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

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

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

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





Key take aways from this whole mess are;

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

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

GOATMUG

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

MAY MACRO UPDATE - LET'S GET TO THE END

THE NUMBER OF OUTCOMES ARE DIMINISHING
The good thing about time and uncertainty is that as time passes, uncertainty also usually fades away.  I have found this to be the case in so many areas of life, especially in dealing with the family situation I've been a part of for the last couple of months.  I typically like to have a good plan (guess) of what will happen and then I like to make small adjustments to the plan as reality unfolds.  I stress out when the number of variables are so large that I can't truly grasp what will ultimately happen.  As you get closer to specific dates or milestones, your choices tend to be reduced and your actions are often dictated by one or two choices rather than ten or eleven.  Oddly, that has been the scenario we've all been investing and trading in for the last several years.  Will we wake up with a "fat finger" flash crash event, will another big black swan hit the markets destroying what is left, will Europe's experiment with the Euro finally be ended?  Each day I've wondered how will these events happen and what will the resulting impact be on us.  The trouble with trying to really dig into these uncertainties from afar is you'll have so many unanswerable questions and scenarios that you'll drive yourself crazy attempting to create contingency plans.

Before I delve into the notion that our choices and investing outcomes are now becoming less complex, let's look at the Monthly Update and catch up on a few things going on in the macro-environment.

RAILS - http://railfax.transmatch.com/
Railroad traffic has continued its rebound after a collapse in late 2010 and early 2011.  The rate of change of growth has certainly slowed in 2012, but tonnage has been solid.  We can expect this kind of trend to continue if fuel prices continue to move higher as shippers will look for any alternative other than land based truck freight to save on transport.

Coal shipments and grains are falling but the fall in these is being offset by higher metal, auto, and construction supplies.  If the summer is as hot as last year coal may rebound as utilities require more of the dirty fuel to meet peak demands in the heat.

SCRAP - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Nothing new is happening with scrap pricing as it continues to trade at the whim of inflation and the USD.  The scrap metal index has fallen some 15% since its peak in February 2011, but is still 13% higher than June of 2010.  Expectations of continued inflationary "heating" up are diminishing and therefore we should see scrap decline.  Uncle Alan Greenspan tracked this indicator as a measure of the health of an economy, and thus we'd suggest that it is in agreement with the idea that the US economy has cooled and probably will continue to do so.

REAL ESTATE - http://www.realtor.org/topics/existing-home-sales
Housing is fixed!  Housing is fixed!  Errr.... perhaps it isn't.  Below is a nice little graph that seems to indicate that housing just isn't quite fixed yet.  In fact, a brief look at this chart might lead us to believe that well see a spike in home prices over the summer, but the price surge will remain lower than the previous lower high, leading to another lower low.  I continue to believe that houses (personal homes) are not investments and that is going to be proved out more and more as homeowners come to grips with the reality that their single largest investment isn't a very good one.  On the other hand, rental houses bought cheaply with very little debt may be a wonderful investment as more and more individuals discover they just can't afford the American dream anymore as their income is eroded by the cost of living that isn't tracked in the CPI.

FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/quote/BFCIUS:IND
The Financial Conditions Index still signals a contraction in the economy.  Try as the Fed may with all of its liquidity storm and steroid pumped printing presses they still haven't been able to push the Financial Conditions Index into expansionary territory for more than a few weeks.  Does this indicate a collapse?  No, in fact we just may be sitting in this steady state of blah that reveals that the US economy is just not so good, and not so bad all at the same time.

EMPLOYMENT - MONSTER JOBS INDEX - http://www.about-monster.com/employment-index
Clearly the Monster.com Jobs Index is showing some good news.  The Jobs Index tracks the number of online ads the firm has and this gives us an idea of how well the employment situation is at a given time.  As the chart expresses, we are near a 3 year high for job placement ads and this is excellent.  This indicator highlights that employers are in fact looking for candidates.  It is also clear from other statistics that is is an awful time to be poorly educated and underscores the need for specialized training and higher education.  Remember, I rag on college education all of the time for being too expensive, but I never suggest that it isn't good, and some type of technical skill isn't required.  I simply am saying that people need to weigh and balance their expenditures on higher education with what they plan to actually do in life.

Apparently, the work from home gig is easy big money and awesome as I got 3 emails today suggesting that I can replace my income in just a few months by working at home.  Why the heck isn't the 8.1% of the US population out there that is still looking for a job not jumping on this easy money?

BALTIC DRY GOODS INDEX -http://www.bloomberg.com/quote/BDIY:IND
The Baltic Dry Goods Index is still low, but has recovered from its descent into the bowels of nothingness.  I think the best way to look at this index is through a much longer term lens than can be seen here on the 1 year chart below.  A longer view shows that the index went from 120,000 to less than 1,000 in about 3 year's time.  Essentially, the $BDI should hover here in this area until we see a sustained rebound in inflation in the emerging markets including China and also in the USA.

