Friday, April 30, 2010

Encouraging the ECB to go Nuclear!

Central banks and governments are getting a little scared.  The FED and their buddies in Europe have had the belief that as long as we they could drive the stock market and financial markets higher it would in turn propel economies higher.  In other words, some time around 1995 Alan Greenspan and his cohorts decided that they would compel markets higher and the resulting fruit would be a great economic boom.

Guess what?  They were right!----In the short run.  In fact they were so good that our US economy and other world economies thrust higher without any sense for fundamental growth or data to back up the growth.  The low rates, easy money, and lack of regulation created several busts such as our most recent (short-lived) sub-prime debacle and the tech-wreck in 2000-2002.

I've lamented several times though that more pleasure, more stimulus, and more reward all lead the addict to abandon any rational view of the world and suddenly the desire and pursuit of a greater and greater high is all that matters.  In addition, the addict does not worry about the consequences of their actions, they simply crave pain to stop and the resumption of the pleasure (whatever addition that may be).  In this way, we see crack addicts rob stores, kill people, and other terrible things --- not because they are truly bad people, but because their addiction is overwhelming the goodness within and stopping the addiction and placating it is job number one.

Our central banks have the same addiction and means to quell the insatiable lust for economic pleasure.  In the same way a drunk begins to shake and become physically ill when alcohol is out of reach, the FED and the central banks become violently ill when credit is removed and the liquid courage of debt liquidity is withheld. 

Greeks are in the throws of the detox process and they are in complete denial of their level of addition.  Unfortunately the drug pushers (credit markets) have run out of supply (or the desire to supply at rates Greece will pay) and if they have any left over are charging quite a premium that is hard for Greece to stomach.  Has anyone learned from the mistakes of sub-prime borrowers?  Heck no!!!

The ECB, IMF, FED, and other bankers are now determining how best to rescue their addicted fellow.  While Greece is a problem we've failed to notice that Greece has a few drinking buddies that just might be worse than the small island country.  Spain and Portgual are ailing and their supply of cheap drugs too seems to be dwindling.

What is the answer?  If you read the following article, it seems like that stance is to facilitate the additions, not let the sick guys face detox.  In this case the prescription is to begin QUANTITATIVE EASING and buy government bonds directly, therefore artificially creating a ceiling for the bond yields and a floor for the dropping prices.  Instead of demanding that lenders take the medicine for their lack of analysis of true risk, or penalizing Greece for lying and hiding their true debt levels, the answer apparently seems to be to allow the sick countries to feed their addictions with more drugs, not more reality.

So, while the ECB and the FED (don't think for a minute that the FED isn't participating and using your tax dollars) is going to undertake their SHOCK and AWE campaign of dashing reality the market may move higher and we all merrily attempt to look away from the coming disaster.  The knock on effect of this is going to build and build until it is uncontainable.

If you listen to the tv and radio you'll hear that everything is getting back to normal.  I would suggest that "normal" is simply a set up for the next bust cycle courtesy of the FED and central bankers.

We know that the central banks absolutely over do it and hold rates low for too long.  But the real question I'm asking now is simply this, what are they looking at that scares them so much to continue to keep rates down?  I know the answer, but it is worth asking again and again and again.


Tuesday, April 27, 2010


I don't think this morning's post could have been more right on. While the market was dropping we were typing that this only means that we'll be seeing more effort from our government to push forward demand, create confidence, and ultimately print money to escape the gravitational pull of deflation.

It looks like we (the US) aren't the only ones to print new currency. The Chinese are contemplating new efforts to keep the plates spinning. The Bloomberg article here cites that this will be announced in August.

We keep hearing that China is in a bubble and China will need to step on the brakes to stop rampant speculation. If there weren't real forces gripping their economy why would a government continue to distribute easy money?

I think the truth is that they absolutely need to keep printing and try to competitively devalue the yuan. If they don't, we'll see riots, unemployment, and a real estate collapse again in the most populous country in the world. More printing in China will create more printing in the USA to offset the devaluation. It is truly a race to the bottom for currencies.



I haven't been posting as much lately because I am working on several projects. In particular I am giving a presentation on the Health Insurance Reform Act and its impact on business owners. I will post an outline of what I present and if I can figure out how to do it will also post the slides. In addition, I will begin some longer posts to outline what I responded to Dacian regarding the catalysts for a turn down.

