The Big Bounce

Crude Oil Plunge Suggests Cracks in Global Economy

It's Just Gets Worse

Dow down about 180 points!

Stocks Plunge at the Open

It's ugly!

Why We'll Never Be Able to "Grow" Our Way Out of Debt

Submitted by Charles Hugh Smith from Of Two Minds
"Growing Your Way Out of Debt" Is A Fantasy 
Add rising interest payments and higher taxes to declining assets and incomes and you don't get "growth," you get insolvency.
The Status Quo consensus is that "kicking the can down the road" a.k.a. "extend and pretend" will work because "Greece, Spain, Ireland et al. are going to "grow their way out of debt." That is a fantasy.

Here's why.

1. There's a funny little feature of debt called interest. The Status Quo solution for Ireland, Greece, Portugal, Spain et al. is A) increase their debt load with more loans and B) roll over their old debt into new loans, without the old lenders taking any "haircut" on the principal.

Both of these "solutions" add more interest costs. That means more of the national income stream must be diverted to pay the lenders their pound of flesh. That means there is less money in the national economy to buy goods and services, which means the economy must shrink to pay the higher interest costs.

This is why unemployment in Spain and Greece has skyrocketed and why 100,000 small businesses have closed in Greece in the past year.

2. A funny little feature of interest is that when people see you're at risk of default, they start charging you more to borrow their money. And it isn't a tiny bit more interest, it's a lot. Think subprime teaser loan at 3% shooting to 8%, or 28% if you're trying to sell new debt on the open market.

For the E.U. to "help" Greece and Ireland by rolling over their already crushing debt loads into new, higher interest loans is like "helping" a sick patient by sticking a knife into their back.

3. Governments over-promise future benefits to win elections in the here and now. This makes sense, of course, because you win the elections and power now and the problem of paying for these excessive benefits is left to future politicos and taxpayers.

But when the phony "growth" (think metasticizing cancer) fueled by rapidly rising debt is finally cut off, then the government has no choice but to raise taxes, and keep raising them, to pay for the extravagant past promises made to citizens.

That means more of the national income is diverted to taxes, only part of which flow through as cash benefits to consumers. Much of the tax revenues flow to cronies, fiefdoms and of course those higher interest payments on the ballooning debt.

4. Cheap abundant credit has a funny little consequence: asset bubbles. When everybody can borrow vast sums of nearly-free money at costs much lower than the outlandish gains being reaped by real estate speculators and punters pouring cash into stocks and commodities, then of course it is a perfectly rational decision to leverage yourself to the max, borrow as much as you can and join the speculative frenzy.

So assets bubble up to frothy levels, and McMansions sprout by the thousands on Irish and Spanish soil. The "demand" is not for shelter; it was all speculative demand for something to flip and churn.

So when the debt bubble pops, so too do all the asset bubbles.

5. Leverage has a funny little feature called collateral and that other peculiar feature, interest. The land and house are the collateral for a mortgage (debt). As the real estate bubble popped, then the value of the collateral plummeted. Now the collateral is worth less than the loan--the borrower is "underwater."

The lender foolishly reckoned this would never happen, and now taking the collateral when the borrower defaults is an unsavory option because the lender will have to absorb a huge loss ("haircut") if they take the property.

So they choose to "extend and pretend," offering the borrower new terms, lower payments, etc., anything to keep the loan value on the books at 100%.

All of this is just artifice, of course; the borrower is insolvent, and so is the lender. As long as the borrower has to pay interest and principal, then there is not enough income left to "grow" anything. As long as the lender keeps the impaired loan on the books at the bogus valuation, then the lender is treading on the thin ice of insolvency.

6. As the national income and asset valuations both decline, the government imposes "austerity" programs which further cut incomes. A funny little feature of government "austerity" is the cuts come from the citizen's side of the expense ledger, not from the crony/fiefdom side.

Here in the U.S., for example, the library hours are slashed and the parks are closed to save $22 million in a $100 billion annual budget (those are the numbers in California) while various favored fiefdoms continue to get their swag. The "pain" of austerity is anything but evenly distributed.

7. People facing financial uncertainty and duress have a funny little habit called saving. As the reality of instability becomes crystal-clear to all, then people rather naturally rally round and circle the wagons, i.e. start saving money to cushion them through the hard times. Trusting in future benefits and bubbles is obviously foolish, and the only avenue of relative safety is cash (or equivalent) in hand.

As people save more of their declining income, there is even less national income left to be spent on goods and services.

8. These forces are self-reinforcing. The worse times get, the more people save. the lower the national income, the more taxes will be raised. The more visible these trends become, the more interest lenders demand as they see the positive feedback loops leading to insolvency.

