Wednesday, June 30, 2010

Updates On Economic Indicators

Here is an update on various indicators that are supposed to predict and/or depict economic activity.  These indicators have been discussed in previous blog posts:

The June Chicago Fed National Activity Index (CFNAI)(pdf) updated as of June 28, 2010:

The Consumer Metrics Institute Contraction Watch:

The USA TODAY/IHS Global Insight Economic Outlook Index:

An excerpt from June 23, 2010:

"The June update of the USA TODAY/IHS Global Insight Economic Outlook Index shows real GDP growth, at a six-month annualized growth rate, slowing from 4.1% in April to 3.1% in November. Increased consumer and business equipment and software spending fueled strong growth in the spring, but tight credit, high debt and continuing high unemployment will slow growth in the second half of the year."

The ECRI WLI (Weekly Leading Index):

As of 6/18/10 the WLI was at 122.9 and the WLI, Gr. was at -6.9%.  A chart of the Weekly Leading and Weekly Coincident Indexes:

An excerpt from a June 25 Reuters article: ""After falling for six weeks, the uptick in the level of the Weekly Leading Index suggests some tentative stabilization, but the continuing decline in its growth rate to a 56-week low underscores the inevitability of the slowdown," said Lakshman Achuthan, managing director of ECRI."

The Dow Jones ESI (Economic Sentiment Indicator):

The Indicator as of June 1 was at 39.4.  An excerpt from the June 1 Press Release:

"“Overall, the ESI has been flat during recent months. This likely reflects the failure of a significant pickup in underlying employment trends and suggests that while the U.S. economy is no longer in recession, its recovery is subdued,” Dow Jones Newswires “Money Talks” Columnist Alen Mattich said. “The modest rise of the Dow Jones ESI in May is largely due to a reversal of April’s slight downward distortion caused by coverage of the Congressional inquiry into Goldman Sachs.”

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, updated through 6-19-10:

The Conference Board Leading (LEI) and Coincident (CEI) Economic Indexes, as of June 17, 2010:

The LEI was at 109.9 and the CEI was at 101.3 in May.

An excerpt from the June 17, 2010 Press Release:

"“The LEI for the United States has been rising since April 2009, and though its growth rate has slowed in 2010, it is well above its most recent peak in December 2006,” says Ataman Ozyildirim, economist at The Conference Board. “Correspondingly, current economic conditions, as measured by The Conference Board Coincident Economic Index® (CEI) for the United States, have been improving steadily since November 2009, thanks to gains in payroll employment and industrial production.”

“New Financial Conditions Index”

I had a post of this index on 3/10/10.  There is currently no updated value available.

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not necessarily agree with what they depict or imply.

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SPX at 1041.24 as this post is written

Tuesday, June 29, 2010

Is This A Depression?

Although almost everyone believes we are in an economic recovery, it behooves us to at least consider whether instead we are in a continuing Depression, as I have previously written.  Beginning on June 22, 2009, I wrote a series of four blog posts that examined various aspects of our economic situation and whether we were in, or heading into, a Depression.

As I wrote on January 19, "Of course, over the last few months there have been signs of economic recovery – or at least a lessening of economic weakness.  However, I believe that these signs represent the type of intermittent economic strength that is often seen during periods of prolonged economic weakness."

Let's assume, for a moment, that we are in a continuing Depression, as opposed to an economic recovery as almost everyone believes.  How could virtually everyone be wrong on such a prominent issue?

I believe the answer is complex and lengthy.  However, there are at least three basic underpinnings of such a mistaken belief.

First, judging the sustainability of economic strength after a steep economic decline seems challenging.  During the 1930's, there were many prominent people who believed that the Depression was over, only to have the economy relapse into further weakness.

Second, since the late 1920s, this country has had very few periods of Depressions or prolonged recessions, as defined.  Due to this lack of "experience," it may be very difficult to discriminate between continual Depression characteristics, during which intermittent economic strength manifests, and that of a new economic recovery that follows a definite end of economic weakness.  As well - and this is of critical importance - how should government, business and citizens act during a Depression?  Needless to say, how these parties should act during a continual Depression will vary greatly as opposed to that of an economic recovery.   Acting as if one is in a sustainable recovery, when in fact one is in a continuing Depression, would prove devastating.

Third, as I have written of previously, do we, as a nation (and by extension the world) really understand our present economic environment?  We, as a nation, failed (some examples are found here) to predict  the severe economic weakness of late '08 and early '09.  Was this failure a "one-time" event - i.e. a fluke not to worry about - or the early "innings" of what will prove to be a colossal, long-running economic misinterpretation?  Before one can flippantly dismiss this concern - as I'm sure most will be tempted to do - one should heed the existence (often mentioned in this blog) of many negative "outliers" during this purported sustainable economic recovery.  Perhaps most noticeable among these outliers is unemployment issues that are proving rather intractable.

