SLAVERY THROUGH STUPIDITY, ENTITLEMENT, AND LIBERAL ARTS

I've often complained over the last two years that American kids are being sold into slavery when they buy into the notion that they MUST obtain a college education without regard to the cost or the amount of debt they must incur to earn a degree.  Recently I ranted about this in WHEN EVERYONE IS SPECIAL, NO ONE WILL BE.  The common idea that all American kids should be forced on to a track to take the college route is tone deaf to the notion that many kids just aren't "college material" and is also clearly oblivious to the fact that we actually have a big need for technical trades and skilled craftsmen. 

For the last twenty or thirty years our wonderful government has made it too easy for inexperienced adults to sign their lives away to take on massive student loan debt.  The easy money (debt) that has been made available to all applicants has also driven up demand for higher education resources, thus resulting in a never ending surge in college tuition and fees.  Basic economic fundamentals suggest that if there is more demand for a product or service, prices will move up in response.  As expected we've seen college inflation rates average around 7% per year! 
The dynamics of this situation have created several key results that have been detrimental to the quality of life for all US citizens.  These include;

• Dumbing down the education - when more than half of college entrants aren't "college material" the universities are faced with a tough choice.  The schools can enforce their rigorous standards or they can loosen up expectations and ensure they can milk their students for a few more semesters. 

• A by-product of a poor public primary education system is that there is more of an emphasis on careers that lean toward liberal arts and soft sciences rather than technical math and engineering.  We produce so many attorneys, social workers, and restaurant managers that we have rapidly lost our capacity to manufacture or create anything. 

• Rising costs end up saddling everyone in the system (qualified or not) with more expense and for most, more debt.  This amounts to setting up graduates and failures alike with a lifetime of interest payments and lost opportunity cost.

The fiscal mismanagement of the US government and state governments have finally hit critical mass.  States can no longer grow their expense budgets and provide services to every special interest group they choose.  Governors are in a position where every expense item is subject to cutting and that includes state funded universities.  Things are about to change as we see the CNN Money article below. 

EXTREME TUITION HIKES AHEAD (right click your mouse and open in a new window!)
The link above gives us an idea of the changes that are coming to many of your favorite universities.  On average, many schools are planning to raise tuition costs by 22%.
Here are a few of the expected bumps in tuition in 2011.
Arizona State - +19.5%
Washington - Universities are consider a rise of 20%
Nevada schools will see an increase of 13% in tuition costs.
University of Florida plans to add more increases this year bringing the total tuition hike to 50% since 2008.

MY DEGREE ISN'T WORTH THE DEBT
We see that tuition costs have risen and will go even farther into the stratosphere, but we've got to ask ourselves is the college experience really worth it?  I've blasted students that go to private universities that end up with teaching degrees, social working credentials, or psychology degrees because they are often the kids that have racked up $80,000 or more in debt and earn $20,000 a year in compensation.  The universities should prohibit students from these degree tracks if they don't have cash to pay up front.  The ROI just isn't there to justify the cost.  Think I'm over the top?  Read the following stories from  6 "winners" that state they wish things were different. (right click and open a new window!)

I was just going to let the link go without making comments but I made the mistake of re-opening the story and I simply was disgusted by the absolute stupidity of three or four of them.  I want to feel sorry for them, but this is freaking ridiculous!  (Yes, I know, I'm sure they are really nice people.)

BIGGEST LOSER #5
Here is the money quote from dummy #5 who owes $80,000 and has a journalism degree

"Because of my debt, I can't afford to marry my girlfriend of five years (she's still in school herself, on loans). I don't want to buy a cheap engagement ring -- I want to be able to do it right.  I take full responsibility for my decisions, and believe me, I'd like nothing more than to "grow up" and pay my debts, but the truth is -- I feel like I spent my loans on a future that I simply did not receive."

This guy is absolutely correct in everything he says, but he still has this attitude of "doing it right" that he probably had when he was racking up all of this debt.  He probably thought about taking a job and paying for school over time, but no, "he wanted to do it right" and live on campus and just take loans out.  Where were his parents and counselors saying, "You won't make $20,000 a year as a journalist"?  If his girl friend has any sense she'll run away from this guy like he has the plague.  $80,000 in debt, why would you ever marry into this mess?

