Market Talk

US stocks modestly rise, but show little conviction, after Fed’s beige book report, Obama’s speech and consumer credit data.

DJIA gains 46, or 0.5%, to 10387, and has risen five times in last six days. But Newswires columnist Tomi Kilgore finds some reason for caution:

The DJIA might look strong, since it has held onto most of its gains throughout the day, but the inability to get through resistance after a third attempt should put bulls on edge. The DJIA’s intraday high is 10427, following highs of 10447 and 10451 the past two sessions. Meanwhile, the 200-day moving average has been coming in right around 10450. The DJIA was recently up 40 at 10381. If the DJIA can’t get above the 200-day tomorrow, a test of the 50-day moving average, which comes in around 10286, should follow shortly. Meanwhile, a close above the 200-day would target the Aug. 9 high of 10720.

Meanwhile, S&P 500 gains 7, or 0.6%, to 1099, yet still can’t shake the psychologically-significant 1100 level. Nasdaq Comp jumps 20, or 0.9%, to 2229. Volume was weak again.

Encouraging developments from European banks helped shed yesterday’s pessimism. But Fed says economy hit soft patch in July and through August and Obama introduces new policies to kick start economy. Consumer credit in July also dropped for sixth-straight month.

- Consumer credit falls for fourth straight month. “There’s absolutely nothing encouraging about these numbers from a standpoint of ‘recovery,’” Karl Denninger writes. Perhaps more disturbing is the negative revisions. “They effectively erased the alleged ‘improvement’ in the rate of decline that was allegedly ‘reported’ last month.”

- Paul Krugman wants to know what went wrong as high unemployment continues to plague the economy. “It’s now obvious that the stimulus was much too small; yet there’s virtually no chance of getting additional measures out of Congress,” Krugman says. “From a strictly economic point of view, we could still fix this: a second big stimulus, plus much more aggressive Fed policy,” he adds. But politically, we’re stuck…I’d like to say something uplifting here; but right now I’m feeling pretty bleak.”

- Bank lobbyists successfully watered down financial reform, Simon Johnson writes, except for one key aspect: the Kanjorski Amendment. The amendment “gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a ‘grave risk’ to the financial system,” Johnson says. “The debate on big banks and the dangers they pose is far from over.”

- Apple’s (AAPL) next release of its Apple TV set-top box will let viewers watch individual TV episodes for 99c, according to the NewTeeVee blog. In a move reminiscent of how AAPL launched what became the world’s biggest music retailer, it’s apparently trying to get TV programmers to allow episode rentals for less than the current $1.99 or $2.99 fees.

- The housing bust, which first hit the working class, has made its way up the ranks and now is hitting the affluent pretty hard. About one in seven homeowners with loans of more than a million dollars are seriously delinquent, NYT reports, while only one in 12 mortgages under $1M are delinquent. The “message here is that high income borrowers aren’t taking the Freddie/Fannie/bank bluster about strategic defaults seriously,” Yves Smith says.

- Adobe’s (ADBE) next version of Flash will support 3D graphics, if the session lineup for the company’s MAX 2010 conference is any indication. The session, flagged in a CNet post, promises “a deep dive into the next-generation 3D API coming in a future version of Flash Player.”

- Percentage of S&P 500 stocks trading above their 50-day moving averages has spiked up to 28% amid this week’s big rally, Bespoke Investment Group reports. “For bulls, this means there could be a long way to go before the rally runs out of steam. For bears, this shows that even after a pretty big rally, breadth remains rather weak.”

- Sure the New York Stock Exchange is flying both the Dutch and Spanish flags, but don’t be fooled by the alleged display of World Cup nonpartisanship. NYSE CEO Duncan Niederauer asked exchange employees to wear orange in support of colleagues in The Netherlands (where NYSE operates an exchange) before Sunday’s final with Spain, says spokesman Ray Pellecchia, emphasizing in a blog post that his own blue-and-orange tie is “NOT a Mets tie.”

- Deflation worries are still prevalent. “Debate rages about whether the trend is a warning sign for the economy or merely statistical noise,” James Picerno notes at The Capital Spectator. “To be fair, outright deflation isn’t here yet, nor is it certain (or even likely) that it’ll turn up.” But the risk remains. “And with the outlook for a jobless recovery looming, this is no time to soft pedal the D risk.”

- Reuters blogger Felix Salmon is pessimistic that there’s an easy solution to the long-term unemployment issue plaguing the US. “Maybe unemployment is simply a problem to which there is no good medium-term solution, let alone any short-term fix,” he says. “Certainly the government can’t directly employ the unemployed, and although I’m a big fan of arts subsidies as a way of creating jobs, that kind of thing is only ever going to have a marginal effect.”

- Potential candidates for Fed Board vacancies should be known to have anticipated the financial crisis in advance, have a pro-consumer stance and be willing to release AIG-related emails, Yves Smith says.

