DOLLAR STRENGTH - YEN WEAKNESS / TURN IS COMING

Check out this chart of YCS, the double short yen. This gives us an indication that the market levitation based on dollar weakness may be ending. The double short yen ETF broke out today as there has been building strength in this position since December. I've been watching for a breakout above the $20.50 level and we got it in a big way today.

Here are my levels on the YCS trade.
Purchase below $20.75
Sell Stop - $20.45
Initial Resistance on the upside will be around $21.50
Ultimate Target to exit - $23.2 (There may be opportunities to sell near $21.60, buy on weakness for a final push to the $23 area, but I'm trying to keep these levels simple).

Again, I want to put this trade in the context of my overall view of the market. Even though YCS is breaking out, I'm sticking to my view that we still have around one month of upward movement left in the market till the end of April, but even during this last gasp up, weakness will sort of permeate the market rather than suddenly showing up in one giant sell off. This sort of trade showing dollar strength gives us a view of what might be to come. Even though equity markets are at 52 week highs, we are seeing the dollar gain and the yen weaken - all in the midst of another log on the fire (Portugal being downgraded by Fitch) -http://www.bloomberg.com/apps/news?pid=20601087&sid=aRbaF3Ideaco

Why is the dollar showing strength? Treasury auctions are not being bid so well and interest rates are climbing and Europe is on the radar again for its sovereign debt issues. I want to reiterate, I believe we have some upside left (1200 target on S&P) however this is the last little push in sight for the entire year in my opinion. We want to begin identifying trades that benefit in a falling market and begin closing out winners that have performed well. I may be a bit early in this trade, but I am willing to enter in and have a hard stop to limit downside, ultimately, this is a good risk reward and sets up well for my strategy for the remainder of 2010.

Goatmug

THE FALL

I am collecting my thoughts on what occurred last evening. I can only simply state that things are not what they seem and we have forcibly had our liberty taken from us. Once again I fear Americans have allowed freedom to be exchanged with "good feelings" and catchy slogans. Health care is not about health care, it is about taxation, revenue building, and growing government power. The size of our government is reaching the point where it will collapse on itself. It is not as though we don't have examples in our midst. Look no further than Europe to Greece, Spain, and the United Kingdom. The government cannot be the answer to all of your needs and desires without the cost of your freedom.

Large organizations only know that they need to be bigger. As a budget analyst for a large firm many years ago, I never heard a manager suggest cut backs and ways to efficiently use their resources. Managers always want more headcount. Is it odd to see that government acts the same way? Unfortunately we have leadership in this country that believes it can know what is best for all people despite years of data and outcomes that show they don't and cannot deliver on their promises.

Please read the following excerpt;

The story of the republic's fall (ROME) is one of the great lessons of history. It is one that Americans should pay special attention to; for the same permissive spirit, sensuality, and apathy have appeared in our midst today. Americans should consider the extent to which we have been unthinkingly cultivating our own destruction. "Surely, then," wrote Cicero after Caesar's assassination in the Roman Senate, "our present sufferings are all too well deserved. For had we not allowed outrages to go unpunished on all sides, it would never have been possible for a single individual to seize tyrannical power." At the end of this passage, Cicero concludes: "Here in the city nothing is left -- only the lifeless walls of houses. And even they look afraid that some further terrifying attack may be imminent. The real Rome has gone forever." [Michael Grant translation, On Duties]

This post taken from a great article by Jeffrey R. Nyquist - http://www.strategiccrisis.com/index.php?option=com_content&view=article&id=197:the-fall-of-the-roman-republic&catid=36:social-issues&Itemid=67

Goatmug

MARCH UPDATE

MONTHLY UPDATE

RAIL TRAFFIC - http://railfax.transmatch.com/

Rail data continues to show improvement in total tonnage shipped. Last week each category of shipments showed higher levels of cargo traffic than the previous year in except for coal shipments. In comparisons to last year's data, coal and lumber are the only categories that are lower than 2009.

LUMBER & STONE

As usual, we are watching lumber and crushed stone to tip us off for some sort of housing and commercial building growth. Lumber is at least pushing higher compared to last year while crushed stone still tells us that commercial building is mired in the pit.

CFO SURVEY - http://www.cfosurvey.org/

We want to watch what CFO's of companies are thinking and how they are feeling to give us an understanding of where they predict the economy may go. I like CFO's more than CEO's because typically CFO's are a conservative lot that see what is actually going on in the firm rather than projecting what may happen. In fact, CFO's typically downplay the strength of the company and I like that as they tend to reign in spending and the projections of the sales team.

A professor from Duke interprets the data here......

"The uptick in business spending indicates the economy has bottomed out. But the recovery might be short-lived if the employment picture does not begin to improve," Graham added. "Another note of concern is the corporate sector’s expectation to decrease inventories, exerting downward pressure on overall GDP growth."

