Monday, December 28, 2009

Give Us Something To Believe In

I wrote this article and submitteed it to Tim Knight's Slope of Hope. He usually will post my contributions only on the weekends because they are so long, so I will go ahead and publish it here in case it doesn't fit with his year-end line up. I will post a very quick (I know-I promise it will not be lengthy) updates on where I think the market is from a trading perspective and how to look at the positions we've mentioned in the past. Right now other than the last piece of my KSU that I exited this morning I have no positions.

I've documented the history of actions that caused our crisis and outlined the steps our government has taken to "bail us out". You may find the most recent post at Goatmug's Blog where we discuss The Best Cup of Coffee Ever and how it seemed wonderful and solved all of my problems, yet ended up bitter and disappointing. As I've mentioned, I believe many of the steps taken have either not worked at all, created other problems, or simply hidden the problems. Let's take a few of the items I pointed to in the last post and review the impact and results of their actions

A) The Federal Reserve and Treasury along with other world central banks stepped in and offered their fiscal support and immediately lowered rates again to near zero. Remember, these are front month rates and are the interest rates the government charges banks for overnight money. The Fed voted in recent weeks to keep rates stable at effectively zero percent interest. They voted to do so some 18 months since the beginning of the crisis and 9 months after the beginning of what we now know as one of the largest rebounds in stock market history. In spite of the rally we are still around the 10,500 level on the Dow which is where we traded in January of 2006 and well below the lofty 14,000 area of October of 2007. Am I saying that we cannot return to these areas? No, in fact if the Treasury department remains committed to devaluing the dollar, I can paint a scenario where that might be a real outcome. I doubt it seriously, but it could happen.

Timothy Geithner gave an interview last week on NPR that should put us all on notice. In his words, we will not have a retest or slowdown after this recession. Although many of his other predictions have been flat out wrong, I have a strange sense that he is committed to not letting that happen no matter what.

Mr. Geithner is only speaking of a short term pull back that he'll help us avoid, for it is too obvious that the Fed and Treasury actions create bubbles and meltdowns and they are coming with increasing speed. I liken this to a drug addict. At first there is pleasure in the use of the substance. Next there is dependency, and then an increasing need for the larger portions of the drug in greater frequency. Think about friends, family members, and others that fit this drug addict description. It usually never has a happy ending does it? I think what we're about to experience is "tough love" provided by our investors. Our friends, (Chinese, British, folks in the Middle East), are about to hold a frightening intervention with the addict and therefore we will be told that we need to shape up and cut out our drug abuse. Unfortunately, I don't think the addict will listen. It is too tempting to let all of that debt go to waste and too hard to cut spending and cut promises and entitlements.

So what are the results of these actions? Interest rates are still low and creating asset bubbles. - Banks and other bank holding investment banks and insurance companies can now borrow at zero overnight and buy stocks, bonds, and commodities. Is there any wonder why all markets are screaming? What happens when that money is taken back? Remember, this money was intended to buttress balance sheets and also intended to be lent out to companies and consumers, not find their way to the casino!

Banks receive this money and will lend. - NOPE! This has not happened. This I believe is one of the greatest lies that has been made in this crisis. Why would any smart banker lend in the teeth of a nasty, jobless recession? Would you? If you looked at a firm that is asking for credit and he tells you that their business is slowing and they need a loan to make payroll, do you think they are a good risk? Asking bankers to lose money on bad loans is not a solution to the crisis. On a positive note, I am hearing some of my clients being contacted by banks that are desiring to lend on decent terms now. This may be an indication of some thawing.

B) The Fed also bought toxic securities outright from troubled financial institutions and traded those assets for treasuries. Our government offered the TARP funds to help institutions and even made outright purchases of banks and insurance companies. (AIG, Citbank, etc.) We even used these to buy and lend stakes to great car companies like GM! We keep reading that many of the banks and insurance companies that we lent TARP money to have repaid us and we (the US taxpayer) may have actually made some money on these loans. The reality is that we may have made some money on loans that have been repaid, but we have taken a bath on the loans that will never be repaid. Making AIG a government controlled entity makes certain that more losses are headed our way. The Treasury Department and Fed's lack of negotiation with AIG's creditors should be enough to convince anyone that the well connected firms like PIMCO, Goldman Sachs, and Blackrock were feasting on the carcasses of weakened and dying financial firms. In addition, these same favored companies have become the mechanism by which the FED and Treasury actually implement their policies. These companies are providing transaction support (spreads), participating in deals, and also offering consulting services

So what are the results of these actions?
AIG is a mess and still 85% owned by the US. Isn't it great we are in the insurance business?
GM - is still GM.
Goldman, Blackrock, and PIMCO are killing it .

