Thursday, February 24, 2011


I am just about to enter into a meeting in about 5 minutes, but wanted to post these items very quickly.

Euribor continues to push upward.  Yes, there are rumors that we'll see an interest rates increase, but this is still important.

Once again the Bloomberg Financial Conditions Index moved up close to 0.5 and then got slammed back.  Recall that a level above 0.0 is considered expansionary, however I'm not convinced this is a real expansion given that we cannot get passed 0.5 ever.

Finally, just an update.  I have scaled out of my shorts on PIN and FXI as I've done really well over the last two days.  No reason to push my luck. 

One parting thought.  If you were a central banker and had policies underway that were not effective and were actually putting you in a box, wouldn't you use the Mid East riots and Libyan oil issue as an excuse for stopping your QE II operations?  We know they would never come out and say they made a mistake, but this would be perfect cover for Bernanke to drain the liquidity swamp and blame it on oil prices that were inhibiting the effectiveness of him flawless (lawless) policies.

This could be one great time to unplug the printing presses and watch the markets fall. 
Be Careful!


Tuesday, February 22, 2011


A reader, let's call him P.T., sent me an email this weekend and I wanted to respond to his questions on FXI.  Here is P.T's question. -

Hi Goatmug
"Just wanted to ask a question about FXI. I saw a post on your site about FXI and China markets. I was waiting to take a LONG position (long term) on FXI few weeks ago but after i saw your update i changed my opinion and wait and see mode. I noticed FXI going up from last few days and now trading above 200 DMA; I was wondering if you still had your short position on short side ? Would you still continue to recommend shorting FXI ?"

First of all PT, thanks so much for reading and thank you for sending an email. 
Here was my response to PT -

"In my opinion we are in no-man's land with FXI right now. You are correct we are above the 200 dma which is right at $42 (where I was looking for a downside break). Having said that, this only gives you about $1 upside to the 50 dma which seems to be pretty good overhead resistance.   Personally, I wouldn't enter a long or short till we break out of either of these moving average bounds. If we pop over the 50 dma, it may be a good long candidate.

The surge over the last couple days does have me confused though, and I'm wondering if the increase from $42 the other day is more attributed to a currency move rather than a fundamental improvement of China prospects. They did increase rates and this would normally put a damper on the upside of stocks in general, but as with everything in the emerging market area it may be a result of a relative value play (in the sense that the US growth prospects are lower and even a China with a government attempt to trample down overheating hot money is perhaps more attractive). The biggest concern I have is that China and the other emergings may get so serious about inflation and combating it that they simply crush all speculation and over do it and pop their bubbles. I think this Bloomberg article underscores my view about the risks.

Having said all that, I still believe that FXI is just one to avoid going long, or better said is still a short from a fundamental perspective. 

I hope that helps."

TRADING UPDATE - 2/22/2011

Well wouldn't you know it, after writing this response we see that markets are a bit shaky this morning and all emerging markets plays are weaker and gold and silver are up quite nicely based on the unrest all over the world.  I've captured a couple of screen shots of what I'm watching and I have resisted on doubling down on my FXI short that I have held for a couple of weeks.  I have been underwater in that position all of this time, but since the open this morning I am now even and have clear momentum on my side.  If we get through the next hour and look weak I may add to my put position, but frankly I doubt it.  We have seen so many wacky reversals that there is no sense in getting crazy.  The key  here is that FXI is now clearly under the $42 area that I was targeting and I see some minor support at $40 on this descending channel and also more support around $39.00.  A move through those areas brings $36 into play.

Weekly Chart - FXI

Another weekly chart with the 14 ema and the 40 ema - (long term indicators).  The 14 day ema has not crossed over the 40 yet, but it is really close.  If it does, that would be a significant long term sell alert.

Here is another chart I am watching with the same macro-themes, but with the added issue of concern that Bangladesh is a next door neighbor to India.  In Bangladesh the populous is outraged and investors are rioting about the collapse of their stock markets.  In one day their stock market was down over 9% and has been down over 30% in recent weeks.  If this unrest comes to India watch out!  From a technical perspective, PIN (Powershares India), the 14 EMA has crossed down below the 40 day EMA which is very bearish.

$23 is a great stop for a short and $20 is a good short term target.

Be Careful!


Friday, February 18, 2011


Here is a video I found on YouTube by a guy named Alexiscom1. It is interesting because he actually shows the impact of inflation on your currency in a realistic and meaningful way. In the first couple of minutes he really gets to the money shot which I quote below.

Alexiscom1 states -
"It reminds me of the Soviet Union in 1990s, where all fundamentals were for the collapse, but you couldn't actually see it because the mainstream media would convince you everything was fine -- and people hope, and wait, and do nothing..."

Sound familiar?  This goes really well with the post I made yesterday about Politics of Deception where the media is used to tell the story that we are to hear.

If you watch the entire 9 minutes of video you'll also find that Alexiscom1 underscores the need to prepare for the events in other ways than just financial preparation.  He implores you to store food and also learn new skills to enable you to deal with radical changes.

