CFOs DON'T CARE ABOUT MONETARY POLICY

CFOS ARE LESS OPTIMISTIC
We received a "gift" from the Federal Reserve yesterday that included unending monthly mortgage bond purchases.  I have another post in the works to help examine the decision by the Fed and uncover what the impact will be on the economy and the market.  Before we delve in the Fed action, I wanted to highlight a new piece of information brought to us by the Fuqua School of Business at Duke University.

As usual, I present to you the quarterly release of the CFO Sentiment Survey.  The survey is important because it provides us a global and domestic examination of what CFOs think about the economy and also their own firm's growth outlook.  I like the CFO angle because these company leaders often have a more realistic assessment of true industry and market direction and how that will impact them financially and operationally.  I often suggest that CEOs can't help but spin and sell a positive outlook because they are wired to promote and push and therefore are often glass half-full (or sometimes glass all the way full) and CFOs tend to just look at what is in the glass.

Let's examine what the most recent survey stated.


SEPTEMBER CFO SURVEY - http://www.cfosurvey.org/12q4/PressRelease.pdf
CFOs admitted in this quarter's results that they are more negative than previous reporting periods.  The financial managers suggest that they have curtailed hiring plans and have reduced their spending budgets as well.  The executives also stated that their capital spending plans would not change even if interest rates fell another percent or two, which suggests that Fed policy to lower rates would have little impact on real companies.  CFOs also stated that they would not change any of their investment plans even if interest rates ROSE 1% which further underscores that the Fed's work is not really going to have a material impact in a traditional business environment.  Clearly the Fed is targeting housing and also attempting to provide banks with more liquidity.

TOP CONCERNS
I like the CFO Survey because it also asks the finance chiefs to list their major concerns.  This survey noted that profit margins, health care cost, maintaining employee morale, and finding qualified employees were their greatest worries.  Europe's recession is also an issue on their radar and very importantly we find that companies are concerned about governmental regulations.



DETAILED RESULTS HERE
I've cut and pasted an image here to examine the survey results.  You can see that this quarter's growth estimates have been reigned in significantly.  If you'd like to examine the pdf, simply click this link - PDF OF SURVEY RESULTS

JOBS AND THE FOOLISH FED
Ultimately, companies are slowing their growth and that includes their capital spending and hiring.  While we keep hearing that the Federal Reserve is acting to support "full employment" it seems like that is a "fool's errand".  Company leaders are stating quite clearly that interest rates don't matter and lower or higher rates won't impact their decision to add more headcount!

Recessionary concerns are important as US firms look across the pond and worry about economic slowdowns visiting our shores.  While the Fed continues to try to work magic, domestic firms are trying to figure out how to balance the powerful impact of greater governmental regulations and cost requirements with the ability to actually run their businesses.  FIRMS ARE NOT HIRING BECAUSE THE REGULATORY OUTLOOK AND MANDATED COSTS ASSOCIATED WITH HIRING IS UNCERTAIN.  The Fed can buy mortgage bonds all they want, but until government gets out of the way, regulatory uncertainty will be a critical barrier to employment growth in the next year.

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/

CFO SURVEY - LESS GOOD, BUT NOT THAT BAD

Regular readers know that the Goatmug Monthly Macro Updates tend to be comprehensive, (ok long), and as the author of the posts I love it because the data helps me forge a picture of the broad economy and this allows me to craft a longer term view of the direction of the markets.  Usually, I don't miss a beat, but somehow a section was deleted from the June Monthly report last month.  This section covered the latest release of the Duke University / CFO Magazine CFO Global Outlook Survey.  Sometimes these mishaps are to our benefit as I would not have had the chance to review the report as closely, so let's make the most of the fumble!

US CFO OPTIMISM DECLINES

In the latest series of responses from CFO's we find that they are less optimistic about their own firms and less excited about the prospects for the economy.  Before we declare a confidence crisis here it is important to note that these numbers are about the same as last year and simply slight declines from the previous quarter. 

Concerns for the financial leaders of business organizations include; high oil prices, a lack of skilled workers to fill open positions, and a generally soft economic environment.  Overall, CFO's expect earnings and capital spending to grow around 8% next year.  These estimates are down a bit from last quarter, but still quite strong. 

