…What Else Can We Do on Sunday? (8 April 2012)

Going to try and make this a weekly feature, to do a cursory analysis of some of the charts I look at as we head into the new week.

A Quick Word

As election season rapidly approaches, the financial media paints a picture of a strengthening US economy that faces headwinds that are largely external, namely the Eurozone Debt Crisis. The recent report on the state of non-farm employment puts a dent in that view. Of course, I never bought into the idea that the recovery was real in the first place, but clearly many have. The basis for my disagreement is the ‘recovery’ is essentially a reflation of the bubble that burst in 2008. That bubble was built on the back of a consumer binge that was fuelled by increased debt. It’s bursting was an inevitability and thus the deleveraging that ensued was to take debt levels back down to sustainable levels. Except that really didn’t happen. Sure banks wrote down debt and have increased lending standards (to the public), but households, corporations, and governments really haven’t pared down debts at all. The following chart shows the level of household and corporate debt.

As you can see, the household debt level took a hit in the crisis, but has seemingly bottomed out and is slowly heading higher again. Corporate debt has actually surpassed its pre crisis highs, and not surprisingly given the low interest rate environment. In either case, the ‘correction’ the levels of debt are hardly blips on the screen, which leaves one to ponder the economic results should a real reversion to the mean take place on this chart, given the chaos that resulted as a result of the aforementioned blips.

As well as the reduction of debt, the savings rate went up in reaction to the crisis. Yet, this too was a short lived blip in a backdrop of an ever declining trend in the savings rate.

It is these two trends that are ultimately fuelling the ‘recovery,’ which, as I said earlier is really a reflation of the prior bubble. Once again we’re seeing the consumer spend again, saving less and getting more indebted. So in terms of the debt driven consumer spending (DDCS) model, there is a recovery. The problem is that model is a bad one and has proven itself to be a bad one by falling apart in 2008. Yet the metrics that led to ruin are slowly being repeated and the financial press is getting more optimistic by the day.

The bottom line is that none of this is sustainable. What we are seeing is a consumer that slightly pared back its record level of debt for a short amount of time, while saving a percentage of its income that is in the lower band of what once was average for that same short period of time. Furthermore, that income has been still been deteriorating in real terms, suggesting that the jobs that are being created are jobs that are not high paying. Thus if these jobs are to be the backbone of a continued recovery (in DDCS terms), they are going to have to enter into the debt binge. With no margin of safety, the American consumer is slowly relevering itself.

The job data itself was boosted by the warm weather we experienced in the winter, and positive data to begin the new year has been a feature of 2010 and 2011. From March to May 2010, an average of 317,000 jobs were created, and from February to April 2011 the average was 215,000 per month. December 2011 through February of 2012 saw an average of 242,000 jobs created. 2010 and 2011 saw those periods as the height of the job creation for the year, as the figures plummeted from that point on. It’s likely that the same will happen this time. The 2010 and 2011 episodes also saw equity markets take a bath in late spring into summer, and the recent run up in stocks over the winter has petered out in ominous fashion.

Courtesy of Zero Hedge, the implication is clear.

Charts

This is a 4 hour chart of the /ES. It’s not a certainty that the uptrend beginning last October has finished. However, since the high at 1419, the chart has made lower highs and lower lows. The move from 1419 to date could be classed as a 3 wave move, and thus corrective in Elliot Wave terms. The 1370-1375 region is also a seemingly strong support area, as it represented the 2011 highs, and a ceiling that was rejected earlier in the recent move. This could be a standard case of resistance becoming support, but for that to be confirmed, a move from here above 1395 must happen. This area is where the market reacted from in response to the NFP data on Friday. European markets are closed on Monday, so there will be an anxious wait to see how the US markets digest the news.

This is a 4 hour chart of the 10 Year US Treasury futures (click for full size). What is of note here is the range that was formed earlier this year outlined by the red lines. The price fell out of bed in mid March and has made a recovery into the range once more. It’s a decent place to short, although one would be far more prudent to wait and see if the price continues on higher out of the range, or falls back lower.

That’s all for now, in subsequent weeks I’ll be doing more charts than this. Just testing some things out really. Have a good trading week.

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