Tuesday, November 24, 2009


Thanksgiving! What an awesome time of the year. This is the time of the year that my family and I gear up for an aggressive 2 or 3 day whirlwind tour of our state. We jump in the car on Thursday morning, drive for hours, pile out of the car and eat. We pile in cars the next day, drive 5 more hours and share a few precious moments with another side of the family.... and then scurry out. Finally we usually make one or two more stops and enjoy another Thanksgiving meal on the weekend and draw names for an annual Christmas gift exchange we'll have when we do it all again in about a month!

Sounds great huh? Believe it or not, it is! As I've gotten older and more of my family members have passed away, I've found that I cherish these encounters with family even if they last a few hours. It took me years to get past trying to put on a good face and sharing with folks that everything with me was "perfect". I've found that as I've shared with my family and extended family challenges in my life and business, they draw closer and are more real as well. I still have a few family members that want to show off and act like they never have a set back, but those are the ones I encourage more and affirm how proud I am of them and all of their hard work. Funny, that's all they want anyway right? I actually have amazing cousins that are very successful, so it isn't hard to support them in this way.

In closing, remember, Thanksgiving really isn't about turkey, football, or a marathon road rally, it is about giving thanks to God for the blessings he has provided. All things come from Him and we should remember this daily anyway.

I've had several emails and calls from family over the last week asking how we should approach the holiday and year end. As usual, I set out to create my own stuff, but Guy Lerner at thetechnicaltake.com has uncovered some historical data on trading for this week and next that does a great job. As time is short, let's just look at the great work he uncovered. Thanksgiving Week Trading History - Technical Take

According to Guy's sources, this week could be pretty positive as traders and managers take the week off and the market kind of melts upward (sound familiar). Today's GDP revisions may change that a bit and that is why I've stated to friends and family that we should simply avoid this week and look to enter on more weakness next week. This data actually confirms this as well as the week following Thanksgiving is usually negative as well. It is often very negative so it may present a good opportunity to come in.

No matter what, keep both eyes on the dollar. A Fed governor came out again yesterday stating that there will be no end to the stimulus and no rate hikes on the horizon. This all means that we'll continue to play weak dollar trades and buying metals, agricultural commodities, overseas market etfs, and begin looking at energy and oil trades too. Gold and silver are on fire and while I hesitate to take off my positions there, I continue to realize that the trend is still down for the dollar and I'll continue to enjoy profits by letting these positions run.

Have a safe and blessed Thanksgiving!


Thursday, November 12, 2009


Ok, just another thing to keep an eye on. The AAII sentiment indicator was updated and we now see that as of 11/6/09, investors are getting very bullish. Keep watching the dollar. Just like on a boat, if everyone is on the same side of the boat, something bad may happen. Although this data is delayed by 1 week, we must be watchful.

The chart shows a dip down to 30 in sentiment. A dip to 30% or lower indicates everyone is too bullish!

There are some issues with the size of this chart and its display. I purposefully imbedded it too large so you can see a clean picture. Click on the image to see it in its true size.

Tuesday, November 10, 2009


As many readers know, I read as much as I can with the time I have. The economic crisis we have endured is not over and I feel strongly that we are in the grips of deflation even though our government and Federal Reserve would like you to believe we are on the back end of a recession.

Michael Shedlock or "MISH" is one blog I read almost every day and I happen to agree with him on his ideas of inflation and deflation and what we're in. In a recent post, I feel like he knocks the cover off the ball with a lengthy piece that describes what these words mean in the real world and where we're at right now.

Please take a few moments to read it!


Oh yes, and let me add a link to this post by Karl Denniger. - Click here and look at the performance of the USD and the S&P500. Absolutely inversely correlated. When the dollar stops going down, watch out. Until the dollar stops going down, everything else will melt up as we've been saying.



Friday, November 6, 2009


Our generous government is at it again! I'll drop these comments into the November Update, but figured that they needed to be separate as well as I couldn't help but rant.

Extension of first time homebuyer credit of $8,000 and now other homebuyers may attempt to receive a credit of - $6,500

The give aways continue. President Obama will sign a new bill in the coming week that will extend the new homebuyer bill that provides an additional $8,000 to new home buyers. If that wasn't enough, our CONgress is now providing more of your money to your friends and neighbors by allowing all potential homebuyers to get in the action and get some free money! Of course these giveaways do nothing but use government money to prop up the housing market and reward homebuyers that would buy homes anyway. Just like Cash For Clunkers we end up overpaying for the impact this and ultimately homebuilders and bankers will profit. As I have contended for some time, the supply of housing is just too high and prices must fall to compensate. Measures like these interfere with the market's price adjustment and simply delay the reductions in price. Buyers today that capture the $8,000 incentive will end up losing more than the $8,000 when prices reflect reality.

Only one question - WHO'S MONEY IS IT?

FHA Lending - FHA IMPLODING - Please click on the link. This is a link to a yahoo page with an article detailing the default rates on FHA loans are out of sight. Probably more important and entertaining is the video interview that starts on the page automatically in the upper left corner. This interview details that the FHA is the new Fannie Mae and is essentially the entire mortgage market and is taking on all of these new bad loans.

