Signposts of Recession and the Downfall of "Free Trade"

By Frank Barbera CMT. February 3, 2009

It was Senator Mitch McConnell who put it best on Monday, when urging the Obama Administration to strip out the “Buy American” clause from the economic stimulus plan. Quoting McConnell, “"I don't think we ought to use a measure that is supposed to be timely, temporary, and targeted to set off trade wars when the entire world is experiencing a downturn in the economy," said Senator Mitch McConnell.” We would have phrased it a bit stronger, as in “the worst downturn of the last 60 years” but no arguments otherwise. As McConnell aptly stated, it is hard to see how such wording will be interpreted as anything but a return to US protectionism and as such, hard to see how the wording would accomplish anything other than a host of ‘retaliatory actions.’

To that end, as McConnell so stated, this language is a ‘bad idea’ – possibly a disastrous idea that could tilt a very negative situation into becoming a dire situation in short order. Any way you slice the baloney the globalization policies of the last two decades were terribly short sighted, and were cataclysmic for the US manufacturing base leaving the US today far more dependent on imported goods. On Monday, Macy’s, an American icon if ever there was one, announced 7,000 job cuts while slashing the dividend. In the last few days, each of the following companies has experienced a share price collapse of sizeable proportions with some of these companies now in single digits, or even penny stocks: Nova Chemicals (NCX), Advanta Corp (ADVNB), Dryships (DRYS), La-Z-Boy, Fifth-Third Bancorp (FITB) Eastman Kodak (EK), ADT Telecommunications (ADCT), Sterling Financial (STSA), Cascade Bancorp (CACB), Smurfit-Stone Container (SSCC), Capital Corp of the West (CCOW), City Bank (CTBK), Colonial Bancgroup (CSB), Beazer Homes (BZR), Black and Decker (BDK), Emulex (ELX), Juniper Networks (JNPR), Marshall & Illsley (MI), CNH Global NV( CNH), Allstate Corp (ALL), Ferro Corp (FOE), Synovus Financial (SNV), Mattel (MAT), EW Scripps (SSP), Hercules Offshore (HERO), Hitachi (HIT), Gannett (GCI), Pier One (PIR), International Paper (IP), Grubb and Ellis (GBE) and Las Vegas Sands (LVS).

Clearly, many of these companies are hurting, and with many folks now out of work, more cut backs will mean still more people joining the ranks of those unemployed. On that front, it is impossible to have anything but tremendous sympathy all the way around. However, the return to a “Buy American’ philosophy, at least as an officially sanctioned philosophy, is an option and a ship that sailed unfortunately 20 years ago. Note in the chart below, the long decline in the American Manufacturing Base as illustrated by the employment of manufacturing workers which peaked 1979 and has contracted by nearly 40%.

In today’s climate, unwinding 20 years of globalization with reverse-globalization (i.e. bringing jobs back to the US), even if it were possible, would be bound to trigger massive trade wars and economic convulsions in both US interest rates and the global currency markets. For the average soul walking the streets of Cleveland or Detroit, Los Angeles or New York, the skyrocketing cost of every day goods that would come with a collapse in the purchasing power of the Dollar (brought on by a currency crisis) would simply devastate the US economy and ratchet up the pain threshold even higher. For many, with things already very grim, that may seem inconceivable, but a currency crisis layered upon the present situation would make life imminently worse and make what has been seen thus far in the way of unemployment but an opening act. Thus, while we have no shortage of contempt for the unrestrained practices which allowed US multi-nationals to exports jobs over the last 20 years, trying to alter and reverse that trend in the current climate is not a tenable outcome.

Still, in the months ahead, the internal tension within the US is likely to continue surging toward a boiling point, bringing with it a new wave of anti-‘free trade’ sentiment. In all likelihood, the fate of the Big Three Auto-Makers will be one of the next major ‘signposts of recession’ likely to foster even more sentiment toward a growing protectionist retreat. In one its most recent comments, Ford Motor Co. announced that it burned thru $5.50 billion in cash in the fourth quarter and said it will tap a revolving credit line after the companies worst annual performance in its 105 year history. Cash in Ford’s automotive business fell to $13.40 billion from $18.90 billion on September 30th, which at current burn rates suggests the company has about six months before things get truly dire. So far at least, Ford is the only US auto maker that has shunned federal loans. Yet in looking at the stock price of Ford, the outlook is pretty dire with the stock tracing out a building five wave decline on the long term weekly chart.

