Goatmug Blog - Financial Perspectives from the Mountain Top: 08/01/2012

Tuesday, August 28, 2012

LET'S EAT - FOOD COMMODITY UPDATE

As August ends and markets hold their collective breath about what decisions will be made at Jackson Hole, I wanted to see if I could debunk the commonly held notion that we'd be in for more QE3 later this Friday.

LOTS OF TALK
I have noted in several posts that I think Bernanke will announce that interest rates will continue to remain low through 2015 and not just 2014 as he previously disclosed. The hope is that another year of low interest rates will continue to underpin the housing market's "recovery" and of course ZIRP will force Mom and Pop and Grandma and Gramps out of their savings accounts into riskier assets.

Unfortunately, I think the market is really looking for more out of the great academic than just constant rate twisting and therefore we may actually see the markets correct a bit here as banks and traders need another boost from the central bank to push the indices higher. There is only one problem with the conventional notion that we'll get more of the stimulus that we need, it is simply that real food and gas prices have been increasing significantly even though the Fed's own inflation measures remain in check.

HOT CAKES?
What types things are going higher in price? We need to look no further than food commodities to see some dramatic prices increases. July 2012 was frankly the hottest July on record in the USA. In addition to the heat, the midwest also suffered a severe drought that has really destroyed corn and soybean crops. As a result of impaired crop growth, prices for have farm products have increased. Soybeans and Corn have not only moved higher, they have exploded to near record highs. Rice is one of the lone exceptions to have not vaulted into record territory.

SOYBEANS

CORN

RICE

WHEAT

The point in putting these charts of the "softs" is that Bernanke may just have put himself in a box with the help of these weather conditions. If he were to implement a fresh round of QE3, 4, 5, or something here, we can be sure to see these food inputs go even further above their ranges and records and also we'd see gasoline blow sky-high. I noted earlier this summer that gasoline has actually done a Crazy-Ivan and actually gone up in July which is HIGHLY unusual. Bernanke can't push gas prices and food input prices much higher without really slamming on the brakes of our economic recovery. UGA has broken out and now could be headed to test its 2008 high near $67 (currently at $58.50). (Not charted here).

GASOLINE

TRADING UPDATE
I have been watching agriculture related commodities since last year and in the new year wrap-up and outlook I mentioned that "AG STUFF" would be a place take advantage of our central bank's foolishness. I've copied a selection from that post here;
TAKEN FROM CONFIDENCE LOST - 13 FOR 2012 - PREDICTIONS

"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."

One I do own now and have had since earlier this year, but didn't mention in the piece is DBA, the Powershares Ag Commodity Trust. I've had a decent 8% gain since obtaining it, but I feel that there is going to be more in this trade coming from macro-factors.

DBA

While I own DBA, I'm not loving where it is sitting now unless Bernanke does go ahead and announce something this week. Clearly, DBA is in between these two trend lines and without new news we'll see it bounce between $32 and $28.00. Overall, I think I am ok with a solid $28 floor here, so I am still waiting on this position. A move through $32 could set up a much larger move to $36.00

WHAT COULD TEMPER THE BULLISHNESS?
While US farmers and agribusiness producers are having a terrible time this summer, Brazil has jumped into a significant leadership roll. Brazil is now the world's largest soybean producer and also had their best corn crop ever. Brazil's role in global food production and exportation has never been so large and important. All the bullishness for agribusiness commodities could dampen if Brazil posts larger than expected production or if the US farmers could actually save some of their crops.

Ultimately, if Bernanke doesn't move to fire up some form of QE as a result of fear of overheating commodity prices or concerns about retaining fire-power as the Euro situation continues to deteriorate, these commodities like corn, wheat, or soybeans could shock the markets and fall significantly.

Thursday, August 23, 2012

GROUPON UPDATE - DEATH OR COFFEE? (GRPN)

HOW ABOUT THIS COUPON---- 80% OFF
The problem with getting things right every once in a while (blind squirrel) is that you begin to look like an a-hole when you bring it up. I actually wrote a couple of posts in the last 8 months that have absolutely nailed some big moves downward in crazed stocks. Unfortunately, I found one on CMG that was simply brilliant, but was stuck in my "draft" file that was never published. On the other hand, I've been quite public about my disbelief about Groupon and it's ability to achieve the lofty expectations and valuation that the market gave it earlier this year.

Please take a look at this link - GRPN - Same Old IPO Scam
In this post I highlighted how bad Groupon has been for a few businesses that used their services, how easy it was to replicate Groupon's services, and how sick the chart looked. The last line of the article can help summarize how poorly I felt the trading prospects for this dog were, "I can't even identify any support below this level, so unless we get back up on the close, I think it is a stock you can short with impunity."