Remember too big to fail? - As a result of the forced marriages between JPM and Washington Mutual, BAC and Merrill Lynch, Wells Fargo and Wachovia, we now have a greater concentration of larger institutions. Seems like the US government has now created larger risk pockets and concentrated more power in less hands. Finally, the repaid TARP money is being used like a slush fund now. The administration and Geithner said they had "extra TARP money" that they could use! Excuse me, just because it is appropriated doesn't mean we need to use it if everything is all fixed, right?
C) In concert with these actions our government also looked to perform direct support (cynics would call it manipulation) in the mortgage market and the treasury market. By guaranteeing and supporting the FHA the US taxpayer became the lender/insurer to 80% of the post-collapse mortgage market. With the announcement of quantitative easing by the Fed we began buying our own treasuries to try to keep prices low and contain rising interest rates.

While short-term manipulation has been successful, it is just that - short term. The bond market is bigger than any one central government and the bet made by Bernanke is going to be called. Once that happens interest rates will climb (and as I type this we are seeing 30 year mortgage rates 10bps higher in one day last week!). THIS IS A HUGE MOVE BY THE WAY! Who will step in to fill the void of the government in this volume at these rates? Stabilizing the home market is job #1 - The government has artificially lowered interest rates and become the dumping ground for all banks to offload their paper on the US taxpayer. Few banks are doing direct lending to residential borrowers without FHA backing. Home sales look to be moving up, but we must ask how long this will continue if rates jump substantially, cash for houses go away, the FED stops buying MBS (stops being the market), or banks actually release the huge backlog of foreclosures that they have kept on their books.

Don't get me wrong, the government is having an impact here and this is positive for the economy. I'm very concerned that this could change if any of the government "help" is removed or investors demand higher rates and push mortgages rates over 6%. For example, in November we were to have the final expiration of the first time home buyer credit. Sales were pulled forward and suddenly we have a reported drop in new home purchases in November. The following Bloomberg article demonstrates what the threat of pulling stimulus does. A mad rush of buyers that would have bought anyway step forward to take advantage of the taxpayer-paid windfall, and then demand dries up in the following months (Cash for Clunkers anyone?).

Obviously I'll have this prediction in my top predictions for 2010, but I'll suggest here and now that we have a dip in the sales trend in existing homes as much of the inventory that has been clearing has been foreclosures and investors (not occupants) have been swooping in to pick them up. Hopefully those investors have been buying smart and have deep pockets because I will predict that we'll see the new generation of home flippers that have emerged get sunk in 2010. They'll find that there won't be many buyers for these homes when mortgage rates hit 6% or 7% since we're all spoiled and believe that 4.75% is what we should expect! These investors will also get hit hard when banks like Wells Fargo and Bank of America actually release their piles of inventory instead of letting them trickle out. Look for these inventory clearances after 1st quarter reports come out.We were told that housing is the key to recovery - housing has not recovered yet, so I guess there is no recovery yet.

D) The Obama administration got in the act and began programs like the Housing Tax rebate for first time home buyers, Cash for Clunkers, and now Cash for Caulkers. In addition, the federal government has continued its payment of extended unemployment benefits. In addition, as a country we are now running a huge fiscal deficit (nothing new, just the magnitude of it is) and our government's expansion has required us to raise the debt ceiling (allowable debt of the country) to $1.8 Trillion Dollars! This doesn't even account for the addition of any new health care program or new stimulus. As I've mentioned several times, I believe that the Fed and Treasury must be cussing the administration for their interference. The Obama administration has kept to their strategy that they wouldn't waste any crisis and by goodness they haven't. In the hysteria they have continued to plunder the US taxpayer and add more programs and benefits to the entitlements for anyone that will take them.

