• According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended July 7 was 350,000, a decrease of 25,000 from the prior week's revised figure. The four-week average of 376,500, about 5,500 lower than the prior month's tally. Initial claims have now dropped for three weeks in a row. Not yet sure what that means, if anything. About 3.30 million people continue to collect unemployment insurance, an increase from the prior month.
• Non-farm payroll employment in June, like the prior two months, was worse than expected, posting a very disappointing increase of only 80,000 jobs as the economy continued to slow. Service and temporary jobs posted the largest gains. Revisions showed little change from the prior two months. The total number of workers counted as unemployed held firm at 12.7 million, which meant that the unemployment rate held at 8.2%. The more comprehensive U-6 rate, moved from 14.5% to 14.9%, the third increase in a row.
• 5.4 million people continued to be unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work rose to 8.2 million and the number of marginally attached workers rose to 2.5 million. The number of people holding multiple jobs fell to 6.7 million. The average hourly wages for blue collar workers inched up to $19.74 and the average work week rose to 33.8 hours. On balance, this was another gloomy picture. The only silver linings were the increases in hourly pay and average workweek; but I'm really scraping for crumbs here.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a federal budget deficit of $60 billion for June and $905 billion for the first nine months of fiscal 2012, which was about $66 billion less than the same period a year ago, thanks primarily to higher tax receipts. If not for some accounting adjustments related to the TARP program, the deficit would be about $130 less this year than last.
• The Census Bureau reported that the U.S. trade deficit of goods and services was $48.7 billion in May, down a bit from an upwardly revised April figure. I have been suggesting that the deficit will shrink a bit over time as we grow less dependent on foreign oil. In addition, our economic slowdown suggests that imports will drop a bit.
• The Census Bureau reported that privately owned housing starts fell 4.8% in May from a revised higher level in April. Housing starts are now 28.5% higher than a year ago, to a seasonally adjusted annual rate of 708,000 units. We'll see if the May numbers are revised higher in subsequent months. New building permits were up 7.9% from the prior month and 25% higher than the year before. We'll need a few more positive months before we can declare a trend.
• The National Association of Homebuilders/Wells Fargo Confidence Index gained 6 points in July to 35. That's a big increase and marks three months in a row of gains in builder confidence, although it's still well below a healthy figure of 50. “Combined with the upward movement we’ve seen in other key housing indicators over the past six months, this report adds to the growing acknowledgement that housing – though still in a fragile stage of recovery – is returning to its more traditional role of leading the economy out of recession,” said NAHB Chief Economist David Crowe.
• The Census Bureau reported that on a seasonally adjusted annualized basis, sales of new homes in May rose 7.6%, and at 369,000 units, were 19.8% higher than a year ago. The estimate of homes for sale was 145,000, which represents a meager 4.7 months at the current rate of sales. The median sales price of $234,500 was roughly the same as last month and about $6,500 higher than the rising 12-month moving average price of $228,000. The new home sale market is actually starting to get tight; we need the banks to slightly relax their lending standards to really get things moving.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, sales of existing homes were 1.5% lower in May to 4.55 million units, but remained 9.6% higher than a year ago. The estimate of 2.49 million homes for sale means there's an estimated 6.6 months supply on the market. The median sales price jumped to $182,600, which is well above the 12-month average of $166,800. It appears that the minor drop in sales is more due to supply constraints rather than a lack of demand. We'll see if things improve next month.
