Wednesday, January 20, 2010


Ok, just a really quick post here. I have been sitting on pins and needles for the last couple of days trying not to get too convinced of anything as the market has given and taken away. As I am typing the market is down 18 pts in the S&P and to sound more scary- down 172 in the Dow.

What does this mean? Maybe nothing, but you must keep your eyes open and also be aware of the ranges we have discussed. In my last post I added the following comment in the trading wrap up section....

"The market is still within its trading range. We can look for us to sit within the 1110 to 1150 range on the S&P500 unless we have a catalyst to push us in one direction or the other. In the very short term we could have a pullback, but through the end of March I'm looking for a melt up higher. "

Well guess what, we got to the top of the 1150 range yesterday and we have a following smack down with the S&P trading now at 1132. Could we move to 1110? Yes. Should you be watching? Yes.

Other developments -

Keep your eyes on the following items that are of note.


Someone suddenly has been buying long term treasuries in big quantities over the last two weeks. What does this mean - it means that institutions are starting to bet that interest rates won't rise. This would happen if the market sold off significantly and these buyers stand to gain tremendously if scared investors flood back to treasuries. Remember, everyone believes that interest rates will rise and the dollar will fall. If tons of buyers come back to treasuries, the dollar will also increase - this means trouble for our commodity laden portfolios.

What is our mantra? If everyone is leaning to one side, a careful investor might slip over to the other side or at least move to the middle to avoid the herd.

Remember what we wrote in the January update - "Bullish sentiment was extremely high". I personally had 2 conversations with traders and they were so concerned with getting in that they never once mentioned that the market could fall and they could lose their money. These conversations are the ones that get me very worried.


Greece is in some serious trouble. Their credit default swaps are pricing much higher (read as much greater risk of default). This will put pressure on the EU and the Euro. This also probably explains movements in treasuries and the dollar. - This picture is from Zerohedge -

Defaults from EU countries will drive folks to safety and remind investors that there really is risk out there (something I think they have tried to forget).

I've included a picture posted by Karl Eggerss at This graphically describes that earnings had better improve dramatically and quickly to adjust the P/E ration back into some normal territory. As we all know, stocks have advanced in a huge rally on the expectation and understanding that the world was not coming to an end and that the world and the US consumer would again go back to the binge buying and credit enslavement.

I like Karl's approach here and this graphic is very telling.

Ok, so what do you do? Watch that 1120 support in the range. If you are in cash, this could be your buying opportunity. If this level falls, perhaps an exit might be in order. As you all know, these have been opportunities to add to positions. Remember July, September, and November? At some point the buy the dips won't work and the ranges will fall apart, until then, keep on your toes.

Thursday, January 14, 2010


Sorry for the delay in getting the update done this month. As usual, life doesn't wait for the blog!

I will make these comments brief and will add new stuff in another post over the weekend or early next week. Things should slow down.


Optimism stats by Duke University were released as of December 2009. CFOs seem to be a tad bit less excited about the prospects for recovery. It is evident that during the credit collapse they were pessimistic and then suddenly felt much better. We notice a dip here as I believe CFOs are getting a picture that the stories of a recovering consumer may be overdone or much delayed. This is something we need to watch as this a a group that isn't positive based on "spin", they see the data within their firm and then make informed decisions as to what reality is. CEOs tend to be much more positive and I have said before that I trust the CFOs more. It is also of note - (not on this picture - go to the link for more) that European CFOs are the most pessimistic of the world and the survey produces results for them that indicates that a recovery from previous levels is very far off.

RAILS - Data from

Total rail traffic has met and begun to exceed levels from 2008. What is interesting to note is that the easy comparisons are now baked in the cake and while the headlines will look good, we are not seeing a significant recovery over those levels. In other words, a total collapse took place last year and we've been told that we are in the full throws of recovery. Some other indicators show that we are probably out of the recession completely. Given this information we should begin to see levels on the chart that show the blue lines ABOVE the green of 2008. This fact that we are not above significantly is concerning and could portend the double dip or W economic path I've discussed for months.

Same story below. Recall that we use Crushed Stone and Lumber shipments as a proxy for commercial and residential construction to try to obtain leading indications that a turn may be coming. Crushed stone is actually falling and lumber is still drifting downward. No recovery in the books for this month.