We are now seeing that COBRA subsidy benefits are being extended to the unemployed (they have been offered for 9 months) and will be provided for another 6 month period. The program pays 65% of the premiums that someone that has been laid off of work must pay to keep their health insurance. It seems odd to me that the US Government and US taxpayer would pay for health plans at rates that are significantly higher than what can be obtained by families in the open market with individual policies. Of course we shouldn't be amazed at all about this, this is what happens when government makes decisions. This one example illustrates how the new health reform plan cannot and will not be an improvement or a cost savings for anyone.

While Obama has added his pork to the budget, the US treasury buyers will not tolerate the bloated debt of the USA. The market will require higher rates of interest and this will cause significant pain for all of us.
Crisis Management- Administrations have added pork laden projects and plans to the backs of taxpayers as an excuse to stimulate the economy. There are no plan for fiscal restraint or management of the budget. What simply blows me away is that I hear Obama speak about finding waste in government programs to pay for more stuff! Where is the idea that you cut costs and if necessary, benefits?

I'll comment more about the health care reform bill in another post, but you need to understand that the winner here is the health insurance industry (for now). As these bills are written they will have a captive audience of buyers. Many of you know that I own a health insurance brokerage and I saw a huge swing in commentary by insurance companies. If you don't think they are giddy, you are WRONG! Check out this email link I received from Aetna. These guys were hammering the Senators and then suddenly came out with this gem. Mind you, if this goes through I hope to sell everyone one of you a policy because I would hate to see you go to jail or pay stiff fines, but everything about this stinks and reeks of over promising and under delivering at a terrible cost to tax payers. A key provision in the plan is the elimination of pre-existing conditions as a basis for exclusion or rating up. Once this exclusion provision is removed we will witness the elimination of INSURANCE! Why would you obtain insurance till you have something serious now? GDP was revised downward and we are seeing that the government is responsible for most of the production for last quarter. I understand that

For all of these programs, what are the results? - We were told we need these programs to stimulate the economy- all have been short term and have done nothing to change the fundamental situation. We still have 10% unemployment and 17% U-6 unemployment. We were told that everything would begin to get better once housing is stabilized, we haven't seen housing stabilize and won't for a while. More appropriately we'll see things stabilize when people have jobs.

E) The accounting standards board (FASB) bowed to pressure from financial institutions and our government by suddenly recommending that accounting standards be thrown out the window. The accounting standards board have been complicit in this crime against investors as the boards were threatened and frightened into thinking that they would be responsible for imploding our economy. Where is the leadership in our country? I am afraid that the move to take a time out on reality simply makes it easier to do it again. The accounting standards board should have stood up and emphatically stated that accounting standards don't change or take a time out because the truth hurts! Future collapses will be much worse because the ponzi schemes the government and banks have set into motion were not stopped here. Clearly now that the banks are bigger and risk more concentrated similar meltdowns will be even more destructive. Accounting standards were thrown out resulting in a lack of understanding of true value of banks and insurance companies.

Where are we now? We still don't know what banks are worth and they are still raising capital and still lying about the risk on their balance sheets.

F) Finally, as we saw in the previous October post called Public Enemy #1-Deflation we see that the Fed and Treasury unleashed its last desperate weapon, Dollar Devaluation. The dollar devaluation trade is simply a move to destroy the value of the dollar relative to other currencies. This makes our dollars worth less and hence our debt worth less. We could also argue that it makes our goods cheaper as we hope to sell them abroad. The Fed has been true to its words that it would implement this strategy if faced with the prospect of deflation. When the government went to work in March the DXY was at $89.20 and they did not disappoint. They have moved the value down by as much at $15.00. The DXY is now trading at 77.64, well off its lows of $74.27 in late November and early December. So as the dollar has been pelted since March, EVERYTHING has gone up. Think about it, stocks, bonds, bread, gas, oil, gold, and the kitchen sink have all increased. So now, we've been told that everything is better and that we are recovering. In fact about 3 weeks ago, we had a surprisingly strong jobless claims report that stunned the market and boom, the dollar reversed course and interest rates began to rise. They rose because the strong jobless report indicated that things were stronger than expected and the Fed might need to remove stimulus (increase interest rates or as we know it, take the drugs away from the addict). Since that day there has been a resurgence of the dollar. Bernanke tried to tell the market that they would not raise rates because there were no indications of inflation in the market. Fed governors tried to tell us there was no evidence of inflation, and now Geithner has come out and told us that there is not a chance that we'll have a double dip.