EMPLOYMENT OUTLOOK
There just seems to be nothing that will take us off a 9 handle when looking at unemployment.  CFO's responded that they believe that unemployment in the US will remain at 9% through next year.  Despite the bleak outlook, financial chiefs in energy, tech, and retail/wholesale all reported that they are hiring actively.  So, if you are in sales, accounting, product development, or an engineer, you have some hope!

ASIAN POINT OF VIEW
Asian Financial Officers were more positive than last quarter, however there was one item that we need to note carefully.  For the first time in the history of the CFO Survey, Chinese respondents reported figures that were less optimistic than their counterparts in other parts of Asia.  Chinese CFOs are reporting that they are concerned about government regulations and policies along with the issues of weak consumer demand and pricing pressures. 

EUROPEAN CFO THOUGHTS ON SOVEREIGN HEALTH
Eighty percent of European CFOs think Greece will default on its debt within one year unless additional financial aid is provided. Only one-third think current proposals to extend maturity and reduce interest rates are sufficient. If Greece defaults, 42 percent of European CFOs think it is likely that Spain will need a bailout to avoid default.


Nearly half of European CFOs believe a Eurozone country will experience an economic depression due to recently enacted severe austerity programs.

Wow!  Did you catch that?  If Greece defaults Spain is up.  Well, this is not a surprise, although I think that their attention is misplaced as I think that Greece is frankly a mouse in the room and it has everyone's attention.  Instead these CFOs need to be looking at the huge elephant in the room named Italy that is about to be a big problem. 

Further, if austerity programs gain traction we'll see an economic depression, why haven't we heard this?  Isn't the kindly IMF, ECB, Fed, and World Bank aware that smart business leaders think that financially crushing economies might be bad for the larger economy of Europe?  Don't these bankers have concern for the markets?

In summary, the CFO Survey shows some mild erosion in confidence in the economy.  There is a desire to hire qualified applicants in about 20% of firms, however the trick is that few potential employees are skilled.  I get the sense that this quarter is an indication of just how fragile the situation really is in the USA and abroad.  If high oil and gas prices prove to be "less than transitory" we could see next quarter's outlook by company leadership to drop significantly.  If price inputs fall, there is a chance that companies could gain some traction.  In general, the CFOs are saying things are less good, but not that bad.  Let's hope for less bad and more good, but we need falling commodity prices and a boost in consumer demand now to make a difference.



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/



SEPTEMBER CFO SURVEY - DOUR MOOD RETURNS?

The quarterly Duke CFO survey was released and what can we say, CFOs just aren't as excited as they were.  Somehow the kool-aid has not made it to the interior offices of the corporate towers where the bean counters are usually nestled. 

Here are the highlights......  http://www.cfosurvey.org/10q4/PressRelease.pdf

OPTIMISM PLUNGES


Optimism about the overall economy fell at 53 percent of U.S. firms and increased at only 14 percent. The optimism rate of 49 is a level not seen since the first quarter of 2009, when CFOs rated the economy at 40.


“The CFO optimism index has proven to be an accurate predictor of future economic performance,” said Julia Homer, executive vice president for content at CFO Publishing LLC. “Therefore, this dramatic drop in optimism bodes poorly for the economic outlook. Half of CFOs say there is only a six-month window -- and another one-fourth believe it’s a 12-month window -- during which they can maintain current levels of business activity without improvement in the overall economy.”
 
CREDIT - WHERE'S THE PROBLEM?
 
“The math is simple. A) Banks are sitting on cash because of their poor health and general uncertainty. B) Small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C) In usual circumstances, small and medium-sized businesses account for the majority of employment growth. A+B+C implies we are stuck at 9 or 10 percent unemployment,” Harvey said.


Harvey added that “recent regulatory reform has not helped. Only 5 percent of CFOs consider the Dodd-Frank legislation as a positive -- and that number excludes all firms in the finance industry. The main concerns about the recent reform are that it will lead to increased compliance costs and make borrowing more difficult. CFOs also expect higher banking fees. Some of these increased costs and fees will be passed on to customers, and others will hurt the bottom line.”
 
The CFO's are telling you that all is not fixed.  What made their outlook change from just a few months ago?
 

Reports like these continue to give me pause on joining in the full blown bullish party.  We've positioned ourselves well since Fed President Bullard's speech in the first week of August, but this type of data continues to reinforce exactly why the FED is continuing its drum beat and repetition of the mantra that they will continue to provide liquidity and will continue to step on the gas.  Clearly they are not going to stop the beating of the dollar either!  The Fed sees this type of stuff way before we do and this is a great data point to remind us that all is not really better.  All stock markets may be heading higher, although it isn't because there is growth or real value, it is because the dollar is being debased. 

