Tuesday, June 29, 2010


Just a note as I'm still trying to get back in the swing of things after returning from Florida.

Just as we saw in October of 2008 we are seeing a move in Treasuries that is abnormal.  Buyers of Treasuries in size are typically NOT Mom and Pop (although I bet we have more Moms and Pops in there than 1 year ago).  Just as we saw in 2008, bad things happen when lots of people are willing to put their money away for 30 years and receive 3.94% or sock it away in the 10 year for 2.95%.  Although when put in contrast to the money market rates or savings rates they get in their checking account it's great right?

This move in treasury rates is not good and I will be watching the bond market for additional signals that confirm this breakout.  This is not a moment to be a hero and take on a bunch of extra risk.  In fact, if we do get some sort of stock market rally, it must be used as a opportunity to unload some long positions.



Well, Goatmug survived a well needed adventure to Disney World with the family.  As he battled with crowds and the Florida heat he was able to coax his kids to ride Space Mountain twice, Splash Mountain twice, Big Thunder River once, and Expedition Everest at Animal Kingdom 3 times.  Clearly the Goatmug family is comprised of roller coaster junkies.  The break from staring at charts all day allowed me to refresh and get a renewed picture of where we are and where we are going.  I don't have much time to write right now, so I'll leave you a taste of two pictures that probably say as much about what I think will happen as writing my normal long winded rant.

Where do I think we are going in the next 6 to 8 months?

Goatmug, that is a lovely picture of poor saps descending into terror, but is there something that you can produce that will help give us a tangible outlook for where the markets could go?

Well of course.  I pulled S&P 500 Data from Robert Schiller's website which I frequently use to look at P/E ratios.  http://www.irrationalexuberance.com/  I created a graph and added a note of how deep I believe this move could be.  The combination of economic headwinds, political leadership (lack of it), and the risk of a national debt default give me more confidence to show this picture.


Well As usual my blogger editor did strange things to my chart and deleted the embedded comments.  Note that we had the peak of 1929 and then the fateful crash.  We recovered from the lows driving up around 25% or so into April of 1930.  The market dropped almost without pausing through June of 1932.  During that period almost 84% of market valuation was destroyed.

I had an emailer send me data on the ERCI Leading Indicators information showing that growth is declining.  I could only respond by saying, YES, that is what we have been commenting for several months.  Today's Consumer Confidence numbers are only parroting that information.  Consumers know that things are bad and jobs are not coming on line.  This double dip I've been speaking about is about slowing growth, poor income levels, rising debt levels, rising defaults (consumer and commercial), and a lack of real job prospects (not government fake jobs!).  Oh yes, and a cliff dive on the housing recovery.  Sales, prices, are going to go down while more foreclosures are going up.  This is no mix for a recovery.

The only thing I can say is be looking for more STIMULUS!

More to come soon, buckle up.  I'm still sticking to my 950 on the S&P 500 projection here, but may need to build a fundamental and technical case for year end at 825 or so.    I also have a 1/2 year review on my Annual Projections.  My results are mixed so far, but some of the projections were so dour that I'd happily report if I was wrong.

It's good to be back.


Monday, June 14, 2010


Duke and CFO Magazine have again released their CFO Survey.  As I always state, the CEO is the sales man and the CFO is the guy we need to pay attention to.  (Yes, I'm biased I worked in Corporate Finance for years).



CFO SURVEY--Chief financial officers in the U.S. say they have limited plans to hire over the next 12 months, although nearly 60 percent won’t return their staffing to pre-recession levels until 2012 or later. Benefits and wages also remain at reduced levels at many firms, and credit is still tight for small firms, which is hindering hiring plans and constraining growth.

GOATMUG INTERPRETATION- Ok, get this.  The recovery is not going to include hiring.  Only 40% of CFOs are projecting getting back to pre-recession levels (if everything goes well) by 2012!  Oh yes, and if you still have a job or will be one of the lucky ones getting rehired, you might expect lower pay or reduced benefits.