Here is a graphic that shows where we are in existing home sales since September 2008. We've had a spike as a result of the economy stabilizing and massive stimulus applied to every facet of the financial system.

We have a few more days of "cash for houses" the incentive that allows new home buyers and trade up buyers to access a tax credit to help with the purchase of a home.

Hopefully the housing market will now be able to stand on its own feet and we won't see a drop from these stimulated levels - however I doubt it. (Edit- I noticed that I didn't put in my skepticism as the auto plan cash for clunkers did nothing to change long term demand).
I pulled the chart from -

We've been on target for the last several months as April has delivered "more of the same" as the melt up has continued. As I'm typing the market Dow is down 150 points on the back of the Portugal debt downgrade. This revelation added to the Greek debt uncertainty and the Goldman Sachs testimony is adding risk and volatility back into the markets.

Does this mean we need to bail on trades? Actually, I believe this is not true at all. In fact, this weakness and the continued understanding that Europe is on its deathbed means that the only course of action will be more of the same. More of what? More printing of course! As I suggested in December and January in my predictions, the FED is not going to be able to raise rates given the deflationary forces at work. This uncertainty assures us that the FED will continue to press the gas pedal and inflate.

Notice that despite the sell off that gold is doing well. This gives us and indication that players have a sense that inflation is going to be looming.

I'm still watching issues with seasonality of the markets in May (Sell in May), but feel like we have sometime before that will kick in near the end of the month. I will be buying on weakness here.


Tuesday, April 6, 2010




Total rail traffic continues to improve from the collapse that occurred in the first quarter of 2009. This improvement suggests that the economy is getting back to normal - even if it is a "new normal".

Continued improvements in lumber and crushed stone are signaling that commercial real estate development may be coming off of its death bed. I am not sure that I am going to ring the bell and say that the commercial real estate sector is fixed, but it appears that someone is crazy enough to begin purchasing some of these components and we need to be looking for this activity to translate into market health (and no, I don't mean stock prices for commercial real estate and builders to go higher --- since they have already run). I'm actually looking at this data to at least validate some of the market's move. If this stalls out, then we know that perhaps there are perils to be navigated in this sector still.

Shipping tonnage for all sectors have now outpaced last years rates and now are all positive. The greatest increase has been in metals compared with last year while coal shipments are the least best improved at +3.2% from last year's period.

KSU continues to show get improvements in shipping and has been the one we've followed for some time. Clearly we sold too soon, however I'd rather do that than lose hard earned gains. I will not cover that trade again till it comes back in line with previous levels. I feel like there are better risk/reward set ups to examine.


The march higher since November of 2009 seems to have abated some as the USD has taken a break. Perhaps much of the "break" here is that we are again pleased to hear that the Greece situation (Grease Fire) has been put out and a solution to their overspending and obstruction of truth has been solved for the moment. Since we seem close (maybe this time?) the dollar has moved south in relation to its rivals and has led to the resurgence in the stock market and especially in the emerging markets and commodities markets. Of course this dollar weakness put a halt to my celebrations in my YCS trade (double short the yen), however I still have that trade on since it has not penetrated my $20.50 stop.

We'll discuss the dollar more as we wrap things up, but it hasn't escaped me that this dollar fall is part of a well orchestrated and choreographed dance. Think of a rhythm and vibration rather than a waterfall drop into an abyss.


Fed liquidity continues to be available and therefore the FCI has signaled an end to the recession and a beginning to an expansion. This indicator is one that continues to make we believe that we are "all systems go" for a move higher through the end of April and perhaps mid to late May. The FCI is flashing all clear.


Just to sprinkle in some reality, the baltic dry goods index marched higher in mid March and then had a lid slammed shut on it. We'll continue to monitor this spot shipping pricing indicator, but we needed to see a push through into the high 3000's and 4000's for me to take real notice. The actual shipping companies had rallied strongly in mid Feb through March, but have retreated as well. In fact, my quick take is that several of the shippers in this space deserve to be shorted, as they have rallied right into pretty stiff resistance.

