HOW FACEBOOK EARNS MONEY

Just wanted to provide a follow up story on The Facebook Economy piece I wrote yesterday.
If you wondered how Facebook makes money, here is a couple minute piece by Bloomberg on how the social media company generates revenues.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/ 

THE FACEBOOK ECONOMY

I had an interesting discussion with a friend the other day when he asked me if I spent anytime on Facebook.  I answered that I didn't "do" Facebook since I was too busy.  (There are a host of other reasons of course, but that's another topic).

I asked him why he Facebooked and he suggested that he did it to keep in touch with people and to network a bit.  I told him that I had read an article recently that had stated that research is beginning to show that Facebook makes people depressed.  To my surprise, he totally agreed.

FACEBOOK LEADS TO DEPRESSION

"The researchers who conducted the analysis noted that “for a significant number of users, the negative effects of Facebook outweigh the benefits of staying in touch with friends and family."

"Things like rejected friend requests caused 32 percent of the people who participated in the study to feel guilty -- and 12 percent of the people said that Facebook just made them generally anxious."

When I read these items about Facebook, there is certainly part of me that is relieved that I don't participate!  

As we closed our conversation I also considered something else that might add to poster's stress, that Facebook lives are not real.  Let me give you an example.  

FACEBOOK DISTORTION

During the holiday season, my wife received a wonderful Christmas card from a person we know.  The lovely card pictured a charming couple holding their 1 year-old baby.  The family hugged and seemed happy to be together to celebrate a beautiful Christmas season.  While everything in the photo and card seemed perfect, the truth is that this couple is separated and living in separate homes.  The father never sees the child and has begun a relationship with another woman.  The appearance of the father in the picture is quite odd, since it isn't an accurate depiction of reality at all.  But there you have it, the woman and the man set up a time to create this photo-op and staged a classic Christmas tradition for all of their "friends and family".  

In some ways, I suspect that just like this holiday card, Facebook is represented by this distortion of reality as well.  Sure, you can un-friend your spouse, but my guess is that members of Facebook (in general) don't highlight that they just had a fight with their husband, got fired for being a terrible employee, or have a kid that is abusing drugs in school.  In other words, Facebook probably is a depository of the version of life that we wish we had where all the good things get posted and none of the bad things get attention.   

FACEBOOKED

As I continue to think on this topic, I realized that our economy and the investing markets are very much like a Facebook post.  We are told all the good things like employment is getting better, rail shipping is at highs, consumer spending is rebounding, companies are starting to hire, but all of that seems hollow as we really measure it against reality.  Think about it, our DJIA is nearing levels we haven't seen since May of 2008 so the logic must be that if the market is really improving, then all of the credit issues and insolvency problems we've faced are well in the rear-view mirror.

Unfortunately, we too know there is an another, real reality in our economy.  In this version, we know that job seekers cannot find a great job, that employees work long hours because they feel threatened  that they may be replaced if they don't work more, we know that money is very tight, and our government continues to take more and spend without constraint while promising more benefits.  In addition to that list, Europe is even worse!  

TRADING PERSPECTIVE

Simply look at the last 26 trading days and you'd be hard pressed to discern that there was any problem in the global economy by looking at the stock market.  Its upward march has been a thing of beauty!  Yet, underlying the wonderful performance, we know that there is a lingering, even gnawing sense that there are other issues that must be tackled for real price action to propel markets higher.  Even with my beginning of the year call for higher markets through April, I do believe that markets do need to pause here and even pull back.  Take a look at almost any chart and they are ramming headlong right into previous highs.  Without some sort of new and positive news, there is no chance that they ramp higher.  If you've been in great dividend payers that have made lots of ground, sell them and reload later!  No one ever did poorly by locking in profits.  If you find yourself questioning this notion, at least set stops in case the reversal really gets going.  

The best case scenario for bulls is that we consolidate here and then push higher on great news, however I actually believe we'll pull back 3% to 5% and then hold for another push higher with a few more words from our benevolent leader in the Federal Reserve.

FACEBOOK IPO

Perhaps we started talking about Facebook as a result of the news leak that Facebook is preparing to unleash its IPO on the world in the coming months.  While I have no doubt that the IPO of Facebook will bring billions of dollars of wealth upon Mark Zuckerberg and many others that somehow joined the firm over the years of its infancy, I have to question if the general investing public will be so lucky.  Certainly, recent tech IPOs leave us with feelings of the dot.com era rather than a sense that these firms are long for the investing world.  Friends on Slope suggest that Facebook is different, that the very name Facebook is part of our daily lexicon and therefore it will be a winner like Google.  Perhaps.  We will certainly see, but isn't it interesting that Facebook's timing could be almost perfect as the estimated IPO date may be in mid-May, right where I have indicated that I see the top in the market for the year.  

Before I go, I wanted to check back in on GRPN since I have publicly stated that I think this is the worst of all the new and hot IPOs that hit the market last year.  The business is one that is easy to replicate and unfortunately for many of the clients the results have been very negative.  Have a glance at GRPN's chart.  If we were trying to spin this for a Facebook post, what would we say?

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/ 

ITALIAN ROAST? (FORGET ABOUT THE USA)

Are we headed back into a declining Euro environment as a result of rising Italian bond yields?  To be clear this would mean that we might see a falling US equity market as well.

SETTING THE STAGE FOR MORE FED ACTION? --- NOT YET, BUT CLOSE
We have the FOMC meeting today and don't believe we'll see anything too earth shattering, except I do believe that we will begin to hear more and more from the Fed that they are concerned about lack-luster growth and that they may need to step in and assist the economy?  You might say, "Why would they need to interject themselves now?"  Unfortunately, the Fed has increased the scope of their mandate and now they are the keepers of growth and provider of liquidity for the entire world.  This is not going to be an ECB or Euro problem, it is a Fed problem and no matter how good the US economy or earnings stateside look, you can bet that Uncle Benny will be focused on halting the spread of credit issues here.

