US GDP HEADING WHERE? GETTING TRASHY

OLD SCHOOL ANALYTICS REVISITED
Over the last couple of years I've shared with you some odd indicators that folks like me track to get a handle on where the economy is going.  I've posted links to US auto searches in google, railroad traffic figures, and even thrown out the old Coppock Turn Indicator.  Some of these items are worthy to keep around and some....not so much.

I saw a post from a Bloomberg contributor the other day and wanted to share his chart with you because it took me back to my old high-yield trading days when you could actually get a decent yield on bonds and people actually demanded appropriate interest payments for the risk they were taking by lending to companies.

One industry that I owned a ton of bonds in the portfolio I traded was in the waste industry.  Waste companies often have assets (leases or ownership of land) and some trucks and machinery.  This was just the type of asset intensive company we liked.  In my research of these waste companies like Allied Waste and Waste Management I discovered that these firms also are almost 100% correlated to the economy.  In other words, if the economy is expanding, waste companies are growing.  If the trash companies are suffering, it is probably due to a recession and slowdown.

WASTE CARLOADS AND GDP - SLOWDOWN HERE WE COME
I have placed a link here for Michael McDonough's twitter page.  It appears that Michael is now working in Hong Kong, but had posted this chart regarding US GDP and carloads of waste here in the US.  The relationship is striking and it seems that it hasn't weakened since I was researching these companies way back in the early 2000's.

The takeaway here is simply that US carloads of trash have been falling and are still falling and if we have less trash it seems a sound argument to suggest we are making and consuming less stuff.  This is not an indicator that shows that our nation is recovering and ready to move forward, it suggests just the opposite that production is falling and we are probably still heading toward a recession.

Finally, if you wanted to drink from the fire hydrant of economic information I've included another link to the Bloomberg Brief dated 7/25/12 which is SO full of information about the global economy.  There is a section on page 10 about the Fed and if they are out of bullets which is interesting, unfortunately they don't give any conclusive answers, simply relaying what both sides of the issue think.  Enjoy.

http://www.bloombergbriefs.com/files/blp_072512_211710.pdf

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 athttp://www.goatmug.blogspot.com/

A LITTLE FRAUD IS OK --- MARKET SYSTEM IS A JOKE

A LITTLE FRAUD NEVER HURT ANYONE?
I am on vacation this week, but couldn't resist making a quick post after seeing this clip today.
Without more comment other than a brief introduction we have Rick Santelli speaking on CNBC about the Federal Reserve Chairman's off-hand dismissal of the Libor-gate under reporting incidents.





Key take aways from this whole mess are;

1)  As long as the fraud you are doing is to save "the banks" it will be seen as ok.
2)  As long as you are manipulating markets and it is only a few bps, then it is ok.
3)  As long as the Fed knows about the fraud you are doing, it is ok.
4)  As long as the markets are close or open, it is ok to commit fraud.

WE ARE NO DIFFERENT - BANANA REPUBLIC HERE WE COME
I don't know why I am so upset by this.  In the midst of the crisis there was talk about this happening and it was pretty obvious that it was.  I think that I am so disturbed because it really does reveal the level of absolute corruption in our "free" market where if you are connected and big enough, anything goes with the blessing from the government and leadership. We have become a centralized communist state where those in power skim off the top and receive blessings and financial rewards.  The people are simply the mechanism to create the wealth that is stolen.  Are we Russia or China or perhaps Mexico?  Perhaps, it is clear though we are not above fraud, corruption, and manipulation.

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 athttp://www.goatmug.blogspot.com/

NEGATIVE BOND YIELDS, MATTRESSES, AND FRAUD

MORE DISTRUST
Yesterday I penned a post called, COMPLETE COLLAPSE OF TRUST that outlined a few of the significant events that I believe have created a market environment that is bereft of morals and "doing the right thing" and is focused on simply taking every last cent (ok even fraction of a cent) from investors.

I guess there are two other ones that come to mind as well;

*Co-location of HFT computers at the trading centers so they can front-run trades and also step inside of the bid/ask and steal from investors.

