My personal opinion is that we actually will break out above this channel and at that point I will add those emerging market stocks I've mentioned. Until then, I will watch this trade.
GOATMUG
Thursday, July 29, 2010
WHAT I'M WATCHING -
Here is the long term weekly chart of $SPX. I'm watching this critical downward channel. If it holds, then we could see lows down to 925 or so. If the $SPX can rise above the channel, we could see levels as high as 1140 or even 1220 by the end of August.
My personal opinion is that we actually will break out above this channel and at that point I will add those emerging market stocks I've mentioned. Until then, I will watch this trade.
My personal opinion is that we actually will break out above this channel and at that point I will add those emerging market stocks I've mentioned. Until then, I will watch this trade.
Friday, July 23, 2010
WHAT WE'VE GOT HERE IS A FAILURE TO COMMUNICATE
(As usual, please forgive the weird spacing issues on this site - The Blogger Editor is up to its old tricks again! I've tried to fix the spacing issues by placing dots and bullet points to make the site readable.
We did recover right?
Declines of this magnitude are absolutely indicative of a recession. Now as I've mentioned, officially the NBER has not called the recession over, (I guess they have mental images of President Bush on the aircraft carrier), however by any stretch of the imagination economists should have declared the recession over with the managed recovery we've had. Of course little things like employment and housing that have not recovered shouldn't stop a few economists and administration officials from stating the obvious right?
IF they did declare the recession over, this data would tell us that we were going to double dip with all doubt removed. However, now that our friends have held off from declaring victory we may have the fabled L shaped non-recovery.
I'll leave you with the optimistic quote of the day from someone on CNBC right after the release.
"It's not that the banks are failing, it is that the banks have failed a level of stress, and they are taking steps to improve it".
Yes, I guess that is one way to look at it. To test how this view works with other applications, let's run it through the British Petroleum version of the stress test.
GOATMUG
We did recover right?
- ECRI DATA - http://www.businesscycle.com/resources/
Declines of this magnitude are absolutely indicative of a recession. Now as I've mentioned, officially the NBER has not called the recession over, (I guess they have mental images of President Bush on the aircraft carrier), however by any stretch of the imagination economists should have declared the recession over with the managed recovery we've had. Of course little things like employment and housing that have not recovered shouldn't stop a few economists and administration officials from stating the obvious right?
IF they did declare the recession over, this data would tell us that we were going to double dip with all doubt removed. However, now that our friends have held off from declaring victory we may have the fabled L shaped non-recovery.
- RAILS - http://railfax.transmatch.com/
- EUROPEAN STRESS TESTS - STRESSED NO MORE?
- LIBOR -
"It's not that the banks are failing, it is that the banks have failed a level of stress, and they are taking steps to improve it".
Yes, I guess that is one way to look at it. To test how this view works with other applications, let's run it through the British Petroleum version of the stress test.
Say this with me ------"It is not that BP is failing to be a good company and manage the environment effectively, it just failed a level of stress, and they are taking steps to improve it". Feel better about the Gulf of Mexico don't you? I thought you might! Perhaps I'll begin to look at all failures with this view! It's not that they have failed, it is simply that there is a failure to communicate!
GOATMUG
Mid Year Predictions Review & Trading Update
2010 PREDICTIONS REVIEW
Well, we are more than half way through the year. The market, if you can believe it, is just about even with where we started, and there is only one word to describe the action, volatile. If you are trading daily and you are lucky, you are probably breaking even. If you are not lucky, you are being ground up in the daily, unreasoned swings that occur because the high frequency trading computers run the show. Call them Skynet (Terminator reference) or Hal 9000, they are doing a job on most active traders. Unfortunately those that are buy and holders aren't doing any better. Is it any wonder that treasuries and corporate bonds are the best performers this year?
I have been busy on several projects and that has kept me from writing, but I have had this topic on my mind to review where I thought things were going. I really love looking at this because it provides great information as to how right and wrong one can be at the same time. It also allows me to tweak my longer term thesis and review if there has been a significant change that has an impact on my outlook.
Let's jump into it shall we?
INTEREST RATES - (-1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Ok, interest rates on the 30 year are more like 3.95% so we don't look like we are in danger of hitting my more reasonable 6% target. So why are we not at a reasonable 6%. I think for two reasons.
A) There is still tremendous fear in the market and investors would rather buy certainty (that they get paid back their money) rather than risk it in the markets.
B) I think that there is actually a level of true Quantitative Easing being done despite the fact that it officially has stopped. What I saying is that there have been a number of buyers of treasuries that have been buying in size that don't really typically opt for these instruments. So while other buyers of our debt have reduced their consumption, the United Kingdom somehow has stepped up mightily and has purchase somewhere near $200 Billion in treasuries over the last several months. These guys are massively mired in debt and running deficits. Where'd they get the cash to buy our T-Bills?
Doesn't matter, I've missed it so far, and frankly, I've changed my tune on this one, we won't see those 6% rates till there is a shock where investors absolutely shun the USD and Uncle Ben will do anything to stop the move up in rates, cause he has to. I expect that we will see a 30 year mortgage at 3.5% by mid 2011, so give me a -1 to start out the 2010 Predictions Mid Year Update.
QUANTITATIVE EASING - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - We as you look above, the question really is, did they really stop? I would bet they haven't, and we'll actually see more public admission that they are going to publicly do it. Uncle Ben this week in his testimony on the Hill stated that they are committed to extraordinary steps to keep the fragile economy afloat (my words not his, but that was the meaning).
HOUSING - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - I think this pretty much was nailed. Check out today's report by NAR about the surge in predicted annualized sales through April and guess what, it is going in the tank. Ummm, look at that inventory build there too. Isn't government stimulus effective?
Annualized Sales Data from NAR - http://www.realtor.org/research/research/ehsdata
MONTH Annualized Sales Supply
2009 Dec 5,440,000 7.2 Month Supply
2010 Jan 5,050,000 7.8 Month Supply
2010 Feb 5,010,000 8.5 Month Supply
2010 Mar 5,360,000 8.1 Month Supply
2010 Apr 5,790,000 8.4 Month Supply
2010 May 5,660,000 8.3 Month Supply
2010 Jun 5,370,000 8.9 Month Supply
CURRENCIES (-1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - We haven't seen this yet, but effectively, the rise in the USD has helped prevent this situation. If we see Geithner and Uncle Ben resume the significant devaluation in the dollar as a measure to inflate and get us out of this mess, we will see these in the back half of the year. I'm conceding this as a miss. Note that Argentina is essentially defaulting on debt to bondholders by forcing an exchange, it isn't a currency adjustment, but sure is sucky if you're told to take new bonds (less bonds).
EURO - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Problems in the Eurozone will not go away even if they can pull off a US style sham with the bank stress tests. They still have major issues of spending too much and promising too many benefits in the nanny state. Need a preview of where our government is taking us? Look no further than the week Euro, out of control spending, and a detachment from math that is temporary. Ultimately Europe and the Euro fail.
YEN - (-1)
I SAID - 1/3/2010 - The dollar will strengthen against the yen.
