Thanks to the easy money policies of Ben Bernanke and the Federal Reserve, Treasury yields will likely remain artificially and historically low at least through 2013. Adding to the downward pressure on yields is the unrelenting buying by investors seeking a safe haven from global economic uncertainties. There is a limit to how long the Fed will be able to keep expanding their balance sheet before they're forced to stop buying treasury and agency bonds. At that point, rates will begin to move higher. Also, should global economic conditions really start to improve, investors will sell Treasuries and move to equities. But for now, don't fight the Fed.

Last Month's Results

• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended January 14 was 352,000, a decrease of 50,000 from the prior week's revised figure. The four-week average of 379,000, a small decrease from the prior week. The DOL cautioned people that the Martin Luthor King holiday and some seasonality reduced the number of claims. Still, the overall trend of jobless claims is moving lower. About 3.43 million people continue to collect unemployment insurance, a drop of more than 200,000 from the prior week.
• Non-farm payroll employment increased by a very solid 200,000 in December, with 212,000 gains in the private sector offset by 12,000 losses in government jobs. The majority of the gains came in couriers and messengers industries as well as other seasonal jobs, so we'll see how many of those jobs are retained in January. Only 8,000 jobs were actually lost to revisions in October and November. The total number of workers counted as unemployed fell to 13.1 million, helping move the unemployment rate down to 8.5%. The more comprehensive U-6 rate, which was as high as 16.7% in June, actually moved up to 15.2% from 15.0% last month.
• A slightly lower 5.6 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work fell to 8.1 million and the number of marginally attached workers inched lower to 2.5 million. The number of people holding multiple jobs fell to 7.03 million. The average hourly wages for blue collar workers remained at $19.54 while the average work week crept up to 33.7 hours. So overall, this report continued the incremental improvement shown in recent months but wages and hours worked remain stagnant.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $84 billion for December and $320 billion for the first three months of fiscal 2012, which was about $50 billion less than the same period a year ago. But half of that resulted from shifts in the timing of payments, so it would have only been $23 billion less.
• The Census Bureau reported that the U.S. trade deficit of goods and services was $47.8 billion in November, up from the revised figure in October, but still within the range of the rest of the year.
• The Census Bureau reported that privately owned housing starts rose 9.3% in November, after being flat in October, and was 24.3% higher than a year ago, to a seasonally adjusted annual rate of 685,000 units. The monthly results continue to fluctuate wildly from month to month, so a reliable trend is not yet in evidence. New building permits were up 5.7% from the prior month and 20.7% from last year. Like starts, the number of permits are fluctuating wildly from month to month, so no discernable trend is yet in evidence. But at least the figures are moving up, not down.
• The National Association of Homebuilders/Wells Fargo Confidence Index in November rose to 21 from 19 in October, marking the highest level since May 2010. While these are still very low numbers, we now have three months of consecutive increases, which provides a glimmer of hope.
• The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in November rose 1.6%, and at 315,000 units, sales were actually 9.8% higher than the depressed level of a year ago. The estimate of homes for sale was only 158,000, which represents 6.0 months at the current rate of sales. The median sales price of $214,100 marked the lowest price since October 2010, and was well below the 12-month moving average price of $225,842. While the rising number of home sales is good news, and probably due in part to the better weather and ever cheaper prices, the falling average sales price continues to be worrisome.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were 4.0% higher in November to 4.42 million units, and were 12.2% higher than a year ago. (All the figures for the year have been revised.) There is an estimated 7.0 months supply of available homes. The median sales price of $164,200 is slightly lower than the 12-month average of $165,108. With mortgage rates at historically low levels, and prices as cheap as they've been for years, this is a great time to buy a home if you have cash, good credit, can find someone willing to sell and take out a conforming loan. If you want a jumbo mortgage, you're basically out of luck.
• The S&P/Case-Shiller Home Price Index (10-city index), which uses a three-month moving average to track the value of home prices across the US, slipped for the second straight month in October. This is not surprising considering the falling home prices reported by the Census Bureau and the National Association of Realtors. My guess is that next month will also be down.
• According to RealtyTrac, the number of foreclosures in September decreased 5.82% from the prior month, and remained 38% lower than a year ago. According to James Saccacio, CEO of Realty Trac, while foreclosure activity in September and the third quarter continued to register well below levels from a year ago, there is evidence that this temporary downward trend is about to change direction, with foreclosure activity slowly beginning to ramp back up."
• The Institute for Supply Management (ISM) index of manufacturing activity was 53.9 in December. This marks 29 consecutive months of expansion in the manufacturing sector, and a slight improvement over the prior month. The ISM index of non-manufacturing activity was 52.6. This marks growth in the service sector for 24 consecutive months. These numbers demonstrate that business still growing, slowly but steadily, and moving away from a risk of recession.
• The Conference Board reported that it's index of Leading Economic Indicators increased by 0.5% in November, a small increase versus the prior month. Says Ataman Ozyildirim, economist at The Conference Board: "Novembers increase in the LEI for the U.S. was widespread among the leading indicators and continues to suggest that the risk of an economic downturn in the near term has receded."
• According to the Bureau of Economic Analysis, the "third" estimate of GDP growth in Q3 was 1.8%, down from the "advance" estimate of 2.5% and "second" estimate of 2.0%. This highly mediocre number follows a weak Q2 GDP growth of 1.3% and the putrid Q1 GDP growth of 0.4%. This compares with 2.3% in Q4, 2.5% in Q3, 3.8% in Q2 and 3.9% in Q1 of 2010. The evidence would suggest that while (at least for now) we have avoided the "double-dip recession", the economy continues to sputter.
• The Federal Reserve reported that in November the amount of outstanding consumer credit was $2.48, up 0.8% from the prior month. This was the largest month-over-month increase in total outstanding consumer credit since November 2007. It would appear that after years of retrenching, the American consumer is back and spending again. This is very bullish for the future of the retailing sector.
• According to the Census Bureau, retail trade and food service sales were up a meager 0.1% in December, and were 6.5% higher than a year ago. This was a weaker than expected report. Autos and clothing led the way while electronics and appliances (which was the best performer the prior month) were the biggest losers.
• The Federal Reserve reported that in December the rate of growth in the supply of M-2 (a broader view of money) slowed a bit from prior months, but continued to move higher, up 12.7% over the prior six months. The supply of M-1 (the most narrow definition of money), on the other hand, rose 21.9% over the same six months. Where is all this money going, other than to the reserves at your local bank or sitting on the balance sheet of the Fed? It seems clear to me that this subtle and dangerous policy of monetary expansion isn't having enough real influence on the economy.
• After plunging in October, the Conference Board's Consumer Confidence Index recovered in November, surging from 40.9 to 55.2 (revised), then moved even higher in December to 64.5, the highest level since April. Still, the index is well below a healthy reading as the economy shows signs of life but home prices and real incomes decline. A reading above 90 indicates the economy is solid, while 100 or above indicates strong growth. It could be a while before the confidence index again reaches those lofty levels.
• According to the FDIC, 90 banks failed in 2011, which was a big improvement over the record 160 banks that were either closed or merged into healthier banks in 2010, and 140 in 2009. By comparison, only 26 failed in 2008 and a paltry 3 in 2007.