*The Facebook IPO disaster where Morgan Stanley and other underwriters destroyed RETAIL investors in the over-hyped initial offering of a declining company.  Further, I think it will come to light that management and the underwriting team hid information that the company's health was getting worse (growth rates of subscribers) and this frankly amounted to selectively sharing inside information.

The list could probably go on and on.  Is there any wonder why every day investors shun this market?  You must have really thick skin to wade into this environment.

MARKET INSANITY?
As I wrote yesterday, we have had a common theme for investing over the last couple of years that have worked out pretty good.  The main idea is to purchase large dividend paying stocks and then also to selectively buy commodity type names in the period of January to May and then sell.  That has worked great.

I also mentioned that perhaps we are really slowing down and with that, all boats will sink, the use of defensive dividend payers might just help you lose less.  I also lamented the issues with fixed income approaches as the entire credit spectrum is a risk/reward screw up as the Fed's actions have managed to destroy all traditional fixed income methods for examining risk in markets and causing investors to make really bad choices.

One example of fixed incomes complete irrationality can be found today where Bill Gross tweeted about 2 year government bonds....

WHY CONTINUE TO LAMENT ABOUT THE STATE OF THE FIXED INCOME MARKET?
The reason I continue to prattle on about the fixed income markets is that they are huge and typically have been known to be the truth-teller or the only adult in the room compared to the equity markets.  Since the Fed and US Treasury and every other central bank have been buying bonds and instituting their ZIRP policy, they have blown up any normalcy and any accurate representation of reality.  How can we make rational decisions about where we are or where we are going if everything is made up and screwed up?  I need only to point to Pimco's Bill Gross to highlight that people are BUYING government bonds from Germany, the Netherlands, and Switzerland and LOSING money because the yield is negative.  They are PAYING the governments because they desire their money back more than they desire earning any interest.  This is damning and this reflects the total disaster that our global investing environment is in.

ARE WE SLOWING DOWN?  WHAT TO WATCH FOR
Finally, I found a nice summary from Barry Ritholtz of The Big Picture Blog.  He made a post called,
THE 7 FACTORS TO WATCH IN A SLOWING ECONOMY (link above in the Big Picture Blog).  I think this is a nice list and it affirms what we've talked about for a while.  In addition, it highlights many of the macro-indicators I watch when I do the monthly macro update.

• Transports have been very soft and confirm slowing global trade. Pay attention to UPS, Fed Ex, and Rails.
• A corollary is energy prices and the shifting revenues of the major oil companies.
• Retailers often feel the bite first. Middle market retailers, than luxe goods. Watch for signs of improvement amongst the discounters like WalMart, Target and the dollar stores as consumers feel stressed.
• Defensive issues such as Utilities and Consumer Staples attract buyers (but should not see big changes in revenues)
• Pay attention to visibility and revenue expectations from companies. I expect the uncertainty trope to be in full flower;
• More  important than that, watch S&P500 Quarterly earnings growth; Is the rate of growth (2nd derivative) slowing?
• Valuations remain reasonable but not cheap; See where the SPX ends after earnings season is over.

I need to do an monthly macro update as very interesting things ARE going on in the economy.  While we continue to hear over and over again that the collapse is coming and that a recession is on the horizon, many indicators ARE showing a slowdown, but then some others just aren't.  There truly is a non-economic factor in play (call it political and policy driven) that could ensure a recession or save us from a recession.  I plan on expanding on this more in a post in the next week or so.  Until then, thanks for stopping by!

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 athttp://www.goatmug.blogspot.com/

COMPLETE COLLAPSE OF TRUST

Retail investors have shunned the equity markets as they feel as though they are rigged.  I talk to people all the time that don't care what kind of interest rate they receive, they just don't want to lose money.  In the last month we've been handed a couple of new scandals that reinforce that the entire financial system is similar to visiting a crooked casino with fixed tables and slot machines.