THE BIGGEST LOSER #4
Finally candidate #4 makes me want to go nuts.  She went to Tulane and owes $140,000 in debt and has a political science degree.  Wow!  She works for a non-profit now and is living off her credit cards.  Ummmm she hasn't learned a thing, perhaps she can work in Congress.  She is a disaster.

FINALLY, THE WINNER OF THE BIGGEST LOSERS - #3
The couple has $240,000 in student loan debt and they are both social workers? REALLY? Where are these people's parents? Who lets kids do this to themselves? Where is the financial aid counselor? These people don't have any future, none, zippo, they are condemned forever as a result of this burden. And yes, it is their fault and there is NO WAY out of it other than death. You cannot escape student loan debt through bankruptcy or anything, these guys are stuck.

So, when you think you are having a rough day or your life is pretty crappy, just bookmark this page so you can come back and read a reminder of what our best and brightest have to look forward to and you'll quickly realize that whatever mess you are in is simply better than the life of slavery they have signed up for; for their entire lives.


Right now, the average tuition cost across America is $6,500 a year (excluding living expenses and books) at a public university.  We are getting to the point where that is going to be unaffordable to many.  Something has got to give, and we are going to see some changes as a result of these out of control costs.

WHAT WILL BE THE IMPACT?
Community colleges will become cool again -
Students that can't cut a 4 year degree and aren't really "college material" are going to increasingly opt for training and jobs that require an Associates degree only.  These students may be a radiology tech, dental hygienist, or something else that will help them find a decent job.  In some cases, this will be a shame because some of these kids really are college material, but the cost of a 4 year degree will simply be prohibitive to attend a regular university.

Second, we'll see more parents demand that kids go to community colleges to knock out all of their pre-requisite classes and essentially finish their first two years on the cheap.  Personally, I am a huge advocate of this approach and hope my kids listen to my wise counsel to try this.  The kid can stay free at home, earn money to save for their last two years, and finish maturing so they can make the most of their final two years at "the big school". 

Online - Here we come!
Major universities will begin conferring degrees that are 100% online.  Currently many schools still retain the "snob appeal" of requiring that a minimum number of hours are done in classroom.  A governor will require these "snobby" universities to deliver an affordable education to their state citizens soon.  Texas Governor Rick Perry had made requests to state universities in Texas to create a 4 year program that would cost $10,000 or less and it was met with stiff resistance from a number of factions.  My only question is why would you resist this, are there special interests involved?  Of course.  An online version of college for these students also would help them reduce the cost of living expenses.
The notion that everyone is entitled to a college education will finally die.  You are not entitled to a college education simply because you finished high school or because you can sign a loan document to receive funding and federal education assistance.  These criteria have resulted in massive fraud by for-profit colleges, but also have created billions of dollars of wasted resources, huge amounts of student loan debt, and ultimately a greater price paid by all kids that go to a university.  No one should be denied access, but we must recognize the damage that the easy access to these student loans is causing in the lives our poor and middle class youth.

Last, I know this will be unpopular, but the financing method of my university experience will finally come back in style.  When I went to school I worked and saved and then signed up for classes when I had enough money to pay the cost.  Yes, it took me a while longer to get through, but I was able to pay for 4 years of undergrad and 2 years of graduate school with no debt on my personal balance sheet.  It did take 8 years to complete that process.  Did finishing school this way seem tough?  Not really, I didn't know any better.  Did paying for the school with cash make me more serious?  Not at first, but once I failed a class and I realized it was costing me time and money, I was absolutely serious.  Any regrets?  I should have gone to a top 20 business school for graduate school, otherwise, no.

Please note, I am not calling for all sorts of government subsidies and interference to save our college system, in fact I'd like to see federal loans abolished.  I believe that colleges simply added infrastructure and headcount because they knew they had a greater and greater pool of students.  They never needed to constrain themselves or tuition expense because there was always demand there.  Of course the demand was driven by debt and that always leads to a bubble.  It seems we are at a crossroads where prices have increased so much it may finally reduce demand.  It can't come quick enough because we are witnessing an entire generation being enslaved by their stupidity, sense of entitlement, and their decisions to major in liberal arts.

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/

IT'S THE END OF THE LINE KID

http://www.flickr.com/photos/volk/ - Thanks Willy!

