30 September 2010

Gold Daily Chart

Another range day in which the Comex tested the limits of the large open interest in holders of October futures coming into the delivery process. The speculative shorts who got excited and jumped on at the bottom of the range got stuffed on the snapback rally later in the day.

Learning to wait for the moment when the odds are in your favor is the great lesson of trading. Life truly is a school of probability.

SP 500 and NDX December Futures Daily Chart

End of quarter. Book it, Dano.

Net Asset Value of Certain Precious Metal Trusts and Funds and the Odd Performance of PHYS

I am finding this contraction in the premiums of the gold-only trusts GTU and PHYS to be extremely interesting. Both followed an expansion of the fund's units and large sales of overallocations to the underwriters, providing liquidity not only to expand the trust but also to game the shares.

This expansion facilitates an arbitrage on the premium in which one sells the trust and buys GLD for example. And the holding of units by the underwriters assures a ready supply of shares for shorting, if one assumes that the big punters even bother with the nicety of borrowing shares.

While the premiums remain uniform it does not matter since the NAV will track the bullion holdings, but it does create a sort of retrograde phenomenon in which the funds will briefly underperform bullion due to the contraction of their premium, especially in the case of PHYS, from the lofty 8% to the lowly 2%. It will be interesting to see if this holds, or if the range of premium reasserts on a new leg up in bullion, and the 'kick' of a possible short squeeze.

In the past a contraction of the premiums was often a signal of bearish sentiment, that the speculators were not willing to pay a premium because they felt that the move was nearing a top. One also has to wonder if this is the case once again.

Who can say? As Robbie Burns once observed:

But, Mousie, thou art no thy lane,
In proving foresight may be vain;
The best-laid schemes o' mice an 'men
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!

Still thou art blest, compar'd wi' me
The present only toucheth thee:
But, Och! I backward cast my e'e.
On prospects drear!
An' forward, tho' I canna see,
I guess an' fear!

If you are trading for the shorter term, one needs to be aware of things like premiums and arbitrage. If you are buying and holding as an investor short term fluctuations become much less of an issue as other things increase in importance. You have to understand why you are buying something and what your own objectives are with it, and then be guided by them.

As in the case of the trusts, there are 'premiums' on stocks and options for example, that are not so readily determined because the exact valuations are not so simple and explicit.

This is why trading for the shorter term is a highly specialized craft and is not suitable for any but a few who have the time and knowledge to attempt it. I have been at it for many years, and still learn new things almost every day, all too often the hard way.

You may wish to keep this in mind if and when Mr. Sprott introduces his Physical Silver Trust.

Here is what the NAVs looked like in early September 2010. One 'benefit' of the added liquidity is that the spreads on the Buy - Ask for these trusts has narrowed significantly.

29 September 2010

For US Corporations the Whole of the Law Shall Be 'Do What Thou Wilt'

"So long as they incorporate, businesses will now be free to trade in or exploit slaves, employ mercenary armies to do dirty work for despots, perform genocides or operate torture prisons for a despot’s political opponents, or engage in piracy—all without civil liability to victims."

US Second Circuit Judge Pierre Leval

Is this some notorious decision in the manner of Dred Scott from an ugly and unenlightened past of robber barons and organized tyranny?  Yes, and no.

I have not yet read a contrary or comprehensive legal interpretation of this decision, or the actual majority court opinion, and will allow that the opinion from Judge Leval could be overstated in its reach and implications. And or course the corporations might still be subject to criminal prosecution, such as that administered occasionally by the federal government, almost always settled for cursory fines without admission of guilt. (Later: here is a decent description of opinion in support of the court).
“The principle of individual liability for violations of international law has been limited to natural persons — not ‘juridical’ persons such as corporations — because the moral responsibility for a crime so heinous and unbounded as to rise to the level of an ‘international crime’ has rested solely with the individual men and women who have perpetrated it,” Judge Jose Cabranes wrote on behalf of the majority."
The US court system has discovered that 'organizations' are incapable of committing misdeed heninous enough to rise to the level of international crimes.  You know, like crimes against humanity.  This does fit with a disturbing trend in the US whereby more power and wealth is being concentrated in corporations who can act with increasing advantage and anonymity vis-à-vis the individual. Barry Ritholz has framed it quite well in his piece: The Left Right Paradigm Is Over. 