Above: Ford on the weekly chart, tracing out an extended ‘C-Wave’ still pointing lower.

Above: Ford Monthly breaking key support levels all the way down.

In fact, going back even further, we note that the shares of Ford have been an excellent leading indicator of major problems to follow with the stock breaking down from a complex Head and Shoulder top in August 2001 at approximately $22 per share. Since then, the stock has collapsed all the way down to the current quote just under $2.00. In December 2007, the stock once again broke down moving to new multi-year lows and likely suggesting the onset of the current recession. In retrospect, it is hard to imagine that some of the long term trendline and support-resistance breakdowns (see points X and Y on the chart above) could have done a better job of communicating to long term investors that something was seriously wrong in the motor city.

Above: GM long term, still one more set of new lows ahead. Will the company and equity survive?

Not only does Ford still appear to imply that a fifth wave decline is dead ahead, but so too does the share price of General Motors where a panic third wave bottom was seen in late 2008. Since then, prices rallied back and formed a five wave contracting triangle which is almost always a bearish downside continuation pattern. Over just the last few sessions, prices have started to once again break down below the lower limits of the triangle, implying another important wave of selling may be just getting underway.

Above: General Motors – daily, last few weeks, forming a bearish triangle pattern.

Above: GM with long term 1 year Rate of Change, so far, full confirmation from downside momentum = very bearish.

In fact, when we look at GM using several longer term and medium term momentum indicators the odds are high that more new lows are still ahead. In the chart above we show the 52 week Rate of Change for GM which collapsed to all time lows late last year. Thus far, there is no indication of any positive divergence between momentum and price, with the more medium term MACD gauge rolling over on yet another sell signal in just the last few days.

Above: GM with MACD rolling over to the downside once again.

As the Auto Makers face tough times and more downsizing, it will likely put enormous pressure on the US Government to (a) try to affect a rescue, and (b) lean toward more protectionist trade policies. In the current climate, rising protectionism risks a repeat of the 1930 Smoot Hawley Tariff Act which intensified the contraction of global trade and strengthened the Great Depression.

Another highly visible ‘sign-post for the recession” for Americans will be the shopping malls of America where a lot more space will be going ‘un-leased.’ In some cases, “ghost malls’ are already beginning to crop up as it is now estimated that an amazing 148,000 retail stores will be shuttered this year in the US. At 148,000 estimated 2009 store closures would be the highest number seen since the recession of 2001 when 151,000 stores were closed. So far, the following chains have filed bankruptcy or announced wholesale liquidation plans: Steve and Barry’s, Sharper Image, Wickes, Levitz, CompUSA, Linens and Things, KB Toys, Whitehall Jewelers, Shoe Pavilion.

With other names like Rite Aid teetering on the brink of solvency, a wide number of additional chains announcing store closures for 2009 include: Phillips Van Heusen (IZOD/Calvin Klein) - 17 stores, Macy’s - 11 stores, Office Depot - 112 stores, Pacific Sunwear - 154 stores, Bombay Co. - all 384 US stores, Pep Boys - 33 stores, Sprint Nextel - 125 stores, Ethan Allen - 12 stores, Ann Taylor - 14 stores, Cache - 20 stores, Lane Bryant - 150 stores, Dillards - 6 stores, Talbots - 100 stores, Starbucks - 300 stores, Gap - 85 stores, Footlocker - 140 stores, 99 Cents Only - 48 stores, and Home Depot - 15 stores. Assuming that the ‘jobs lost per store averages around 5 jobs per store, the total retail jobs lost in 2009 could soar toward 800,000 jobs.

