Today's Markets

Guess what? Oil hit another record today. And that will probably lead to a lower number of Americans driving over memorial day weekend. American Airlines announced they would be cutting jobs and charging for the first bag. We also learned the Fed is lowering it's growth forecast for the economy.

In market land, we had some really big developments.



Notice the QQQQs have been in a rally since March 17. The QQQQs have led the market higher.



On the 1 month chart, notice the following:

-- Prices moved through the 10 and 20 day SMAs today

-- Prices dropped on heavy volume

-- Prices moved through the long-term support line started on March 17

-- Prices are right at the 200 day SMA



On the SPYS first notice there are two possible trend lines. This is because there are three data points which I think are outliers of the real trend, but to be complete I added a trend line below these points.



On the one month SPY chart, notice the following:

-- Prices moved through th 10 and 20 day SMAs

-- Prices moved through both trend lines. In other words, it doesn't matter which one you think is accurate; prices moved through them.

-- Prices were rebuffed from the 200 day SMA

Both the QQQQs and SPYs fell on heavy volume

The main thing to keep an eye on is the QQQQs. They have pulled the market higher for the last few months. If they move through the 200 day SMA, we've got a big problem.

More Agricultural Price Charts

Below I mentioned that agricultural prices have started to cool a bit. Let's look at some individual charts to see what's going on.



On rice's daily chart, notice that prices have clearly broken two different upward support trend lines. In addition, prices are clearly in a downward sloping trend channel



On rice's weekly chart, notice that while prices are still technically in an uptrend they are cooled. However, the weekly uptrends are still firmly in place. And while prices have technically dropped through support that could change by the end of the week. In other words, this could just as easily be a consolidation before a further move higher rather than lower.



On corn's daily chart, notice tow important points.

-- There is still an uptrend in place, BUT

-- Prices are having a hard time getting over 625.



On corn's weekly chart, notice that prices are firmly in an uptrend.



On wheat's daily chart, notice that prices have retreated to beginning of the year levels.



On wheat's weekly chart, note that prices have broken the uptrend started in mid-2007.

Moody's Begins Internal Probe On Ratings

Actually, I was thinking of the headline "Moody's probes self" because that's basically what's going on:

Moody's Investors Service said it's conducting ``a thorough review'' after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

Some senior staff at Moody's were aware in early 2007 that CPDOs rated Aaa the previous year should have been ranked as many as four levels lower, the FT reported today, citing internal Moody's documents. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.

``If it is true, does that mean other products haven't been rated correctly?'' said Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London. ``Will they be downgraded? It could lead to turmoil.''

Here's what really happened.

Moody's figured out they made more money by giving AAA ratings to everything. In addition, Moody's clients probably performed a lot of "alternative negotiations". For example, client X held a "meeting" with Moody's in a strip club "gentleman's retreat" and offered "special incentives" for certain ratings. Or when a client found out they wouldn't get a AAA rating, they called the president of Moody's and threatened to pull their business at which time the president of Moody's chewed out the analyst who then magically gave the company a better rating (imagine that).

The ratings agencies are incredibly culpable regarding the current mess we're in. The idea they can objectively investigate themselves is laughable at best and criminal at worst.

More On Commodity Inflation

Below I mentioned that it looks as though certain commodities are now dropping in price. While we're not out of the woods, it appears things are setting up to ease. The following is from today's IBD:

Crude oil prices rose again Tuesday, hitting record highs near $130 a barrel and sparking a gold rally for a second straight session.

But the mixed performance in agricultural, softs and metals markets was evidence that the rest of the commodity complex was not following the dramatic rise in oil, traders said.

"All the markets have been overinflated by the fund buying in recent times, and as soon as that disappears, let alone turns in the opposite direction, there's not so much support to it," said a softs trader in Europe.

I'm going to throw up some charts of individual commodities later today to see what they say.

Bureau of Labor Statistics: Comedian

According to the latest PPI release finished energy prices -- after adjusting for seasonal factors -- decreased .2% last month.