CFO SURVEY--The recovery is not completely stalled, however, as CFOs predict strong business spending and earnings growth.
GOATMUG INTERPRETATION - Businesses are hoping and praying for a rebound although they are not confident enough to bet on it (hire).  As I've mentioned, my belief is that during the peak crisis months company's quit reordering to replace inventory.  Ultimately we had a situation where firms HAD to reorder and begin acquiring materials for their products just to replenish them.  We've done that, now let's hope we have someone to buy all of this new inventory.
CFO SURVEY--Borrowing conditions remain tight, with roughly an equal split between firms reporting that credit conditions have tightened and those saying credit has eased. One-third of micro-firms (100 or fewer employees) say credit conditions have worsened in the past six months.

GOATMUG INTERPRETATION - Lending is still a problem?  Either banks aren't lending or the loan officers are suddenly looking a realistic levels for debt and requiring firms and borrowers to actually be credit worthy.  I think this is got to be a very accurate piece of data in that I'm sure 50% of the firms are actually decent credit risks while I'm sure another 50% are scary and probably don't deserve the lines of credit they previously consumed.  I guess this is why we see that credit is actually worse than 2009 in many cases.  I'm sure there will be a rollout of a new Federal loan program that loses billions of your tax dollars to bail out credit starved firms that "deserve" all the credit they can handle.

CFO SURVEY-- Earnings are expected to rise 12 percent and capital spending 9 percent in the next 12 months. Research and development and tech spending will increase 4 to 6 percent. 

CFO SURVEY - The top two concerns for U.S. CFOs are weak consumer demand and the federal government’s agenda. U.S. CFOs, who expect to raise the prices of their products by 1.5 percent, are also worried about price pressure from intense competition. Maintaining employee morale is among the top company-specific concerns.

GOATMUG INTERPRETATION - Wait a minute, we have growth forecasts and profit expansion predictions, but our top concern is the anemic consumer demand and the not so invisible hand of the government?  On top of that, CFO's say that management can't raise prices because price competition, these guys are trying to spin this.  I'm not buying it and I don't think they even believe it!
CFO SURVEY - Health care costs also have reappeared among the top four concerns for U.S. companies, with corporate health care payments expected to rise 8 percent in the next year.
GOATMUG INTERPRETATION - Healthcare costs an issue?  Just wait for 2011, 2012, 2013, and 2014.   That is 4 and 1/2 years for the insurance companies to prepare (increase prices) for the national healthcare system.  Employers with 50 or more employees will suffer most in the business community right along with the tax payer.
All in, I don't think this is a very positive report.  This should be a report that suggests that CFO's are seeing increased momentum and better long term visibility about revenue growth and margin expansion.  We should not hear that CFO's are concerned about weak demand and a lack of pricing power.  In addition, boards and executive teams are worried about our government's plans for business.  It is incredibly hard to predict and create strategic plans when you don't know where big government will decide to regulate or takeover within the business world. 
A closing word on credit.  We are really hearing two stories when it comes to credit.  Strong firms are being lavished with amazing opportunities to borrow at ridiculously low prices (interest rates).  In fact this will be a monster year for highly rated corporate bond issuance (at least so far year to date).  This is driven by the fact that overall the FED and central banks have lowered the alternative lower risk yield so much that investors are DRIVEN to take more risk just to outpace inflation.   On the other hand, smaller firms or high yield firms are facing tremendous problems funding their operations and rolling debt.  Europeans are also having a terrible credit funding year.  The market has dissected the risk and is punishing poor creditors (forcing them to pay much higher rates) and rewarding good creditors (giving away cheap money).  At least the system is starting to appropriately price some risks! 
I think the CFO's are hedging their bets and remain totally cautious because they know that demand is falling and they may have one more quarter of upside and then down we go.  June's update shows that the rate of change on many metrics is absolutely falling and the actual real levels have also dropped from their peaks.  No amount of government stimulus is working and the economic disaster in the Gulf will only increase the speed of the double dip.  We had all better be praying a hurricane or tropical storm does not form in the Gulf. 
Having said that beware, our government is still involved in the house bubble it is trying to reflate.  Hence we see a tremendous mispricing of residential home mortgages where we can obtain a 30 year $400,000 loan today for at 4.8% in Baton Rouge, LA with zero points!  They will attempt to roll out any plan to keep the plates spinning.  I fully expect the Fed and Treasury to execute Quantitative Easing Part Deaux within one or two more months.   They will blame it on the crisis in the Gulf as we remember that they never waste a good crisis.
This market is and has been really hard to trade.  If you are a short term trader, you are being ground up as moves of plus or minus two to four percent a day will ravage you.  If you are a longer term investor you are either back to where you were in August of 2009 or have been crushed if you bought after that period. 
We could still see a rally here to the 1140 area, but I ultimately believe that we'll end lower for the year.  I've made it a point to highlight those posts that are simply suggesting that you get out of the market because you need to see these.  If you don't get out, you need to have some protection in investments that will get you out if possible or at least earn you interest or dividends despite things going down (dividend paying stocks or bonds).  Several indicators I watch are beginning to confirm a rollover in the market and if we end June under 10,000 in the Dow, we'll have a confirmation.  These are traditionally very long term signals too, so I'm sitting up in my chair and waiting for them to trigger.  If they don't trigger, I'll still be sitting up watching.  Be very careful.  The Dow was up today almost 80 points and then ended down  20 - just another 1% reversal - nothing to see here!