I am hearing that commodity prices are rising, however I also hear that actual demand is not. Orders requiring spot shipping prices are simply made to fill the void of diminished inventories and suppliers and manufacturers are not moving to follow through on a great inventory rebuild because the volume of orders on the horizon are just not there. As a production manager wouldn't you be slow to add an inventory of raw materials that may sit idle in the face of rising prices that you assume are not based on true orders fundamentals?


March Unemployment figures officially still show we are at a 9.7% unemployment rate. This actually may rise as people get hired causing those seekers to that gave up to re-enter the workforce.

I haven't written much about employment lately, but I am hearing some positive stories from friends through the country. Let me first highlight the Monster Employment Index for March. I've never referenced this item, but figured that I'd put it in. The Monster Employment Index is showing continued increases in job listings online, especially when compared to the easy comps of one year ago. Some would argue that the rate of change is not rapidly increasing from last month, however it is positive. I'm more inclined to be positive because this jives with what I am seeing and hearing from folks looking for work. They are saying that there are beginning to be more opportunities. These guys are not reporting that they have actually landed a new gig, but they are suggesting that it is close and opportunities exist where none did previously.

- Quote from the Monster Employment Index Summary -
During March, online job availability rose in 12 of the Index’s 20 industry sectors and in
13 of the 23 occupational categories monitored.


The Dow Jones Economic Sentiment numbers were released a week or so ago and we find that again we are seeing slight improvement in what the masses are hearing in news stories about the economy. I think this is a pretty funny study simply because it measures how many positive news stories are being fed to readers of the top 15 major newspapers.

I cannot cut and paste and reference the actual graphic for the study, but like everything March of 2009 was low and there has been a pretty steady crawl up and to the right since that time.

I will be interested to see how CFO sentiment improves to validate this study. It won't be out for several months, but I'll add it when it is posted.

Well, as you might have guess it, almost all of my trading gauges and indicators are screaming that this market's rise is overdone. I will make reference to a couple of items to demonstrate just how cautious we should be in the short run as investors seem to have become complacent and expectant that markets only go up. While this has been true for the last year with a few brief corrections, we all know that this market will continue to go higher till it doesn't. And when it doesn't, it will be pretty nasty.

Guy Lerner at has again put his charts into action and demonstrated that hedge funds and individual investors are "all in" and have bought with abandon. The "smart money" is neutral or slightly bearish meaning that you have two opposing forces in these trades. Typically, we see the retail investor (Mom and Pop---us) on the losing end of this trade. Guy has some great content and a really cheap subscription for trying to time the market in short time frames (1 to 2 days trades). I constantly use his work and suggest you read him daily.

I've also received permission to copy and link to a new site that includes a valuable indicator of market breadth. Lee Franzen at Lee has a subscription service (I don't personally subscribe to this one), as well, but he does provide some great tools that are updated daily for free.

Specifically, Lee provides an indicator similar to the T2107 indicator that is available if you are a subscriber to Telecharts. The indicator provides information about how many stocks in the S&P 500 are trading over their 40 day moving average. Typically we are looking for extreme values in this measure to indicate that we are over-valued or "overbought". Click on the image below and at the bottom right hand corner you'll see that we are clearly at extremes and many stocks are now above their 40 day moving average. Now just like everything does that mean that the never ending rally will conclude tomorrow? No, but it is just another signal that we may be topping. Thank you Lee for allowing me to reference your great site. Please check out his subscriber service to and let me know if you like it (I have no affiliation or compensation agreements with Lee, he is generous enough to share his hard work with us here).

(For the next few pieces of information, please bear with me - I don't have permission to copy these charts, but they are so simple and clear that they are worth the extra time necessary to click. I will see what I can do to get them to allow me to post their work here.)

Interest rates are rising. Check out this link -
We are going to witness increasing rates if all things continue as they have. Given that we are going to see interest rates move higher we must ask ourselves the question - "Can we really tolerate a move higher in rates which will cause a slow down in the recovery of the economy and housing?" The answer to this question is that we can only endure it if we are willing to trash the dollar to get there. Guess what - the Fed is willing to trash the dollar to get there! Everyone take a deep breath and sigh of relief!
This statement ultimately goes to what I was mentioning about the moves of the dollar. I perceive the move up in the dollar almost as though it was planned and rehearsed. The Fed wants to devalue the dollar but cannot make it look like a beeline downward. They must generate a zig and a zag a vibration or oscillation north and south to reduce the value of the outstanding debt and constantly newly issued debt. This is their only hope to move beyond what we have endured.
Of course you know the trades that will succeed in this environment if all goes as planned --- NON US ASSETS AND COMMODITY BASED ASSETS --- ALTOGETHER NOW!
EMPLOYMENT CHART - Here is a graphical demonstration of what we've been saying --- hmmmm all better?
Can these unemployed tolerate higher interest rates or mortgage resets or increasing credit card minimums? No.

