The markets continued to hit new highs but the progress is painstakingly slow with every move two steps forward and one step back but the direction is still higher.

Market Stats Table

Ben Bernanke must have passed the employment review with his Jackson Hole performance last week. President Obama announced today that he was nominating Bernanke for another term and stressed the need for an independent Federal Reserve. Bernanke's current term ends on Jan-31st 2010. Senator Dodd promised a prompt but through confirmation procedure. The markets rallied off the overnight weakness on the news.

Also helping the markets was the news that home prices fell less than expected in Q2. According to the Case Shiller 20-city index the price of a home declined -15.4% from the same period in 2008. Estimates were for a decline of -16.4%. Even more important of the cities in the top 10 index only one city failed to post a gain. That was Las Vegas where prices fell another -2.5% for the month. San Francisco led the list with a +3.8% rise. The 20-city index saw prices rise +0.7% in June for the first gain since May 2006. Removing the seasonal adjustment saw the same index rise +1.4% for June. The rate of increase will continue to be slow because of the large number of foreclosures still coming on the market. Moody's expects housing prices to stabilize by the middle of 2010. The next challenge will be the expiration of the $8,000 first time buyer stimulus in November. The slight improvement in prices barely registers on the chart below.

Home Price Chart

Home Prices Comparisons

The Consumer Confidence numbers for August rebounded to 54.1 from the July decline to 47.4. The expectations component led the gains with a +10 point spike to 73.5 while the current conditions component barely budged with a +1.6 point gain to 24.9. The headline number is still below the 54.8 high for the year in May. Despite the 50% rebound in the stock market and the various stimulus programs like cash for clunkers the level of confidence remains at recessionary levels. Those planning to buy a car rose to 5.2% from 4.8% and a home 2.8% from 2.1%.

Consumer Confidence Chart

The Richmond Fed Manufacturing Survey failed to post a gain but held the big gain we saw in July. The headline number came in at 14 once again. The low was -51 back in February. The shipments component rose +5 points to 21 and capacity utilization rose +8 points to 22. Keeping the survey from posting those gains was a decline of -6 points to 18 on the new orders and a decline in the six-month outlook from 27 to 20. In the Richmond survey any number over zero is considered expansion so there is improvement in the region. In the chart below the current economic activity has rebounded to levels of pre recession activity seen from 2006-2007. This is not strong growth at only 14 points over recession levels but still growth.

Richmond Fed Chart

Wednesday's economic reports include the Mortgage Applications, Durable Goods, New Home Sales and oil and gas inventories. New Home sales could help the market if the expected gains to 400,000 units, up from 384,000, actually appear.

The oil inventory is likely to produce a lot of volatility in oil prices. We saw some apprehension of the number today with a -$3 drop from the touch of $75 intraday. The monster -8.4 million barrel hurricane related drop last week is likely to be erased this week and next when those storm delayed deliveries all show up at once.

Crude Oil Chart

The bond market was busy today with $99 billion in new government debt being sold without a problem. There was $30B in one-month bills, $27B in one-year bills and $42B in two-year notes. Tomorrow has $39B in five-year notes and Thursday has $28B in seven-year notes. This is another record week for debt sales but surprisingly yields are moving down instead of up as you would expect. The yield on the ten-year fell to 3.45% and analysts said it was due to money coming out of the stock market as some cautious funds took profits and shifted cash from equities to bonds to avoid the traditional Sept/Oct market weakness.

Transunion reported today that average credit card delinquency rates fell in all 50 states. The number of bankcard borrowers 90 days or more delinquent fell -1.17% in Q2, down -11.36% from Q1 levels. The average credit card debt fell -1% from Q1 levels to $5,719 but rose +1.78% compared to Q2-2008. This is a positive sign that conditions are improving. However, it could also be the result of delinquent borrowers being charged off and no longer carried as delinquent on Transunion records. I could not find any reference on how charge offs impact these delinquency numbers.


Another factor weighing on the equity markets was the White House Office of Management and Budget predicting that the deficit will exceed $9 trillion over the next decade. That is more than the sum of all previous deficits since the founding of America. The OMB also said by the end of the next decade the national debt with accrued interest would be $17.5 trillion and equal to three-quarters of the entire U.S. economy. That would be the highest percentage in more than 60 years. This prediction makes it even more amazing that buyers showed up for $99 billion in debt sold today.

The OMB is still projecting unemployment over 10% and a negative GDP for all of 2009 at -2.5% or lower. President Obama's economic adviser Christina Romer said it would complicate the president's vow to cut the deficit in half by 2013. This assessment by the OMB could also complicate the passage of the proposed health plan since that would add another $1.0 to $1.5 trillion in deficits over the next decade. The rising deficit assumptions will also make it nearly impossible to take additional stimulus actions like future tax cuts or tax rebates. The only real option lawmakers have today to reduce the deficit is to cut spending. However, the markets fear the government will instead resort to large tax increases as soon as the economy appears to be on solid footing. Regardless of what party is in the white house the burden on the American taxpayer and on the economy over the next couple decades is going to be huge.

Obviously anyone in the market has already heard those deficit numbers being tossed around but hearing the OMB agree with the Congressional Budget Office in a big public announcement was a depressant to the morning rally.

Toyota said it was boosting production by 14,000 vehicles a month for the rest of the year. However, they also said they were going to cut production capacity by 10% or one-million vehicles in order to improve capacity utilization at other locations. Toyota currently production capacity of about 10 million cars per year but they are only producing about 6.7 million. They are boosting short-term production to replenish inventories depleted by the cash for clunkers program. Three Toyota models were in the top five cars sold under the cash for clunkers program.