• After slipping for seven straight months, the S&P/Case-Shiller Home Price 10-city index, which uses a three-month moving average to track the value of home prices across the US, rose in April. Last month I wrote that "It's possible that we are approaching the bottom in existing home prices." If we're lucky, I was right.
• The Institute for Supply Management (ISM) index of manufacturing activity was 49.7 in June, breaking a streak of 34 consecutive months of expansion in the manufacturing sector. This is a very negative development, but not completely surprising. According to Bradley J. Holcomb, CPSM, CPSD, chair of the Institute for Supply Management™ Manufacturing Business Survey Committee, "The PMI registered 49.7 percent, a decrease of 3.8 percentage points from May's reading of 53.5 percent, indicating contraction in the manufacturing sector for the first time since July 2009, when the PMI registered 49.2 percent." The ISM index of non-manufacturing activity was 52.1, down from May, which marked growth in the service sector for 30 consecutive months. These numbers demonstrate that the overall economy is growing slightly, but shrinking to dangerous levels.
• The Conference Board reported that it's index of Leading Economic Indicators increased by 0.3% in May after a small decrease in April. Says Ataman Ozyildirim, economist at The Conference Board: "Weakness in the average workweek in manufacturing, stock prices and consumer expectations kept the LEI from rising further. Its six-month growth rate remains in expansionary territory and well above its growth at the end of 2011, pointing to a relatively low risk of a downturn in the second half of 2012." This contradicts that data presented in the PMI. Which one is right? We'll see in the next few months.
• According to the Bureau of Economic Analysis, the "final" estimate of GDP growth for Q1 2012 was 1.9%, the same as the second estimate. I guess the good news was that GDP growth didn't shrink even further. It's crucial that the economy doesn't contract too much further in Q3 or we're headed for (more) trouble. As it is, growth has fallen from 3% in Q4 2011. The GDP growth rate was 1.8% in Q3, 1.3% in Q2, and 0.4% in Q1.
• The Federal Reserve reported that in February the amount of outstanding consumer credit was $2.57 trillion, up 0.7% from the prior month, or over 8% annualized. Interest rates near zero leave Americans with no reason to save, creating more incentives to borrow and spend. I'm surprised that the weak jobs market isn't putting a bigger dent in consumer borrowing.
• Not surprisingly, according to the Census Bureau, retail trade and food service sales were down 0.5% in June, marking the second straight monthly decline, but still 3.8% higher than a year ago. Given the weak economy and the lack of job growth, retail sales simply have to be bad. There were simply no good areas to report. I said last month that "If consumers retrench in any meaningful way, it will have a very deleterious effect on the economy." If that's true, it will start to appear in the Q2 GDP numbers.
• The Federal Reserve reported that in June the six month rate of growth in the supply of M-2 (a broader view of money) was 6.8% after 6.3% in May. The supply of M-1 (the most narrow definition of money), on the other hand, rose a faster 8.1%. It's no surprise that after the market tanked, the Fed opened the monetary spigots a bit, which helped stocks rise. They can't keep doing that forever.
• It is no surprise that the Conference Board's Consumer Confidence Index fell again in June, marking four straight months of declines, to 2.0 from 64.9 in May. The bad news has been almost unremitting. Says Lynn Franco, Director of The Conference Board Consumer Research Center: "Consumers were somewhat more positive about current conditions, but slightly more pessimistic about the short-term outlook. Income expectations, which had improved last month, declined in June. If this trend continues, spending may be restrained in the short-term." That won't help retail sales, or housing, one bit.
• According to the FDIC, 7 more banks failed in June, bringing the total number of bank failures in the first half of 2012 to 31, which is a big improvement over 2011. It's clear that there will be far fewer bank failures this year than the 90 banks that 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 negligible 3 in 2007.