The Italian bond yield is just one indicator that all is not well.  Clearly we still have the Greek issue too.  But further, we are seeing many signs of a complete credit seizure type event in Europe that is building.  Large firms are having trouble performing in this environment because credit spigots are being turned off (for themselves or for their clients).  Could it be that we are witnessing the Lehman moment for many industries in the Eurozone?  The Fed will have to act won't it?  It will need to stave off any chance of that coming to our shores, right?

LOOK FOR A TIP OF THE HAND IN THE PRESS CONFERENCE
As a result, of the worsening credit conditions overseas you should look for key words in the written statement and the press conference related to "providing liquidity facilities", Repos, Dollar Swaps, and inter-bank lending facilities.

The credit and debt issues of sovereign nations is bleeding into the business of regular businesses as Siemens reported declining margins and profits.
SIEMENS REPORTS DECLINES

The trouble is affecting smaller businesses as well as we see in this recent article in bendbulletin.com.
The gist of the story is that larger banking institutions have just stopped lending to smaller firms and therefore new niche lenders have moved in to fill the void.
TIGHTENING CREDIT


Unfortunately, the new lenders aren't making things better for Swiss Eurozone refiner PetroPlus who filed for bankruptcy earlier this week.  The firm was getting crushed by a poor economic environment as oil prices rose and the crack spread went against them.  Lenders refused to step in and provide liquidity creating a situation which couldn't be managed.
PETROPLUS FILES


The situation in Europe is not getting better for companies, bond trading in sovereigns is not improving, and the Greece situation is coming close to a head where bond holders are about to take it on the chin and take real haircuts.  Can the Fed come to the rescue again?  We will see shortly.


Becareful trading today as FOMC events can be hazardous to your account's health if your are long or short.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

THE 3 PILLARS OF THE FED MANDATE

I almost fell out of my chair today at lunch as I scanned Bloomberg's news stories.  There in not-so-black -and-white stood the statement that completely summarized all of the issues that America has with Wall Street and its crazy view of the world.  There, plainly for all to see, one statement characterizes why the last two years of my blogging has been therapy in a way.  This sentence captures the essence of why Main Street will never get Wall Street, and why Wall Street won't be happy until the entire nation's financial system is completely destroyed.

WE NEED MORE POWER!
In an interview this morning with Bloomberg Surveillance, Tom Keene spoke with Ira Jersey of Credit Suisse Group.  In the discussion, Ira gives us his view that more quantitative easing is needed and more liquidity should be spent to stimulate the economy.  Mr. Jersey starts with;

"The policy-making Federal Open Market Committee meets Jan. 24-25. The central bank is forecast to keep its target for the federal funds rate at zero to 0.25 percent. The target has been at that level since December 2008 and the Fed has pledge to keep it there until mid-2013. 

The central bank has purchased $2.3 trillion of mortgage and government bonds in two rounds of so-called QE. In September, it announced plans to sell $400 billion of short-term debt and use the proceeds to buy an equal amount of longer- maturity securities, in a program as nicknamed Operation Twist after a similar action in 1961 designed to contain borrowing costs for companies and consumers."

“We do think the Fed is going to do another round of asset purchases later in the quarter, probably aiming for April,” Jersey, director of U.S. rates strategy at Credit Suisse" 

ALL IS FIXED, LEAVE IT ALONE?
Ok, so we are told daily on CNBC that jobs are getting better,  housing is improving, banking is returning to normal and banks are healthier, inflation is under control,  foreclosures are abating, and the consumer is out there spending and adding to his revolving debt.  How could we possibly need more QE?

Well, if you are a Main Streeter, perhaps all of those positive things would lead you to conclude that while the economy is not fully recovered, it is on its way and the government and Fed should wait and see how things are going and maintain the status quo for a while.  You'd probably think that allowing market forces to take over might be a good thing.  While you might feel that way, bankers don't exactly see it the way you do.

"Jersey said a third stimulus effort may be more focused toward the housing market and buying mortgage-backed securities. 

A Bloomberg news survey conducted in November found 16 of the 21 primary dealers of U.S. government securities said Fed Chairman Ben Bernanke and his fellow policy makers would start another purchasing program during the first half of 2012. The dealers’ estimated that the Fed may buy about $545 billion in home-loan debt. 

“We need to get confidence up, in particular business confidence up,” Jersey said. “That would help stimulate jobs, which helps stimulate the residential housing market, and that’s what gets you out of the doldrums.”  

HOUSING, HOUSING, HOUSING IS NOT OK
So, we need to get the business confidence up and that will fix housing and everything else.  Why the heck didn't I think of that? Have you noticed that everything comes back to these housing values?  If I didn't know any better, I'd almost suspect that banker's balance sheets could somehow still be impaired after all this time.  Mr. Jersey believe that the Fed will act to drive mortgage rates even lower and somehow this will get economic activity really fired up.

WHERE IS HE GOING WITH ALL OF THIS AND HOW DOES IT RELATE TO THE FED?

Mr. Jersey casually drops this bomb on us, which is frankly just awe-inspiring.

“We are growing, we just don’t feel prosperous. It is a part of the job of the Fed to assure prosperity, one of the ways to do that is to kick- start housing.”

WHAT??  THE 3RD LEG OF THE FED STOOL
Did Ira Jersey just say what I thought he said?  Of course he did.  Didn't you know that there was a 3rd mandate of the Fed?

