Sunday, May 9, 2010


Total rail traffic continues to show increases YoY, however we must continue to look at previous levels from 2008 and note that we are still 50,000 tones away from peak levels.  We are taking note that the increase continues.

Crushed Stone and Lumber continue to tick up which indicates some growth in commercial real estate development.  Lumber doesn't get me too excited, but the rate of growth on the trend line of crushed stone is saying that we need to look for new project starts.  This may also be a flow through of some of those Obama "shovel" ready projects that weren't so ready.  Perhaps those road construction projects are getting going.

KSU - KSU was bloodied tremendously during the correction.  In fact in the midst of the correction, several banks downgraded some other rails too.  KSU dropped from over $41.00 to $36 in the last several days.  The firm reported great earnings and management also released good forward guidance.  The knock on it was that they just issued stock to take out high cost debt.  I will post a chart if it looks good for an entry. 

The stimulus plan to get homes moving did create results as first time home buyers and trade up buyers got off their tails and entered into contracts to buy homes.  The answer we'll be watching for will be whether or not it will last.  The timing is pretty good in the sense that the summer moving season is here, so the next 2 months will be critical. 

Home prices continue to move up per the leading home price index, but the measure of real home price is showing no change in its downward move.  The leveling off of this index does give us a sense that perhaps the leading index could be telling the truth, but we'll have to wait and see.  I personally believe we have a couple of issues with the leading index that will make this thing turn back down. 
First, we have the absence of the Fed's intervention in the MBS market.  As they have said they will stop agency purchases, we will have a move up in interest rates, UNLESS we have a flight to safety and all of a sudden other asset classes are perceived to be much riskier (ANY COINCIDENCE?).
Second, the termination of the stimulus plan will make those buyers that were "stimulated" get deals done.  In other words, these were probably all buyers that would have bought in the next 6 months anyway.  I agree totally with the pull forward of demand theory that suggests that this program just moved the timeline up a bit to take advantage of the taxpayer's open wallet.
Third, I don't think we've seen an end to the tidal wave of foreclosures that banks are going to release.  I don't think that the release of the inventory has been captured in the leading indicators data.
Fourth, the mortgage loan guarantors are broke and filled to the gills in horribly defaulted loans.  At some point someone sane will stop the madness and really tighten up mortgage lending standards.

WLI Data Leading Indicators are showing a complete reversal in the very short term.  We'll need to watch it to see what happens next week.

CAN YOU SAY WOW!??  I've been watching this indicator every single day for the last week.  As you know, this is a quick measure of 7 or 8 pieces of data that give us an idea if we are in recession or expansion.  For the last 14 months the FCI has moved from the abyss to expansion.  As I've reported often, the FCI data is subject to the manipulation errrr the momentum delivered by all sorts of Fed related activities.  So therefore attempts to increase liquidity tend to bump up the FCI.  It only took one week to shatter the great work that has been going on in the FCI.  The FCI now is well below zero (although it could easily come back up with a string of good days).  I mention this simply because I felt pretty strongly that we'd have a double dip, but the speed of the reversal shown here certainly is surprising.  The first picture is from Tuesday.  The second snapshot is one that shows the level of the FCI at -.77 on Sunday May 9th.

The USD caught a bid over the last several days as fear gripped the world and great buys like Greek debt seems not so great.  When real fear sets in the US treasury bond is really king and in those times, they need to convert their currencies into dollars making the currency go up in comparison to a basket of other currencies of the world.  This also makes yields on treasuries drop too as the prices of the US debt does higher.  As of Sunday night, we're seeing the dollar off a bit here because the EU is stepping in an offering a plan to "protect the EURO" and stating they are going to commit $962 billion Euros to provide economic stability.  So they would have you believe that they have made all the worries go away and everything is all better....... until Spain and Portugal and Italy need bailing out.
I'm not sure how providing another 1 Trillion euros worth of loans provided by equally bankrupt countries will help much but go ahead and pass the kool-aid, it's starting to get hot here and at least it might provide a week or two of liquid confidence to the market.
While the markets and commodities were getting shelled over the last week, something odd was happening to the Baltic Dry Goods Index.  Remember, this is the spot price for getting a ship to move your dry commodities around at the last minute.  Note the move higher.  We've been looking for higher highs and higher lows to indicate that the demand for commodities is real.  Just watching, but in the midst of such a sell off you might expect to see some paralysis in the spot shipping rates too.  It didn't happen last week, even though many of the shippers like DRYS got hammered.  I'm showing that the index is now at 3608 as of Sunday night.  Obviously higher than that last peak in late March.

