Bernanke looked more comfortable in this second soiree with journalist, even if he didn’t let much slip concerning timelines the FOMC is looking at. It’s still a good idea to hear what the head of the Central Bank is thinking. Below is the webcast from the conference.

What questions were you hoping Bernanke would address? How does your outlook for the economy change as a result of what Bernanke says here? Be sure to check out our Mid-Year Economic Outlook that will be published in the July issue of Fututres on June 27.

Broadcasting Live with Ustream.TV

Today’s employment situation report showed growth in nonfarm payrolls of 54,000, about 120,000 fewer than were expected and that expectation was dropped this week due to other weak economic news. Namely Wednesday’s Institute For Supply Management’s (ISM) manufacturing index.

 ISM  dropped to 53.5 in May from 60.4 in April, the largest month over month drop since 1984.  The new orders component slipped to a reading of 51. Readings below 50 indicate a contracting economy. ISM has become one of the most followed economic indicators and if you have any doubt follow the below ISM chart along with a chart of the Dow Jones Industrial Average Index. Dips in ISM have been followed closely by drops in the stock market.

Federal Reserve Board Chairman Ben Bernanke announced in April that the Fed would complete QE2 this month in the Fed’s first ever press conference, though it was not clear whether or not he ruled out a QE3. What was clear was that the Fed would continue reinvesting principal payments from its securities holdings.

That is significant as ending that practice would be the first step in an exit strategy. That exit strategy seems to be further away today than it was last week, but if you were paying close attention to the markets you would have seen that expectations of Fed tightening have been pushed back fairly dramatically since April 1.

Despite what was on the surface a strong employment report for March, which was released on April 1, that is when Fed Funds began rallying sharply. On April 1 the expectation based on fed funds futures was for a 25 basis point tightening by December, now it indicates no change. The June 2012 contract indicated on April 1, rates would have risen to between 0.75%-1% by June 2012,  now it is pricing in no change. The October 2012 contract indicated on April 1 that the rate would be between 1%-1.25% by that time, now it is indicating a rate of 0.50% on the eve of the 2012 election.

Given these numbers, talk of a double dip recession doesn’t seem so crazy.

What struck me most about the announcement was the source. Frankly, I can’t give much credence to any of the official ratings agencies who arguably are the most guilty entity in our current economic crisis. They are the ones that slapped AAA ratings on the toxic subprime assets behind the crisis and who had conflicts of interests with those that created those securities. Turns out their current analysis may not be much better. Jay Feuerstein talks about how they are off the mark in a recent op ed piece titled “S&P is dead wrong about U.S. debt.”

Feuerstein points out that the U.S. may be in better shape today than after the last credit crisis following the S&L crisis in 1988.

He writes, “According to data from the Treasury Department, interest expense as a percentage of GDP has been steadily declining since the last real estate crisis in 1988. That year, approximately 4.23% of GDP went to pay for interest expense. Today that number is closer to 2.8%. This means the ability of the U.S. to service its debt has increased by nearly 6o% over that time period.”

Don’t get me wrong, our growing debt is a huge problem and our leaders continue to demagogue the issue rather than attack it. We have pointed that out here in numerous posts. A case in point is the compromise to extend tax cuts for the rich as well as extending unemployment benefits out 99 weeks. If our leaders were serious the compromise would have involved each side giving up something important to them in order to decrease the deficit, not increase it.

The government continues to miss the point. This may be illustrated by the fact that there still is an S&P ratings agency. That type of failure should have put them out of that business for good.

The event is creating quite a stir but I am a little confused if people think that Fed Chief Ben Bernanke could be less opaque live than in a canned statement or in front of a Congressional hearing. Or more to the point, if what he says can tell us more about the direction of the economy than today’s S&P Case-Shiller Home Price Index, which showed prices in February for the 10-and 20-city composites are lower than a year ago and only slightly above their April 2009 bottom, or Thursday’s GDP report.

Case-Shiller’s 10- City Composite fell 2.6% and the 20-City Composite was down 3.3% from February 2010 levels.

David M. Blitzer, chairman of the index committee said, “There is very little, if any, good news about housing. Prices continue to weaken, trends in sales and construction are disappointing.”

The report goes on to note that, measured from their peaks in June/July 2006 through February 2011, the peak-to current decline for the 10-City Composite and 20-City Composite are -32.5% and -32.6%, respectively.

I guess that answers the question as to what part of the economy is declining to offset rising energy and food prices, which allows the Fed to claim inflation is not a problem. Unfortunately it doesn’t help homeowners that they are losing equity while shelling out more for everything they must purchase.

John Prestbo, editor and executive director of Dow Jones Indexes, talked about today’s market action in a statement while offering caution over tomorrow’s press conference. He wrote, “With today’s flurry of positive earnings reports, it’s no surprise that investors responded by pushing the Dow up to its highest levels in nearly three years. This wave of optimism could be challenged within the next 24 hours, however, as the market will undoubtedly be riveted to the Fed’s first-ever press conference tomorrow.”