One last comment on the dollar.  Remember how I allude to the dollars decline as a well choreographed dance to the bottom?  Well, that is exactly how I see it.  We've tumbled very far very fast and now it seems about like it is time to make a measured move higher just to give all the other central bankers some relief.  That of course means that we may see a pause in the gains in shiny things like gold and silver.  Personally I would not add to my metal and commodity positions here and I would not be short the dollar.  Just a warning.

GOATMUG



CFO SURVEY - JUNE UPDATE

Duke and CFO Magazine have again released their CFO Survey.  As I always state, the CEO is the sales man and the CFO is the guy we need to pay attention to.  (Yes, I'm biased I worked in Corporate Finance for years).

http://www.cfosurvey.org/10q3/PressRelease.pdf

HIGHLIGHTS -

CFO SURVEY--Chief financial officers in the U.S. say they have limited plans to hire over the next 12 months, although nearly 60 percent won’t return their staffing to pre-recession levels until 2012 or later. Benefits and wages also remain at reduced levels at many firms, and credit is still tight for small firms, which is hindering hiring plans and constraining growth.

GOATMUG INTERPRETATION- Ok, get this.  The recovery is not going to include hiring.  Only 40% of CFOs are projecting getting back to pre-recession levels (if everything goes well) by 2012!  Oh yes, and if you still have a job or will be one of the lucky ones getting rehired, you might expect lower pay or reduced benefits.


CFO SURVEY--The recovery is not completely stalled, however, as CFOs predict strong business spending and earnings growth.
 
GOATMUG INTERPRETATION - Businesses are hoping and praying for a rebound although they are not confident enough to bet on it (hire).  As I've mentioned, my belief is that during the peak crisis months company's quit reordering to replace inventory.  Ultimately we had a situation where firms HAD to reorder and begin acquiring materials for their products just to replenish them.  We've done that, now let's hope we have someone to buy all of this new inventory.
 
CFO SURVEY--Borrowing conditions remain tight, with roughly an equal split between firms reporting that credit conditions have tightened and those saying credit has eased. One-third of micro-firms (100 or fewer employees) say credit conditions have worsened in the past six months.


GOATMUG INTERPRETATION - Lending is still a problem?  Either banks aren't lending or the loan officers are suddenly looking a realistic levels for debt and requiring firms and borrowers to actually be credit worthy.  I think this is got to be a very accurate piece of data in that I'm sure 50% of the firms are actually decent credit risks while I'm sure another 50% are scary and probably don't deserve the lines of credit they previously consumed.  I guess this is why we see that credit is actually worse than 2009 in many cases.  I'm sure there will be a rollout of a new Federal loan program that loses billions of your tax dollars to bail out credit starved firms that "deserve" all the credit they can handle.


CFO SURVEY-- Earnings are expected to rise 12 percent and capital spending 9 percent in the next 12 months. Research and development and tech spending will increase 4 to 6 percent. 
 
GOATMUG INTERPRETATION -  They better!
 
 

TOP CONCERNS

 


CFO SURVEY - The top two concerns for U.S. CFOs are weak consumer demand and the federal government’s agenda. U.S. CFOs, who expect to raise the prices of their products by 1.5 percent, are also worried about price pressure from intense competition. Maintaining employee morale is among the top company-specific concerns.

GOATMUG INTERPRETATION - Wait a minute, we have growth forecasts and profit expansion predictions, but our top concern is the anemic consumer demand and the not so invisible hand of the government?  On top of that, CFO's say that management can't raise prices because price competition, these guys are trying to spin this.  I'm not buying it and I don't think they even believe it!
CFO SURVEY - Health care costs also have reappeared among the top four concerns for U.S. companies, with corporate health care payments expected to rise 8 percent in the next year.
 
GOATMUG INTERPRETATION - Healthcare costs an issue?  Just wait for 2011, 2012, 2013, and 2014.   That is 4 and 1/2 years for the insurance companies to prepare (increase prices) for the national healthcare system.  Employers with 50 or more employees will suffer most in the business community right along with the tax payer.
 
 
All in, I don't think this is a very positive report.  This should be a report that suggests that CFO's are seeing increased momentum and better long term visibility about revenue growth and margin expansion.  We should not hear that CFO's are concerned about weak demand and a lack of pricing power.  In addition, boards and executive teams are worried about our government's plans for business.  It is incredibly hard to predict and create strategic plans when you don't know where big government will decide to regulate or takeover within the business world. 
 
