Short-Term Key: Negative Long-Term Key: -93 (Neutral to Negative)

The two most important developments that came to light this past weekend both occurred within the energy sector, a sector which is also a key indicator of economic health.

On the global level, we had a report that oil consumption in the U.S. fell in January to its lowest level since 1998. We can interpret this drop in several ways.

Most of the recent decline came in the demand for distillates, including diesel fuel. Diesel fuel, which is used in trucking, railways, and other forms of mass transit, is particularly sensitive to economic activity. The more goods we produce, the more transportation fuel gets consumed and vice versa. In fact, UCLA has recently created a Pulse of Commerce Index based on real-time diesel consumption by the American trucking industry.

Diesel consumption has a very good record as an indicator of industrial production. Unfortunately, this means the drop in January's consumption figures suggests that industrial output is slowing as well.

To be fair, the 3-month moving average for this index is considered more reliable than the monthly data, and the 3-month MA is up. December saw a big increase in consumption, so perhaps January's dip is really just a brief correction. Nonetheless, another drop in February would call the U.S. economic recovery into question.Read more...

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Short-Term Key +8
Long-Term Key +26

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In this pre-election update...

***** Not a stock market, but a market of stocks.
***** Incredible deals that won't last long.
***** Keeping an eye on the long-term picture.
***** Election fever has us excited too.
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The Federal government has now confirmed what we have been predicting for some time: that a severe economic downturn is a real danger, and that the government is determined to do anything and everything to prevent one. Yesterday, Treasury Secretary Paulson announced that the government would seize control of Fannie Mae and Freddie Mac, and that the taxpayers are prepared to pay $200 billion dollars to prevent the immanent collapse of these mortgage lenders, and add over a trillion dollars in mortgages onto the Federal books. In addition, the FDIC and the Federal Reserve said they would help small banks left holding Fannie and Freddie stock. This is not exactly how free enterprise is supposed to work, but the consequences of letting these companies fail appear so dire that they have scared the pants off the Treasury.

Clearly, we are watching the Mother of all rescue plans in action. But it's a necessary plan. At no other time in history have we seen the two largest financial institutions on the verge of drowning at the same time.Read more...

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The combined efforts by the Fed and Congress to stimulate and lubricate the economy seemed to work extremely well last week as the S&P rose 4.87%, while the Dow climbed 4.39%. Putting aside any impolite metaphors, what really impressed us were the even bigger gains in the broad market. Indeed, the win:lose ratio last week was on the order of 7:1, which is extremely positive. We had to flip back through out data to 1987 to find a week in which market breadth was stronger.

What’s more, the few cases in history when market breadth was as good or better than last week were all followed by further gains in stock prices. True, there are occasions (1977 in particular) in which high breadth did not signal a full-fledged bull market. Then it signaled the arrival of higher inflation. This time may be similar. While we welcome last week’s market advance, we are pretty sure it was the result of liquidity on a scale greater than we have ever seen, and that higher inflation is in the bag.Read more...