So, eight months later we can see that GRPN has been destroyed from the $20 to $30 IPO range to its current price of $4.50 (OUCH!). Let's revisit the stock and see if anything looks interesting as we delve into Groupon's plans to revive itself.

NEW COO ATTEMPTS TO RIGHT THE SHIP-

In the article we hear that Kal Raman is attempting to reduce the sales force, fix their payment system which has been called an accounting scam, and push new technology. All of these problems are real and should be addressed but I am skeptical that if they are fixed that they will bring about any real change to the firm.

FIRE THEM
First, Groupon is apparently bloated with a huge sales force for what they actually produce. Clearly if the sales reps are not bringing in substantial deals they need to trim the fat.

SLOW PAYMENTS
Second, their payment system has been said to essentially be based on holding back customer (vendor) revenue and potentially counting it as Groupon revenue. Raman must fix anything that could be looked upon as a scam or accounting loophole. Apparently, GRPN would receive money from online buyers, pay 1/3 out to business owners upon purchase, and hold back the remaining for several months. In addition, they would pay out these slugs of payments via check. This is amazingly odd since Groupon was said to be a technology company and this was the reason for the obscene valuation at the time of the IPO. I would imagine that a technology company could set up immediate payment systems that used direct deposit, wouldn't you?

Whatever you may say about the accounting, the slow payments must have absolutely killed many of the small businesses they were working with as cash flow issues are the biggest problem that most micro-firms face.

NEW TECHNOLOGY - COFFEE IS THE SAVIOR?
Uh oh. Here we go again. I've heard that new advances in technology were going to save companies since I've been around stocks. I think Groupon should have already had real-time metrics available to clients so they could monitor their future-client purchases and even stop selling them if they desired at any given moment.

Groupon's new software called Coffee is reported to be able to show reps from the firm other deals they have sold to businesses nearby in order to frame the sale better and present similar ideas to new customers. I am not sold that new technology does anything to change the problems at this firm.

BOTTOM LINE
At the end of the day all of these changes make Groupon better, but at the real problem with Groupon is that it was over-valued and was a company that had no real or unique key that was a barrier to entry or replication. In fact, Groupon was the biggest coupon seller online anyway, Living Social had been at work for years and had done a much greater volume of business, Groupon just had a better team of underwriters and VC firms greasing the markets to swallow another over-hyped and over-valued "online" game-changing business. I don't believe that Facebook is as bad as Groupon, but it is clear that the same type of market-bringing strategy was used in both names.

TRADING
I don't think it matters if Raman can implement the fixes he has been brought in to address. Groupon is frankly a coupon company that uses an email distribution list to sell its wares. Give me a list of 500,000 email addresses that I could probably purchase from Linkedin and I bet I could replicate Groupon's business quite easily. By the way, I have softened my dislike of LNKD, of all the internet IPOs we have seen, it may possibly be the only real-deal out there. It is hard to continue being short GRPN, I'd simply suggest that it is a zero and that it will not be a viable investment candidate......ever.

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/

Tuesday, August 14, 2012

ALL CLEAR? - CHARTS TO CALM OUR FEARS

IS IT POSSIBLE TO CLIMB A WALL OF WORRY, FOREVER?
It seems like everyone is negative about the markets. As a blogger and market participant that is usually concerned about the health of the market I feel pretty negative too since I look at the long-term direction and structure of our economy and can't help but doubt that unrestrained deficit spending will be good for us. However, when everyone is doubting the market and the economy, I have to question the sanity of crowding into the same side of a boat with all of the other passengers. Since everyone is expecting a collapse, my guess is that we need to have the bots and the powers that be really screw things up and show us how powerfully bullish things can get.

Let's quickly look at a couple of charts and see if all of this one-sided negativity is warranted.

DJIA
A review of the DJIA shows us that there may be some room to move higher if we can break through overhead resistance at 13,350. If a breakout does occur, the upward channel 13,600 seems possible as well. Clearly that overhead resistance is the major short-term challenge we need to watch.

Link for the chart - DJIA

BLOOMBERG FINANCIAL CONDITIONS INDEX
We've monitored the Bloomberg Financial Conditions Index for almost three years now. This indicator gives us a sense for whether the economy is contracting or expanding. The print recently over 0.00 suggests now that the economy is not in a recession, but is in an expansion. Obviously this metric is quite different than what we are hearing from the heard. The index sits at .31 as I type.

