MARCH UPDATE

MONTHLY UPDATE

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

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

LUMBER & STONE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TRADING UPDATE FOR MARCH

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

WARNING - THE FOLLOWING ARE SPECULATIVE TRADES -

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

EWM - Malaysia

Current - $11.30

Target $12.35 (Target Gain = 8.8%)

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

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

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

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

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

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

Goatmug

WLI Data - 2/12/2010 - 4 WEEKS OF DECLINE

I haven't posted the WLI data in a while, but wanted to post it here now and not wait for the March update. The dip in the blue line shows that the Weekly Leading Indicators index published by ECRI http://www.businesscycle.com/resources/ . The interesting thing is that the data shows a 4 week consecutive drop and I can only expect when they publish the 2/19/10 data it will show the same.

I also track the 4 week average for this data and while it has not turned negative, almost any reading next week will confirm this drop as well.

I've mentioned this data set often as a good indicator that shows if we are coming in or out of a recession, however I've also discussed that much of the data in the leading indicators index can be pushed around by floods of liquidity (as we've experienced in amounts that blow the mind!).

I can only imagine that the WLI and also the FCI will be hampered and show contractions as the Fed attempts to draw down the juice in the system. I've also commented that this won't be possible in the long run as the markets have only been able to fake a recovery because of the extraordinary measures taken by our central bank, US Treasury, and the Administration.

If this trend continues the notion of higher interest rates could certainly be delayed and the double dip I'm suggested my be coming. I don't want to over-react as I still think we've got a month or two left of momentum higher, but the stage is being set for an April / early May top in the market.

Notice as well that the top of this recent WLI move is still at a similar level as the January 2000 level which ushered in the tech blow up. I personally hope that we don't have similar results in the market, but I wouldn't bet against it.

Goatmug

DECEMBER OUTLOOK

I hope everyone had a wonderful holiday. As I have been speaking with many of you over the last two weeks you have seen that I have become more and more concerned about a period of decline in the market. The last couple of days have proven those thoughts to be right on target. I will keep the monthly summary pretty short and provide a fuller explanation of my concerns and how to trade it.

Many of the data items I look at are now beginning to show real positive momentum. Many folks might look at these new and building trends and decide to get into the markets now that it is clear we are on the verge of exiting the recession. I urge caution in that thinking. As usual, we want to think like the banksters and corporate robbers that live to take our money. When these trends are readily visible, we should probably do what they do and exit the market following the old adage, "SELL THE NEWS".

WLI - DATA

The ECRI WLI data continues to press onward and upward. Remember this is a compilation of 6 or 7 leading indicators to give us an idea of the direction of the economy. Because they are leading indicators, they should turn up before we feel or see the impacts in the economy. The indicators have done a great job highlighting the change in trend in the economy. As I've pointed out though, more than half of the indicators are reliant on data that is liquidity or FED driven. We've discussed at length that the flood of liquidity provided by the FED is intentional and historic. If the WLI data didn't turn up with the amount of cheap money in the system, we'd really begin to worry. I'm not discounting the information here, just want to be sure that it is clear that the vast improvement rests solely at the feet of the FED.

WEEKLY RAIL DATA
OK, same trend follows here as well. slight improvement, but nowhere near the 2008 levels. We are going to see big changes in year over year comparisons starting next month simply because we began a waterfall like descent in the 4th quarter of 2008. This chart measures the weekly loaded units. They are 4 week rolling averages.

Recovery Watch - As usual, I'm watching crushed stone and lumber shipments to show us any indication of a pick up in commercial and residential construction.......nothing.

On a positive note take a look at this carrier. Kansas City Southern's shipments have achieved 2008 levels. Before you run out and buy the stock, notice that it is trading at just under $29.00 which is a 100% increase since July of this year. I point it out because it has had the best recovery of the rails and obviously the market has rewarded it for its return. In September of 2008 it's price was around $50, so this is one to watch. I see some overhead resistance at $30.00, if you see it punch through, you might look deeper at it. (I'M NOT RECOMMENDING IT, JUST SAW IT AND FOUND IT INTERESTING FROM A FUNDAMENTAL AND TECHNICAL PERSPECTIVE).

KSU - Total shipping units beginning to eclipse last year's performance.

MIT TRANSACTION BASED INDEX -
We see a very slight uptick in prices for commercial real estate. Yes, commercial real estate is a disaster! Yes, regional banks are crippled with commercial real estate loans that are not performing. Yes, MIT is seeing someone come in and pay a bit more than they did in previous weeks. Let's watch it. DO NOT GO OUT AND BUY REITS BASED ON THIS!

FINANCIAL CONDITIONS INDEX -

The Bloomberg Financial Conditions Index continues to march forward. This index is comprised of money market and bond market pricing and liquidity inputs. We know the bond market has improved substantially in recent months. A print above 0 indicates that we are out of a recession. We continue to inch closer. Does a proclamation by the FCI or Obama or the Economic Council mean that everything is better? No. We will see a proclamation that the recession is over, but we'll still have U6 employment (or should I say unemployment) at greater than 15%.