A closing word on credit.  We are really hearing two stories when it comes to credit.  Strong firms are being lavished with amazing opportunities to borrow at ridiculously low prices (interest rates).  In fact this will be a monster year for highly rated corporate bond issuance (at least so far year to date).  This is driven by the fact that overall the FED and central banks have lowered the alternative lower risk yield so much that investors are DRIVEN to take more risk just to outpace inflation.   On the other hand, smaller firms or high yield firms are facing tremendous problems funding their operations and rolling debt.  Europeans are also having a terrible credit funding year.  The market has dissected the risk and is punishing poor creditors (forcing them to pay much higher rates) and rewarding good creditors (giving away cheap money).  At least the system is starting to appropriately price some risks! 
 
I think the CFO's are hedging their bets and remain totally cautious because they know that demand is falling and they may have one more quarter of upside and then down we go.  June's update shows that the rate of change on many metrics is absolutely falling and the actual real levels have also dropped from their peaks.  No amount of government stimulus is working and the economic disaster in the Gulf will only increase the speed of the double dip.  We had all better be praying a hurricane or tropical storm does not form in the Gulf. 
 
Having said that beware, our government is still involved in the house bubble it is trying to reflate.  Hence we see a tremendous mispricing of residential home mortgages where we can obtain a 30 year $400,000 loan today for at 4.8% in Baton Rouge, LA with zero points!  They will attempt to roll out any plan to keep the plates spinning.  I fully expect the Fed and Treasury to execute Quantitative Easing Part Deaux within one or two more months.   They will blame it on the crisis in the Gulf as we remember that they never waste a good crisis.
 
TRADING UPDATE
This market is and has been really hard to trade.  If you are a short term trader, you are being ground up as moves of plus or minus two to four percent a day will ravage you.  If you are a longer term investor you are either back to where you were in August of 2009 or have been crushed if you bought after that period. 
We could still see a rally here to the 1140 area, but I ultimately believe that we'll end lower for the year.  I've made it a point to highlight those posts that are simply suggesting that you get out of the market because you need to see these.  If you don't get out, you need to have some protection in investments that will get you out if possible or at least earn you interest or dividends despite things going down (dividend paying stocks or bonds).  Several indicators I watch are beginning to confirm a rollover in the market and if we end June under 10,000 in the Dow, we'll have a confirmation.  These are traditionally very long term signals too, so I'm sitting up in my chair and waiting for them to trigger.  If they don't trigger, I'll still be sitting up watching.  Be very careful.  The Dow was up today almost 80 points and then ended down  20 - just another 1% reversal - nothing to see here!
 
 
GOATMUG

MARCH UPDATE

MONTHLY UPDATE

RAIL TRAFFIC - http://railfax.transmatch.com/

Rail data continues to show improvement in total tonnage shipped. Last week each category of shipments showed higher levels of cargo traffic than the previous year in except for coal shipments. In comparisons to last year's data, coal and lumber are the only categories that are lower than 2009.

LUMBER & STONE

As usual, we are watching lumber and crushed stone to tip us off for some sort of housing and commercial building growth. Lumber is at least pushing higher compared to last year while crushed stone still tells us that commercial building is mired in the pit.

CFO SURVEY - http://www.cfosurvey.org/

We want to watch what CFO's of companies are thinking and how they are feeling to give us an understanding of where they predict the economy may go. I like CFO's more than CEO's because typically CFO's are a conservative lot that see what is actually going on in the firm rather than projecting what may happen. In fact, CFO's typically downplay the strength of the company and I like that as they tend to reign in spending and the projections of the sales team.

A professor from Duke interprets the data here......

"The uptick in business spending indicates the economy has bottomed out. But the recovery might be short-lived if the employment picture does not begin to improve," Graham added. "Another note of concern is the corporate sector’s expectation to decrease inventories, exerting downward pressure on overall GDP growth."