THE HITS JUST KEEP ON COMING
Think back for a moment and recall these assaults on market participants;

2007-2011 - Large bank mortgage fraud and financial crisis resulting in bail outs
2008 - Bernie Madoff ponzi
2009 - R Allen Standford (Standford Financial Group) ponzi
2011 - 2012 - Banks caught manipulating Libor rates during the crisis
2011 - MF Global collapse where segregated account monies are stolen
2012 - JPM is involved in a total meltdown of its "hedge position" related to corporate bond interest rates.  Initially the loss is estimated at $2B, now it could be as high as $5B.
2012 - Peregrine Financial and PFG Best implosion where $220 Million is missing

And who can forget this one?

THE GREATEST CON OF ALL
2008 - 2012 - Federal Reserve ravages the American public and crushes pensioners and savers in an attempt to boost housing thereby saving banks.

We will soon find I am sure that the Fed was completely aware of the manipulation of Libor and rather than do anything about it, was happy to let this go because the business of the Fed is really the business of the biggest banks.  

10 YEAR TREASURIES SIGNAL EVERYTHING IS JUST FINE?
Let's take a look at the Fed's handiwork.  Below is a graph of the 10 Year Treasury Yield which now shows we are sub 1.50% at 1.48%!   - Source Bloomberg

I hope you didn't bet against treasuries thinking that because we were at historical lows, we couldn't go lower!  We are now within a few basis points of all-time lows.  Certainly this is a picture of financial health, right?

5 Yr View - 10 Yr Yield - http://online.wsj.com/mdc/public/page/mdc_bonds.html

The killer here is that this action by the Fed via "Operation Twist" and the inaction or complete incompetence of the SEC, CFTC, NFA, and FED to regulate banks, brokerages, futures trading firms, and themselves is that drives regular investors away from markets that may actually provide some return into assets that are completely worthless or in term of inflation, money losers.

Investors scrambling to get out of equities have chased yield into corporate bonds.  The Merrill Lynch US Corporate Bond Index with 1 to 10 year maturities is pegged at a 2.76% yield!  So, if these investors don't already have these bond holdings and are looking to buy today, they are weighing taking on a 5 to 7 year bond with some company risk, and perhaps even some interest rate risk, and lots of inflation risk for some taxable yield that is less than 3%!  Are you kidding me?

WHY NOT MUNIS?
I mentioned taxes, so how about one of those safe municipal bonds?    Muni's are even scarier.  We are now seeing a host of cities threaten or actually file for bankruptcy as they are finally coming to grips with the reality that they can't pay 100% of the healthcare cost of employees and retirees and also can't promise an 8% return for life on their pensions.  Meredith Whitney may be finally redeemed although her timing has been off, but that is how it is when you are making dire predictions in a completely manipulated environment.  As an investor, I have felt that individual municipal bonds are frankly difficult to invest in simply because it is too hard to do prudent financial analysis on the city in real time.  Often, the city's financials are released with significant delays and therefore an investor must rely on those awesome rating agencies who always are ahead of the game in determining financial risk!

In addition to the perils associated with knowing what you are buying, the yield on municipals are lows as well, adding to the danger and the poor risk and reward pay off.  Merrill Lynch's 7 to 12 year muni index suggest that the average yield is a staggering 1.76%!  So much for retiring, Mom and Pop.

DIVIDEND PAYING STOCKS RIGHT?
For almost two years I've been advocating the approach to buy dividend paying multi-national firms as an approach to investing.  First, I suggested this because it was an attempt to pre-invest ahead of portfolio managers as they realized after us that we were heading for recession.  Second, I felt like government stimulus would help these larger firms.

Can we continue to invest in this area?  Maybe, the real issue is that there may not be a place to hide if the economy continues to slow.  Yes, these stocks will fall less, even if you are in utilities and healthcare because everything could go down, the play here would be to try to minimize those losses as much as possible.  Perhaps buyers of those treasuries are right after all, in this new normal, perhaps 1.48% for 10 year risk on a government that is deficit spending like no other country has ever done is a great deal!