EMPLOYMENT STABILIZING, BUT INVENTORIES TO DECLINE
About half of U.S. CFOs say they will increase full-time domestic employment in the next year, twice as many as say they will decrease their workforce. Net full-time employment is expected to increase 0.2 percent and temporary employment 0.5 percent. Finance chiefs expect outsourcing to rise nearly 4 percent.
"Certainly, it is good news that the employment bleeding has stopped," said John Graham, professor of finance at Duke’s Fuqua School of Business and director of the survey. "CFOs, however, still expect a virtually jobless recovery in 2010. Looking further ahead, it will be two to three years, maybe longer, before employment returns to pre-recession levels at most firms. CFOs say they are keeping workforces low due to weak consumer demand and increased efficiency in their production processes."

-- CFOs’ top economy-wide concerns include weak consumer demand, federal government policies, price pressure and credit markets. Top concerns about their own businesses include maintaining profit margins, low employee morale and liquidity management

WLI DATA - http://www.businesscycle.com/resources/

No double dip - WLI data back up after 4 weeks of decline. Now at 129.8, the WLI is showing continuing strength in the recovery.

FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/

Like the WLI, the FCI is now solidly above 0 and this tells us that the "recession" is over. We will need to continue to watch the jobs data as this will be the issue that drags the economy down if people don't find jobs. As we marry this concept with what the CFO's are saying in the sentiment data above, we need to make sure that we are enjoying the "recovery", but are skeptical of it at the same time. CFO's are telling us that they are going to actually decrease employment and outsource more of their jobs overseas. That doesn't lend support to the notion that the consumer is back and that housing is fixed.

HOME PRICES - http://www.businesscycle.com/resources/

Speaking of housing, we are seeing pricing declines. While this sounds bad, pricing drops are the only way to make homes more affordable and accessible to buyers. Lower prices will help clear the shadow inventory of homes that will continue to suppress a recovery. Why our government continues to delay this is a mystery when we all know that the only way to fix the sickness is to take the medicine.

BALTIC DRY GOODS INDEX- http://www.bloomberg.com/

I've been watching the BDGI lately alot as an indication of activity of shipping in overseas markets. Spot shipping rates (not contracted ones, but the rate that you'd have to pay if you needed to ship something and lease your ship today on the open market) are moving higher, moving up some 10% from last month's report. A continued move here may bode well for some shippers. An acquaintance on www.slopeofhope.com sent me an article on how the pricing changes in the baltic dry goods index is not that connected to the pricing of the actual shippers, but no matter if that is true, this does indicate that commodities themselves are being consumed and moved. This bodes well for the continued move higher in emerging markets, basic industries, and commodities.

USD - http://www.bloomberg.com/ -

The dance continues. As we have concerns over debt defaults in countries like Greece, Spain, Portugal and Ireland, we see strength in the USD. When we get word that the EU, IMF, or Germans are going to bailout these countries, we then get a flight from the dollar and a recovery in equity markets. There has been some breakdown in the traditional relationship because not only are European investors fleeing the euro and other currencies, they are also simply buying US equities as well. This is why we've actually had some equity market strength in the face of concerns over Greece's sovereign debt problem. The nasty little secret is that all of these countries have been hiding debt and this is just coming to light. We will have a debt crisis, national governments are simply trying to do what they have done forever, ----keep the charade going as long as possible.

A story released this weekend is suggesting that Dubai actually has nearly 4x's as much debt as every thought as they have hid it. Doesn't that make you feel cozy inside to thing that national governments would like to their investors and debt holders? Why would banks and people follow laws and be honest if their governments don't lead by example.

Longer term, I still expect the dollar to rise and treasury rates to go higher as well. In the short run if we get a "solution" to the Greece issue, we'll see the USD drop.

TRADING UPDATE FOR MARCH

We've continued to rally since February 5th. I am still positive for the next month and 1/2 or two, but I am waiting to see a very slight pullback as investors will get overly bullish and everyone will lean to a specific side. Economic data will continue to surprise folks on the upside (jobs, housing sales, retail sales) and this could push the market higher. In addition, the resolution to the situation with the debt problems in Greece - although this is temporary because more countries face trouble. In spite of the negative potential news, slight pull backs have been tough to come by, so a good strategy may be to add purchases in an incremental fashion. Traders often call these time stops. Perhaps the timing could be to add every 2 weeks or every month. This way you don't put your entire holdings in at once.

WARNING - THE FOLLOWING ARE SPECULATIVE TRADES -

Emerging Markets - As we see continued USD weakness, we'll see momentum build in the emerging markets. I have had the following trade on for some time, but it just broke out today and I think it still has close to $1.00 more to run before hitting resistance.

EWM - Malaysia

Current - $11.30

Target $12.35 (Target Gain = 8.8%)

Downside stop - $10.50 (potential loss -7.1%)

Oil - I think oil continues to breakout. We are now above $80. As I stated in the beginning of the year, I believe we have a shot at $100.

GOLD - GLD - For a short time horizon, I believe gold is going higher. I am personally not involved in this trade and am not going to provide levels for a trade on this item despite it's positive direction. You can comment and leave me levels and I'll take a look to confirm it if you'd like.