KSU - If you were playing along with the trade we discussed in KSU, total shipments are still outpacing last year's but now isn't on the trajectory we noted last month, hence our call in posts to exit in the $34 area. KSU has remained in this range. I like that the 20 SMA has moved up to provide support in this $33 area. Major support still is in the $28 area, with an upside target in the $39 area. Volume is dropping in KSU, so be watchful. (no positions in KSU)


My friend Guy Lerner's post of investor sentiment clearly shows that everyone is bullish and this should be a signal for folks to be on high alert. Not only are folks bullish, the VIX (volatility index - known fondly as the fear index) is now trading in the 16 area. These areas indicate that investors have been lulled to sleep and there is little concern in the market. As Guy points out in his post, the bullishness is beginning to hit extremes and as the VIX glides lower, it will be indicating extreme levels of "non-fear". Just because levels are here doesn't mean that this week we'll encounter a sell off, but if the VIX falls more toward the 10 level, you can be assured of seeing a dramatic drop in markets. For the active traders that can't put the mouse down, a trade using VXX might be in order (for speculation only). The VXX bets that the volatility in the market will increase.

Extremes in sentiment occurred in August 2008 which was several months prior to the collapse in October of 2008


I am going to begin including a quote on the Dry Goods Index simply because so much of our discussions involve commodities and the dollar trade. As we see other economies ramp up and recover (China, India, Brazil, etc) we should expect to see this index of the spot price of bulk shipping increase. On the other hand, if we don't see a continued improvement this should be a warning that the global recovery is hitting headwinds. We are seeing higher highs and higher lows since March of 2009. If this trend continues this is positive. If we see a breach of pricing on that 2000 level, it will be another indication that the recovery is a mirage.

The Financial Conditions Index breached the 0 mark in mid December. This data suggests that the recession is over and we are in the midst of an expansionary phase. I have often pointed out that more than 1/2 of the component pieces of data in the FCI measure "levers" of the Fed and are therefore are more of a measurement of Fed liquidity flows than anything else. This may be true and is not lost here. It is important though to use it and note what it tells us. It will be for us to discern and the market to absorb the liquidity and do something with it. We all know that banks still are not lending as outstanding consumer credit still continues to nose dive. The Fed can print all the dollars they want or as it has been said, "Helicopter Ben can shower us with as much cash from his helicopter as he wants." I would challenge this notion and say that if the dollars that fall down are swept back up into the rotors or the dollars get stuck in trees then the liquidity measures will not prove fruitful. Essentially my thoughts are exactly that - that the Fed has showered the banks with currency in amounts never seen before, however the dollars have not reached the hands of businesses that would use the credit and therefore the liquidity has become a instrument of interest rate arbitrage for banks rather than a tool of fractional reserve fuel for the economy.

If we hear more stories of businesses receiving funds or banks lending for projects and investments I will feel more comfortable.

US DOLLAR - Bloomberg

The dollar had a recent surge and now the Fed and Treasury are back to business in driving it lower. I am looking at these upward corrections (counter-trend rallies) as opportunities to build positions in overseas holdings and commodities. Longer term interest rates will rise and commodity pricing pressures will increase not abate.


The dollar weakness trade is back. Look for rallies in commodities, especially gold, silver, natural gas, oil, and ag commodities.

Other trades should be considered that focus on investments outside the US. I've mentioned the country ETFs I like in past posts.

Look at the graph on the double inverse dollar UDN -

While I can't capture it here, the weekly chart of UDN shows that there is building momentum in UDN (dollar weakness). The action here should be good for commodities.

The market is still within its trading range. We can look for us to sit within the 1110 to 1150 range on the S&P500 unless we have a catalyst to push us in one direction or the other. In the very short term we could have a pullback, but through the end of March I'm looking for a melt up higher. The challenge in the market could come in late March when the Fed says that it will stop its process of Quantitative Easing. Q.E is the process where the FED actually buys our own Treasuries that they are attempting to sell. The reason they are doing this is to create a false market for our debt and CONTROL the prices (interest rates). If the FED had not stepped in to pursue QE, our interest rates would be much higher. As you know I've stated will be continued in my opinion no matter what the Fed says, because they will be shocked to find that no one wants US Treasuries for 30 years at 4.375% interest!

