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.