The decision in the US to grant corporations the rights of individuals does have deep roots. From the Supreme Court case of Santa Clara County v. Southern Pacific Railroad in 1886, the US Supreme Court ruled that a private corporation is a natural person under the US Constitution.
"The court does not wish to hear argument on the question whether the provision in the 14th Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does." US Supreme Court Chief Justice Morrison Waite
Justice William O Douglas wrote in 1949, "the Santa Clara case becomes one of the most momentous of all our decisions...Corporations were now armed with constitutional prerogatives."

How can the courts find that judicial constructs like corporations have the protections and privileges of the Bill of Right, but become strict constructionalistic and literal in allowing that they can engage policies and actions supporting and provoking the commission of heinous crimes such as murder and torture without any collective liability?  This was not the decision of some rogue sadist, but the cold and calculated corporate business decision in the pursuit of profit. Corporations implement policy decisions collectively all the time, often of a magnitude to engage the power of the entire organization, even if the actual decision to proceed rested within a small circle of decision makers. In principle they act as officers for the corporation.

And when it comes time for the prosecutions and investigations, managers from the CEO's on down don't know anything about the business, and have apparently been accepting their enormous paychecks for what seems to be benignly vacuous inertia in la dolce vita in absentia, on a pile of wiped emails and shredded documents.  Someone was obviously paying attention during the last international war crimes trials.

Maybe it will be good for the business recovery. I would imagine quite a few European, South American, and Asian companies seeking to reincorporate themselves in Delaware to achieve carte blanche against civil liabilities for increasingly uncivil acts.  It seems to have worked for Royal Dutch Shell.   After all, quite a few credit card companies relocated key operations to western states that encouraged the practice of interstate usury.  Debasement of the currency is not the only thing that the US seems to have underway and well in hand.

I wonder if the European Union will grant the same privilege to their own corporations, to advantage themselves at will on the American Public in acts of violence and torture? Would the US judiciary extend professional courtesy and acknowledge the EU's sovereign right to suspend the protections of the individual as long as the crimes were corporate?

Is BP incorporated in England or the States? Perhaps Mr. Clegg has a card to play here in adopting the US precedent of corporate sovereignty as long as they are inflicting sufficiently heinous damage on foreigners. There does seem to be some historical precedent for this approach with the East India company, for example. Destroying the vitality of the Gulf of Mexico seems heinous enough so that only an individual or two could possibly be liable.  And they are liable to be someone rather low on the corporate ladder, and very liable to be thrown under a bus for the corporate good.  I can imagine Tony Hayward playing the hapless and barely involved imbecile effectively on the witness stand.  And if the Skilling amnesia gambit fails, there is always the Kenny boy castle-to-save-the-king.

Is the United States the equivalent of a corporation?  Some executives from the former and even current US administrations might wish to keep this line of defense in mind.  That last sentence from Judge Leval's quote seems tailor made.
"...employ mercenary armies to do dirty work for despots, perform genocides or operate torture prisons for a despot’s political opponents, or engage in piracy—all without civil liability to victims."
As the saying from the 1930's goes, corporatism is fascism, and fascism is great for business. But Mussolini should have incorporated, and learned to delegate more effectively.

Court Exempts Corporations from Alien Tort Law

A federal appeals court has ruled US corporations can no longer be sued for human rights violations abroad under the longstanding Alien Tort Statute. Earlier this month, the Second US Circuit Court of Appeals ruled that Alien tort claims can only be brought against individuals, not corporations. The ruling dismissed a lawsuit accusing the oil giant Royal Dutch Shell of complicity in the murder and torture of Nigerian activists including Ken Saro-Wiwa.

In a separate opinion, Second Circuit Judge Pierre Leval criticized the ruling, writing, "The majority opinion deals a substantial blow to international law and its undertaking to protect fundamental human rights… So long as they incorporate, businesses will now be free to trade in or exploit slaves, employ mercenary armies to do dirty work for despots, perform genocides or operate torture prisons for a despot’s political opponents, or engage in piracy—all without civil liability to victims."

Gold Daily and Silver Weekly Charts

The Gartman Letter Called a Top Last Night

"It is not just over-extended to the upside; it is hyper-extended. It is not just overbought; it is hyper-overbought. We cannot strongly enough urge everyone to avoid buying gold here and we shall go so far as to suggest that those who are long begin the process of quietly heading for the exits and to reduce their positions to the most minimal "insurance" positions possible."

SP 500 and NDX December Futures Daily Charts

The end of quarter is almost here, and the levitation continues. The bulls will have to break this out on thin volumes, or give up the propping effort and let prices find their level fairly soon. The outflow from retail investors continues and hedge funds are challenged by redemption requests.