First, we want to maximize employment, second, we want to maintain price stability and NOW, Credit Suisse has added that we need to expect the Fed to make us feel prosperous!! It is so nice to know after all of my years in the markets that I had completely left one of the Fed's mandates out!

Clearly this interview reveals the divide between Wall Street bankers and normal people.  We want the Fed to just stop, and the bankers just want the Fed to make them happy.  Unfortunately we also know that the only thing that makes bankers happy is a predatory economic attack on our wealth and our savings (sort of like the government too eh?).  Somehow I think regular people don't have a chance in this fight.

Finally, if you want to read some old speeches about the Fed mandate, how about this gem from another Fed Governor who helped do "research" that helped collapse a Euro nation a couple of years ago. - MONETARY POLICY & THE DUAL MANDATE - Fred Mishkin

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

YOU CAN NEVER HAVE ENOUGH OF A GOOD THING

More QE?  Now?  I thought the economic situation in the US was getting better?  I thought employment was improving?  What could possibly lead the Fed and it's newly elected doves to conclude that the US economy needs another dose of the economic elixir that heals all woes?

Apparently, there is something out there that these guys see as a significant risk to cause them to want to double down and flood the economy with more liquidity.  It doesn't matter if it doesn't help the real economy, asset values may go higher, so thus we probably need more of it huh?  Or, is it even more simple, is it just the non-partisan Fed working the election cycle?

Enjoy the video where Steve Liesman from CNBC examines the possibility of more action by the Fed to save us from even the possibility of a slow down.  He also mentions something I highlighted last year that the composition of the Fed has changed again and those terrible fiscal and monetary hawks have been replaced by doves that are all for pushing the envelope of monetary safety.



The stunner here for me is that message expressed in the video that even if GDP comes in a 3% or more, there is a real possibility for Fed intervention.  Perhaps this talk is simply setting the ground work with a plausible threat for action by the Fed as we know they like to believe that the mere mention of their action will cause market participants to act in new and risky ways.

If we consider that a breakdown of the Greek situation is coming and very rapidly, these may be not-so-subtle efforts to pre-warn the market that they will be acting to keep the world from ending.....again.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

CHART-FOO-YOUNG

A COLLECTION FOR YOUR ENJOYMENT
Here are a few more charts I examined this weekend.  Not really a rhyme or reason for the collection, but I had them so I thought I'd share them.

Don't read too much or too little into the charts and their significance here in the post.  I love some of them as seen through the lens of the thought that May 2012 will be the high for the year, others I hate now and will probably hate more later.

In my mind, PFE looks the most topped out while EWY and EWC look like they could go much higher if we don't have some Euro-crisis in the next week or so.

VLO - VALERO

BX - BLACKSTONE

CAT - CATAPILLAR

EWC - CANADA ETF

EWM - MALAYSIA ETF

EWY - SOUTH KOREA

FCX - FREEPORT MCMORAN

MMM - 3M COMPANY

PFE - PFIZER

SHLD - SEARS

Have a great day off from trading and honor Martin Luther King on this wonderful day.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

RESISTANCE IS FUTILE (MAYBE) - CHART FIESTA

It's Friday, why not look at some charts and have a chart fiesta (party for you gringos).  Many charts are showing signs of hitting resistance and most in the market segment areas also have been going higher on lower and lower volume.  Housing is the only exception, which has rocketed higher on higher volume (XHB).

I am not going to give any additional commentary, cause I've laid out the case in the 2012 Outlook for most of these items.  It's as big as the Great Wall of China, but I think it will help you if you take the time to read it.  The charts below will help you compare the commentary to what I believe I see in these charts!

OH YES, AND ONE NOTE AND PROMOTION FOR WHY YOU NEED TO USE GOOGLE CHROME AS YOUR BROWSER!!! 
If you use Google Chrome as your browser and you click on the charts to get a full page view, all you need to do is page down or even possibly roll the mouse down if you have a roller ball and it will allow you to move to the next chart!  WOW!  Easy and awesome.  It took me a long time to convert to Chrome, but I almost use it exclusively now and this is an example of why!

MARKET SEGMENTS

XRT - RETAIL

XHB - HOUSING

XLP - CONSUMER STAPLES

XLV - HEALTHCARE

XLU - UTILITIES

IYT - TRANSPORTS

LQD - CORPORATE BONDS

HYG - HIGH YIELD BONDS

PPA - DFS/AEROSPACE

SECTOR / COMMODITY CHARTS

WNR (REFINER)

JJC - COPPER

JJG - GRAINS

POT - POTASH (FERTILIZER)

SGG - SUGAR

UGA - GASOLINE

There you have it, lots of charts and lots of topping and a little opportunity mixed in there too.
Have a great weekend.  Send me an email or leave a comment if you have thoughts or questions about any of them.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

THE RAVAGING EFFECTS THIS MARKET HAS ON PARTICIPANTS

Can someone tell me what happened in the life of ex-Pimco Managing Director Paul McCulley?  As a respected player in the upper tier of all global finance, Mr. McCulley was actually one of my favorite guys.

Now though, Mr. McCulley seems to have taken one of those trips like the Beatles did to India for transcendental meditation.  Apparently he has connected with his inner spiritual man???

These markets do have the ability to mess with people, it just looks like Paul may have been impacted more than most.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

EL-ERIAN PUTS THINGS IN FOCUS

The Pimco-Fest continues as I found today's Bloomberg interview with Pimco's CEO and CIO, Mohamed El-Erian.  The CEO restates much of what Bill Gross highlighted in his article, but heck, it's a video, so you don't have to read!!!!