Friday, June 11, 2010


Ok, let me plainly state this.  The US government is not to blame for the BP explosion or spill.  The point of my last post was that the US government has been championed by liberals and Utopians as the character of almost mythic proportions.  The idea is that the government can ride in on its brilliant white steed and rescue us from all that impacts us or is not fair in life. The point I'm making is that there really is no magic government that does everything perfect and mops up messes created by nature and greedy capitalists. BP was and is terrible, but holding our collective breath for government's perfect execution of a plan will only end up in us turning blue.

A comment was made on the blog that the FED wasn't really to blame for much of the trouble, just those darn borrowers.  In other words, the Fed just followed what the markets were telling them and set rates accordingly.   I totally disagree. While there may be some truth to the statement that the FED follows what prevailing market conditions expect in terms of rate setting policy, we all know from just very basic economic theory that the maximum impact from central bank policy can be derived by surprise movements to "shock" the market. The FED is supposed to be better than Joe 6 Pack and even better than Wall Street and soften recessions by providing low rates and liquidity and curtailing expansion by raising rates and pulling back cash from the market. The "super human" Fed tells us that they can manage markets until you put them on the spot and then Bernanke and Greenspan squirm and state that they actually couldn't see any trouble coming.

And again, that goes to my original point. If the Fed cannot see bubbles forming and doesn't take it's role as the BAD COP in good times seriously when things are getting red hot, what good are they? They are to be the adults in the room when all the greedy kids are on Main Street and Wall Street.  The kids are not mature enough to manage themselves and that is why we are told that we need the adults (Fed).

The the entire decade, the Fed kept rates extraordinarily low too long and even beyond that, the FED had regulatory power to put the breaks on lending practices and cool down the overheating housing market. The Greenspan strategy is clear, it saw the asset bubble building and either ignored it, kept fanning the flames, or was too stupid to realize it. Their policies (whether following the market or not) were the cause of subprime. Yes, borrowers too were to blame, but the drug dealer has a part in every drug addict's addiction.  I saw the House of Cards documentary on CNBC the other day - where a subprime foreclosure victim stated it perfectly. She is to blame because she was stupid, they are to blame because they were just greedy crooks. I think that statement accurately describes the FED as well.

Wednesday, June 9, 2010


I haven't hidden my thoughts about the oil spill and its ultimate impact on the Gulf Coast.  I believe it will be devastating and we can lay the blame right at the feet of BP.  I have heard that they did not have proper safety equipment or redundant systems in place to stop this blow out - I can't confirm or deny that, but rather than linger on who is to blame, we unfortunately have the results that continue to billow up in the form of barrels and barrels of crude. 