I don't know about you, but I've had just about enough.  I can only say that my frustration level in the last two weeks has been the highest in well, ever.  I basically hit the tipping point where I was ready to do many drastic things because I was tired and exasperated that reality had been suspended longer than any time period I would have expected or imagined.  What am I talking about?  Well, you see I have been brought to the breaking point by the fact that our markets have rallied and rallied and rallied while our world financial system has addressed absolutely none of the issues that created the original financial crisis in the first place.  Despite my many long purchases over the last two years, I have never once believed that things were all better and truthfully I still wake almost every morning and check the markets immediately to see that our futures markets would show us down 500 or 1000 Dow points or more.  Well, those days haven't materialized very often lately and I've had to say too often, I'm going to hold my nose and buy. Why am I writing this now?



RATINGS AGENCIES DO A HIT JOB (ITALIAN STYLE)
I'm writing this bearish confession I guess because I can't hold it in anymore.  Although it is obvious to readers that I've had a bearish leaning, I just can't express enough how badly we have attempted to paper over our mess.  Central bankers around the world have simply traded all the excessive credit on company balance sheets and transferred them to government or sovereign debt issues.  In the world monetary system the only thing we accomplished two years ago was to move the ticking debt bomb from the left pocket (private) to the right pocket (public tax-payer obligations).  While the USA has been the largest player in the use of that strategy, the ECB has been at work simply hiding and ignoring excessive debt problems within the EU zone.  We all know that Greece has received all the blame, but the reality is that all of these countries have created ponzi-schemes that were doomed to fail from the beginning.  Greece is simply the country that has reached there first.

Greece's small size has been one of the key reasons that the ECB and IMF have been able to extend and pretend and push these debt issues out farther than I anticipated.  If Greece were a bit larger or actually created something besides more pensioners we'd already been hitting critical mass.  However, last year during the first warning shot, the Europeans were able to play like the problems had been addressed and everyone gratefully carried on and witnessed an amazing comeback in equity markets as the world celebrated the genius of our financial maestros.  Unfortunately, there are larger Greece's that we've been talking about for some time.  I've often mentioned Portugal, Spain, and Italy since Feb 2010 and now it seems like the problem is just too big to ignore.  Just as the ECB and EU are struggling to get the Greek situation all taken care of, Italy has come under significant pressure from the one place we hadn't expected any real responsible analysis.....the rating agencies.  A couple of weeks ago Moody's announced that it was putting Italian sovereign bonds on the list for potential downgrade, (please note you of course wouldn't want to actually downgrade them).  While the warning was bad enough, what really rocked the financial world was that because of the large amounts of domestically held Italian bonds, 16 Italian banks that held those bonds were also subject to potential downgrade.  A couple of these banks are systematically important and connected with others in the EU to cause serious problems.  Uh oh. 

Italian Borrowing Costs Soar

So, once again we are back to square one where this bank could face trouble and if it goes down another goes down which kills this other one.  Through the use of extraordinary measures and suspension of rules and lack of regulation of the CDS markets we have managed to find ourselves and the world right back in the midst of another event.  The central bank leadership including the IMF don't have enough money to begin bankrolling a fix for an issue the size of Italy. Having said all of that, we are very close to the end of the line.  The end of the line is the place where EU membership falls apart, heroic measures are instituted and they fail, and our financial systems are blasted.  We have done nothing to slow down this train and we have only done more to harm ourselves in the process and made the inevitable collision more traumatic. 

SO IS THE COLLAPSE HERE?
Of course it isn't the end, but you can put a big "X" on your calendar on Friday, June 23rd to mark the day where the wheels began to fall off again.  We've already seen the ECB float the idea that it would buy back bonds from troubled countries, also that it would ignore rating agency ratings, and we've seen Italy demand lists of investors that are short Italian bonds.  We will see liquidity injections by the IMF (17% by the USA of course), we'll see suspension of laws, and we'll see the FED send out emergency swap lines and liquidity to save the world.  We'll even see Europe's heroic knight, the Chinese, kick in substantial funds to buy bonds outright.  Unfortunately, it won't work; the jig is up - sort of.
 
EUROPEAN DRAMA ON A GLOBAL STAGE
Crazy as this may seem I'm more afraid to trade now than I was when I was freaked out and near the point of hanging up my options trading account password.  The reason I say this is that now we can be certain that there will be no rules left standing in the way of the end result of sweeping these messes under the carpet, no matter the cost.  Threatening and bribery of rating agencies, suspension of laws, and outright theft of public funds are actions that I can guarantee that we'll see over the course of the next months.  We will see massive printing of funds to create enough money to buy these troubled assets.  This all means that we will see scary dives and euphoric rocket launches and volatility like we haven't seen in quite a while.  Oddly enough, we are going to see all of this theater against the backdrop of US earnings which will probably be better than most bears think.  I think companies posting decent results will make this such an interesting reporting period yet it may be overshadowed by the drama playing out across the pond, this will make it difficult to trade longs or short.