Let's look at that again.

The prices of finished energy prices decreased .2% last month.

Here's more from the same report:

In April, the index for finished goods other than foods and energy moved up 0.4 percent and was partially offset by prices for energy goods, which fell 0.2 percent. The index for finished consumer foods was unchanged from its March level.

Let's debunk that line of crap. Here are two graphs/charts. The first is from "This Week in Petroleum" and it shows this year's gas prices verses last year's gas prices:



I'm still looking for the hidden price declines in retail level gas. Maybe I don't have the appropriate decoder ring.

Here's a chart of gas futures. I blocked-off April.



That's one hell of a decline, isn't it?

I realize there is probably a statistical thing going on here. But frankly, where "seasonal adjustments" fly this much in the fact of objective reality, I have to question the veracity of the actual numbers being reported.

Wednesday Commodity Round-Up

Let's take a look at the commodities charts to see how they've been behaving. After looking at some of these charts, I'm going to tie them into the recent inflation numbers.



We'll start with the weekly CRB chart. Notice two points.

-- The sharp uptrend that started at the end of last summer is still in place.

-- The double top that appeared to be forming didn't.

However --



On the daily chart, notice that prices have a rising bottom (what I'm calling a pseudo triangle) but are having a hard time getting through the 420 - 430 area. That doesn't mean they won't get through this area, but they haven't yet. Also notice the following:

-- Prices have been using the 50 day SMA as support since January of this year.

-- Although the SMAs are technically in a good pattern (the smaller are above the larger), they're awfully bunched up with prices. That's not a good place for to be.

While there isn't a strong enough move in either direction to make a call as to where this chart is going, it sure looks like it is consolidating right now.



On the agricultural prices weekly chart, notice the following:

-- Prices were in a strong rally from the middle of 2Q07 to about the beginning of April. Prices continued to rise, hugged their trend line and consolidated gains along the way.

-- Prices broke that upward trend line at the beginning of April. Now prices have consolidated in a downward sloping pennant formation.



On the daily agricultural price chart, notice the following:

-- Prices rose from mid-January to early March.

-- Price formed a double top with the first top at the end of February and the second in mid-March.

-- Prices have dropped about 20% since then. They are currently in a clear downward sloping channel.

-- The shorter SMAs are below the longer SMAs

-- All the SMAs are pointing lower

-- Prices are below the SMAs

This chart says it's going to continue to move lower



On gold's weekly chart, notice that prices have been rising for the better part of three years. They have risen and consolidated their gains along the way. However, the latest rally (which started at the end of last summer) is over as prices have broken through support.



The daily chart shows a clear break occurred in mid-March. Prices have been dropping since then. However, prices may have broken through upside resistance. Notice the prices have moved through the 10 and 20 day SMA and are about to move through the 50 day SMA.

To sum up, it looks like commodity based price moves are taking an upside break -- at least for now. But there aren't firm downward moves yet. The CRB is still in an uptrend (although it is running into a great deal of upside resistance). While agricultural prices have clearly broken their uptrend, these prices have bounced off of the 50 week SMA on the weekly chart several times in the recent rally. And gold may have broken through upside resistance recently.

So, let's tie this into the latest inflation readings.



Year over year CPI has dropped a bit.



Year over year PPI is in a holding pattern

The good news is the year over year inflation numbers are at worst holding. But we're not out of the woods with these charts -- not by a long shot. For that to happen one of two things (or both) need to happen.

-- The CRB index breaks it's uptrend

-- Agricultural prices convincingly move through their 50 week SMA.

Today's Markets

In the "the housing market is nowhere near bottom" file, we have Home Depot's earings which dropped 66%. Oil crossed 129 a barrel (thank God it's not part of core inflation and therefore unimportant). And while Target also missed earnings, Saks and Staples saw increases (but note that Staples increase came from overseas increases rather than increases at US stores). We also saw Iceland get its credit ratings lowered.