Of course, the hope is that we are avoiding a Depression.  However, if we are actually in one, it would strongly behoove us to acknowledge such and act accordingly.

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SPX at 1047.61 as this post is written

Monday, June 28, 2010

Raghuram Rajan Interview - Noteworthy Comment

A June 17 2010 Raghuram Rajan interview contained several interesting viewpoints.

While I don't necessarily agree with what he says in this interview, I found it to be well worth reading.

Of particular note was the following comment, which I found provocative - if not very much so - and thought-provoking, as its implications, if the statement is true, are rather far-reaching:

"We have long understood that it is not income that matters, but consumption. A smart or cynical politician knows that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks."

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SPX at 1076.76 as this post is written

Friday, June 25, 2010

MacroMarkets June 2010 Home Price Expectations Survey

On Wednesday (June 23) MacroMarkets released its June Home Price Expectations Survey results.

Here is the Press Release (pdf); the accompanying chart is seen below:

As one can see from the above chart, the expectation is that not only has the residential real estate market hit a "bottom" as far as pricing; but that steady yet mild appreciation will occur through 2014.

The survey detail is interesting.  The most "bearish" of the forecasters is seen as Gary Shilling, with a forecast of 18.78% cumulative price decline through 2014.  A couple of other forecasters are close to this forecast, including John Brynjolfsson, with a forecast of a 18.08% cumulative price decline through 2014; and Mark Hanson with -17.37%.  Of note, all three of these most "bearish" forecasters see the preponderance of losses "front-loaded" (i.e. occurring over the nearest years, 2010-2012).

For a variety of reasons, I believe that even these "most bearish" of forecasts will prove too optimistic in hindsight.  Although an 18% decline is substantial, from a longer-term historical perspective such a decline is rather tame in light of the wild excesses that have occurred over the years.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While many people have an optimistic view at this time regarding future residential real estate pricing trends, in my opinion such a view is unsupported on an "all things considered" basis.  Furthermore, there exists outsized potential for a price decline of severe magnitude, unfortunately.

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SPX at 1073.69 as this post is written

Thursday, June 24, 2010

Macroeconomic Advisers On Possibility Of Double Dip

I found this June 10 blog post, titled "The Chances of a 'Double-Dip' are Essentially Nil" by Macroeconomic Advisers to be notable.

Of course, I am not in agreement with those that believe any material further economic weakness will be avoided.  However, many economists feel differently; as I have noted in the post of June 14 concerning the latest Wall Street Journal Economic Survey, "The economists in the survey put the odds of a double-dip recession at 19%.”

Some of my other thoughts on the idea of a "Double-Dip" scenario can be found at this March 8, 2010 post.

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SPX at 1087.62 as this post is written

Wednesday, June 23, 2010

ECRI On Frequency Of Recessions

I recently came across a notable excerpt in ECRI's "U.S. Cyclical Outlook" of December 2009 (pdf):

"The bottom line is that long expansions are needed after severe recessions to undo the damage.  After the 1932-33 depression, not even four years of expansion were quite enough, despite 10% annual GNP growth.  This time trend growth is likely to be far lower, and the danger of frequent recessions accordingly higher."

my comment:

I find the above excerpt interesting and notable.   While I don't necessarily agree with ECRI's current forecast or economic interpretations, the concept of Sustainable Prosperity is one that I have frequently written of, and it is imperative that we, as a nation, should consider our longer-term economic plight as we seek to improve our current economic  condition.

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SPX at 1087.62 as this post is written

Monday, June 21, 2010

Larry Summers On The Economy

Saturday's (June 19) Boston Globe contained an interview with Larry Summers on the state of the economy.
I found the phrasing in a couple of his statements, as seen below, notable:

"Summers, the former Harvard University president and Treasury secretary under President Clinton, presented a cautious, measured view of economic conditions. For example, after expressing confidence that European policy makers would contain the government debt crisis and avoid another global financial crisis, he added that the assessment was “my best guess, and I could be wrong.’’

Or, when asked if the nation had achieved a self-sustaining recovery, Summers responded, “I think that’s the right presumption and my expectation. I wouldn’t be foolish enough to be certain.’’"