This is just another reason that we suggest that if you own bonds that are have maturities of longer than 10 years (probably even 7) you should consider exiting. As interest rates rise you the price of bonds will decrease. Even if you do not sell them and simply continue receiving the coupons the interest you earn will be less because inflation will consume more of your return.

Be vigilant as we enter earnings season. If everyone is bullish it is reason to maintain an eye for the exit.


Thursday, January 7, 2010

Misdirection and Slight of Hand - Health Care Reform

Just a quick post to provide you information on the health care reform trends.Click below to read what United Health Care has summarized as what they believe will be the final version of the coming changes to health care over the next few years.

Specifically, in the next 6 months, insurers will need to adjust their treatment of the following;

1) Get rid of any waiting periods of greater than 90 days to begin insurance that is approved.
2) Stop rejecting children under 19 for pre-existing conditions.
3) Stop canceling insurance policies except in the case of fraud (this is overdone - in 7 years I have never seen a policy dropped for someone making valid claims.)
4) Provide preventative care (wellness visits) without cost sharing. - Many insurers only pay $300 or $400 a year, but require a client to pay 25% of the cost. For example they pay 75% of wellness visits up to $300 out of the insurance company's pocket.

All of these changes are good and right, however they will raise rates, so hold on to your hat!

UHC also highlights other changes they expect in 2011 and 2014 so read away.Here is my take on the entire deal.

You must know how the structure is set up to understand the fraud that is being put in place.
A) Taxes begin immediately.
B) Cuts in Medicare coverage begin (After mid-term elections)
C) In six months, the changes above are effective
D) 2014 - The big reform is schedule to hit - Individuals are required to have coverage or pay a penalty of the greater of $750 or .5% of their income if they don't purchase insurance.


As I mentioned, the impact of these changes will be immediate. Insurers now are required to take children that have pre-existing conditions in the near term and these "sick" kids will be an immediate drain on profitability and an increase in cost. Is there any doubt that kids that are very sick will hurry to buy insurance? Is there any doubt that insurers will adjust rates on all new policies sold and also on all existing policies when they have a chance?

Ok, so here is the real deal. The administration's efforts here are to begin paying for this plan with increased taxes today. In addition they begin cutting Medicare benefits, require insurance companies to make changes immediately add sick folks to the insured roles (read as decrease profits and increase costs - or simply put hurt their businesses significantly). Finally in 2014 we have everyone come on the plan. Kind of strange timing isn't it?

A) Oh yes, please look at the 2014 stipulations as well. Employers will ultimately drop their coverage and stop offering it if they employ more than 50 employees. Think about it, they will cut costs significantly in the form of premiums (they will have to pay a $750 fee per employee fee when not offering a plan) and will be able to tell their employees that they have health care available through the government exchange plan. -- You don't think they'll do it? Right now, most employers pay 1/2 of the health plan costs per employee, just assume that that is $200 a month of a total of $400 a month. The break-even is just at 4 months. Cash strapped employers will absolutely push their employees off into the new plan.

B) Over the course of the next 3 years, people will sue the federal government and it WILL be declared unconstitutional to require a person to enter into a contract with a third party to obtain insurance.B) In that 3 year period, private insurers will have had their business margins slashed and profitability will have been destroyed. With the high court ruling that the health reform act is unconstitutional, we will see a final destruction of these firms as the trend to buy insurance will be broken and good healthy clients will drop policies, while sick folks will retain them.

C) As a result of the court action, the federal government will step in with the only solution - a national health plan that is a one payer system (GOVERNMENT HEALTH PLAN). This will be the only fix as the collapse of private insurance plans will be complete.

It sounds ominous and sounds like a conspiracy doesn't it? The answer is clearly "YES" it does and guess what, it is all planned. Remember, the administration says they don't care what gets passed, just as long as it is passed. This is the gateway for the end goal of national health care. The first step is only a first step.

Do I think the system needs an overhaul? Yes, of course. I speak with people every single day that are declined by insurers.