REALITY - 7/20/2010 - Hasn't happened. The Fed and Treasury have had been luck keeping rates low and Japan has not been as effectively using QE as I thought relative to the US. Remember, this is a race to zero and Japan has been in deflation for 20 years. I will patiently wait for this, but they are clearly worse than the US.
GSEs - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Ok, I'm not sure if this was really a stretch in predicting anything. These companies are toast, and we the US taxpayer are unwillingly footing the bill for complete insanity.
LENDING - (+1)
I SAID - 1/3/2010 - Small business lending and personal credit will continue to decline through 2010.
REALITY - 7/20/2010 -Lending is still extremely tight. The administration and Congress just past legislation in an attempt to get small business lending going. While I applaud this, this probably means an abandonment of conservative lending principles and we'll see losses in this area of government generosity as well.
GOLD (No Rating Yet)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Gold is still at $1192 as of this update (7/23). The gold market has not dropped as much as I anticipated, but certainly hasn't ramped up higher. I am still looking for the move down to the $950 to $1,000 area though after an anticipated ramp up again. You could potentially buy it and then sell it higher, but you face serious risks in timing it.
EQUITY MARKETS (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Pretty right on so far, but I would actually look for a move up in markets over the next month or two and then a slide down in the months of October and November. There will be no rate increases by the Fed.
FOREIGN POLICY - (No Rating)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Tensions are mounting. The longer we languish economically I believe we will see an increase in tensions in the Middle East.
OIL - (No Rating)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Oil is now back up to $79. A move to devalue the dollar any will result in meeting my $100 projection.
US POLITICS (No Rating)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - This looks as though it is moving in the direction I thought, however, I am looking at the impact of the Tea Party Movement which is being marginalized by it's inability to speak through the labels that both the Republicans and Democrats are throwing on them. Unfortunately the Republicans have swept in and made efforts to identify with the Tea Party (and I'm sure some do), but the cost of allowing Republican incumbents to take the Tea Party mantle is that there is no real and lasting change and you continue to have the same political elites in power. In a sense for me the Tea Party movement is about new leadership and fiscal responsibility, not the same old structure and system with new faces.
SUPREME COURT - (+1)
I SAID - 1/3/2010 - Obama names a replacement for Justice Ginsberg who retires in 2010.
REALITY - 7/20/2010 - Ok, that was an easy one.
HEALTH CARE REFORM - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Yes, this reform was passed. We do need change, but this is a mess and more importantly, it is a financial mess. I've written at length that the cost is out of sight and I am not being over the top. This is a disaster. Abortion is a component of this bill and despite the "Executive Order" lie that was provided by our president, we are paying for these with tax payer dollars. I have rethought my notion that the Supreme Court will strike down the legislation. It will not, this system is here for good. The losers are the US consumer and tax payer, the winners are big government advocates and big pharma.
NATIONAL SECURITY / PERSONAL RIGHTS (+1)
I SAID - 1/3/2010 - 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).
REALITY - 7/20/2010 - Little erosions continue. We have now discovered in the health care bill that all purchases made by businesses over $600 must be recorded and issued a 1099. This is far reaching and an encroachment of personal privacy. The impact is also being felt by gold and silver dealers that now must record and issue a 1099 on all purchases of gold or silver in excess of $600. What is the purpose of this? Tax revenue generation, but also a deeper view and insight into the personal transactions of the person in the US.
OK, thats a wrap. For those of you keeping score at home, the mid-year update has a score of +6 total. The tally looks more like this. +9 Correct right now. -3 are incorrect now. 4 with no rating. So 9 out of 17 so far. This isn't about being right or wrong, it really is about making a statement of what I think will happen and why.
TRADING UPDATE
Over the last several months we've seen markets trade within a 200 point S&P500 range (20%). As of completing this post today, we are waiting on the European stress tests to come out and convince us that all European banks are healthy and the markets should feel really good about the global economy and recovery. I personally believe that we will rally for the next month or so and then more reality will set in. I've written a lot about the possibility of a double dip recession and what is interesting is that we've had no formal announcement from NBER that the recession is even over. I guess this is a way to hedge your bets and state that there is no double dip - you just never get out of the quicksand in the first place.
I've been laying the ground work for a strategy on the next drop in markets that I will employ and I'll share just a few thoughts about it. US growth is estimated to be a 2% to 3%. Emerging market growth is obviously predicted to be much higher somewhere in the 8% to 12% range. These countries would includes Vietnam, Malaysia, China, India, Brazil, and more.
As we look at this, you must ask yourself where you think the best stock market performance is going to be. Obviously, you would expect many of these countries to outperform.
How do you put it together? First, the easy one, you simply buy those countries. Second, if you want to give yourself some protection, you could take steps out short US and go long these countries in a relative value trade, hoping that the countries go better. This gives you some downside protection if they all go down, but you will still suffer. Ultimately, I think very long term, this will be a home run strategy as millions and millions of new world citizens rise to the ranks of the middle class. This also makes sense on so many levels as it removes our dependency on our government to actually make responsible decisions and somehow navigate us out of the mess we are in. If, as the Fed and Treasury desire, they are able to devalue the USD, you'll also win on the currency bet side of things as well. If deflation in the US takes hold, this strategy my hurt you on the currency side of things as the USD rises in value, but you will hopefully also receive rewards from getting out of the US equity markets into ones that actually will grow.
Ok, enough rambling on this post that has taken a few days to write. I will develop the relative value trade more and put out some charts to examine. I'll also do something on gold. I've thought for a long time that our government would do everything in its power to stop the gold increase and I believe the healthcare bill is just one step to crush the move higher in gold long term.
GOATMUG
Well, we are more than half way through the year. The market, if you can believe it, is just about even with where we started, and there is only one word to describe the action, volatile. If you are trading daily and you are lucky, you are probably breaking even. If you are not lucky, you are being ground up in the daily, unreasoned swings that occur because the high frequency trading computers run the show. Call them Skynet (Terminator reference) or Hal 9000, they are doing a job on most active traders. Unfortunately those that are buy and holders aren't doing any better. Is it any wonder that treasuries and corporate bonds are the best performers this year?
I have been busy on several projects and that has kept me from writing, but I have had this topic on my mind to review where I thought things were going. I really love looking at this because it provides great information as to how right and wrong one can be at the same time. It also allows me to tweak my longer term thesis and review if there has been a significant change that has an impact on my outlook.
Let's jump into it shall we?
INTEREST RATES - (-1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Ok, interest rates on the 30 year are more like 3.95% so we don't look like we are in danger of hitting my more reasonable 6% target. So why are we not at a reasonable 6%. I think for two reasons.
A) There is still tremendous fear in the market and investors would rather buy certainty (that they get paid back their money) rather than risk it in the markets.
B) I think that there is actually a level of true Quantitative Easing being done despite the fact that it officially has stopped. What I saying is that there have been a number of buyers of treasuries that have been buying in size that don't really typically opt for these instruments. So while other buyers of our debt have reduced their consumption, the United Kingdom somehow has stepped up mightily and has purchase somewhere near $200 Billion in treasuries over the last several months. These guys are massively mired in debt and running deficits. Where'd they get the cash to buy our T-Bills?