SCRAP
Finally, we can't have a 100% bullish post in this blog, so we need to at least leave you with a chart that confronts this positive outlook head on. Alan Greenspan watched the scrap metal markets while Chairman of the Federal Reserve to help him get a real gauge on the health of the economy. Below I've captured a chart of the scrap metal composite index which is saying that the economy is absolutely not heating up and improving. While I love this indicator, I think there is more to this than what we may initially think.

http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5

Perhaps, instead of saying that the US economy faltering, I think the chart suggests that this is more of an indication of what we are seeing a contraction in Asian countries. These nations have been large buyers of recycled goods for a long time and scrap isn't any different. A Chinese slowdown is absolutely impacting the price of these goods and this chart may be a better reflection of global trade.

Finally, we must keep watching the situation with US crop production and the drought. Ultimately fuel costs could rise significantly on the loss of corn production and also food companies

No matter how bullish or bearish we are, we must always look to examine the market, the participants, and the other side of our view. We looked at 3 charts that may help us discern the market direction. The DJIA price chart suggests more strength if we can plow through 13,350 and the Bloomberg Financial Conditions Index also shows we are actually in a period of growth. Scrap is in the toilet, but I think this is more about China than the USA.

TRADING
I think we continue to melt up here until perhaps the first week of September as investors remember we actually have this place called Europe that is a total disaster, so carry on!

GOATMUG

Friday, August 10, 2012

THE MOUNTAIN TOP VIEW - MACRO THOUGHTS

A friend of mine asked me about my thoughts on the market and I wanted to capture my thoughts and also put some charts up for review (I did this under two other posts.... CHART-SLAW and SON OF SLAW). Now we have made it through the Fed meeting and the ECB meeting we are coming to a point where we see that central banks may be boxed in and have little ability to do much other than talk about what they could do..... until they are forced to do something entirely out of the box (yes, this is still coming).

Let's break the perspective into two broad categories. First, we'll talk about all the reasons the market looks bad and how the gathering clouds could reduce the gains that the market has posted so far this year. Second, we'll review all of the reasons that the market could actually go higher.

CLOUDS ON THE HORIZON

ECB - LOT'S OF BARK, NO BITE
Draghi and pals really did have great success a month or so ago when they claimed they would do anything and everything without limit to save the Euro. Well, it sounded good and the market was happy..... till everyone realized that practically no other country would approve the measures and possibly the most important one, Germany, can't constitutionally do what needs to be done to save Europe. I'm hearing more whispers that perhaps Germany is beginning to see the light and might even consider their own exit from the Euro. Mark September 7th on your calendar as this is the day the German High Court will decide if the extraordinary measures proposed by the ECB are allowable in the context of their constitution. If the German court pulls a Chief Justice Roberts and twists their laws to promote a greater government, then the Euro could very well emerge stronger (with a little addition by subtraction as Greece has to go). If though, the law really is the law, we can expect a very messy situation until the people demand to be saved by the ones that are destroying them.

FED - ON HOLD TILL NEXT MONTH
The Fed last week told us that conditions in the US were slowing, but hadn't gone so far that they would intervene. Of course they didn't miss the opportunity to let us know that more QE could still come later. The reality here is that more "twisting" probably won't help too much as rates are in the cellar anyway. I had an interesting thought the other day that ultimately we would see the Fed buying index futures to bolster stock prices at some point, but so far I don't think this has happened (except during the flash crash --- we'll never know). When we do see this type of extraordinary action, you can be sure that it will be implemented when the complete collapse is unavoidable.

What do I expect in September? Well, I think the easy thing to expect is that we will have them tell us that they will not only keep interest rates low through 2014, but we'll also see them promise rate stability through 2015. This could make some opportunities very interesting and will highlight those ideas later.

The script is already being played out in front of us as we've had a host of Fed Governor's give us their views on what needs to be done. We've had calls for more stimulus and of course we've had the token hawk, Dallas Fed President Fisher explain that nothing more needs to be done except for fiscal actions by Congress. As we've discussed at length, Fisher and any other hawks are just useful tools to make it look like there is a reasonable discussion going on. Dudley, Yellen, and Bernanke are the only votes that count and we all know that ultimately more QE is coming.

DECOUPLED?
Despite the powerful interventions of QE, QE II, QEIII, and all sorts of other efforts, we really are slowing down in the US and globally the economic turn seems to have happened in Europe and in Asian countries. I think we have determined that the US has not decoupled from the world and likewise, the world has not decoupled from the US. As world economies slow, we could see the unorthodox intervention I mentioned above to save the US system. Transports like the rails and UPS are all showing weakness and the sudden and abnormal spike in gasoline prices in July won't help them much either. Today's MCD same store sales data suggests that Europe is a total disaster so watch those multi-nationals.