Non farm payroll data showed that employment INCREASED 290,000 jobs last week.  The positive report shows that employers are adding people.  There are also folks that were discouraged and not looking that are now back at it.  This will actually lead to a higher unemployment rate as the BLS folks must count people that are actively searching.  It is very interesting that as people drop off of unemployment benefits they magically find jobs!  Don't get me wrong, there are extremely tough circumstances out there and there are legitimate folks that cannot find work.  On the other hand there are other folks that can find work that don't because they have access to some income and as a result aren't looking.  No matter what, this is the third month of gains and we need to be looking at it.

GDP was reported at the end of the month and it came in at a +3.2%.  This was down from the previous quarter's number of +5.6%, but it is still positive.

Well, I've strung together a bunch of stuff that indicates that things are getting better.  The reason why I document these things is that if you read in my tone that I'm bearish, I write it and post it so that I can be challenged by the real numbers.  So, the data including GDP, Home Prices, Jobs, and Rail Traffic all look like they are not only turning the corner, but have posted several periods of strong numbers.  The bear in me wants to point out that the rate of change of improvement is slowing for almost all of these items, so we need to keep watching.  This of course would dovetail exactly with my idea that we'll have a double dip recession in the economy.  In addition, although the consumer seems to be back to his old ways, I'm still betting that much of the economy's recovery has been on the back of an inventory build of depleted merchandise and materials as manufacturers need to restock since they simply halted inventory replacement orders during the really tough and scary times of 2008 and 2009.  Now that all of that inventory was run down to nothing, they had to get ordering and manufacturing.  Once all the factories and companies are restocked, we'll need to rely on real demand to provide economic growth.  My bet is that that growth isn't there.

Last week will be all that the consumer needs to see that the stock market really hasn't recovered and is just as unstable as it was in 2008.  Remember, we've noted all too many times that the FED and government KNOW that the STOCK MARKET is economy.  What I mean by this is simply that the stock market previously was an indicator of health in the market, rather now, the stock market is the driver of "health or perceived health" in the economy.  This makes it so much simpler to know what to do to kick the economy into gear doesn't it.  If the market drives the economy, the strategy is to goose the market to goose the economy.  And guess what?  This is exactly why in March of 2009 that the government outlawed short selling and started buying stocks through the large primary dealer banks.  We've seen consumer confidence rise and the stock market has risen.  What will happen to that same consumer confidence if the market volatility of the last week stays and we suffer several more serious setbacks?  My guess is that the US consumer that has previously driven 70% of our economy, will suddenly go back on strike and remain conservative.  Perhaps it isn't such a bad thing that they return to frugality. 

Anyway, I continue to watch the fundamental recovery, but almost every fiber in me desires to see the linkage of each data point to the government hand that is pushing it.  When the government doesn't or can't keep pushing it, will the recovery halt as well?

I've got a couple of other items to post and I'll do those plus add a trading update in tomorrow's posts.  The infamous 1000 point plunge is extremely concerning and normal trade action indicates that we'll probably see that same 10,000 level on the DOW again simply to retest it.  I keep hearing that everyone wants to find out how we had this avalanche downward.  I personally want to know how we had the rise upward to recover.  Many professional traders have their finger on the trigger as they have thought this was a fake rally for the last 2000 points on the DOW.  So did everyone of those guys see that the market was tumbling and hit the sell button?  Do you really believe that some hapless trader fat-fingered a trade and entered in an order to sell 16 billion S & P futures?  REALLY?  Where is the P& L hit then?  If that happened, a hedge fund or bank would have gone bankrupt instantly and at least we would have heard that someone got fired.

That drop was real and it was panic.  I'm not so sure that the surge was real though.  At least real in the sense that it was inspired by average Joe buying stocks to take advantage of the drop.  It certainly was Fed inspired, I'd bet.