BUBBLE FACTORIES MAKE BUBBLES - FOMC PRESS CONFERENCE ANALYSIS

I wanted to provide a video feed of yesterday's historic post FOMC meeting press conference.  This was a brief review of the FOMC decision and a question and answer session where the FOMC Chairman Ben Bernanke addressed the nation via a few questions from reporters.  Unfortunately there was not a real opportunity for meaningful follow up questions nor any real journalists that would actually press the Chairman about the destruction that he is causing.  Anyway, here is the video.  Below I've captured a few highlights that I've summarized and also pulled out a few notes and quotes from the exchange.

Bernanke Video




The first 13 minutes or so are his summary of the FOMC press release.  I think it is worth the time it takes to watch it.

THE FED'S ROLE

• "As long as we have low resource utilization we will have a low Fed Funds rate."   
• GOATMUG TRANSLATION - (As long as the economy is sluggish and showing slack, our friends at the Fed will be more than happy to provide extra-ordinary measures to assist the economy).

THE FED'S PROJECTIONS (LONG-TERM)

• "The Fed has a long term outlook for growth for the US economy at 2.5% to 2.8% with a long term unemployment rate of 5.2% to 5.8%." 
• GOATMUG VIEW - Are you kidding me?  There is absolutely no way we will hit 5.8%!!!!

INFLATIONARY CRAZINESS

• (6:40) Inflation from commodity pricing has increased significantly recently, BUT measures of underlying core inflation has only risen moderately.  Inflation remains subdued and long term inflation expectations remain stable.  (7:13)As increasing commodity prices moderate, inflation should decline."  (9:13)  If inflation is not passed through to consumers and households then inflation will remain tame.
• GOATMUG THOUGHTS - I don't think there is enough space on blogspot for me to write about these amazing statements!  First of all, inflation from commodity prices have increased, but because we use a fake measure of core inflation that excludes energy and food, of course it has only risen moderately!  That too is about to change as we have seen annoucements from companies like Kimberly Clark and others that state they are raising prices.  Second, long term inflation expectations are not remaining stable unless of course you are looking at the bond market to suggest that things are great.  Many financial pros suggest that treasury rates have not exploded higher, therefore, inflation expectations remain in check.  I would counter that the FED is buying those treasuries and is obscuring the true price of those bonds.  Next, Bernanke says that commodity prices increases should moderate..... how?  Finally, if inflation is not passed through to consumers, inflation will stay low.  Well, since we are now seeing price increases flow through, don't you think that confounds the entire argument? 

After the briefing, Bernanke took a few questions from the stooges that were lined up.  Here are a few of those questions.

CRITICS SAY THAT FED POLICY HAS DRIVEN DOWN THE VALUE OF THE DOLLAR AND DECREASED THE AMERICAN STANDARD OF LIVING.  WHAT IS YOUR RESPONSE? (15:00)

• "First, the Federal Reserve believes in a strong dollar, just like Sec. of the Treasury Timothy Geithner.  Over the medium term we are trying to remain stable inflation.  We are also trying to get a stronger economy through maximum employment.  In our view if we do what is needed to achieve the dual mandate we will create fundamentals that support the dollar.  The dollar retains a high standing in the world.
• GOATMUG RANT - Really?  Yes, there was a safe haven effect that caused the US Dollar to spike in 2008 and in 2010.  However have you noticed that since May 2010, the dollar has gotten crushed.  I haven't seen any of the policies that you highlight as successes that have influenced the direction of the dollar in a positive way.  In fact, the creation of QEII has been absolutely connected to the decline of the value of the dollar and the increase in "asset values".