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SPX at 1117.51 as this post is written

Friday, June 18, 2010

S&P500 Price Projections

The June 9, 2010  Livingston Survey (pdf) contains, among its various forecasts, a S&P500 forecast.  It shows the following price forecast for the dates shown:

June 30, 2010   1115.0
Dec. 31, 2010    1187.6
June 30, 2011   1243.5
Dec. 30, 2011    1280.0

These figures represent the median value across the 40 forecasters on the survey’s panel.

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

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SPX at 1117.48 as this post is written

Thursday, June 17, 2010

Total Household Net Worth As Percent Of GDP 1Q2010

The following chart is from the CalculatedRisk Blog of June 10, 2010.  It depicts Total Household Net Worth as a Percent of GDP.  The underlying data is from The Federal Reserve Flow of Funds 1Q2010 report:

click on chart to enlarge image

As seen in the above-referenced CalculatedRisk blog post:

"According to the Fed, household net worth is now off $11.4 Trillion from the peak in 2007, but up $6.3 trillion from the trough in Q1 2009. A majority of the decline in net worth is from real estate assets with a loss of about $6.4 trillion in value from the peak. Stock market losses are still substantial too."

My comments:

As one can see, the first outsized peak was in 2000, and attained after the stock market bull market / stock market bubbles and economic strength.  The second outsized peak was in 2007, right near the peak of the housing bubble as well as near the stock market peak.

As seen on the chart, the Total Household Net Worth is making an upturn, but is significantly below the prior 2007 peak.

I could extensively write about various interpretations that can be made from this chart.  One way this chart can be interpreted is a gauge of "what's in it for me?" as far as the aggregated wealth citizens are gleaning from economic activity, as measured compared to GDP.

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SPX at 1114.73 as this post is written

Wednesday, June 16, 2010

ECRI WLI Interpretation & Commentary

The recent steep fall in the ECRI WLI has been widely commented upon.

I've recently run across two items, an article and an interview, that I think are very notable with regard to interpreting the WLI.

The first is an article ( "Is ECRI Growth Rate Index Signaling A Double Dip?") that discusses the predictive history and interpretation of the WLI.  The second is a June 11 CNBC interview of ECRI's Lakshman Achuthan about the recent drop in the WLI and how he believes it should be interpreted.

Although I indicate the level of the ECRI WLI on a monthly basis ("Updates On Economic Indicators"), my only previous commentary on ECRI and the ECRI WLI can be found at this post of July 15, 2009.

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SPX at 1115.23 as this post is written

Tuesday, June 15, 2010

Bloomberg BusinessWeek Story - Wall Street's Biggest Bears

The June 14-June 21 2010 Bloomberg BusinessWeek had a cover story titled "Time to Slip Into Something Less Comfortable?"

The subtitle reads: "The bearish forecasters who rose to fame in the market crash of 2008 have, for the most part, not surrendered their pessimism.  Their moment could be coming back around."

While I don't necessarily agree with all of the comments by the prognosticators in the article, I do think that many of them deserve contemplation.  The article appears to be a good summary of their many concerns.

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SPX at 1089.63 as this post is written

Ben Bernanke's Comments On The Current Economic Forecast

I found Ben Bernanke's comments on the economic outlook, given last Wednesday (June 9), to be interesting.

Here are some excerpts, as published in this Wall Street Journal article of June 10:

"Federal Reserve Chairman Ben Bernanke offered guarded reassurances about the economy in testimony to the House Budget Committee Wednesday, saying a new recession is unlikely and that the Fed still expects the U.S. economy to grow at a 3.5% annual rate in the months ahead."


""Forecasting is very difficult and I make no promises in any particular direction," he said, "but it appears to us that the recovery has made an important transition from being supported primarily by inventory dynamics and by fiscal policy toward a recovery being led more by private final demand." Still, he added, a double-dip recession couldn't be "entirely ruled out.""

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SPX at 1089.63 as this post is written

Monday, June 14, 2010

The June Wall Street Journal Economic Forecast Survey

I found The June Wall Street Journal Economic Forecast Survey was interesting on a couple of fronts.

First, as stated in the article, "The economists in the survey put the odds of a double-dip recession at 19%."

Second, as seen in the detail of this survey, the survey now includes more forecast information for December 2011. The current average forecasts for December 31, 2010 and December 31, 2011 among economists polled include the following:

Ten-Year Treasury Yield:
for 12/31/2010: 3.87%
for 12/31/2011: 4.58%

for 12/31/2010: 1.4%
for 12/31/2011: 2.0%

Unemployment Rate:
for 12/31/2010: 9.4%
for 12/31/2011: 8.6%

for 12/31/2010: $76.82
for 12/31/2011: $80.87

full-year 2010 : 3.2%
full-year 2011 : 3.1%

Of note, with the exception of the GDP and Unemployment Rates , the above categories did see significant change in average expectations since last month's survey.