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 athttp://www.goatmug.blogspot.com/

CRISIS IN EUROPE SMELLS LIKE OPPORTUNITY

Happy 4th of July.  I pray that God blesses the USA more and we as a nation return to the pursuit of a relationship with Him and as a nation we honor Him, recognizing where all of our blessings have come from.  A student of history cannot escape from noting that the USA was a product of so many circumstances that can only be attributed to divine and miraculous intervention.  May Jesus reign in our hearts and minds more today than yesterday.  Enjoy the holiday.

TROUBLE IN EUROPE MEANS WE NEED MORE POWER!
Please read the interview that appeared in Der Spiegel last week with German Finance Minster Wolfgang Schäuble. - EUROCRISIS MEANS EU STRUCTURES MUST CHANGE

As you read, make sure that you note the tone of the Spiegel interview which seems to be quite negative with the suggestion that the Euro was a miscarriage.

Why is the interview important? - After reading the passage you have to be impressed that the Eurocrat leadership seems to be committed and unwavering in their support for the Euro and EU.  Statements like this below help us see that those that want the Euro actually want more integration rather than less and they will not waiver in the commitment to move forward.

 "The world is moving closer together, and we're talking about the possibility of each country in Europe going its own way? This cannot, must not and will not happen!"

Ultimately the end game here is centralization of power in the ECB an manifests itself in a fiscal union, one where nation states give up their individual control of their purses and release autonomy to a group of leaders that know best how to manage finances and can determine the course for the whole of Europe  (yuck!!!).

Further, Schäuble describes how he desires the structure to look like;

"In an optimal scenario, there would be a European finance minister, who would have a veto against national budgets and would have to approve levels of new borrowing. It would be up the individual countries to decide how to spend the approved funds, that is, how to answer the question: "Should we spend more money on families or on road construction?"

Spiegel goes on to point out that citizens of the individual nations would be outraged to give up their discretion over monetary allocations and Germany's finance ministers responds;

"There is certainly the risk that there would be national reactions, and that's why all of this requires intensive discussion. But one thing is also clear: Those who want a strong Europe also have to be willing to surrender decisions to Brussels. But even then parliamentary responsibilities are needed."

Last, let me highlight the give and take that was shared near the end of the interview.  This part is key as the interview points out that the popular notion is that further integration is not the correct path and the periphery states eye further integration as a bad thing (especially since they are on the austerity path).

SPIEGEL: In your euphoria, you overlook the fact that most people in Southern Europe tend to see Brussels as a threat.Schäuble: I'd be careful with statements like that. In the most recent election in Greece, more citizens voted for parties that support the course that was agreed to with Europe than in the first election.
SPIEGEL: Although voter turnout was lower.
Schäuble: That may be. Of course, a lot of people in Europe are worried about the future. But as far as I can see, the vast majority of Germans and people in other countries are pro-European. Aside from relatively small movements, there are no nationalist tendencies.

Schauble flat out lies here by omission.  While it is true that the Greeks essentially elected a government that continues to support the path of the Euro, popular support for an exit from the Euro is actually greater.  So yes, they did elect a government that cows to the ECB, but popular sentiment is of the mind that the EU is now a bad thing. See the following graphic that described the Greek vote that appeared in the Dailymail.

Essentially 45% of the Greeks want to pullout of the bailout ponzi and there is a slim 6% that rides the fence.

POWER ELITE WANT MORE

SPIEGEL: In Germany, the Federal Constitutional Court has imposed tight restrictions on relinquishing further sovereignty. Given the German constitution, how much more European integration is possible?
Schäuble: If the things that I've just outlined were in fact implemented and we concluded that the limits of the constitution had been reached, the Constitutional Court would be correct in saying: There's no problem with transferring more rights to Brussels, but the German people will have to make that decision.

I'm not so sure that German citizens would be so excited about transferring more rights to Brussels.  Why is it that these guys believe that people desire to give power to bureaucrats that will only take power and siphon off money in the long run?

CONQUERING NATIONS WITHOUT A SHOT
To wrap this up I was left with the sense that these guys adhere to the notion that a little crisis is good for moving things in the direction you want.  While I think the normal person would believe that these troubles with funding in the poorer nation states would create a movement to slow things down, the opposite it true in that the leaders feel like it is a reason to push harder.