The Wall Street Journal online offered a guide on keywords to listen to. Pardon me if I sound rude, but we are talking about parsing the words of a man who claimed their was little risk of a deepening credit crisis a few months before the worst economic crisis since the Great Depression and  someone who has refused to  acknowledge the inflation staring every consumer in the face. He also said there was little risk of moral hazard following the sweetheart deal the Fed put together for Bear Stearns and watched as Lehman Brothers wilted while expecting the same treatment.

In the past, bad economic news moved the markets in a positive direction because analysts assumed it would result in lower interest rates from the Fed, but with the zero interest rate policy now 28-months old and two rounds of quantitative easing nearly complete, would more easy monetary policy really be good news?

The press conference could give the media a chance to pin Bernanke down.  Ernie Patrikis, a regulatory partner with law firm White & Case who is also a former general counsel of the New York Fed and former alternate member of the FOMC, sees it as a good thing but wants more. “Why isn’t there a press conference after each meeting?” he asks. He goes on to say in a White & Case release, “There are complaints about the loose monetary policy under Chairman Greenspan. I do not recall Congressmen criticizing him for that then. Might the press do a better job?”

I guess we will find out tomorrow but if Bernanke says anything that causes the markets to move off its lofty (nearly-three-year) highs, will anyone be demanding a repeat performance?

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again…. It falls to us to make different choices if we want different results.”

These are the words of the task force that wrote the Financial Crisis Inquiry Report released in January. These 10 commissioners were tasked by Congress to determine what caused the 2008 financial meltdown. After hearing about possible exemptions of certain firms from the Dodd-Frank Act by those in Congress, I read this report. It irks me that some of those responsible are the loudest naysayers of reform. Even the task force notes: “Some on Wall Street and in Washington with a stake in the status quo may be tempted to wipe from memory the events of this crisis….” So let’s have at it…what were the group’s main conclusions?

1) The financial crisis was avoidable. “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.” The main instigator? The Federal Reserve Bank and “its pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards.”

2) Widespread failure in financial regulation and supervision. “The sentries were not at their posts…more than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve Chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the financial industry at every turn, had stripped away key safeguards, which could have helped avoid the catastrophe.” Regulators highlighted for sleeping on the job: Securities and Exchange Commission, Federal Reserve Bank of New York and those keeping an eye on the mortgage industry. One suggestion on how it was weakened: The financial industry spent about $4 billion in lobbying and campaign contributions from 1999 to 2008.

3) Failure of corporate governance and risk management at key financial institutions. “Too many of these institutions acted recklessly, taking on too much risk, with too little capital, and with too much dependence on short-term funding.” Further, compensation focusing on short-term gain added to the long-term problems.

4) A combination of excessive borrowing, risky investments and lack of transparency led to the crisis. Everyone was overleveraged, especially Fannie Mae and Freddie Mac. Both Wall Street and Main Street incurred debt levels unseen before.

5) The government was ill-prepared and its inconsistent response added to the uncertainty and panic. They rescued Bear Stearns, then put Fannie and Freddie into conservatorship, then let Lehman fail and then bailed out AIG.

6) There was a systematic breakdown in accountability and ethics. You think?

7) Contributing to the meltdown was a collapse of mortgage-lending standards, unchecked OTC derivatives and credit rating agencies that didn’t do their jobs.

My synopsis just skims the report; this group dug in and even got philosophical. “These conclusions must be viewed in the context of human nature and individual and societal responsibility…. It was a failure to account for human weakness that is relevant to this crisis.” It does hold accountable public officials, specifically in the Clinton and W. Bush administrations, and sort of blames us for allowing these officials to do what they did to the system. So what’s the takeaway? Learn from the past, heal thyself, and blame Alan Greenspan.

 Today (Aug. 4) the Dow set a near three-month high after the monthly ADP jobs survey indicated private sector jobs rose 42,000 in July. Most analysts viewed this as positive yet it may not be. The consensus of various reporting groups on the July employment report is for unemployment to rise to 9.6% from 9.5% and for non-farm payrolls to drop by 50,000-100,000 jobs. The negative number is based on a further reduction of temporary census jobs. The Wall Street Journal Market Data Center expects private sector jobs to increase by 100,000.  By my math that makes the ADP number, which only measures private sector payrolls, bearish not bullish.  

Add to that the Dow gained 1,000 points since the last employment report and we can be in for a rough Friday. From what I can see there are two scenarios: One the market knew something the rest of didn’t and the report will be better than expected. In that case people buying the last month will take profits in typical buy the rumor sell the fact fashion. The other is the report will be worse than expected and the market goes south.

Either way it calls for a sell-off, and a big one.

Of course the third scenario is that the market is responding to weak economic news and as has been suggested, the Fed is going to have to return to quantitative easing instead of beginning its exit strategy. We could be back to the bad news is good and good news is bad fundamental based on potential Fed activity. 

This is scary because we have not dug out of the hole the current stimulus in all of its forms has created. The question is have we taken the bad medicine yet or are we still delaying the inevitable?