Do I think this is the answer? No way.

Long term, you as a patient and consumer will pay more, have less choice, and ultimately wait much longer for medical services. Government is inefficient and is never the answer. In addition, all of the assumptions by the CBO and the administration don't account for the massive exodus from employer plans to the new government plan. This will be the major reason for massive cost overruns.

We have been told that the model for these plans are the VA system and Medicare.Remember two or three years ago when President Bush was blasted for the conditions and treatment of soldiers in the VA system during the Iraq conflict? Remember how the Democrats told us how terrible things were and how bad the hospitals were maintained? Ask a veteran that goes to the VA how quickly treatment is provided? This is the model?

Finally, if you think that government can run things well why is Medicare absolutely broke? Why would we model anything after this plan. The system is filled with fraud and costs are out of control. The government almost creates an environment where over billing is the norm because they reimburse providers at less than 50%. If you owned a practice wouldn't you do an extra procedure, lab, or other test simply to cover the cost of the haircut you'd receive?

Bookmark this post, I'm certain of only a few things in life, but I am sure this is a disaster waiting to happen. In the meantime, I'll rejoice as I'll sell a lot more policies and insure many of the kids that I've had declined previously. I better save my money though because the future is certainly dim over the long term unless the government allows for the sale of supplemental coverage to sit on top of the government run plan we are sure to have.


Tuesday, January 5, 2010


Just a quick note regarding commentary by Jeff Saut from Raymond James. His notes come out every Tuesday morning and I like to read him. I always remember that he doesn't get paid to be bearish, however he has a great style and he has been pretty good in last year's surge, by being bullish and bearish throughout the year..

His best quote is found here, which summarizes my thoughts about this market as well. On a relative basis, I'm still concerned about the dollar even though the first two days of the trading year are showing us it is back to usual on the weak dollar, long commodities trade.

Last Monday we wrote, “As we enter the New Year, we are once again turning cautious because the Treasury market is breaking down (higher rates) and the U.S. dollar is rallying. . . . Therefore, we think it prudent to ‘bank’ some trading profits and hedge some investment positions as we approach the new year.” Moreover, one of the lessons we have learned is that the beginning of a new year is often punctuated with head fakes, both on the upside as well as the downside. One of the greatest upside head fakes was in January 1973 when in the first two weeks of that year the DJIA rallied to a new all-time high of 1051.70 before sliding ~20%. While we are clearly not predicting that, what we have indeed experienced since the March “lows” is the second greatest percentage rally (69%), adjusted for time (nine months), since the 1933 rally. Following that 1933 explosion of 116% in just five months came a pretty decent downside correction. Since we tend to be “odds players,” prudence suggests some caution is again warranted.


Sunday, January 3, 2010

Outlook from the Moutain Top for 2010

Predictions are interesting because they allow us to really document and work through what we think and feel. We'll revisit these predictions throughout the year to measure how we're doing. No matter how negative I want to be, I still understand that the Fed is spewing its flood of funds at a pace that has not been seen before. The massive liquidity has been the fuel for the ascent back to the 10500 level in the Dow, an amazing almost 4000 point run up in the index. Our government is committed to see assets increase in value no matter the life-style cost in the longer term. Remember, this asset value increase is so important to re-establish confidence in the financial system. If J6P (Joe six-pack) doesn't believe in the integrity of the system a key player has left the table. Much of the moves of the government are meant to get him back in the game.

One last note - don't forget risk. It is really neat to see the huge gains the market posted last year. Don't make the mistake of forgetting that the entire financial system was almost destroyed in the process. The market is still down some 35% from the Oct 2007 highs. Yes, you can go to Vegas and plunk down your entire net worth on red or black and make an easy fortune, the problem is that this is a tremendous risk as well. What significant changes have been made in the market to remove the risk from the system? What would embolden you to take more risk now.

Let me hear from you on the comments section. I'd love to know your perspective.

I will make a new post regarding year-end / month end analysis over the next couple of days to set up trades for the coming month.



Interest Rates will rise, but not at the direction of the Fed. - The market will demand a more just compensation for the risk it has taken in Treasuries. The 30-year will hit 6%. The market is predicting a rise in the Fed Funds rate coming in August, but I think they will delay raising rates overtly until November or December at the earliest. Any slow down in the economy will be another excuse not to raise them at all in 2010.