How awesome!



There are a few takeaways that I enjoyed and since El-Erian is such a sharp guy, his perspective is neat, and also he always uses language so well.

HIGHLIGHTS
People's mindset doesn't change to match the risk environment we are in.

Fed is out of tools, so now it is employing communication to try to push investors to take more risk.

The Fed alone cannot help and fix everything, other agencies globally are asleep at the well.

QE III cannot produce what we want.  The Fed wants to do things, but can't produce the outcomes.

Is the US decoupled?  There is a massive headwind called Europe.  We can't avoid Europe.

Investors need to stay defensive,  Focus on fundamentals and pay attention to technicals.

Uncertainty and unpredictability should never lead to paralysis.

US stocks are the cleanest dirty shirts, we will see if they can continue to produce revenue while controlling costs.

There is nothing new in this interview, but the clarity and conciseness that he brings is refreshing.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

2 HEADED MONSTERS - BILL GROSS' BINARY WORLD

I read the 2012 outlook from Bill Gross this week and wanted to make it available and make some clarifications about his thoughts and also highlight how powerful it is that this controller of literally hundreds of billions of dollars has gone so negative on the outlook for the global economy.

Below is the link;
TOWARDS THE PARANORMAL

In this post, Bill Gross revisits the term "New Normal" that Mohamed El-Erian had made common place when referring to a low growth, stagnant global economy.

"The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012."

Where Gross is really focusing on is this idea of a distribution curve where there are two really bad outcomes at each side of the distribution of events.  Unlike the unforeseen black swan eventst, Gross is suggesting that the probability of the worst outcomes is increasing and therefore he references the "fat tails". (In a normal distribution the tails are small).

THE PARANORMAL
Gross describes where we are as we enter 2012;

"The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,” standby to redefine “New Normal,” and welcome to 2012’s “paranormal.   

Perhaps the first observation to be made is that most developed economies have not, in fact, delevered since 2008. Certain portions of them – yes: U.S. and Euroland households; southern peripheral Euroland countries. But credit as a whole remains resilient or at least static because of a multitude of quantitative easings (QEs) in the U.S., U.K., and Japan. Now it seems a gigantic tidal wave of QE is being generated in Euroland, thinly disguised as an LTRO (three-year long term refinancing operation) which in effect can and will be used by banks to support sovereign bond issuance. Amazingly, Italian banks are now issuing state guaranteed paper to obtain funds from the European Central Bank (ECB) and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another."

Not exactly mincing words is he?  Gross continues to state that in reality, global credit markets are actually EXPANDING mildly rather than what should be happening through normal events we've been through.  Extra normal intervention of central banks and politicians is having the effect to push credit expansion rather than contraction.  Gross explains that INFLATION is one side of the distribution; one of the "fat tails".

THE FED SURE LOVES ITS INFLATION DOESN'T IT?
On the other side of the curve we have the following;

"At the other tail, however, is the potential for “implosion” and actual delevering. To the extent that most sovereign debt is now viewed as “credit” in addition to “interest rate” risk, then its integration into private markets cannot be assured. If only Italian banks buy Italian bonds, then Italian yields are artificially supported – even at 7%. If so, then private bond markets and non-peripheral banks in particular may refuse to play ball the way ball has been played since 1971– purchasing government debt, repoing the paper at their respective central banks and using the proceeds to aid and assist private economic expansion. Instead, fearing default from their sovereign holdings, any overnight or term financing begins to accumulate in the safe haven vaults of the ECB, Bank of England (BOE) and Federal Reserve. Sovereign credit risk reintroduces “liquidity trap” and “pushing on a string” fears that seemed to have been long buried and forgotten since the Great Depression in the 1930s."

DELEVERAGING  IS A NICE WAY TO SAY DEFLATION
Here, Gross suggests that the other side of inflation is the repudiation of ponzi debt and the notion that central banks efforts to stave off credit implosion through debt purchases could result in absolutely nothing meaningfully good, and ultimately tax-payers eating a lot of defaulted debt.

 Well, central bank efforts have worked previously, why not now?  I've discussed this reason many times, the Fed has worked itself into a box of zero interest rates now, and that amounts to them trapping themselves with little room to work.  If rates are 25bps how much farther can they go?  If the Fed dropped rates to zero and the ten year US Treasury fell to 1% through additional bond-buying activities (QE) does that buy them incrementally anything?  Does more liquidity available do anything at all when the world is swimming in USD?

NO, zero bound money makes yield investors freeze and these buyers state that all they would really desire to do is keep their money safe given that when they deploy it and invest, they are really taking significant risk adjusted risk for very little return.  Why is that?  When was the last time your broker told you that money markets could lose money?  When was the last time you thought about your brokerage firm freezing your money in accounts like an MF Global situation?  Situations like these make investors that rationally examine risk state that they will forego investing in anything to ensure the safety of their money.  Essentially, the desires of the central banks to stimulate asset demand ultimately can have a chilling effect on investing that is exactly opposite to what they intend.

So what does Bill Gross say the Fed will do about this growing conundrum?  He says that they will actually signal in their January meeting that they intend to hold interest rates low even longer, perhaps as long as 3 years!  

INVESTING OUTLOOK
What does Mr. Gross say investors should do in response to the 2 potential outcome disaster scenarios?