I am not sure but I would be careful on Friday.

Under the headlines: the Employment Situation In June,  it stated, “Private nonfarm payroll employment increased by 83,000 in June and the unemployment rate fell two-tenths of a percentage point to 9.5%.”

The official BLS press release stated under the headline THE EMPLOYMENT SITUATION – JUNE 2010 (the official name of the report): Total nonfarm payroll employment declined by 125,000 in June, and the unemployment rate edged down to 9.5%, the U.S. Bureau of Labor Statistics reported today.

In the May report the White House blog featured the headline payroll number,  up 431,000, nearly all of it attributable to census hiring and the President and Vice-President jumped the gun in touting the number that was generally seen as pretty negative.

If we point out, which we did, that the May number was poor as it was under expectations and nearly all of the growth was attributable to temporary census hiring we should also note that June payrolls rose sans census though a little below expectations.

But the bigger issue — and yes I know politics is politics — is that there is better use of our leaders’ time then spinning economic reports. The economy is not growing as it should and whether we technically fall into a double dip recession or merely experience tepid growth is a matter for accountants. Simply report the numbers and move on.

It seems the previous administration wasted time trying to mask significant economic problems rather than acknowledging them head on. This most likely made the problems worse. They also complained that negative reporting served as some sort of self fulfilling prophesy. This is nonsense and the current administration should not fall into this self pitying pattern. Instead they should concentrate on solutions.

The U.S. Department of Housing and Urban Development on Wednesday released its new homes sales report for May showing a drop of 33%. Analysts have attributed the major drop in new home sales in May to the expiration at the end of April of government tax credits for new home buyers. While the end of the credits where expected to negatively affect sales figures, the May drop in sales goes way beyond those estimates.

The report comes on the heels of other bad news starting with the surprisingly poor May unemployment figures. The report showed virtually no job creation once temporary census hiring was taken out of the equation following promising growth in April. And today’s Fed announcement added more cold water to the flickering spark of recovery. While the Fed continued to state conditions “warrant exceptionally low levels of the federal funds rate for an extended period;” it added the following: “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.”

This is a departure from past rhetoric suggesting economic conditions slowly improving. While it did note that “the economic recovery is proceeding,” this is clearly a less optimistic view than past statements.

John Williams of shadowstats.com reports that even government jobs are declining as the census reduced its payrolls by 240,000 in June. “I would look for an outright contraction of June payrolls, net of temporary census impact. Such would mean an aggregate monthly loss in excess of 250,000 jobs. The early consensus from Briefing.com is an aggregate loss of 70,000 jobs in June, versus May’s census-spiked gain of 431,000, with the June U.3 unemployment rate unchanged at 9.7%. I would be surprised if the consensus estimates do not turn more negative,” Williams noted.

It is hard to call this a recovery with near 10% unemployment but at least we were beginning to see job growth, even if it was only modest. If those numbers again turn negative a double dip seems likely.

 When examining what happened on May 6, I wrote a blog detailing all the bearish factors in the equities market. The point being that all these factors were sitting there like oily rags in a garage waiting for a match. The bears were claiming a major top was in place and the bulls knew a significant correction was coming before markets could once again rally. Once the market turned down, presumably due to what was going on in Europe, that scenario was in place.

Obviously there were some structural problems with the market that allowed certain securities to basically go to zero. We covered that here.

 But I was curious as to what it meant technically so I asked my friend and Futures Magazine contributor Jeff Greenblatt (aka Fibonacciman) what it looked like technically. Jeff commented, “I found that in all cases, major indices and futures markets stopped going down in the right place implying there was universal symmetry.”

 I took that to mean that while there may have been structural errors that led the indexes to fall exponentially in that crazy 15-minute period on May 6, they stopped roughly  where they should have and where they approximately reached today. As noted previously, even the bulls were expecting a significantly correction, in the 10-12% range. It happened in an instant on May 6 and now it has been confirmed.

What is left to be determined is whether this was simply a correction or the start/resumption of a more significant bear move. I wonder what Fibonacciman thinks?

In an excellent column in the New York Times, Paul Krugman suggested that from an economic standpoint, the past decade should be referred to as “The Big Zero.”  ”It was a decade in which nothing good happened, and none of the optimistic things we were supposed to believe turned out to be true,” Krugman writes, citing zero job creation and zero economic gains for the typical family.

In a press release from my inbox, Leon Labrecque, the managing partner and founder of LJPR, LLC, predicted we will ride a “positive wave” economically in the next decade, citing the potential for new business creation. “The last ten years have undoubtedly been a decade of crisis upon crisis. On the other hand, you have reports showing us how many entrepreneurs have risen up through this recession,” Leon said. Just one example of an analyst saying the next decade can’t be much worse than this one.

Futures will weigh in with its annual Best of/Worst of list, “Tops and Bottoms,” in our February issue. We’re compiling the biggest high notes and low notes from the year and the decade in the futures industry. So stay tuned…