OCTOBER MACRO UPDATE (Rumors and Rumors of Rumors)

OCTOBER MONTHLY MACRO ECONOMIC UPDATE

I took a month off last month and it was very good to have a break.  I'm excited to "get to" put this together and see what the data is telling us.  As of Friday, October 21, the equity markets have stabilized a bit after a thrashing and we are back to the 1235 level on the SPX.  Earnings have been mixed and there have been some misses that shocked the world and then some beats that have been quite good.  Overall, I didn't expect this earnings season to be all that bad, but the next one should be more than interesting. 

Investing in these markets is quite perilous as 2% moves up and down intraday are not signs that we are investing in a healthy market.  Rumors and rumors of rumors result in absolute face-ripping turns that can leave your rear and your portfolio aching.  It is important that you slow down and remember the risk rather than focus on the money you are not making by being in a trade.  I've had several email conversations this week with people that were upset they were "missing it".  Don't worry, there will be another trade after that one.

Let's dive in shall we?

RAILS  - http://www.aar.org/NewsAndEvents/~/media/aar/railtimeindicators/2011-10-rti.ashx
2011 continues to track right on par with 2010 on a non-seasonally adjusted basis.  From an economic perspective one might suggest that this is bearish, yet oddly I find myself noting that despite all of the ominous double-dippiness that I see, it is quite positive to see that we are tracking right along with last year and not falling.  This is based on the assumption that many folks have that 2009 and early 2010 were essentially pulling forward all sorts of demand (and that was the case for cash for houses and cash for clunkers), but at least in the midst of this "pull forward" 2011 has been able to match that transport demand punch for punch.

US Carloads - 52 Wk Moving Avg -
What does this graph tell us?  Simply that we are better off now than we have been in terms of moving stuff compared to anytime in the last 2 years.  It is not a huge revelation to note that we are not near the 2006/2007 excessive peak of everything.

Crushed Stone - I've finally found a reporting source for crushed stone transportation since Railfax went to a subscription model (greedy 1%ers!)  Here we find much the same that 2011 is right on target with 2010.  Unfortunately for commercial builders, this indicator is telling us that there is no real demand for commercial building at all.

MANUFACTURING INVENTORIES
Here is nice graph I pulled from the Railtime report that highlights a concerning trend.  See the red line there?  That is showing that since March of 2009 manufacturing inventories were at significant lows.  As we've mentioned often, the red line demonstrates that the climb in inventories has fueled much of the consumption of raw materials and the illusion that the economy is a lot better.  Now that we are near peak levels reached in 2007 and 2008, where do we go from here?

ECRI - Weekly Leading Indicators - http://www.businesscycle.com/
The WLI from ECRI continues to show weakness and point toward a "new recession". 

6 MONTH EURIBOR - Charts
Euribor continues to remain stubbornly high for this type of credit environment.  Euribor is the rate in which banks can borrow from each other in Euros.  While the absolute levels here are nowhere near the highs of the past in "normal" credit markets, given the scary lending environment the Eurozone is in now, the uptick in rates over the last two months is indicative of the stress between counterparties.  Despite being told that a solution is in the works to the Greece solvency problem, we've seen other dominoes fall.  The "dominoes" are weak banks that are exposed to bad sovereign debt.  These include Dexia, and a few other French banks.  These rates seem to be on their path higher.....again.

PULSE OF THE ECONOMY - http://www.ceridianindex.com/
I'll be very interested to see the results of next months report from the UCLA/Ceridian Fuel Index.  Readers should recall that the Ceridian Index monitors the fill-ups of truckers across the country and in turn, this fueling activity gives us an idea of how the economy is doing in real-time.  Over the last couple of months we've seen a slow-down in these figures and this is an indication that a recovery is on the skids.

MONSTER.COM INDEX - http://about-monster.com/employment/index/15
The Monster.Com Index shows a reading of 148 which is actually very good.  The print represents a 7% year-over-year gain, but more importantly the figure is the highest level we've seen in a very long time.  The Monster.Com Index measures the number of on-line job listings available.  Obviously in this graph you can tell that September is seasonally the most active job posting month, but when we continue to hear that there are just no jobs available, we must question the common wisdom.  Perhaps some of the OWS guys can use some of their down time to hop online and apply for one of those "fair wage" jobs they are demanding.

HOME SALES - Uh oh. - http://www.realtor.org/research/research/ehsdata
Home sales prices are beginning to fall again.