EMPLOYMENT STABILIZING, BUT INVENTORIES TO DECLINE
About half of U.S. CFOs say they will increase full-time domestic employment in the next year, twice as many as say they will decrease their workforce. Net full-time employment is expected to increase 0.2 percent and temporary employment 0.5 percent. Finance chiefs expect outsourcing to rise nearly 4 percent.
"Certainly, it is good news that the employment bleeding has stopped," said John Graham, professor of finance at Duke’s Fuqua School of Business and director of the survey. "CFOs, however, still expect a virtually jobless recovery in 2010. Looking further ahead, it will be two to three years, maybe longer, before employment returns to pre-recession levels at most firms. CFOs say they are keeping workforces low due to weak consumer demand and increased efficiency in their production processes."

-- CFOs’ top economy-wide concerns include weak consumer demand, federal government policies, price pressure and credit markets. Top concerns about their own businesses include maintaining profit margins, low employee morale and liquidity management

WLI DATA - http://www.businesscycle.com/resources/

No double dip - WLI data back up after 4 weeks of decline. Now at 129.8, the WLI is showing continuing strength in the recovery.

FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/

Like the WLI, the FCI is now solidly above 0 and this tells us that the "recession" is over. We will need to continue to watch the jobs data as this will be the issue that drags the economy down if people don't find jobs. As we marry this concept with what the CFO's are saying in the sentiment data above, we need to make sure that we are enjoying the "recovery", but are skeptical of it at the same time. CFO's are telling us that they are going to actually decrease employment and outsource more of their jobs overseas. That doesn't lend support to the notion that the consumer is back and that housing is fixed.

HOME PRICES - http://www.businesscycle.com/resources/

Speaking of housing, we are seeing pricing declines. While this sounds bad, pricing drops are the only way to make homes more affordable and accessible to buyers. Lower prices will help clear the shadow inventory of homes that will continue to suppress a recovery. Why our government continues to delay this is a mystery when we all know that the only way to fix the sickness is to take the medicine.

BALTIC DRY GOODS INDEX- http://www.bloomberg.com/

I've been watching the BDGI lately alot as an indication of activity of shipping in overseas markets. Spot shipping rates (not contracted ones, but the rate that you'd have to pay if you needed to ship something and lease your ship today on the open market) are moving higher, moving up some 10% from last month's report. A continued move here may bode well for some shippers. An acquaintance on www.slopeofhope.com sent me an article on how the pricing changes in the baltic dry goods index is not that connected to the pricing of the actual shippers, but no matter if that is true, this does indicate that commodities themselves are being consumed and moved. This bodes well for the continued move higher in emerging markets, basic industries, and commodities.

USD - http://www.bloomberg.com/ -

The dance continues. As we have concerns over debt defaults in countries like Greece, Spain, Portugal and Ireland, we see strength in the USD. When we get word that the EU, IMF, or Germans are going to bailout these countries, we then get a flight from the dollar and a recovery in equity markets. There has been some breakdown in the traditional relationship because not only are European investors fleeing the euro and other currencies, they are also simply buying US equities as well. This is why we've actually had some equity market strength in the face of concerns over Greece's sovereign debt problem. The nasty little secret is that all of these countries have been hiding debt and this is just coming to light. We will have a debt crisis, national governments are simply trying to do what they have done forever, ----keep the charade going as long as possible.

A story released this weekend is suggesting that Dubai actually has nearly 4x's as much debt as every thought as they have hid it. Doesn't that make you feel cozy inside to thing that national governments would like to their investors and debt holders? Why would banks and people follow laws and be honest if their governments don't lead by example.

Longer term, I still expect the dollar to rise and treasury rates to go higher as well. In the short run if we get a "solution" to the Greece issue, we'll see the USD drop.

TRADING UPDATE FOR MARCH

We've continued to rally since February 5th. I am still positive for the next month and 1/2 or two, but I am waiting to see a very slight pullback as investors will get overly bullish and everyone will lean to a specific side. Economic data will continue to surprise folks on the upside (jobs, housing sales, retail sales) and this could push the market higher. In addition, the resolution to the situation with the debt problems in Greece - although this is temporary because more countries face trouble. In spite of the negative potential news, slight pull backs have been tough to come by, so a good strategy may be to add purchases in an incremental fashion. Traders often call these time stops. Perhaps the timing could be to add every 2 weeks or every month. This way you don't put your entire holdings in at once.

WARNING - THE FOLLOWING ARE SPECULATIVE TRADES -

Emerging Markets - As we see continued USD weakness, we'll see momentum build in the emerging markets. I have had the following trade on for some time, but it just broke out today and I think it still has close to $1.00 more to run before hitting resistance.