With more and more people losing their jobs, the drop off in income tax revenues to many states has become quite acute with an amazing 46 states now facing budget shortfalls. In our view, with California in the lead as the world's 8th largest economy, the severe cut backs coming from state and local governments will be yet one more very visible sign-post of recession in the weeks and months ahead.

Source: CNN Money.com

California delays $3.5B in payments

Gov. Schwarzenegger's Golden State is in a world of pain. Now it can't meet its obligations to taxpayers, vendors and others until a budget deal is reached.

By Tami Luhby, CNNMoney.com senior writer
Last Updated: February 2, 2009: 4:49 PM ET
NEW YORK (CNNMoney.com) -- Running short of cash, California has started delaying $3.5 billion in payments to taxpayers, contractors, counties and social service agencies. With the governor and state lawmakers locking horns on resolving California's budget crunch, the controller Monday halted checks covering these obligations so the state could continue funding its school system and making its debt payments. The delay will inflict more pain on the already sorry condition of the Golden State, which is facing a $40 billion budget gap. People won't have tax refund money to spend, businesses won't get paid for their services and agencies won't have funds to help the needy until the budget situation is addressed. Nearly $2 billion in personal state income tax refunds are being held up, according to state estimates. Last year, some two million Californians received refunds in February. "People are going to be hurt starting today," said Garin Casaleggio, a spokesman for Controller John Chiang. Also on hold are $515 million in payments to the state's vendors and $280 million to help people with developmental disabilities. Other public assistance agencies will be left waiting for hundreds of millions of dollars. California, the world's eighth largest economy, is not alone in its budget troubles. Some 46 states face budget shortfalls, forcing them to slash funding for many services. But California, the largest state in the union by population, faces a deficit that totals more than 35% of its general fund. Some 257,400 jobs in the Golden State evaporated in 2008, pushing the unemployment rate up to 9.3% in December, the fourth highest nationwide. Its median home price plunged nearly 50% since the spring of 2007. And because of California's financial woes, credit rating agencies are taking a dim view of the state. Moody's warned in mid-January it might downgrade California's general obligation bond rating because of its budget and liquidity problems. If this happens, it will become even costlier for California to borrow.

On the charts, we are watching the Nuveen Muni Bond Index quite closely as that index appears to be topping at the current time. From the highs in May 2007 to the panic low in October 2007, the Muni Index has now retraced 66% of the prior decline, completing a typical bear market rally. In Elliott Wave terms, most bear markets tend to unfold as an A-B-C affair, with Waves A and C the declining phases of the Bear Market, and Wave B representing the intervening counter trend rally phase. From my point of view, it appears that for the Nuveen Index, along with a number of California Muni Bonds, Wave B was now peaked with the second killer bear market ‘downwave’ -- Wave C, now in force. This implies another huge down wave dead ahead with the index likely to drop to a fresh round of multi-year lows as fear rises of default and delinquency.

Above: Nuveen Index peaking at 200 day moving average with A-B-C counter trend rally. Wave (B) of Primary degree is now likely complete, Wave (C) down – dead ahead.

Above: Nuveen Index with Fibonacci retracements -- peaking at 2/3 retracement zone.

As a result, it appears that the current down wave still has a long way to go before major capital markets hit any kind of final low. In stepping back from just the US market, we see that viewing the Dow Jones World Sustainabilty Global Market Index (a gauge of many leading stock markets in one), the action of the last few months is little more then a bearish triangle. Like the bear flag which preceded it back in March-April of 2008, the implication of the triangle seen in the last few months is that of a break down to new lows and a long series of further declines still ahead.

Above: Dow Jones World Index with a very bearish tone.

For those investors who are anxious to buy stocks at these levels, we would argue that the best approach is to keep your wallet firmly attached to the hip and wait until, at the very least, prices have managed to move above the declining trend channel seen in the chart above. Until that declining tops line is overcome, the path of least resistance will remain to the downside.

That’s all for now,

Frank Barbera

© 2009 Frank Barbera

Contact Information

Frank Barbera CMT
Editor, Gold Stock Technician
PO Box 48072
Los Angeles, CA 90048
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