MIT / MOODY's REAL TRANSACTION BASED INDEX - http://web.mit.edu/cre/research/credl/rca.html
The late September release of the MIT/Moody's Transaction Based Index show some positive news, however the release captures data from the month of July.  The month of July noted an increase in transaction price of 5% which is quite good given the circumstances of the economy.  Obviously the follow on months of August and September will be critical and we'll keep watching them.

SCRAP METAL COMPOSITE INDEX - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Alan Greenspan better take notice as scrap metal prices are plummeting.  Since their peak in February, metal prices have fallen.  Mr. Greenspan used scrap metal as an indicator for the health of the economy.  I'm wondering how healthy the economy looks given the almost 20% drop in the index.

FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
Bloomberg's Financial Condition Index is also suggesting that we are in recessionary territory.  Any level under 0.00 gives us the information that the economy is contracting.

BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY&exch=IND&x=15&y=11
After reaching multi-year lows in February, the BDGI seems to have found some footing.  and the spot rate shipping index has almost doubled.  Unfortunately we need to resist the desire to rush out and buy shippers as I recently read a story that noted that shippers have another huge delivery of ships coming online in the next several years.

USD INDEX - http://www.bloomberg.com/apps/quote?ticker=DXY:IND
The dance of the USD continues as each Eurozone fix rumor creates massive gains and losses in the USD.  September's spike in the dollar has been met with October's destruction in the greenback.  The volatility will continue till we see some sort of resolution from the ECB, IMF, and Euro countries.  A very cursory look at this chart suggests that their may be a small move higher in the dollar and then a continuance of the larger trend down to retest 74.  If that does happen, the equity markets will enjoy a healthy rally.

COPPOCK INDICATOR -
Well I've kept the Coppock Indicator warmed up and up to date despite my belief that it is pretty worthless.  I've tracked this indicator for more than a year now and as I noted when I started, it didn't have much predictive power, and doesn't seem to have much still.  Recently I did a post on the notion that the slope of the moving average had something to do with the predictive capabilities, but I'm  not sold.  Needless to say, the Coppock Indicator for September was still in "sell" mode and thus the big rally over the first weeks of October would have been missed.  Coppock needs a close over 12,500 to earn a buy turn signal.

MACRO SUMMARY -
As bearish as I sound on many posts, I am not as bearish as I could be and actually feel a bit positive.  Employment measured in the Monster.com Index is up, real estate transactions (commercial) are getting better, rails are shipping as much or more than last year, and input costs are falling (copper, scrap, etc).  There are serious headwinds, most notably a lack of any confidence in the sustainability of the "recovery" and of our leadership in the political sphere.  I think this is exactly the kind of environment that could foster upside surprises in terms of economic performance since everyone is just so darn pessimistic.

TRADING UPDATE -
The last two weeks of rallying has saved the bulls and charts have made some really compelling progress to bolster the bullish case.  As I type this, I am reminded that these markets have tended to move into territory lately that "bolsters cases" and then suddenly destroys that case in an instant.  With that in mind we'll pretend that the Eurozone issues don't exist and we're simply going to look at the charts and attempt to discern where we could go!

$SPX looks strong here for a move to the 1275 area as this would be essentially the 200 day moving average.  As I discussed in the earlier USD chart, this type of move higher in SPX would result as a drop in the USD paved way for the equity market rebound.

14/40 CROSSOVER - On a much longer time frame we get a sense that perhaps all things are not well with the indices as we see that on the 14/40 chart of $SPX that the 14 Day EMA on a weekly chart is still below the 40 day EMA.  This is essentially still a hold bonds not equities signal here.  While not pictured here, the MACD is turning up, but that doesn't change that the longer term call here is still bearish till we see a cross back over.

Finally, let me share with you a couple of perspectives on specific names.

FCX - Put this one on your watch list.  I have been playing this one long and short all week, but am out of the name as of today.  The move into the $36 area from the $34's yesterday makes this one in no-man's land.  However, if we do see a continued rally in the Euro, we'll see commodities run up and FCX has been strong despite falling copper and gold.  A continuation of this could lead to much higher prices in FCX near the $45 level.  If we get a move to $38.25 and it is repelled, it might be a good play to short.  If $38.25 holds well, a short trade may be the play with a low $32 handle as a target.  In the near term, here are the levels I am watching.