- In the next year or so, if we are to have a sustained recovery, I think we would be much better off with stingy banks, than with thrifty consumers,” Stephen Gandel writes.

- The notion that newspaper publishers should torch their print editions and just embrace the Web is “just plain nutty,” Newsosaur blogger Alan Mutter says. “It doesn’t take a certifiable Silicon Valley genius to see that no business can walk away from some 90% of its revenue base without imploding.”

- Jobless claims have been stuck at current levels for nearly four months, Economist’s Free Exchange blog notes. “The wait for the dip back to normal levels continues.”

- Google and retailers are teaming up to help customers find products.

- Consumer credit has contracted about 6% since the recession began, and banks’ lending standards are getting even tougher. “It will be interesting to see to what extent the tightening of standards for revolving credit impact overall lending,” writes Atlanta Fed’s Ellyn Terry.

- Latest AAII weekly poll shows surging bullish reading of 45.3%. “This has served as a fairly reliable contrarian indicator in the past as small investors tend to pile into stocks near the end of rallies,” Pragmatic Capitalist says.

- Is a housing bubble developing in China? Calculated Risk weighs in.

- Peter Boone and Simon Johnson say beware of the coming Greek debt bubble. Paul Krugman isn’t so sure.

- Sen. Chris Dodd will introduce his sweeping plan to overhaul financial regulations on Monday without any Republican support.

I just want to capture the moment.

A positive “print,” as the smart crowd calls is, for 3Q GDP is a given, as far as the stock market and just about everybody else is concerned. But that’s growth is coming via a tremendous expense in government spending, and where it goes after that is not so easy to predict.

GDP should expand briskly over the next year, Capital Economics’ Paul Ashworth says, but it may be “the mother of all dead-cat bounces,” as GDP slows markedly again in 2011.

In a normal recovery, pent-up demand gives an initial boost to activity, which drives production, which sparks hiring, which fuels demand. “But the crucial difference this time is that the legacy of debt built up during the past two decades will constrain consumption growth for several more years.”

This is something I mentioned just this morning, actually. What is going to be the spark that drives the business cycle? Every card-carrying free-marketer will tell you it can’t be government spending (well, they may have once upon a time; we’re not so sure now. Seems, much like atheists, there are no free-marketers in a foxhole.)

Continue reading…

Well, I was right about two things. Consumer credit continued its slide in August, and the reporting of it still isn’t moving the market.

The Fed reported its consumer credit numbers for August, showing that credit contracted for a seventh consecutive month, by $12 billion. That was more than the $7.5 billion expected. And even during a month that saw a big spike in auto sales, nonrevolving credit, which includes auto loans, dropped.

In today’s Ahead of the Tape column for the Journal, I noted the seven months match a stretch hit in 1991 for duration. But this stretch has seen a steeper decline, and if it should stretch into an eighth month, it would represent a new record.

It’s hard to know how the numbers break down. The Fed doesn’t break it down by income levels or demographics; it also isn’t clear how much of it is consumers paying down debt, or just defaulting on their cards, leaving the banks to write-off the debt.

The report itself isn’t a market mover; it comes out late in the day, and until recently it generally just rose. But seven months is pretty much a trend.

And it’s a trend that’s dovetailing with other trends that is the concern. For one thing, unemployment is not improving as fast as the bulls expected. For another, retail sales tomorrow are expected to show a 13th consecutive month of declines. People are either unemployed, underemployed, having their wages cut or just generally worried about the job they have.

It seems clear at least to me that consumers will not be spending very freely this year. The only “must have” item this year is a job.

Make ours a short-stack, please.

Premarket US stock futures suggest markets are headed for a wishy-washy open, with mixed action in Asia overnight as well as mixed trading in Europe. Economic data calendar is empty, though the Fed releases its latest Beige Book survey at 2:00pm.

Big drop in July consumer credit, out late yesterday, and sizable revision to June’s number are an eye-grabber and reveal plenty about where consumers’ heads are these days. Another glimpse at the “new normal”? Probably. Forget tighter lending standards – consumers certainly don’t appear to be banging down banks’ doors to get new loans these days.

S&P futures 1.10, DJ futures flat. Ten-year a shade lower, yield at 3.47%. Crude’s up, edging toward $72/barrel. Gold’s slipped back under $1,000/ounce.

Chicago Fed Pres Charles Evans says the Fed will be more “aggressive” in tightening the monetary spigots “relative to 2004″ in a speech at the Council of Foreign Relations titled the “Great Inflation Debate.” In the prepared remarks, Evans said deflation has been avoided, although it was still too early to start removing the monetary props.

“I think neither a harmful deflationary episode nor a repetition of the Great Inflation (from 1965 to 1982) is very likely,” Evans said.

Is Goldilocks making a comeback?