Ok, so how does this all come together? The deal is that we have two powerful forces at work that are attacking one another. We have the FED in one side of the ring and they are flexing all of their weapons at this moment and in fact might even becoming confident and hurling a few insults at their opponent.
In the other corner of the ring we have Mr. Deflation (Mr. Mathematical Reality) and he is feeling a bit beat up. In fact, Mr. Deflation believes that the Fed is cheating and even probably has a horseshoe in his glove like those old cartoons.
The Fed (and his buddies) has used all of its tools to win this epic melee. The Fed and Treasury have devalued the dollar, printed trillions, revoked all semblance of accounting rules, purchased MBS and treasuries in the open market to control interest rates, and probably even purchased the sovereign debt of troubled countries or at least entered into swap agreements that allowed for hiding of distressed liquidity needs.
Mr. Deflation has also battled well. He has reduced the value of almost every home in the United States, he has caused record bankruptcies, he has caused the consumer to briefly come to their senses and live within their financial means, he has cause US citizens with jobs and money to actually pay down debt, and cause a reduction in home sales and car sales that required "CASH FOR CLUNKERS AND CASH FOR HOUSES" to be rolled out to salvage what was left of two industries.
So who wins? The simple answer is I still don't know. The FED is resilient and in the short run has access to powerful weapons and Ben Bernanke is not afraid to use them. In fact, he knows he better use them because in his mind there is no losing. Losing is similar to death and he won't have that!
Picture the scene in the Godfather where the gangster screams "Say hello to my little friend".... Well Benanke has a little friend too and his little friend is the printing press. The Fed is absolutely convinced that deflation is death and they will destroy the dollar to avoid the gripping destruction that Japan has faced for two decades.
Ultimately, in the long run, I believe that Mr. Deflation wins. Just ask our Japanese who is tougher - a central bank that protects corrupt bankers or a deflationary force that requires justice and a honest evaluation of how much bad debt a country can absorb and still grow.
I was asked what I thought the catalyst for Mr. Deflation winning or at least beginning to steal some rounds recently. The answer is that it could be several things at once. The synergy of rising interest rates, tougher lending standards that shift downward the demand for housing, more sovereign debt issues (think Spain, Portugal, and Ireland---don't forget Dubai), crushing debt and US deficits, or even a collapse of a bubble in China or other emerging market economy. Remember ALL countries are trying to recreate the fantasy land of 2006 & 2007 and it isn't just the FED that has a printing press. Ultimately most countries are also trying to devalue their currencies.
I ask you. What specifically has changed in the last 1 year? Have banks written off all of their debt? Have they evicted all of those owners that are in foreclosure? Have banks written off their worthless HELOC balances? Have we begun to enforce real accounting principles? Have we regulated CDS as insurance? Have we received back all of our investments in AIG and Citibank and Fannie Mae and Freddie Mac? Have we returned the last two to solvency or are they simply bankrolling terrible mortgages that will never be repaid?

My guess is that nothing has really changed beside the upward recovery of the stock market. At some point the smart money will decide to go short the market and they'll pull the rug out from under Mom and Pop and leave them utterly burned for the 3rd time this decade. Unfortunately this time their assets will probably be destroyed in the process.
Does this mean that the party is over? No - in fact for this entire year I suggested that this rally may continue through May. We need to harvest gains in the portfolio and position ourselves in sectors and industries that have improving fundamentals that have lagged the others. The idea is that these will not correct as much and probably gain as investors search for value.
I do not have a specific trade to discuss this month. While I do like a few charts I will wait for break outs that are significantly above their resistance if we go higher to confirm the move. I don't like the risk/reward here even though many fundamental factors are showing continued improvements.
BE VERY CAREFUL - friends I speak with have almost forgotten the word risk and that can only mean that we are due for a correction. This may be a great opportunity to add as we pull back.