Good stuff, but I felt the quote was great and the overall message was spot on.


Thursday, February 17, 2011


I've been thinking about the following topic for about three weeks now and the discovery of the following video from FOX NEWS spurred me to actually put my thoughts down here.  Before you roll your eyes and click over to some other blog because I'm going to go deep into my political rants, stop, wait, and hear me out.  I'm going to briefly highlight this because it is important and is going to help us today and in the future.

Watch a few minutes of Fox here where they put together two years worth of video and created the illusion that Ron Paul is booed vehemently as he is announced the winner in 2011.  The only problem with the video is that he wasn't booed in 2011, the boos were provided in 2010!  Fast forward to 4:45 in the video to see the actual reaction to the announcement at the 2011 convention.

The  CPAC attack on Ron Paul by Fox News is just an example of how we live in a world where "what they show us" becomes reality.  This is why state run media in Russia, China,  Iran, and North Korea is so effective at framing a picture of reality for their people.  After viewing the video you walk away with the idea that Ron Paul may have won, but he sure is a poor candidate because he has a lot of people that are not supporters.

Readers of the Goatmug Blog know that as a history buff I relish the views of thinkers like J.R. Nyquist who writes on the geopolitical landscape with an emphasis on Russia, the plague of Communism, and the tactics used by them to obtain power and achieve their goals.  Mr. Nyquist's latest offering provides details about the possibility that the Egyptian revolution may have been hijacked or at least sponsored by people that didn't have a genuine quest for liberty.

In his post, Nyquist reveals that bloggers from the Ukraine couldn't find a majority of people that supported the uprising and in fact could find many Coptic Christians that felt a transition could be a bad thing.

I've found the original blog post he referenced from the Ukranian bloggers and have translated the text with the help of a translator (it's still a bit rough).

"Domestic and international media broadcast the one-sided interpretation of the U.S. government concerning the events in Cairo. Most reporters in the hotel for security reasons, and looks at what is happening through the eyes of CNN and the BBC.
We visited Egypt and study in detail the situation on the ground. Having talked with hundreds of residents of Cairo and other Egyptian cities came to a single conclusion: a nationwide uprising against President Mubarak does not exist.

Most of the population, even if it does not support the current government, a negative attitude toward anti-presidential parties shares. In particular, the Copts, are the largest Christian community in the Middle East believe that, if successful coup significantly worsen the situation of Egyptian Christians. And why the Copts are not allowed the protesters to their quarters.

In fact, the Egyptian rebellion is limited to one area of Cairo. Statements made in Tahrir Square can not be considered massive - they account for up to twenty thousand members, but for the millions of Cairo is extremely small.

The Egyptian army is not against the protesters, not because Mubarak has lost his grip on power but because the position of Mubarak - not to irritate the Americans. Participants in the uprising - nice people, but their protest, they rely solely on the support of the U.S. government."
What if this was true, that the revolt was led by a small group of minorities that had more sinister reasons yet were championed by naive reporters in the media?  We need to keep in mind that the reporters want and need juicy stories that play well for the camera.  The need for a good story line is why you kept hearing that these were "youths" rallying for freedom.  Where was the coverage of the Muslim Brotherhood that cried for an Islamic state for Egypt that could unite all Muslims under one rule?  That is what we heard from the Muslim Brotherhood leader Monday.  Interesting that we didn't hear that before the fall of Egypt's leader.  We wouldn't want the global media machine to let facts get in the way of an inspiring story would we?

What were the angles we received in the reporting?  We consumed lots of the following;
Egyptians were casting off the yoke of economic hardship
The youth were breaking the chains of those that are heartless leaders

While there is truth to this, think deeply, these portraits seem to have been constructed for our eyes, ears, and hearts to compel us to support this version instinctively.
Given the fact that we see a rumored "conservative" media outlet splicing video and creating their own version of an event we must question what that means for us as investors and participants in this "democratic" country. 

As Amerikans are pushed to the brink in the near term and the future don't be deluded to believe that all of them are violent terrorists.  Many folks like you and me will be forced to stand up against financial tyranny and the lack of representative government in the office of the President, the Senate, and Congress.  The disconnect between our "leadership" and the desires of the people is growing, not shrinking.  When Amerikans simply cannot stand it any longer you can expect to see edited videos and disinformation about their actions and their message.  Amerikans won't riot because they see an erosion of their personal liberties and a decay in their ability to protect and express themselves, no, we are fat sheep.  Amerikans will watch idly by as the poor waste away, but citizens will finally rise up when the middle class cannot afford food and gas or something terribly essential like cable or cell phones.  When Amerikans do come to their senses and stand up, you can be sure to find the media reporting that these people are trouble makers, quacks, and opposition forces rather than freedom fighters demanding that their government listen.  Sounds like how the Tea Party has been characterized doesn't it?