WHAT CAN THE FED DO ABOUT THE HIGH COST OF GASOLINE? (17:50)

• “There’s not much the Fed can do about gas prices. After all the Fed can’t create more oil. We don’t control emerging markets. What we can do is try to keep higher gas prices from passing into other prices, creating a broader inflation. Our view is that gas prices will not continue to rise at the recent pace.”
• GOATMUG DISCUSSION - Ok, remember that for once Bernanke says that the Fed can't do everything!  However, I think this is a subtle shift where Bernanke usually highlights how effective and powerful the Fed is at controlling everything in the financial world, but then suddenly becomes impotent when it comes to the price of actual hard assets.  I don't buy it.  This line of response essentially says that the emerging market economies are responsible for all the increased oil demand in the world and that this coupled with the unrest in the Middle East is causing gasoline prices to increase.  There is not one mention that it really is the relative cost of the gasoline that is killing people in the US due to the destruction of the US Dollar.  Not even a whiff of that here.  Finally, later we'll see that the Fed takes credit for the increases in asset prices, the problem is that we at the Goatmug Blog realized early in January that gasoline was an asset!  Therefore I suggested that it might be a worthwhile consideration to buy a whole bunch of UGA to get ahead of the crowd that might also see gasoline as an asset. (look to the very bottom of this long post).  So, indirectly and directly, we have Mr. Beranake to thank for our huge increase in asset prices!  Thank you FED!

HOW IS IT THAT ENDING OF QEII PROGRAM WON'T IMPACT THE ECONOMY?

• The ending of QE II won't harm the economy because we have telegraphed the end of the policy and the market expects it.  Second, it is not the pace of ongoing purchase, but the size of the portfolio.  The amount of securities we hold will remain approximately constant.  The amount of monetary easing should remain constant.  Early in our exit process, it is very likely an early step will be to stop reinvesting securities that will be maturing.  This is a tightening.  We would do this based on economic outlook. 
• GOATMUG REMARKS - So, what you are saying is that turning off QE won't impact the market. (What about what happened at the termination of QE 1?)  Secondly, although you won't buy more than the allotted $600 Billion in QEII and you say that you are terminating the program, you even suggest that you'll continue to buy securities as maturing ones roll off.  So, in other words, you are going to keep QE II going forever.  Ultimately when life support can be removed, you'll then start selling.  Hopefully the patient won't be dead when that happens.

IS IT IN THE FED'S POWER TO REDUCE UNEMPLOYMENT MORE QUICKLY?  29:00

• The Fed took extraordinary measures to stabilize the economy.  We have created new ways to to change monetary policy.  The Fed has a dual mandate.  The Fed needs to worry about inflation.  The cost of future inflation on employment could be high.
• GOATMUG RETORT - No, while the Fed talks about creating jobs as an indication that the economy is recovering, the FED doesn't have any ability to create jobs and the fact that it has taken this long for someone to realize it is just a sad commentary on how poor the main stream media is at actually providing quality analysis and a statement that Joe 6 Pack and Mom and Pop are doomed.  Notice the shift here.  The Fed's intent was to get asset prices higher to save the banks and now that they've done all they could, they want to exit stage left.  J6P thought he'd get a job out of it, but all he got was a foreclosure notice.

QEII HASN'T DONE MUCH TO HELP THE ECONOMY?  30:40

• "The second round of securities purchases was effective.  We saw this first in financial markets.  We saw this in increases in stock prices, decreased spreads in credit markets.  We saw the same responses as we saw in QE 1.  We did get very significant easing.  You would expect from decades of financial experience that it would lead to improving economic conditions.    We didn't say this was going to be a panacea.  We never said that it would solve the enourmous jobs problem.
• GOATMUG - So there it is.  The metric for the measurement of the impact of QE is if financial markets and asset prices (stocks) go higher.  This is no revelation for me as I've highlighted this stinking thinking for more than a year now, but it now seems that Bernanke has simply given up on the notion that alluding to a recovery in other parts of the economy matter (jobs, housing, manufacturing).  Clearly Bernanke has settled in to the thought process that simply stock price increases an indication of a job well done.  See, that was always the game.  The FED has always tried to ease to prop up the next bubble.  The only problem is that this bubble has been one that has been of great size (huge increase in asset prices over the last two years), and it has been so fast.  The last bubbles (housing and tech) took years to pull off and were like slow moving freight trains.  The resulting crash from this Fed bubble will be much more messy due to the size and speed at which it has been formed.  So, that is what is striking, I see Bernanke shrugging here and simply saying, "Well, we did what we could and stock prices rose, it's just too bad the jobs didn't materialize with it". 