Doesn't matter, I've missed it so far, and frankly, I've changed my tune on this one, we won't see those 6% rates till there is a shock where investors absolutely shun the USD and Uncle Ben will do anything to stop the move up in rates, cause he has to. I expect that we will see a 30 year mortgage at 3.5% by mid 2011, so give me a -1 to start out the 2010 Predictions Mid Year Update.
QUANTITATIVE EASING - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - We as you look above, the question really is, did they really stop? I would bet they haven't, and we'll actually see more public admission that they are going to publicly do it. Uncle Ben this week in his testimony on the Hill stated that they are committed to extraordinary steps to keep the fragile economy afloat (my words not his, but that was the meaning).
HOUSING - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - I think this pretty much was nailed. Check out today's report by NAR about the surge in predicted annualized sales through April and guess what, it is going in the tank. Ummm, look at that inventory build there too. Isn't government stimulus effective?
Annualized Sales Data from NAR - http://www.realtor.org/research/research/ehsdata
MONTH Annualized Sales Supply
2009 Dec 5,440,000 7.2 Month Supply
2010 Jan 5,050,000 7.8 Month Supply
2010 Feb 5,010,000 8.5 Month Supply
2010 Mar 5,360,000 8.1 Month Supply
2010 Apr 5,790,000 8.4 Month Supply
2010 May 5,660,000 8.3 Month Supply
2010 Jun 5,370,000 8.9 Month Supply
CURRENCIES (-1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - We haven't seen this yet, but effectively, the rise in the USD has helped prevent this situation. If we see Geithner and Uncle Ben resume the significant devaluation in the dollar as a measure to inflate and get us out of this mess, we will see these in the back half of the year. I'm conceding this as a miss. Note that Argentina is essentially defaulting on debt to bondholders by forcing an exchange, it isn't a currency adjustment, but sure is sucky if you're told to take new bonds (less bonds).
EURO - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Problems in the Eurozone will not go away even if they can pull off a US style sham with the bank stress tests. They still have major issues of spending too much and promising too many benefits in the nanny state. Need a preview of where our government is taking us? Look no further than the week Euro, out of control spending, and a detachment from math that is temporary. Ultimately Europe and the Euro fail.
YEN - (-1)
I SAID - 1/3/2010 - The dollar will strengthen against the yen.
REALITY - 7/20/2010 - Hasn't happened. The Fed and Treasury have had been luck keeping rates low and Japan has not been as effectively using QE as I thought relative to the US. Remember, this is a race to zero and Japan has been in deflation for 20 years. I will patiently wait for this, but they are clearly worse than the US.
GSEs - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Ok, I'm not sure if this was really a stretch in predicting anything. These companies are toast, and we the US taxpayer are unwillingly footing the bill for complete insanity.
LENDING - (+1)
I SAID - 1/3/2010 - Small business lending and personal credit will continue to decline through 2010.
REALITY - 7/20/2010 -Lending is still extremely tight. The administration and Congress just past legislation in an attempt to get small business lending going. While I applaud this, this probably means an abandonment of conservative lending principles and we'll see losses in this area of government generosity as well.
GOLD (No Rating Yet)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Gold is still at $1192 as of this update (7/23). The gold market has not dropped as much as I anticipated, but certainly hasn't ramped up higher. I am still looking for the move down to the $950 to $1,000 area though after an anticipated ramp up again. You could potentially buy it and then sell it higher, but you face serious risks in timing it.
EQUITY MARKETS (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Pretty right on so far, but I would actually look for a move up in markets over the next month or two and then a slide down in the months of October and November. There will be no rate increases by the Fed.
FOREIGN POLICY - (No Rating)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Tensions are mounting. The longer we languish economically I believe we will see an increase in tensions in the Middle East.
OIL - (No Rating)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Oil is now back up to $79. A move to devalue the dollar any will result in meeting my $100 projection.
US POLITICS (No Rating)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - This looks as though it is moving in the direction I thought, however, I am looking at the impact of the Tea Party Movement which is being marginalized by it's inability to speak through the labels that both the Republicans and Democrats are throwing on them. Unfortunately the Republicans have swept in and made efforts to identify with the Tea Party (and I'm sure some do), but the cost of allowing Republican incumbents to take the Tea Party mantle is that there is no real and lasting change and you continue to have the same political elites in power. In a sense for me the Tea Party movement is about new leadership and fiscal responsibility, not the same old structure and system with new faces.
SUPREME COURT - (+1)
I SAID - 1/3/2010 - Obama names a replacement for Justice Ginsberg who retires in 2010.
REALITY - 7/20/2010 - Ok, that was an easy one.
HEALTH CARE REFORM - (+1)
I SAID - 1/3/2010 - 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.
REALITY - 7/20/2010 - Yes, this reform was passed. We do need change, but this is a mess and more importantly, it is a financial mess. I've written at length that the cost is out of sight and I am not being over the top. This is a disaster. Abortion is a component of this bill and despite the "Executive Order" lie that was provided by our president, we are paying for these with tax payer dollars. I have rethought my notion that the Supreme Court will strike down the legislation. It will not, this system is here for good. The losers are the US consumer and tax payer, the winners are big government advocates and big pharma.
NATIONAL SECURITY / PERSONAL RIGHTS (+1)
I SAID - 1/3/2010 - 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).
REALITY - 7/20/2010 - Little erosions continue. We have now discovered in the health care bill that all purchases made by businesses over $600 must be recorded and issued a 1099. This is far reaching and an encroachment of personal privacy. The impact is also being felt by gold and silver dealers that now must record and issue a 1099 on all purchases of gold or silver in excess of $600. What is the purpose of this? Tax revenue generation, but also a deeper view and insight into the personal transactions of the person in the US.
OK, thats a wrap. For those of you keeping score at home, the mid-year update has a score of +6 total. The tally looks more like this. +9 Correct right now. -3 are incorrect now. 4 with no rating. So 9 out of 17 so far. This isn't about being right or wrong, it really is about making a statement of what I think will happen and why.
TRADING UPDATE
Over the last several months we've seen markets trade within a 200 point S&P500 range (20%). As of completing this post today, we are waiting on the European stress tests to come out and convince us that all European banks are healthy and the markets should feel really good about the global economy and recovery. I personally believe that we will rally for the next month or so and then more reality will set in. I've written a lot about the possibility of a double dip recession and what is interesting is that we've had no formal announcement from NBER that the recession is even over. I guess this is a way to hedge your bets and state that there is no double dip - you just never get out of the quicksand in the first place.
I've been laying the ground work for a strategy on the next drop in markets that I will employ and I'll share just a few thoughts about it. US growth is estimated to be a 2% to 3%. Emerging market growth is obviously predicted to be much higher somewhere in the 8% to 12% range. These countries would includes Vietnam, Malaysia, China, India, Brazil, and more.
As we look at this, you must ask yourself where you think the best stock market performance is going to be. Obviously, you would expect many of these countries to outperform.