To wrap up our thoughts on housing we need to mention that the FOMC statement also mentioned that the FED would begin reducing its purchases of agency securities with the goal of stopping in March of 2010. These agency securities are the securitized market for mortgage loans. As I've mentioned above, FHA has become the only home lender and the FED has been buying FHA debt in securitized form and is really the only buyer of this garbage. As the Fed exits the market we will see a rise in the cost of debt for these securities meaning that residential home loan rates WILL rise. Perhaps we won't only see a rise in the cost of the debt (interest rates) we may see the housing mortgage market freeze completely. This is the problem when a market participant becomes the market, when they want to stop or reduce their impact the ramifications are huge!

So take a moment here and think about this. When a homebuyer applies for a home loan they use a mortgage company or bank to obtain the loan. As the process is completed your lender will decide to keep the loan or resell it to the FHA. As long as the loan meets all the requirements, the FHA buys the loan from the provider and now you, the taxpayer ,are lending money directly to homeowners.

Put yourself in the position of Bank of America or another lender. Would you keep ANY loans that seemed anything less than perfect? If you perceived ANY risk or potential trouble with the borrower wouldn't you sell it? Of course you would, in fact, you'd actually try to find as many borrowers that were marginal and then sell those loans you never intend to keep to the US government! You'd make loan origination fees and other income and take none of the risk! WE'VE LEARNED NOTHING!!!! But the banks have learned to make money at taxpayer expense and are getting rich doing it!

Ok, so we've established that the banks sell the loan to FHA and then they securitize the loans (bundled lots of them up and package them) and then sell these to the FED. In doing so, the FHA takes enormous risk by incenting the bankers to make bad loans, the FHA doesn't do a good job of scrutinizing the loans because they are an inefficient non-profit government entity that exists to destroy tax payer money, and finally the Fed buys these loans or essentially funds the operations of FHA and keeps interest rates well below what they should to reflect the risk and real cost of borrowing! Sounds like a great system huh?

We are doing all of this to prop us housing costs and make us FEEL better. The only problem about doing short term fixes and simply trying to "feel better" is that we often end up making the problem bigger and the resolution worse. The prescription is to address the problems and work through them as a responsible person would. When the government ultimately extracts itself from this market we will see that there are no buyers of this debt and the cost of loans for home mortgages will adjust MUCH higher.

Thursday, November 5, 2009


Data continues to come in that bolsters the notion we've had that things were better than most have thought. Employment numbers are bad in the aggregate, but have been "less bad" and the trend is improving. GDP numbers were reported and were positive, and housing and retail sales are showing upticks.

For the last several months we've had a stance that things were getting better and therefore we needed to hold our nose and be invested even if it was based on the theory that the improvement might be short lived and based on the efforts of the Fed's liquidity flood and the Treasury's devaluation of the dollar. What has occurred? Well, exactly what we expected! While many folks were doubting the turn, we've seen it and now the numbers are coming in to prove it out.

Does this mean we can rest now? Actually, no, this is the time when we need to be more aware and perhaps begin looking further out to clarify our strategy through the end of the year and the first quarter of 2010.

Let's look at the data;


This morning's unemployment report came in a bit higher than expected and shook the market briefly. While the market was shocked, we were not and now see that the payroll unemployment rate is now 10.2%. Weakness in manufacturing , construction and retail were the culprits while education and health services jobs were actually added over the month. The real story is that unemployment now tops 10.2% when you use the government's method of counting, however if you include all the unemployed that have simply given up or are working part time that would rather work full time you have a number closer to 17.5%. This larger number is the U-6 data. http://www.bls.gov/news.release/pdf/empsit.pdf

As you might expect, employers are squeezing more effort and productivity from their workers. This week the government also released productivity data showing that American workers are more 9.5% more productive in the 3rd quarter. How are we achieving these gains? FEAR! Yes, what a powerful motivator it can be in the teeth of a recession. We are willing to work harder, longer, and cheaper to avoid losing our incomes. The market loved this data point, I'm not so sure it is a good thing in the long run for the US economy.

WLI Data

The Weekly Leading Indicators continue to show improvement. It will not be long before the recession is declared over and we'll need to somehow continue to convince ourselves that despite 10% unemployment the good times are here again! I know, I know, employment is a lagging indicator and therefore will always lag a recovery. As I've explained previously, much of the WLI data is focused on the liquidity in the system and clearly the FED has provided liquidity. Therefore we'll have to keep trusting the Fed playbook that the liquidity that substantiates the recovery will stay sloshing around for banks and Wall Street to pump up asset bubbles.

Rails Traffic

Rail traffic continues to improve. Tonnage is still well below last year's rates however we are clearly in an uptrend. If we continue on trend, we will see weekly traffic exceed those handled in the fourth quarter of 2008. We need to get used to this as comparisons between year's will be very easy for the next two quarters. This statement will cover many areas of the economy, not just rail traffic!

In specific areas we are beginning to see upticks in actual shipments. For example, last week grains and food actually exceeded shipments for the same week in 2008. We see this happen again in food and chemicals this week.