Let's go to the chart to see what they say:



On the 5-minute daily chart, notice the clear trend break that occurred today, with prices dropping hard at the open and continuing to drift lower for the rest of the day. This shouldn't be surprising considering oil's price spike and the strong rally the SPY's have been experiencing since the beginning of last week. While a gentler sell-off is always preferred, a harsh sell-off isn't the end of the world.



On the SPY's daily chart, notice the upward trend is still intact. However, also notice the SPYs got to the 200 day SMA and couldn't cross. But also notice the positive SMA picture.

-- The shorter SMAs are higher than the longer SMAs

-- All the shorter SMAs are moving higher, and

-- Prices are still above the shorter SMAs.



Like the SPYs, the QQQQs, sold-off hard today, but would up in a trading pattern during the rest of the day.



But notice the uptrend is still very much intact on the daily chart. Also notice the following positive SMA points:

-- Prices are above all the SMAs

-- The 10 and 20 day SMA have crossed the 200 day SMA

-- The shorter SMAs are greater than the longer SMAs (10 > 20 > 50)

-- All the shorter SMAs are heading higher



The IMMs have been in the middle of a broadening pattern since last Wednesday. While they sold-off today as well, they used the established lower boundary of the broadening pattern as support.



Notice the following positive SMA points on the IWM chart:

-- Prices are above the shorter SMAs

-- The shorter SMAs are greater than the longer SMAs (10 > 20 > 50).

-- All the shorter SMAs are moving higher.

-- The longer-term trend lines are still very much in place.

The Big.....Auto Bubble?

This is from the front page of today's WSJ:

.....The auto industry is the nation's largest manufacturing sector, accounting for almost 4% of U.S. gross domestic product. It employs about 2.5 million people directly or indirectly, and spends tens of billions of dollars a year in research and development.

.....

Through most of the 1990s, auto makers sold a little over 15 million cars and light trucks a year in the U.S. market. That changed in the late 1990s: With gasoline prices low and many U.S. consumers feeling flush from the tech-stock boom, auto sales surged. Sales peaked at 17.4 million in 2000 and remained near 17 million for another five years. Heads of General Motors Corp. and Toyota said the U.S. was entering a golden age of the automobile. In 2003, Toyota's head of North American sales predicted the industry would soon be selling 20 million vehicles a year.

They were wrong. Sales started falling in 2006 and this year are expected to be right back where they were in the 1990s, at just over 15 million. Last week, market researcher Global Insight Inc. lowered its 2008 forecast for U.S. vehicle sales to below 15 million. Global Insight now believes sales won't reach previous highs again until 2012, a year later than it had previously thought.

"Going forward, 16 million is a good year," says Ron Harbour, whose firm, Harbour Consulting, tracks auto production.

Imagine that -- cheap and/or easy financing terms were used to inflate the market. Where have I heard that before?

As a side note, Mrs. Bonddad and I have been talking about getting a new car. We are both amazed that gas mileage technology has not significantly improved over the last 15 years. In fact, I would swear it has gotten generally worse (but I can't prove that).

Let's take a look at the charts, which we can break down into US and Japanese auto makers.



The main issue with Ford is we saw prices consolidated from the end of 2007 to the end of 2008 when they broke through support. They have since rebounded and have formed a pennant pattern over the last few weeks. But note that prices are back to where they were in 2007-2008, and not higher.



On General Motors, notice that prices consolidated in a broadening pattern over the same period as Ford. However, GM has yet to significantly bounce back from the last summer sell-off.



On Honda's chart, notice the strong rally from 23 to 39 that lasted from 2006 to the end of 20006. Also note that prices have dropped in a downward sloping channel (which has two possible top channel lines), but in a very orderly way. Bottom line, trades still see Honda as having value.



Toyota has a chart similar to Honda's. There is a good strong rally from about 70 - 135 between 2005 and the end of 2006 followed by an orderly sell-off. My guess is the Prius sales were a prime reason for this (the Prius has continually been a top seller in a big way). Whatever the reason, this is a good chart regardless of the sell-off.