How do you put it together? First, the easy one, you simply buy those countries. Second, if you want to give yourself some protection, you could take steps out short US and go long these countries in a relative value trade, hoping that the countries go better. This gives you some downside protection if they all go down, but you will still suffer. Ultimately, I think very long term, this will be a home run strategy as millions and millions of new world citizens rise to the ranks of the middle class. This also makes sense on so many levels as it removes our dependency on our government to actually make responsible decisions and somehow navigate us out of the mess we are in. If, as the Fed and Treasury desire, they are able to devalue the USD, you'll also win on the currency bet side of things as well. If deflation in the US takes hold, this strategy my hurt you on the currency side of things as the USD rises in value, but you will hopefully also receive rewards from getting out of the US equity markets into ones that actually will grow.
Ok, enough rambling on this post that has taken a few days to write. I will develop the relative value trade more and put out some charts to examine. I'll also do something on gold. I've thought for a long time that our government would do everything in its power to stop the gold increase and I believe the healthcare bill is just one step to crush the move higher in gold long term.
GOATMUG
Thursday, July 15, 2010
TLT UPDATE - TREASURIES QUICKLY REGAIN FAVOR
Just a quick note. As soon as I posted that comment last week about treasuries breaking out and that being a warning signal, the market rallied 6%!!! I mentioned that we should be on the look out for a move higher so I guess I covered myself. Interestingly though, today's action has moved TLT (20 Year treasuries) back up and through the area I highlighted as a cause for concern just this morning. The trouble isn't over with no matter how much we rally.
I've said it before that we need to use these rallies as opportunities to lighten up our longs. Do it.
I've said it before that we need to use these rallies as opportunities to lighten up our longs. Do it.
GOATMUG
Monday, July 12, 2010
JULY MARKET OUTLOOK
Hello everyone!
The first week of July provided the greatest market gains in over a year. Weeks like this require us to step back and review exactly what all the euphoria was about! To ensure we have our feet firmly on the ground, I've highlighted a few items here.
RAILS -
Rails continue their march higher in terms of total rail traffic. We are actually nearing (not there yet) levels late 2008. Each sub-category continues to see year-over-year improvement. Of all the individual rail carriers, CNI (Canadian National Railroad) is seeing the most significant recovery compared to levels from 2 years ago and they are actually very close to matching those tonnage rates. When I see fundamental data like this, I like to check in on the stock price of the company to see if it has priced in the good news.
5 YR CHART OF CNI -
As we examine this 5 Yr chart of CNI, we actually see that we are trading ABOVE levels we've seen in 2008 and prior. While CNI did drop significantly since April, it generally held support at $57. Despite this good news, I am not sure I'd take a flyer on a long position in this rail and I'd wait for the $57 level to be taken out for a short trade.
MOODY'S / MIT REAL ESTATE TRANSACTION -
Moody's is showing that in April their property price index showed a move up of 1.7% in commercial real estate prices.
FINANCIAL CONDITIONS INDEX
With this week's amazing rally we see a significant rebound in the Bloomberg Financial Conditions Index. Recall that a level below 0 indicates we are in a contraction (read recession) and a level above indicates an expansion. We had a few months on the edge of recovery, but then stalled and collapsed. We will need a sustained capital market recovery to signal much better than we've experienced in the last several months.
WLI DATA - http://www.businesscycle.com/resources/
The Weekly Leading Indicator data released by ECRI last Thursday again showed slowing in the economy. While the dip in the number is concerning, what we are really examining here is the rate of change of the growth or decline. Right now, the growth model is showing a level of -8.3% in their indicators and this is essentially the 5th straight negative reading. As I've mentioned before, this study released on the public ECRI site includes the stock markets in their model. The decline in the model therefore is highly correlated to the significant drop we've seen in markets over the last 7 or 8 weeks. We might see a rebound or leveling off of this number because the first week of July was so strong in equity markets. Of course, the rebound may be tempered by the poor showing in housing.
HOUSING - NAR DATA
Housing has done an excellent job of feigning recovery. Of course the false recovery has been based primarily on the largess of the US taxpayer courtesy of the $8,000 and $6,500 stimulus. The only problem is that we are slowing in sales as a result of the removal of the generosity! The graph from ECRI shows this, but the chart from NAR (click on the link -1st table) clearly shows the inventory build and decline in sales from the peak.
In my mind it is even more concerning to look at the second table. This is a graphic of housing prices. In May (last month of the stimulus) we see that the average house price deal shot up hmmmmm let's see about $7,000 from the previous month in April!!!!! Is that truly amazing? We have a stimulus plan in place that gives buyers about $7,000 in credits so they go out and spend about $7,000! For me I would hope that the buyer would negotiate better and would essentially get some benefit for our money, but no, the buyer simply paid up more than the previous month and gave the money away! And that is really my point here, when it is someone else's money, you are much more apt to piss it away rather than spend it in a frugal and wise manner. Katrina debit card's anyone?
(Chart - http://www.businesscycle.com/resources/ )
FOOD STAMPS - http://www.fns.usda.gov/pd/34SNAPmonthly.htm
The June release of the April data shows that we are still feeding 40 million Americans at a cost of greater than $5 Billion a year. Let the 40 million number sink in, that is 13% of our population! Until we see real job creation (not census workers) this will continue to rise. I have mentioned it before as well, the cessation of fishing and the clobbering of tourism in the Gulf States will only add to this. Note, this is April's data - before the impact of the oil spill with the Deepwater Horizon.
CREDIT MARKETS - 30 YR MTG - Fed
Credit markets continue to show stress, but less so than a couple of weeks ago. Libor continues to remain elevated (in this context) and we see that treasuries are still very low in a historical sense. I noticed that mortgage bonds are really low where you can obtain 30 year financing for 4.5% with decent credit. I still am anticipating that we will see long term mortgage rates at 3% or 3.5% as our government does anything they can to get the economy going (hello Japan!). How do we get to that 3%? - I am fully anticipating the Son of Stimulus to arise soon in the form of another housing recovery stimulus and also an overt devaluation of the dollar by the Fed and Treasury. Any wonder we keep hearing about China and their currency manipulations again? I wrote more about the Son of Stimulus in my 2nd Quarter Wrap Up .
I made a post about a week ago about the break out in TLT where it popped above $100.15 which was a significant sign of stress. As usual as soon as I post something that I've been watching it completely reversed, but the point in the posting is that we must watch these warning signals because they are showing up and I believe they are going to usher in the Big Kahuna drop at some point. As we'll see later on in the post more and more alarms are going off and we need to remain vigilant despite the great feelings we have from last week.
1 WEEK LIBOR (USD) - http://www.homefinance.nl/english/international-interest-rates/libor/usdollar/libor-rates-1-week-usd.asp
COPPOCK TURN-
One of those alarm bells we need to look at is the Coppock Turn Indicator. This is simply a 14 month moving average on the Dow. When the 14 month moving average changes direction, it is a warning that a fundamental shift has occurred. Now for most traders and Slopers this 14 month indicator is way too slow, but it is useful to see that it did turn in June due to the close below 10,000 and this signals that the market should continue to go down. Just to give you a level to look for - the indicator would turn positive if the Dow closed July at 10,650 or above.