As I have mentioned before, I watch lumber and crushed stone shipments to give us an idea if we'll see growth in commercial real estate building or residential home construction. We are see a slight rise in crushed stone but lumber still looks weak. I've included a chart of spot lumber prices for a specific November contract


The reason I post the lumber pricing is that I'm watching this as a leading indicator of an uptick in construction. Of course we'll see this manifest itself in construction starts and even the rail data, but it is important to try to determine if we are seeing real improvement. It is notable that there was a recent spike in pricing over the last week or so.

Bloomberg Financial Conditions Index -

The Financial Conditions Index took a spill over the last week. It enjoyed a mild recovery today, but the improvement clearly waned over this period. We need to watch this data for indications of trouble in the bond markets.

The US Dollar became a bit firmer over the last couple of days, but I am in no position to call a turn in the dollar's descent into the depths. As I've shown in PUBLIC ENEMY #1 - DEFLATION , our Fed and Treasury are absolutely committed to resolving concerns about deflation with inflation. As a last resort, Ben Bernanke has stated that a currency devaluation has been successfully used to combat deflationary forces, and could be used again. I do not think there is any doubt that we are currently employing every possible means to attack deflation and the intentional destruction of the dollar's value against other currencies is now the primary weapon being used. Yes, I'm watching that upturn and will report immediately if I see a continuation of this reversal. Remember, because much of the basis I have for investment is based on dollar weakness, if we see strength, we need to quickly exit our positions in commodities and overseas holdings. A rising dollar will typically hurt all of these.

AAII Investor Sentiment -

Investor sentiment has fluctuated wildly over the last couple of weeks. I was very concerned as market participant bullishness spiked, but the recent decline in the markets of approximately 4% to 5% has quickly turned many more investors bearish. Remember, we typically want to be on the opposite side to the trade when most folks feel really happy about the market or really gloomy. I'm more happy staying with these trades that there is fear back in the market.

FOMC Meeting
The FOMC (Fed) meeting occurred on Wednesday and we received word that they Fed will not increase Fed Funds Overnight lending rates. As we've discussed, there was no chance that these guys would hike rates and frankly there is little or no chance of that happening until the middle of 2010. Fed critics have often cited that the double dip crash of 1937 was caused by an overly aggressive Fed that raised rates too soon. As rates rose, the stock market dropped approximately 38%. Bernanke is the expert in depression Fed actions and we can rest assured that he will not duplicate the mistake. This Fed believes that they can manage the inflationary risk and would rather try to deal with that issue than a deflationary one.


New home sales for September 09 were released in late October stating that sales were on target for 402,000 for the year. This was 3.6% below expectations. This represents a decline of about 7.8% from the 1 year period from September 2008 to 2009. http://www.census.gov/const/newressales.pdf

Extension of first time homebuyer credit of $8,000 and now other homebuyers may attempt to receive a credit of - $6,500 Read my new post - THANK YOUR NEIGHBOR

FHA Rules Changes - I cannot find a link to the story, but heard that beginning December 15th, the FHA will adjust the % of your income that is used to calculate the maximum loan you may receive. The current rate is around 65%, apparently that maximum monthly income amount will be reduced to around 45%. The impact of this change if correct will be to reduce the amount of house that you can afford if you are obtaining an FHA loan.

During October we saw our trend continue where dollar weakness lead to increases in commodity and equity markets. As the dollar firmed, we sold off a bit which served as a consolidation to move back to highs. During that phase the indicators of fear (volatility) rose dramatically and that gave us significant pause as a spike in the VIX over 30 can warn of a significant sell off in equity markets.


During the last 3 trading days though, we've recovered dramatically and are now below 25 on the VIX indicator as I type. This return to "bullish levels" and the readjustment investor sentiment away for all out greed reaffirms our notion to keep trading as we have. As the dollar goes, so will we trade!
We say this with conviction, but do not misunderstand that our attention and concern is hightened. We are seeing gold at new highs, the dollar at recent lows but trying to show some strength, and many other stock indicators showing that we are near levels where the market gains should be consolidating or rolling over.
I do use another indictor for trying to determine investor sentiment and have received permission from him to link to his website. Please consider Guy Lerner's site http://www.thetechnicaltake.com/ . Guy does an awesome job of looking at techincal indicators and always has excellent analysis. I am so happy that he has begun providing his insight for free as he previously had a service that charged for his analysis! I view his site everyday and I suggest that you follow it as well.
Guy's research often includes a review of positions of hedgefunds and investors in the Rydex Bullish and Bearish Funds. By examining the assets in the funds he can get a sense for how bullish (greedy) or bearish (fearful) sophisticated investors are at a given point and time. Recent findings show that investors are mixed rather than leaning one specific direction. As with the AAII sentiment indicator, when investors are really leaning toward one side, we should probably bet against them.
In the future, I will post Guy's charts in the place of the AAII sentiment numbers or right alongside them. Please check his site out, it is a great read.
In the next couple of days I will highlight my longer term investment thoughts (meaning the next 6 months). I started to post them here, but I've realized that many of my posts are really long and I need to break them up!