So -- what do these charts tell us? Simple -- the Japanese car companies have a far better business model than US car companies. Seems like old times.

Treasury Tuesdays

There are strong cross-currents hitting Treasury investors:

David Ader, a U.S. government bond strategist at RBS Greenwich Capital, said many cross-currents buffeted bonds this week, not the least of which was "a steady litany of hawkish Fedspeak" from Fed officials, speculation about a shift in Libor, a "V-shaped" economic recovery, and weak economic data.

Hawkish tones from the Fed implies rates are going up. This would be a sell signal to Treasury traders for several reasons. First, it probably means inflation is increasing which erodes the value of fixed income investments. Secondly it means bonds that will be issued in the future will have a higher coupon and will therefore be more valuable than the current run.

However, weak economic data indicates the Fed won't be raising rates and may very well be lowering rates. That would make current issue Treasuries more valuable leading to higher prices and lower yields.

The basic problem is the traders are getting mixed signals on a variety of fronts.

Last week Fed officials made several speeches highlighting their concern over inflation:

The myriad Fed officials who offered their views Tuesday — including Cleveland President Sandra Pianalto, San Francisco President Janet Yellen, Kansas City President Thomas Hoenig and Dallas President Richard Fisher — all paid heed to the risk of stoking inflation by keeping interest rates low for too long.

But there was also very weak economic news.



Year-over-year industrial production is dropping



Year-over-year empire state is still negative, and



The Philly Fed is still deeply negative.

In addition, a trend may be developing: investors are selling treasuries to move into stocks and higher yielding assets:

Treasuries fell Wednesday, as a benign inflation report seemed to lessen the chance of a Federal Reserve interest rate hike this year and encouraged investors to buy stocks and higher-yielding fixed-income securities instead of safe-haven government debt.

However, the Treasury market is now running into resistance:

It is anyone's guess where U.S. Treasury yields will go from here, and this week is unlikely to bring any clues.

Bonds have been on a weakening trend since Bear Stearns Cos.' mid-March downfall. Believing they have seen the worst of the credit crisis, investors have relaxed their dependence on risk-free government paper. This action has brought Treasury yields, which move inversely to prices, to highs last seen in January.

But now those yields are bumping against stubborn resistance -- 2.5% for the two-year note and 3.90% for the 10-year note -- and it will take more compelling evidence of either economic or financial-market recovery to push prices lower and yields higher.

Federal Reserve officials can't produce that kind of evidence at the moment; last week's cacophony of speakers appears to have left markets no more assured of the economic or monetary-policy outlook than before.

Let's look at the charts to see what's happening there.



On the daily SHY chart (1-3 year Treasury) the most important thing to note is the clear upward trend break that happened in mid-March. Before that this part of the Treasury market benefited from the "flight to safety" as investors wanted their money returned. As the credit markets unfroze a bit this trend lessened and traders left the safety of the front end of the yield curve.



On the 3-month chart, notice the clear downward sloping trend of the last few months action. Also notice the following:

-- Prices are above the 200 day SMA

-- The shorter SMAs are below the longer SMAs

-- All the shorter SMAs are heading lower

-- Prices have been bouncing off of the 10 and 20 day SMA for the last month or so



But in the last 10 days, notice the market has been whipsawed and is about where it started. This chart shows the conflicting nature of the trends in the Treasury market right now.



On the IEF, notice (again) a clear trend break from the "flight to safety" trade.



And on the 3 months daily chart, notice the clear downward sloping trend. This is an orderly sell-off. Also note the following:

-- The shorter SMAs are below the longer SMAs

-- The 10 day SMA is leveling out. It may cross the 20 SMA within the next week.

-- Prices have been bouncing off the 10 and 20 day SMA for the last month or so



On the long-end of the curve we're in a trading range and have been since the end of last year.