USD -http://www.bloomberg.com/apps/quote?ticker=DXY:IND
What do you know, the markets rallied and the USD got clobbered. This is one of the only policy tools left that the Fed and Treasury have. If they have any mojo left at all, Uncle Ben and Turbo Tax Timmy will be attempting to rally markets, inflate assets, and devalue bucky to restore confidence.
BALTIC DRY GOODS INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The Baltic Dry Goods Index is in a free fall. It has decline more than 30 days in a row I believe. It is suddenly much cheaper to ship all of those raw materials to China or wherever. Personally I have not been able to discern the cause except for the interpretation that China is done stockpiling commodities or there has been commissioning of an entire armada of freighters that can now carry dry bulk for the world. (I'm leaning toward the first one). Again, I know this is the spot price for shipping, but the chart says it all. Again, I wouldn't be buying DRYS here based on this pricing and certainly not on their leverage on balance sheet. Shipping companies have also been performing poorly because their are thoughts that firms will need to do equity issuance to help them raise cash.
WRAP UP -
Overall, last weeks performance by the bulls was very strong. If there was ever a time for a comeback that was it. Pessimism was so thick you could cut it and I believe that bears got a little too brave (I did). Many longer term charts are illustrating that there has been a shift to the bearish camp. These include the Coppock indicator mentioned above, the 13/34 EMA crossover ,and the TLT breakout,. All of these items make we want to get really bearish and put down serious long term cash on the short side. I have not put this to work yet simply because I know that the government is increasingly boxed in and are in a position where they must react. A perceived policy failure on their part would be devastating and there for I expect massive stimulus. This level of stimulus would certainly blow up a short trade quickly (remember the financials short ban?).
We are also entering the thick of summer and earnings season. I believe results will be pretty good, but guidance should be timid and weak. As I build my own strategy I am pretty content to trade small and wait things out till earnings wind down so I can begin to scale into larger long term short positions.
Be Careful! ---
GOATMUG
The first week of July provided the greatest market gains in over a year. Weeks like this require us to step back and review exactly what all the euphoria was about! To ensure we have our feet firmly on the ground, I've highlighted a few items here.
RAILS -
Rails continue their march higher in terms of total rail traffic. We are actually nearing (not there yet) levels late 2008. Each sub-category continues to see year-over-year improvement. Of all the individual rail carriers, CNI (Canadian National Railroad) is seeing the most significant recovery compared to levels from 2 years ago and they are actually very close to matching those tonnage rates. When I see fundamental data like this, I like to check in on the stock price of the company to see if it has priced in the good news.
As we examine this 5 Yr chart of CNI, we actually see that we are trading ABOVE levels we've seen in 2008 and prior. While CNI did drop significantly since April, it generally held support at $57. Despite this good news, I am not sure I'd take a flyer on a long position in this rail and I'd wait for the $57 level to be taken out for a short trade.
MOODY'S / MIT REAL ESTATE TRANSACTION -
Moody's is showing that in April their property price index showed a move up of 1.7% in commercial real estate prices.
FINANCIAL CONDITIONS INDEX
With this week's amazing rally we see a significant rebound in the Bloomberg Financial Conditions Index. Recall that a level below 0 indicates we are in a contraction (read recession) and a level above indicates an expansion. We had a few months on the edge of recovery, but then stalled and collapsed. We will need a sustained capital market recovery to signal much better than we've experienced in the last several months.
WLI DATA - http://www.businesscycle.com/resources/
The Weekly Leading Indicator data released by ECRI last Thursday again showed slowing in the economy. While the dip in the number is concerning, what we are really examining here is the rate of change of the growth or decline. Right now, the growth model is showing a level of -8.3% in their indicators and this is essentially the 5th straight negative reading. As I've mentioned before, this study released on the public ECRI site includes the stock markets in their model. The decline in the model therefore is highly correlated to the significant drop we've seen in markets over the last 7 or 8 weeks. We might see a rebound or leveling off of this number because the first week of July was so strong in equity markets. Of course, the rebound may be tempered by the poor showing in housing.
HOUSING - NAR DATA
Housing has done an excellent job of feigning recovery. Of course the false recovery has been based primarily on the largess of the US taxpayer courtesy of the $8,000 and $6,500 stimulus. The only problem is that we are slowing in sales as a result of the removal of the generosity! The graph from ECRI shows this, but the chart from NAR (click on the link -1st table) clearly shows the inventory build and decline in sales from the peak.
In my mind it is even more concerning to look at the second table. This is a graphic of housing prices. In May (last month of the stimulus) we see that the average house price deal shot up hmmmmm let's see about $7,000 from the previous month in April!!!!! Is that truly amazing? We have a stimulus plan in place that gives buyers about $7,000 in credits so they go out and spend about $7,000! For me I would hope that the buyer would negotiate better and would essentially get some benefit for our money, but no, the buyer simply paid up more than the previous month and gave the money away! And that is really my point here, when it is someone else's money, you are much more apt to piss it away rather than spend it in a frugal and wise manner. Katrina debit card's anyone?
(Chart - http://www.businesscycle.com/resources/ )
FOOD STAMPS - http://www.fns.usda.gov/pd/34SNAPmonthly.htm
The June release of the April data shows that we are still feeding 40 million Americans at a cost of greater than $5 Billion a year. Let the 40 million number sink in, that is 13% of our population! Until we see real job creation (not census workers) this will continue to rise. I have mentioned it before as well, the cessation of fishing and the clobbering of tourism in the Gulf States will only add to this. Note, this is April's data - before the impact of the oil spill with the Deepwater Horizon.
CREDIT MARKETS - 30 YR MTG - Fed
Credit markets continue to show stress, but less so than a couple of weeks ago. Libor continues to remain elevated (in this context) and we see that treasuries are still very low in a historical sense. I noticed that mortgage bonds are really low where you can obtain 30 year financing for 4.5% with decent credit. I still am anticipating that we will see long term mortgage rates at 3% or 3.5% as our government does anything they can to get the economy going (hello Japan!). How do we get to that 3%? - I am fully anticipating the Son of Stimulus to arise soon in the form of another housing recovery stimulus and also an overt devaluation of the dollar by the Fed and Treasury. Any wonder we keep hearing about China and their currency manipulations again? I wrote more about the Son of Stimulus in my 2nd Quarter Wrap Up .
I made a post about a week ago about the break out in TLT where it popped above $100.15 which was a significant sign of stress. As usual as soon as I post something that I've been watching it completely reversed, but the point in the posting is that we must watch these warning signals because they are showing up and I believe they are going to usher in the Big Kahuna drop at some point. As we'll see later on in the post more and more alarms are going off and we need to remain vigilant despite the great feelings we have from last week.
1 WEEK LIBOR (USD) - http://www.homefinance.nl/english/international-interest-rates/libor/usdollar/libor-rates-1-week-usd.asp
One of those alarm bells we need to look at is the Coppock Turn Indicator. This is simply a 14 month moving average on the Dow. When the 14 month moving average changes direction, it is a warning that a fundamental shift has occurred. Now for most traders and Slopers this 14 month indicator is way too slow, but it is useful to see that it did turn in June due to the close below 10,000 and this signals that the market should continue to go down. Just to give you a level to look for - the indicator would turn positive if the Dow closed July at 10,650 or above.