Once a household or nation is burdened with stupendous debt loads and stagnating earnings, "growing your way out of debt" is impossible. The E.U. may succeed in strong-arming Greece into swallowing even more debt, more austerity and higher interest payments, but that will only speed up the self-reinforcing dynamics of insolvency, and guarantee the losses kicked down the road for a few months will be even more devastating.

Stocks Continue Plunge After Hours

CBO Report Sends Stocks Tumbling to Close Down 80 Points

This was the impact of the CBO report today. The Dow had been slightly higher than yesterday's close, but collapsed 100 points upon this news.

CBO Warns of "Sudden Fiscal Crisis"

WASHINGTON (AP) — A new report says that the national debt is on pace to equal the annual size of the economy within a decade, levels that could provoke a European-style debt crisis unless policymakers in Washington can slam the brakes on spiraling deficits.
The Congressional Budget Office study released Wednesday offers a fresh reminder of what’s at stake in ongoing talks led by Vice President Joe Biden that are aimed at slashing more than $2 trillion from the federal deficit over the coming decade as the price for permitting the government to take on more debt to pay current obligations.
CBO says the nation’s rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax hikes.
“As Congress debates the president’s request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff – a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,” said House Budget Committee Chairman Paul Ryan, R-Wis.
The findings aren’t dramatically new, but the CBO analysis underscores the magnitude of the nation’s fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations. The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid.
With the fiscal imbalance requiring the government to borrow more than 40 cents of every dollar it spends, CBO predicts that without a change of course the national debt will rocket from 69 percent of gross domestic product this year to 109 percent of GDP – the record set in World War II – by 2023.
Economists warn that rising debt threatens to devastate the economy by forcing interest rates higher, squeezing domestic investment, and limiting the government’s ability to respond to unexpected challenges like an economic downturn.
But most ominously, the CBO report warns of a “sudden fiscal crisis” in which investors would lose faith in the U.S. government’s ability to manage its fiscal affairs. In such a fiscal panic, investors might abandon U.S. bonds and force the government to pay unaffordable interest rates. In turn, CBO warns, Washington policymakers would have to win back the confidence of the markets by imposing spending cuts and tax increases far more severe than if they were to take action now.
“Earlier action would permit smaller or more gradual changes and would give people more time to adjust to them, but it would require more sacrifices sooner from current older workers and retirees for the benefit of younger workers and future generations,” CBO Director Douglas Elmendorf said in a blog post.

Jobs Situation Now Worse Than Great Depression

by Mort Zuckerman at US News:


The Great Recession has now earned the dubious right of being compared to the Great Depression. In the face of the most stimulative fiscal and monetary policies in our history, we have experienced the loss of over 7 million jobs, wiping out every job gained since the year 2000. From the moment the Obama administration came into office, there have been no net increases in full-time jobs, only in part-time jobs. This is contrary to all previous recessions. Employers are not recalling the workers they laid off from full-time employment.