6 MONTH LIBOR - Graphs and Rates
I wanted to highlight two key things in posting the 6 Month USD Libor chart with the 6 Month Euribor rate below it.  Note that the 6 month rate for USD Libor is around 75 bps and this is near 1 year highs for this metric of "trust" between banks.  This rate climbed steadily after August of 2011 and has plateaued in January of 2012.  Essentially, we saw a rise in rates and frankly this was probably seen as healthy as US bond rates were beginning to rise as the US economy was perceived to be improving.

6 MONTH EURIBOR -
While the chart I've used here for 6 Month Euribor highlights a longer term perspective, yet in Euribor terms we see the a contraction in rates that I personally believe can only be attributed to government coordination (ECB, FED, IMF, etc) as the weakness of the PIIGS is getting more pervasive.  Extra-governmental organizations are doing everything they can to throw liquidity at a situation we all know is unmanageable in the longer term.

USD INDEX  -
Today's closing print of 79.84 for the USD Index brings it that much closer to breaking above the critical 80 level where it hasn't been for almost two years (there were a brief couple of months above, but nothing sustained.)  Is it fear that makes the dollar the haven when the other parts of the world seem to be coming unglued?  Is it just a lack of alternatives?  It is probably both of these as investors are now running away from the Euro and finding anything else that might be a safe haven in this storm.  If and when we see the USD Index move substantially over this key level, we'll know that a real firestorm has brewed overseas in Europe.

10 YR TREASURY - Marketwatch and Bloomberg
The charts below show the 10 year Treasury bond rates.  As of today's close we settled at 1.845%, which is well below the recent highs of 2.25% of just a few months ago when everything in the world was perfect.  Today, post Greek and French elections....not so perfect.  The incredible bull market in treasury bonds continues to defy all logic and as the PIIGS continue their slide and their bonds are shunned, US treasuries will be bought and once again we'll see TLT push to even higher highs.  It is so fashionable to call a top in treasuries, but until the US is perceived as "just as bad" rather than "less bad" then our easy funding will continue.

WHERE NEXT? - TRADING UPDATE
When markets were roaring it was very hard to find anyone that questioned the ability of US markets to rip higher.  Emerging markets also were able to rebound and the last 6 months prior to mid April were simply a dream of positive performance.  Jobs data as contrived as it is with BLS manipulation seemed stronger and stronger, consumer spending had no limits, and manufacturing just continued to improve.  With the passage of a week or two, suddenly the world seems a bit dimmer and there is risk everywhere.  Could it just be a few pieces of slowing Chinese data?  Is it really word of another Spanish bank bailout?  Do elections in Greece and France really matter at all?  The answer of course is yes, and all of these things have come together in one instance to conspire against a run at all time highs in domestic equity markets.  Will the negative news prevail?  Perhaps.... and perhaps not.

On the horizon in coming weeks, we have the Facebook IPO that should wow us all and excite the trading bots a few hundred million times in the first second or so of trading.  We should also hear if the anti-austerity left in Greece is able to actual form a government.

GOLD & SILVER & OTHER METALS
Unless and until we see Chinese inflation, all bets are off on the shiny stuff.  Silver and gold could endure some serious technical damage as they continue to slide.  One strange thing we are not seeing though is a swarm by European holders of cash to buy gold as an anti-currency move.  I can only guess that we are not seeing a "Euro-collapse, buy gold response" because everyone has already hunkered down and has already diversified as much as they can into physical assets.

I personally will pick up another few ounces of gold and more silver if we near $1,400 and $26.00.

OIL, GASOLINE, AND NATURAL GAS
As long as we don't have a Middle East eruption involving Israel and Iran, we should see oil continue to fall.  Along with the slide in oil, I've suggested that May 1st was a good time to exit gasoline related trades, and that would have been a very nice exit.  Oddly, natural gas may actually be a bullish play here as we are now finally starting to hear about production being shut in.  The last couple of weeks have actually seen natural gas go higher, which is frankly very strange indeed!  NO, YOU MAY NOT BUY UNG, IT IS A PIECE OF SH$T!!! (Sorry to be profane, but I knew what you were thinking!)

IS THERE A REASON TO NOT COUNT EQUITIES OUT?
If US GDP is leveling off or falling and global investing insecurity is rising, why or how could equities still be a place to invest given that I've said for six months that you should exit in May and stay away?  Well, frankly, getting out then would have been a great strategy and if you are disciplined and have been long and in the market, then you have done well and you might consider it.  If you are one of those long only guys that hates the idea of sitting in cash even when markets are falling, then I'm talking to you!