While the Fed stated they will stop Quantitative Easing in March of 2010, they will not be able to stop because losses on their book will be immense.

Housing issues will improve through April at which time the impact of increasing interest rates will force the hands of banks and they will begin to release their inventory of "non-foreclosed homes" on the market pushing the new wave of speculators underwater teaching them that falling knives are tough to catch. Some are pointing to the HAMP requirements that state that banks that had home owners that modified mortgages and failed to keep the terms of the deal (make their payments) must release this inventory and use short sales as the tool to divest themselves of the inventory as another reason for a coming drop in home prices. I don't see it that way, I see the government changing their minds again and lifting this requirement when they figure out that it could hurt the recovery.

We will see at least 2 currency devaluations in 2010. These will manifest themselves in the form a North Korea style announcement where you will wake up and the currency will be declared -10% less in value or more. These devaluations are necessary to continue each country's desire to sell goods cheaply abroad. The US' motivation of course is simply to reduce the relative amount of the crushing debt that we continue to heap upon ourselves.

Fannie Mae and Freddie Mac will become the dumping ground for all private mortgages loans made in 2009 and 2010. The banks will avoid taking losses and pass all of them to the US taxpayer. The Christmas present (uh-unlimited losses) that the government gave the US tax-payer on Christmas day is unbelievable. For the next 3 years the loss limits on these two organizations have been lifted and we are backing them with a blank check.

The Euro will face continued pressure, the US dollar will rise significantly against the Euro from the 1.432 level it is as of this writing. The US dollar will actually fall relative to the South Korean won, Australian dollar, and many other commodity based economy currencies. The dollar will strengthen against the yen.

Small business lending and personal credit will continue to decline through 2010.

Gold will actually decline to the $950 area and then move higher later on in the year when it becomes increasingly obvious that Bernanke and Geithner have no intention of pulling liquidity. This will be the opportunity to add more to the position. Gold ends the year in the $1150 to $1200 range. Longer term, gold is still a buy.

US equity markets will end the year slightly positive (meaning less than 5%). This year will be volatile and gains should be harvested when they are acquired. This means that there will be periods of gains and you need to take advantage of the ranges in the markets and buy at the low end and sell at the high end. I still maintain that the Fed will support this market directly or indirectly at all costs. As housing reverses, be prepared to see unexplainable increases in equity markets. Bernanke knows the conventional thoughts that the collapse in 1937 occurred because the Fed increased rates too soon, he'll be sure not to repeat that lesson. This is how we'll be sure to over inflate and also create the next collapse in 2011 or 2012.


Middle East tensions will boil over. The US will give Israel the green light to defend herself and presumptively attack Iran. Russia and China will condemn the attack and they will choose the side of their trading partner against Israel by selling arms and providing material support.

Upon attacking Iran, Syria and Lebanon will engage Israel on their northern fronts.

Oil moves to $100 this is based on the continued debasement of our currency through the actions of the Fed and Treasury and also geopolitical tensions.


Republicans sweep away the majority held by the Democrats in the mid-term elections. The third-party movement continues to garner support but is quashed by the two party system.

Obama names a replacement for Justice Ginsberg who retires in 2010.

Obama is able to pass some sort of health reform. He passes the reform knowing that it is unconstitutional. The strategy is to destroy the health care industry as we know it in the next several years. When the high court determines that the legislation cannot stand, a one-payer system (government) medical system will be the only option left to pick up the pieces. The final step will not take place till 2013 or 2014. No matter what, abortion will be a major component of the bill and will not be removed.


Despite failed terror attempts our personal rights and privacy will continue to be eroded in the name of our safety. Our government will continue to take measures to protect you after each attempt (meaning safety measures that will waste your time and add little to your safety).

Christians continue to be attacked for their beliefs (read by the secular world as intolerance) and there will be several prosecutions of Christians for their beliefs. This will of course continue in Europe, but will also begin in the United States.

There they are. I reserve the right to add more as I see them, but I'll add them to the bottom and date them so they will be easily identified.