SECTOR ROTATION MODEL - REVISITED

THE FED CONFOUNDS INVESTORS
Given the release from the Fed last week that they would hold rates low and continue Operation Twist more ,(they will never stop twisting by the way), I think it is more important than ever to review the Sector Rotation Model that I've posted in years past.

This model helps us review where we are and look at the industries and sectors we should be examining to purchase in anticipation of where we will be.  Thanks as always to www.stockcharts.com, I recently became a member of their service and find it very helpful especially since I punted E-Trade Pro for good!

As we look at the overall economic environment it appears as though we are at a market top and we are entering a recession despite all of the attempts by the Fed to do something to stimulate the US.  Based on the Sector Rotation Model we'd be getting ready to move from our consumer staples positions into healthcare and utilities and then ultimately into finance.  However, we've been in these extremely profitable positions for almost a year and a half now, so something is amiss with the rotation model right?  Even though the trade is a bit old, I still continue to expect that these same positions may not go higher, but on a relative basis will outperform..... (portfolio manager speak for keep your money in my fund!)

I would caution though, that the "normal" progression to go to finance and banks will be a deadly one.  There are several key factors that will make this a bad move in the future.  First, banks continue to hide and lie the embedded risks they have on balance sheets and the issues with Europeans sovereigns will only reveal these more of these problems.  (I am speaking of the mega banks here).  In addition, in a recession, you'd see normally that the Fed would step in and lower interest rates creating a stimulative environment for these institutions, but as we know, the Fed has no room to lower anything.  Thus, banks will be dead money.  Some might suggest that you'd buy preferred from some of these institutions, I'd say, "Why Risk It?

MORE OF THE SAME
So to quickly wrap up this macro-perspective, we need to stick with more of the same here.  More defense (PPA), more healthcare (XLV), and more utilities (XLU).  Don't get too ahead of yourself thinking that the coming recession can be avoided as we are in the wasteland created by ZIRP, courtesy of the Fed and there is no stimulus that can be provided that will be lasting.

RISKS ON THE HORIZON
What could jeopardize our strategy?  Simply put, the tax on dividends created by the expiration of the Bush tax cuts.  Ultimately if dividends are taxed at any higher rate and Congress doesn't do anything to address this, there could be a move to sell many of the significant winners that investors have benefited from over the last couple of years.  What caused this great surge in dividend paying stocks?  The Fed of course!  As rates have been crushed lower, investors has fled from bonds into dividend paying stocks as a proxy income tool.  It would seem like any tax hike could usher in a wave of selling to avoid the new revenue grab by our wonderful government.

GIVE UP ON GOLD, SILVER, AND OTHER COMMODITIES?
I'll leave you one last thought, despite the slow down here, is this rotation suggesting that gold, silver, and other commodities are done.  Yes.....and no.  We'll talk more about how even though the model suggests that these commodities would be the worst place to be, they just might be in the sweet spot.  Look for that post later this week.

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/

THE DECAY OF THE AMERICAN DREAM

I EXPECT TUITION, A JOB, A HOUSE, AND RETIREMENT
As most of you know I keep a running list of stories that I want to post and then as I have time I will work on them and post them when complete.  Some stories take so long to get back to they become dated and I simply trash them.  I was about to discard this one when I took a few moments to rewatch it and I was simply stunned by how easily our American values have been sapped from us and how it has only taken one or two generations for us to become convinced that independence and personal responsibility are not core tenets of American society.

In the following 5 minutes clip we see an interview on Fox News with a Valencia College professor Jack Chambless.  Professor Chambless describes an exercise he has students complete in the beginning of the year where they write an essay explaining what the American dream is to them and also what the role of the federal government should be in their lives.  Unfortunately, the results of the assignment highlight the extent our attitudes have been warped and how quickly we have created a citizen base that expects care from an external entity for life.  Is it any wonder that the Obama campaign created the internet campaign video on the Life of Julia where the government provided assistance in every stage of her life?  This wasn't some odd mix up or some ill-conceived campaign idea, they were creating a video that targeted the very beliefs that many young people expect and want!  Conservatives better not brush this off as some stupid liberal foul up, this was an intentional advertisement highlighting the things that liberals identify as a goal and now many young people believe are important!!!

THE WAR IS COMPLETE WITHOUT FIRING A SHOT
While a small percentage of students simply wanted the government to leave them alone (10%), a staggering 80% see the government as a mechanism to provide them a college education, a home, employment, and retirement.  As I see results like this I am simply aghast and am reminded of writings by J.R. Nyquist that suggested that Russian Communists had planned and schemed throughout the last 40 years to infiltrate our college professor ranks to wage an ideological war from within the US.  If this idea of a long term war of ideas driven by intellectuals is in fact true, we can see that their efforts must have been more successful than their wildest expectations as they have destroyed the very basic principles of capitalism in that there is no expectation of success AND failure along with reward AND risk.  In corporate banking and finance we have nationalization and at a personal level we have the social nanny state.