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

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SPX at 1097.32 as this post is written

Friday, June 11, 2010

The Bond Bubble

On June 8 The Wall Street Journal had an article titled "Bond-Fund Managers See Signs of a Bubble."

While most people wouldn't think of the bond market as having bubble characteristics, nonetheless such a bubble has developed.

The article mentions several vulnerabilities the bond bubble faces.  I would add that a major vulnerability is a repricing of risk due to perceived asset quality, due to a variety of issues.

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SPX at 1086.84 as this post is written

Thursday, June 10, 2010

S&P500 Earnings Forecasts & Forecast Accuracy

On June 1 The Wall Street Journal had an article titled "Analysts Cheer For Recovery."

From the article:  "Current estimates put the S&P 500 on track for earnings per share of $85.26 this year, according to Thomson Reuters, a return to 2007 levels. Analysts' $96.61 forecast for 2011 earnings would mark a record that surpasses the 2006 peak."

However, what I found most notable is a quote from Ed Yardeni, with regarding to analyst forecasts:

"They're pretty good at anticipating earnings when the economy is expanding," says Ed Yardeni, president of Yardeni Research, "but they typically don't see recessions coming."

One of the most notable aspects of the economic weakness of  2008-early 2009 was that economic forecasters almost completely failed to predict it.  I believe that this is very significant for a variety of reasons;  perhaps foremost is whether this inability to predict the last economic crisis is indicative of whether they will be able to foresee the next one.

I've put together some examples of forecasts in the 2007 to early 2009 time period; it can be found at this link.

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SPX at 1078.50 as this post is written

Tuesday, June 8, 2010

Disturbing Charts (Update 1), Part II

As a continuation of the last post, here are three other charts that I find disturbing in nature.

These charts raise a lot of questions.  Many of these questions I have discussed in the blog, as I believe they are very significant in nature.  Additionally, these charts should highlight the “atypical” nature of our economic situation from a long-term historical perspective.

Here is a St. Louis Fed chart depicting the Median Duration of Unemployment (last updated 6-4-10):

(click on chart to enlarge image)

These next two charts are from the Minneapolis Federal Reserve.  These charts really provide a perspective on the length and extent of this downturn.  The first depicts our Unemployment situation (last updated 6-4-10):

(click on chart to enlarge image)

This depicts Output (last updated 5-27-10):

(click on chart to enlarge image)

I will update these charts on an intermittent basis as they deserve close monitoring.

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SPX at 1050.47 as this post is written

Disturbing Charts (Update 1), Part I

In the next two posts, I am going to display various charts that I find disturbing.   These charts would be disturbing at any point in the economic cycle; that they depict such a tenuous situation now – nearly a year into what most believe is an economic recovery – is especially notable.

Many more such charts exist, unfortunately.  I regularly discuss many troubling characteristics of our economy in this blog.

As well, I find many aspects of the financial markets to be problematical.  These aspects are frequently discussed.

All of these charts are from The Federal Reserve, and represent the most recently updated data.  I especially find these charts valuable as they depict our current situation in a longer-term historical context.

Charts in this post are from the St. Louis Federal Reserve.  Here are the charts (click on chart to enlarge image):

Housing starts (last updated 5-18-10):

The Federal Deficit (last updated 3-8-10):

Federal Net Outlays (last updated 3-8-10):

State & Local Personal Income Tax Receipts  (% Change from Year Ago)(last updated 3-26-10):

Total Loans and Leases of Commercial Banks (% Change from Year Ago)(last updated 6-7-10):

Bank Credit – All Commercial Banks (Percent Change from Year Ago)(last updated 6-7-10):

M1 Money Multiplier (last updated 5-27-10):

Now, onto Part II - unemployment and output…

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SPX at 1050.47 as this post is written

Monday, June 7, 2010

Economic Impact Of Policies

On May 18 The Wall Street Journal had an article on a new lead-paint law titled "New Lead-Paint Law Heavy on Budgets."

This law serves as a good example of an important issue I wrote of in my May 2009 article "America's Economic Future - 'Greenfield' or 'Brownfield'?"

In that article I wrote of the need for policies to be thoroughly assessed with regard to overall economic impact, compared with whatever "societal good" the policy purports to accomplish.

