Tuesday, April 6, 2010

APRIL UPDATE



APRIL SHOWERS - WHAT WILL SPRING UP?

RAIL TRAFFIC -

Total rail traffic continues to improve from the collapse that occurred in the first quarter of 2009. This improvement suggests that the economy is getting back to normal - even if it is a "new normal".










Continued improvements in lumber and crushed stone are signaling that commercial real estate development may be coming off of its death bed. I am not sure that I am going to ring the bell and say that the commercial real estate sector is fixed, but it appears that someone is crazy enough to begin purchasing some of these components and we need to be looking for this activity to translate into market health (and no, I don't mean stock prices for commercial real estate and builders to go higher --- since they have already run). I'm actually looking at this data to at least validate some of the market's move. If this stalls out, then we know that perhaps there are perils to be navigated in this sector still.















Shipping tonnage for all sectors have now outpaced last years rates and now are all positive. The greatest increase has been in metals compared with last year while coal shipments are the least best improved at +3.2% from last year's period.


KSU continues to show get improvements in shipping and has been the one we've followed for some time. Clearly we sold too soon, however I'd rather do that than lose hard earned gains. I will not cover that trade again till it comes back in line with previous levels. I feel like there are better risk/reward set ups to examine.

US DOLLAR



The march higher since November of 2009 seems to have abated some as the USD has taken a break. Perhaps much of the "break" here is that we are again pleased to hear that the Greece situation (Grease Fire) has been put out and a solution to their overspending and obstruction of truth has been solved for the moment. Since we seem close (maybe this time?) the dollar has moved south in relation to its rivals and has led to the resurgence in the stock market and especially in the emerging markets and commodities markets. Of course this dollar weakness put a halt to my celebrations in my YCS trade (double short the yen), however I still have that trade on since it has not penetrated my $20.50 stop.












We'll discuss the dollar more as we wrap things up, but it hasn't escaped me that this dollar fall is part of a well orchestrated and choreographed dance. Think of a rhythm and vibration rather than a waterfall drop into an abyss.



FINANCIAL CONDITIONS INDEX -



Fed liquidity continues to be available and therefore the FCI has signaled an end to the recession and a beginning to an expansion. This indicator is one that continues to make we believe that we are "all systems go" for a move higher through the end of April and perhaps mid to late May. The FCI is flashing all clear.
















BALTIC DRY GOODS INDEX-

Just to sprinkle in some reality, the baltic dry goods index marched higher in mid March and then had a lid slammed shut on it. We'll continue to monitor this spot shipping pricing indicator, but we needed to see a push through into the high 3000's and 4000's for me to take real notice. The actual shipping companies had rallied strongly in mid Feb through March, but have retreated as well. In fact, my quick take is that several of the shippers in this space deserve to be shorted, as they have rallied right into pretty stiff resistance.




I am hearing that commodity prices are rising, however I also hear that actual demand is not. Orders requiring spot shipping prices are simply made to fill the void of diminished inventories and suppliers and manufacturers are not moving to follow through on a great inventory rebuild because the volume of orders on the horizon are just not there. As a production manager wouldn't you be slow to add an inventory of raw materials that may sit idle in the face of rising prices that you assume are not based on true orders fundamentals?













EMPLOYMENT -

March Unemployment figures officially still show we are at a 9.7% unemployment rate. This actually may rise as people get hired causing those seekers to that gave up to re-enter the workforce.


I haven't written much about employment lately, but I am hearing some positive stories from friends through the country. Let me first highlight the Monster Employment Index for March. I've never referenced this item, but figured that I'd put it in. The Monster Employment Index is showing continued increases in job listings online, especially when compared to the easy comps of one year ago. Some would argue that the rate of change is not rapidly increasing from last month, however it is positive. I'm more inclined to be positive because this jives with what I am seeing and hearing from folks looking for work. They are saying that there are beginning to be more opportunities. These guys are not reporting that they have actually landed a new gig, but they are suggesting that it is close and opportunities exist where none did previously.