So why are rates starting to rise and the dollar increase? How have we seen the dollar rise and the markets increase? First we have had some credit issues with Dubai, Greece, and Spain. All of those have reminded investors that there really is risk in the credit market and we aren't fully recovered. Scared investors tend to go to safety, and therefore we have seen a flight to safety in the dollar. Having said that, treasuries are a poor investment as the Fed has made sure to destroy any reality in that market (and value too). Therefore it is easy to see how liquidity could move to other dollar denominated assets allowing for the strengthening dollar AND rising equities and bonds (at least here in the last few weeks). Remember, this move up in interest rates and increase in the value of the dollar is contrary to what the Fed and Treasury desire (even though they say they want a strong dollar for the sake of our Chinese buddies). The increase in rates immediately translates to greater borrowing costs for the tax payers AND devalues the value of the treasury assets we already own. The government states that it wants to keep rates low to stimulate lending, but I can also see that we need to keep rates low to keep from blowing our own foot off since we have been purchasing our own debt through quantitative easing. Zerohedge has another good post that captures exactly what I've been saying and leading up to here.

What are the results? - So we have an administration that says they want a strong dollar, but we have a Fed Chief that has stated his strategy to save the economy would rely on a devaluation of the dollar. We have had an engineered rally in all asset classes and treasury rates that are way too low for the risk and duration of the trade. In essence we have a bubble in Treasuries!
My isn't it obvious, where ever we see the footsteps of the Fed, we see bubbles? So what is on the horizon for the Fed and Treasury? In 2010 we will see greater rates as buyers decide to wait it out and purchase their mis-priced treasuries at a better risk-reward. The greater rates will hurt bond holders and most of all the US tax payer. The bond market at some point will change the behavior of our current administration and the corrupt politicians that look to hand out entitlements and lack the idea of being representatives of the people.

We will see drastic cuts in city and state budgets and services before we see anything on the Federal side, but cuts will come at the national level.

If the Fed and Treasury want to keep the charade of low rates going then a fall in the equity markets will be the mechanism to deliver lower funding rates, unless they announce a new set of Q.E.

To wrap this up, we see that in each instance the failed efforts of the government to fix the situation have either simply done nothing or helped to kick the can down the road. As we've elaborated since our first post in August, the game of extend and pretend has been in full force. The problem is that at some point (2010, 2012, or 2015....) there will not be a way to extend it and a creditor will call our bluff and call in our debts. What I am really longing for is for a responsible leader to stand up and say NO, we won't offer this entitlement, no- we are actually going to cut services. Americans are going to be forced to live through these boom and bust cycles at an increasing level of speed and magnitude because our current leadership will not speak truth. The best result of all of this crisis is that average Americans are beginning to wake up and live a paradigm based on their needs and not their wants, based on their own ability and assets, not based on what their neighbor has. I am seeing a genuine reversion to true values of healthy financial management in peoples financial lives and in their businesses. Unfortunately, they had better be ready quickly because our government is saddling them with more debt and taxation to pay for promises and entitlements we can't afford. As an example of the crisis that consumers are facing check out this closing study.

Almost half (46%) of 2,148 consumers surveyed recently said they weren’t confident they could come up with $2,000 within a month in a crisis–from savings, family, friends, credit cards or other sources.Even among those earning $100,000 to $149,000 a year. almost 25% doubted they could raise it, according to the survey conducted by research firm TNS with academics from Harvard Business School and Dartmouth College. “We wanted to know if people could fix a broken car or furnace,” says Harvard finance professor Peter Tufano, who adds that most studies he has seen measure “how much cash people have… not how much they can access.” The survey results surprised him. “The ability to cope with emergencies is much less strong than we might have thought.”