Second, our own government will use the media to continue to lie to us.  Ben Bernanke lied right in our face with his testimony that attempted to claim responsibility for the "asset price increases" in stock markets, but dispel any notion that he has the power to lift commodity prices and food prices around the world.  How is the Fed all powerful in the one situation but entirely powerless in the other?  Doublespeak at its finest!  I haven't read 1984 by George Orwell since high school, but I will read it again because these are the days we are living in. 

Here are a list of the lies I could find just in this testimony and a quick listening while I was typing.
1:10 in the video -  We are not monetizing our debt because it is temporary (there is no way they can reverse this)
3:30 in the video -  The US is not responsible for inflation worldwide. 
5:25 in the video -  We have 1% inflation in the US

In conclusion, I want you to know that I am not a conspiracy theory junky who sees attacks coming from everywhere and evil plots lurking around each corner.  I do believe that Amerikans believe what we are presented and we cannot continue to consume the political and economic gruel that is being served.  The Fox News story absolutely worries me as Ron Paul is someone who is an enemy of the Fed (at least in the way he speaks, let's see some action), and it is clear that editors at Fox News purposefully framed this to hurt his political support and momentum.  I would expect those actions from MSNBC and even Dan Rather with CBS, but it simply puts me on alert to question everything.  We already question every statistic released from China, why don't we do the same for statistics from the US?

If everything we see from the media is true, it is a certainty that US citizens will act like these peaceful Iranians starting at :50 in the final video clip where clerics demand the death of imprisoned leaders that called for uprisings in Iran.

Be careful!


Wednesday, February 16, 2011


Kyle provides some highlights in a CNBC Strategy Session interview with David Faber this morning.  The obvious catalyst for his appearance was his client note which we posted in COUNTDOWN TO EXTINCTION yesterday.  I will post each segment of the interview here from top to bottom so you can watch the clips as you have time.  No matter what, you must watch part 1 which is contained in this post.  You can fast forward to about 1:30 in the video where Gary gives us his perspective of a Japanese stock market index and the impact of QE (Quantitative Easing) to propel markets higher.  Gary's point is that as soon as QE is removed, gravity takes over and markets fall.

While Kyle gets a lot of attention here and it must seem like I have a man-crush on him, I don't, I just agree with the basic fundamental principles of math that Kyle champions.  It is clear from part 2 in the interview that he believes that he is one of the few that actually looks under the hood and kicks the tires to challenge preconceived notions about finance in this world.  And you know what?  It's true!  Kyle is one of the few that examines what many take for gospel, he researches it, and then he is willing to state emphatically that "The Emperor Has No Clothes".  In addition and to his credit, he is willing to bet all takers that the emperor is not wearing anything!

You must recall that Kyle went to every Wall Street firm and presented to them that the housing market and the securitizations were going to blow sky high and each firm rebuffed him and told him he was insane.

As usual the market is running off today. I've been looking for some sort of correction to get more involved in equities, but we have simply seen a consolidation. You must read these comments that I am still targeting an exit or at least putting on hedges in late April and early May, so as much as I actually feel like we may move higher it is tempered somewhat because I believe we've only got another few months left in the tank and we adhere to the "Sell in May and go away" philosophy.



Part II of the interview includes Kyle's perspective on the European economies and why the entire experiment is going to fall apart.  There are some funny stories about Greece and the fraud there.




In part 3 of the strategy session, CNBC interviewers ask Kyle about his views on municipal bonds and the comments made by Meridith Whitney about the impending collapse of many municipalities.

I hope you took the time to watch parts 1 and 2 at least.  Kyle is very patient and willing to let math work on his side.  Hopefully you'll take his lead and invest accordingly.


Tuesday, February 15, 2011


Goatmug often writes solely about economic and trading things in an attempt to warn readers of the disparity between feelings and reality.  In fact for the last eighteen months (since August 2009), the disconnect between feelings and reality have led us to actually invest heavily in commodities and emerging markets despite our longer term fears although we've maintained a careful eye on the "fundamental picture" of reality.  We've essentially had to hold our nose and deploy dollars, despite the fact that we know how it will actually all end sometime in the future and attempt to target areas that would provide enhanced returns.

As I look back, I recall feeling this way in 1999 as an investing novice witnessing worthless companies become overnight sensations.  I felt deep concern in October, November, and December of 2007 when I asked many of my friends to abandon the markets because I sensed that carnage would soon follow.  Now, I still have real hesitation about the state of reality and want all of us to be on alert for a change in the posture and perceived health of the market.  Over the last couple of weeks the stock markets have slowed a bit and have not pushed significantly higher.  Perhaps this is just the buyers taking a breather?  As I have laid out in the 2011 Outlook, I did anticipated a drawdown of 3%-5% early in the year that would allow the markets to reach higher levels inimid April or May.  Guess what?  We haven't really seen that pullback as of this writing.  Timing is everything so we simply need to watch for new cracks and signs of weakness.