NO TRUST - GOOD KNIGHT CONFIDENCE, GOOD KNIGHT
I have posted quite a few notes lately suggesting that the retail investor is simply not on the same playing field as the high frequency trading bots and institutions. The entire system seems to be structured in a way to rip money away from Mom and Pop and remove them from the markets. Banks through their trading of derivatives and manipulation of LIBOR continue to show that the culture is rotten in that industry. We also see the regulators asleep at the wheel and the PFGBest scandal is a damning indictment of their inability to see any of these acts until the collapse of the ponzi is complete. Finally, the Knight Trading incident added to the fat-finger May 6th flash crash may be the final straw that breaks the back of small investors that are actually paying attention to their accounts. While I am pretty confident that the average investor has no idea what happened last week to Knight and their bots-gone wild match-making test software fiasco they may hear and learn about it as more dominos appear to fall and of course liquidity will suffer in the long run. It appears that Knight was able to somehow salvage itself and obtain critical financing to stay in business, but this event shows just how significant "fat-finger" errors can be in terms of lost capital and potential job losses. Knight employed more than 1,500 people and it boggles the mind to think that all of them could have been out of a job as a result of a software program that ran for 45 minutes. Makes you want to buy some stocks doesn't it?

Here is a great article today highlighting the impact our markets feel under the weight of HFT attacks. This post looks at 1 second in time in the trading of gold prices.
http://www.financialsense.com/contributors/dimitri-speck/a-high-frequency-attack-on-gold

FISCAL CLIFF AND POLITICS
Let's not kid ourselves at all. While Obama has a few left leaning views, Romney is no super-conservative savior either. In fact, other than a few guys that say they are Tea-Party guys (and then don't actually act like it or don't have any power to actually do anything) both sides are equally terrible. The bottom line is that the arguments between these two disaster parties are stupid and not based on any real substance. In order to actually make a real dent in things we need to halt deficit spending and actually force government to quit growing! These cuts will hurt, and our economy would absolutely grind to a halt.. Unfortunately addictions are really tough to quit and so the process will be painful. The adults in the room need to ask themselves if they want a few years of pain or a complete collapse. Since there are no adults in the room (Executive branch or in the Senate or Congress), we will continue down the path of destruction till Japan implodes and it will be too late to do anything but watch the event happen here.

The theatrics of budget cutting and the fiscal cliff are a sham and will certainly be a distraction and may get markets rolling over soon. Let's not kid ourselves, we'll be rolling over the debt we'll just be subjected to political posturing from both sides with little real substantive cuts or fixes.

SMALL BUSINESS OWNERS = NO JOBS
Policy, policy, policy. The bottom line is that no smart employer is going to add to headcount in this environment. Why would you attempt to grow your business with the threat of more regulation and more tax obligations unless you knew there was a significant upside? While the passage of the Healthcare Act and it's affirmation by the Supreme Court clears the uncertainty it also ensures that employers will think harder about providing benefits and adding people to the roles. The tax roll-back issue is also one that prevents smart employers from taking significant risks at this time.

COMMODITY PRICES
Commodity prices are really at a critical juncture. Europe is slowing. Australia says that China has stopped slowing. Droughts have caused massive spikes in corn and soybean prices. Gas dropped significantly since May 1st (when we said to get out...thank you) and now have roared back in a very unusual July move. Gold and silver seem to have gained some traction, yet also are poised to rally or fall significantly shortly. So what is the point? I believe that the main item we need to watch is oil and gas prices. If oil and gas move higher, Europe and China suffer and we will too. If oil stays below $90, we could see a domestic improvement here in the US despite some of the headwinds I've noted above.

MIDDLE EAST - ARE YOU PAYING ATTENTION?
Last, them me wrap up this section about the threats to the economy with a thought on the Middle East. The Arab Spring, or better stated the Islamic Revolution, that seized Africa and the Middle East last year still continues to have a destabilizing impact on the region and the world. In very short order, the very nature of the Middle East was changed. The situation is clearly not settled in Egypt and the region's stability is very much in question until this is resolved. The Syrian situation too seems to just be getting started and the nation's importance is not to be underestimated. Iran needs Assad and Assad needs Iran and Russia needs a strong Iran in this theater of the world as a thorny irritant of the USA. If Assad is close to being overthrown we could easily see the use of chemical weapons on the Syrians and or Israel in an attempt to muddy the waters and draw by-standers into the fray (NATO or the US as Russia and Iran already have assets there). Once Assad reaches this point of desperation, there won't be a check on him as he attempts anything to delay an end to his power.