AAII SENTIMENT -

Investor sentiment is usually wrong when they are at extremes. Unfortunately, we are stuck right at 50 which indicates balance between greed and fear. We'll keep monitoring it. This week's data should get interesting with the dollar being up 3 days in a row.

US DOLLAR -

The US Dollar rose like a phoenix from the flames, ok, let's not get carried away here. The dollar has been up against a basket of currencies for the last couple of days. This does make trading a bit harder because it means that the trend for the last 8 months is being challenged. As of this writing the DXY or USD Index is over 76 which is a critical area. We'll keep watching. Read below to revisit how many of our trades are underpinned with the notion that the dollar will continue to decline at the hand of the FED and US Treasury.

TRADING SUMMARY - NEXT 30 DAYS

The dollar is still our benchmark and its new found strength has me watching our overseas and commodity investments even more intensely. The dollar is clearly still in a long term downtrend and nothing has changed, but I am more vigilant in monitoring it's daily moves because we are seeing other signals that the equity markets may be near a top.

US EQUITIES

We are nearing the end of the year and with the holiday season comes declining trading volumes in the market. We are seeing a narrowing of market breadth. Market breadth simply measures the number of advancing stocks versus the number of declining stocks. In a rising market the market breadth shows more advancers than decliners. As a market's rise slows, market breadth begins to contract.

In addition to the number of companies rising, we are also seeing two key items happening now. We are seeing only major leaders in the market advance while the rest of the market declines or languishes. Think of companies like Apple and Amazon as these leaders. What this means is that the surge in the market over the last couple of months has been extremely concentrated, not broad. This usually indicates that investors don't have conviction to go out and buy the market and fear holding anything other than the best names. As the rally continues to tire, even those names begin to fall. This is where I believe we are at the moment.

FINANCIALS

Finally, the market's rise has not taken financials with it over the last several months. Without financials any rally will be doomed. After hitting $193 in late October, Goldman Sachs is now at $162. This does not convey that we are in a position of strength.

OIL

Oil has sold off over the last few days which is no surprise due to the dollar's strength. Compounding the pressure on oil is that we are in a season that is typically very weak in last part of the year. At this time oil is $73. I have been looking for an entry into oil back in the $60's. I'm not in any hurry to buy here as I continue to believe longer term we'll see a double dip recession.

GOLD & PRECIOUS METALS

Gold has been crazier than a bucking bronco over the last several weeks. I have been pleased to have done well with highly speculative positions in gold while it was moving higher. I was even lucky enough to have caught some of the move down over the last two days. If you get the sense that I am glued to my computer during these times, you'd be correct. These are highly risky trades and I limit the amount I have invested, knowing that I could lose 100% on the trade if I get it wrong.

Because of the huge volatility in gold, I am suggesting that you exit any positions.

Gold has some significant support at the $1000 level. I would be inclined to add positions back if we neared that mark.

OK, so what do we do? Due to the weakness in many of the indicators I watch I am moving my stock holdings to a more conservative position. During this huge rally I have not committed all of my capital, with only about 50% of my long term account in the market for the months since August. The gains have been good and I do not desire to give them back. As always, I value preservation of principal and while not happy to miss gains, am always willing to pass up potential gains if I think there is a great probablity for loss. This selling of positions includes all overseas etfs, precious metal and commodity positions.

LONG TERM OUTLOOK (2 to 6 MONTHS)

Even though I suggest moving out of all positions here I want to give you a sense for what I perceive will happen over the next several months to a year. As I wrote earlier, the USD is in a long term downward trend and I believe it will maintain its direction. Understanding this trend allows me to not be too concerned about commodity positions unless I see the dollar index move above the $79 to $80 level.

Don't be mistaken though, a move in the dollar index from $76 to $80 could be EXTREMELY PAINFUL if you are in commodities or precious metals. Don't read this and say, I'll just watch $80 as a level and keep my positions on! While this is just a few points in the dollar, we could see a significant drop in the price of these commodities if you are still in them.

Even if we just churn here in a range or see mild weakness materialize in the short run, there may be a temptation to enter back into equity positions in January through February. Be careful, because after that period I believe we will head for a significant drop.

Gold and commodities will continue to perform well on a relative basis, but they too will be caught in a down draft, so watch out!. Overseas investments will continue to out perform US Stocks. I am still favoring holding ETFs like EWY, EWM, and EWZ. Of the three mentioned here, I like EWZ the least. I do continue to keep it in mind because EWZ is a proxy for trade with China as Brazil is natural resource rich and will benefit from its trade with the Asian super-power. Even if US stocks do not decline, holding overseas assets will help you significantly to counteract the dollar devaluation you will be experiencing.

Bonds - I believe with the coming correction in stocks, we'll also see a decline in bond prices. We won't see the traditional disconnect between bonds and stocks like we should as when fear arises, all asset classes will be sold.
If you are holding bonds right now that have appreciated significantly, I suggest you sell them and capture your gains.

Last, I am working on another post to explain why I believe we'll have dollar strength and how my contention that despite this HUGE rally, nothing has changed in the credit markets. I am extremely busy working on a few projects, but will hopefully finish the post by this weekend if not before. I think this is an important post if you don't quite understand how all of these instruments fit together.

Goatmug