The real job losses are greater than the estimate of 7.5 million. They are closer to 10.5 million, as 3 million people have stopped looking for work. Equally troublesome is the lower labor participation rate; some 5 million jobs have vanished from manufacturing, long America's greatest strength. Just think: Total payrolls today amount to 131 million, but this figure is lower than it was at the beginning of the year 2000, even though our population has grown by nearly 30 million.
The most recent statistics are unsettling and dismaying, despite the increase of 54,000 jobs in the May numbers. Nonagricultural full-time employment actually fell by 142,000, on top of the 291,000 decline the preceding month. Half of the new jobs created are in temporary help agencies, as firms resist hiring full-time workers. [Check out a roundup of political cartoons on the economy.]
Today, over 14 million people are unemployed. We now have more idle men and women than at any time since the Great Depression. Nearly seven people in the labor pool compete for every job opening. Hiring announcements have plunged to 10,248 in May, down from 59,648 in April. Hiring is now 17 percent lower than the lowest level in the 2001-02 downturn. One fifth of all men of prime working age are not getting up and going to work. Equally disturbing is that the number of people unemployed for six months or longer grew 361,000 to 6.2 million, increasing their share of the unemployed to 45.1 percent. We face the specter that long-term unemployment is becoming structural and not just cyclical, raising the risk that the jobless will lose their skills and become permanently unemployable.
Don't pay too much attention to the headline unemployment rate of 9.1 percent. It is scary enough, but it is a gloss on the reality. These numbers do not include the millions who have stopped looking for a job or who are working part time but would work full time if a position were available. And they count only those people who have actively applied for a job within the last four weeks.
Include those others and the real number is a nasty 16 percent. The 16 percent includes 8.5 million part-timers who want to work full time (which is double the historical norm) and those who have applied for a job within the last six months, including many of the long-term unemployed. And this 16 percent does not take into account the discouraged workers who have left the labor force. The fact is that the longer duration of six months is the more relevant testing period since the mean duration of unemployment is now 39.7 weeks, an increase from 37.1 weeks in February. [See a slide show of the 10 best cities to find a job.]
The inescapable bottom line is an unprecedented slack in the U.S. labor market. Labor's share of national income has fallen to the lowest level in modern history, down to 57.5 percent in the first quarter as compared to 59.8 percent when the so-called recovery began. This reflects not only the 7 million fewer workers but the fact that wages for part-time workers now average $19,000—less than half the median income.
Just to illustrate how insecure the labor movement is, there is nobody on strike in the United States today, according to David Rosenberg of wealth management firm Gluskin Sheff. Back in the 1970s, it was common in any given month to see as many as 30,000 workers on the picket line, and there were typically 300 work stoppages at any given time. Last year there were a grand total of 11. There are other indirect consequences. The number of people who have applied for permanent disability benefits has soared. Ten years ago, 5 million people were collecting federal disability payments; now 8 million are on the rolls, at a cost to taxpayers of approximately $120 billion a year. The states today owe the federal insurance fund an astonishing $90 billion to cover unemployment benefits.
In past recessions, the economy recovered lost jobs within 13 months, on average, after the trough. Twenty-three months into a recovery, employment typically increases by around 174,000 jobs monthly, compared to 54,000 this time around. In a typical recovery, we would have had several hundred thousand more hires per month than we are seeing now—this despite unprecedented fiscal and monetary stimulus (including the rescue of the automobile industry, whose collapse would likely have lost a million jobs). Businesses do not seem to have the confidence or the incentive to add staff but prefer to continue the deep cost-cutting they undertook from the onset of the recession.
But hang on. Even to come up with the 54,000 new jobs, the Bureau of Labor Statistics assumed that 206,000 jobs were created by newly formed companies that its analysts believe—but can't prove—were, in effect, born in May under the so-called birth/death model, which relies primarily on historical extrapolations. Without this generous assumption in the face of a slowing economy, the United States would have lost jobs in May. Last year the bureau assumed that 192,000 jobs were created through new start-ups in the comparable month, but on review most of them eventually had to be taken out, as start-ups have been distressingly weak given the lack of financing from their traditional sources such as bank loans, home equity loans, and credit card lines. [Read more stories on unemployment.]
Where are we today? We have seemingly added jobs, but it is not because hiring has increased. In February 2009 there were 4.7 million separations—that is, jobs lost—but by March 2011 this had fallen to 3.8 million. In other words, the pace of layoffs has diminished, but that is not the same thing as more hiring. The employment numbers look better than they really are because of the aggressive layoffs in the early part of this recession and the reluctance of American business to rehire workers. In fact, the apparent improvement in job numbers has been made up of one part extra hiring and two parts reduced firing.
Even during past recessions, American firms still hired large numbers of workers as part of the continual cycle of replacing employees. Of the 150 million workers or job seekers in America, about one third turn over in a typical year, leaving their old jobs to take new ones. High labor "churn" is characteristic of our economy, reflecting workers moving to better jobs and higher wages and away from declining sectors. As Stanford business professor Edward Lazear explains so clearly in the Wall Street Journal, the increase in job growth over the past two years is attributable to a decline in the number of layoffs, not from increased hiring. Typically, when the labor market creates 200,000 jobs, it has been because 5 million were hired and 4.8 million were separated, not just because there were 200,000 hires and no job losses. But when an economy has bottomed out, it has already shed much of its excess labor, as illustrated by the decline in layoffs—from approximately 2.5 million in February 2009 to 1.5 million this April. In a healthy labor market like the one that prevailed in 2006 and into 2007, American firms hired about 5.5 million workers per month. This is now down to about 4 million a month. Quite simply, businesses have been very disciplined in their hiring practices. [Read Zuckerman: America's Fading Exceptionalism.]
We are nowhere near the old normal. Throughout this fragile recovery, over 90 percent of the growth in output has come from productivity gains. But typically at this stage of the cycle, labor has already taken over from productivity as the major contributor of growth. That is why we generally saw nonfarm payroll gains exceeding 300,000 per month with relative ease. This time we have recouped only 17 percent of the job losses 23 months after the recession began, as compared to 207 percent of the jobs lost from previous recessions (with the exception of 2001). There is no comfort either in two leading indicators of employment, with no growth in the workweek or in factory overtime.
Clearly, the Great American Job Machine is breaking down, and roadside assistance is not on the horizon. In the second half of this year (and thereafter?), we will be without the monetary and fiscal steroids. Nor does anyone know what will happen to long-term interest rates when the Federal Reserve ends its $600 billion quantitative easing support of the capital markets. Inventory levels are at their highest since September 2006; new order bookings are at the lowest levels since September 2009. Since home equity has long been the largest asset on the balance sheet of the average American family, all home­owners are suffering from housing prices that have, on average, declined 33 percent (compare that to the Great Depression drop of 31 percent).
No wonder the general economic mood is one of alarm. The Conference Board measure of U.S. consumer confidence slumped to 60.8 percent in May, down from 66 percent in April and well below the average of 73 in past recessions, never mind the 100-plus numbers in good times. Never before has confidence been this low in the 23rd month of a recovery. Gluskin Sheff's Rosenberg captured it perfectly: We may well be in the midst of a "modern depression."
Our political leadership in both Congress and the White House will surely bear the political costs of a failure to work out short- and long-term programs to fix the job shortage. The stakes are too high to play political games.