Again, I need to emphasize that I write this because I know that some of you will demand to stay long rather than exit or even short the market.  As a result, your play here is centered on the "relative performance" aspect of fund managers as we've discussed over time.  In the past we've discussed how defensive times require you to consider utilities, healthcare, consumer staples, and defense sectors. Any continued fall in markets and a perceived overall weakness in the domestic economy will cause fund managers to rebalance and overweight these sectors.  Of course these are all dividend paying types of firms and this too will entice investors to hide here in a  relative yield search.  Essentially treasuries and corporate bonds are so overbought and expensive, new money purchasing these bonds earn you less yield than the purchase of the dividend paying company equity.  Money managers look at this risk/reward trade off and often will lean to the equity saying that it is cheap relative to the credit.  Since investors have piled out of the rigged casino....errrr stock market, they have looked to corporate bonds and have bid them up so high, stocks may be cheap.

Other institutional investors also will suggest that earnings have been great (compared to lowered analyst expectations of course) and also that the US consumer is going wild and is unstoppable, thus the spending data supports that notion that the US economy is not going to derail.

All of those positive items may be reason to support the stock market as we've said, the economy isn't the market and the market isn't the economy, so anything is possible especially when you have the threat of a round of QE loaded in the 3-barrel QE FED shotgun.  I think the key risk here is that even if you are picking up a 3% yield in your stock, you have the risk of giving up a tremendous amount of gains you've earned and could risk a part of your initial investment.  A good stock to look at to examine this action is CAT.  This stock is one I've liked for a long time and yet all of the gains earned in this name could be in danger if you still are holding it.  A friend of mine did not sell it when I advocated letting it go near $110, I think we both wish he'd had been willing to just hold cash.

REDUCING POTENTIAL OUTCOMES
I am excited to see what the coming week brings.  We are nearing a point in the Euro experiment where countries are at the tipping point and citizens have realized, really realized that "global citizen" bankers, politicians, and billionaires, are men and women without honor, without country, and allegiance to only the elite firms that provide them power.  The people of these countries are beginning to embrace nationalism rather than globalism as the deception of a global village and Euro unity has left them poorer and without industry, saddled  with unpayable debt.  As we get clarity on the direction of new governments in France and Greece we'll see that the number of outcomes reduced and be able to invest accordingly.  Until then, I'm sure that we'll see new and more emergency liquidity from every side of the pond

The coming events will serve to essentially make our investment decisions binary in the sense that we can trade according to the assumption that the Euro survives or doesn't.  If Greece exits, surely it will lead to an exodus by Spain and Portugal at least.  Clearly those economies will suffer for at least a couple of years if the global financial system can survive.  While I can imagine many other scenarios about a global financial meltdown and even potentially a stronger Euro after a big fall, the easy trade frankly is that the USD will be much stronger in the short run relative to the Euro.  That strong dollar leads to other plays like a continued short on gold, silver, and oil.  Further justification is found in the lack of strong Chinese data suggesting that global inflation is down and almost out in this round.  
      

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/

WHERE THERE'S SMOKE, USD LIBOR IS RISING

SOMETHING NEW IN USD LIBOR?
Monthly readers are accustom to reading the monthly Macro Update and finding neat little charts of 6 Month USD Libor and Euro Dollar Libor posted here.  I've lamented each time that USD Libor remains stubbornly low and a result of straight up manipulation rather than some reflection of healthy interbank lending.

Before I go further, let's recall what LIBOR is.  LIBOR is the rate that banks say they can borrow from each other for overnight loans, but in the case of the charts I show, it is the rate for 6 month loans to each other.  LIBOR is extremely important because this rate is essentially the benchmark rate that many other interest rates are set against.  Some of you might have an 7 Year or 5 Year Option ARM, most of those reset according to some LIBOR rate plus a percentage mark up.  Needless to say, LIBOR is an important data point, and this is why I've posted it for more than a year or so. 

While we look at LIBOR as a metric to determine the cost of borrowing, it is also really an indication of the trust and fear levels in the financial markets.  If banks really trust each other, they will gladly lend to each other at low rates.  If one of them smells trouble, funding rates suddenly begin to climb.  Remember, these bankers are all buddies and they are all in the same game, if LIBOR is rising, it isn't just because someone is mildly concerned about a bank issue, it is because there is a real threat. 
Ok, so what is all the fuss about 3 Month and 6 Month LIBOR?  Let's take a look.

6 MONTH USD LIBOR

3 MONTH USD LIBOR

See, in the last month to two months, USD LIBOR has done a moonshot.  In the case of 6 Month LIBOR you are looking at a 21% increase in USD LIBOR since 7/1/2011 and 3 Month USD LIBOR has vaulted 29% since the first of July. 

Now I know that someone may say that LIBOR rates are going to be based somewhat on the costs of funds in the market, in other words that LIBOR rates will look to the Fed Funds rate or might even be forward looking anticipating future interest rate increases. I understand that, but what has happened to treasury yields during that same time period or Fed Funds rates.  Let's have a look.