Bullish - Resistance at $38.25 if goes through there, $45 is in play.  Lower support at $32.60

INTC - While the FCX play is bullish I have been watching and shorting Intel.  Oddly, I actually like INTC alot, and had identified it as a great "defensive" name due to the high dividend when the stock was trading near 19.00.  Unfortunately I missed that entire run as I was over thinking it.  Now, despite my admiration for the dividend and the good results the company posted, I find that a 30% + move in a couple of weeks is just too much.  Look at how INTC has struggled at the $24 level.  If this isn't a good opportunity to short, I don't know what is.  I'm setting a tight stop at $24.75 and letting this one go with a target of $21.50 as a retracement to the 50 D MA and then possibly a $19 target again where I'd then flip and go long.  Finally, you'll note on the chart that INTC is at a point that is 2 standard deviations above the longer term average which is essentially the 200 day.  This seems that the move up has been a bit overdone, therefore it reinforces the bearish posture in this trade.

Well, that's enough for me today.  Please check out the blog often as I'm back and enjoying my publishing outlet again!

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/

ROBERT SCHILLER - RISK IN EQUITIES?

The Yale Professor continues to discuss his bearish outlook for housing.  He explains why equities still appear expensive in the long term, why housing is likely to remain under pressure, why the general economy is likely to suffer a continuing malaise and why TIPS are his favorite investment currently.  This doesn't seem like a set of investment choices that have a positive bent despite the Fed's best efforts.  Could it really be as simple as the "loss of our American spirit" that explains depressed economic activity?



Despite the summary above and his bearish commentary, Shiller does make the case that one should be buying into the weakness in the markets and that one should be careful.  Interestingly he says that equities are overvalued, but not by alot in historical terms.  I make my own graphs using his data from the site http://www.irrationalexuberance.com/.  The correlation of long term P/E's to equity performance is remarkable.  It is tough to discern if stock prices lead to long term P/E declines or the other way around here, but the linkage is quite obvious.  Did I mention that we are in a recession? 

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/

DISTURBING CONVERSATIONS ABOUT REAL ESTATE

I had an interesting conversation with an old acquaintance the other day and it reminded me that people make money related decisions without examining costs and benefits and they never look out farther than a few months.  In addition, I heard a radio program today that reinforced my view of the NAR folks (and their local associates) and realtors in general.  The conversation and the radio program have a lot in common so bear with me. 

While I'm sure writing this post will be therapeutic for me, my hope is that readers will lock in on the absolute concern I have for this economy and the need for us to make meaningful, thoughtful, and hard financial decisions quickly, and now before our options and our cash stores have been wasted.  Before we get too detailed, let's have a little background discussion first.

In the area of the country I live we have been blessed economically.  Despite the US recession, our region suffered very mildly, and now have largely come back to the same employment or even grown since the last set of highs in 2007 and early 2008.  Because this area is in the energy corridor we've have been insulated.  Having said that, the suburban areas in our city did not enjoy such luck.  Lower income areas surrounding the city did get hurt and home values fell some 10% to 20%.  Still, compared to areas like Arizona, Nevada, and Michigan, this is great.  Specifically, the person I had coffee with lamented that their home value had fallen 5% below what they purchased the home for 10 years ago.  In this case, that paper loss is about $10,000 assuming all closing costs and a recent market valuation by a realtor.

As I chatted with my friend I asked a few more questions about their situation and found that the family is really struggling.  After all of their paychecks and bills each month they need about $2,000 additional cash to be able to meet their expenses.  Needless to say, I was shocked.  When I hear that kind of talk and I think of that kind of situation I feel like we should be in crisis or battle mode, not enjoying a coffee at a Starbucks!  It seems that the major issue creating a hole in their finances is their home.  Fortunately for them they had about $70,000 in emergency reserves to draw on to help cover this shortfall.  I was happy to hear that they met with several realtors and had received estimates of their home's value and the found that they would probably end up with a $10,000 loss due to falling home values in their area.

I asked when they were going to list the home for sale and I was met with silence.  It seems like it was a hassle to sell their home right now (during the summer busy season when there are a lot of buyers)  and they were planning on putting the house on the market next June.  I said, "WHAT?" and she mentioned that it was just too much trouble to try to get things ready all the time and next year would be better and they could de-clutter their home between now and then.  Additionally, by waiting another year, the home values would come back a bit. 

I could see how committed to this line of thinking she was so I didn't go much further.  I proposed a couple of scenarios for her about selling earlier and tried to highlight how her cash position might be different yet there was no movement.  This is when I realized that I was not there at the Starbucks as a male Mr. Fix-it goat, I was supposed to be playing the role of the sympathetic "listening only, no fixing" goat.  Like a Phil Jackson having a total Zen moment, this powerful realization hit me and I suddenly found peace.  There was not a chance this person was going to listen to the words she might hear, so I simply stopped, changed the subject, and finished my coffee.  I hugged my old friend goodbye and wished her family well, knowing that she was only deferring her trouble and hurting her family's longer term position.