Trends To Watch

In 2011 the relative value of the dollar was the most important factor determining the direction of the stock market. When the dollar went up, the market went down, and vice versa. Almost all sectors traded down when the dollar rose. The big increase last year in the value of the greenback had a particularly deleterious effect on the relative values of hard assets like gold, copper and iron ore. This will be a very important relationship to watch this year. Should the ECU get a handle on their crisis, expect the dollar to slip, increasing the relative value of hard assets and equities. Looking at the chart below, one might expect the dollar to take a breather anyway.

Last month I wrote that it was "a very interesting and important moment for gold investors. The price of gold has fallen below both the 50-day and 200-day moving averages, and below the rising trendline. For some, this is time to panic and sell. For others, like me, this will create a profitable buying opportunity." I hope you listened and bought when it was in the $1,500's as you may not see that price again for some time. Even with the year-end weakness (as you can see in the first chart), 2011 marked the 11th consecutive year in which the price of gold increased on a year-over-year basis. Can you name any other asset class that can make the same claim? And I'm confident that the trend will continue this year as the global debt problems and political uncertainty will persist for the foreseeable future.

To put the movement in the price of gold into greater perspective, I'm showing you a three-year picture below. The decline in December violated the trendline which wasn't good. But if the current rally bring it back above 1,700, it'll be back on trend and back above both moving averages.

