LET THE LIQUIDITY FLOW SAYETH THE FED

WHEN HE COMES OUT FROM UNDER HIS ROCK, PAY ATTENTION
We should have known something was up when Timothy Geithner was making the rounds doing interviews and proclaiming that there would never be another capitalistic banking failure ever (another Lehman event).  At that moment we should have simply went triple long everything as this was the signal that QE III was underway.  Read the following Bloomy article regarding Fed coordination with everyone to save....well everyone.

Call me a little gun shy as I didn't plow everything into longs.  Unfortunately, we all should have seen the signals as big money was buying transports and they were up over 10% in two days....it's such a hard thing to keep a secret.

UP, UP, AND AWAY FOR A WEEK OR TWO
Here is the current view of what I think could happen.  First here is a chart of $SPX where it is really a nice chart.  I think 1230 could be upper resistance, especially since the 50 day SMA is right there.  That might take us a day or a week to get there, but if you really think about it, a week is about how much time we'll need to find out that Greece has spent through its latest allowance and is in need of another infusion of cash!  This is a great pre-boost before the Sept 21st Fed meeting.  This would normally be when I suggest that the Fed is going to move forward with a full court press of official QE III, but today's inflation numbers might make them pause and do a double secret QE III.

The way things have gone lately make me suggest also that a push through 1230 would mean that 1260 could be the next level of resistance.

Let's also not forget our old buddy GLD.  As much as I hate it, the chart says this thing is going to track back to the area I've mentioned before at 162.50.  Gold needs a good riot or two in Europe to resume it's parabolic ascent.

I'll post a bit more later this evening.  Lots of going on.  Don't be confused by my sudden bullishness, we all know that the ECB and FED coordination means nothing, we are just pretending it matters and we are going to let the bots take our stocks higher.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

JUNE UPDATE - WHO ORDERED A DOUBLE DIP OF RECESSION?

I normally don't post my monthly fundamental updates on anywhere except this blog, but we have entered a critical part of the year and so I submitted the post to http://www.slopeofhope.com/ first where it has been up a day or two.  As many know, I have suggested that summer would bring a significant correction as the grips of the deflationary forces embedded in the system really take hold. As central bankers attempt to remove stimuli or the efforts lose effectiveness, deflation will prevail. As things have played out, we seem from many fundamental points to be just coming out of the worst of things. Unfortunately what we are seeing is that the rate of change of improvement is falling and indicating that we might be headed directly toward that double dip recession many of us have trying to identify.




OIL SPILL - RECESSION WARNING FOR THE GULF COAST ECONOMY



Before plowing into the charts I wanted to make a comment about the oil spill fiasco. There is no doubt in my mind that BP royally fouled things up. Their mistake cost people their lives and has begun to damage our coastlines and fisheries. The economic survival of many along the Gulf Coast are in jeopardy as the disaster's impact is felt throughout the region. Fishermen, hotel owners, and restaurant owners have been hit the hardest and significant regions have not even had oil landfall yet.


In an effort to attempt to look like it is managing the situation, the government has mandated there will be a 6 month halt of exploratory drilling in the deep water of the Gulf of Mexico. Already, Chevron and Exxon have stopped two projects. The administration's steps to curb deep water offshore drilling and exploration projects will have the effect of doing what the 2008 recession could not do; sink the Texas economy. Houston and other Texas cities have survived the downturn much better than most. The impact of shuttering exploration won't just hurt the largest firms, but all of the small firms that consult and serve the majors. Ultimately we will again see the largest attack on small businesses that seem to always bear the brunt of the Obama administration's reactionary steps.



RAIL TRAFFIC- http://railfax.transmatch.com/

The last two weeks have begun to show a slowing of the growth and improvement in rail shipping tonnage. I like to examine rail tonnage because we can get a feel for where the economy might be headed. Year over year comparisons are now quite easy but it is the weekly rate of change I'm watching. Remember, it was the rate of change that was lauded in the "bull market recovery", let's keep watching the rate of change in the retest.

COMMERCIAL AND RESIDENTIAL BUILDING INDICATORS - (RAIL TONNAGE)
I like that Railfax breaks out these components (lumber and crushed stone) because they are the inputs for commercial and residential building. We have seen an increase in building permits for both types of construction, and the move up in crushed stone shipping does back this story up. Lumber doesn't tell the same story though, and therefore we need to continue to watch this. It is important to note too that lumber prices really took off earlier in the year and have corrected significantly.

LUMBER PRICING / LUMBER ETF - (CUT)

What is causing the softness in the lumber market? Lumber futures have fallen around 23% since April. Is softening demand for construction putting a damper on lumber and their rail shipments? Does a permit mean a real project?
http://futures.tradingcharts.com/chart/LU/W
I normally would put up a chart of the tonnage of one or two of the individual rail carriers, but none of them are showing out performance from each other or from recent weeks. Of course year over year comps are easy, but the recent moves up have stalled. This data has helped me make several low risk trades when combined with chart reading to find good entry points. I'm not seeing anything compelling from the fundamental perspective that makes me want to jump in.