- Quote from the Monster Employment Index Summary -
During March, online job availability rose in 12 of the Index’s 20 industry sectors and in
13 of the 23 occupational categories monitored.


ECONOMIC SENTIMENT -


The Dow Jones Economic Sentiment numbers were released a week or so ago and we find that again we are seeing slight improvement in what the masses are hearing in news stories about the economy. I think this is a pretty funny study simply because it measures how many positive news stories are being fed to readers of the top 15 major newspapers.


I cannot cut and paste and reference the actual graphic for the study, but like everything March of 2009 was low and there has been a pretty steady crawl up and to the right since that time. http://solutions.dowjones.com/economicsentimentindicator/


I will be interested to see how CFO sentiment improves to validate this study. It won't be out for several months, but I'll add it when it is posted.


TRADING INDICATORS AND SENTIMENT
Well, as you might have guess it, almost all of my trading gauges and indicators are screaming that this market's rise is overdone. I will make reference to a couple of items to demonstrate just how cautious we should be in the short run as investors seem to have become complacent and expectant that markets only go up. While this has been true for the last year with a few brief corrections, we all know that this market will continue to go higher till it doesn't. And when it doesn't, it will be pretty nasty.


Guy Lerner at http://www.thetechnicaltake.com/ has again put his charts into action and demonstrated that hedge funds and individual investors are "all in" and have bought with abandon. The "smart money" is neutral or slightly bearish meaning that you have two opposing forces in these trades. Typically, we see the retail investor (Mom and Pop---us) on the losing end of this trade. Guy has some great content and a really cheap subscription for trying to time the market in short time frames (1 to 2 days trades). I constantly use his work and suggest you read him daily.


I've also received permission to copy and link to a new site that includes a valuable indicator of market breadth. Lee Franzen at http://www.growthstock.com/ Lee has a subscription service (I don't personally subscribe to this one), as well, but he does provide some great tools that are updated daily for free.


Specifically, Lee provides an indicator similar to the T2107 indicator that is available if you are a subscriber to Telecharts. The indicator provides information about how many stocks in the S&P 500 are trading over their 40 day moving average. Typically we are looking for extreme values in this measure to indicate that we are over-valued or "overbought". Click on the image below and at the bottom right hand corner you'll see that we are clearly at extremes and many stocks are now above their 40 day moving average. Now just like everything does that mean that the never ending rally will conclude tomorrow? No, but it is just another signal that we may be topping. Thank you Lee for allowing me to reference your great site. Please check out his subscriber service to and let me know if you like it (I have no affiliation or compensation agreements with Lee, he is generous enough to share his hard work with us here). http://www.growthstock.com/Market_Breadth.html

(For the next few pieces of information, please bear with me - I don't have permission to copy these charts, but they are so simple and clear that they are worth the extra time necessary to click. I will see what I can do to get them to allow me to post their work here.)

INTEREST RATES
Interest rates are rising. Check out this link - http://www.multpl.com/interest-rate/
We are going to witness increasing rates if all things continue as they have. Given that we are going to see interest rates move higher we must ask ourselves the question - "Can we really tolerate a move higher in rates which will cause a slow down in the recovery of the economy and housing?" The answer to this question is that we can only endure it if we are willing to trash the dollar to get there. Guess what - the Fed is willing to trash the dollar to get there! Everyone take a deep breath and sigh of relief!
This statement ultimately goes to what I was mentioning about the moves of the dollar. I perceive the move up in the dollar almost as though it was planned and rehearsed. The Fed wants to devalue the dollar but cannot make it look like a beeline downward. They must generate a zig and a zag a vibration or oscillation north and south to reduce the value of the outstanding debt and constantly newly issued debt. This is their only hope to move beyond what we have endured.
Of course you know the trades that will succeed in this environment if all goes as planned --- NON US ASSETS AND COMMODITY BASED ASSETS --- ALTOGETHER NOW!
EMPLOYMENT CHART - Here is a graphical demonstration of what we've been saying --- hmmmm all better?
Can these unemployed tolerate higher interest rates or mortgage resets or increasing credit card minimums? No.