Bond Investors -
1)  Extend out maturities and bond duration.  With a signal from the Fed it won't raise rates for even longer, essentially you are protected from rising rates and the losses on bonds this imposes.
2)  Invest in US Treasuries, not Europe.  Go 6 to 9 years out, not less because you get paid nothing.
3)  If you are buying long dated US Treasuries, they better be TIPS
4)  Corporate bond holdings should be in the higher grades of debt, not lower.  Again, he suggests some financials here and I think he is off his rocker.
5)  Munis could be a good opportunity --- PERSONALLY I THINK HE IS NUTS, but then again, Pimco has to invest in long maturity bonds, but I wouldn't touch them.
6)  No EU bonds.

Stock Investors -
1)  High yielding dividend payers is what he says to go after.  Look for companies with stable cash flows like utilities and big healthcare (pharma).
2)  Commodities - Gross is basically flipping a coin here saying it could go either way.

Currency -
He gives us no real insight, simply saying that in deleveraging the USD is awesome and in inflation, it sucks.

SUMMING UP - DID HE REALLY SAY THAT?
Finally, Gross puts it all in perspective with this last parting shot;

"For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable."

What?  Investors had better begin to expect 2% to 5% returns from all asset classes?  Is he serious?  I presume he is dead serious and this is the real issue.  I still have discussions with friends that expect 10% returns or 12% returns and I ask them where you plan to get that?  The reality is that yes, you can get those returns, but the amount of risk you take in the investing environment today is off the charts.

THEY BOUGHT US TIME, NOT MORE ROPE
I will say it again, daily moves up and down 3% indicate that the market is having a death-rattle event, not that it is healthy and invigorated.  I am suggesting that the very underpinnings of the market itself is heaving and struggling and these are the last gasps and fits of life in this dying beast. It seems as though Bill Gross agrees.  Gross doesn't say it, but I think he is calling BS on all work of the Fed and realizing that they have gained us absolutely no material and meaningful improvement for lots and lots of bailouts and manipulation.  We are at the end of our rope and essentially the Fed has only bought us time over the last three years, not more rope.

NOTHING IS BETTER, THE BIG ONE IS COMING
In a way, I feel like the comments of Bill Gross echo the sentiments of a video interview Kyle Bass did a couple of months ago, where Bass lamented that we are in a "Binary Outcome" situation with the Euroland.  Bass described the Euro situation as a scenario that results in either the implosion and collapse of the financial system or they are saved.  While Bill Gross extends a bit more of the "curve" in between nasty outcomes, the thrust of the statement is the same, nothing is better, and the big one is coming.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

 

 

 

CONFIDENCE LOST, 13 PREDICTIONS FOR 2012

The 2012 year is off and running and before it gets away from me, I wanted to publish the outlook for the new year and get it done before the middle of January like last year.  I will do a review of the 2011 Predictions later, which I might suggest you read here - 12 FOR 2011, where I might say I was right more than wrong and really on point in several key macro level directional calls.  (Back patting over now).

Let's jump into it.

VOLATILITY, VOLATILITY, VOLATILITY
2011 was one of the nuttiest year for the broader markets that I can remember.  The SPX traded in huge ranges and ended up only 2% for the year.  There were many, many swings up and down of at least 5% and this kind of action makes any sane investor sea sick.  As I mentioned many times in the 146 posts I did last year, 3% moves up and 3% moves down in consecutive days is not a sign of a healthy market, it is a sign that the market is absolutely sick.

CONFIDENCE COLLAPSE WILL BE COMPLETE
2012 will be a year where this type of manic action will continue, so I suspect that there will be great periods of euphoria and gut wrenching falls during the year.  Unlike last year where I predicted that the US markets would be positive and increase 6%, I suspect that we'll see an unnerving drop from the closing levels of the SPX to 1144 or a loss of 9%. (everything in me wants to say a loss of only 5%, but this blog isn't for chickens).  Does this mean that there are no gains to be had this year?  NO WAY!!!  In fact, I believe that we'll see a repeat of 2011 with the theme of Sell in May and Go Away being rewarded heavily in commodity and energy names.  This further highlights that if the front half of the year has the potential of being pretty decent, it must mean that the later half of 2012 is going to be nasty for me to get to my -9% prediction.  It is with this in mind that we must note that all Euro deception and troubles will be revealed after May, and this is how I reconcile the two ideas.


The odd thing about the market losses for 2012 will be that the performance will be disconnected from the improving US economy.  What I am saying is that we will actually look back in January 2013 and say "wow, the economy isn't really that bad compared with last year, but what we'll actually see is that Europe is just that bad, and the fall of the Euro will spell a falling market for equity players.

WE JUST CAN'T AVOID IT, WE'RE STILL CURRENCY TRADERS
Even if you don't think you are a currency trader you are.  In relative terms, the USD is so much better than the feeble Euro and we'll see a continuation of the recognition of this issue, therefore the USD will be higher despite a concerted effort in the first 5 months of the year to reverse this trend.

US MARKETS - IMPROVING CONDITIONS BUT WAIT....
1)  JOBS - The jobs picture will continue to improve with the jobless rate dipping to the low 8% levels.  This rebound in the joblessness level has more to do with employers simply hiring under qualified workers to fill specialized roles as this issue has been persistent for the last year or so.  Employers biggest challenge has been to find skilled workers to fill open positions.  In 2012, employers will just suck it up and attempt to train those new hires in the open spots.

Note that there is an extremely troubling problem in our labor environment where unemployment for the uneducated is amazingly high while the unemployment rate for college grads is extremely low.  Despite the stories you hear, if you have a college degree and are willing to move, you should be able to find a job.  This bifurcation of the jobs market feeds the class warfare sentiment and who can argue with it when looking at the issue through this lens?  The trouble is that the uneducated have to WANT to actually work to get educated!  Our nation has become one where many of our citizens don't even make an effort to grasp one of the best attributes that our country offers; the hope and reality of achieving the American dream and having the ability to work hard, risk, and achieve greatness.  Unfortunately our least prepared and least equipped have traded hope and opportunity for the instant gratification of subsistence living and are pacified with social programs that placate many needs and are a facade of comfort.  Why give maximum effort when the short run gains received from working hard are less than or only marginally better than doing nothing?