I was sharing with a friend today that we must also be on the look out for the end of QEII.  My thoughts for a significant pullback in late April to May has been predicated on the idea that large institutional investors will anticipate the end of QEII in June of 2011 and therefore attempt to get out in front of a draining of the liquidity swamp.  At that time we may see all assets fall and the USD and treasuries actually gain.  I do not believe that these institutions will wait till June to make their moves to see if QE II will be extended or QEIII spawned.

On a longer term time frame (before 2015) there are other pot holes to be aware of.  In the past I have mentioned one of my favorite investors, Kyle Bass of Hayman Capital Management, L.P as one of the smartest guys in the room that was sounding the alarm to the impending MBS and real estate collapse years before it came to fruition.  Kyle made more than $1 Billion betting against the entire industry in 2007 and 2008.  Kyle was featured in CNBC's documentary House of Cards.  Please find my previous posts here - Kyle Bass Part I- Why the Fed is Trapped and also House of Cards .  Kyle is sounding his alarms again and going deeper into his thesis that Japan's massive debt will be one of the first sovereign collapses that well see.  In his article to clients called "The Cognitive Dissonance Of It All", Kyle lays out his firm's view that Japan will not be able to sustain their high debt levels and low interest rates.  So far the country has managed to survive because they have had a nation of savers, but because most of their population is now nearing retirement, they face the mathematical impossibility of keeping their pozni scheme going.

You must read this article!  One of the awesome quotes from his letter is captured below -

"One last point about Japan that is more psychological than quantitative: there is an interesting psychological
parallel between JGBs and US housing. In the last 20 years, Japanese stocks have dropped 75%, Japanese real
estate has declined 70% (with high‐end real estate dropping 50% in the last two years), and nominal GDP is
exactly where it was 20 years ago. What one asset has never hurt the buyer? What one asset has earned a 20‐
year pro‐cyclical, ‘Pavlovian’ response associated with safety and even more safety? The buyers and owners of
JGBs have never lost money in the purchase of these instruments as their interest rates have done nothing but
fall for the better part of the last 2 decades. It is fascinating to see an instrument/asset be viewed as one of the
safest in the world (10‐yr JGB cash rates are currently 1.21%) at a period of time in which the credit
fundamentals have never been riskier. "

What Kyle is focusing on is exactly the type of thought that ripped the financial worlds to shreds during 2003-2007.  Kyle is pointing out that the Japanese Yen and the Japanese Bond is essentially priced to as a risk free asset, or said another way, always to be considered safe money.  Remember real estate?  Remember how all of the securitized deals and tranches of MBS were modeled on the assumption that housing values always would increase?  Remember how pervasive the notion that real estate was easy and riskless became?  Do you remember shows like Flip This House?  Remember your neighbor telling you he was going to start buying houses and telling you there was no way to lose money?  Essentially this is the mentality of investors in JGBs (Japanese government bonds - many of which have been Japanese nationals).  What happens when those Japanese nationals begin selling JGBs to fund their retirement?  What happens when those holders start to lose money on their bond holdings? 

What is beautiful about Kyle's strategy is that he doesn't need a total collapse of Japan to make huge sums of money for his fund or his firm.  Kyle simply needs the world to wake up and realize that there is a real risk that Japanese bond interest rates could go significantly higher, creating big losses for holders of Japanese debt.  I hate to say it, but it goes back to the theme I always talk about, this is about mis-pricing of the cost of credit.  Do you really think buying Japanese bonds at 1% or 1.5% for 10 years is a good deal?  Who is the world would do that?  This is the bet that Kyle is making.  Now a lot of things will go wrong when Kyle's investment bets (gains) are realized, as this will really lead to a systematic collapse of many other institutions and ponzi schemes. 

In closing, many of you may not know this, but Goatmug grew up a rabid heavy metal fan.  The Goat played a mean guitar and often dreamed of being on stage in front of thousands while shredding some hard core riffs on his 6-string axe.  Kyle's note reminded me of one of my favorite Megadeth tunes on the album Countdown to Extinction, the song's name was Symphony of Destruction.  Kyle has composed the symphony, the orchestra is assembling, it won't be long till the destruction is played out in real life on the financial stage.


Enjoy one of my favorites.


Wednesday, February 9, 2011


Rails continue their march higher in terms of their increases in shipments compared to 2010 and 2009, with the exception of food.  Interesting decrease here, but as with all economic statistics that underperform we'll just blame the weather.  I recall my days as a Financial Analyst doing budgets for a big company where I simply used "timing differences" as my excuse for variances I simply had no idea why they were off.  I think "weather" is just like a timing difference.
We saw a season dip over the last month and now we are back into the ramp up stage.  It is important to have seen that we didn't cross below the 2010 levels here.

Motor vehicle shipments continue to be of concern as we just are increasing the shipments like we should given the super recovery that we have been promised.  Ford's disappointing report over the last week was essentially tipped by watching the rail shipping data below.  It won't be hard to imagine that GM comes out with numbers that are quite as good either.  Have you noticed that GM hasn't been able to exceed that $39 mark we highlighted several weeks ago?