(VXX) - (BEARISH TRADE FOR A PULLBACK) VIX is now at 17.8 as I am writing this. I do believe we could have a short term pullback and the use of VXX to play that would be ok. This is not a long term trade, you are simply trying to capture any downside as we've moved quite far since Feb 5th without a significant fall. Take a look at thetechnicaltake.com . Guy Lerner is again stating that bullishness is high and this should give us some validation to the notion that we'll make money as the fear index reverses and goes higher - making money in the VXX.

KSU - KSU is now trading above $35.00. I like the gains we took on it, and will wait to re-enter.

As usual, thanks for visiting and thanks for your comments.

Goatmug

CAN THE "FEAR INDEX GUIDE US?" - VIX REVISITED

Just a quick note about our old friend the VIX. We've rallied back quite well and all still seems to be going according to the plan we've laid out where we see some strength in the market for the next 6 weeks or so. Now the jobs report could come out extremely weak since (and blame it on the snow of course!) but still there does seem to be strength in the market in a broad based rally that has included home builders, retailers, technology, metals, commodities, and energy.
Despite things going as planned, I am still cautious and looking for indicators in the market that may give us a warning that the run is over done.


I have noticed that transports like KSU seemed to have hit the wall over the last two days, so that may be an indication of some weakness or some consolidation. As you know, the KSU trade in my opinion has past and I sold out of that earlier. Some might say too early, but 10% gains in little over a week are great and I didn't want to give them back. Having said that there has been some real stiff resistance right at the $35 area where I highlighted in the chart. By the way, don't over do your trade size. I received a comment from a visitor that told me that he had completed the KSU trade and it was HUGE. Do not purchase a particular stock in such a large portion that it becomes a significant or oversized holding in your portfolio. You must manage risk in many ways and the worst thing you can do is to take too large of a position.



Anyway, I mentioned that P/Es were way too high the other day and another item I'm watching is the VIX. The VIX is the fear index or really a measure of the volatility in the market. Since February 5th the market has pretty much rocketed in one direction and therefore fear has almost disappeared. As usual, my friend Guy Lerner at thetechnicaltake.com has highlighted that the smart money and insiders are beginning to sell and the dumb money is very bullish. These are the times we need to wake up! The VIX is now reading 18.83 and this is an indication of complacency in the market. I have mentioned a trade to buy VXX on a bet that the market will reverse and fear will flood back to the market. I think we are getting close to a good risk/reward area to put that trade back on, but I will hold off a bit as I've mentioned before in the comments section, I'd like to see it with a 17 handle. We won't need to go much higher in the market to get to that level.



I hope the attached chart is clear. Click on it to enlarge it, but this is a 3 year picture of the cash S&P 500 (SPX) against the VIX. I have marked each instance where the VIX traded lower than 19. I've also plotted points on the SPX so we could see where it was trading on that same day. (The tabletop line is the spot where showing the value of the SPX rather than the bold dot. The capture software I used moved the dots around, so please use the white line as a graphical indication of where the text values should be). I think the information is pretty compelling that it may make sense to bet that the market will reverse sooner rather than later. Yes, the market can continue higher, but again the VIX is warning us that EVERYONE thinks it is safe in the water, and that is usually when the sharks attack.

Finally, some will say that the last 3 years is not a great sample of to use, but I have two ideas that counter that notion. First, even the most recent correction on January 19th hit a level on the VIX around 17.50 and resulted in nearly a 100 point drop or 8.5% fall in the SPX or a purchase of VXX would have gone from around $27.00 a share to $33.50 in just a few days. So we have recent history that highlights just how actionable this trade can be. Second, the market in the last year has traded in a fashion that is absolutely not normal. The market typically doesn't move in one direction for 10 straight months. Therefore I would suggest that we need to be looking at recent evidence in "this" market rather than long dated historical examples that might not be relevant.
















Goatmug

PS - Note the cool little map at the upper right hand portion of the blog. Click on it and it shows a map of where all the visitors to the site are coming from. Thanks for visiting, I think it is neat that someone in Brazil and Indonesia have visited!

P/E's ARE TOO HIGH AGAIN

I found a great website by Robert Schiller the Yale professor. He's provided interesting details going back to 1875 of market levels including interest rates, index prices, and P/E ratios. I have used his data to give us a picture of the S&P 500 index charted against the long term P/E ratios for the market. http://www.irrationalexuberance.com/



The chart is useful because we can see that the rebound in the markets over the last 10 months has now propelled us into levels that indicate that the market is overvalued. Two things can happen to adjust this imbalance. First, earnings can improve, this will decrease the denominator of the equation and bring the calculation into equilibrium. The second is that stock prices can fall back in line with earnings to balance it out. Recall that the long term median P/E for the market is 15, so we are 30% above the average.

If you look at 2000 and 2007 you should see that just because we have spikes above 20 doesn't mean that the market will immediately collapse, but it is an indication that a stocks are over-valued and will regress toward the mean. It doesn't escape me that the last 15 years has been spent at P/E's greater than the norm. I also think we would agree that the last 15 years has been a period build on excessive debt and the illusion consumers could leverage themselves to happiness. Remember, consumers have been borrowing to buy stuff they didn't need thus creating demand that supported entire industries.


Goatmug