Trends To Watch

The dollar continues to rise in the face of weakness in the Euro. But to put this in greater historical perspective, the dollar index was 121 in 2001 and 89 as recently as early 2010, so the current level of 83 remains below its "normal" historical average level in the mid-90's. The 1990's demonstrated that we can have a strong dollar and a bullish stock market, which has not been the case over the past few years. A return to this former relationship would be very good for investors.

The next three charts show a similar declining wedge pattern; as the wedge tightens it creates pressure which hopefully will result in strong upward movement. Gold has been mired in a downward trend for over 10 months. Given that the wedge remains relatively wide, I wouldn't expect any major action to happen before the Fall. Indeed, I believe the price of gold will remain between $1,650 and $1,550 for a few more months before heading higher towards the end of the year. In the near term, it would be constructive if the price could move higher than both moving averages, and if the 50-day could move higher than the 200-day.

The falling wedge pattern for silver has formed over the past fourteen months and as you can see, it has narrowed dramatically. This suggests that within a month or two, if support at $26 holds, there could be an explosive move to the upside as the pressure builds to an unsustainable level. Taking a position right now is very contrarian, and not for the faint of heart, yet it could pay off handsomely if/when the price again heads higher.

The chart for copper isn't as dramatic right now, and the wedge hasn't tightened sufficiently to create much pressure. The good news is that the price is well above support at $3.00 and is trading above the 50-day moving average. The recent announcement of Chinese GDP growth at 7.6% helped. Better news out of Europe would be needed for any long lasting growth here.

The plunge in the price of West Texas Crude that began in May continued in June before finally finding a bottom around $77/barrel, just north of support around $76. Since then, the price has moved higher, almost reaching $90 again. The rally has brought the current price back to its 50-day moving average. RSI has finished working off a very oversold position. In the short run, a lot will depend on the dollar and global economic stability. I don't expect any significant near term gains unless our relations with Iran take a turn for the worse. Longer term, the picture is less clear than it used to be. I'll talk more about this in the coming months.

The recovery in the financial sector that began in June has continued so far in July. Whether there is enough strength to make another attempt to pierce resistance around $16.25 remains to be seen. I think a lot depends on Europe and the Fed. Left to it's own devices, I don't think the domestic economy is strong enough to warrant another big move from the financial stocks. So for now, I remain wary of this sector. If QE3 is announced, then it's off to the races.

The market has clearly discounted all the bad news in housing and is banking on a lasting recovery. While all the statistics that I've reported over the past few months suggest that the worst may indeed be over, it all assumes that the economy doesn't get any worse, and that's a big assumption. Still, after trading sideways for five months, the index broke above resistance this month to achieve a new high around 140. That means this index has nearly doubled in the past 10 months. I clearly missed this move.

As we leave the US and head to Europe, things don't look nearly as good. The EAFE index is barely holding above crucial support around $46. It's hard to make a case for investing in the developed markets in Europe, Asia and the Far East right now unless you are a serious contrarian. Personally, I've drastically cut the developed markets exposures for my clients.

I said last month that it makes no sense for the chart of the emerging markets to be identical to the chart of the developed markets, and I still believe that. The countries that make up the emerging markets are growing much faster than the stagnant developed world, yet they are treated with equal disdain. China's GDP is "only" 7.6% vs 1.9% in the US vs. negative growth throughout parts of Europe. This disconnect creates an investment opportunity for the brave. Eventually, rational investors will dedicate a greater percentage of their international exposure to those markets that are growing at the expense of those that are stagnating (or shrinking). At that point, the relative performance of these two sectors should begin to diverge.

The optimism in April and May has ebbed, leaving pessimism and fear in June and July. The Shanghai Index is trading perilously close to major support. This could either be a great trading opportunity with RSI at very oversold levels, or could presage huge problems should the index fall further. If the index breaks below 2,100 it will likely take our stock market down with it.

According to the NYSE Bullish sentiment index, the market is basically sanguine right now, even though RSI is touching overbought levels after recovering from a hugely oversold position (see the red circle). Based on this picture, I'd say we're likely to trade sideways, or even moderately higher for a bit.

This chart shows that less that about 66% of stocks traded on the New York Stock Exchange are currently trading above their 50-day moving average. This is about the middle of the trading area. As with the sentiment index, I'd say that this chart suggests we will either trade sideways for a bit or maybe a little higher.

According to the "fear index", the market is surprisingly complacent given the uncertainty in the global economy and the various financial scandals. Yet pictures don't lie (at least not in this case - no Photoshop). As a contrary indicator, this suggests to me sideways trading ahead.