VALUE-LESS PAPER CAN BE VALUED AT ANY AMOUNT
Remember, our currencies are simply made up things. In the past, Indians traded hides because they had value.  The Euro has value because we all agree there is value there.  Back in the midst of the financial meltdown, our Fed and the FASB simply stated that all the worthless mortgages on bank's balance sheets were going to classified as "held to maturity" relieving them of the obligation to find a real price for these bonds.  How could they do this?  Because these debts are made up pieces of paper based on a fictional value of made up paper.  Essentially everyone with financial power in the world colluded and came to an understanding that the mortgage paper had a new value of par and with the wave of an imaginary wand, all things were made whole.  Now in reality we know this isn't true, but it doesn't matter.  I remind you of all of these steps because if you don't understand this and if you don't remember this you will end up frustrated and near the breaking point just like I was a week or two ago. 

Does it change the fact that the exponential growth of world debt is beyond the control of anyone?  Does it mean that there won't be some sort of breakdown in the future where the Euro implodes or the dollar falls apart?  No, not at all.  But it does mean that we need to keep in mind that no matter how bad it gets there will be only one response by those in charge of managing the mess, it will be to press on!  European leaders will buy loads of debt issued by insolvent countries, the Fed will buy US treasuries, China will keep making loans that ultimately will never be paid back, and all of it doesn't matter.  They must do these things because if they don't continue, power and wealth will shift out of their control.  I don't know if you've ever been in a position as executive, but typically it is very hard for those that have position power and decision making power to simply leave it and lose it.  Why would we expect anything different from those making economic and financial decisions for their countries?

TRADING APPROACH
As this mess continues to heat up, I think gold will again be the un-currency.  I have been trying to buy some gold in the last couple of weeks and I had a target of $1475.  I haven't been able to get it there and we probably won't for a while.  Eurozone depositors in the PIIGS have largely shunned depositing money in domestic banks and it is believable that many of those former depositors are trusting in the anti-currency gold instead of the Euro.  Like them, I believe that gold is probably a good play here (due to fundamental issues with the debt crisis).

While there may be a big temptation to hop on to any other commodity-like hard assets, remember, a collapse of the Euro will lead to a strong dollar temporarily, meaning that if you are in the US, the dollar will rise significantly and commodities priced in dollars should also drop.  I'd stay clear.

A strong dollar probably also means dropping stocks, I enjoyed my BRK.B short (here's to you Warren) from Friday, but remember each day will be met with a huge and focused media blitz PR campaign telling us how everything is under control and how amazing the business climate is for companies and how great the earnings numbers have been.  Great company results could have an impact to really jam the indices higher and this is what makes this such a dangerous game for shorts.  We know we will have good numbers and positive conference calls AND announcement after announcement by EU officials stating that everything has been fixed.  While the longer term story may be dark, the heroin junkie stock market can only be focused on the real story for a day or two and then it is back to reaching for that drug induced high.  As I have stated, the driverless train will have a fiery and awful crash when it comes to the end of the line, the frustration is simply that we don't know when.      

BE CAREFUL! 

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/

ECONOMY ROLLING OVER OR SLOWING DOWN? JULY MACRO UPDATE

The July report is full of great data but as usual we find that the information leads us to mixed conclusions.  I've added an additional indicator this month that may be helpful in providing us a clue about the economy's direction over the next quarter or two.   The last eight to nine weeks as an investor have been anything but easy.  We've seen a mild correction in markets that lasted almost two months suddenly turn into a blistering buying rampage that resulted in the markets pushing to new highs within 7 or 8 days.  We've seen Europe appear to be in collapse mode only to be rescued from the jaws of death.  We've seen US markets erupt in optimism and rally expectantly into the coming earnings season.  It is so important for us as investors to note that the economy is not the market and sometimes it is better to stop being right and simply but a saddle on the beast and ride it.  Have I thrown in the towel and dropped the notion that the economy and markets will retest their 2009 lows?  Unfortunately the answer is no.  But just like I posted in August 2009, there is a time to simply ride the wave like an agile surfer less we face the awesome power of the ocean's fury and get beat to death.  Ultimately this may mean that you trade small and look for significant points of support and resistance to enter trades to reduce risk and maximize gains.  Please enjoy and don't forget to leave your questions and comments, I really enjoy them.