I feel so badly for those that are fishermen, hotel owners, and anything that has to do with the vacation industry.   I think the image below says everything.  So far, many have received a small bit of compensation, but let's face it, many will be put out of business and no amount of "compensation" can replace a person's way of life.


ORIGINAL CAPTION: River Shay, 13, stands in the front yard of his camp with his dog "Smash", while his father Patrick Shay, a seafood business owner from River Ridge, Louisiana, digs grave sites "In Memory of all that is lost courtesy of BP and our Federal Government," at their fish camp in Grand Isle, La, on Memorial Day, Monday, May 31. (Sean Gardner / Reuters)

So there you have it, the accident in the Gulf will destroy many industries and put much of the Gulf into a recession, but I've been pondering what other things the spill is going to do.  As with any big "black swan" event, many first looked for our government and President to step forward and resolve the issue (cause that is what we do when you are in a Nanny State).  I guess it is that so many people think that because the government has access to an unlimited checkbook (not unlimited really - we'll soon find out), that it can swoop in and save us from anything.  Perhaps it is because our politicians and the government tell us that it can do anything and has the answer to all the things in life that are wrong or unfair.  Perhaps it is because we are looking for a savior, or we as a nation are just soft and think that someone should bail us out when ever we get in a mess.  Heck, if you remember back to the election with the woman that flat out stated that Barrack Obama would pay for her gas and her mortgage when he became President (wonder how she's doing now?).  Since I'm writing this, I'm guessing that you might know that I have a different opinion.  I believe that government's actions are often the very cause of many of our problems.

In fact, I think recent history shows us that actually government is not able to perform well as a savior in any respect and in fact is just a huge consumer of time and energy.  Let's think for a moment when we've drawn on the resources of the US government to save us.

2007-2008 (Financial Crisis) - Despite the fact that the Fed helped cause it  / NOPE - Current cost is greater than $2 Trillion and we are still discussing how we may be in a double dip recession and how the world's credit markets are worse than they have ever been.

2005 - Hurricane Katrina - This for me is the big one.  This event was George Bush's Waterloo.  The entire country looked at the government to save New Orleans from the hurricane only to find that the government could not manage anything.  The scope of the problem was so large and the complete collapse of local government destroyed the ability of the federal government to manage this situation.  Clearly lack of planning and total corruption of local Louisiana government complicated matters.  No matter the reasons, the federal government received an F for its handling of the crisis.

Finally, we have this terrible environmental destruction.  Obviously the government doesn't have the equipment or the expertise to take over and plug the leak, I don't expect them to.  The point of my discussion here is to highlight that what we are hearing is the government should "DO SOMETHING" and our President tells us he needs to know "who's ass to kick".  No amount of regulators or moratoriums will help "fix" this situation in the gulf.  The reality is that I'm shocked that big leaks like this haven't happened before.  I am not looking for the administration to do anything, but ensure that the Coast Guard has the ability to coordinate the cleanup.  Seeing the President in Florida and Alabama for the third, fourth, or fifth time does nothing to impress me.  Cries for him to show his outrage are a waste as well.

Ultimately, when we do not have expectations, we are not disappointed.  I think this is the issue that we are seeing come to a head....again.  The BP catastrophe is destroying the Gulf and the false idea that government is the answer to anything. 


Friday, June 4, 2010


I normally don't post my monthly fundamental updates on anywhere except this blog, but we have entered a critical part of the year and so I submitted the post to http://www.slopeofhope.com/ first where it has been up a day or two.  As many know, I have suggested that summer would bring a significant correction as the grips of the deflationary forces embedded in the system really take hold. As central bankers attempt to remove stimuli or the efforts lose effectiveness, deflation will prevail. As things have played out, we seem from many fundamental points to be just coming out of the worst of things. Unfortunately what we are seeing is that the rate of change of improvement is falling and indicating that we might be headed directly toward that double dip recession many of us have trying to identify.