2)  HOUSING - (CONVENTIONAL WISDOM DIES HARD AND ATTITUDES CHANGE)
I anticipate that the US housing markets will remain flat even in these depressed levels.  Unfortunately we really have no idea what sales numbers can be trusted from NAR because they have fudged reported sales for so long.  Despite this slight of hand and the conflict of interest, I think that we'll see a flat line amount of growth in sales as there is a significant paradigm shift occurring in the minds of the US home buyer.  In the past owning a home was part of the American dream.  Now, given the collapse of real estate markets and the lack of availability of credit (the demand that home buyers actually have 20% to put down) potential buyers are simply now believing that home ownership is quite as cool as they were led to believe.  The myth that home ownership is a great investment is being debunked and this sham is finally getting some publicity.  As this knowledge is now getting widespread acknowledgement, there will be a steady-state level of home ownership and little variation or boost to buy homes.  Add to the mix the notion that Congress is still looking at a move to get rid of the mortgage interest tax deduction and you'd see a continued decline in home ownership.

3)  USD
As I mentioned above, we are all currency traders whether or not we know it.

While it is tough to believe that the USD has merit, it certainly has "relative merit" and therefore I see an even more impressive move higher in the USD currency basket.  The continued revelation that the Euro is done in its current form plus the continued efforts of politicians and financial leaders to keep the "ponzi" intact will only serve to boost the USD to higher levels.  I think a level of 84 is very easy to achieve on the DXY. (See the 5 year chart below).  If USD goes higher, stocks go lower. (chart by www.marketwatch.com )

4)  INTEREST RATES
Did I tell you that predicting interest rates is a fools errand?  Ask Bill Gross, the king of bonds, if guessing where US Treasuries will go is easy!  I am going to say that the last two directional calls of Mr. Gross have made him look like a complete dolt!  Of all of my predictions last year, this is the one that I missed as I expected rates of 3.5% or more!  Ha!  Who is the idiot now?  I guess I anticipated a decent year in the markets and assumed that we'd achieve that decentness by way of actual growth and a clearing of some tough issues.  Unfortunately, I could not have known that we'd achieve the average returns on the Dow by doing what central banks always do, which is create really low interest rate environments that ultimately blow the real economy sky high and collapse financial markets!  (Oddly, I think Bill Gross miscalculated the level of insanity that the Fed would go to to keep the scheme in place, even though he is one that is really close to these nut jobs).

So, where do we go from here?  Lower.  How about a bold call of 1.65% to 1.75% on the 10 Year.  Despite a stronger dollar, we'll actually see yields lower as the flight to quality and away from the Euroland disaster will push 10 years to Japanese type levels. (chart by www.marketwatch.com )

COMMODITIES
Now we get to the fun stuff.  I nailed the macro level calls on commodities this year which makes me feel very nice and warm inside for about 3 seconds.  Unfortunately, that is about as wonderful as it gets as I am reminded that you have to trade the strategy to make money on it!  Yes, I did trade these, and yes, I did make money, but I didn't make as much as I could have because I stayed longer in the trades than I had outlined in the 2011 outlook.  Essentially, the call on all of these was to stay in till May and get out.  If you did that and actually exited on May 1st, and never traded again (or dare say even went short) you rocked.

I will spare you the gloating about how I nailed the calls on oil and gas to almost perfect calls on the high and low, etc.  I will however say that this year is even scarier than last in that we have a quickly escalating Iranian problem and the countries involved are removing all wiggle room for themselves.  It looks like the US and Europe are on a collision course with the real nut job and no one wants to back down, in fact, it could actually be in their best interests to pick a fight!  Without further ambling about things I will obviously write much more on.

I think intra-year, oil and gas ARE the big winners this year, even though they will fall after mid year, other than that, the big winners at the end of the year will be the ag-type commodities like sugar, corn, and wheat.  The play here is that central banks must fight for their lives by providing stimulus in the face of the deflationary forces of the Eurozone collapse, while they won't be successful in saving that which cannot be saved, they will resume the process that helped tear down many of the Middle East regimes by way of out of control food inflation.  Buy your freeze-dried stuff now, cause it is going to cost more by the end of the year!

5)  OIL AND GAS -
This year the theme to buy now and sell in May is again right on.  There is mounting evidence that the US economy is resilient and not collapsing, there is the Fed giving oil and gas an inflationary wind at its back, and finally, Iranian President Mahmoud Ahmadinejad is pushing all of his chips onto the table to buy enough time to go live with several nuclear warheads.  If he can weaponize just one device, he suddenly has tremendous leverage over his neighbors and the USA in the region.  With the brinkmanship at record levels, oil and gas will not sit idly by, they will lurch higher with $110 within easy reach by mid February.

The seasonal play also works well for the plays I made last year and in fact, I am already involved with several of them.  I think WNR and VLO will be winners in the first half of the year and a play in UGA also looks solid.  Targets for these plays are $18, $27, and $54.  I think all of them could easily exceed these levels, but I will stick with the "exit by May 1 strategy" this year even if it means missing out on other gains.

Oh yeah, the big oil names and service companies are awesome too, especially if they pay a dividend.    Portfolio Managers are still in the game of security selection where one would pass on bonds and buy dividend paying equity stocks instead because corporate bond yields are so low.  This benefits almost all large firms and energy firms that are dividend players seem to be a solid approach to capture upside and income.