Orange Juice Limit Up

Stocks Go Parabolic

Fitch Sees U.S. Debt Default Coming

Fitch's Colquhoun also reiterated that the rating agency would place the U.S. sovereign rating on watch negative if Congress did not raise the federal government's borrowing ceiling by August 2, and said if the U.S. government misses an August 15 coupon payment, then Fitch would place the rating on restricted default.
But it added it believed it was very likely that the debt ceiling would be raised and default would be avoided.
Fitch had made similar comments earlier this month and Moody's and S&P have issued warnings along the same lines. But Fitch was the first major ratings agency to say U.S. Treasury securities could be downgraded, even for a short period.
U.S. lawmakers working to rein in rising debt said on Monday they will have to make substantial progress this week to ensure the country retains its top-notch credit rating.

Ag Commodities Blasting Higher Again

Beef -- near limit up three days in a row

Pork

Sugar

See! Back to Black

The Pollyanna Party resumes!

Stocks Start Red, But POMO to Push Higher

The Fed has scheduled two POMOs today, for the first time in 2011.

S&P Back to Flat

Bounce, anyone?

Reversal of Sentiment, Reversal of Direction

Sentiment reversal: hard, fast uptrend, slow downtrend

This 15-minute chart shows just the opposite of yesterday. It illustrates that market sentiment has shifted. On the left side, the green candles moving higher are strong and fast. The red candles on the right are choppy, sloppy and interspersed with green candles, moving downward at a pace that is without conviction. The market has become bullish despite the current downward direction at the moment. I suspect we'll see another reversal somewhere near the flat line, and a higher close.
This surprises me despite that on the daily chart, the trend is still weakly downward  and despite that the news continues to reflect increasing economic weakness.

S&P Bounces Off 200-Day Moving Average

by Barry Ritholz at The Big Picture blog:


After gyrating much of the day, the S&P500 bounced off the the 200-day moving average (which also coincided with the December 2010 close)  just like a page out of a technical analysis textbook.   The bounce helped rescue Apple from some very ugly price action, which pierced its 200-day moving average for the first time since September 2008, x/ the flash crash, trading down to $318.33 before recouping most of its loss with a strong close...
But the current environment is much more difficult to navigate,  where a flock of macro swans — including European Debt, China hard landing, the QE2 endgame, Japan supply chain issues, global economic slowdown,  natural disasters, and commodity price inflation –  are batting the market around like a piñata.  This, therefore,  warrants more caution and greater risk mitigation.

And Speaking of Global Alarm Signals, China Flashes the Infamous Death Cross

from Tomi Kilgore at WSJ:


While US investors’ eyes may be on Greece, China’s Shanghai Composite just produced a “death cross,” a longer-term bearish pattern in which the 50-day moving average crosses below the 200-day.
The “cross” appeared one day after the index fell below the January low, which confirmed a long-term ”double-top” reversal pattern (the tops were seen in April and November 2010).
The last time a “death cross” appeared, in March 2010, the index rose slightly for a month before starting a 3-month, 25% slide. US stocks may be able to rise with China going nowhere, but it’s very doubtful they can if China’s in a bear market.
The Shanghai Composite is down 0.8% today, and the Hang Seng is down 1.2%. Most of the rest of Asia is down as well.
China’s stock indexes are among the worst-performing in the world so far this year, which may not bode well for the US market, Barry Ritholtz warned this morning.

IMF Cuts Global Economic Forecast

No worry, because stocks are up 75 points.

Charles Hugh Smith: From Here, a Dead Cat Bounce

This is what I've been expecting. Wall Street is determined to rally stocks despite the atrocious economic news in the past three months.


Submitted by Charles Hugh Smith from Of Two Minds
The Turning Point
Some technical analysts are calling for a major rally from here, but the massive injections of financial insulin don't seem to be reviving the sagging global economy.
The stock market and economy are both at a turning point. Analyst Martin Armstrong's Economic Confidence Model (tm) set the turn date as June 13/14, 2011.

In the stock market, a number of technical analysts are issuing strong buys based on the negative sentiment of so-called "dumb money"--small investors--and the number of stocks below their 50-day moving averages.

Others such as Armstrong are predicting that Greece has no alternative to default and the Euro is untenable as "one size does not fit all."