In my youth I would have pulled out some paper and charted scenarios to try to show and convince my friend that a move now was needed, but I've aged and learned and know better.  So here's the frustration.  Assuming that these guys do put their home on the market next June and their $2000 a month shortfall remains they will be at least $24,000 poorer as their cash reserves will be liquidated. (12 months till listing).

In addition to that, they then must hope that the home actually sells and it is sold in a reasonable time of 90 day or so.  That is another $6,000!  We must also hope that their loss on their home is only $10,000.  As I mentioned in the July update, we are getting indications that banks are not beginning to release underwater inventory and breaking up the log jam of non-foreclosed properties.  In other words, these banks are increasing the flow of supply on the market and that may be bad for future sales prices.  No matter what, let's just assume that they sell the home for a loss next year of $5,000. 

Here's how it could work out;

SCENARIO 1
$5,000 loss on the property
$24,000 income drain for 12 months before listing
$6,000 income drain while waiting to sell the property.
In total, these guys suffered a $35,000 loss but a net cash loss of $30,000 by staying in this home!
They have $70,000 in cash reserves and would end up with $40,000 in remaining emergency funds.  If they were able to trade down to a home that needed only $1,000 additional income from their reserves, they could live a little over 3 years in this situation.

SCENARIO 2
On the flip side, they could list the home this month and face this situation.
$6,000 income drain while waiting to sell the property.
$10,000 loss on the home.
A total of $16,000 in losses but only a $6,000 cash loss. 
Let's assume they buy a home or rent and can drop the out of pocket needs to $1,000 a month to be very conservative. That results in a $9,000 cash drain.
At the beginning they had $70,000 but suffered a $6,000 cash drain and then a $9,000 drop due to still falling short of their expense needs.  Their total cash remaining would be $55,000.  While not optimal, they could still live in this situation for more than 4 years.

The family would probably be better off in the second scenario as well as many of their other expenses like air conditioning and heating would drop because they would be in a much smaller home. 

The point of this is simply that while it would be an inconvenience to move now, it is still going to be a hassle that must be endured.  Why not go through the pain now and come out the other side with a larger war chest for the future?  Why not cut your losses on the home instead of gambling that things work out for the best?  What if things actually get worse and the home value drops? 

KEY POINTS
CONSERVATIVE IS GOOD!
In this economic environment with all of the uncertainty isn't it best to attempt to have the smallest amount of debt and largest amount of savings to ensure that you can stay solvent as long as possible?  I love how this family had a pretty big store of savings, I hate how they plan to destroy their cash by taking too long to act on an important decision.

YOUR HOME IS SHELTER, NOT AN INVESTMENT
Have you noticed that the "Flip This House" and Carlton Sheets infomercials are no longer on TV?  This is happening because people are still getting killed in real estate.  As home-buyers we need to get rid of the notion that we'll be able to sell our home in 3 year or 5 years for a mint, it just isn't going to happen again.  We need to buy affordable homes that provide for our needs.  We don't need a home or a mortgage that fits the description that my mortgage broker and realtor told me when buying our first residence.  They stated, "Buy a home that is big enough and costs as much as you can possibly get even though it is uncomfortable now, with raises you'll be able to grow into it ."  What happens if you lose your job or those bonuses and raises don't materialize?  What if the economy takes a nasty turn and we enter a double-dip?

RADIO, REALTORS, AND NAR ASSOCIATES ARE SALESMEN
When is the last time a realtor told you it was a horrible time to buy?  Exactly.  As I mentioned in the introduction, I heard a radio show here locally that interviewed the local version of the Chairman of NAR.  He explained that home values were increasing and that is might be a good time to get out there a buy a home.  The realtor that was interviewing him continued to hammer home the idea that investment rentals were such a good deal because rents were up and that first home buyers should get out there and buy.  While that all may be true we just don't know and these guys didn't reference once that values could easily go down.  I wonder what my friend's realtor told them 10 years ago?  Probably the same thing they are saying now and everyday..... Buy! Buy! Buy!.

Financial decisions can be tough and they can be scary.  We always need to seek wise counsel and also remember that many times doing nothing is a decision.  Inaction due to fear, uncertainty, or over-analysis can sometimes be very costly.