WHY DON'T YOU DO MORE QE?

• "The problems are getting tougher due to inflation risk."
• GOATMUG - Bernanke is saying, "That's it, NO MAS!"  In other words, they are trapped and he knows it.  Of course he doesn't come flat out and state that he created all of this inflation.  Of course he doesn't say that housing is going to implode even more.  Of course he doesn't say that he can't do anything about jobs.  He simply is saying, we're done, we can't do anything extra other thank keeping asset purchases at the same level.  See, if Bernanke does the Son of QE (III) we will see commodities go even more nuts and the US dollar simply collapse.  Recall, I've always stated that the US Dollar destruction was purposeful and choreographed like a dance.  A collapse is not the best form of art, so this is where we could see a skillful move on the part of the Fed to hit stock markets with a few blows (corrections) and move the dollar higher.  You can't just have the dollar fall through the floor.  Once there is a reprieve, we could see some sort of emergency stimulate program put in place again.

FOMC NUGGETS
Let me wrap it up there. The press conference didn't tell us anything we didn't know, but give us a few hints as to the mindset of the Chairman.  This is important because what he says goes, the other Fed Governors are simply a distraction.  I'll just bullet point the key items.

*  Inflation is showing up, but somehow it will moderate.  (How?)
*  No more QE, except for the $600 Billion they have on and whatever else they decide to do later.  (A promise)
*  Jobs no longer are under control of the Fed, they can only indirectly create an environment where that happens. (Sorry)
*  Asset prices have increased, so that means the Fed did a good job.  (Bubble factories only know how to make bubbles).

*  The strong dollar is important to the FED.  (We believe in the Loch Ness Monster too).
*  The Fed didn't impact increasing gas prices (obviously it isn't an asset), that is the fault of emerging markets. (uh huh.)
*  The Fed is stuck.  They are at the end of the rope and they know that they are creating inflation.  (The dirge is playing).
It is telling to me that the Fed is winding things down.  The theme we've discussed all year is that stock markets could begin to fall in May which historically has been a very poor month.  Thanks for sticking with this post.  It is a bit weird in its structure, but I think that we can pull a few interesting tidbits from the remarks how the Chairman responded to the questions.


TRADING UPDATE
Since I mentioned it, I might as well make a comment about the on-going UGA trade.  Things have obviously gone very well in this trade since the original post on 1/17/2011 when UGA was trading at $40.00.  $14.00 in gains is nothing to sneeze at and I do think that it will continue to be a positive trade.  Having said that, it is nice never to give back hard fought gains.  Therefore I advocate putting a stop in around $53.00 (I'd do it 5 cents below) to ensure that you don't blow a great trade.  There was a gap up that took place around June of 2008 where UGA blew through $60, I have that as an upside target for this trade.  This is also a good way to trade this since I posted that article from FMXconnect.com where they suggest the best trade here is to sell on May 1 or May 15.  Either way, we can let the market just take us out around $53 or get us to the target. 

GOATMUG



BIG WEEK = BIG FLOP?

I want to drop a quick note here.  This is a really, really, really big week. 

ELECTIONS
We have elections in the US for mid term positions where it is widely anticipated that voters will reject the unfettered spending of the current administration, Congress, and Senate.  (Don't forget Bush was also a complete idiot when it came to fiscal controls too and should be held responsible for his completely insane implementation of Medicare Part D which is the worst and costliest entitlement program ever!)