EWM - Malaysia

Current - $11.30

Target $12.35 (Target Gain = 8.8%)

Downside stop - $10.50 (potential loss -7.1%)

Oil - I think oil continues to breakout. We are now above $80. As I stated in the beginning of the year, I believe we have a shot at $100.

GOLD - GLD - For a short time horizon, I believe gold is going higher. I am personally not involved in this trade and am not going to provide levels for a trade on this item despite it's positive direction. You can comment and leave me levels and I'll take a look to confirm it if you'd like.

(VXX) - (BEARISH TRADE FOR A PULLBACK) VIX is now at 17.8 as I am writing this. I do believe we could have a short term pullback and the use of VXX to play that would be ok. This is not a long term trade, you are simply trying to capture any downside as we've moved quite far since Feb 5th without a significant fall. Take a look at thetechnicaltake.com . Guy Lerner is again stating that bullishness is high and this should give us some validation to the notion that we'll make money as the fear index reverses and goes higher - making money in the VXX.

KSU - KSU is now trading above $35.00. I like the gains we took on it, and will wait to re-enter.

As usual, thanks for visiting and thanks for your comments.

Goatmug

October Summary

OCTOBER - TRICKS OR TREATS

Unemployment Data - http://www.bls.gov/news.release/pdf/empsit.pdf

Unemployment numbers for September were higher than anticipated and this helped shake the markets. The truth is that the trend of lower losses is continuing and the market is still focused on everything getting less bad. While the data was worse than expected, we need to look at these numbers as 1 or 2 month averages and there is clearly and improving trend.

Rail Data -
Rail traffic looks flat as of the last part of September. Optimists will say that we are turning south and pessimists will suggest that we aren't improving. As we enter this season we should begin to see shipping and transport data ticking up because we are entering into the part of the year where Christmas inventory and orders are being stocked. If we don't begin to see an uptick in these charts as we normally would we will have our first indications that the rally may be ending.

Lumber and Crushed Stone are indicative of the pipeline for growth in commerical and residential real estate. No trend changes are apparent in these items. As we've stated before, no matter how high banks, REITs, and home builders go, we would avoid them.

Financial Conditions Index - Source / Bloomberg

The Financial Conditions Index continues to maintain it's trend of improvement. There has been a slight dip over the course of the last week, however we won't do much more than raise an eyebrow at this metric unless we see other data that confirms this warning. Index numbers over 0 (zero) indicate that the economy as measured through fixed income and money market liquidity metrics is growing and expansionary. We are not going to signal the end of the recession, but possibly could as we near zero.

Source - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND

CFO OPTIMISM - Source Duke Fuqua School of Business - http://www.cfosurvey.org/
Duke released its September CFO survey results again. CFO's believe that things are looking better for the overall economy and their own firms. In general they are more positive. This change is not overwhelming, but given that most CFOs are going to more conservative than their CEO or COO counterparts, we should take heed here to recognize the potential for real growth during earnings season (starts later this week) and then next two months.

WLI Data
The Weekly Leading Indicator data from ECRI shows sustained improvement. Admittedly 50% of the data that comprises the WLI Data is "Fedcentric", meaning that it has more to do with the amount of money that the Federal Reserve has sloshing around rather than real economic improvement. Having said that, the flood of money sloshing around is making an impact and we cannot ignore it or discount the impact that those dollars will have when they chase assets. Source - http://www.businesscycle.com/resources/

AAII Sentiment -

The AAII Sentiment numbers continue to remain in no-mans land. Remember, when sentiment reaches an extreme (bullish or bearish), we usually want to do the opposite. In this case there are a mixed number of folks that believe in this rally and an appropriate amount of investors that are bearish. The confusion confirms exactly what we are seeing with big up and down days as traders attempt to sort out the direction of the market.
Source - http://tal.marketgauge.com/dvMGPro/charts/charts.asp?chart=AAIISR

US DOLLAR INDEX -

Anyone seeing anything familiar here? We had a couple of days worth of a head fake last week that was just enough to ensure that we were on our toes. This has merely provided us an opportunity to buy more of the types of holdings we've discussed in the last several months. "Carry on, nothing to see here!"

Source - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND

Home PX Index -

I've left the home price index graph up here simply as a placeholder since it hasn't been updated yet. Why is it important? It is important for several reasons. First, home price stabilization is the basis for much of this rally. If you recall, Ben Bernake and Hank Paulson repeated told us that if we can simply stabilize the home market, we'll see the economy recover. In their efforts to stabilize home prices they have become the mortgage lender of choice for most of the deals getting done. Directly you ask? No, but lenders are being supported as the government backstops the entire mortgage market. By buying these mortgages and also controlling treasury rates, the fed has created an artificially low interest rate environment.