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/

WHY AREN'T WE TURNING JAPANESE? JAPANESE DEFLATION REVISITED

Please review the Bloomberg story - http://www.bloomberg.com/news/2011-01-13/japan-exporting-deflation-reveals-meaning-of-bernanke-s-economic-nightmare.html

In the last post titled Economic Warfare - Inflation Bombs (Part 1) -  I outlined how the US leadership was attempting to create asset price inflation (stock markets up) in an attempt to change perception and create a state of "feeling better" which actually changes reality so that the economy's participants act in ways that spur improvement and thus makes the economy "better".

The mechanism of this "feel better" cocktail is the use of QE or Quantitative Easing which is simply where the Fed and Treasury "print" electronic dollars and buy US Treasuries from the open market.  Essentially the hope is that this exchange of dollars floods banks and other investors with cash.  In the case of banks, the hope is that they will lend money to borrowers that will then do projects that stimulate the economy and create jobs.  Investors are "encouraged" to buy other things like stocks with their treasury proceeds.    The tidal wave of new dollars has done exactly what the Fed has desired in that the purchases of stocks and other assets have increased substantially in value since the low of March 2009.

As I covered, those same dollars haven't just bought stocks, they bought commodities like gold, silver, oil, wheat, cotton, sugar, cocoa, copper, and every other hard and soft asset.  The by-product of this has been a surge in prices for these commodities.  Read my article for more on the impact of those price increases.

So, to summarize and get to the point of this post, the Fed gambit has succeeded so far in getting stocks up and the economy moving forward.  As Ben Bernanke has highlighted many times, deflation is the ultimate enemy, it was the cause of the Great Depression and some say it was the cause for WWII as well.  Since he is an expert in that economic period, he has vowed to defeat it at any cost.  The cost literally has been in the trillions to accomplish this feat.

There is also one other thing going on in the back ground.  Our government (Bush and Obama) attempted their own fixes in concert with the Fed.  These fiscal  approaches included massive government spending to counter act the decline in personal consumption and spending.  Of course the US government didn't have all the money for the additional trillions it was spewing out, so it created massive deficits and that trend continues today.  What is important to note here is that this massive outflow of government spending and surge in debt now must be paid for in the form of treasury obligations.  So, not only is the Fed buying US government debt for the sake of sparking an asset rally, it is also purchasing the debt of the US due to significant cost over runs.  The amount we owe is so large that we are now sensitive to any increase in interest rates that come from an erosion of the quality of creditworthiness.  Here is the money shot - The US Fed now really has this dual policy mandate (that is unspoken) - 1)  Keep the markets up so the recovery can be sustained   2)  For goodness sake don't let interest rates rise cause we can't pay the cost of interest on our borrowed principle.

So after that very long introduction we know that there is a WAR ON DEFLATION.  So what is the problem with deflation?  What happens to consumers in a deflationary environment?  Let's examine the story about Japan's experience to see what scares Bernanke so much.

• "Their advantage may be Japan’s disadvantage. Prices in Japan as measured by the gross domestic product deflator have declined almost without interruption since 1994. That has muted the effect of falling wages and provides a cautionary tale for Federal Reserve Chairman Ben S. Bernanke, who has been lecturing on deflation’s perils as a central banker since 2002. "

Ok, so since 1994 prices have declined in Japan for everything from shirts to hamburgers.  Anything bad there?  Let's read on to see. 

• “Retailers like Uniqlo were able to ride the wave of deflation and grow,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “To win these pricing wars at home, companies had to keep cutting workers’ pay, and that’s spiraled down with prices falling and then falling some more, with deflation never ending.”

The article's point here is that the company did cut wages to attempt to compete in the environment.  Therefore, if my wages are cut it must be terrible right?  Actually, if my wages are cut, but all the things I buy are less then I don't really feel it as much.  It seems like Martin Shulz agees.

• “Everyone knew deflation was bad for jobs and bad for the economy, but gradually, households and companies just got used to it,” said Martin Schulz, a former Bank of Japan researcher and now senior economist in Tokyo at Fujitsu Research Institute. “The risk is that it takes hold in the U.S. as well.”

Admittedly there are negatives.  Companies just don't cut prices, they cut headcount to complete.  But where does the notion come from that deflation is bad in the article? 

• ‘Unavoidable Endgame’
  
  Deflation will steadily sap nominal growth, depriving the government of revenue, until one day Japan will no longer be able to finance its borrowing, Jerram said. The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.
  
  “That’s the unavoidable endgame,” said Jerram, who has analyzed the Japanese economy since 1987. “As long as it’s in the future, everybody can pretend it’s someone else’s problem.”