US Dollar Index Still Up For the Year, But Not By Much

The Dollar has tested key support and broken down lower. The next levels of support are obvious. It appears to be renewing its long term downtrend after the short squeeze in the eurodollar that drove it higher.

The dollar is short term oversold and could find some support around this level.

At some point the DX index needs to be reconstituted as the SDR will eventually be. The weighting to Europe and Japan are much too heavy for the current volumes of world trade and reserves.

28 September 2010

SP 500 and NDX December Futures Daily Charts

Nice stick save on the indices for the end of quarter.

Gold Daily Chart - Cup and Handle Formation

Remarkable action today as the wiseguys 'ran the stops' down to 1285, the top of the support from the cup and handle breakout, on the new holders of October futures contracts from the holders of in-the-money calls in yesterday's options expiration.

The bears 'got stuffed' badly as their raid met heavy physical buying and strong hands who held their positions in the futures markets. The raid fizzled, and turned sharply around with gold running almost the entire range of the trend channel, finishing at yet another new high.

Is the Gold Rally Strictly a US Dollar Phenomenon?

One sometimes hears that 'gold is only rallying in US dollars.'

One can always point out that since the US dollar is still the world's reserve currency, it affects everything and everyone that hold it in their reserves or their assets on deposit. A good part of the recent crisis in Europe was caused by the severe deterioration in dollar denominated financial assets held on deposit in commercial banks by private customers, who started to demand their money, in dollars. This precipitated a dollar squeeze and a liquidity crisis.

There is clearly a safe haven trade in gold denominated in US dollars.

But the US dollar is not alone, not the only fiat currency in a bit of a crisis. Since one picture is worth a thousand words, here is the price of gold over the last five years in six of the world's major currencies of the developed nations. Granted, the price of gold may be different in select currencies. One has to make their own investment decisions to suit their own particular circumstances.

But there is an obvious message in these charts for those who care to listen.

The twenty year charts are more impressive, because they almost uniformly show the long bear market coming to an end, with a remarkable bull market in gold bullion underway. Something has clearly changed, something obviously has occurred that is the mark of a sea-change in the structure of the major global currencies, starting slowly at first and then gaining momentum with the most recent financial crisis.

Charts Courtesy of Galmarley via my friend Nick at Sharelynx.

27 September 2010

SP 500 and NDX December Futures

AAPL is driving the NDX and CAT is the bulk of the Dow Industrial rally. When stock markets become this narrowly driven on thin volumes it is generally a sign of window dressing, or tape painting, and a decline to come since the foundations are not based on sound investment but mere speculation and price manipulation. This week is the end of month and quarter for the hedge funds.

Gold Daily Chart - Bullion Pauses for Option Expiration

Relatively modest attempt to take gold and silver down for October option expiration. Physical bullion buying is gaining resilience against paper market antics.

Net Asset Value of Certain Precious Metal Funds and Trusts

Timmins Gold Proposes Takeover / Merger with Capital Gold

Consolidation, acquisitions and mergers, particularly of the junior miners by the larger, well capitalized but lower growth majors, will be a recurring theme as bullion prices rise higher.
Timmins Gold proposes Capital Gold takeover
Monday September 27 2010 - News Release
Timmins Gold Corp. made, on Aug. 31, 2010, a non-binding proposal to the directors of Capital Gold Corp. to merge on a negotiated basis with Capital Gold based on a value of $4.50 per common share of Capital Gold, which, at the time of the proposal and based on closing prices as of that date, equated to a share exchange ratio of 2.27 Timmins Gold shares issued for every one Capital Gold share. The proposal represented a premium of 26 per cent to the 20-day volume-weighted average price of Capital Gold shares on the Toronto Stock Exchange for the period ended Aug. 31, 2010. Timmins Gold believes that the transaction, if completed, would result in a merger of two equal-sized companies with regional and operational synergies that would benefit both companies' shareholders by creating a mid-tier, low-cost, Mexico-focused gold producer. These benefits include:
  • Complementary operating teams and exploration assets;
  • Management team with proven ability to access capital markets and create shareholder value;
  • Stronger market presence;
  • Creation of a company with a larger market capitalization that would be attractive to certain institutional investors.
Ratio of XAU Mining Index to Spot Gold
 Despite repeated requests, Capital Gold's board of directors has not been receptive to Timmins Gold's proposal.