Scrap shipments continue to go along the trend line from last year.  Essentially the data here, with autos, and a few other items we'll review shows that this is a "recovery-less recovery" (yes, Goatmug owns the trademark on that!).

KSU - I've captured a few snapshots of individual rail tonnage for you.  All seem pretty similar, but the hope is to find the weak one of the bunch.  Let's see if we can find it.

Looks actually a bit better than KSU.

CANADIAN PACIFIC - Uh oh, one of these pledges is not like the others.  (Remember, stock performance is all about expectations.  I would contend that that dip below 2010 levels may not be a positive.  I have looked at CP's chart though and it is pretty impressive.)

Scrap prices were Alan Greenspan's favorite macro-indicator, but I'm wondering if all macro-indicators are worthless in this asset price melt up and dollar meltdown environment.  This beautiful chart just continues to go up and to the right.

December home prices were released and we continue to see real estate decline.  The effects of QE II have just begun to impact mortgage rates (in this data) and we can only assume that the home price slide will accelerate.

In my quest to add more indicators, my buddy Carrz suggested that we should use the Architecture Index.  Billings and Inquires are up based on their December survey.

The Moody's / MIT Transaction Index recorded another rise of .6% for the month of November (released last week of Jan).  Commercial real estate has been very solid here and has not declined further.  Has the the bottom been made and are we in the clear?

While real estate prices may be going higher, job prospects seem to be not getting better.  In fact, the job listing index has recorded another monthly decline.  Essentially records the number of online job listings that are available.  This is the fourth straight drop in this data.  Are all the positions taken?  Monster tried to spin this and state that this is a 7% increase from the previous year's level, but I don't see it that way.  January of 2010 was the edge of the cliff, are we really expecting to be way over this level?

Below is a graphic of the most recent food stamp data.  Almost 43.6 million, ok let's be exact 43,595,000 are obtaining food stamps at a cost of $5.8 billion!  Essentially each person is receiving $133 a month in government food assistance.

January's release of the PCI shows a slight decline from December's big gains.  Ultimately this can probably be blamed on weather if you can believe it (and I actually do believe it for this stat!).


Interbank lending rates continue to climb.  We haven't heard much about Europe over the last couple of days, but we should keep Greece in mind and not be eased into any complacency.  It is coming, it is just a matter of when, rather than if.

The US Financial Conditions Index not is solidly above zero which indicates that the economy is expanding.

The Baltic Dry Goods Index continues its free fall.  Spot shipping rates are simply off the cliff and it is anyone's guess as to when the drop will abate.

The USD Index is captured below.  One might expect a defense of these levels here,. but one might expect alot of things in this economy that don't happen.  If we do see some strength in the dollar, we would expect to see the commodities complex sell off and perhaps the equity market too.  If we see more declines in the dollar index, we should see Garth and Ben out yelling "Party On Wayne!"

Commodities like the softs (corn, wheat, etc) continue to rock.  Take a look at the graph for corn and note that we are right back at the levels of the summer of 2008 where President Bush happily signed the corn/ethanol subsidy bill and made life hard for Mexican families that choose to consume corn tortillas.  Isn't it great that we still subsidize corn based ethanol despite the fact that it is terribly wasteful and inefficient!  Wouldn't that corn be better placed in the stomachs of people rather than the fuel tanks of autos?

Here is a neat snapshot of all of the commodities for the last 1 year period.  As Ben Bernanke testified today, there is no inflation, but they are watching the increase in commodity prices closely.  Hopefully they are watching those price levels rather than the same screens as the folks at the SEC.  (Remember this awesome revelation from April 2010?)

I want to wrap up and I'm forced to take a deep sigh.  We really have a mixed bag still where some portions of the economy look have begun their recovery and other parts are simply mired in a funk. 

Rail shipping looks to be improving or at least remaining at higher levels.
Commercial real estate seems poised to move higher.
Employment could go either way, but I'm leaning to the side of a slowing of hiring as opportunities are gone (filled or simply the job was removed).
Housing stinks and is essentially a lost asset at this point, especially with the specter of higher interest rates.
Commodities will soon hit the level where they inhibit any recovery in the global economy so I think there is limited upside.
Credit concerns have not abated and we are seeing discussions of haircuts in Greece and CDS blowing out to all time highs for Portugal.

With all of these negatives and a few positives it is just amazing to me to see many of the indices trading at or near July 2007 highs (and near almost all-time highs of Oct 2007).  I've struggled with how to characterize this economic and stock price move and I think the best way to capture it is to say that this has been a "RECOVERY IN ASSET PRICE ONLY".  In other words, the economy comeback we've seen is only in the levels of stock indices rather than in the basic fundamentals in the real economy.

Emerging markets continue to be of great concern for me thus today's FXI update and I still remain bullish on energy here as described in the 2011 outlook.  We have made it through January without the correction that I've been looking for, I don't know if it is merely delayed or just not coming.  My thesis that we'll see strength domestically through the first 4 or 5 months of the year still looks good but that is no reason to not remain vigilant.