FOOD STAMPS - SNAP PROGRAM 6.1.2010

The government just released it's SNAP details or the number of folks participating nationally in the food stamps program. The release adds the data for the month of March. There has been turn in food stamp recipients, in fact more than 40,150,000 of your friends are getting their milk, cheese, eggs, and other groceries courtesy of your tax dollars. The average family takes in $290 a month in assistance.

HOME SALES DATA - RELEASED TODAY FOR APRIL


The National Association of Realtors' index of pending home sales jumped 6% in April, beating estimates for growth of 5%. The jump in contracts is thought to be due to home buyers locking in the tax-payer give-away of money for home buyers as the tax scam expired April 30. Any guess we'll have a decline in sales over the next few months once this round of stimulus closes the contract process in June?



MIT CENTER FOR REAL ESTATE - MOODY'S / REAL COMMERCIAL PROPERTY PRICE INDEX -  http://web.mit.edu/cre/research/credl/rca.html


Commercial property prices had a move up, but have resumed their drop. The strong dollar has put a stop to all of those foreign buyers rushing in to buy properties. Financing is also a bit tough to come buy as terms for deals include as much as 30% to 40% down. Deal mechanics don't look so good when leverage isn't so leveraged.

ECRI LEADING INDEX - GROWTH RATES - http://www.businesscycle.com/resources/

Weekly leading indicies from ECRI show a sharp decline in growth rates. As I've stated many times, the ECRI (WLI data) and the Bloomberg Financial Conditions Index are really subject to monetary liquidity measures and now stock market moves. How many times have I stated that the Fed realized several years ago that the stock market WAS the economy? Notice the acceleration of the decline of the growth in the last two weeks?

WLI DATA VS S&P 500 - http://www.businesscycle.com/resources/
I've graphed the WLI data here versus the S&P 500.

LONG TERM ROLLING 6 MONTH AVERAGE ECRI WLI DATA VS S&P 500


Here is a smoothed long-term version of the same data. WLI peaks indicate a recession. Before we jump to the conclusion that WLI levels around this 130 area indicate that markets will head south, be careful. The WLI stayed in this area and above for close to 5 years in the period from 2003 to 2008.

 

FINANCIAL CONDITIONS INDEX - BLOOMBERG - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

The Bloomberg Financial Conditions Index is another data point I watch. Levels above 0 show that the economy is in an expansion phase while points below 0 indicate we are in recession. May's reversal seems to tell us that we may have had a brief exit from recession but someone ordered a double dip of pain.

 
 

 

 

 

 

 

 

  1 WEEK LIBOR - STILL TRADING AT 33 BPS  ( http://www.homefinance.nl/ )

Does yesterday's 200 point gain make everything all better? Not according to 1 Week Libor. Bank stress levels remain high as compared to last month. We've seen a few days of little change as Europe and the ECB is attempting to stabilize the situation. LIBOR is the rate that banks lend to each other. In the absence of a rate hike, upward moves in LIBOR suggest there is anxiety in the financial system or liquidity issues.

 

 

USD - BLOOMBERG - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND
USD has continued its move higher and it took a breather today. I will write more in coming weeks about the real problems that the strong dollar, weak euro, and strong yuan are going to create for global trade and recovery. China is really going to suffer as the declining euro pressures Chinese manufacturers to cut their margins even more. China will absolutely not allow the yuan to appreciate no matter what they say publicly.

 

 

 

 

 

 

 

 

 

 

BALTIC DRY GOODS SHIPPING INDEX -
http://www.bloomberg.com/apps/quote?ticker=BDIY%3AIND
Spot shipping rates continue to form higher highs and higher lows since the end of 2009. Despite the moves up in the index, shipping companies stock prices don't look as good. LEVERAGE KILLS.

COPPOCK INDICATOR - LONG TERM TURN INDICATOR - NOT GOOD FOR SHORT TERM
I have been playing around with indicators for quite a while and have looked at the Coppock Indicator for months. In truth, I had almost forgotten about it altogether and said that it was a poor indicator because it typically signals a turn well after a significant move. The indicator is really a 14 month average of index prices. As a turn approaches the rate of change slows. If the DOW closes lower than 10,000 in June, the indicator would have signaled a turn (yes I know the market has fallen 15%!). Obviously there can be false signals, but I include this in here just because it has highlighted areas to watch as price momentum turns for extended periods.