Before plowing into the charts I wanted to make a comment about the oil spill fiasco. There is no doubt in my mind that BP royally fouled things up. Their mistake cost people their lives and has begun to damage our coastlines and fisheries. The economic survival of many along the Gulf Coast are in jeopardy as the disaster's impact is felt throughout the region. Fishermen, hotel owners, and restaurant owners have been hit the hardest and significant regions have not even had oil landfall yet.

In an effort to attempt to look like it is managing the situation, the government has mandated there will be a 6 month halt of exploratory drilling in the deep water of the Gulf of Mexico. Already, Chevron and Exxon have stopped two projects. The administration's steps to curb deep water offshore drilling and exploration projects will have the effect of doing what the 2008 recession could not do; sink the Texas economy. Houston and other Texas cities have survived the downturn much better than most. The impact of shuttering exploration won't just hurt the largest firms, but all of the small firms that consult and serve the majors. Ultimately we will again see the largest attack on small businesses that seem to always bear the brunt of the Obama administration's reactionary steps.

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

The last two weeks have begun to show a slowing of the growth and improvement in rail shipping tonnage. I like to examine rail tonnage because we can get a feel for where the economy might be headed. Year over year comparisons are now quite easy but it is the weekly rate of change I'm watching. Remember, it was the rate of change that was lauded in the "bull market recovery", let's keep watching the rate of change in the retest.

I like that Railfax breaks out these components (lumber and crushed stone) because they are the inputs for commercial and residential building. We have seen an increase in building permits for both types of construction, and the move up in crushed stone shipping does back this story up. Lumber doesn't tell the same story though, and therefore we need to continue to watch this. It is important to note too that lumber prices really took off earlier in the year and have corrected significantly.

What is causing the softness in the lumber market? Lumber futures have fallen around 23% since April. Is softening demand for construction putting a damper on lumber and their rail shipments? Does a permit mean a real project?
I normally would put up a chart of the tonnage of one or two of the individual rail carriers, but none of them are showing out performance from each other or from recent weeks. Of course year over year comps are easy, but the recent moves up have stalled. This data has helped me make several low risk trades when combined with chart reading to find good entry points. I'm not seeing anything compelling from the fundamental perspective that makes me want to jump in.


The government just released it's SNAP details or the number of folks participating nationally in the food stamps program. The release adds the data for the month of March. There has been turn in food stamp recipients, in fact more than 40,150,000 of your friends are getting their milk, cheese, eggs, and other groceries courtesy of your tax dollars. The average family takes in $290 a month in assistance.


The National Association of Realtors' index of pending home sales jumped 6% in April, beating estimates for growth of 5%. The jump in contracts is thought to be due to home buyers locking in the tax-payer give-away of money for home buyers as the tax scam expired April 30. Any guess we'll have a decline in sales over the next few months once this round of stimulus closes the contract process in June?

MIT CENTER FOR REAL ESTATE - MOODY'S / REAL COMMERCIAL PROPERTY PRICE INDEX -  http://web.mit.edu/cre/research/credl/rca.html

Commercial property prices had a move up, but have resumed their drop. The strong dollar has put a stop to all of those foreign buyers rushing in to buy properties. Financing is also a bit tough to come buy as terms for deals include as much as 30% to 40% down. Deal mechanics don't look so good when leverage isn't so leveraged.

ECRI LEADING INDEX - GROWTH RATES - http://www.businesscycle.com/resources/

Weekly leading indicies from ECRI show a sharp decline in growth rates. As I've stated many times, the ECRI (WLI data) and the Bloomberg Financial Conditions Index are really subject to monetary liquidity measures and now stock market moves. How many times have I stated that the Fed realized several years ago that the stock market WAS the economy? Notice the acceleration of the decline of the growth in the last two weeks?

WLI DATA VS S&P 500 - http://www.businesscycle.com/resources/
I've graphed the WLI data here versus the S&P 500.