Just a quick follow up on the China trade (FXI) I outlined last week. In the post titled, China - Great Big Loveable Panda or Blood Thirsty Bear I noted that the etf was close to breaking critical support at $42.00. As often is the case, I have been short that trade since the post and have slowly been bled to death by the daily POMO that makes markets go one direction despite the fundamentals that suggest the price action should be the opposite.

As of this writing at 9AM Eastern, FXI is trading at $41.79 pre-market. If we open here, this should be cause for a doubling of my short position, with a target on the downside of at least $39.00 and a lower target of $36.00
China raised one year interest rates yesterday by a quarter of a point to 6.06% as they attempt to cool off their overheating economy. Please see the following Bloomberg article on the topic -

What does this mean for other emerging countries? The serious answer is I don't know. If we look at charts like EEM, I don't see anything there that is a big tell as to direction, although it is really just floating out in space and could easily drop back to support around $43.75. I think a better target might be found in a chart like the one below EWS (Singapore), it looks like a pretty good short with an easy stop above $14.00.

I will have the monthly macro update done this evening. Please continue to check in at . Until then, be careful!


Friday, February 4, 2011


Apparently I wasn't the only one that thought the "jobs" report was a little suspect. Please enjoy this video from David Stockman the former Director of the OMB.  He is a regular on CNBC and he completely discounts much of the improvement in the economy and employment.  Fast forward to around 3:00 in the interview.  It is well worth your time.

Specifically, he points out that we are not adding enough jobs to keep up with population growth AND we have less employed folks working than when the recession ended.

Stockman calls into question the use of QE and the remarks that the FED is responsible for all the commodity inflation.  David calls for some sanity in the markets and really suggests that we are in some deep trouble ("and it won't be in 3 years").



I think Rick Santelli from CNBC has an entertaining rant about the jobs report.  Enjoy.

As of 1:13 today the Dow is now up, isn't it great to invest in a market where securities never go down?


Wednesday, February 2, 2011


Lately I've been doing more writing and have been highlighting the battle that is being waged in the economy.  In my recent article Inflation Bombs, I discussed how the US central bank was using dollar devaluation to inflate assets (stocks and commodities).  The next major post highlighted the Japanese experience with deflation in Why Aren't We Turning Japanese
The key takeaway in these posts is that our US FED has opted to inflate assets and the by-product of that choice is a flood of speculative dollars deployed throughout the world.  The result of the deluge has been massive increases in commodity prices, tougher living conditions for the poor and retired, and an increase cost of living for US and world citizens. 

I received a few comments from a reader the other day and the basic thrust of his comments were that China and the emerging economies were an easy choice for us to make when compared to the recessionary economy of the US.  While there is part of me that agrees with him fully we need to make a distinction between "economy" and stock or commodity investing targets (of course time frame is important too).  My statement is made clear as we examine the chart below and see that the FXI has dropped some 11% from it's recent highs in November. 

From a fundamental long term perspective I think the reader has the correct investment thesis (of course I like it because I've had it and traded on it for the last 18 months!).  However, the short-term in China has me taking a pause because the charts are telling me that we are at an inflection point.  We'll talk about those technical trading markers in a second.  First though, I'll put China in the same basket as all the other emergings that I like. 

Relative Low Employment Costs (to Europe or the US)
Little Environmental Protection Regulation
Excellent Demographics (Growing Middle Class)
Fast Growing Economy

NEGATIVESQuestionable Rule of Law (Legal Rights and Copy-Right enforcement)
Closed markets to foreign firms
Inflation (Wages)
Inflation (Land)
Inflation (Raw Materials)
Inflation (Food)

If you are getting the point that I'm most concerned about inflation in the emerging world, you'd be right.  We don't need to look further than Tunisia, Egypt, Jordan, Yemen and Oman to see that poor, unemployed, youth ultimately rise up and look to change the leadership and rules of the land.  The food inflation and poor employment may have been the final straw that broke that cause the Tunisians and Egyptians to revolt, but these are real issues that we must examine in our favorite countries like Singapore, Malaysia, South Korea, Taiwan, Thailand, Chile, India, and Indonesia.  To clarify, I tend to think that China is further along in its emergence than the others that I've listed, and in fact is now had such an improvement that it is losing manufacturing business to the other Tigers because wage costs are increasing in the mainland.

I think the story I found here describes the wage situation in China quite well.

The story describes a situation where living costs are now growing at such a clip that workers are simply walking out of their jobs and not returning from their Chinese New Year holiday since wages are not enough to pay their living expenses.  The impact of this is that manufacturers are being forced to delay shipments to the world (for useless junk we don't need).  This means that US retailers can't get the products that they have ordered.  Finally, the Chinese government is attempting to force wages up with regulations requiring minimum greater minimum wages.  In time, this will help and will create a huge domestic economy --- the economy all of the US multi-nationals have all been dreaming of for the last 20 years (remember Dell salivating about making manufacturing plants in China in the late 90's).  This future huge economy is what I've discussed for a while as the reason for investing in the emerging markets.  I've said it a few times, there will be really big draw downs, but in 20 years we'll be giving each other high fives for investing in these gems.