I laugh when I read that text.  Yes, the unavoidable endgame is that the government defaults or devalues IF they continue to have stupid government spending on useless building projects (bridges to nowhere), entitlements, and stimulus spending that achieves nothing!  Sound familiar?  Japan is the future of Amerika!  The endgame is unavoidable if governments continue to have huge fiscal deficits and don't control themselves.  This is where we see the sheer terror of Bernanke and other government leaders.  Delfation is a killer if you have an out of control government that doesn't manage spending appropriately.  How many times have we heard that governments will actually downsize and cut costs?  NEVER!  In fact, the US government builds in annual increases into the budget that do not need to be approved.  So every department's budget grows automatically every year.  That includes salaries and base expenditures!  No wonder we cannot control the power and cost creep of the government!

The takeaway here is that deflation is bad if you are a government official.  Otherwise you'll see that Japan's style of deflation isn't quite as horrible as it is cracked up to be.    Consumers (normal people) actually feel fine with deflation.

• The success of the companies in Japan has helped consumers adjust to deflation. The average household owns 1.4 cars and 2.4 color televisions, about a quarter more than in 1990, a Cabinet Office survey shows. The proportion of people content with their standard of living was 63.9 percent last year, compared with 63.1 percent in 1989, a government report said.

Contrast the information above with the choice that your federal government and Federal Reserve is making.  They would rather declare war on the retired and poorest US citizens by invoking the spirit of inflation.  Bernanke demands rising prices in gasoline, oil, clothing, and food and those costs become a larger portion of the poorest income --- just to survive!  The middle class are squeezed to death in the spiral of surging prices.  The Fed claims that wages will increase and jobs will be created, but where is the data to support this?  Where are the rising wages?  Where are the jobs?   I've highlight again the statement from above -

• The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.

The reality is that the government and the Fed has chosen not to cut the size of our government and it's entitlements, but has chosen to debase our currency.  The debasement of the currency amounts to the crushing of our poor and also the poor of the world through price inflation (because commodities are priced in dollars).  I wonder how long the Amerikan poor and middle class will put up with these attacks.  When will the rioting of Egypt and Tunisia come to the streets of our cities?  If you think the trend of higher prices in food is going to abate you are absolutely wrong.  If you think we won't see $4 gas this summer you are nuts!  Good or bad, Amerikans are soft and don't have the heart to stand up to these overt attacks by government elites.  Where is the America I grew up in?

Would you rather choose starving to death, being on the government foodstamp roles, and losing your independence and dignity or choose this?

• “It’s amazing what you can buy with 100 yen now, we didn’t have 100-yen stores before,” said Sachiko Enokida, 80, who lives on her bimonthly pension checks from the government and has witnessed inflation’s ups and downs since the 1940s. “After the war, we all thought this was going to be the last year before we starved. Then things really boomed and people were buying apartments like crazy and you saw wealth everywhere. I would hate for things to get expensive again.”
  With almost one fourth of the population over 65 years old, Japan chose to stay in deflation, said Feldman. That turned cash into an investment, as money left in bank deposits gained in purchasing power the longer it stayed there. Today, Japanese households keep 56 percent of their financial assets in cash, compared with 14 percent in the U.S.
  
  “The factors that produced and permitted deflationary policy seem likely to persist,” Feldman said in a report.
  Meanwhile, consumers continue to enjoy lower prices. Golfers pay 26,800 yen to play on the weekend with a caddy at Oak Hills Country Club, a course 90 minutes’ drive from central Tokyo designed by Robert Trent Jones Jr. Twenty years ago, the fee was about 40,000 yen, said Katsutoshi Ohira, acting manager.
  
  “I don’t think I can expect any meaningfully big pay raises going ahead,” said Satoshi Miyazaki, 34, who works for an advertising company in Tokyo. “Since I’m paying for things out of my limited salary, lower prices have been a great help.”

There is going to be a collapse in Japan too, don't get me wrong.  Both countries have pursued poor policies that didn't include government cuts.  Both countries continued to borrow and live in the moment rather than in a mode of planning for the future.  My point here is simply that Bernanke and the Fed have picked the option that benefits the US government, banks, and elites rather than the US citizen.  They have picked themselves over the us.

GOATMUG

  

IMPACT OF HEALTHCARE REFORM -

I was asked to give a speech last week to some Christian Business Owners on the impact of Healthcare Reform. I've had some techincal difficulties posting the actual slideshow here on my blog, so I made a pdf available and Tim Knight at Slope of Hope posted it for me this weekend. As usual, please check out Tim's site if you are in any way interested in trading, it is great stuff. www.slopeofhope.com

The talk was well received however I discerned that there is so much frustration in people that they feel like they have no voice and they are angry. Each person that posed a question really needed an outlet to vent. In fact, the majority of the questions were rhetorical.