Here is a smoothed long-term version of the same data. WLI peaks indicate a recession. Before we jump to the conclusion that WLI levels around this 130 area indicate that markets will head south, be careful. The WLI stayed in this area and above for close to 5 years in the period from 2003 to 2008.


FINANCIAL CONDITIONS INDEX - BLOOMBERG - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

The Bloomberg Financial Conditions Index is another data point I watch. Levels above 0 show that the economy is in an expansion phase while points below 0 indicate we are in recession. May's reversal seems to tell us that we may have had a brief exit from recession but someone ordered a double dip of pain.


  1 WEEK LIBOR - STILL TRADING AT 33 BPS  ( http://www.homefinance.nl/ )
Does yesterday's 200 point gain make everything all better? Not according to 1 Week Libor. Bank stress levels remain high as compared to last month. We've seen a few days of little change as Europe and the ECB is attempting to stabilize the situation. LIBOR is the rate that banks lend to each other. In the absence of a rate hike, upward moves in LIBOR suggest there is anxiety in the financial system or liquidity issues.

USD - BLOOMBERG - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND
USD has continued its move higher and it took a breather today. I will write more in coming weeks about the real problems that the strong dollar, weak euro, and strong yuan are going to create for global trade and recovery. China is really going to suffer as the declining euro pressures Chinese manufacturers to cut their margins even more. China will absolutely not allow the yuan to appreciate no matter what they say publicly.

Spot shipping rates continue to form higher highs and higher lows since the end of 2009. Despite the moves up in the index, shipping companies stock prices don't look as good. LEVERAGE KILLS.

I have been playing around with indicators for quite a while and have looked at the Coppock Indicator for months. In truth, I had almost forgotten about it altogether and said that it was a poor indicator because it typically signals a turn well after a significant move. The indicator is really a 14 month average of index prices. As a turn approaches the rate of change slows. If the DOW closes lower than 10,000 in June, the indicator would have signaled a turn (yes I know the market has fallen 15%!). Obviously there can be false signals, but I include this in here just because it has highlighted areas to watch as price momentum turns for extended periods.

SHILLER DATA - P/E RATIOS vs LONG TERM INTEREST RATES - http://www.irrationalexuberance.com/
I wanted to include these two charts from the Irrational Exuberance website from Robert Shiller at Yale. Of importance here in the first chart is that P/E's start to rise when interest rates are declining. While we could have a crisis of confidence in debt and equity markets (really?) that might spur dropping long bond interest rates, we seem to be about as low as one might expect with some invisible hand intervening. What I'm getting at here is that we will not have much of a catalyst for rising P/E ratios in our current state because we've already had the boost from a drop in long bond rates. This "juice" came in the form of low rates in 2001 resulting from the 9/11 attacks and the subsequent Fed policy injections from the sub-prime meltdown.

With that same context, we see that we have had a surge in P/E ratios and are back above the long term average. While we could see a move higher, from a fundamental perspective I don't know where we'll obtain the higher E's. Perhaps the higher P's will come courtesy of the FED's balance sheet?

I usually end the monthly post with a trading strategy to start the month off right. As you can tell from my comments I believe we are heading down through the end of the year. We've had a significant correction and are due for a move higher to attempt to retrace the loss of 12% from the highs. I've been posting that I would use that as a way to exit positions and get short. I think retail sales will be greater than expected and also the employment picture will show more upside surprises this week. These will be catalysts for a bounce. In my opinion the bounce may not last long though as now even good news is being met with selling which is a fundamental change from the last 14 months. Can you blame them either? Who wants to risk holding stocks over the weekend on the chance of a Greek or other sovereign default.

The fundamental data all tells me that the stimulative effects from the Fed and government are waning and the result is a decline in the growth rate or even drops in the actual reported metrics. A double dip of pain is in our future. CPI data releases are showing that inflation is muted, therefore all commodity related long trades need to be exited. I personally will avoid gold and silver until I see gold back at the $1050 range. I'd be negative on oil too, but with the geopolitical tensions in Korea and Iran, I will simply stay away from the trade.