IT'S NOW A CON....CONFIDENCE GAME

We don't have time for long posts and rants about the stupidity of politicians, the Fed, ECB, and US Treasury so I'll be very quick about where we're at and what I expect.

WHAT WAS WITH THE DROP LAST WEEK
Last's week drop was about Europe (Italy and Spain) and how the leadership of the European Central Bank, IMF, and leading countries are fractured and have no solution to the debt problems in the Eurozone.  Trouble has moved from the PIIGS to the inner circle and the bond market has called BS on the entire Euro structure.  Because the leadership in these organizations came  out with three different versions of solutions and all of them were half-baked and incoherent the equity markets got blasted globally.

RATINGS DOWNGRADE A NOTHING BURGER?
Yes, the ratings downgrade was about 3 years overdue.  Yes the Tea Party forced the issue.  Yes the Democrats and RINOS agreed to much more, but the agreement was a sham just like the final agreement.  None of that mattered, the ratings agencies should have downgraded the US a long time ago and Standard and Poors was sending a much needed message to the politicians that they need to get our situation handled fast.  Democrats will say we need taxes, Republicans will say we need tax cuts.  I will say we need a flat corporate tax at about 20% that will unemploy hundreds and thousands of accountants that game the system and we need to start with GE.  We can also tax folks a bit more if they make more than $1.5 million a year and raise that rate to 40%.  We need to cut SS benefits, Medicare, and cut all foreign aid by 75%.  We need to have 10% cuts in every department in the Federal government to start.  We need to put Congress on a 401K and put them on a normal health plan and finally set two term limit maximums for Senators and three term limits for Congress.

WHAT WILL HAPPEN NEXT WEEK
The real answer is, "I don't know".  From the perspective of the European leadership,what needs to happen is that the ECB, IMF, and entire Eurozone with backing of the FED need to come out with a strong statement saying that they have a plan to buy up all the sovereign debt on the market and they are a backstop and will not let bond yields go above some number.  Yes, this takes huge firepower in terms of money but its all digital money anyway isn't it?  I'm writing this in a tongue in cheek fashion, but IF they want to have some market stability the only thing that can help is coming out swinging with a limitless plan that is overwhelming.  If the markets detect any weakness or fragmentation then all bets are off and those evil "bond vigilantes" will come back with a vengeance.  Let me be clear, this is not a real solution, nor is it viable for a sustained recovery, but these guys are just trying to keep the system alive.  The real answer is bond investors taking haircuts and losing billions of dollars, but so far the leadership in each area of the world has tried to prevent this needed solution from happening. 

This may only buy them a few weeks or months, but this is what must happen to prevent a total meltdown tomorrow. 

If the financial leaders come up with a solution as I suggest, we could actually see markets trade MUCH higher over the coming days.  If there is no solution or the sharks smell the blood of a divided Eurozone with no German backing, a market rout is sure to play out. 

Overseas markets in the Middle East traded down significantly this weekend.  Futures just opened up and the Dow Futures are down 270 as I'm typing, but there is lots of time left for the IMF, ECB, the Fed, US Treasury, and the President to do their overnight magic and work markets higher. 

MONEY MARKETS ARE STILL A HUGE CONCERN
I have received a couple of emails this weekend about where investors can hide in this mess.  The trouble is that most average investors don't have good places to "hide" because the money market funds they would normally go to could be much riskier than some of the non-money market options.  If you can short, then short and be careful, but I'm writing the following information with Joe-6 Pack investor in mind.

With that warning made, you could consider some short term investment grade corporate bonds as an alternative to money markets.  This strategy is not without risk, BUT there are positives here in the sense that investors will shun stocks for treasuries and corporate bonds if things get really nasty (nastier).  Companies have a lot of cash on their balance sheets and sometimes you'd rather risk the event risk associated with one company over taking a gamble on what time bomb is held in a money market that you have no control over.

I hate to say it but you need to stick with the ideas I posted several days ago in the midst of the total rout of the market, because if indeed this ship is righted you will need a "relative value play" for some of your money.  Please read GOLD IS GOOD, SOME COMMODITIES, THEN THE REST.

The thrust of that post is simply this.
1)  The Un-Currency (Gold) is probably best especially in the event that the ECB subverts national power and usurps the individual nation state's power and begins to issue Eurozone bonds.  Couple that with a QEIII being unleashed in some form and it is a place to not only hide but to gain.  Physical holdings are better.

2)  Selective commodity plays may also be winners however the entire global growth story is crashing to an end, so therefore you must only buy commodities that may be in short supply like agricultural commodities.  Oil will be subject in the short run to a fall.

3)  Dividend paying equities will also be relative winners.  Remember long only funds must go somewhere so by choosing these positions you may also lose, but the bet here is to lose less than the broader market.  I don't like this strategy, but some folks just feel like they need to be in the market 100% at all times (and remember those money markets can be and are risky too!).  These dividend paying stocks also compensate you while holding them.  Think firms like Phillip Morris (MO) and Campbell's Soup (CPB).

4)  I also outlined a longer term strategy of owning dividend paying commodity producing stocks.  Now this is going to be very volatile in the short run, but from a longer term perspective I think this is one of those long term home runs since they own everything that will go up in value as the dollar continues to crater.