SUMMARY - PUT IT ALTOGETHER
Ok, so how does this all come together? The deal is that we have two powerful forces at work that are attacking one another. We have the FED in one side of the ring and they are flexing all of their weapons at this moment and in fact might even becoming confident and hurling a few insults at their opponent.
In the other corner of the ring we have Mr. Deflation (Mr. Mathematical Reality) and he is feeling a bit beat up. In fact, Mr. Deflation believes that the Fed is cheating and even probably has a horseshoe in his glove like those old cartoons.
The Fed (and his buddies) has used all of its tools to win this epic melee. The Fed and Treasury have devalued the dollar, printed trillions, revoked all semblance of accounting rules, purchased MBS and treasuries in the open market to control interest rates, and probably even purchased the sovereign debt of troubled countries or at least entered into swap agreements that allowed for hiding of distressed liquidity needs.
Mr. Deflation has also battled well. He has reduced the value of almost every home in the United States, he has caused record bankruptcies, he has caused the consumer to briefly come to their senses and live within their financial means, he has cause US citizens with jobs and money to actually pay down debt, and cause a reduction in home sales and car sales that required "CASH FOR CLUNKERS AND CASH FOR HOUSES" to be rolled out to salvage what was left of two industries.
So who wins? The simple answer is I still don't know. The FED is resilient and in the short run has access to powerful weapons and Ben Bernanke is not afraid to use them. In fact, he knows he better use them because in his mind there is no losing. Losing is similar to death and he won't have that!
Picture the scene in the Godfather where the gangster screams "Say hello to my little friend".... Well Benanke has a little friend too and his little friend is the printing press. The Fed is absolutely convinced that deflation is death and they will destroy the dollar to avoid the gripping destruction that Japan has faced for two decades.
Ultimately, in the long run, I believe that Mr. Deflation wins. Just ask our Japanese who is tougher - a central bank that protects corrupt bankers or a deflationary force that requires justice and a honest evaluation of how much bad debt a country can absorb and still grow.
I was asked what I thought the catalyst for Mr. Deflation winning or at least beginning to steal some rounds recently. The answer is that it could be several things at once. The synergy of rising interest rates, tougher lending standards that shift downward the demand for housing, more sovereign debt issues (think Spain, Portugal, and Ireland---don't forget Dubai), crushing debt and US deficits, or even a collapse of a bubble in China or other emerging market economy. Remember ALL countries are trying to recreate the fantasy land of 2006 & 2007 and it isn't just the FED that has a printing press. Ultimately most countries are also trying to devalue their currencies.
I ask you. What specifically has changed in the last 1 year? Have banks written off all of their debt? Have they evicted all of those owners that are in foreclosure? Have banks written off their worthless HELOC balances? Have we begun to enforce real accounting principles? Have we regulated CDS as insurance? Have we received back all of our investments in AIG and Citibank and Fannie Mae and Freddie Mac? Have we returned the last two to solvency or are they simply bankrolling terrible mortgages that will never be repaid?

My guess is that nothing has really changed beside the upward recovery of the stock market. At some point the smart money will decide to go short the market and they'll pull the rug out from under Mom and Pop and leave them utterly burned for the 3rd time this decade. Unfortunately this time their assets will probably be destroyed in the process.
Does this mean that the party is over? No - in fact for this entire year I suggested that this rally may continue through May. We need to harvest gains in the portfolio and position ourselves in sectors and industries that have improving fundamentals that have lagged the others. The idea is that these will not correct as much and probably gain as investors search for value.
I do not have a specific trade to discuss this month. While I do like a few charts I will wait for break outs that are significantly above their resistance if we go higher to confirm the move. I don't like the risk/reward here even though many fundamental factors are showing continued improvements.
BE VERY CAREFUL - friends I speak with have almost forgotten the word risk and that can only mean that we are due for a correction. This may be a great opportunity to add as we pull back.