FED FUNDS RATES

2 YR TREASURY BOND YIELDS

Not much change at all.  Fed Funds rates remained pegged at zero and Treasuries have simply fallen off a cliff here as the entire world has piled into US government bonds as a safe haven from the carnage that is our financial system.  And finally a skeptic may say, "Well yes the stock markets were really tanking and all LIBOR or interbank trading simply moved higher because there was a genuine concern when equity markets were getting body slammed.  I would simply highlight this graph of EURO LIBOR in response.  I've grabbed the 1 Month chart here, but all of them are the same.

Nope, not the same panic stricken increase in funding rates since July here, in fact, we see just the opposite, we see a drop in rates by about 10 bps here. Euro LIBOR is made up of 16 reporting European institutions (just like USD Libor).


IS THAT YOUR BANK THAT IS SMOKING?

We don't have to dig much deeper here to realize that there are real issues going on here that have caused the inter-banking lending rates in USD LIBOR terms to go up, and up a lot in percentage terms.  While we can't know if the drop in equity markets in general are the cause of the increase or if it something more specific related to the banking sector or if it is a particular bank here in the USA, it is pretty compelling.  I will continue to monitor these rates daily as it is obvious that CEOs of large US financial institutions mean what they say when they state, "We are well capitalized and don't need any future fund raising".  Clearly Bank of America's CEO Brian Moynihan couldn't be anything like another powerful CEO, Dick Fuld, from our favorite bankrupt investment banking firm, Lehman Brothers that uttered pretty much the same words several years ago.

Here's a little parting view of what distress in the banking sector looks like.
BAC Daily 100 Day Chart

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/













 
 

EURIBOR RATES BEGIN TO RISE ACROSS THE CURVE - CAUSE FOR CONCERN?

I've been in pretty good sync with the market lately and have been trading well.  It seems that for this last cycle or two I've been able to capture rallies and short swoons at the best time.  Even now, I've ridden the last 6% move in the market here and have been quite bullish.  Just as I say those words though, I'm quite certain that we are bumping against the 1130 to 1150 range that has been difficult to exceed.  Call it pervasive bearishness or just the trader's mentality to want to exit when I have profits, but I spent last night and this morning looking for short-term signals that the wheels of the rally could be coming off.  Perhaps this is a hint that something troubling might be coming to slam this rally back down to the lower end of the range (1040).

Please click on the Euribor rates below.  I look at these figures almost every morning and have not seen a consistent move like this in quite a while where every time frame ticks higher (meaning the banks charge each other more to borrow).  Before we put too much stock in this we must marry this with the comments from  the Greeks that say they will not default (when do you trust the Greeks?).  The no-default scenario would obviously be a good thing, so I remain watchful and glad I've got some profits, I'm not selling yet, but am vigilant.

Above is a quick snapshot of the S&P500.  Is there any wonder that I'm watching that 1130 range, it has held for the last several rally attempts, why would it be different this time?

GOATMUG

MONOPOLY LESSONS FOR A BEAR MARKET - SEPTEMBER UPDATE

SEPTEMBER UPDATE
I need to make this post really quick since I have so much going on.  I will be posting quite a few times over the next week or so because I have a lot of material (economic) that I want to share.  Overall, we are seeing divergent data coming through as usual, so we'll have to wait and see where we fall.  In general, I tend to believe the longer term theme that I've laid out that our economic situation for consumers is slowly grinding to a halt while big business is taking full advantage of the globalization of the world economy and managing to keep busy.  I think this is why some of this data remains stubbornly positive despite what Joe 6 Pack is feeling here in the US.  The fact that large multi-nationals are diverse enough to show gains abroad is great and is really beneficial to the US economy, if we didn't have that, I think we'd be in a much worse position.

TOTAL RAIL TRAFFIC - http://railfax.transmatch.com/
Rail traffic can reversed its season decline and all carriers have resumed their forward march.  They still are 10%-20% less than the 2008 period, but they continue to improve.  I need to find some truck shipping data because I have a feeling that trucking companies are opting to load their trucks on rails to save on transit costs.  This obviously makes rail shipping look better.

Total Rail Traffic

MOTOR VEHICLES (RAIL TONNAGE)
Auto shipments rebounded.  As I mentioned last month, it looked like a seasonal decline was causing a drop.  I'm interested to see what happens here in the next quarter as the green line really ramped higher last year.  Is there pent up demand or will this begin to flat line?

WASTE & SCRAP RAIL TONNAGE
Interesting, it looks as though scrap shipments are coming back in line with the 2008 and 2009 level which leaves me wonder what was happening over the last few quarters to fuel the spike.  I believe we will see the same trend happen with those auto shipments.  Despite the leveling off of scrap shipments, scrap prices do continue higher.  See the chart below for those details.

FOOD STAMPS (SNAP DATA) - http://www.fns.usda.gov/pd/34SNAPmonthly.htm

Generally speaking, there is no change in the trend for government food stamp recipients.  There is an ever increasing number of families on government assistance.  I know things are rough and this is highlighting the divide between the haves and have nots.  A person in the US does not need more tax write offs or rebates or enticements to buy more "green" energy stuff or other overpriced crap, they need jobs.