A thorough discussion of the benefits and costs of this new lead-paint law would be exceedingly lengthy and complex.  However, I believe that this lead-paint law, if thoroughly analyzed from an "all things considered" standpoint - taking into account both "societal good" as well as economic impacts - would be found to be (far) suboptimal in many respects.  Of particular concern is that this is yet another law that disproportionately (negatively) impacts small businesses.

While one may dismiss this new law as one that is limited in nature and thus relatively insignificant, it is important to note that it is just one example among many in which inadequate overall analysis was conducted.   Cumulatively, these poorly analyzed policies are very significant in determining whether America's economic future will be that of a "greenfield" or "brownfield."

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SPX at 1064.88 as this post is written

Friday, June 4, 2010

"Chronic Joblessness"

The Wall Street Journal of June 2 had an article titled "Chronic Joblessness Takes Toll."

I have written extensively about the unemployment  situation for a number of reasons.  Perhaps chief among these reasons is that I believe the situation is far worse than generally acknowledged.

While it is easy to dismiss the unemployment problem with glib statements or convoluted reasoning, I believe the issue is very complex and threatening.  As seen in the aforementioned Wall Street Journal article, as well as various charts shown on this blog, there is little doubt that from a long-term historical perspective our unemployment problems are outsized.  Additionally, there are many facets of our unemployment situation that go unrecognized yet are exceedingly important.

Last July I wrote a series of blog posts titled "Why Aren't Companies Hiring?" which contains many of my thoughts on the issue.

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SPX at 1084.83 as this post is written

Cost Cutting - A Few Comments

McKinsey Quarterly had an interesting May 2010 article on cost cutting.

I have many thoughts on the issue of cost cutting.  The issue is complex and  particularly challenging as detailed data and analyses on the subject seem to be lacking, despite cost cutting's widespread popularity over many years.

While prudent management of costs is of course beneficial, I believe that in general, the benefits of cost cutting are often exaggerated.  The reasons for this are various.

However, the detriments of cost cutting are rarely acknowledged or discussed.  This is unfortunate as these detriments can be very significant and pernicious across a variety of fronts.

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SPX at 1084.76 as this post is written

Thursday, June 3, 2010

Residential Real Estate Market Characteristics

I found this MacroMarkets web page to be an interesting characterization of the U.S. residential real estate market.

Here is an excerpt:

"With an aggregate capital value of $16.6 trillion at the end of 2009, real property owned by United States households comprises the largest real estate marketplace – and one of the largest asset classes in the world."

There is also investment performance information on the page, with a table showing relative performance of various asset classes.  Of note, the table encompasses a timeframe of June 1987 through December 2009.

In my opinion, one needs to be very careful when assessing price data of residential real estate due to a variety of factors.

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SPX at 1103.94 as this post is written

Wednesday, June 2, 2010

The Stock Market - Continued Weakness?

With the ongoing problems in Europe, fears of worldwide economic "contagion", and many overt signs of economic slowing in the United States, one is led to wonder how susceptible the U.S. stock markets are to further declines.

While I have written extensively about how I believe the stock market will face an exceedingly large decline in the future, for now, I think (based upon a variety of factors) that a near-term stock market advance is likely.  This is not to say that I think "all is well" with the economy or the markets - anything but.   In essence, I think we will see a little more "sunshine" but if one looks out to the (economic/financial) horizon "the sky is black," unfortunately.

One item that I have found interesting is that during the latest stock market decline (from the 1219 peak in April), while the VIX shot up significantly, the 3-month Treasury Bill stayed stable.  Although this is certainly not a "guaranteed confirmation" of any type, I find it notable and positive for the markets and economy for the short-term.  Below is a daily chart from 2008 showing the 3-month Treasury rate vs. the VIX and S&P500 (with a 50-day moving average line in blue):

(click on chart for a larger image)

chart courtesy of

As I wrote on May 19, "I believe that we are building to a variety of major market events."  I plan on elaborating upon this in the near future.

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SPX at 1075.73 as this post is written

Tuesday, June 1, 2010

Multipliers Used In Stimulus Plans

John Taylor's May 21 blog post discusses the stimulus multiplier used for the ARRA and new research from the IMF with regard to actual stimulus multipliers.

The chart shown has immense significance on a variety of fronts, assuming that the IMF research is representative of the effectiveness of stimulus spending.

We, as a nation, do ourselves no benefit by continually overestimating the (gross) benefits to be derived by stimulus actions.

As I've previously commented, I don't believe the concept of stimulus spending is well understood.  I have written extensively about the concept of stimulus.  Stimulus spending is of particular noteworthiness as I believe that we will continue to enact stimulus spending in significant amounts.

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SPX at 1089.41 as this post is written