FOMC
Probably more important from a market and economic standpoint we also have a Federal Reserve FOMC meeting on Wednesday.  This is the meeting where Ben Bernanke has purposely timed the unveiling of their plans for additional stimulus spending which has been named "QE2" for Quantitative Easing 2.  The purpose of this program is to continue to spew liquidity in the form of electronic dollars all over the global economy to ensure that asset prices will rise.   As Alan Greenspan has stated, "nothing will help cure the economic conditions as much as a rising stock market!"  The real impact of all of this money sloshing around though is that the value of the dollar drops with each keystroke on the economic printing press.  QE2 is synonymous with dollar debasement.

DOLLAR DOWN MAKES GROCERIES RISE
Is it a wonder why you are going to see grocery costs rise?  Sugar, wheat, corn, rice, and coffee are rocketing higher.  Clothes prices are going to rip higher as cotton is at an all time high.  Oil and gas are vaulting upwards and it is suddenly possible to see my $100 oil price target prediction actually be met this year.  We are seeing all of these hard goods increase in cost, yet personal incomes are dropping.  If you hadn't realized it yet, it is almost like this is a war on the poor as these are the ones that will get squeezed the most in this environment.  Thank you Federal Reserve, US Treasury, and President Obama.  It is odd that the President sits idly by as the Fed rips up and destroys the purchasing power of the poor and the middle class.  I guess this achieves his goals though as more and more marginally middle class will slip into poverty and he can be their benevolent care-taker.  He can continue to promise to take from the wealthy and give the poor their fair share of hope.  The President should be slamming Bernanke and Geithner now and demanding that they quit destroying the value of the dollar.  Instead, he tells us that he inherited this mess and that fixes take time.  Very directly Mr. President, it takes no time to make a phone call and demand that Bernanke quit this now! 

TRADING UPDATE -
Ok, so what do I expect?  I expect that the elections will be exactly what has been predicted.  Congress will go to the Republicans and the Senate will remain in the hands of the Democrats.  The Fed will announce that they will do another $500 Billion of QE 2 and they are going to add more when and as needed with no cap.  This announcement will be less than the markets expect, but the added sentence that they will do more when needed will be somewhat of a life preserver.  The market should sell off some 3% to 5% (individual stocks could go down 10% or more).  At that point, that will be the signal to buy.  The Fed is essentially the market's put (floor) and therefore they will step in and buy and float this thing no matter what.  In a 1930's analog, this is about the time when the market dropped another 30% to 40% because the FED did not provide stimulus and Congress became budget hawkish and tried to reign in spending.  Bernanke will not make this mistake and in fact will go overboard attempting to overwhelm the stagnant real economy.  This annoucement is half the real deal and half a promise that there is no end to the intent to provide as much massive stimulus as needed.  He will signal with overwhelming confidence that there is no lack of desire or willingness to blow as much money as need to reflate the US stock market.

After the temporary drop in the market due to a smaller than expected stated amount, we will be buying anticipating a huge stimulus inflow courtesy of the Fed.  Of course our old favorites will be the targets with a couple of additions.  I still like emerging markets, but I will add SLV and DBA.  I am more positive on silver than gold right now and I like the agriculture commodities.  In addition, although the fertilizer names have run it is possible to see an even bigger move there.

Be careful ------ AND WAIT FOR THE PULLBACK!

GOATMUG

NOVEMBER UPDATE

Data continues to come in that bolsters the notion we've had that things were better than most have thought. Employment numbers are bad in the aggregate, but have been "less bad" and the trend is improving. GDP numbers were reported and were positive, and housing and retail sales are showing upticks.


For the last several months we've had a stance that things were getting better and therefore we needed to hold our nose and be invested even if it was based on the theory that the improvement might be short lived and based on the efforts of the Fed's liquidity flood and the Treasury's devaluation of the dollar. What has occurred? Well, exactly what we expected! While many folks were doubting the turn, we've seen it and now the numbers are coming in to prove it out.