41.2 million people are taking food stamps which is a total of 19.1 million households.  Benefit costs per year continue to edge up at $5.5 Billion.  The average household is receiving $287.00 a month in assistance. 

MONSTER EMPLOYMENT INDEX - http://about-monster.com/employment-index

We've commented on how the Monster Employment Index had been steadily improving as employers continued to buy advertising slots to fill their positions.  Over the last two months we've seen a decline in the listings as June was the index high at 141.  At the end of August we are at 136.  This is still high end of the range for the last year, but clearly we've seen a softening.

HOUSING
I am purposely omitting a discussion on housing.  I am attempting to obtain approval to use a few charts that I found from a great blogger on the topic.  As soon as he grants permission to copy the charts I'll make a post in the next week.  Chart or no chart, the housing market is terrible.


WLI DATA - http://www.businesscycle.com/resources/
WLI data continues to flounder in the low 120's area.  If you've followed any of the recent debate about the usefulness of their data you'd be completely confused.  The ECRI folks have submitted that their data is not an indicator of a recession, or should I say they are saying that their data does not suggest a double dip, however they have consistently advertised that their data can predict recessions.  I think we are simply seeing that all data is completely fouled up due to government influences in the market.  The Fed and Treasury have flooded the markets with excess liquidity that is doing nothing for the general economy, rather propping up asset values (and doing a poor job of it too).  These liquidity streams are really wreaking havoc with the WLI and also the Bloomberg Financial Conditions Index in my opinion.  While overall data is weak, the components that deal with easy money availability are signaling that the good times are here.  The conflicting information is causing these metrics to fail.

MIT/MOODY'S COMMERCIAL PROPERTY INDEX - http://web.mit.edu/cre/research/credl/tbi.html
MIT and Moody's data shows that all is not so good on a national level for commercial real estate.  Price moves up have been met with corresponding drops.  Overall, stock market prices for commercial real estate (CRE) have been doing wonderful this year, as I'm sure that much of the improvement has been a relief that the complete meltdown that everyone expected has not come.  Yet, these are the exact times when we should be examining these investments that have had their relief rallies and now are left with a dose of reality.  Perhaps it is wise to review shorts of several real estate investments?

COSTAR - http://www.costar.com/about/article.aspx?id=7719
Costar is suggesting exactly the same.  I like this chart because it breaks down the space by type of property.  While there are regional improvements, especially in the Western US, the overall health of the CRE space is poor and declining.

SCRAP METALS COMPOSITE - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
As we've covered several times, Alan Greenspan used scrap metal as a way to take the economic "temperature" of the economy.  We continue to see prices rise here, but I'll be watching for a breakout above these levels to signal that some real recovery activity might be going on.  All in all this may be a reflection of international demand and dollar weakness.

BALTIC DRY GOODS SHIPPING - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
Speaking of international demand, we are seeing continued improvement in the BDI.  I'm still bullish on pricing for this index to go higher.  If you are looking at this space as an investment, remember that few shippers are leveraged to this metric as they've contracted out their fleets for longer term deals.  There are a couple of shippers that are tied more to the daily rate and you should do some homework on those names.  The bottom line here is that most shippers are leveraged to an extreme and they are subject to dividend cuts (which is why many people own these types of firms).  So, faced with a cut of dividend and high leverage, I tend to shy away from these firms.  Although one can argue that with pricing as bad as it it now, there is only one way to go and it is up!

1 WEEK LIBOR - http://www.homefinance.nl/
Despite rumors of poor banking lending in Europe and around the world, we continue to see 1 week Libor and all other dates come in.  This would normally be an indicator of health in the system as bankers are "trusting" each other more and therefore demanding less of an interest rate for 1 week exposure.  As mentioned above, government interference in this space causes me to question any rate or improvement I see, especially with the concerns that European banks may need more capital.  While this is USD Libor, we are seeing the same rate reductions in all rate curves.

US FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
The USCI has edged above 0 again which would suggest that we are now in recovery mode and in an expansion! HA!  As mentioned with WLI, I have to question it.  The big move is a result of the rebound in the stock market over the last week.  As we have covered, this is exactly the strategy of the Fed, if asset values move higher, people believe that the recovery is in.  Once they believe the recovery is in, they spend like crazy adding to their debt and spending beyond their means for instant gratification!  I'm not buying it and Mom and Pop are not buying it either.  We'll continue to watch this one.

COPPOCK TURN INDICATOR
Since I posted the Coppock turn signal in June there has been no looking back.  The signal continues to suggest that you should be out of the market rather than in.  The thing has a decent track record, but won't get you in early  on the turns because it is based on a 14 month average, however, on big swings it does give you decent signals.