I saw this in reality as people in the South dealt with Hurricane Ike. After 1 day people were cashless and without resources to make it through this terrible emergency. Americans need to wake up and save and communicate to their leaders that it is unacceptable to continue in this fashion. We had a final emergency and the US leadership chose to fake it till they made it rather than employ real fundamental solutions to problems of our own creation. At the end of the day I feel like the Bush Administration, Obama Administration, Treasury, and the Fed have just tried to spin whatever story we would fall for in order to get us to give them time. What they have figured out is that we just want them to give us something to believe in to quote a favorite from Poison (yes, I'm still into 80's hairbands). Guess what, they've given us a few tales, let's hope that no one actually figures out that what we've believed in isn't worth the trust we've placed with them.


Wednesday, December 9, 2009


I have to admit, the older I get, the more spoiled I am. When I was younger (college) I lived on a diet of Taco Bell, Top Ramen, and Keystone Light. You might be able to discern with that line up that I paid for college myself and you'd be right on. Fortunately, those items contain just enough of the four food groups to sustain me. I didn't eat or drink any of these things because they were awesome, they were simply life sustaining and served their purpose.

As I earned my undergrad degree, I became a coffee fiend as well. I often tried drinking coffee black, but found that coffee with a bit of that white powdered gluten laden non dairy creamer improved the taste. As I've aged, I developed a taste for better quality beverages and I often won't even drink coffe when half and half is not available. I've learned that I don't care for the manufactured taste of the powdery drink additive.

Why do I take this trip down memory lane? Yesterday I took a new leap. In the quest to create the perfect brew of coffee I purchased hand roasted whole bean coffee from a local roaster. I purchased organic turbino sugar, and also organic half and half. Why such a special concoction? I was celebrating the completion of several major work projects I've been tackling for months. (By the way, I would have never dreamed of making a cup of coffee like this in college). After grinding the beans, brewing the coffee, adding the sugar, and adding the half and half, I realized something was horribly wrong. Something was not as it should be. Flakes of creamy white rotten half and half floated to the top of my "perfection in a coffee cup". A few explicatives and a drive down to the corner grocery quickly rectified the situation, but as you can see I was clearly scarred by the experience.

What is the purpose of relating this story? Easy, things are not always what they seem. I bought the best of the best in all of the ingredients in my coffee. Unfortunately, organic, rotten half and half is still just as nasty as non-organic rotten half and half. While the packaging was prettier, the marketing better, the price tag greater, the end results were disappointing. In fact, after the entire ordeal, the results were probably more tragic!

I think that is a great starting point for our story of the marketing job our Fed, Treasury, world central banks, and two Presidential Administrations have served up. Recall that the problems over the last 18 months started in the following manner;

1) The Federal Reserve attempted to restart our economy after the tech wreck by lowering interest rates to stimulate spending. As usual, low cost money for a prolonged period spurred irrational exuberance, and a mis-pricing of risk. American investors felt that real estate was the new "money tree" and either gobbled up investment properties or used their home equity as an ATM for rampant consumption of stuff they didn't need or access to additional debt to buy other investments.

2) As more Americans borrowed and spent, more and more less qualified borrowers were wooed by President Bush's goal that 70% of Americans could own homes despite that the long term average percentage of home ownership in the US is 63%.

3) Realtors, mortgage brokers, mortgage lenders, and Wall street were more than happy to oblige these lower tiered borrowers and like a drug pusher helping an addict they continued to offer their wares.

4) As home prices continue to go higher the merry go round had all of the kids on board and so therefore there was no one left to keep pushing. Sub-prime borrowers began defaulting as mortgage resets hit them with higher interest rates and caused them to lose their undeserved homes.

5) As the tidal wave of defaults hit, Wall Street became a victim of its own success. Bear Stearns and Lehman Brothers exploded bringing down Wachovia and Washington Mutual. All of these firms were involved in lending to marginal borrowers or the securitization of pools of these loans. Merrill Lynch, AIG, and more also were involved in this mess.

6) The Federal Reserve and Treasury along with other world central banks stepped in and offered their fiscal support and immediately lowered rates again to near zero. Remember, these are front month rates and are the interest rates the government charges banks for overnight money. The Fed also bought toxic securities outright from troubled financial institutions and traded those assets for treasuries. Our government offered the TARP funds to help institutions and even made outright purchases of banks and insurance companies. (AIG, Citbank, etc.) We even used these to buy and lend stakes to great car companies like GM!