Capital Gold shareholders representing approximately 17 per cent of the outstanding Capital Gold shares have confirmed to Timmins Gold that they would support the proposal (subject to customary conditions).

Bruce Bragagnolo, chief executive officer and director of Timmins Gold, comments: "Our proposed merger with Capital Gold presents a great opportunity for the shareholders of both companies. In putting it forward, we are responding to the expressed wishes of Capital Gold shareholders, including the 17 per cent who have signed support agreements, that this merger take place. The absence of meaningful dialogue with the directors of Capital Gold has driven us to bring this process into the public arena.

"We are prepared to move quickly to arrive at a mutually agreeable transaction. Given our familiarity with Capital Gold's operations and management team, we believe that due diligence will move very quickly."

24 September 2010

Gold and Silver Charts

Gold Daily

Silver Weekly

Go with the flow, it's said,
If you can't groove with this then you're probably dead.

Hammer time.

Can't touch this.

SP 500 and NDX December Futures

See what I mean about not shorting this market until there is a confirmed break in the uptrend?

SP 500


23 September 2010

Gold Daily Chart

Can't touch this.

SP 500 and NDX December Futures Daily Charts

Stocks fell back to test support at the top of the trading range on weaker than expected US data.

SP 500


Net Asset Value of Certain Precious Metal Trusts and Funds

It will be interesting to see if the NAV premium on PHYS expands again to the 8 to 10 percent range or stays closer to the modest premium on the GTU fund. CEF is holding its richer premium because of the higher beta silver content in its portfolio.

22 September 2010

SP 500 and NDX Futures Daily Charts

SP 500

Except for perhaps some hedging or a daily 'skin' this is not a market to be shorted until the uptrend is broken. It is drifting higher on a steady short squeeze and light volumes in the kind of artificial action that is reminiscent of the 2004-2006 reflationary stock market rally fueled by Fed easy money.

An event can bring it down and quickly. But one can burn a lot of cash trying to pick a top ahead of the market signal that it has gone far enough. I do think that the two gaps will be filled, and that this market will retest its lows again. The timing is problematic, especially given the upcoming November elections. No president or Congress wishes to go into an important general election on the heels of a stock market crash. But this could serve the desires of those on Wall Street. So a continued rally is hardly a 'sure thing' despite the statistical profile of the SP 500 in the second year of a presidential term.

The SP 500 is up against resistance but the NDX has broken out cleanly. With relatively few risk-comparable productive outlets the excess of the easy money being fed to the Wall Street banks by the Fed is flowing into the higher yielding 'risk trades' like junk bonds and equities. In the absence of a strongly directive fiscal policy and honest price discovery this is what happens when monetary stimulus is applied without a broader policy support. It is hard for real economic proposals to compete with a Ponzi scheme that insiders control and that has a de facto sanction and subsidy from the governing authority. And this then is the basis for Obama's failure most likely sourced in his Wall Street friendly advisors, Summers and Geithner, and his own natural tendency to 'go along to get along' and sacrifice principle to expediency. This potential strength, the ability to find and form a consensus, can become a tragic flaw when carried to excess.

The NDX is a more obvious example of this reflationary risk trade.


Gold and Silver Charts; US Dollar

Gold Daily

Gold has firmly and clearly broken out of the cup and handle formation which is now active. There is a possibility that it will retrace to the point of breakout which should now be considered support. Targets for the formation are as indicated.

Silver Daily

Silver has reached the minimum measuring objective of its breakout from the symmetrical triangle which is a continuation pattern in the powerful bull market. A consolidation would be typical, considering the short term overbought condition. However, silver is not a 'typical commodity' but a key metal that has been subject to years of suppression by a few powerful trading banks. So be on your guard and expect the unexpected.

Silver Weekly

US Dollar Daily

I have support at 79.50, and this is where the dollar tested today in its downside slide. The DX Index is deeply flawed, being weighted heavily to the yen and euro, with no weight to the developing country currencies or gold and silver. But it is the most widely watched index until something better comes along.

US Dollar Weekly

US Dollar Ready to Plummet - James Turk

21 September 2010

Gold Daily Chart

First attempt at a breakout from the handle of the cup.

Can't touch this.

SP 500 and NDX December Futures Daily Charts

It may have been a bit telling that the equity market was not able to rally up after Ben and his Merry Banksters pledged their troth to endless liquidity and inflation even as the dollar went into a swoon.

So much of these machine driven markets are now smoke and illusion that it is difficult to derive much legitimate information from them, however.