S&P 500 15 DAY / 40 DAY EMA CROSSOVER
Last week's rally has put another bearish chart into question.  We'll need to watch this set up as I type this today, the signal will go back to bearish.  As many know, one of my favorite bloggers Chris Puplava suggests that a very long term signal for market declines is the 15/40 Crossover on a weekly chart confirmed with a sub-50 RSI.  As I posted several weeks ago, we did get that signal in the S&P500.  I wanted to post this here because you might get the sense that I'm bearish (and that would be correct), but I want to make sure that I'm not caught leaning one way when it really is a false signal.  Of real importance is that the DOW has NOT crossed over and therefore is not confirming the action in the S&P500.

USD -http://www.bloomberg.com/apps/quote?ticker=DXY:IND
The US dollar has almost lost all of its gains made in that last several months.  How easy it was for Fed President Bullard and Chairman Bernake to slash the value of the dollar!

TREASURIES (TLT)
Treasuries continue to remain above the levels that suggest stress in the financial system.  While TLT trades higher we must acknowledge that much of the gap higher is related to the Fed's QE program where they buy treasuries.  Of course this incited a stampede to get in front of the FED so we have traded down a bit once the rush abated.  I have spoken with several people that want to short treasuries or buy TBT but I would caution against this trade unless it is very short term in nature.  What we all need to understand is that this program is here for the long haul and we'll continue to see record setting low rates across the spectrum of the debt curve.  We will see 3.25% or 3.5% 30 year mortgages and to have that come to fruition, we'll need to see TLT go higher.

TRADING UPDATE
As bearish as things are beginning to look, I am very concerned when it seems like the entire universe shares my pessimistic view.  I was noting that last week and guess what, we got a big rally!  Fortunately I continued to stay long in the emerging markets strategy I've advocated since July and have rebounded nicely.  In fact, holdings in Singapore and Malaysia continue to outperform.  As we enter September I am going to scale out of positions, or if I retain them, will marry them to a short position to have downside coverage.  I still like corporate debt, but so does everyone else, so I haven't added any bonds to my portfolio in a long time and don't anticipate adding unless I see something come out that is being unloaded by a distressed seller.

For longer term trades, I still believe 100% in my anti-US strategy of going long emerging markets and gold.  The Fed has put us on notice that they will monetize debt and drive the value of the dollar down in an attempt to stimulate, stimulate, stimulate! 

I had an interesting conversation with a few professional oil and gas traders last week.  They reflected that this has been one of the toughest trading years that they can recall.  They were very concerned that top notch guys were getting blown up with the wild swings from day to day.  They commented that several big firms were really in bad shape.  It is these types of conversations that continue to keep me out of oil and gas because you can be directionally correct, but have someone blow up and move the entire market against you. 

MONOPOLY AND THE BEAR MARKET OF 2010
This is dangerous work and it pays to be cautious, patient, and above all protect your capital. I played an online version of Monopoly with my kids the other day and we had an unusual experience that is an example of what will happen in real life in the coming years.


In our online game a computer player landed on an unowned space and he decided that he did not want to buy the property. In our example, when the buyer doesn't want the property, it is sent to auction where all of the other players can bid on it. (Perhaps the real game is like this too, but I never remembered that). In our game we really wanted this Boardwalk-like property and had lots of cash to purchase it since we'd had terrible luck with our rolls. All of the other players were really strapped for cash since they had bought other properties due to their good rolls. Since I'm teaching them "economics and game theory" we entered a clever bid in hopes of stealing this prime property on the cheap. What happened next was very unusual. As the time to enter bids expired we received a notice on the screen that we were the only bidder for the property and therefore bought it for almost nothing!
The message is simple and clear. In Monopoly and in real life bear markets, there will be opportunities, you need to have cash to be able to take advantage of them. Patience is a trade so protect your capital!


Be careful!

GOATMUG

WHAT'S UP WITH EURO - LIBOR 2 MONTH RATES?

Just scanning some of my normal indicators and found something odd in 2 month Euro-Libor rates.  While everything in banking land looks and feels great (RIGHT!!!) and all rates have been coming down for at least 5 to 6 weeks, the 2 month Euro-Libor rate has started to move higher on 8/5/2010. 

All other time periods continue to show funding rate improvement, so I don't want to over do the alarm here, but this kind of nugget would help us identify trouble in Europe if on the odd chance that perhaps the bank stress tests over there didn't really clear up anything.  I mean, can you imagine a stress test where regulators didn't actually stress anything but the market just rallied because someone told them things were better?  No, I can imagine anything like that either!

Here is the data summary so you  can see the trend in rates by day.

08-12-2010 0.67313 %


08-11-2010 0.67313 %

08-10-2010 0.67063 %

08-09-2010 0.67063 %

08-06-2010 0.67063 %

08-05-2010 0.66938 %

08-04-2010 0.66750 %

08-03-2010 0.66875 %

08-02-2010 0.66875 %

07-30-2010 0.66750 %

I'll keep watching this as an indicator that banks begin to not trust each other.  As concerns re-emerge about the health of sovereign country debt in Europe we'll see pressure on European banks too. 
 