An attack like this or an entry into this conflict will move oil prices significantly higher and a sustained period of time with high prices will absolutely slow our economy and our consumption.

CONSUMER ISSUES
We are seeing a few signs that all isn't well and that the US consumer is still able to recall what it was like in the financial pit of 2008. Revolving credit is beginning to fall again as consumers pay down debt and also the high-end retailer Coach missed big last week when they reported their earnings. Finally, Priceline also fared poorly this week as they cited that European travelers are way down. Remember, 70% of the US economy is based the American consumer being a total clown and spending their way to poverty. Without Joe-6-pack blowing his wad of cash on payday, much of the Fed's improvement scheme will have been for nothing.

ALRIGHT, THAT'S ALL NEGATIVE, WHY WILL THE MARKET LAUNCH HIGHER?

THE FED
We've said it before and we'll say it again, the Fed has this market's back. When the street is actually hoping for negative news, you know that we live in a crazy world! As I mentioned above, we will see action within the next several months from the Fed and this must be counted as a positive for equities. I've heard thoughts that the next move will be to drive mortgage rates so low that absolutely everyone will refinance in hopes that it causes every market participant to rush out there and buy a rent house with their uninvested cash. Perhaps that strategy is starting to work already as I speak with someone every day about low interest rates and the potential for buying rent houses......watch out bubble here we come!

HOUSING
Housing construction and existing sales seem to be improving and certainly homebuilder stock prices continue to do well. XHB is at 3 year highs too. Housing related plays like Mohawk Industries all have similar charts that are right at the edge of multi-year break outs higher.

JOBS
Employment continues to look better here in the US. We have seen great momentum in agriculture, trade, and transportation areas along with retail. Negative areas continue to be in public education, public administration, and food service and hotels. Broadly speaking, jobs are out there and this is shown by the continued growth in online job listings available. The Monster.com online job index shows that the number of available listings and postings continues to grow, although at a slower pace. MONSTER INDEX

USD TOO STRONG
A quick glance at the USD Index chart indicates that the USD has gone just a bit too far, too fast as it was recently at the top of the 2 standard deviation bollinger band. Since mid July, that has corrected a bit and thus we've had a nice equity rally. I think I still might continue to believe that markets will continue to try to believe in Draghi and the ECB's successful management of their crisis. I do believe that Draghi is crazy smart and was so smart in his recent tact to dismiss concerns about Spanish long term bonds while crowing about the relatively low funding cost levels in the 2 year bonds. This powerful David Copperfield-like distraction has worked well and I assume it will till it doesn't. If it does for a bit more time, we'll see the USD Index fall to near $80.

TRADING OUTLOOK - ALL SYSTEMS GO FOR 1 MORE MONTH
In closing, I've laid out both sides of the near term arguments for a higher and lower market. The US economy seems to be sliding along, but mostly due to a lack of clarity on policy and fiscal issues. Elections do matter as well, but nothing matters as much as the September 7th German High Court ruling on the fate of the ECB's coordination to save the Euro.

Until September 7th, I do believe we'll see the market defy gravity and wander up simply because this market is one where absolutely 100% of the participants believe it is too high and due for a correction.

The bond market is usually the best indicator of big macro moves, but we know that each credit market is so distorted that real decisions cannot be made based on manipulated treasury rates, Lie-bor rates, and any spread that is derived from them. Interestingly, I have noticed some odd activity in the corporate bond market in the last several days where new bond positions have appeared for sale at unusually high yields. While I personally haven't been able to purchase them despite my best efforts, the fact that they are there for just a few minutes indicates to me that really smart money may be liquidating positions since yields are so low (smart money exiting). While this has only happened 4 times so far this week, this is odd that the offer price was so low and I will continue to monitor these events.

GOATMUG

Thursday, August 2, 2012

SON OF SLAW - MORE CHARTS

Below are a selection of dividend paying stock charts I have been watching. I have included few comments and NO annotations on the charts. Many of them have run and run and run to new highs and you'd think we were in the midst of a huge bull market. As we've said for 2 years and it is reinforced daily, if the Fed makes corporate bonds, CDs, and treasuries pay nothing, they will force investors into riskier assets. Dividend paying stocks just happen to be the beneficiary of that tsunami of money. Will it continue? Probably, despite record negative sentiment in the market.

Macro trends continue to slow and worsen with transports showing us that the global economy is suffering.

Here are the charts - notice how many of them are themed for recession-proof industries like telecom, pharma, and consumer staples. There are some other plays based on food shortages/inflation and crop planting issues. Finally, since the focus is yield, I've added some other stuff for examination.

IXP - TELECOM