It is rare to find a market where the technical evidence is so compelling for a strong rally yet the fundamental basis for such a rally so lacking. Exactly where do Bulls think the growth and rising profits are going to come from?

The answer for the past few years has been massive Federal Reserve/Federal intervention and stimulus, and a weakening U.S. dollar that boosted overseas profits via the legerdemaine of currency devaluation.

But three years of these policies have accomplished nothing but load the taxpayer with staggering amounts of debt: none of the causes of the 2008 implosion have been fixed or even addressed. As Armstrong notes, the massive interventions did not shorten the crisis, they have prolonged it.

This reality has filtered down to the political swamp, and now the politicos are hesitant to bet their own futures on additional trillions in stimulus and quantitative easing. For the first time in memory, the Federal Reserve is on the defensive. Simply put, its policies have failed to accomplish anything except prop up a rotten, insolvent banking sector that needs to be declared bankrupt and swept into the dustbin of history.

As I have noted here before, the next round of QE (quantitative easing) will fail to inflate the stock market regardless of its size or tricks. The fact that QE3 is needed will spook everyone who understands that it is a last-ditch effort to keep the Status Quo financialization from imploding, and since QE2's sugar-high was so brief, others will be spooked by the possibility that the next high will be even shorter.

This is the dreaded Diabetes Financial Syndrome--the Fed is pouring ever larger amounts of financial insulin into the system, but the financial "body" no longer responds to this insulin. The financial system then goes into toxic shock and implodes.

Let's look at two charts for context. Here is the S&P 500 from 1965 to 2011. Hmm, are there any aberrations visible here, any gigantic spikes of speculative frenzy? Just because these spikes of speculative, financialized frenzy have been normalized doesn't mean they are no longer speculative, financialized frenzies.



Has the economy really been healed? If not, then what is the basis of the market's spectacular rebound since 2009? We all know the answer: $6 trillion in Federal financial insulin and another $2 trillion in Federal Reserve insulin. The entire rally, in other words, is an artifact of Central bank/State intervention.

Courtesy of dshort.com, here is an inflation-adjusted chart of the S&P 500. This chart clearly illustrates that unprecedented Central State stimulus and intervention/manipulation have juiced the market higher than previous post-crash highs.


But the whole financial-insulin project is looking a bit long in tooth compared to previous post-crash markets. In the long run, perhaps we can attribute this extension of the euphoric high of "recovery" to the Fed's QE2, which pumped half a trillion dollars into stocks in a matter of months.

Short of the Fed simply buying trillions of dollars in stocks outright, then it looks like this "recovery" rally is about to have a Wiley E. Coyote moment, as it has raced off the solid ground provided by the Fed's QE2 injections and is now poised in thin air.

Of course the market could rally from here, but it's hard to see on what basis other than a technical dead-cat bounce. The Fed could announce another round of intervention, and that would certainly give the comatose body a jolt. But for how long?

If it does respond to gravity, then we might want to re-visit the definition of "dumb money:" small investors have been pulling money out of the stock market all during the QE2 insulin-rush rally while the "smart money" has been piling in, blubbering piously about the key tenet of their religious faith, "don't fight the Fed."

So which do you think is all-powerful, smart money--the Fed or gravity? We're about to find out.

Wall Street and Main Street Part Ways

from Bloomberg:

Main Street is out of step with Wall Street.
The Bloomberg Consumer Comfort Index has stalled near its recession average as the Dow Jones Industrial Average has risen 83 percent from a 12-year low in March 2009. A tight correlation between the index and Dow that lasted more than two decades has broken down as joblessness above 9 percent, stagnant wages and near $4-a-gallon gasoline outweigh the benefits of higher share prices, even after a 6.6 percent retreat in the Dow since the end of April.
“Consumers are fairly depressed, yet the stock market continues to improve,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in an interview

Eurodollar Futures Plunge on Europe's Debt Debacle

This is coming to the United States treasury markets sometime, possibly soon!

And Now, the Bounce

Right at the Dow flatline.

Market Sentiment: Choppy Going Up, Hard and Fast Going Down

When I see this candlestick pattern (see description next paragraph), I take it as a reading of market sentiment. The S&P 500 is now back to flat for the day. The Dow is lagging behind and is still positive; since the Dow was up much higher in percentage terms, this is not surprising.


Notice on this chart that the uptrend was choppy and sloppy going up, but hard and fast going down. This tells me that traders are uneasy taking a long position, but quick to liquidate and/or short when the market turns. Note on the left the frequency of red, downward candles and long wicks in an uptrend. Note also on the right the lack of green candles and the rapidity of the downward move.

Reversal! Stocks Tumble

Was it a stark dose of reality? Very chopping market today. Difficult to trade!