I've tried to position this presentation in an even handed fashion where we examine the good stuff about the bill and point out the things that need improvement. At the end of the day no one will argue that the current system doesn't really stink. Unfortunately I still have not heard anything that convinces me that we can come close to paying a portion of the future liability we are signing up for.

Face it, if I wasn't concerned about the future cost and long term fiscal solvency of my family I would drive new cars every year, live in a house that was 5 times larger, trade for a living, write a blog, and take two week vacations in Paris and blame it on a volcano. However, I am pragmatic and focused on reality therefore I weigh the risk and the cost of each purchase.

Our government's leadership does not possess the same value system that I do and this is why this program is doomed never to make financial sense. When we raise taxes and add a VAT it still will not be enough to meet the future obligations created in this plan.

Don't get me wrong, I want everyone to have insurance and be healthy, I just want someone to show me the money!

Download Goatmug-HealthReformActSummary-4.29

The presentation was divided into two parts. The first 18 slides were the subject matter in my talk, the remaining 40 slides provide details about the timeline of implementation and highlights the provisions as they are scheduled which I did not have time to cover. - I did not include the additional slides here, but I will attempt to make them available on along with the actual vocal commentary when I post it on You Tube.


Goatmug

October Summary

OCTOBER - TRICKS OR TREATS

Unemployment Data - http://www.bls.gov/news.release/pdf/empsit.pdf

Unemployment numbers for September were higher than anticipated and this helped shake the markets. The truth is that the trend of lower losses is continuing and the market is still focused on everything getting less bad. While the data was worse than expected, we need to look at these numbers as 1 or 2 month averages and there is clearly and improving trend.

Rail Data -
Rail traffic looks flat as of the last part of September. Optimists will say that we are turning south and pessimists will suggest that we aren't improving. As we enter this season we should begin to see shipping and transport data ticking up because we are entering into the part of the year where Christmas inventory and orders are being stocked. If we don't begin to see an uptick in these charts as we normally would we will have our first indications that the rally may be ending.

Lumber and Crushed Stone are indicative of the pipeline for growth in commerical and residential real estate. No trend changes are apparent in these items. As we've stated before, no matter how high banks, REITs, and home builders go, we would avoid them.

Financial Conditions Index - Source / Bloomberg

The Financial Conditions Index continues to maintain it's trend of improvement. There has been a slight dip over the course of the last week, however we won't do much more than raise an eyebrow at this metric unless we see other data that confirms this warning. Index numbers over 0 (zero) indicate that the economy as measured through fixed income and money market liquidity metrics is growing and expansionary. We are not going to signal the end of the recession, but possibly could as we near zero.

Source - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND

CFO OPTIMISM - Source Duke Fuqua School of Business - http://www.cfosurvey.org/
Duke released its September CFO survey results again. CFO's believe that things are looking better for the overall economy and their own firms. In general they are more positive. This change is not overwhelming, but given that most CFOs are going to more conservative than their CEO or COO counterparts, we should take heed here to recognize the potential for real growth during earnings season (starts later this week) and then next two months.

WLI Data
The Weekly Leading Indicator data from ECRI shows sustained improvement. Admittedly 50% of the data that comprises the WLI Data is "Fedcentric", meaning that it has more to do with the amount of money that the Federal Reserve has sloshing around rather than real economic improvement. Having said that, the flood of money sloshing around is making an impact and we cannot ignore it or discount the impact that those dollars will have when they chase assets. Source - http://www.businesscycle.com/resources/

AAII Sentiment -

The AAII Sentiment numbers continue to remain in no-mans land. Remember, when sentiment reaches an extreme (bullish or bearish), we usually want to do the opposite. In this case there are a mixed number of folks that believe in this rally and an appropriate amount of investors that are bearish. The confusion confirms exactly what we are seeing with big up and down days as traders attempt to sort out the direction of the market.
Source - http://tal.marketgauge.com/dvMGPro/charts/charts.asp?chart=AAIISR

US DOLLAR INDEX -

Anyone seeing anything familiar here? We had a couple of days worth of a head fake last week that was just enough to ensure that we were on our toes. This has merely provided us an opportunity to buy more of the types of holdings we've discussed in the last several months. "Carry on, nothing to see here!"