7) In concert with these actions our government also looked to perform direct support (cynics would call it manipulation) in the mortgage market and the treasury market. By guaranteeing and supporting the FHA the US taxpayer became the lender/insurer to 80% of the post-collapse mortgage market. With the announcement of quantitative easing by the Fed we began buying our own treasuries to try to keep prices low and contain rising interest rates.

8) The Obama administration got in the act and began programs like the Housing Tax rebate for first time home buyers, Cash for Clunkers, and now Cash for Caulkers. In addition, the federal government has continued its payment of extended unemployment benefits. In addition, as a country we are now running a huge fiscal deficit (nothing new, just the magnitude of it is) and our government's expansion has required us to raise the debt ceiling (allowable debt of the country) to $1.8 Trillion Dollars! This doesn't even account for the addition of any new health care program or new stimulus.

9) The accounting standards board (FASB) bowed to pressure from financial institutions and our government by suddenly recommending that accounting standards be thrown out the window. Clearly they were pressured and threatened that if they did not create new "rules" for accounting for troubled assets and balance sheet holdings economic collapse would surely follow. A better translation for this should be, "If you don't allow banks and financial institutions to continue reporting false values and lie the whole ponzi scheme will collapse". You know what, that is exactly what would have happened. Am I amazed that FASB suspended its own rules and took a break from truth telling? NO, NOT A BIT! Am I amazed that for a while I was duped to believe that there was ever any truth in the markets, truthfully, yes. What these accounting standards amount to now is that they are standards as long as they are convenient. When accounting standards are not, they are no longer required.


10) Finally, as we saw in the previous October post that was published in we see that the Fed unleashed its last desperate weapon, Dollar Devalution. I've posted that blog article here if you missed it PUBLIC ENEMY NUMBER ONE . This speech given in 2002 highlights all of Bernanke's contingency plans for a bust cycle. Guess what - he's done it all and now the bullets are expended.

Now don't get me wrong if you are reading this and saying that "Goatmug sure does hate prosperity and the government!", the truth is that would be absolutely wrong! What I do hate is waste, entitlement, theft, and intentional distraction and lying. I admire honesty, consequences, discipline, entrepreneurialism, and nationalistic pride.

My aggravation with the government's scheme is that it avoids almost all of the things which I've highlighted as worthy of admiration. As I've mentioned before, I believe that the government has done unprecedented acts and while it appears to have done amazing things, in reality has accomplished little but to raise asset prices of stocks, bonds, and commodities. We have not addressed the underlying asset destruction on the balance sheet of banks and in fact it has not forced them to write bad loans down at all. The FASB's actions simply reinforced that our approach would be to "extend and pretend" rather than taking a disciplined approach and closing these Too Big to Fail Institutions. We've allowed Goldman Sachs and others to literally use the US balance sheet and make billions while it would have been more economically reasonable to cut a check to each American family for $200,000 or more.

As usual, this post is way longer than I thought it would be, and I haven't even gotten to the main point. Therefore, I will highlight in the next post what has changed for the US economy due to the actions of our government and how they are simply surface level improvements. I'll outline how the global economy and its linkage will ultimately lead to a double dip recession or worse despite our best efforts.

I found this quote in a piece done last week by Chris Pulplava, who is also one of my favorites. If you are not reading him weekly on Wednesdays you are missing out. (By the way, he is quite bullish now, so please know that I read all perspectives and don't dismiss them when they don't agree with my point of view).

FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:

"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”

I wonder if that sounds familiar? We'll discuss what improvements have been seen in the economy and how they have been manipulated and engineered to create them. We'll also discuss how these improvements will abate in the next several months as counter-vailing forces moving to limit and undo the positive moves of the last 9 months. In other words, we'll put the economy to the "Best Cup of Coffe Ever" test and see if it really pans out to be as good as we envison it.