SP 500


FOMC: Sound the Bell. School's In, Suckas

I do not expect this to change anyone's mind who has sworn themselves to a belief in a stronger dollar through debt deflation and credit contraction, with riches obtained by buying and holding Uncle Sam's proliferating promissory notes. Or those who believe in the instantaneous appearance of hyperflation for no discernible or inexplicable reasons for that matter.

Those who disagree with events as they are unfolding like to dismiss just about anyone who disagrees with them as naive and ignorant, and the Federal Reserve specifically as clueless and incompetent in their ability to generate monetary inflation and expand their balance sheet by buying existing debt of whatever type and flavor.

This is not giving the devil his due. That is the one thing that the Fed knows how to do and quite well: destroy the purchasing power of the dollar in the course of their financial engineering. They obviously have the tools as they have explained in detail, and from this statement and their recent actions it is clear that they stand willing and ready to use those tools again. You cannot say that Benny P to the M has failed to warn you.

What the Fed cannot do is breathe vitality into a zombie economy, and provoke a sustained recovery not tied to some sort of credit bubble. That is why stagflation remains the most likely outcome until the nation obtains the will and the determination to reform the financial system and restore a balance to trade and the real economy through a commitment to sound and practical public policy not driven by self-serving economic quackery. The dollar and bonds are made stronger through a vibrant underlying economy with the ability to generate taxable income and real returns to their holders.

But in the meanwhile the special interests will be served. A profound deflation and hyperinflation remain as possibilities for the future, but they will most likely be seen on the horizon in advance of their arrival as the result of some exogenous event or catastrophic failure. So far, not a glimpse.

Federal Reserve
Release Date: September 21, 2010
For immediate release

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts are at a depressed level. Bank lending has continued to contract, but at a reduced rate in recent months. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives. (Mr. Hoenig was NOT heard to say, "Suck it up, bitchez." That was the other fellow afflicted with dementia. - Jesse.)

Sound the bell. School's in, suckas. And Ben and the Banks have the hall passes, the keys to the restrooms, and chalk.

Slouching Towards Bethlehem: Double Dip or Banana Split?

"If the 2010 contraction we are now monitoring in consumer demand for discretionary durable goods scales to the full economy as faithfully as the "Great Recession" did, the second dip will, at minimum, be 33% more painful than the first dip and will extend at least half again as long."

This is the case for trouble dead ahead, a worse decline in consumer activity and therefore GDP than the first, and the likelihood of further quantitative easing from the US Federal Reserve to patch over the inability of the political process to reform the financial system and balance the real economy because of their myriad conflicts of interest. These policy errors favoring a small minority will most likely result in a stagflation of the most pernicious and corrosive kind, high unemployment and a rising price of essentials, that may ultimately test the fabric of society. Obsession and sociopathy are not generally ruled or limited by the equilibrium of common sense and ordinary appetite, so I would not expect the powerful minority to draw back from the brink of this crisis voluntarily: a classic scenario for exogenous change. I would enjoy the moral irony of all this if I was watching from the distant future.
The good want power, but to weep barren tears.
The powerful want goodness: worse need for them.
The wise want love, and those who love want wisdom;
And all best things are thus confused to ill.

Shelley, Prometheus Unbound

NBER: Double Dip or Banana Split?
Consumer Metrics Institute
September 21, 2010

We founded the Consumer Metrics Institute precisely because we felt that the economic bureaucrats in Washington were out of touch with the economy that most of us live in. They remind us of those patients sitting in wheelchairs in the "memory impaired" wards at nursing homes: with crystal clear recall of 1937 but no clue about what they ate for breakfast. Thank you, NBER, for making our case.

In contrast, we measure what consumers are actually doing on a daily basis. If, for the sake of argument, we accept that we are not experiencing just "one big scoop," but rather a "double dip" (thereby making the 1930's a "banana split"), we can show evidence that the first dip ended early in 2009. Arguably, we've been monitoring in real-time what could be viewed as two independent consumer demand contraction events that were separated by a stimulus induced "sugar high" last summer. If so, the first dip is ancient history. What is important now is future course of the second dip -- which may just now be revealing itself.

We are far enough "up-stream" in the economic cycle that we can measure changes in consumer demand for discretionary durable goods long before those changes flow "down-stream" to the factories and the GDP. From our up-stream vantage point the "double dip" is not hypothetical, but rather something that we have been watching unfold on a daily basis since January. Now, for the first time, we may have measured what will be the worst of the second dip when it eventually hits the factories -- all because, ironically, our data has started to improve.