6)  AG STUFF -
Yes, I said it again, corn, wheat, soybeans, sugar and anything that can be consumed will move much higher.  A safe play is to time the exit in May as well, but I think that agricultural commodities will be the one uncorrelated asset this year that just kills it.  The more intervention we see domestically by Uncle Ben and his round table of doves we will see more food disruption in the form of out of control prices fed into the system.  Tunisia, Egypt, Libya, and Syria will all just be the tip of the iceberg as world citizens rise up to confront their leadership's ability to control prices of food as a result of the never-ending liquidity spigot originating in the USA.  Names to watch here are CORN, JJG, SGG.

7)  GOLD AND SILVER -
I am telling you what, I nailed this one too last year.  While I undershot the move upside in gold and silver, the pricing action did just as expected and clearly the move isn't done.  The crazy euphoria is now gone from the trades and that is awesome because I feel like both gold and silver can now be entered rather safely for longer term trades.  It seems like central bank intervention has eased some fears related to the "buy gold, cause the Euro is going to collapse", but it will return and with a vengeance.

I hesitate to give price levels and targets here, but what the heck it's not like you are paying for this.
I think we will see a revisit to the $1,900 level in gold and probably beyond that given the circumstances that need to be in play for the shiny metal to return to its highs. (charts by www.kitco.com )

Silver, will probably NOT revisit its $50 highs, but will settle in at $44

I think either of those would be nice if you pulled the trigger and then made a hasty exit.

As I noted last year, I actually DID sell 1/2 of my silver position as it was blasting near its highs.  I had experienced enough misery by giving away gains in my refiners and gas trades that I locked in profits on much of my silver holdings.  I am looking to purchase a new replacement slug any day.


8)  COPPER
Copper too was one of the trades that made me look really good in my predictions from last year.  I suggested that copper was going to be a big loser, and it was almost from the start.  There is a chance that copper goes higher this year for several reasons despite the fall of the Eurozone.  First, there is some hope of a recovery in the emerging markets.  Any improvement there will be a benefit to copper.  Second, copper got shelled last year and as a result, is a relative better play.  Despite the chances for a rebound, I won't be buying JJC anytime soon, however a play in FCX might be good for the same May 1 sell time frame since a move higher will absolutely benefit FCX as a miner of gold and copper.  I think this is the best way to play this angle, AND you get a dividend too.  $44.00 is probably a very conservative target (only a 10% move from today's levels, with $55 as a realistic area to expect).

FINANCIALS - 
I just have to say it, I hate them.  They are hard to understand and chock full of liabilities and counter-party risks that are not truly known.  This statement unfortunately goes for banks, insurance companies, and brokerage firms (are there any left?).  There might be gains out there, buy if we can get them from other areas should we really try here?

9)  BANKS - I missed it on banks last year.  I expected that things would improve and they would perform much better, they didn't.  Oddly enough, I think that bank performance could rebound in 2012 IF yields begin to rise.  The margin compression they are suffering as a result of Operation Twist and other FED intervention has been costly and we should see some abatement in this as the program nears its end in 2013.  I think BAC is still a big fat loser and suggest running away from it as some type of Country-Wide or Mortgage Fraud stuff is going to have an impact on them.

It isn't lost on me that Kyle Bass invested a slug of $200MM into Mortgage Guaranty Insurance Corp which is probably more a statement of his feeling that housing is at least bottoming domestically, but it also might be a signal to watch that stock (yes, it is already up 50%, I know and since he bought at $2.50 a share he is also doing quite well).

In this short to medium term for the year, the chart also suggests that GS could rally almost $15.  If we see a $110 or $112 handle on GS and you are crazy enough to be long it, I suggest an exit.

FIXED INCOME -
The question is, does fixed income exist anymore?  The answer clearly is no.  Treasuries are a scam in that the US government through a scheme of the Treasury and the Fed are distorting the prices for bonds to achieve their own goals of suppressing borrowing costs.  The private sector is buying US Government debt as a result of absolute fear, and so are other sovereign nations.  There is no real market here, just a concoction of lies and more lies to cover the first lies up.

The average investor who is a retiree cannot live on the interest produced by any fixed income investment and so they are force to yield search and carry more risk than they normally would or simply abandon this asset class and reach for dividend paying equities.  Unfortunately that strategy will back fire, we just don't know when.  The Fed strikes again.

10)  GOVERNMENT DEBT -
I've already highlighted this topic in the INTEREST RATE section.  Bonds will go higher and yields lower as we near year-end.  The safety trade to flee to US Treasuries will be firmly intact next Christmas.  Downgrades of sovereign debt abroad will make the US yields even cheaper despite the fact that US spending is totally out of control.

TLT looks like it could spend some more time falling to at least the $113.50 area, but if my call for a move up in equities and then down again is correct, we could see an attack at $123 on the long side by year end.  (That's not much you say??? They are treasuries I say, should they really trade in a 10% range?)

11)  MUNI BONDS - 
Meredith Whitney seems like the biggest loser when it comes to Muni Bonds in 2011.  Meredith learned a hard lesson that a great call one time doesn't mean that you will make every call right.  Further, the better lesson is that once you make an awesome call, DON'T PUSH YOUR LUCK and predict the apocalypse!  Everything that Meredith Whitney said is true, the only problem is that she, like Bill Gross, misunderstood the commitment of the players in the system to keep the system afloat.  Also, Ms. Whitney didn't state a realistic time frame for the collapse to hit.  If the Euro crisis has shown us anything, it is that they implosions are slow and are delayed and delayed until they can't be delayed, and then suddenly the market and its willing participants simply wake up one day and reject the credit of entities and borrowers that just one day prior were perfectly fine.  Perhaps if Goldman Sachs had made a prediction like that, things would have fallen apart faster, but it didn't.