Take a look at the two charts above, but let's start with the the colorful black one right above this section.  What we see here is that FXI has pretty significant support at $42 and overhead resistance at $47.  The biggest concern we have is the lower channel trend line that was recently broken last week.  This action to me spells further weakness.  If the $42 area of support breaks FXI could easily trade down to $36 ---- (another 15% or 20% from here).

Finally, examine the upper chart.  I use this chart to examine the 14 day EMA and the 40 day EMA on a weekly chart.  Typically when we see the breakthrough of the 14 day EMA below the 40 day EMA it is a harbinger of doom!  (ok, that may be a bit dramatic, but it isn't a positive).  For me, when this signal appears it signal is a longer term sign that the trend has turned negative.  Let me be clear, it has not crossed below yet, but when it does, it may be a great opportunity to short.   I've posted many articles about this signal in the past, one of the best has been VLO where it signaled a positive move up when the stock was in the $18 - $19 area in November 2010.  That signal (along with good fundamentals) has proved to be an awesome long term trade.

Keep watching, but with continued inflationary forces bruising the Chinese economy along with a confirmation of the 14 day EMA/40 day EMA crossover, I'd be inclined to trade this.

Tuesday, February 1, 2011


Please review the Bloomberg story -

In the last post titled Economic Warfare - Inflation Bombs (Part 1) -  I outlined how the US leadership was attempting to create asset price inflation (stock markets up) in an attempt to change perception and create a state of "feeling better" which actually changes reality so that the economy's participants act in ways that spur improvement and thus makes the economy "better".

The mechanism of this "feel better" cocktail is the use of QE or Quantitative Easing which is simply where the Fed and Treasury "print" electronic dollars and buy US Treasuries from the open market.  Essentially the hope is that this exchange of dollars floods banks and other investors with cash.  In the case of banks, the hope is that they will lend money to borrowers that will then do projects that stimulate the economy and create jobs.  Investors are "encouraged" to buy other things like stocks with their treasury proceeds.    The tidal wave of new dollars has done exactly what the Fed has desired in that the purchases of stocks and other assets have increased substantially in value since the low of March 2009.

As I covered, those same dollars haven't just bought stocks, they bought commodities like gold, silver, oil, wheat, cotton, sugar, cocoa, copper, and every other hard and soft asset.  The by-product of this has been a surge in prices for these commodities.  Read my article for more on the impact of those price increases.

So, to summarize and get to the point of this post, the Fed gambit has succeeded so far in getting stocks up and the economy moving forward.  As Ben Bernanke has highlighted many times, deflation is the ultimate enemy, it was the cause of the Great Depression and some say it was the cause for WWII as well.  Since he is an expert in that economic period, he has vowed to defeat it at any cost.  The cost literally has been in the trillions to accomplish this feat.

There is also one other thing going on in the back ground.  Our government (Bush and Obama) attempted their own fixes in concert with the Fed.  These fiscal  approaches included massive government spending to counter act the decline in personal consumption and spending.  Of course the US government didn't have all the money for the additional trillions it was spewing out, so it created massive deficits and that trend continues today.  What is important to note here is that this massive outflow of government spending and surge in debt now must be paid for in the form of treasury obligations.  So, not only is the Fed buying US government debt for the sake of sparking an asset rally, it is also purchasing the debt of the US due to significant cost over runs.  The amount we owe is so large that we are now sensitive to any increase in interest rates that come from an erosion of the quality of creditworthiness.  Here is the money shot - The US Fed now really has this dual policy mandate (that is unspoken) - 1)  Keep the markets up so the recovery can be sustained   2)  For goodness sake don't let interest rates rise cause we can't pay the cost of interest on our borrowed principle.

So after that very long introduction we know that there is a WAR ON DEFLATION.  So what is the problem with deflation?  What happens to consumers in a deflationary environment?  Let's examine the story about Japan's experience to see what scares Bernanke so much.

  • "Their advantage may be Japan’s disadvantage. Prices in Japan as measured by the gross domestic product deflator have declined almost without interruption since 1994. That has muted the effect of falling wages and provides a cautionary tale for Federal Reserve Chairman Ben S. Bernanke, who has been lecturing on deflation’s perils as a central banker since 2002. "
Ok, so since 1994 prices have declined in Japan for everything from shirts to hamburgers.  Anything bad there?  Let's read on to see. 
  • “Retailers like Uniqlo were able to ride the wave of deflation and grow,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “To win these pricing wars at home, companies had to keep cutting workers’ pay, and that’s spiraled down with prices falling and then falling some more, with deflation never ending.”

The article's point here is that the company did cut wages to attempt to compete in the environment.  Therefore, if my wages are cut it must be terrible right?  Actually, if my wages are cut, but all the things I buy are less then I don't really feel it as much.  It seems like Martin Shulz agees.