USD -http://www.bloomberg.com/apps/quote?ticker=DXY:IND
What do you know, the markets rallied and the USD got clobbered. This is one of the only policy tools left that the Fed and Treasury have. If they have any mojo left at all, Uncle Ben and Turbo Tax Timmy will be attempting to rally markets, inflate assets, and devalue bucky to restore confidence.
BALTIC DRY GOODS INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The Baltic Dry Goods Index is in a free fall. It has decline more than 30 days in a row I believe. It is suddenly much cheaper to ship all of those raw materials to China or wherever. Personally I have not been able to discern the cause except for the interpretation that China is done stockpiling commodities or there has been commissioning of an entire armada of freighters that can now carry dry bulk for the world. (I'm leaning toward the first one). Again, I know this is the spot price for shipping, but the chart says it all. Again, I wouldn't be buying DRYS here based on this pricing and certainly not on their leverage on balance sheet. Shipping companies have also been performing poorly because their are thoughts that firms will need to do equity issuance to help them raise cash.
WRAP UP -
Overall, last weeks performance by the bulls was very strong. If there was ever a time for a comeback that was it. Pessimism was so thick you could cut it and I believe that bears got a little too brave (I did). Many longer term charts are illustrating that there has been a shift to the bearish camp. These include the Coppock indicator mentioned above, the 13/34 EMA crossover ,and the TLT breakout,. All of these items make we want to get really bearish and put down serious long term cash on the short side. I have not put this to work yet simply because I know that the government is increasingly boxed in and are in a position where they must react. A perceived policy failure on their part would be devastating and there for I expect massive stimulus. This level of stimulus would certainly blow up a short trade quickly (remember the financials short ban?).
We are also entering the thick of summer and earnings season. I believe results will be pretty good, but guidance should be timid and weak. As I build my own strategy I am pretty content to trade small and wait things out till earnings wind down so I can begin to scale into larger long term short positions.
Be Careful! ---
GOATMUG
Wednesday, July 7, 2010
SNAP DATA - WHO'S EATING THAT GOVERNMENT CHEESE?
FOOD STAMPS AND GOVERNMENT CHEESE FOR EVERYONE!
The newest release of data was provided by the government last week when we got a new slug of information on the number of families taking food stamps. What this data tells us is that we are not seeing a recovery on main street and there is a growing need to supplement income so people can eat. We are looking at a growing issue here, not an easing of folks on the roles.
WHERE IS THE RECOVERY?
The newest release of data was provided by the government last week when we got a new slug of information on the number of families taking food stamps. What this data tells us is that we are not seeing a recovery on main street and there is a growing need to supplement income so people can eat. We are looking at a growing issue here, not an easing of folks on the roles.
WHERE IS THE RECOVERY?
GOATMUG
Tuesday, July 6, 2010
14 / 34 EMA CROSSOVER - BEARISH LONG TERM SIGNAL
Today (rather last week) we also completed another long term bearish technical pattern. When trading we often use signals to identify when you need to get in and get out. I have used the signal personally and this is one of the items that caused me to have more conviction to move money out of the market in December of 2007. (Look at December 2007 on this chart). Now depending on how active you are as a trader you might have heard about the fabled "DEATH CROSS" pattern. This is typically when you see the 50 day moving average swoop down and cross over the 200 day moving average. The pattern I am showing here is NOT the death cross. I personally believe that this pattern is much more reliable because it uses very long changes (weekly) to identify it's move. Anyway, use it as a warning if nothing else.
Now we don't know what will happen if the market suddenly rebounds in the next few days causing the weekly indicator to move higher. It is just really important to note that this technical indicator showed up. I for one am not adding to positions as I just mentioned in the 2nd Quarter Round Up.
And for those of you that are saying to yourself, awwww, it's long term money, I don't need to move to cash - I say whatever! Long term money is intended to be preserved and grow, not get cut by 35% or say flat to negative after 10 years! Don't lose your cash! Yes, wait for a bounce, but then protect your gains.
Trade carefully!
Now we don't know what will happen if the market suddenly rebounds in the next few days causing the weekly indicator to move higher. It is just really important to note that this technical indicator showed up. I for one am not adding to positions as I just mentioned in the 2nd Quarter Round Up.
And for those of you that are saying to yourself, awwww, it's long term money, I don't need to move to cash - I say whatever! Long term money is intended to be preserved and grow, not get cut by 35% or say flat to negative after 10 years! Don't lose your cash! Yes, wait for a bounce, but then protect your gains.
Trade carefully!
GOATMUG
Second Quarter Wrap Up and Random Comments
The quarter has officially ended and I wanted to take a step back and review where we stand and discuss further some significant issues and ideas we've got to address in this investing environment.
WHERE WE STAND -
As of the end of July 1st 2010 the indices have provided the following returns for the year;
Dow -5.40%
S&P 500 -6.95%
Nasdaq -7.82%
This is pretty tough, especially in light of the fact that the indices were actually up more than 10% in April of this year. Now to be intellectually honest we also need to speak about the gains we've seen. Remember the scary lows of March 2009? Since March of 2009 the S&P has rebounded 53% to these current levels. However we also need to make sure that we take into account that the same index is 34% lower today than it was at the market high in October 2007.
Since that magical recovery on March 9th of 2009 we have been witness to the invisible hand of government (ok, not so invisible) aiding and assisting the citizens with all its power to create a rebound of asset prices. We've seen efforts in autos (Cash for Clunkers), housing (Tax Rebates), bank bailouts, green energy programs (weatherizing), Fed open market actions in tandem with Treasury Department intervention to purchase mortgage backed securities, buy troubled assets in the open market, complete US dollar swaps with foreign banks and central governments, and finally outright devaluation of our currency. We didn't stimulate small business efforts or make sound decisions about the use of government monies, we simply tried to micro manage little areas in the economy rather than making strategic plans that might actually work. We didn't allow bad firms to accept their fates as failures, no we sloshed easy money around and wasted it in the typical corrupt government way. All of these efforts have been in the name of "GETTING US BACK TO THE GOOD OLD DAYS", or as I like to recall our then President stated that "we needed to suspend free market capitalism to save free market capitalism!" - (WOW! I still can't believe he said that!)
As I've noted several times the FED and Treasury gave us their play book, and I've written quite a bit about it in --- PUBLIC ENEMY #1 - DEFLATION . Their goal is to raise asset prices to get you spending and using credit, essentially "growing" our economy on the backs of those countries that are willing to lend to us.
These guys don't want us to do this because we need more plasma screens or anything else, it is simply because when the music stops the ponzi scheme falls apart and things end badly. You must know that this government debt and over leverage is just that, a game of musical chairs that ends really badly when there is only one winner. Ask Iceland, Greece, and more countries to come how it feels when the game of musical "credit" chairs comes to a screeching halt when the lenders decide to take all the chairs away.
Take a look at this graphic courtesy of Shadow Stats. This is a graph of our money supply growth. There are several ways people describe inflation and deflation and one of those is in terms of the growth of the money supply. As the money supply grows (and its velocity) this is an indication of expansion in the economy. When a bank obtains a deposit from a person, it must keep 10% of the deposit and then can lend out the rest. So effectively the money supply or available credit and expand 9 times more and you have exponential growth as borrowers are successful and make their loans productive.