IS THAT PRIDE I'M HEARING?
Does this mean we can rest now? Actually, no, this is the time when we need to be more aware and perhaps begin looking further out to clarify our strategy through the end of the year and the first quarter of 2010.

Let's look at the data;


UNEMPLOYMENT REPORT


This morning's unemployment report came in a bit higher than expected and shook the market briefly. While the market was shocked, we were not and now see that the payroll unemployment rate is now 10.2%. Weakness in manufacturing , construction and retail were the culprits while education and health services jobs were actually added over the month. The real story is that unemployment now tops 10.2% when you use the government's method of counting, however if you include all the unemployed that have simply given up or are working part time that would rather work full time you have a number closer to 17.5%. This larger number is the U-6 data. http://www.bls.gov/news.release/pdf/empsit.pdf



As you might expect, employers are squeezing more effort and productivity from their workers. This week the government also released productivity data showing that American workers are more 9.5% more productive in the 3rd quarter. How are we achieving these gains? FEAR! Yes, what a powerful motivator it can be in the teeth of a recession. We are willing to work harder, longer, and cheaper to avoid losing our incomes. The market loved this data point, I'm not so sure it is a good thing in the long run for the US economy.





WLI Data




The Weekly Leading Indicators continue to show improvement. It will not be long before the recession is declared over and we'll need to somehow continue to convince ourselves that despite 10% unemployment the good times are here again! I know, I know, employment is a lagging indicator and therefore will always lag a recovery. As I've explained previously, much of the WLI data is focused on the liquidity in the system and clearly the FED has provided liquidity. Therefore we'll have to keep trusting the Fed playbook that the liquidity that substantiates the recovery will stay sloshing around for banks and Wall Street to pump up asset bubbles.

http://www.businesscycle.com/resources/

Rails Traffic

Rail traffic continues to improve. Tonnage is still well below last year's rates however we are clearly in an uptrend. If we continue on trend, we will see weekly traffic exceed those handled in the fourth quarter of 2008. We need to get used to this as comparisons between year's will be very easy for the next two quarters. This statement will cover many areas of the economy, not just rail traffic!

In specific areas we are beginning to see upticks in actual shipments. For example, last week grains and food actually exceeded shipments for the same week in 2008. We see this happen again in food and chemicals this week.

As I have mentioned before, I watch lumber and crushed stone shipments to give us an idea if we'll see growth in commercial real estate building or residential home construction. We are see a slight rise in crushed stone but lumber still looks weak. I've included a chart of spot lumber prices for a specific November contract

(RAILFAX)-http://railfax.transmatch.com/

LUMBER SPOT PRICING

The reason I post the lumber pricing is that I'm watching this as a leading indicator of an uptick in construction. Of course we'll see this manifest itself in construction starts and even the rail data, but it is important to try to determine if we are seeing real improvement. It is notable that there was a recent spike in pricing over the last week or so.

Source-WSJ- Lumber pricing

Bloomberg Financial Conditions Index -

The Financial Conditions Index took a spill over the last week. It enjoyed a mild recovery today, but the improvement clearly waned over this period. We need to watch this data for indications of trouble in the bond markets.

http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

US DOLLAR INDEX
The US Dollar became a bit firmer over the last couple of days, but I am in no position to call a turn in the dollar's descent into the depths. As I've shown in PUBLIC ENEMY #1 - DEFLATION , our Fed and Treasury are absolutely committed to resolving concerns about deflation with inflation. As a last resort, Ben Bernanke has stated that a currency devaluation has been successfully used to combat deflationary forces, and could be used again. I do not think there is any doubt that we are currently employing every possible means to attack deflation and the intentional destruction of the dollar's value against other currencies is now the primary weapon being used. Yes, I'm watching that upturn and will report immediately if I see a continuation of this reversal. Remember, because much of the basis I have for investment is based on dollar weakness, if we see strength, we need to quickly exit our positions in commodities and overseas holdings. A rising dollar will typically hurt all of these.