Over the 45 days from August 1 to September 15, our Weighted Composite Index has improved substantially, rising from recording a year-over-year contraction rate in excess of 9% to recently registering a contraction rate much nearer to 3%. This is the largest positive movement that we have seen since late 2009. That said, it is important to remember that consumer demand for discretionary durable goods is still contracting, albeit at a slower rate. But the improvement has stopped (at least temporarily) the decline of our 91-day trailing quarter average (our Daily Growth Index):

Our Daily Growth Index reached a -5.86% contraction rate on September 12, which was fully 97% as bad as the worst contraction rate reached during the "Great Recession of 2008" (-6.02% on August 29, 2008). A calendar quarter of comparable GDP growth has occurred among only 1.29% of all quarters of U.S. GDP growth recorded by the Bureau of Economic Analysis of the U.S. Department of Commerce, since the spring of 1947. This corresponds to level of contraction that should be expected only once in 19.4 years, and it comes close on the heels of the 2008 contraction that should occur only once in every 21.4 years.

One of the tools that we have used to monitor the 2010 contraction event is a chart that we call our "Contraction Watch," which overlays graphically the day-by-day progression of the current 2010 contraction onto the "Great Recession of 2008":

In the above chart the two contractions are aligned on the left margin at the first day during each event that our Daily Growth Index went negative, and they progress day-by-day to the right, tracing out the daily rate of contraction. This chart conveys important information about the 2010 event, in particular how it differs in profile from the "Great Recession of 2008." It has now lasted three weeks longer than the "Great Recession" and is perhaps only just now forming a bottom. Furthermore, that bottom is very nearly as low as the one experienced in 2008. Even if the 2010 contraction immediately starts to retrace the recovery pattern seen in 2008, we should expect at least another 120 days or so of net contraction before the consumer portion of the economy is growing once again.

We have previously pointed out that the true severity of any contraction event is the area between the "zero" axis in the above chart and the line being traced out by the daily contraction values. By that measure the "Great Recession of 2008" had a total of 793 percentage-days of contraction, and its severity can be visualized as the amount of area covered by red in the chart below:

Similarly, the current 2010 contraction has just reached 592 percentage-days, and its severity can be visualized as the amount of area covered by blue in this chart:

The blue area above already covers about 75% of the area covered by the 2008 "Great Recession", and the curve has only just begun to start back up. Looking ahead, should the 2010 event recover from its bottom exactly like the 2008 event did, it would still experience another 466 percentage-days of contraction before ending -- resulting in a grand total of 1058 percentage-days of contraction for the 2010 event, fully 33% more severe than the "Great Recession of 2008."

That probably bears repeating: if the 2010 contraction we are now monitoring in consumer demand for discretionary durable goods scales to the full economy as faithfully as the "Great Recession" did, the second dip will, at minimum, be 33% more painful than the first dip and will extend at least half again as long. This, of course, assumes that stimuli comparable to those seen in 2008-2009 will be available to cause such a recovery during 2010-2011. Furthermore, the upturn that we measured in 2008 started when unemployment was still at a 6.1% rate, substantially better than we are observing now. Absent fresh consumer stimuli and dropping unemployment rates, the consumer demand contraction we are witnessing now could very well linger even longer.

Supporting that concern is the shape of the 2010 contraction in the above charts, which is significantly different from that of the "Great Recession of 2008." Of particular interest is the fact that in 2010 consumer demand plateaued for some time in a zone between 1% and 3% contraction from about day-25 through about day-180, before falling off the plateau. Since our data is always reflecting year-over-year changes in consumer demand, we had anticipated a sharp dip in our index as an inverted reflection of the stimuli-induced "green shoots" of late last summer. The long plateau described above, however, is not a reflection of any such now lapsed stimuli -- and as such it may be a new normal baseline for a lingering consumer contraction. Before we get too excited about a new recovery we will wait until our Daily Growth Index breaks significantly above the plateau levels visible in the 2010 line within our "Contraction Watch."

We are monitoring the behavior of internet shopping consumers on a daily basis. Those "up-stream" consumer activities will flow "down-stream" to factories and the GDP over the course of weeks or quarters. It's really not unlike being far up a great river and watching a water-level gauge predict that communities further down the river will be flooding catastrophically in a few days or weeks. Although our flood-gauge may have just peaked, unfortunately the damage further downstream remains inevitable -- it simply hasn't arrived yet.