When money supply growth drops, this is deflationary! This means that banks are not leading or not receiving their money back. The money supply in the US is not growing and this is confirming that access to capital is drying up. So all the efforts of the Fed and Treasury have done nothing.
Source - http://www.shadowstats.com/
WHAT'S NEXT?
So we've been bleeding out here obviously since the highs in 2007, but since April of 2010 we've dropped some 20%. Is this just a correction or is this some bigger move?
Let's get this straight, the prescription that will heal the situation IS deflation, yet it is also very painful. It is clearly the one that is not politically easy and therefore not the own chosen by our government. Deflation comes with some of the following results;
Strong dollar
High interest rates
No growth
Loss of jobs
Angry citizens
Loss of equity (people investments in assets go to zero)
Angry elites in the political and wealthy classes
WHAT'S A GOVERNMENT TO DO? - SON OF STIMULUS WILL ARISE!
Since the deflation scenario is not too good for political incumbents and the leadership, what should we expect? Well, I fully expect the Son of Stimulus to show up! The Fed is going to have to step up again and begin buying mortgages and treasuries and we'll have a new round of home purchase and ownership incentives. The result - don't rush out there and refinance, cause you are going to see a 30 year mortgage at 3% soon enough!
The hope in these actions will be that we'll see an asset inflation in all asset classes (equities, corporate bonds, commodities). The problem with these moves is that the effectiveness in terms of real bang for the buck is weakening and the effect is not lasting as long each time (just as drug addicts experience). The other disconnect is that if they actually have success with these programs, we'll seen an INCREASE in treasury yields and this hurts our economy as we need to pay more for the service our debt. Why do treasury yields increase if they are trying to levitate all the other asset classes? Simply because investors sell treasuries in the market and buy other assets. The flood from one area to the next bids up prices in equities, commodities, and corporate bonds and will leave prices lower on treasuries. This is just the opposite of what has occurred in the last two months --- see the chart of TLT and my post about the signals of BIG THINGS HAPPENING from earlier this week.
NO OTHER POLICY TOOLS LEFT BUT TO KILL THE DOLLAR
Since we have Fed Funds rates at effectively zero and there is no chance of an increase in rates here, the only stimulative options are that the Fed and Treasury are going to need to begin outright purchases of securities (stocks) and or engineer a devaluation of the currency. These will be effective in the short run, but just like Japan, cannot be carried on forever. The end result will be just like Japan - slow or non existent growth after many painful years of credit and asset destruction. Again, this is why the FED will do anything including destroying the purchasing power of your currency to avoid this fate. The destruction of purchasing power means that assets and objects from outside your country cost significantly more than in the past. Items like imported goods, oil, gold, and other commodities do really well if they can be effective in pulling the devaluation off. Now you know the reason for the administration (Geithner and Congress) whining constantly about the revaluation of the Chinese yuan. We desperately want other currencies to go higher and those Chinese continue to manipulate their currency and refuse to let it rise against our worthless buck!
Can their actions make a sustained impact - or I guess a better question is, can we have this hyper-inflation scenario? The answer is, NO, not yet. We cannot have hyper-inflation until we have growth in the economy, and we do not have any growth at all, we have deflation.
I commented earlier this week about the ERCI data showing that we are rolling over and that is just another validation that we are not growing. Retail sales are falling, consumer confidence is falling, and even today's manufacturing data is showing that it is collapsing. Just like I posted several times, the "growth" we saw was simply a replacement of inventory draw downs and now we have no one buying new stuff. Thus I expect second quarter earnings numbers by companies to look and sound good, but when we pay attention to the outlook from company leadership we'll hear a scary story about a retreating consumer, eroding base of orders, and a poor or at least cloudy third quarter.
TRADING UPDATE -
Well the trend for the last several months has been down now, and that is not a shock I actually expect some sort of bounce because you typically don't see this type of sustained destruction day in and day out. The market psychology is turning very pessimistic here where market participants are simply going into treasuries at historically low rates simply because they are fed up with the ups and downs of the market and they want their money back rather than some type of unpromised return.
In the short run what have we discussed almost every time, when everyone believes something, it is probably wrong, so in turn, if everyone is negative we'll probably see some upward movement as we rebound (reload for another drop). The wave of coming bad news is going to get larger, so you need to be unloading as the market goes higher. I personally am not adding any longs here because I cannot foresee how long the thrust higher will last before giving way to a lower low.
Let me be clear, you need to take advantage of any move of 3% or 5% to get out of positions that you've been holding. Be careful and sell your positions as we move higher. Above this area we have lots of tough slogging for bulls and we'll see how the market can face this now tough resistance. Key areas on the $SPX to examine are 1037 and also 1055.
If the market falls I'll be watching 1018 and then 993 and 978, after that, it is the low 900s.
Again, the FED will attempt to do anything and everything to bounce and boost this market. We might get more shorting bans, we might get more outright purchases of equities by the Fed, we might get dollar devaluations, and we might get a kitchen sink or two...... anything and everything to get something positive going, so don't go shorting the market here, but do get conservative because even a 15% move higher will be met with sellers that feel they have been given a gift from the Lord above and they will be very happy to unload their shares once they get back to their April levels. (If they get there).
Oh yes, I have so many things I want to write about, but I'll give you a quick teaser topic. Everyone loves gold, be prepared to witness gold trading down to $1040 or so. The more you hear about Europe implementing austerity measures means that Gold (the alternative currency) will fall. People have literally been running to gold because they fear a collapse in the Euro. In the short run they are not going to profit by chasing gold in their fear. DO NOT BUY GOLD HERE. I wouldn't doubt that these buyers are ultimately correct, but you'll be able to buy 10% to 15% cheaper. I will begin buying more again around this area.
WHERE WE STAND -
As of the end of July 1st 2010 the indices have provided the following returns for the year;
Dow -5.40%
S&P 500 -6.95%
Nasdaq -7.82%
This is pretty tough, especially in light of the fact that the indices were actually up more than 10% in April of this year. Now to be intellectually honest we also need to speak about the gains we've seen. Remember the scary lows of March 2009? Since March of 2009 the S&P has rebounded 53% to these current levels. However we also need to make sure that we take into account that the same index is 34% lower today than it was at the market high in October 2007.
Since that magical recovery on March 9th of 2009 we have been witness to the invisible hand of government (ok, not so invisible) aiding and assisting the citizens with all its power to create a rebound of asset prices. We've seen efforts in autos (Cash for Clunkers), housing (Tax Rebates), bank bailouts, green energy programs (weatherizing), Fed open market actions in tandem with Treasury Department intervention to purchase mortgage backed securities, buy troubled assets in the open market, complete US dollar swaps with foreign banks and central governments, and finally outright devaluation of our currency. We didn't stimulate small business efforts or make sound decisions about the use of government monies, we simply tried to micro manage little areas in the economy rather than making strategic plans that might actually work. We didn't allow bad firms to accept their fates as failures, no we sloshed easy money around and wasted it in the typical corrupt government way. All of these efforts have been in the name of "GETTING US BACK TO THE GOOD OLD DAYS", or as I like to recall our then President stated that "we needed to suspend free market capitalism to save free market capitalism!" - (WOW! I still can't believe he said that!)
