Wednesday, May 11, 2011


I'm going to try something new this month where I produce the monthly macro report, but break it into two or three slices over the course of a couple of days.  I think this will help you as readers actually take a few moments and look at and digest the data, and it will also help limit my writing fatigue.

May rails during the first week of May are above last quarter's dip.  The tonnage exceeds last year although the rate of excess over previous months and quarters is certainly declining.  We did have declines in coal, autos, forest products, and food vs last year.  However, year to date all categories are showing increases since 2010's end.

Canadian Pacific continues to have worse tonnage shipments compared to last year.  They are the only major player that is facing this issue and therefore this is why I continue to highlight there production.  I'm not crazy about shorting this one at all unless we see a breakdown of the $60.50 area.  At that point, CP would be a true winner from the short side.

Despite the poor weekly performance, Motor Vehicles continue to be shipped at a much higher clip than last year.

Hauling of waste and scrap continues to be muted and in the last few weeks has actually dipped below the 2009 and 2010 trend line. 

As noted above with the rail shipping of scrap and waste, the Scrap Composite Index has briefly stopped its ascent.  As we always mention, Alan Greenspan always watched scrap prices as a tell for the direction of the economy.  Since it was good enough for the 2nd biggest bubble blower in the free world, it is good enough as an indicator for Goatmug.

The Moody's / MIT real transaction index data for March 30th 2011 showed another decline of 1.2% on all national real estate transactions.  If you were calling for a recovery in asset prices related to commercial properties, you'd still be looking for it.

NAR reported that home sales actually increased for the first time in several month.  While that may be the case in total, I am interested also to see the distribution of the sales across different price points.  In my area which is mostly affluent, I am seeing a tremendous amount of interest for homes that are in the $800,000 to $1,000,000 and above.  Where I live, that is a very large amount of money (perhaps unlike New York or San Franscisco).   

As you examine this posting from a NAR press release, we will note that this is exactly the case.  Comparisons of prices from one year ago demonstrate that homes from the $100,000 to $750,000 level continue to face declines while those that are able to afford the priciest abodes are actually paying up. 

I've highlighted quite a few times that this economy is becoming two, one where the rich are happy to carry on their lives with little impact, and then another where the middle class and poor scratch to earn an existance.  Clearly, Greenspan's housing bubble took the middle class to the cleaners as they reached beyond their means and were caught in a trap of their own greed and "right" to live in a specific way.  Now you may say that there are those that are blameless, that they couldn't help but purchase houses in a market that was over done because the price was the price.  I will only retort that this is absolutely not true.  They made a decision that was they they deserved a house and that renting was below their means.  They never once looked at their home choice as an investment that could lose, rather many just saw the potential for gains.

If there is some good news this month, it is that the rate of change of food stamp users is finally beginning to slow.  Despite the fact that food stamp usage once again increased, at the slowest pace since November of 2008.  At the end of Febuary we saw that 44.2 million Americans were using food stamps.  This amount is a 11.6% increase year over year.
While this is great news, it should also make you sick to know that the US Government (you) is paying $5.9 Billion a year to support these families.

There you have it for part one.  We are seeing continued stability in the rail shipping area, just an uptick in residential housing, and continued transaction weakness in commercial real estate.  The good news is that food stamp usage growth is slowing too.  In general perhaps we'll see a continued drop in commodity prices as we find out if Mr. Bernanke was correct in his thought that commodity price inflation was merely "transitory".



On January 6th of this year I posted an article called MCP BREAKDOWN about the craziness of the valuation of a company in a "hot" sector.  Molycorp (MCP) has been the darling of Wall Street receiving loads of hype and a tremendous amount of attention.  A perfect storm has developed as the company is exploiting a space where there is real need in terms of the product that they intend to mine and geopolitical issues related to the supply that is already available in the world.  Back in January and the preceding months China had taken overt actions to limit the amount of rare earth metals they were going to sell on the world market.  Obviously the threats of controls jacked up prices and also pushed stock prices of those mining companies through the roof.

As we all know, investing is about anticipating the next move, not just catching the one that is in play today.  If you are not looking forward, you will end up catching the tail end of a rally only to be left holding the bag.  (Ask buyers of silver at $48.00 how that feels just one week later).  Is the "anticipation effect" enough to justify the valuation of MCP where it is?
I'm not sure is the clear answer, but everything in me says no.  Recall in the post that I discussed how revenues were expected to be $15 Million for the year and the valuation of the company was close to $5 Billion?  It is great to see that since that time revenues have increased to $35 Million, but of course the valuation of the company is even greater now that the stock has traded almost $20.00 higher.  Now this post is a bit late to the party since MCP is now trading around $63.00 a share, but it is still noteworthy because that price level is still about $8.00 greater than when I called it overvalued in the first place! 

Who knows what the future will bring, but one thing experience has taught me is that companies that have rise fast and furiously often produce situations where obscene valuations don't match the hope and speculation about future growth.  More often, these situations usually don't end well for the stock holder.

Take a look at the chart and notice there is some weak support at $63 where it has bounced as I finish this note, however, the bottom of this ascending channel could take MCP down to the $50 area.

Be Careful!