By the way, I no longer drink, I haven't eaten Taco Bell in 5 years, but MSG addictions and bad habits are hard to break. I must admit that I have a stack of Top Ramen Roasted Chicken Soup in my cabinets. God, family, great coffee, Tabasco, and Top Ramen are essentials for a fulfilled life. You might pick up a packet, heck even with inflation a packet is still 20 cents! (Remember when it was 12 cents?)

Tuesday, December 8, 2009


I hope everyone had a wonderful holiday. As I have been speaking with many of you over the last two weeks you have seen that I have become more and more concerned about a period of decline in the market. The last couple of days have proven those thoughts to be right on target. I will keep the monthly summary pretty short and provide a fuller explanation of my concerns and how to trade it.

Many of the data items I look at are now beginning to show real positive momentum. Many folks might look at these new and building trends and decide to get into the markets now that it is clear we are on the verge of exiting the recession. I urge caution in that thinking. As usual, we want to think like the banksters and corporate robbers that live to take our money. When these trends are readily visible, we should probably do what they do and exit the market following the old adage, "SELL THE NEWS".


The ECRI WLI data continues to press onward and upward. Remember this is a compilation of 6 or 7 leading indicators to give us an idea of the direction of the economy. Because they are leading indicators, they should turn up before we feel or see the impacts in the economy. The indicators have done a great job highlighting the change in trend in the economy. As I've pointed out though, more than half of the indicators are reliant on data that is liquidity or FED driven. We've discussed at length that the flood of liquidity provided by the FED is intentional and historic. If the WLI data didn't turn up with the amount of cheap money in the system, we'd really begin to worry. I'm not discounting the information here, just want to be sure that it is clear that the vast improvement rests solely at the feet of the FED.

OK, same trend follows here as well. slight improvement, but nowhere near the 2008 levels. We are going to see big changes in year over year comparisons starting next month simply because we began a waterfall like descent in the 4th quarter of 2008. This chart measures the weekly loaded units. They are 4 week rolling averages.

Recovery Watch - As usual, I'm watching crushed stone and lumber shipments to show us any indication of a pick up in commercial and residential construction.......nothing.

On a positive note take a look at this carrier. Kansas City Southern's shipments have achieved 2008 levels. Before you run out and buy the stock, notice that it is trading at just under $29.00 which is a 100% increase since July of this year. I point it out because it has had the best recovery of the rails and obviously the market has rewarded it for its return. In September of 2008 it's price was around $50, so this is one to watch. I see some overhead resistance at $30.00, if you see it punch through, you might look deeper at it. (I'M NOT RECOMMENDING IT, JUST SAW IT AND FOUND IT INTERESTING FROM A FUNDAMENTAL AND TECHNICAL PERSPECTIVE).

KSU - Total shipping units beginning to eclipse last year's performance.

We see a very slight uptick in prices for commercial real estate. Yes, commercial real estate is a disaster! Yes, regional banks are crippled with commercial real estate loans that are not performing. Yes, MIT is seeing someone come in and pay a bit more than they did in previous weeks. Let's watch it. DO NOT GO OUT AND BUY REITS BASED ON THIS!


The Bloomberg Financial Conditions Index continues to march forward. This index is comprised of money market and bond market pricing and liquidity inputs. We know the bond market has improved substantially in recent months. A print above 0 indicates that we are out of a recession. We continue to inch closer. Does a proclamation by the FCI or Obama or the Economic Council mean that everything is better? No. We will see a proclamation that the recession is over, but we'll still have U6 employment (or should I say unemployment) at greater than 15%.


Investor sentiment is usually wrong when they are at extremes. Unfortunately, we are stuck right at 50 which indicates balance between greed and fear. We'll keep monitoring it. This week's data should get interesting with the dollar being up 3 days in a row.


The US Dollar rose like a phoenix from the flames, ok, let's not get carried away here. The dollar has been up against a basket of currencies for the last couple of days. This does make trading a bit harder because it means that the trend for the last 8 months is being challenged. As of this writing the DXY or USD Index is over 76 which is a critical area. We'll keep watching. Read below to revisit how many of our trades are underpinned with the notion that the dollar will continue to decline at the hand of the FED and US Treasury.