As I've noted several times the FED and Treasury gave us their play book, and I've written quite a bit about it in --- PUBLIC ENEMY #1 - DEFLATION . Their goal is to raise asset prices to get you spending and using credit, essentially "growing" our economy on the backs of those countries that are willing to lend to us.
These guys don't want us to do this because we need more plasma screens or anything else, it is simply because when the music stops the ponzi scheme falls apart and things end badly. You must know that this government debt and over leverage is just that, a game of musical chairs that ends really badly when there is only one winner. Ask Iceland, Greece, and more countries to come how it feels when the game of musical "credit" chairs comes to a screeching halt when the lenders decide to take all the chairs away.
Take a look at this graphic courtesy of Shadow Stats. This is a graph of our money supply growth. There are several ways people describe inflation and deflation and one of those is in terms of the growth of the money supply. As the money supply grows (and its velocity) this is an indication of expansion in the economy. When a bank obtains a deposit from a person, it must keep 10% of the deposit and then can lend out the rest. So effectively the money supply or available credit and expand 9 times more and you have exponential growth as borrowers are successful and make their loans productive.
When money supply growth drops, this is deflationary! This means that banks are not leading or not receiving their money back. The money supply in the US is not growing and this is confirming that access to capital is drying up. So all the efforts of the Fed and Treasury have done nothing.
Source - http://www.shadowstats.com/
WHAT'S NEXT?
So we've been bleeding out here obviously since the highs in 2007, but since April of 2010 we've dropped some 20%. Is this just a correction or is this some bigger move?
Let's get this straight, the prescription that will heal the situation IS deflation, yet it is also very painful. It is clearly the one that is not politically easy and therefore not the own chosen by our government. Deflation comes with some of the following results;
Strong dollar
High interest rates
No growth
Loss of jobs
Angry citizens
Loss of equity (people investments in assets go to zero)
Angry elites in the political and wealthy classes
WHAT'S A GOVERNMENT TO DO? - SON OF STIMULUS WILL ARISE!
Since the deflation scenario is not too good for political incumbents and the leadership, what should we expect? Well, I fully expect the Son of Stimulus to show up! The Fed is going to have to step up again and begin buying mortgages and treasuries and we'll have a new round of home purchase and ownership incentives. The result - don't rush out there and refinance, cause you are going to see a 30 year mortgage at 3% soon enough!
The hope in these actions will be that we'll see an asset inflation in all asset classes (equities, corporate bonds, commodities). The problem with these moves is that the effectiveness in terms of real bang for the buck is weakening and the effect is not lasting as long each time (just as drug addicts experience). The other disconnect is that if they actually have success with these programs, we'll seen an INCREASE in treasury yields and this hurts our economy as we need to pay more for the service our debt. Why do treasury yields increase if they are trying to levitate all the other asset classes? Simply because investors sell treasuries in the market and buy other assets. The flood from one area to the next bids up prices in equities, commodities, and corporate bonds and will leave prices lower on treasuries. This is just the opposite of what has occurred in the last two months --- see the chart of TLT and my post about the signals of BIG THINGS HAPPENING from earlier this week.
NO OTHER POLICY TOOLS LEFT BUT TO KILL THE DOLLAR
Since we have Fed Funds rates at effectively zero and there is no chance of an increase in rates here, the only stimulative options are that the Fed and Treasury are going to need to begin outright purchases of securities (stocks) and or engineer a devaluation of the currency. These will be effective in the short run, but just like Japan, cannot be carried on forever. The end result will be just like Japan - slow or non existent growth after many painful years of credit and asset destruction. Again, this is why the FED will do anything including destroying the purchasing power of your currency to avoid this fate. The destruction of purchasing power means that assets and objects from outside your country cost significantly more than in the past. Items like imported goods, oil, gold, and other commodities do really well if they can be effective in pulling the devaluation off. Now you know the reason for the administration (Geithner and Congress) whining constantly about the revaluation of the Chinese yuan. We desperately want other currencies to go higher and those Chinese continue to manipulate their currency and refuse to let it rise against our worthless buck!
Can their actions make a sustained impact - or I guess a better question is, can we have this hyper-inflation scenario? The answer is, NO, not yet. We cannot have hyper-inflation until we have growth in the economy, and we do not have any growth at all, we have deflation.
I commented earlier this week about the ERCI data showing that we are rolling over and that is just another validation that we are not growing. Retail sales are falling, consumer confidence is falling, and even today's manufacturing data is showing that it is collapsing. Just like I posted several times, the "growth" we saw was simply a replacement of inventory draw downs and now we have no one buying new stuff. Thus I expect second quarter earnings numbers by companies to look and sound good, but when we pay attention to the outlook from company leadership we'll hear a scary story about a retreating consumer, eroding base of orders, and a poor or at least cloudy third quarter.
TRADING UPDATE -
Well the trend for the last several months has been down now, and that is not a shock I actually expect some sort of bounce because you typically don't see this type of sustained destruction day in and day out. The market psychology is turning very pessimistic here where market participants are simply going into treasuries at historically low rates simply because they are fed up with the ups and downs of the market and they want their money back rather than some type of unpromised return.
In the short run what have we discussed almost every time, when everyone believes something, it is probably wrong, so in turn, if everyone is negative we'll probably see some upward movement as we rebound (reload for another drop). The wave of coming bad news is going to get larger, so you need to be unloading as the market goes higher. I personally am not adding any longs here because I cannot foresee how long the thrust higher will last before giving way to a lower low.
Let me be clear, you need to take advantage of any move of 3% or 5% to get out of positions that you've been holding. Be careful and sell your positions as we move higher. Above this area we have lots of tough slogging for bulls and we'll see how the market can face this now tough resistance. Key areas on the $SPX to examine are 1037 and also 1055.
If the market falls I'll be watching 1018 and then 993 and 978, after that, it is the low 900s.
Again, the FED will attempt to do anything and everything to bounce and boost this market. We might get more shorting bans, we might get more outright purchases of equities by the Fed, we might get dollar devaluations, and we might get a kitchen sink or two...... anything and everything to get something positive going, so don't go shorting the market here, but do get conservative because even a 15% move higher will be met with sellers that feel they have been given a gift from the Lord above and they will be very happy to unload their shares once they get back to their April levels. (If they get there).
Oh yes, I have so many things I want to write about, but I'll give you a quick teaser topic. Everyone loves gold, be prepared to witness gold trading down to $1040 or so. The more you hear about Europe implementing austerity measures means that Gold (the alternative currency) will fall. People have literally been running to gold because they fear a collapse in the Euro. In the short run they are not going to profit by chasing gold in their fear. DO NOT BUY GOLD HERE. I wouldn't doubt that these buyers are ultimately correct, but you'll be able to buy 10% to 15% cheaper. I will begin buying more again around this area.
As you can see, there is some support below, but lots of resistance overhead. Doesn't that April high look far away?
GOATMUG
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