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

AAII Investor Sentiment -

Investor sentiment has fluctuated wildly over the last couple of weeks. I was very concerned as market participant bullishness spiked, but the recent decline in the markets of approximately 4% to 5% has quickly turned many more investors bearish. Remember, we typically want to be on the opposite side to the trade when most folks feel really happy about the market or really gloomy. I'm more happy staying with these trades that there is fear back in the market.

http://tal.marketgauge.com/dvMGPro/charts/charts.asp?chart=AAIISR

FOMC Meeting

The FOMC (Fed) meeting occurred on Wednesday and we received word that they Fed will not increase Fed Funds Overnight lending rates. As we've discussed, there was no chance that these guys would hike rates and frankly there is little or no chance of that happening until the middle of 2010. Fed critics have often cited that the double dip crash of 1937 was caused by an overly aggressive Fed that raised rates too soon. As rates rose, the stock market dropped approximately 38%. Bernanke is the expert in depression Fed actions and we can rest assured that he will not duplicate the mistake. This Fed believes that they can manage the inflationary risk and would rather try to deal with that issue than a deflationary one.

HOME SALES AND HOME TRENDS

New home sales for September 09 were released in late October stating that sales were on target for 402,000 for the year. This was 3.6% below expectations. This represents a decline of about 7.8% from the 1 year period from September 2008 to 2009. http://www.census.gov/const/newressales.pdf

Extension of first time homebuyer credit of $8,000 and now other homebuyers may attempt to receive a credit of - $6,500 Read my new post - THANK YOUR NEIGHBOR

FHA Rules Changes - I cannot find a link to the story, but heard that beginning December 15th, the FHA will adjust the % of your income that is used to calculate the maximum loan you may receive. The current rate is around 65%, apparently that maximum monthly income amount will be reduced to around 45%. The impact of this change if correct will be to reduce the amount of house that you can afford if you are obtaining an FHA loan.

NOVEMBER TRADING -

During October we saw our trend continue where dollar weakness lead to increases in commodity and equity markets. As the dollar firmed, we sold off a bit which served as a consolidation to move back to highs. During that phase the indicators of fear (volatility) rose dramatically and that gave us significant pause as a spike in the VIX over 30 can warn of a significant sell off in equity markets.

VIX -

Bloomberg - VIX

During the last 3 trading days though, we've recovered dramatically and are now below 25 on the VIX indicator as I type. This return to "bullish levels" and the readjustment investor sentiment away for all out greed reaffirms our notion to keep trading as we have. As the dollar goes, so will we trade!

We say this with conviction, but do not misunderstand that our attention and concern is hightened. We are seeing gold at new highs, the dollar at recent lows but trying to show some strength, and many other stock indicators showing that we are near levels where the market gains should be consolidating or rolling over.

I do use another indictor for trying to determine investor sentiment and have received permission from him to link to his website. Please consider Guy Lerner's site http://www.thetechnicaltake.com/ . Guy does an awesome job of looking at techincal indicators and always has excellent analysis. I am so happy that he has begun providing his insight for free as he previously had a service that charged for his analysis! I view his site everyday and I suggest that you follow it as well.

Guy's research often includes a review of positions of hedgefunds and investors in the Rydex Bullish and Bearish Funds. By examining the assets in the funds he can get a sense for how bullish (greedy) or bearish (fearful) sophisticated investors are at a given point and time. Recent findings show that investors are mixed rather than leaning one specific direction. As with the AAII sentiment indicator, when investors are really leaning toward one side, we should probably bet against them.

In the future, I will post Guy's charts in the place of the AAII sentiment numbers or right alongside them. Please check his site out, it is a great read.

In the next couple of days I will highlight my longer term investment thoughts (meaning the next 6 months). I started to post them here, but I've realized that many of my posts are really long and I need to break them up!