The dollar is still our benchmark and its new found strength has me watching our overseas and commodity investments even more intensely. The dollar is clearly still in a long term downtrend and nothing has changed, but I am more vigilant in monitoring it's daily moves because we are seeing other signals that the equity markets may be near a top.
We are nearing the end of the year and with the holiday season comes declining trading volumes in the market. We are seeing a narrowing of market breadth. Market breadth simply measures the number of advancing stocks versus the number of declining stocks. In a rising market the market breadth shows more advancers than decliners. As a market's rise slows, market breadth begins to contract.
In addition to the number of companies rising, we are also seeing two key items happening now. We are seeing only major leaders in the market advance while the rest of the market declines or languishes. Think of companies like Apple and Amazon as these leaders. What this means is that the surge in the market over the last couple of months has been extremely concentrated, not broad. This usually indicates that investors don't have conviction to go out and buy the market and fear holding anything other than the best names. As the rally continues to tire, even those names begin to fall. This is where I believe we are at the moment.
Finally, the market's rise has not taken financials with it over the last several months. Without financials any rally will be doomed. After hitting $193 in late October, Goldman Sachs is now at $162. This does not convey that we are in a position of strength.
Oil has sold off over the last few days which is no surprise due to the dollar's strength. Compounding the pressure on oil is that we are in a season that is typically very weak in last part of the year. At this time oil is $73. I have been looking for an entry into oil back in the $60's. I'm not in any hurry to buy here as I continue to believe longer term we'll see a double dip recession.
Gold has been crazier than a bucking bronco over the last several weeks. I have been pleased to have done well with highly speculative positions in gold while it was moving higher. I was even lucky enough to have caught some of the move down over the last two days. If you get the sense that I am glued to my computer during these times, you'd be correct. These are highly risky trades and I limit the amount I have invested, knowing that I could lose 100% on the trade if I get it wrong.
Because of the huge volatility in gold, I am suggesting that you exit any positions.
Gold has some significant support at the $1000 level. I would be inclined to add positions back if we neared that mark.
OK, so what do we do? Due to the weakness in many of the indicators I watch I am moving my stock holdings to a more conservative position. During this huge rally I have not committed all of my capital, with only about 50% of my long term account in the market for the months since August. The gains have been good and I do not desire to give them back. As always, I value preservation of principal and while not happy to miss gains, am always willing to pass up potential gains if I think there is a great probablity for loss. This selling of positions includes all overseas etfs, precious metal and commodity positions.
Even though I suggest moving out of all positions here I want to give you a sense for what I perceive will happen over the next several months to a year. As I wrote earlier, the USD is in a long term downward trend and I believe it will maintain its direction. Understanding this trend allows me to not be too concerned about commodity positions unless I see the dollar index move above the $79 to $80 level.

Don't be mistaken though, a move in the dollar index from $76 to $80 could be EXTREMELY PAINFUL if you are in commodities or precious metals. Don't read this and say, I'll just watch $80 as a level and keep my positions on! While this is just a few points in the dollar, we could see a significant drop in the price of these commodities if you are still in them.
Even if we just churn here in a range or see mild weakness materialize in the short run, there may be a temptation to enter back into equity positions in January through February. Be careful, because after that period I believe we will head for a significant drop.
Gold and commodities will continue to perform well on a relative basis, but they too will be caught in a down draft, so watch out!. Overseas investments will continue to out perform US Stocks. I am still favoring holding ETFs like EWY, EWM, and EWZ. Of the three mentioned here, I like EWZ the least. I do continue to keep it in mind because EWZ is a proxy for trade with China as Brazil is natural resource rich and will benefit from its trade with the Asian super-power. Even if US stocks do not decline, holding overseas assets will help you significantly to counteract the dollar devaluation you will be experiencing.

Bonds - I believe with the coming correction in stocks, we'll also see a decline in bond prices. We won't see the traditional disconnect between bonds and stocks like we should as when fear arises, all asset classes will be sold.
If you are holding bonds right now that have appreciated significantly, I suggest you sell them and capture your gains.
Last, I am working on another post to explain why I believe we'll have dollar strength and how my contention that despite this HUGE rally, nothing has changed in the credit markets. I am extremely busy working on a few projects, but will hopefully finish the post by this weekend if not before. I think this is an important post if you don't quite understand how all of these instruments fit together.