensus forecast.
Low conventional mortgages and economic factors such as job and income growth continue to keep demand for housing strong, although home sales have certainly slowed from last summer. Since condo sales have been included in the data, analysts have seen the increasing popularity of this type of co-op housing. They site the reasons are based on the eroding affordability for single-family homes which is pushing first-time buyers into condo or co-op units.
Higher mortgage rates are expected to overcome the economic factors that have contributed to the strong housing market and a real slowing should take place in the latter part of 2005. In addition most potential homebuyers have already entered the market so demand will be less than we have seen in the past.
The final report the market had to endure today was the weekly 10:30EST American Petroleum Institute and Energy Information Agency's release of Oil and Gas inventories; a report that has taken on a great deal of significance of late because of oil prices.
This report showed crude-oil inventories were higher than expected sending crude oil prices below $55 a barrel on the New York Mercantile Exchange. Unfortunately though the report also revealed falling inventories of petroleum products such as gasoline, so many believe the sell-off to be temporary.
I have been writing a series of articles on Point and Figure charts so I thought that I would deviate from the normal bar charts and show you some P&F charts tonight. Now don't worry if you have not been following my articles and you dont know anything about P&F charts. I am going to use these charts more as way to compare markets to one another and to see how bullish or bearish each is in relation to each other. P&F charts also add a little sanity to a normally insane market.
These charts take a long time to annotate so I started creating them on Tuesday March 22nd. I believed we would have a upward or sideways day today and the P&F charts would not change. Well that was not the case, each market made a new lower low today. So I have made note of the changes to the P&F charts reflecting today's lows.
Point and Figure Daily Chart of the DOW:
The blue line the DOW is currently trading above is called a bullish support line and the DOW remains a bullish candidate until this line is broken. There was a double bottom sell signal on March 17th but these happen so often you would never take a trade just based on this sell signal.
The red lines you see on the chart are bearish resistance lines and as you can see there is usually a red bearish resistance line right after the blue support line and it will usually start to form before the blue support line is pierced. But currently we have not even had a red resistance line start to form let alone a piercing of the support line. This market is still bullish and you would not even be thinking of bailing on long positions and definitely would not be thinking about opening new short positions.
The DOW hit a low of 10430 today so another O would be added to the last column of Os.
Point and Figure Daily Chart of the RUT:
With the Russell 2000 you see Red Resistance lines that have been consistently broken but the Blue Support line only broken once. And like the DOW, price has a ways to go before it will pierce the Blue support line and a Red resistance line has not started to form. This chart is bullish as well and you would still be bullish positions.
Russell 2000 lows today were 612.06 so another O would be added to the last column of Os. This is also a pierce of the double bottom.
Point and Figure Daily Chart of the COMPQ:
Now here is a chart that is indeed bearish. The Blue support line has been broken and the NASDAQ Composite is trading below it. You would not only be out of your bullish positions but into new bearish ones.
Lows today were 1985 so one more O would be added to the final column of Os.
Point and Figure Daily Chart of the SPX:
This is our most bullish chart. Look at how long the Blue bullish support line has been in place without been pierced. It has a long way to go before it turns the bear corner.
SPX made a low today of 1068 so another O will have to be added to the last column of Os.
Point and Figure Daily Chart of the NDX:
This is our most bearish chart. The Blue support line was broken in early 2005 and a new one has never even had a chance to form. The dominate line is the bearish Red resistance line that started at the same time the blue support line was pierced. We also have had a triple sell signal. No one should be in bullish positions in this market and should be well entrenched into bearish positions.
Don't the Point and Figure charts give you a little different perspective from the one you develop when looking at the bar charts?
Tomorrow's Economic Reports
Tomorrow we have the weekly Jobless claims report out at 8:30EST for the week ending March 19th. The Consensus is for 314,000 claims down from the previous week of 318,000.
Also at 8:30EST is the Bureau of Census Durable Goods release, one of the earliest indicators of both consumer and business demand for equipment. Durable goods include intermediate goods, such as steel, lumber and electronic components and all industrial products with an expected life of one year or more.
At 10:00EST is the Bureau of Census release of February's New Home Sales an indicator of consumer spending through spending on business services associated with home sales, construction and employment. Consensus is 1,150,000 up from January's 1,106,000.