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Five Things: A Silver Lining for the Economy?


Or simply a move from horrific to astonishingly awful?

1. Fewer Banks Are Tightening Their Lending Standards

"Although credit conditions remain strained, an April survey of loan officers by the Federal Reserve found a smaller number of banks were tightening loan standards compared with a few months ago."

Wall Street Journal, May 5, 2009, "Fewer Banks Are Tightening Their Lending Standards"

Finally, a little light at the end of the tunnel, right? According to the Federal Reserve's April survey of loan officers fewer banks are tightening lending standards. While that sounds good on the surface, a cursory look at the actual report reveals that the percentage of banks tightening lending standards is still huge, just not as huge as the astonishingly huge percentage reporting tighter lending standards in the prior two quarters. We're now back to the merely horrific levels of 2001 and 2002.

Meanwhile, demand for commercial and industrial loans remains weak...

Demand for commercial real estate loans continues to collapse...

And standards for residential mortgage loans are still tightening...

2. Debit vs. Credit; Debit is Winning

In light of the reality of the Fed's Senior Loan Officer Survey, the following shouldn't be too surprising. According to Visa (V), in the fourth quarter of last year... you know, "the critical retail shopping season"... the total dollar volume of purchases made with a debit card during exceeded the volume made with credit cards for the first time in the company's history.

3. Tear Them Down

One of the most frustrating things about following economics in the mainstream media is the one-sided focus on the supply of credit (while largely ignoring demand), and conversely, the one-sided focus on demand for housing (while largely ignoring the oversupply).

So it was rather refreshing to see the Wall Street Journal this morning take a look at how some banks are handling the massive overhang of housing supply we still face before a demand-induced recovery can began: they're tearing them down.

"A Texas bank is about done demolishing 16 new and partially built houses acquired in Southern California through foreclosure, figuring it was better to knock them down than to try selling them in the depressed housing market."
- Wall Street Journal, May 5, 2009 - "No Sale: Bank Wrecks New Houses"

4. Fundamental Snapshot

Minyan Travis Randolph was doing some fundamental work on the S&P 500 and forwarded me the following to consider:

"Using PE Ratio as the standard of valuation the top chart shows two remarkable things. One, the market has never been as over-valued as it is today. Two, price and valuation bands have left the uptrend channel that has held since the Depression bottom. One would expect price to move toward valuations.

The lower chart puts things into a shorter time span and highlights the current historically based over/under valuation band...which is a long ways down from here."

5. Technical Snapshot

So where do we stand with the DeMark indicators a full week past the DeMark TD Sequential indicators that registered on the daily charts we discussed here?

There isn't much change. In fact, the market has forged higher since then, a possibility we noted in the last article given the alignment of the higher time frames; weekly, monthly and quarterly charts.

My interpretation is we remain in a window of about 4-8 weeks duration before the market can reconcile conflicting signals among competing time frames. Within the 4-8 week window, it is possible that the weekly charts of major indices will show perfected TD Sell Setups. On the monthly charts we will at that time also have moved out of the 1-4 bar reaction window following perfected buy setups in February.

It is always dangerous to have a fixed view. Markets are dynamic. But when I look at quarterly charts of the S&P 500 and German DAX, for example, I see the following possibilities:

1. During the first quarter of 2010 we get a TD Buy Setup that will offer some clues for next year.

2. The market goes higher and erases the present count. How could that happen?
We are currently on bar 6 of a potential 9 Buy Setup. Because the bar for next quarter (which would be bar 7) looks back to bar 3 (comparing its close to the close 4 price bars earlier) we would need to see a significant rally in Q3 to exceed the close of Q3 2008, in other words, a close above 1166.36, to erase the current count. A Buy Setup is nine consecutive closes below the close four price bars earlier, with the low of bar 8 or 9 exceeding the lows of both bars 6 and 7.

3. It looks like the quarter that will really be telling then - because of the lookback comparison in that is relatively low - is the fourth quarter. The close comparison in that case is 903.25. With most, including Federal Reserve Chairman Ben Bernanke, expecting a fourth quarter recovery, that will likely be the one that tells the tale.

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