The government ended the cash for clunkers program on Monday and the latest estimates suggest more than 625,000 cars were purchased by the government for more than $2.58 billion in vouchers. Analysts believe there was another 245,000 cars sold that did not go through the C-F-C program because their trade vehicle did not qualify or the purchased vehicle did not qualify. The extra sales were still due to the increased buyer traffic. Analysts claim there is no reason to rush to replenish inventory levels since that nearly 900,000 auto sales were undoubtedly sell forwards. That is buyers would probably have bought a car over the next 6-9 months and the program prompted them to accelerate those plans. This suggests sales for the next 3-6 months could be very slow.

Bernanke was the safe choice for the next term Fed president. The market had already expressed its desire to have Bernanke continue as Fed Chairman and changing generals in the middle of a battle would have been dangerous both economically and politically. The President is fighting a lot of battles today and his approval rating is falling. If he wants to continue getting things done before the mid-term elections he needs to avoid any unnecessary battles. I believe he wisely chose not to fight the battle over a new Fed Chairman in order to boost his ratings by going with the perceived winner. The markets rallied on the news with the overnight futures rebounding from negative territory when the news broke about 4:AM this morning. By 10:00 it was old news and the deficit announcement erased the gains. It was good timing by the president to make the market favorable announcement on Bernanke just before the market negative OMB news broke.

A Goldman Sachs analyst said the Fed's balance sheet has grown to $2.06 trillion over the last year with all the various stimulus programs. However, the analyst claims the Fed could expand it nearly another 100% to $4.0 trillion if needed to make sure the economy was truly on the mend before the stimulus should be withdrawn. This would be very dangerous since inflation is already a concern for 12-18 months down the road. The Fed would have to focus on new stimulus that would not be fuel for inflation rather than zero interest rates.

Other than what I have discussed above it was another slow news day as the summer draws to a close. Medtronic (MDT) reported a 38% drop in quarterly profits due to restructuring charges and legal fees in a patent dispute. Sherwin Williams (SHW) was downgraded by Morgan Stanley on the weak outlook for construction spending into 2010. Morgan said nearly 40% of Sherwin Williams sales come from new construction. Anheuser-Busch InBev (ABI) said it was planning raising the price of beer this fall. Prices will rise on its low-end and high-end brands. MillerCoors and Diageo (DEO) also said they were raising prices. This should be a clear sign that the recession is ending if all the brewers believe they can get consumers to pay higher prices.

The Dow moved over 9600 at the open and came very close to resistance at 9625 before easing back on the deficit news. Just after lunch the Dow tried again to move back over 9600 but was unable to hold the gains. This two steps forward, one step back is agonizing to watch because every small sell cycle rekindles worries that the markets are about to fall. Despite the daily gains there is still a constant worry that we are due for a correction. As long as that worry is visible and getting face time on stock TV I doubt a correction will appear. Corrections don't advertise in advance that they are coming. Most occur when the markets appear most bullish. Today we have a mildly bullish market with a great deal of concern that we could correct. That encourages the shorts to take positions on each rally and then forces them to cover on the next move higher. I want to see this happen at resistance at 9625. If we can get a short squeeze over 9625 then we should be able to add another couple weeks to the current rally. The real problem is finding some event to produce that short squeeze. Support is well below at 9400 so we have plenty of room to wander on low volume.

Dow Chart

The S&P-500 is well over resistance at 1014 and should not encounter new resistance until around 1060. That prior resistance at 1014 should now be support. The real challenge facing the S&P is finding buyers at this level. The S&P is up nearly 60% since the March lows but the S&P is made up of 500 individual stocks so buyer interest in each stock is the key. How much higher can Google, Apple, Microsoft go after their rebounds from the March lows. Most analysts believe they can go much higher as profits increase. However, that is a long-term proposition and may not produce a big jump over the next week. This is next to last week of summer and bullish volume is going to be a challenge. Support at 1014 will probably be tested.

SPX Chart

The Nasdaq has been the weaker index and today was no exception. Several major stocks gave up their early gains and the Nasdaq was lucky to close in the green. For instance Dell, QCOM and Oracle all closed negative for the day. The Nasdaq did manage to move over downtrend resistance from Oct 2007 and has now established initial support at 2012. However, there is simply nothing on the tech front to energize buyers. The good news is priced in and without some new event to trigger a squeeze it may be difficult to move higher in a hurry. I believe it will happen but I suspect it will be more of the "inch by inch" variety of gains.

Nasdaq Chart

I am concerned about the markets for the rest of the week. We continue to hit new highs but we are starting to see that end of day sell cycle increase. The end of day short covering is turning into end of day selling. I said above that corrections to not advertise in advance but there are subtle signs. I am not saying we are about to fall off a cliff and as long as that is the prevalent mood in the market I doubt it will happen. I am still in buy the dip mode until proven wrong. I am hopeful there will be something happen to blow out the shorts one more time. Unfortunately volume is a weapon of the bulls and volume until Labor Day is going to be hard to find. On the NYSE only three stocks accounted for 35% of all the volume today. That was C, FRE, FNM with nearly 2 billion shares between them. We are not going to get a major market move with $3-$4 stocks providing all the volume. We need to be patient and keep our fingers crossed that the markets can keep their inchworm rise on track until after Labor Day.

I apologize for the lateness of the newsletter today. We had an error that prevented us from uploading the content on schedule.

Jim Brown