GOATMUG




























4 comments:

  1. "What specifically has changed in the last 1 year? Have banks written off all of their debt? Have they evicted all of those owners that are in foreclosure? Have banks written off their worthless HELOC balances? Have we begun to enforce real accounting principles? Have we regulated CDS as insurance? Have we received back all of our investments in AIG and Citibank and Fannie Mae and Freddie Mac? Have we returned the last two to solvency or are they simply bankrolling terrible mortgages that will never be repaid?

    At some point the smart money will decide to go short the market ..."

    Ok, thanks. For the "what has changed", I'm with you (but actually many things changed, starting with Ben realizing what's happening here). As we want to take advantage of these moves, the most important thing here is the TIMING! I still don't understand why you have May as an end to this rally? (seasonality, sell in May, what?)

    Second is the smart money going short; the question is who's smart money on the floor? Traditionally the pros, like US brokers and banks; but these people are in the same boat as Ben; they know they can't win the epic battle; those weapons employed by Ben and Co. weren't directed to these "smart money"? Why these smart money suddenly bet change boat and bet with Mr. Deflation?

    I still wonder where S&P will be if the economy is to be running on all cylinders; 3000 points?


    thanks for this post.

    ReplyDelete
  2. naveed ahmad khanApril 13, 2010 at 4:55 AM

    i visit your site n i got more information then other visited last month
    was good enough then last what i had gone throught


    work and study

    "

    ReplyDelete
  3. Hi, I have visited your website,it was good as it has lots of information about part time jobs.
    PART TIME JOB

    ReplyDelete
  4. Dacian,

    I absolutely love it that you aren't going to let me off the hook on the May target date. Sorry I've not answered, I'm doing my best just to keep posting as I'm slammed at work. When things calm down a bit I'll post a flurry of other posts that I'm working on.

    Ok, here is the story on the May turn and I will probably use this as a basis to further build this out in a coming post.

    Reason for a May turn -

    A) MBS purchases and and end to QE as of 3/31/10. I have figured that initially the market would be supported by hope and good feelings. After about 1 month, those evil bond vigilantes will try to test the Fed's resolve at actually exiting the market.

    So, plainly - higher interest rates.

    B) Increased rates put a clamp on home buying and ramp up revolving credit costs. (understandibly this will take time to flow through and perhaps won't manifest for a few more months more after A.

    C) Earnings - We'll be done with earnings and although I personally believe they won't be bad, the forward looking projections will not be positive enough.

    D) Banks will disclose more loan losses and reserves for losses than anticipated.

    E) Commodity prices will have gotten near peaks and pricing pressures will actually begin to cool off growth. Remember I suggested that oil would get near $100 and retrace this summer. A sprint to $100 will have impact on the economy and the transports.

    F) GDP annoucements forthcoming and we'll actually see downward GDP revisions and contractions in the out months.

    G) Something nasty is brewing in the EU and I don't think it is resolved. I think we'll get a few more weeks of calm and another leak will burst open again in Greece (again) or Ireland, Spain, or Portugal.

    Ok, that's enough for now but I think it gives you an idea of what I'm thinking. Is there a possibility this comes down in September or October or even after the elections - sure! I personally felt strongly at the beginning of the year though that the pulling of the QE facilities would be a significant factor.

    Is Ben committed to not letting this happen? Yes, so is the ECB, IMF and everyone else. But that is why I've constantly mentioned that I'm buying and holding my nose. Even more - on those purchases of bets that suggest dollar strength (YCS) or VXX I'm emphatically stressing stops and giving hard and fast levels. The old adage that you don't fight the Fed has real validity so that is why I've been long.

    Do I think a bubble my be growing overseas? Sure, I hear that there is a China bubble, and then I hear there isn't. But the Chinese have their own printing press too. Ultimately, I think I agree with you that things are not right and they stink, but I'm going to continue to invest on the long side with extreme caution and extreme use of stops. I'll let them take me out of positions rather than simply avoiding being in them for now.

    Hope that helps

    Goatmug

    ReplyDelete

Thanks for commenting.... if you are leaving spam or any link that is not related to the post, your comment will not be approved.