RAILS - http://railfax.transmatch.com/
Rail traffic continues to trend higher against the 2010 postings.  The week showed gains in every group except coal and autos.  Grain shipments were significantly higher.

BNSF
Regular readers know that I often look at individual rail shipping tonnage in an attempt to spot trend changes or relative under or out performance.  I wanted to highlight BNSF because it is showing signs of weakness here and beginning to trend below last year's number.  Unfortunately Warren Buffett bought this target last year and added to Berkshire Hathaway's conglomerate of holdings so we can't add this railway to our watch list of potential shorts, but heck since BRKA is doing so poorly perhaps we should add it too our lists anyway.  The decline in production here in BNSF isn't going to fix problems there.  CP and CSX look weak too, but not as potentially bad as BNSF.  BRKA is posting a negative 3.1% return so far year to date as of 7/7/2011.  YUCK!

CRUSHED STONE
The movement of crushed stone often gives us insight into commercial real estate construction.  Crushed stone tonnage is tracking right on par with 2010's levels so I'm not expecting an overwhelming surge in commercial real estate building numbers.  We'll look at transaction pricing for CRE later, I'd personally expect to see a ramp up in those prices on existing buildings and then expect to see a follow on as investors and developers take confidence in higher prices.  Clearly we aren't seeing any of that. 

CHEMICALS
The transportation of chemicals is great to examine as we look at manufacturing in the US and the world.  Chemical usage is a barometer of the health of the general economy.  So far, the relative position of the amount of chemicals transported is a parallel shift higher than 2010 so things continue to look positive.  Over the next couple of weeks we'll need to watch closely to ensure that volumes turn up to keep pace with last year's recovery trend.

MOODY'S / MIT TRANSACTION BASED INDEX - COMMERCIAL REAL ESTATE - http://web.mit.edu/cre/research/credl/rca.html
The April numbers were recently released for the Moody's/MIT Transaction Based Index.  This index includes actual commercial real estate transactions for the period.  Unfortunately we continue to see that commercial real estate prices in total are falling still.  April deal prices notched a 3.69% decline for the month.
 

COSTAR - COMMERCIAL REAL ESTATE - http://www.costar.com/about/article.aspx?id=9979
Just as the MIT data suggests, Costar also reports that commercial real estate continues to fall.  While the information is dismal, there are some areas of the nation that are actually showing improvements in transaction price in past months.

I wanted to highlight some key points for April CoStar data.

Sales volume is rising.  Perhaps sellers are finally going to puke out their bad investments from the 2005 to 2007 period where they simply overpaid.

In April, 793 transactions were on properties that were "repeat" sales, meaning that this is a great source of data for them to examine real pricing trends.  We not only can see price, but can also see when the seller acquired the asset (or liability in this case!).  CoStar’s Composite Commercial Repeat Sales Index declined by 1.7% in April 2011.  It is now 13% below the same period last year and 38% below its peak in August 2007.

Here is the staggering part!
In April 2011, over 77% -- or more than 3 out of every 4 of the properties previously bought at the 2005-2007 peak were sold at a lower price. Comparatively, 46% of the properties that were purchased before or after the 2005-2007 period were subsequently sold at a lower price in April 2011.

Now we are seeing some traction here.  We are seeing an acceleration of the amount of deals that are getting done and prices are falling.  Perhaps, just perhaps those banks, insurance companies, and investors have finally decided just to take the loss on these deals and get over with it.  If this happens we may see more significant drops in price, but this would be healthy in the longer term for commercial real estate.


NAR EXISTING AVERAGE HOME SALE PRICES - http://www.realtor.org/research/research/ehsdata
May average home prices moved up substantially by almost a full 2% from April.  Homes sales in the South and Northeast drove the gains.  While this move up is great, we are still below the December 2010 average home price of $217,900.

ECRI WEEKLY LEADING INDICATORS - http://www.businesscycle.com/resources/
WLI data continues to show weakness. 