Philly Fed Shows Economic Contraction, But Stocks Still Higher

from the Philly Fed's own report:

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from 3.9 in May to -7.7, its first negative reading since last September (see Chart). The demand for manufactured goods, as measured by the current new orders index, showed a similar decline: The index fell 13 points and recorded its first negative reading since last October. The current shipments index fell just 3 points but remained slightly positive. Firms reported declines in inventories and unfilled orders, and shorter delivery times.

Firms’ responses suggested little overall improvement in the labor market this month. The current employment index remained positive for the ninth consecutive month, but only 14 percent of the firms reported an increase in employment, while 10 percent reported a decline. Only  slightly more firms reported a longer workweek (14 percent) than reported a shorter one (12 percent) and the workweek index was down only slightly from May.

It gets worse. Look what the survey said about employment:

The future general activity index decreased 14 points this month and has now dropped 61 points over the last three months (see Chart). The indexes for future new orders and shipments also declined, decreasing 9 and 14 points, respectively. The index for future employment fell 17  points and has declined 32 points in the last two months. Still, slightly more firms expect to increase employment over the next six months  (21 percent) than expect to decrease employment (16 percent).

Wall Street Grasping at Straws

Initial unemployment claims fell, but remain elevated and above 400,000. Wall Street is grasping at straws to find any news that would allow them to perpetuate the Pollyanna Party. Hence, a rally!

Ouch! Futures Setting Up for Another Downer Day

Stocks Freefall After All Support Taken Out

Dow off more than180 points!

No Support for Stocks

We just took our yesterday's lows. Next stop 1259.50.

All Yesterday's Gains At Risk

update: All yesterday's rally gains have now been erased. This same phenomenon occurred on May 31st and June 1st. May 31st saw a rally of about 90 points, and the Dow plunged 280 points the next day.

Home Builder Sentiment Declines

"After holding at a low but steady level for the past six months, builder confidence in the market for newly built, single-family homes declined three points in June to a reading of 13 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The last time the index was this low was in September of 2010. "Builders are being squeezed by the continuing weakness in existing-home prices – against which they must compete -- as well as rising material costs," said NAHB Chairman Bob Nielsen

Industrial Production Flat

"Industrial production edged up 0.1 percent in May, the second consecutive month with little or no gain. Revisions to total industrial production in months before May were small. In May, manufacturing production rose 0.4 percent after having fallen 0.5 percent in April. The output of motor vehicles and parts has been held down in the past two months because of supply chain disruptions following the earthquake in Japan. Excluding motor vehicles and parts, manufacturing output advanced 0.6 percent in May and edged down 0.1 percent in April; the decrease in April in part reflected production lost because of tornadoes in the South at the end of the month."

Stagflation Rages, Manufacturing Falters

Is it any wonder both both stocks and treasuries plunge on this news? Treasuries are now recovering, but higher inflation is going to take its toll, as it did yesterday. 

from Zero Hedge:


