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Today's Market WrapUp 02.21.2007 Mon Tue Wed Thu Fri Puplava Archive
I see the bad
moon arising “Bad Moon Rising”~ Creedence Clearwater Revival I’m not ringing any alarm bells, just pointing out some interesting developments. The current advance after last summer’s lows is fairly extended and there are some signs brewing, hinting of a “Bad Moon Rising” where we might be seeing a market correction, or at least a breather coming soon. Westpac Strategy Group publishes economic data designed to track the evolution of economic data surprises over time. Their percent surprise index and size of surprise index for U.S. economic data can be used to determine reversals of economic sentiment. The Westpac Positive Surprise Index measures the percentage of releases beating Bloomberg consensus estimates in the previous eight weeks, presented as a percentage and is bounded by 0% and 100%. The Westpac Size of Surprise Index captures the size of economic data surprise from Bloomberg consensus forecasts, with the data bounded by z-scores of -1 and +1. The z-score reveals how many units of the standard deviation a result is above or below the mean. So let’s have a look at the data to see how relevant it has been in calling for turns in the markets using the S&P 500 to represent the market and what the data is currently hinting. As seen by Figures 1 and 2 below, peaks in the Westpac data, whether in terms of percent surprise (Figure 1) or size of the surprise (Figure 2) have been consistent in leading or coinciding with peaks in the S&P 500 over the past three years. Figure
1 Figure
2 Both indices turned sharply lower prior to last May’s correction and have both recently rolled over hinting at another possible correction as economic data is turning more negative in terms of the size of the surprise and the number of positive economic surprises contracting. We have already seen some negative economic news from subprime mortgage lenders and higher energy prices as of late after January’s fall. More fuel is coming from today’s economic reports with a higher headline CPI number that came in above the consensus, and a negative year-over-year percent change in the Conference Board’s Leading Indicator Index (discussed below) are possibly putting the breaks on investor enthusiasm. Another development hinting at a possible market correction is the double bottom forming in the relative strength ratio of the S&P 500 consumer staples sector, as the sector is seen as a defensive sector due to its non-cyclical earnings. The relative strength ratio turned up sharply from September to October of 2005 during the market correction, and in April through September of last year as the market corrected again. The ratio bottomed in December and looks set to turn higher as it has put in a higher low, though a higher high or sharp upturn has yet to be seen. Figure 3
Is the sky falling? No, but there may be rain clouds on the horizon as indicated by the above mentioned developments. ADDICTED TO OIL… YOU BETTER BELIEVE IT! On a side note, I wanted to share some insights of what I found while looking at the trade report last week. I took the cumulative value of petroleum imports, both real and nominal, since January of 2000 through December of 2006 and charted them below. Figure 4
Nominal:
$1.2 Trillion dollars or $1,200,000,000,000 Since 2000, we have imported $1.2 trillion dollars worth of energy products -- quite a staggering number to say the least. I conducted the same analysis with the trade deficit, from January 2000 through 2006 with the data provided below. Figure 5
Nominal: -$4.2
Trillion dollars or -$4,193,000,000,000 Last year marked the fifth consecutive annual record and an all-time high for the trade gap with China. The gap between what America sells abroad and what it imports rose to a record $763.6 billion last year, a 6.5 percent increase from the previous record of $716.7 billion set in 2005. In December, the deficit rose 5.3% to $61.2 billion, larger than the consensus figure of -$59.5 billion. What I want to comment on is that of the cumulative -$4.2 trillion trade deficit since 2000, $1.2 trillion of that deficit has come from oil imports. Oil imports represent 29% of the cumulative trade deficit since 2000!
Addicted to oil, you better believe it! We have shipped $1.2 trillion dollars to Mexico, Canada, the Middle East, and Venezuela to purchase a product that doesn’t last, that returns no dividends, no income, no return on investment -- it’s completely consumed! In contrast to our country exporting our dollars overseas for a consumable product, the nations receiving our dollars invest them into their economies to improve productivity, quality of life, or they recycle them back into our country buy buying our treasuries where they receive interest on their investment. We ship our dollars (wealth) overseas for oil and then to compound the wealth transfer, our government pays interest to foreigners on this exported wealth when they buy our treasuries, shipping even more of our wealth overseas. Who do you think is the loser and winner in this trade? We have nothing to show for the money we ship overseas as our wealth is transferred to oil exporting nations and what we buy is consumed. These nations are building wealth while we consume it! By improving our alternative technology industries here in the United Sates and reducing our dependency on foreign nations exporting oil to us, we will be able to keep more and more of our dollars within our borders and recirculating within our economy instead of making other nations wealthy at the expense of our dependency. TODAY'S MARKET - Economic Reports Consumer Price Index (CPI) – January 2007 The headline CPI rose 0.2% in January over December, above the consensus expectation of a 0.0% rise, despite a 1.5% decrease in energy prices. The core CPI (headline CPI less food & energy) also came in above the consensus of 0.2% by rising 0.3% last month. Headline CPI has risen 2.1% on a year-over-year (YOY) basis, which is lower than its peak of 4.3% in June and lower than the 2.5% reading seen in December. The core CPI’s YOY rate came in at 2.7%, higher than the 2.6% YOY rate seen in December, though below November’s 2.8% reading.
MBA Mortgage Applications Survey Mortgage demand fell 5.2% last week, the result of a 5.4% decline in refinance applications and a drop in purchase applications of 4.8%, pushing the purchase index near a 12-month low. The contract rate on the 30-year FRM decreased 5 basis points to 6.19% while the 1-yr ARM increased 1 basis point to 5.81%.
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