SCRAP COMPOSITE INDEX - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Scrap pricing has fallen quite a bit since March 7th of this year.  Over the last month we've seen a mild improvement in pricing, but this item should be examined closely over the next month or two.  As we've noted often, Alan Greenspan used scrap pricing as one of his best indicators for financial health in an economy.  It is very interesting in that context to note that scrap has been falling for nearly 4 months now. 

CERIDIAN / UCLA PULSE OF COMMERCE INDEX - http://www.ceridianindex.com/
The Pulse of Commerce Index continues to flash warning signs to us that the broader economy is not as vibrant as our amazing stock markets would suggest.  The PCI has now shown declines in four of the past five months of 2011 and it is clear that rising fuel prices are having a dampening effect on growth.  Recall that the PCI is derived from real time fueling data from commercial long-haul trucks.  This information is a powerful indication of how much stuff is moving across our nation and how those goods translate into consumer consumption levels. 

MONSTER.COM EMPLOYMENT INDEX - http://about-monster.com/employment-index
The MEI released this morning continues to show good things are happening on the job front.  The index level that measures the number of online job listings hit a level of 146 which is the highest point since October of 2008.  I do find it interesting that the annual growth rate on the MEI is only 4% meaning that the improvement is not a great one and the rate of change is falling fast.  I would not be shocked to see this report come in lower next month.  Oil and gas jobs, utility employment, and mining ventures continue to lead the charge in hiring while public administration jobs continue to get the ax.

MONEY ANXIETY INDEX - http://moneyanxiety.com/Blog/page1.aspx
I've added a new indicator to our monthly list called the Money Anxiety Index.  Thanks again Carrz as he is so good at pointing out these cool macro-economic health indicators.  Thanks also to Dr. Dan Geller, the creator of the index for allowing us to use the data and charts, we're happy to have one more item to analyze!

The Money Anxiety Index attempts use economic measures to quantify the human behavior associated with those levels of stress, fear, comfort, or confidence.   Since MAI captures early signs of consumers’ financial anxiety, it can be used as a barometer to consumers’ behavior related to various economic activities.  The level of consumers’ spending and savings is impacted by the level of financial anxiety.    

The MAI is at a very critical spot.  Based on the data, the anxiety level for consumers is at a level not seen since the 1980 recession.  In addition to this, the model also has a solid track record of predicting recessions when the anxiety level increases for 5 consecutive months.  As of the end of June we had seen 4 straight months of increased anxiety.  If next month's number show more worry, this will be a significant indication of a coming recession. 

Check out Dr. Geller's blog and sign up to follow the Money Anxiety Index on Twitter.  (Thanks again Doc!)

COPPOCK TURN INDICATOR -
The Coppock Turn Indicator ended June providing us a buy signal for the markets as the DOW roared past the 12,350 level and closed above it.  Coppock will stay bullish and long unless the Dow rolls back over and drops to 11,800 by July's month end, which seems all together unlikely.  While I include the Coppock for entertainment purposes only, it would seem as though it nailed this last move or got part of it (for once).

6 MONTH EURIBOR - http://www.homefinance.nl/english/international-interest-rates/euribor-interest-rates.asp
6 Month Euribor continues to move higher and higher.  Nothing to see here folks!  While the Euribor rate is actually fine, it really isn't when compared to the 6 Month USD Libor chart below.  My only question is, "Which one of these is mispriced?"

6 MONTH USD LIBOR - http://www.homefinance.nl/english/international-interest-rates/libor/libor-interest-rates-usd.asp
Hello, Houston, do we have a problem?  6 month rates haven't even moved up at all which indicate some sort of financial health.  What the heck is going on here?  We are lower than we were a year ago!  Really?  Everything is just fine!

BLOOMBERG FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
The FCI was looking very bearish just a week and a half ago and then suddenly out of nowhere a tsunami of stock market liquidity and gains blasted the index higher out of near recession level numbers.  The handy work of the last week has revealed that the recession is off the table for the moment according to this market index.  Remember the FCI is comprised of data that captures the health of equity markets, bond markets, and money markets.  The rebound in the Financial Conditions Index is certainly to be expected after the blow out week we just had.

BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
Dry Goods Index prices continue to languish.  The oversupply of ships is simply killing these businesses.  These guys are a disaster.  Have you looked at the charts for DSX, EGLE, DRYS, and PRGN lately?  Ouch!  Leverage kills doesn't it?