June brings us much more centrally planned stagflation. CPI increased 0.2% in May, higher than expected 0.1%, and up 3.6% Y/Y. This is the 11th consecutive increase in inflation. And so much for the CPI ex-Food and Energy which came at +0.3% on expectations of 0.2%, up from 0.2% in April: "The index for all items less food and energy increased 0.3 percent in May, its largest increase since July 2008. The indexes for apparel, shelter, new vehicles, and recreation all contributed to the acceleration, rising more in May than in April. These increases more than offset declines in the indexes for airline fare, tobacco, and personal care." More on the Chairman's failure to rein in inflation in 15 minutes: "The food index rose in May as well. The food at home index repeated its April increase of 0.5 percent as four of the six major grocery store food group indexes increased, with the index for meats, poultry, fish, and eggs rising the most. In contrast, the energy index, which had been rising sharply, declined in May. The gasoline index decreased for the first time since last June, although the index for household energy increased. The upward trend among the 12 month increases of major indexes continued in May. The 12 month change in the all items index, which  was 1.1 percent as recently as November, reached 3.6 percent in May. The energy index has increased 21.5 percent over the last 12 months, the food index has risen 3.5 percent and the index for all items less food and energy has increased 1.5 percent. All of these figures have been rising in recent months." But the real action was in the Empire Manufacturing Index which plunged from 11.88, and forget about expectations of 12.00, printing at -7.79 in June. The contraction is now confirmed. This is the first contraction since November 2010 when QE2 began. Hint: QE3 is coming. Also, the future general business conditions index fell thirty points, reaching 22.5, its lowest level since early 2009. And the kicker: margins continued to collapse as prices paid fell less than prices received. This is what stagflation is pure and simple; it has also been Zero Hedge's keyword of 2011 since January.
From the Empire State Mfg Index:
The Empire State Manufacturing Survey indicates that conditions for New York manufacturers deteriorated in June. The general business conditions index slipped below zero for the fi rst time since November of 2010, falling twenty points to -7.8. The new orders and shipments indexes also posted steep declines and fell below zero. The index for number of employees dropped fifteen points to 10.2. The indexes for  both prices paid and prices received were positive but lower than last month, suggesting that increases in input prices and selling prices had slowed. Although future indexes were generally above zero, they were well below last month’s levels, indicating that the level of optimism  about the six-month outlook had deteriorated significantly.
In June, the general business conditions index fell below zero for the first time since November of 2010, declining a steep twenty points to -7.8. Eighteen percent of respondents—compared with 23 percent in May—reported that conditions had improved over the month, while 25 percent, up from 11 percent last month, reported that conditions had worsened. The new orders index fell twenty-one points to -3.6, and the shipments index tumbled thirty-four points to -8.0. The unfi lled orders index fell to zero. The delivery time index slipped fi ve points to -3.1,  and the inventories index dropped ten points to 1.0.
Level of Optimism Deteriorates Significantly
The six-month outlook was notably less optimistic in June than in May. The future general business conditions index fell thirty points, reaching 22.5, its lowest level since early 2009. While the index was still above zero—an indication that conditions were expected to improve in the months ahead—its June decline represented the second largest drop in the index in the history of the survey. The future new orders index fell thirty-two points to 15.3, and the future shipments index fell twenty-fi ve points to 17.4. The future inventories index retreated thirteen points to -9.2, suggesting that manufacturers expected inventory levels to fall over the next six months. Future price indexes fell but remained positive, implying that price increases were expected, but would occur at a slower pace than was expected last month. The index for expected number of employees fell fourteen points to 6.1, and the future average workweek index fell to -2.0. The capital expenditures index slid four points to 26.5, and the technology spending index dropped fi fteen points to 14.3.
And the kicker: Margins continue to collapse as drop in Priced Paid is smaller than in Prices Received:
Price indexes posted their first declines in several months. The prices paid index fell fourteen points, to 56.1–still a relatively high value, but a sign that price increases were smaller in June than in May. The prices received index retreated seventeen points to 11.2, with the share of respondents that reported an increase in selling prices falling from 33 percent last month to 17 percent this month. Employment indexes were also lower. The index for number of employees remained in positive territory, indicating that employment levels increased, but the index fell fifteen points to 10.2. After reaching a relatively high level last month, the average workweek index tumbled twenty-six points; at -2.0, the index suggested that hours worked fell slightly.
Summary:

Monthly CPI:

Inflation Surges, Stocks Sag

Stocks Fall Off Cliff

More Melt-Up for Pollyanna

Stocks Spike Higher Still on Retail Sales, PPI Data

from Zero Hedge:

US May PPI came in at 0.2% sequentially, on expectations of 0.1%, and down from 0.8% previously. This was the 11th consecutive increase in PPI. The 12 month change in PPI came at a multi year high 7.3%, much higher than the 6.8% expected, which supposedly is a good thing: inflation is back. PPI ex food and energy was in ling with expectations at 2.1%. Elsewhere, the May Advance Monthly Sales came at -0.2%, on expectations of -0.5%, down from a lower revised 0.3%. Retail sales ex auto and gas came at 0.3% on expectations of 0.2%, with the previous revised lower to 0.2% from 0.3%. Stocks appear to enjoy the increasing inflation on declining economic output.

Stocks Spike on Lower-Than-Expected Inflation in China

Stocks Lose Their Nerve, Close Almost Flat

The Dow closed up only 1 point.

Go Figure! Euro Strengthens on Greek Debt Downgrade

Big Bounce

Wall Street traders seem to be eager for an opportunity to buy, unless more morose market conditions and negative economic data overwhelm that desire. Strong buying prevails for the moment. Here comes the Pollyanna Party! It's easy to rally the drunken troops on a day when there is no news, especially following so much excessive spending and stimulus over the past 3 years.

Economy Summarized

Excellent economic assessment and summary courtesy of David Rosenberg and Zero Hedge:

David Rosenberg provides the key bulletized market observations that have marked the broad capital markets over the past few months.

• $950 billion of paper equity wealth has been wiped off the map in the past six weeks.
• The Dow is below 12,000 for the first time since March 18th.
• The Transports are down more than 8% from the nearby highs and are down for the year as well
• The Transports/Utilities ratio has broken down to its lowest level since November 9th of last year.
• The Nasdaq is now down for the year (-0.3%)
• The Russell 2000 index is also down for the year (-0.5%).
• The S&P 500 is just 1.1% away from seeing the same fate.
• The S&P 500 has declined in each of the past six weeks, the longest losing streak since June-July 2008.
• The S&P 500 has fallen below its 150-day moving average after breaking below the 50-day and 100-day trendlines earlier in this corrective phase; the 200-day is the next level of support.
• For the Dow, this is the longest string of weekly declines since the Fall of 2002.
• The total six-week decline in the broad market is nearly 7% ... a slow bleed.
• Junk bond spreads widened 25 basis points last week, more evidence of risk re-rating.
• Investment-grade bond spreads widened out 14bps and new issue activity ($0.63 billion) was the lowest of the year.
• Bank of America is back to being a $10 stock after a two week 8% slide — how do the bulls dismiss this out of hand? It's the biggest consumer bank in the country.
• In the past six weeks, Energy, Industrials, Materials, Financials and Consumer Discretionary have all rolled over significantly. The defensives have outperformed dramatically — Healthcare, Utilities, Telecom, and Consumer Staples.