GOATMUG

THROWING DOWN THE GAUNTLET - AUGUST MACRO REVIEW

RAILS - http://railfax.transmatch.com/

We begin this month's review looking at rail traffic.  Rail traffic in general continues to improve over 2009 levels.  Because there are some seasonal issues going on around this time, I don't want to over-hype the small draw down that we are seeing here.  Seasonally adjusted we are only down around 1.3% in total tonnage from last month.  Having said that, every report I read is simply talking up how great the shipping tonnage rates are.  In an attempt to examine this, we can simply note that tonnage compared to 2009 is about 20% greater yet it is still around 10% lower than 2008.  In addition, we need to keep in mind that the best years on record for intermodal rail shipping were 2006 and 2007 so it is a bit more sobering to think that we are recovering, but not near peak levels.

GDP adjustments really reinforce this as last weeks revisions to GDP showed that growth in GDP was slowing well before 2008.

RECESSION INDICATORS ON RAILS -
Motor Vehicle rail cargo and waste and scrap metal materials shipping is tailing down in recent months.  The autos shipping and sales data is absolutely seasonal so I don't want to highlight that much given that it may mean nothing, however the drop in scrap metal and waste movement is something to keep an eye on as these are inputs into the manufacturing process.  Later we'll look at scrap metal pricing.

THE WEAKEST SHIPPING TONNAGE - KSU

As I mentioned last month KSU and KSU Mexico continue their slide in tonnage.  I put this up because we need to continue watching these rails and their cargo shipping.  Specifically for them, they are encountering a crossover from levels from last year in this quarter and this may be a concerning development to monitor.  Last month I mentioned CNI and showed their chart as the best performer.  I also suggested passing on their stock simply to wait for a retest below support.  That didn't work out well as the stock is now trading almost $6.00 or 11% higher.  (I wouldn't chase it here).

MONSTER.COM EMPLOYMENT INDEX -

I wanted to include some data related to jobs.  Below is the information for the Monster.com Employment Index.  This data shows a summary of online recruiting efforts and job availability.  This data highlights information from June, but I will begin updating it monthly in my chart form.  In that time period, Monster suggests that in 13 of the 20 major employment areas in the country, there were additional listings on job boards and company websites.  The biggest gains were made in hospitality and food services industries.  Examining the most recent unemployment report confirms these trends are continuing as well.

ECRI / WEEKLY LEADING INDICATORS and ECRI GROWTH RATES  - http://www.businesscycle.com/resources/
ECRI continues to release data showing that the weekly leading indicators are falling.  Last week's -10.7% growth rate provides ammo to those that are arguing that we are headed for slow down, if not another recession.  Again, the slowing data here is in contradiction to the ever-ramping stock market.

Housing drops and consumers reducing their purchases is driving the drop in growth rates.

MOODY'S / MIT COMMERCIAL PRICE INDEX - http://web.mit.edu/cre/research/credl/rca.html

The most recent Moody's / MIT Commercial Price Index Data shows that commercial real estate prices in the index increased 3.6% for the month of May.  Again, this data is lagging here, and isn't showing that pricing has leveled off yet. 

FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

Equity market gains and other financial market rebounds have fueled the recovery in the Bloomberg Financial Conditions Index.  A level above 0 would indicate that the recession is over, numbers below show a contraction.  We have not pushed through zero yet, but a significant equity market explosion higher in August could at least give us a second attempt at moving into an expansionary number.

SCRAP METAL - GOOD TIME AL'S FAVORITE INDICATOR - Alan Greenspan often said that he watched the price of scrap metal to determine the health of the economy.  Below is a scrap metal chart for the last two years.  Just like every 2 year chart it shows the same shape moving up and to the right, but it is interesting to point out that this index bottomed out in January of 2009.  This would have been a good indicator to use to portend the market's recovery in 2009.  We see that we've endured a drop in scrap pricing in late June and July, only to see a move up in the last week or so.

USD - http://www.bloomberg.com/apps/quote?ticker=DXY:IND

The USD's dramatic decline seems to have washed away all fear of European collapse or should I say the lack of fear of the European collapse has begun to wash away the value of the dollar!  Those stress tests sure did the trick didn't they?  The decline of the dollar has certainly also ushered in a revival of the stock markets.  Funny, we are now hearing that folks are concerned about the downward direction of the dollar.  The truth is simply this in my opinion.  We will have little upward momentum in the markets without a destruction of the value of the dollar.  Having said that, Alan Greenspan this weekend put into words what the FED is really thinking.  Greenspan simply stated that the market is the economy!  So, we must be on alert that since the "Economy is the Market" we are being reminded that asset values are the only concern of the Fed and the only hope to return things back to the good old days.  Understanding this means we remind ourselves that they seek a return to inflation, easy money and credit, and if it takes it, a decline in the purchasing power of the dollar.  Here me loud and clear.  There may be ups and downs in the value of the dollar, but if the FED has anything to do with it, there will be an ultimate walking down of the value of the currency.  This is the only way to survive and extend with the looming debt issues we have.   

BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND

The BDI has made a significant drop since May and June and is attempting a bottom here.  As commodity demand increases we should see a move higher in the cost of spot shipping, however the drop in the BDI is a reflection of the over supply of ships that stand ready to carry freight.  Still, if you are an owner of those ships that don't have long term contracts at a fixed price, you are probably hurting very badly at these rates.

TRADING UPDATE -

OVERBOUGHT? / OVERSOLD?

I like the simple chart provided by the guys at Growthstock Advantage. Based on their indicator that examines the number of stocks trading above their 40 day moving average, the market is NOT overbought yet.  As stocks get extended it is sometimes helpful to see when everyone loves the market.  Typically you might consider scaling out of positions or shorting at that time.  At this point the indicator is NEUTRAL.

C

COPPOCK TURN INDICATOR - I showed this chart last month and it is simply a 14 month moving average of the Dow.  When the average turns and heads south like it did last month at the end of July, it is an indicator that the market may be headed the other direction.  The COPPOCK is one of those indicators that confirms a move rather than one that is predictive.  Having said that, even with July's monstrous performance, the COPPOCK is suggesting that we are still going to go lower and therefore it is BEARISH.

1 WK LIBOR -

US Libor continues to improve and so do all other denominated Libor measures.  I made a comment right after the European financial stress test result release that I'd be watching these levels to get a confirmation that the banks actually were believing what was being served up.  Because we are seeing a drop in these rates we can confirm that stress is abating. So while the contraction in rates is only a few basis points since last week, it is a 10% reduction in 1 week funding rates, which is significant. 

ST LOUIS FED PRESIDENT BULLARD THROWS DOWN THE GAUNTLET -
As the flood of disappointing news rolls in about a slowing economy, St. Louis Fed President James Bullard moved from his centrist position to one of outright advocacy for the spawning of the Son of Stimulus just like we've been warning for at least a month.  Bullard's discussion warned of the specter of a Japanese style deflation, exactly what they want to avoid at all costs.  Bullard's comments make it all the more likely that the Fed will actually move to invoke more stimulus in the form of buying treasuries, buying more agency backed mortgages, and maintaining a near zero rate (no hikes).

Bullard's comments probably are part of an orchestrated effort to convey the Fed's future policy.  We cannot forget that no matter how ineffective Fed policies have been in creating a real recovery in the economy, this is really about creating a rebound in market or asset values.  Like we've stated above, Good Time Al believes the market IS the economy.  Check back to the post we made last year regarding Bernanke's 2002 deflation speech.  There is no ambiguity there.  He is positively stating that the Fed can and must win against the deflation enemy.  Despite the fact that jobs have not returned and the housing market is still floundering, we will see a new round of QE that looks to further juice the market.  I would guess that this will have a smaller effect in terms of the magnitude of a move on the market and the impact will have less of a lasting effect in terms of time than last time, but if we get confirmation from the Fed that they will provide liquidity, we will see a move up.

This further highlights the notion that we will probably see mortgage interest rates at 3% or 3.5% in 2011.  Isn't it funny how despite their efforts we continue to spiral the way of Japan.  Want to get an idea for what it might look like right now?  You can buy a Japanese 10 Year note and receive 1% on your money!  Hello deflation! PUBLIC ENEMY # 1 - DEFLATION

I'll remind you the futility of the game that the Fed is playing - FDR’s Secretary of the Treasury, Henry Morgenthau came to in 1939 after initially being a proponent in massive fiscal stimulus to cure the depression and employment. His comments are provided below:



"We have tried spending money…We are spending more than we have ever spent before and it does not work. I say after eight years of this administration, we have just as much unemployment as when we started… And an enormous debt to boot!”



30 DAY TRADING OUTLOOK- Ok, so the Fed is beating the drum that they will do anything to stop deflation and they will continue to buy treasuries, what is the play for the month?  It is exactly the same strategy that I outlined on July 3rd in the Mid Year Review. We should continue to invest in emerging market issues focused in countries like Brazil, China, India, Indonesia, Malaysia, Chile, and Taiwan. 

All of these etfs have broken out, and even the S&P 500 extended its gains over the 1120 level I highlighted last week.  While macro indicators confirm the slowing, we cannot deny the short run impact of a committed Fed.  Bullard essentially has thrown down the gauntlet and stated that the Fed will use all of its ammo to fight deflation.  Once again, the Fed playbook is opened and I suggest you read our post on deflation to remind yourself of the commitment to defeat that enemy at any cost.  The hawkish tones of Bullard emphasize what is at stake and the intensity of the desire to prevail. 

While I've been bearish on gold lately expecting a pullback to the $1040 area, I am tempering this because of the expected Fed devaluation.  CPI data will probably come in lower, yet this will only fuel the Fed's aggressive response.

GOATMUG