USD - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The USD continues to fall, but we are at the base that has been trying to form.  We'll need to watch the USD Index to ensure that the mid $73.50 level is not breached.  If the dollar falls significantly we'll see a pop in all commodity prices and at least initially we'll see stock prices rise as well.

WRAP-UP
Still have some indicators that are flashing warning signs that the overall economy is weakening.  The key ones to watch are the PCI, Money Anxiety Index, scrap prices and chemical rail tonnage.  The measures paint a broad picture that the rate of recovery is absolutely slowing, if not topping.  I will be very interested to see the new numbers posted on the MAI in the coming week from Dr. Geller. 

I plan to do a post on this later next week, but the European farce is just about to go too far.  I have been waiting for the rating agencies to do what they've needed to do and now that they are finally finding their mojo (they are finally evaluating bonds and rating them appropriately for the risk they carry) the EU and ECB are stepping in stating that they will ignore the ratings!  In other words all the rules are off to achieve the desired result.  The economic and political leadership have used the agencies as useful idiots and now that the agencies now longer are willing to be bought off, there is no need for them.

While equities shot up, commodities seemed to be in the crosshairs of those central banker bounty hunters.  The IEA's coordinated release of oil supplies looked like it was going to finally break the back of commodity bulls, yet after one week we've seen amazing rebounds in oil and gas.  In fact, gas futures are ABOVE the price before the SPR release!  As much as I've been a bull on commodities including gas, I am not taking advantage of this momentum move higher.  I believe that we'll see a move up and then more downward pressure on everything from oil, gas, silver, and gold. 

As I was about to finish up this monthly wrap-up I scanned a headline about Warren Buffett and his notion that there will be no double dip recession.  Now Mr. Buffett has incredible information about the economy because he sees all of the data for all of the pieces that comprise Berkshire Hathaway.  While I noted earlier in the post that BNSF appears to be underperforming last year's tonnage I tend to focus much more when we get talk like this from folks that have big money in the pot at the poker table.  Call me a cynic, but I often believe that guys like Warren Buffett are talking their book more than they are really sharing their insight about the direction of the economy, the market, or a specific investment.  When I hear the Chairman of Berkshire state something like this, I hear that he needs the market to stay out of a recession or else he'll feel some pain.  Clearly Berkshire is leveraged to the homebuilding and construction market with all of his furniture makers, carpet manufacturers, and brick companies.  He needs a turnaround in housing to build a base for improving performance.  I've shared many times that I find it difficult to believe that home building will be a great place to invest for a while.  In my area a new home cost significantly more than the cost of a used home because commodity input prices are so high.  Many of those first-time home buyers cannot justify the additional expense to have the luxury of a new home.  There is also this little problem of a huge inventory of foreclosed homes that make the competition even tougher.  In other words, I don't see the home construction business turning around anytime soon.  As for the economy getting back to 6% unemployment within a few years, there's not a chance.

Earlier in the rails section I mentioned BRK.A, and how it had turned in a negative year-to-date record so far.  Let's take a closer look at the B shares of Berkshire (BRK.B).  I like this one simply because it is affordable!  In terms of setting up a trade here, I really like the action in BRK.B, and especially find it interesting because of the drop resulting from this morning's employment report.  I think this trade could take us easily to a $71 or $72 level for a nice shorting opportunity with an entry here around $76.75.     

Here are two views of BRK.B that I'm watching. 

5 YR WEEKLY (BRK.B)

DAILY 100 DAY CHART (BRK.B)

Finally, the Weekly view below shows the 14 Day EMA under the 40 Day EMA, this "death-cross" view indicates that Berkshire has no momentum and validates the notion that it is a potential short.

That's enough for now, please continue to check in with us and leave your comments.  Have great luck and be careful!

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/



FINANCIAL WIZARDS DIG FOR PROFITS

WATER SHORTAGES MAY BE GREAT BUSINESS FOR BANKS?
I found an interesting article today in Bloomberg about why the world should care about China's water problems.  Unlike what I first thought when glancing at the title, the author doesn't suggest that China will attack neighbors for their water rights or anything close to this.  The article's author suggests that some financial alchemy would be the prescription for solving the world's water problems.

http://www.bloomberg.com/news/2011-07-06/why-we-care-about-the-price-of-water-in-china-peter-orszag.html

I won't go into depth into what Peter Orszag highlights as reasons for the water issues, but they are the same ones we hear about China all the time.  They have polluted everything, including their water supply.  They are using all energy sources and burning them takes a bunch of water.  Oh yes, there is also a terrible drought as well.  All of these things are reasons that the world should assist China in fixing their situation.