The last bullet point is precisely in line with our May 16 proposed QE Unwind compression trade.
And here is what Rosie believes is ailing the market. Nothing really new here:

• The economy is cooling off and there is no policy stimulus in the pipeline. Ben Bernanke did give a sombre assessment of the economy last August in Jackson Hole but at the same time threw Mr. Market a bone by hinting at a new round of liquidity expansion. Last week, the Fed Chairman delivered an even more sobering outlook and did not offer any olive branch this time around.
• So here we have it economic deceleration but with no policy response. NY Fed President Bill Dudley also gave a speech that was very similar in tone to Bernanke — maybe even more cautious, and while repeating the refrain about second-half recovery prospects he listed an array of downside risks to that forecast. He, Bernanke and Yellen ('The Big Three') would love to do another round of QE (Yellen also gave a speech on Friday on housing) but the bottom line is that they are gun-shy after receiving so many complaints from foreign governments, Congress, Wall Street and Fed Bank Presidents that they just do not have the political capital to engage in more stimulus (though it will come at some point but maybe at a similar strike price as last August; dare we say, 1,040 on the S&P 500).
• While the economists have cut their numbers, the equity analysts have yet to do that with their earnings numbers. That comes next.
• Leading indicators are suggesting that we are in more than just a "soft patch" — the jargon of Wall Street economists. The ECRI leading economic index has fallen now for four weeks in a row!
• Global cooling. The Chinese economy is also slowing down with auto sales declining now for two months in a row and the PM! perilously close to the 50 level. Retail sales in Brazil fell 0.2% in April, the first decline in a year and the news came on top of a sudden sharp slowing in industrial output. U.K. factory output fell 1.7% in April as well and France posted a surprising 0.3% drop in industrial production.
• Tightening monetary policies to combat rising inflation pressure across the emerging market world.
• The situation in Europe is untenable — Germany's finance minister is drawing a line in the sand and calling for some sort of Greek restructuring in which bond holders will also have to take a haircut. This has caused the ECB's Trichet to almost go apoplectic. Of course, the ECB is holding onto hundreds of billions of dollars of P.I.G.S. debt on its balance sheet so any haircut would render the central bank insolvent in its own right.
• Threatening not to repo restructured debt is like saying to the Greek banking industry to kiss itself goodbye (a likely prelude to Greece exiting the eurozone, by the way). But Trichet is not elected, the likes of Angela Merkel and Wolfgang Schauble (the finance minister in question here who came right out and said a Greek restructuring is "inevitable") just happen to be, and it looks like the German taxpayer-funded bailouts are coming to an end. See Rift Over Greece Deepens in Europe on page B1 of the weekend WSJ. Some markets are starting to price in the inevitability of sovereign debt defaults in Europe, with 5-year credit default swaps soaring to record highs in Greece, Ireland and Portugal.
• One can't help but think that the ECB rate hike (and the threat to do more!) will go down as a colossal mistake the same central bank made in the summer of 2008. Considering that most of Spain's mortgage market is variable-term and the housing market is beset with tremendous excess supply and downward price potential, the ECB rate hike is like a stake in the heart — to combat perceived inflationary pressures in Germany.
• The slide in U.S. bond yields is telling you that an economic slowdown is here and here to stay beyond Q2, despite consensus views to the contrary. The fact that copper was down in the same week that oil was up says two things here — the former reflects the falloff in Chinese imports; the latter tells you a thing or two about just how thinly balanced the global demand-supply for crude is given that the move back to $120/bbl was all due to discord within OPEC in terms of whether or not to bump production up (looks like the Saudis will be going it alone).
• Actually, it is all about discord here — within OPEC, Congress and the White House (see the editorial piece The Economy and Washington on page 8 of the Sunday NYT 'Week in Review' section), the confines of the Fed, the ECB and Germany, etc. Discord, instead of decision-making, in the current environment is not a good thing— leaving the financial markets in a heightened state of uncertainty.

"B" Is For Bounce

Stocks Collapse In Sell-Off

After being up 65 points, stocks have collapsed again and are decidedly in the negative today. I'm surprised, because I expected a bounce at Friday's close.

S&P 500 Turns Red

Stocks Back to Flat on Slow News Day

Choppy, Sloppy Stocks

Volume is low, too. Market has just turned bearish for the first time today.