SHILLER DATA - P/E RATIOS vs LONG TERM INTEREST RATES - http://www.irrationalexuberance.com/
I wanted to include these two charts from the Irrational Exuberance website from Robert Shiller at Yale. Of importance here in the first chart is that P/E's start to rise when interest rates are declining. While we could have a crisis of confidence in debt and equity markets (really?) that might spur dropping long bond interest rates, we seem to be about as low as one might expect with some invisible hand intervening. What I'm getting at here is that we will not have much of a catalyst for rising P/E ratios in our current state because we've already had the boost from a drop in long bond rates. This "juice" came in the form of low rates in 2001 resulting from the 9/11 attacks and the subsequent Fed policy injections from the sub-prime meltdown.

SHILLER DATA - P/E RATIOS TO S&P 500
With that same context, we see that we have had a surge in P/E ratios and are back above the long term average. While we could see a move higher, from a fundamental perspective I don't know where we'll obtain the higher E's. Perhaps the higher P's will come courtesy of the FED's balance sheet?

WRAP UP -
I usually end the monthly post with a trading strategy to start the month off right. As you can tell from my comments I believe we are heading down through the end of the year. We've had a significant correction and are due for a move higher to attempt to retrace the loss of 12% from the highs. I've been posting that I would use that as a way to exit positions and get short. I think retail sales will be greater than expected and also the employment picture will show more upside surprises this week. These will be catalysts for a bounce. In my opinion the bounce may not last long though as now even good news is being met with selling which is a fundamental change from the last 14 months. Can you blame them either? Who wants to risk holding stocks over the weekend on the chance of a Greek or other sovereign default.


The fundamental data all tells me that the stimulative effects from the Fed and government are waning and the result is a decline in the growth rate or even drops in the actual reported metrics. A double dip of pain is in our future. CPI data releases are showing that inflation is muted, therefore all commodity related long trades need to be exited. I personally will avoid gold and silver until I see gold back at the $1050 range. I'd be negative on oil too, but with the geopolitical tensions in Korea and Iran, I will simply stay away from the trade.

WADDELL & REED TO BLAME FOR THE MARKET CRASH ON MAY 6?

Please examine the story from Reuters here that examines the broker dealer Waddell & Reed as a possible source for the drop in the markets on May 6.

http://www.reuters.com/article/idUSTRE64D42W20100514

The story goes that sometime in the 20 to 30 minutes of nuttiness, Waddell & Reed entered in a trade to sell 75,000 e-mini contracts into the market.  The sale had a notional value of close to $4 Billion.  Waddell manages several mutual funds and explained that they were employing a hedging strategy for protect their clients.  In the text of the story we see some other pieces of data to note.

On average, 50,000 e-mini contracts usually trade in an hour, but in the specific 20 minute period of the fall and rise in the market almost 850,000 e-mini contracts exchanged hands.

Here's the money quote -

"To get rid of 75,000 contracts, that's a lot of trading even if the market is healthy," the trader said. "But when suddenly the market changes and there's not as many bids there to trade with, 75,000 is going to cause quite a shock to the market.
"That's an enormous position for anybody, whether it's a hedge or whether it's a trade. It's a big position, no doubt about it," the trader said."

So again, this story raises more questions than answers and I'm just going to lay them out in no particular order.

1)  Where is the mysterious "fat-finger" trade of 16,000,000,000 future trades that CNBC kept referring to?
2)  What broker or hedge fund really went bankrupt in that time period.  If something happened according to the rumor, someone really blew up.
3)  Is it any coincidence that the politicians were examining Fed and bank regulation right at the time of the drop?
4)  Who caused the amazing rally that made the markets rise 700 DOW points from the lows?
5)  Does anyone really trust this market?
6)  When are we going to unplug the computers that are doing HFTs?


GOATMUG

RISK, IT'S NOT JUST A GAME YOUR KIDS PLAY

Just a quick note regarding commentary by Jeff Saut from Raymond James. His notes come out every Tuesday morning and I like to read him. I always remember that he doesn't get paid to be bearish, however he has a great style and he has been pretty good in last year's surge, by being bullish and bearish throughout the year..

His best quote is found here, which summarizes my thoughts about this market as well. On a relative basis, I'm still concerned about the dollar even though the first two days of the trading year are showing us it is back to usual on the weak dollar, long commodities trade.

Last Monday we wrote, “As we enter the New Year, we are once again turning cautious because the Treasury market is breaking down (higher rates) and the U.S. dollar is rallying. . . . Therefore, we think it prudent to ‘bank’ some trading profits and hedge some investment positions as we approach the new year.” Moreover, one of the lessons we have learned is that the beginning of a new year is often punctuated with head fakes, both on the upside as well as the downside. One of the greatest upside head fakes was in January 1973 when in the first two weeks of that year the DJIA rallied to a new all-time high of 1051.70 before sliding ~20%. While we are clearly not predicting that, what we have indeed experienced since the March “lows” is the second greatest percentage rally (69%), adjusted for time (nine months), since the 1933 rally. Following that 1933 explosion of 116% in just five months came a pretty decent downside correction. Since we tend to be “odds players,” prudence suggests some caution is again warranted.

Goatmug