WHAT TYPE OF HELP SHOULD THE WORLD PROVIDE?
1)  You knew it would be long to find that if the "global village" was going to get involved that the first answer had to be that we need to fix CLIMATE CHANGE!  I mean it is simply stunning that in one sentence Orszag links that we need to reduce water pollution and then somehow jumps to the notion that we must address climate change.  Can it be that simple?  What specifically does global warming have to do with polluting streams, rivers, and aquifers?  Are we heading somewhere?  Does this sound familiar?

2)  The second recommendation is one that seems reasonable.  We should provide more potable water.  I get this and I'm for it.  Let's get more desalinization plants and cook up some drinkable water.  No argument here.

3)  Finally, we get to the meat of the posting.  We need to let the "market" begin pricing water to effectively manage usage of supplies.  Here is the quote;

"Water is Earth’s most valuable commodity, and yet in most countries it is given away free -- as if it had no value at all.

If China moved more aggressively to price water in a manner that reflected demand and supply, it could teach the U.S. a lesson in using market economics to address environmental issues. As a colleague of mine at Citigroup Inc., the analyst Deane Dray, has written, “water has never been priced efficiently.” In the U.S., water is generally heavily subsidized, and prices aren’t adequately linked to usage levels.
Just as we need to price carbon in order to avoid a climate crisis, we need to price water to avoid a water crisis. Market forces can work wonders for the environment, but only if we have the political courage to create them. "

THE REAL AGENDA
Here is the takeaway from all of this nonsense.  Peter Orszag is a Vice Chairman of Global Banking at Citibank and also a former official in the Obama Administration.  Mr. Orszag probably has several main goals here, so I'll assume his motivations fall into just a few camps.

First, market based pricing for a necessary commodity like water would be a great place for a bank like Citi and JPM to completely dominate.  That is all we need is another situation where banks hold and trade valuable commodities (like oil) rather than provide lending services.  (What business are they in again?)  As a Vice Chairman, I can guess that he's in the business of business development.  Is there any doubt this is the angle he's playing here?

Second, this all comes back to Orszag as an excuse to wage war on Global Warming, errr, I mean Climate Change.  Actually a better word for this would be a market mechanism for pricing carbon emmissions throught the creation of related credits based on the fiction of climate changes due to man.

Last, as a former senior administration official, I suspect that Mr. Orszag would identify himself as a senior believer in the Global Village concept where we collectively should jump in and solve all of the problems in the world without concern for national sovereignty.  I'm not so sure China is quite so open to the UN's type of help and doubt seriously that they would comply with any rules related to water pricing or carbon trading at all.  So if China doesn't participate could we really be looking to get into pricing of water here in the USA as well?

WHEN FINANCIAL WIZARDS GET COOKING THEY MAKE A MESS
As a Financial Analyst at a large firm many years ago I was a financial wizard.  My firm had many offices throughout the world and as each location became connected over the years, communication and connectivity costs grew significantly.  In my younger days managing corporate spending I led a team that intended to allocate and charge out these costs because the parent company was subsidizing all of the expenses and we needed to look more profitable at the core business. 

With an enthusiasm that is unmatched in the finance world I created an amazing soup of allocations and charges to all of the global offices for everything from executive leadership to T-1 lines and GWANs (Global Wide Area Networks ---- big, big, Internet pipes!).  The executive team and board bought my allocation strategy and I looked great and on paper, our corporate offices gained $15 to $22 million a year simply by waving a wand in front of an excel spreadsheet. 

Clearly the home office saw me as a hero and the global offices saw me as a.....goat.  What really happened was that the entire scheme was a bunch of garbage.  The company didn't make any more money than it did previously, and you had about 10 global local CFOs that were angry every single month when we reviewed these communication and technology related charge outs.

My wizardry added absolutely no value to the bottom line, but some executives in the home office looked much better.  Perhaps I made them more bonus money at the expense of some to those in other locations?  When an excel guru starts trying to price your IT costs or your carbon credits or your water, you must recognize that you are not going to benefit one bit.  Things will get very complicated and someone might earn a bonus, but it isn't going to make much difference in the long run.

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/