What else is going on here? We are hearing that banks continue to pile up foreclosures on their books, but refuse to release them for sale on the market. Other stories highlight that many ex-homeowners still remain in homes they haven't paid a mortgage on for many, many months. How can they stay and not pay? By keeping foreclosed properties in "defaulting" status rather than taking receipt of the properties, banks don't have to recognize the huge losses they are saddled with. Our regulators sit idly by as banks game the system and overstate the assets on their books and earnings. The hope is that by controlling the flow of foreclosures coming to market they can extend the period until the market recovers.

Is it working? Well, according to the graph, it might be. I would guess that as soon as there is a noticeable stabilization or increase in pricing a new wave of sellers will come to drive prices down. No matter what, banks and the government are both giving it all they have to keep prices afloat. Their ability to sustain this is a key driver to the continued resurgence in the market.

Are there still concerns in the housing market? Yes, people continue to lose jobs and people continue to stop paying mortgages. We are coming into more trouble as a new barrage of bad loans are due to reset to higher interest rates. These are the option ARM loans. Many of these loans were "interest only" loans for a period of 5 or 7 years. Borrowers took these loans out with the assumption that they would have increasing home values they could then use as equity to refinance with, or they were used by folks that needed low interest loans because they were maxed out and didn't have the ability to pay more. These loans are due to reset in 2010 and should unleash a new wave of homeowners that cannot afford to own.

Ok, so everything is possibly negative, does it impact our trading? No! Why would reality impact the way we trade? Of course I'm being silly here, but the reality is that the numbers are showing that the pricing data is turning north and this alone will be the basis for optimism in the market. We need to be constantly watching for further improvement to reinforce our short term bullishness. If we get socked with negative news, it is another warning shot across the bow that we need to exit long trades and be more conservative.

Great, Now what? - Summary for October

Given the data we've presented lets summarize it like this.

Unemployment - Bad, but getting less bad

Rail Data - Unchanged

Financial Conditions Index - Still Improving

CFO Sentiment - Improving

WLI Data - Getting Stronger

Trading Sentiment - Mixed (no real trend here but uncertainty)
US Dollar - Declining. It took a pause and now continues its retreat.

Home Prices - Improving

Other items - Consumer Sentiment has still not improved as much as the rally in the market would suggest. We need to continue to eye these figures. Government's entire strategy is that stabilizing the housing market will cause a rebound in consumer spending which is 70% of our economy. If the consumer remains on strike and buys less and demands lower prices, the planned recovery will fail.

Earnings Season - I eluded to earnings season starting this week. I believe that most company reports will beat handily the lowered and managed expectations. We may have continued upward movement here to celebrate how "great" these firms are doing. I say take it while they are coming, but we need to watch carefully for a "sell the news" reaction as we close down earnings seasons. Next quarter's earnings will be easy to beat as well and this is the reason I continue to look at February and March of 2010 as really critical months. These certainly could be the months when the euphoria wanes and gravity reasserts herself after a 9 month vacation.

OK, How do we play it?

It seems pretty simple doesn't it? Keep doing what we covered the last three months. Watch the dollar and invest in base metals, commodities, foreign / overseas countries and etfs, and buy other currencies if you are sophisticated. Silver and Gold have been big recent winners along with Brazil. The Dow Jones Industrial Average has actually lagged in performance the other assets I watch with the exception of corporate bonds. High yield bonds though have continued to outperform. Dollar strength will indicate a turn, but at this point I don't believe that the Federal Reserve desires to change the dollar's direction or they would have already intervened. I think that they will allow for the USD Index to fall another $2 or $3 before supporting it. Therefore, we continue to believe that the types of trades we have on will perform well and I am adding more of my money in the market. Remember, I look at these trades on a daily basis, so my trades probably won't look like yours. Many are invested in mutual funds and are locked in for 30 days when buying. This time requirement should give you pause as you think through the possibility of a sudden reversal. Am I saying don't do it? No, but you can lose money and you need to be aware of the risks!

A couple of last words.

Energy and Utilities have also lagged lately, they may be areas to examine and enter as well.

Have a great month and watch the dollar!