The decline in the price of silver was greater than the concurrent losses in gold over the last quarter of 2011. You can't describe the chart any other way than ugly. Yet recently silver is again showing some life. I've show, with a green line, the next level of resistance at around $35.70. Even though silver is a "precious metal", it's also viewed as an industrial metal, and therefore more susceptible to economic uncertainties. So assuming the economy continues to improve, one might expect the price of silver to recover. I'm still bullish.

It appears that Dr. Copper is now giving the economy a much better prognosis as the price of copper has advanced more than 23% over the past few months. It would be even more bullish if the price can break above resistance around $3.75 or so, and above both moving averages. Still, this is a positive sign.

The price of West Texas Crude had exploded higher over the past three months, rising back to around $100/barrel. The price is now bullishly above both moving averages and at the high end of the trading range (in blue). A little profit-taking and consolidation is normal after such a brief and powerful rally. It will be very important for the bulls for the price to remain above $90/barrel (red line) then eventually move above resistance at around $104-$105. For now, remaining in the upward moving green channel is bullish.

I've written about my bearishness on the financial sector every month since early 2008, and that was a very good stance to take for over three years. Now, things may be changing. As you can see, there has been a strong rally over the past two months, after an equally powerful move in October fizzled in November. The index is now trading above both moving averages after bumping against resistance around 14. I've been a bear for so long that I'm not ready to change my tune just yet. We'll see if this rally has legs.

I have been bearish on the housing sector since 2007, and like the financial sector, it saved my clients a lot of money to avoid housing stocks. I honestly cannot understand why this index has gained about 58% since the end of September. I have reported virtually no good news on housing. Indeed, prices continue to fall and show no sign of going up any time soon. Yet you can't argue with the chart. The index is right at resistance around 120 and far above both moving averages. RSI is into oversold territory, so I'd expect some profit-taking. I'm just not ready to turn bullish just yet. 

The equity markets of the developed international countries, not surprisingly, took a beating the second half of last year. The good news is that support held around 46. The better news is that the price has recently moved above the 50-day moving average. I'm not saying that it's full steam ahead. In fact, the slightest bad news could easily send this index plunging again. It's hard to imagine any sustained rally until the ECU is on more stable footing. But there is a whiff of optimism in the air. The next resistance comes in around $54. So we'll see if this index can continue to move higher.

The chart for the emerging markets index, which shouldn't be correlated with the developed markets, looks remarkably similar to the chart above. The emerging markets don't have the same crushing debt burdens, and a much higher GDP growth rate. This suggests that should there be some global economic stability, there could be some explosive gains coming from the emerging markets region. Technically, the chart looks better now that the index has risen back past both failed support levels and the 50-day moving average. The next resistance looks to come in around $43-$44, which would also bring it past the 200-day average.

I wrote for six months last year that the weakness in the Shanghai Index made me very nervous because of China's importance to the world economy. Indeed, you could make that case that as China goes, so goes much of the rest of the world. In July the index fell below its moving averages and a year old support level (green line). Then after testing it in early October, the index sunk In December below major support (red line) to a level not seen since the Lehman failure when it bottomed out at 1,665. I also wrote that RSI was extremely oversold which suggested that a short-term pop should coming up. Fortunately, as you can see in the circle below, the SSEC has indeed popped a bit, although there's a long way to go before I'll call a recovery. So for now, we'll watch and see what happens.

What a difference a few months make. After suffering through extreme bearishness in early October, the market could now be considered mildly bullish. Add to that the fact the RSI is in oversold territory and it suggests that a correction is coming sometime soon, although I don't know how severe that correction might be. My intuition suggests it will be mild.

This chart, which shows that almost 80% of stocks traded on the New York Stock Exchange that are trading above their 50-day moving average, also suggests a hint over over-exuberance. Look for either a correction, or at least some sideways action ahead.

Finally we have the somewhat busy chart of the "Fear Index". One might expect that after all the political, economic and meteorological crises we endured last year, a few of which are noted below, the VIX would show evidence of greater concern. Yet amazingly, it's closer to the complacency range than the fear range. Is the VIX discounting all the bad news and forecasting better things to come? While I don't miss the crazy volatility of 2011, I don't want to see too much more complacency because that could set up a big sell off.