If you take a moment to look at Muni yields you are first struck with how crazy one has to be to  buy munis.  First, it is very difficult to get financials for these municipalities that are timely.  Second, it is impossible to get a decent yield, and finally if you attempt to stay shorter in your maturities you will get paid absolutely nothing for the risk you can't evaluate.

Perhaps the best way to approach Muni Bonds is to short them.  Take a look at MUB which looks like it should at least revisit $107 or even $102.

12)  CORPORATE BONDS -
I am going to copy word for word what I wrote last year in this space and I'll only change a word or two.  Wait for commodity and market ramp. That move higher will continue to push corporate bond prices lower and finally put them in a pricing area where they again become interesting. Please note that I usually target buying corporate bonds that are less than 7 years in maturity. I do not subscribe to the hyper-inflation theories and therefore I do believe that a chance to buy solid company bonds yielding a 5%, 6%, or 7% rate will be great.  What did I change?  #1 - You may only get an opportunity to get into corporate bonds in February or March (last year that was the low).  #2 - I reduced the target yields on bonds by a percent or two.  Right now I would do just about anything for a 5% 4 year bond, you just can't find it, (without buying some stupid financial company bond) so when you do, you better buy it with the money that is allocated to a more conservative type investment.

As you look at LQD it seems ripe for a correction to $107 or even $104.  The crazy shorters out there may look to take advantage of a drop in this etf, but the fear trade will drive buyers right back in to fixed income assets by year end.

EMERGING MARKETS
Other than Bill Gross and Meredith Whitney the other big loser of the year was the emerging market trade.  All of these markets were smashed as the shiny veneer was rubbed off the glorious BRIC trade.  The trouble these countries ran into was one of a slow-down in growth, a wind down of credit bubbles, and finally importation of inflation served to them directly from their friends at the Fed.  I've commented often about the currency race to the bottom as they attempted to counter each move of the Fed to stay competitive.  The only problem with fighting the Fed in this fashion results in run away inflation and citizens tend to get really pissed off about paying 10% higher prices for veggies and meat each month!


13) COUNTRIES TO WATCH -
Based on the three causes of the beating that the emerging market players took last year I am hard-pressed to see if there is any abatement in any of those issues.  The answer is no.  Based on this, I think it is quite easy to simply pass on China as an option for further long-sided investment.

I am still a huge fan of Indonesia (IDX) simply because it is a really nice chart to trade.  I would not be caught adding a position here on IDX unless I saw a pop through $31 (I waited all last year for that)  and I'd certainly be watching closely at the $25 level.  In a year when China's FXI lose almost 20%, Singapore's EWS lost 21%, and Russia (RSX) lost 29%, IDX was flat when you calculate and add in the dividend. (Chart below is IDX)

I'm a fan of EWS despite the brutal beating and I like EWM too, but once again sell early.  Finally, readers will recall that I've had this stalker-like love affair with India where I'd wait and wait and wait for EPI to do something positive.....and it never did.  I must believe that India will one day be a powerhouse, but it wasn't last year.  I like the bounce EPI had over the last week and if there was a time to do it, it was then.  A bounce here could take it to $18 or even $20, I'm just a bit gun shy after seeing a 40% loss of a blood-letting over last year.

Let me wrap things up here.  There are the ideas for 2012 and the outlook for the major macro-level areas of the economy.  I could say much more about the defensive approach that fund managers are using going into healthcare, consumer staples, defense, and utilities, but I've already said that many times last year, and it was a highly successful venture for any that took action.

SHORTS
I was fortunate enough to call a few big shorts this year too.  There were a couple that I was very, very, very early on and just killed it being short on like NFLX, MCP, and RIMM (don't believe me, do a search on the blog for those symbols!).  I did tend to sell those too early as is often the case, I think I am so conditioned to believe that some invisible hand will appear and save crappy companies that I am willing to exit trades that I know could be much bigger winners.  That is one of my goals for this trading year, to keep my foot on the throat of dying losers and cash in on them in a much more significant way.  I'll be looking for those entries in earnest in April.  I can't let this section go without mentioning GRPN.  Groupon will be one firm that is out of business in the next 5 years and therefore it is clearly an equity to focus on if it can ever gain any traction and get a bounce.

DISCLAIMER - THE EVENT THAT MESSES UP ALL PREDICTIONS (A swan that makes black swans shake in their boots)
Finally, let me throw in one last disclaimer because it is important.  All of these predictions in some way assume that the US, Israel, Europe, and Iran (along with the Persian country's allies, Russia and China) don't get involved in a real and escalated shootin' match.  If that happens all bets are off.  I don't think this is a situation where the markets rally like they did in 1991after Saddam invaded Kuwait and we invaded Iraq in the first Gulf War.  If there was a quick overthrow internally of the Iranian leadership and hostilities ceased then I think that a bull market rally could follow, but I don't predict that kind of easy internal outcome and frankly I am terrified that an EMP attack on the USA is really something that is possible.  If that were the result from a conflict our markets would cease to trade and the world as we knew it would be over in the blink of an eye.  An EMP assault on our country would make New Orleans after Katrina look like a picnic and a fun day at the park.

Please read the follow up post that I'll put up over the next couple of days which will include bonus predictions on the elections, healthcare, and foreign policy.  Honestly, I think all of those topics may drive the markets more than we appreciate, but this post is about stating where I think things will go and specific reasons why.  The broader drivers like these topics should be covered in another post, so look for it soon!

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/