Thursday, January 14, 2010


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

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


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

RAILS - Data from

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

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

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


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

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


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

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

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

US DOLLAR - Bloomberg

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


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

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

Look at the graph on the double inverse dollar UDN -

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

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

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

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