Source - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND

Home PX Index -

I've left the home price index graph up here simply as a placeholder since it hasn't been updated yet. Why is it important? It is important for several reasons. First, home price stabilization is the basis for much of this rally. If you recall, Ben Bernake and Hank Paulson repeated told us that if we can simply stabilize the home market, we'll see the economy recover. In their efforts to stabilize home prices they have become the mortgage lender of choice for most of the deals getting done. Directly you ask? No, but lenders are being supported as the government backstops the entire mortgage market. By buying these mortgages and also controlling treasury rates, the fed has created an artificially low interest rate environment.

What else is going on here? We are hearing that banks continue to pile up foreclosures on their books, but refuse to release them for sale on the market. Other stories highlight that many ex-homeowners still remain in homes they haven't paid a mortgage on for many, many months. How can they stay and not pay? By keeping foreclosed properties in "defaulting" status rather than taking receipt of the properties, banks don't have to recognize the huge losses they are saddled with. Our regulators sit idly by as banks game the system and overstate the assets on their books and earnings. The hope is that by controlling the flow of foreclosures coming to market they can extend the period until the market recovers.

Is it working? Well, according to the graph, it might be. I would guess that as soon as there is a noticeable stabilization or increase in pricing a new wave of sellers will come to drive prices down. No matter what, banks and the government are both giving it all they have to keep prices afloat. Their ability to sustain this is a key driver to the continued resurgence in the market.

Are there still concerns in the housing market? Yes, people continue to lose jobs and people continue to stop paying mortgages. We are coming into more trouble as a new barrage of bad loans are due to reset to higher interest rates. These are the option ARM loans. Many of these loans were "interest only" loans for a period of 5 or 7 years. Borrowers took these loans out with the assumption that they would have increasing home values they could then use as equity to refinance with, or they were used by folks that needed low interest loans because they were maxed out and didn't have the ability to pay more. These loans are due to reset in 2010 and should unleash a new wave of homeowners that cannot afford to own.

Ok, so everything is possibly negative, does it impact our trading? No! Why would reality impact the way we trade? Of course I'm being silly here, but the reality is that the numbers are showing that the pricing data is turning north and this alone will be the basis for optimism in the market. We need to be constantly watching for further improvement to reinforce our short term bullishness. If we get socked with negative news, it is another warning shot across the bow that we need to exit long trades and be more conservative.

Great, Now what? - Summary for October

Given the data we've presented lets summarize it like this.

Unemployment - Bad, but getting less bad

Rail Data - Unchanged

Financial Conditions Index - Still Improving

CFO Sentiment - Improving

WLI Data - Getting Stronger

Trading Sentiment - Mixed (no real trend here but uncertainty)
US Dollar - Declining. It took a pause and now continues its retreat.

Home Prices - Improving

Other items - Consumer Sentiment has still not improved as much as the rally in the market would suggest. We need to continue to eye these figures. Government's entire strategy is that stabilizing the housing market will cause a rebound in consumer spending which is 70% of our economy. If the consumer remains on strike and buys less and demands lower prices, the planned recovery will fail.

Earnings Season - I eluded to earnings season starting this week. I believe that most company reports will beat handily the lowered and managed expectations. We may have continued upward movement here to celebrate how "great" these firms are doing. I say take it while they are coming, but we need to watch carefully for a "sell the news" reaction as we close down earnings seasons. Next quarter's earnings will be easy to beat as well and this is the reason I continue to look at February and March of 2010 as really critical months. These certainly could be the months when the euphoria wanes and gravity reasserts herself after a 9 month vacation.

OK, How do we play it?

It seems pretty simple doesn't it? Keep doing what we covered the last three months. Watch the dollar and invest in base metals, commodities, foreign / overseas countries and etfs, and buy other currencies if you are sophisticated. Silver and Gold have been big recent winners along with Brazil. The Dow Jones Industrial Average has actually lagged in performance the other assets I watch with the exception of corporate bonds. High yield bonds though have continued to outperform. Dollar strength will indicate a turn, but at this point I don't believe that the Federal Reserve desires to change the dollar's direction or they would have already intervened. I think that they will allow for the USD Index to fall another $2 or $3 before supporting it. Therefore, we continue to believe that the types of trades we have on will perform well and I am adding more of my money in the market. Remember, I look at these trades on a daily basis, so my trades probably won't look like yours. Many are invested in mutual funds and are locked in for 30 days when buying. This time requirement should give you pause as you think through the possibility of a sudden reversal. Am I saying don't do it? No, but you can lose money and you need to be aware of the risks!

A couple of last words.

Energy and Utilities have also lagged lately, they may be areas to examine and enter as well.

Have a great month and watch the dollar!