  • “Everyone knew deflation was bad for jobs and bad for the economy, but gradually, households and companies just got used to it,” said Martin Schulz, a former Bank of Japan researcher and now senior economist in Tokyo at Fujitsu Research Institute. “The risk is that it takes hold in the U.S. as well.”
Admittedly there are negatives.  Companies just don't cut prices, they cut headcount to complete.  But where does the notion come from that deflation is bad in the article? 

  • ‘Unavoidable Endgame’

    Deflation will steadily sap nominal growth, depriving the government of revenue, until one day Japan will no longer be able to finance its borrowing, Jerram said. The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.

    “That’s the unavoidable endgame,” said Jerram, who has analyzed the Japanese economy since 1987. “As long as it’s in the future, everybody can pretend it’s someone else’s problem.”
I laugh when I read that text.  Yes, the unavoidable endgame is that the government defaults or devalues IF they continue to have stupid government spending on useless building projects (bridges to nowhere), entitlements, and stimulus spending that achieves nothing!  Sound familiar?  Japan is the future of Amerika!  The endgame is unavoidable if governments continue to have huge fiscal deficits and don't control themselves.  This is where we see the sheer terror of Bernanke and other government leaders.  Delfation is a killer if you have an out of control government that doesn't manage spending appropriately.  How many times have we heard that governments will actually downsize and cut costs?  NEVER!  In fact, the US government builds in annual increases into the budget that do not need to be approved.  So every department's budget grows automatically every year.  That includes salaries and base expenditures!  No wonder we cannot control the power and cost creep of the government!

The takeaway here is that deflation is bad if you are a government official.  Otherwise you'll see that Japan's style of deflation isn't quite as horrible as it is cracked up to be.    Consumers (normal people) actually feel fine with deflation.

  • The success of the companies in Japan has helped consumers adjust to deflation. The average household owns 1.4 cars and 2.4 color televisions, about a quarter more than in 1990, a Cabinet Office survey shows. The proportion of people content with their standard of living was 63.9 percent last year, compared with 63.1 percent in 1989, a government report said.
Contrast the information above with the choice that your federal government and Federal Reserve is making.  They would rather declare war on the retired and poorest US citizens by invoking the spirit of inflation.  Bernanke demands rising prices in gasoline, oil, clothing, and food and those costs become a larger portion of the poorest income --- just to survive!  The middle class are squeezed to death in the spiral of surging prices.  The Fed claims that wages will increase and jobs will be created, but where is the data to support this?  Where are the rising wages?  Where are the jobs?   I've highlight again the statement from above -
  • The country will either default on a debt of about twice the size of the economy or debase its currency to reduce the real value of liabilities.
The reality is that the government and the Fed has chosen not to cut the size of our government and it's entitlements, but has chosen to debase our currency.  The debasement of the currency amounts to the crushing of our poor and also the poor of the world through price inflation (because commodities are priced in dollars).  I wonder how long the Amerikan poor and middle class will put up with these attacks.  When will the rioting of Egypt and Tunisia come to the streets of our cities?  If you think the trend of higher prices in food is going to abate you are absolutely wrong.  If you think we won't see $4 gas this summer you are nuts!  Good or bad, Amerikans are soft and don't have the heart to stand up to these overt attacks by government elites.  Where is the America I grew up in?

Would you rather choose starving to death, being on the government foodstamp roles, and losing your independence and dignity or choose this?

  • “It’s amazing what you can buy with 100 yen now, we didn’t have 100-yen stores before,” said Sachiko Enokida, 80, who lives on her bimonthly pension checks from the government and has witnessed inflation’s ups and downs since the 1940s. “After the war, we all thought this was going to be the last year before we starved. Then things really boomed and people were buying apartments like crazy and you saw wealth everywhere. I would hate for things to get expensive again.”
    With almost one fourth of the population over 65 years old, Japan chose to stay in deflation, said Feldman. That turned cash into an investment, as money left in bank deposits gained in purchasing power the longer it stayed there. Today, Japanese households keep 56 percent of their financial assets in cash, compared with 14 percent in the U.S.

    “The factors that produced and permitted deflationary policy seem likely to persist,” Feldman said in a report.
    Meanwhile, consumers continue to enjoy lower prices. Golfers pay 26,800 yen to play on the weekend with a caddy at Oak Hills Country Club, a course 90 minutes’ drive from central Tokyo designed by Robert Trent Jones Jr. Twenty years ago, the fee was about 40,000 yen, said Katsutoshi Ohira, acting manager.

    “I don’t think I can expect any meaningfully big pay raises going ahead,” said Satoshi Miyazaki, 34, who works for an advertising company in Tokyo. “Since I’m paying for things out of my limited salary, lower prices have been a great help.”

There is going to be a collapse in Japan too, don't get me wrong.  Both countries have pursued poor policies that didn't include government cuts.  Both countries continued to borrow and live in the moment rather than in a mode of planning for the future.  My point here is simply that Bernanke and the Fed have picked the option that benefits the US government, banks, and elites rather than the US citizen.  They have picked themselves over the us.