In addition, there is also a feeling as I read his comments that it seems like this is part of the plan, that was set in motion a long time ago.  We simply cannot underestimate the long-term commitment and vision to put a centrally run Europe in place.  The challenge I see here is to begin looking at this group as conquerors.  If you wanted to be dictator or president of a huge slice of the world would you have the notion that you could do it in a year or two (doesn't matter if you did it through violence or by some other means)?  No, in fact, you'd probably lay out a 10 to 20 year plan.  Different cultures and nations would have different time tables.  For example, in the West, we might implement a 10 year plan.  If you were Russian, you might envision a 30 year or 40 year plan.  In China, because they see time and history differently, they might have a 100 year plan.  My guess is that the EU experiment is nothing of the sort, but is a means to achieving what so many want, power and control.  It isn't shocking to see that the leadership won't give up and is committed to going further using failures as an excuse to centralize and consolidate power.  Look for more of this is the future.

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 athttp://www.goatmug.blogspot.com/

SECTOR ROTATION MODEL - REVISITED

THE FED CONFOUNDS INVESTORS
Given the release from the Fed last week that they would hold rates low and continue Operation Twist more ,(they will never stop twisting by the way), I think it is more important than ever to review the Sector Rotation Model that I've posted in years past.

This model helps us review where we are and look at the industries and sectors we should be examining to purchase in anticipation of where we will be.  Thanks as always to www.stockcharts.com, I recently became a member of their service and find it very helpful especially since I punted E-Trade Pro for good!

As we look at the overall economic environment it appears as though we are at a market top and we are entering a recession despite all of the attempts by the Fed to do something to stimulate the US.  Based on the Sector Rotation Model we'd be getting ready to move from our consumer staples positions into healthcare and utilities and then ultimately into finance.  However, we've been in these extremely profitable positions for almost a year and a half now, so something is amiss with the rotation model right?  Even though the trade is a bit old, I still continue to expect that these same positions may not go higher, but on a relative basis will outperform..... (portfolio manager speak for keep your money in my fund!)

I would caution though, that the "normal" progression to go to finance and banks will be a deadly one.  There are several key factors that will make this a bad move in the future.  First, banks continue to hide and lie the embedded risks they have on balance sheets and the issues with Europeans sovereigns will only reveal these more of these problems.  (I am speaking of the mega banks here).  In addition, in a recession, you'd see normally that the Fed would step in and lower interest rates creating a stimulative environment for these institutions, but as we know, the Fed has no room to lower anything.  Thus, banks will be dead money.  Some might suggest that you'd buy preferred from some of these institutions, I'd say, "Why Risk It?

MORE OF THE SAME
So to quickly wrap up this macro-perspective, we need to stick with more of the same here.  More defense (PPA), more healthcare (XLV), and more utilities (XLU).  Don't get too ahead of yourself thinking that the coming recession can be avoided as we are in the wasteland created by ZIRP, courtesy of the Fed and there is no stimulus that can be provided that will be lasting.

RISKS ON THE HORIZON
What could jeopardize our strategy?  Simply put, the tax on dividends created by the expiration of the Bush tax cuts.  Ultimately if dividends are taxed at any higher rate and Congress doesn't do anything to address this, there could be a move to sell many of the significant winners that investors have benefited from over the last couple of years.  What caused this great surge in dividend paying stocks?  The Fed of course!  As rates have been crushed lower, investors has fled from bonds into dividend paying stocks as a proxy income tool.  It would seem like any tax hike could usher in a wave of selling to avoid the new revenue grab by our wonderful government.

GIVE UP ON GOLD, SILVER, AND OTHER COMMODITIES?
I'll leave you one last thought, despite the slow down here, is this rotation suggesting that gold, silver, and other commodities are done.  Yes.....and no.  We'll talk more about how even though the model suggests that these commodities would be the worst place to be, they just might be in the sweet spot.  Look for that post later this week.

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 athttp://www.goatmug.blogspot.com/