I still haven't gotten a total body count on the damage that last week did to hedge funds.  Last week's volatility and commodity destruction surely blew up a few trading firms. 

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

GOOOOOOD MORNING GDP!

Just wanted to make a quick post reminding everyone that tomorrow morning we'll have a release by the government stating the second quarter's revised GDP report. As you can tell by how the market has been trading, there are now lowered expectations for growth. In the last month expectations have dropped from 2.5% to now somewhere around 1.4%. So needless to say, the market has a lot of emphasis put on this one information release.


A print of greater than expectations would probably goose the market higher right at the open while a print in the low 1.0% area will all but deliver a final body blow to those that have been suggesting that we are not going to double dip. Don't you recall back in April when you were hearing people say that there was no chance of a double dip? I sure do, I got a few emails stating that I was always emphasizing negative data and we weren't going to have another peek at recession.

As I mentioned to them, they were probably correct, but only because it was evident that we didn't ever come out of one.

Anyway, since the expectations in the market have been so managed and the tone in the market is pretty negative it may pay to at least think through the contrarian view. I almost expect to see any large gap down met with buying if the number is nasty (1% ish..).  If the number comes in above the managed expectations, we may see a jump, but I think we'll sell off after the fact as people will realize that the market is bouncing because it is happy about a less bad horrible scenario.  The only thing that holds me back here from getting long if we have some upward momentum is that we did close under 10,000 again, we still have really negative technicals, we are entering the September and October period which is usually more horrible than other months. In addition, we closed very poorly as folks crowed out to get out of the way of the GDP report. This clearly wasn't an end today with positive conviction.

Finally, if GDP announcements weren't enough, the Fed's round table meeting in Jackon Hole, Wyoming will wrap up and if the GDP number is very negative, expect our Fed Chairman to come out with unusual and extraordinary doses of financial shock and awe! I'm guessing that he'll admit things are slowing and suggest that the Fed has lots of ammunition to deal with the decline in growth. Of course all the measures won't really be effective and will not really produce any meaningful improvement long term. The issues are still cemented in place and we won't see any REAL improvement until they are attacked. Just so we have a handy list, here they are;
1) People don't have jobs
2) Because people don't have jobs and they've been without one for a long period, they are losing their homes to foreclosure...
3) Because people don't have jobs, they can't buy these foreclosure homes left by their neighbors.
4) If people have a job and still have a decent credit score, they might be able to refinance, but if they do refinance, they are using that to pay down debt, not spend more. (The Fed has wanted more spending not paying down debt).
5) Having said that, most people with jobs don't have a decent credit score, and therefore cannot refinance their mortgage.
6) Many others not buy houses either because they don't have 10% or 20% to put toward a down payment.
7) Without buyers, housing won't be fixed and banks have begun actually enforcing and processing foreclosures which will add more inventory to the huge backlog of unsold homes.
8) Against this backdrop, Mom and Pop have stopped spending and are now believers in paying down debt and bragging about how little they paid for clothes at Target and Wal-Mart.
9) Businesses cannot sell products to people that don't have jobs, don't have large houses they never really couldn't afford in the first place, and sell fewer products to people that are bragging about how little they spend now.
10) Businesses now face a working environment where they do not have certainty about their future sales, tax, and regulatory environments. In other words, they are pretty sure that their sales are stagnating, taxes are going higher, and they will be forced to pay more for health benefits for their staff and any new people that might be added. Since they have convinced themselves that this is highly likely they are not attempting to add staff (expenses) when their sales are flat to declining.
11) Because business profits are declining, tax revenues for cities, states, and the federal government are horrible.
12) Because cities, states, and the federal government have become accustom to ever increasing taxes they have been devastated for their long term mismanagement of our dollars. They have overspent on useless projects, promised free benefits to everyone, and richly compensated themselves with healthcare and pension plans that are without match in the private sector. These shortfalls of revenues for the second year will add to layoffs of government workers and reductions in benefits (if we tax payers are lucky).

And to fix all of these problems our Administrations, Congress, Treasury Department, and the Federal Reserve have attempted to rescue us by issuing more debt and even gone so far as to buy more of our debt with our own money.

My guess is that Ben Bernanke will tell us tomorrow that he's got it all covered. He'll stimulate the economy, get jobs growing, get banks lending, and do it all through the power of financial engineering and monetary policy. Call it QE (Quantitative Easing), call it debasing the dollar, call it outright purchases of stocks and bonds, no matter what he calls it, it will be an attempt to cover up the core problems and its real impact will be to destroy the value of our currency and further drive us into an oblivion of unpayable debt.



Cross your fingers, tomorrow will be interesting.

GOATMUG

NEW WARNINGS - DOW THEORY

More "Get out of Dodge" warnings.  Are you starting to see a trend here?

Richard Russell - SELL EVERYTHING

I guess that makes 3 of us.  I keep hearing folks tell me that if they sell out of something, what should they buy as a replacement.  Remember the old adage..... That we sometimes should not worry so much about the return ON our investment, but rather we should be worried about the return OF our investment.

Ok, given the think fog of bearishness, I would not be shocked at all to see some round of government intervention to save us all this weekend.  If there was ever a time to do it, it would have been to give us a strong day today to reassure investors over the long weekend.  Clearly we finished weakly so we holding our breath waiting for our government to save us.

GOATMUG