I will concede that college aged students are typically more liberal and frankly inexperienced in real life but this shocking interview reveals that our youth expect "someone" to care for them and that they have a right to anticipate that some benevolent force will pay for the things they need or want in life.  Unfortunately, I don't think that these kids realize that often just like in trading, when you minimize your downside (some government provides everything for you) you often limit your upside as well.  Second, I'm sure they haven't thought that they too could be the source of government redistribution as everyone is willing for the government to take and take and take as long as they are the beneficiary.  When you are the target of the asset confiscation, suddenly we all become proponents of a free market system!

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/

THANK YOU FED MAY I HAVE ANOTHER.....

I was doing market research this morning and I found yet another reason to dislike the Federal Reserve (yes, I know they have social media monitors logging in my rants).  As you examine your bank accounts, savings accounts, and all other "safer" investments we should be prepared to thank the entity that assists us our efforts to move backward away from any realistic investment goals.

Here is a real advertisement from ALLY Bank promoting a very wonderful 1.45% yield on a 4 year CD.  WOW!!!  And to think you only have to invest your money with a bank that was formerly GMAC that owned ResCap, an entity which filed for bankruptcy in the last couple of weeks.  Don't forget though, those CDs are 100% guaranteed by the FDIC so no worries!!

HOW CAN WE THANK THE FED?
ZIRP is how we can thank the Fed!  Our liquidity at all costs and zero interest rate policy is absolutely the reason we can lock our money away for 4 years and receive almost nothing.  Thank you Uncle Ben!

In comparison we can buy short dated corporate bonds and earn only slightly better if we go do the credit curve and buy riskier names.  The range I am seeing for lower quality investment grade names ranges from 1.4% to 4.0%  Still, that is disgusting considering the risk you need to take to get those rates.

WILL IT EVER CHANGE?
Unfortunately to keep the ponzi scheme going, it can't.  If the Fed lets rates rise, we can't afford it as a nation.  Ask the Japanese how that 10 year 1% bond helps retirees, I'm sure they love it!

JPM AND ITS IMPACT ON CREDIT SPREADS
Well, JPM seems to be getting a little news on its "Hedge Book that looks and acts like a Prop Trading Desk".  I find this story to be very entertaining as they were short long dated investment grade bonds, betting that price would go down and yields up.  It seems as though JPM's Hedge Book is so large that it was moving markets as it bought and sold positions (or in credit terms he sold protection on the IG9.  In addition, it seems as though the book was thrashed as several issues combined to tip the market off that there was a massive player in the markets.  As JPM's desk sold protection its daily adjustments were so large that it dislocated normal correlations of the investment grade market to the S&P500 equity market.  Those evil hedge funds began to see the divergence in markets and started trading against the mis-allocation in pricing, betting that it would come back into alignment.  In the midst of these trades, long term treasury rates fell as concerns in Europe mounted, creating an even more trouble set of circumstances.  Since the book is so big, JPM was altering credit markets in their attempts to hedge and position the book!  If JPM is still in it's positions, it is getting hammered.  In a conference call, it was released that the DV01 or Dollar Value of a 1bps move for the book was $200 million!  Since the the early rumors broke on this story back in April, the 9 year investment grade yield curve has moved out 25bps which could suggest that there really is a staggering $5 Billion loss (if they still have those positions on).  Pretty nasty loss for a risk controlling desk isn't it?

As I've written for almost two years now, investors in bonds can only be in short dated bonds.  If a person desired longer maturities they certainly shouldn't be buying bonds now as the only place for rates would be up (in sometime in the future).  Given the problems we are seeing with JPM and long dated credit, we all are left saying, "Thank you Fed, may I have another!"

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/

COLLEGE TUITION MADNESS

INSANITY 
I've often written on the blog over the last couple of years about how college costs are out of control.  You can say that costs are driven higher by excess demand as "everyone" needs to go to college now and others point their finger at the massive college loan and federal aid subsidies that put gobs of money into the hands of immature and financially illiterate youths that have never thought to examine the return on investment for $100,000 of borrowed money.  (See past writings on this subject - "SLAVERY THROUGH STUPIDITY, ENTITLEMENT, AND LIBERAL ARTS")

Clearly, college tuition costs have raced higher over the last 10 years and it is probably attributable to these ideas and even others like the expansion of stupid programs and hiring of professors and Deans to promote "Diversity" on campus.  I've howled about how colleges now emphasize more liberal arts and less hard science and math and how the "system" is not focused on teaching but providing "the college experience".

CHANGE THE FREAKIN SYSTEM!!!
I even wrote about how the Alumni Association of the University of Texas rallied against Texas Governor Rick Perry's challenge to create a 4 year degree program for students that could be completed online at a cost of no more than $10,000.  They complained that the degree conferred would rob students of the maturing they receive and the college experience.  Let me tell you, that "college experience" robbed me of 2 extra years in school and it would have been longer had I not discovered that the purpose of college is to be equipped in the skills of critical thinking and teaching valuable real world information to prepare kids for a real job.  Nothing else!

Here is a snapshot of what has happened to costs in the last 10 years courtesy of Bloomberg.

Bloomberg is trying to make the point here that out of control college costs are crowding out a person's ability to purchase a home because student loan debt makes them hesitant to buy.

Finally, I'll end with a nice chart from the WSJ - This chart highlights the highest paying college majors and also some of the lowest.

Personally, I feel pretty strongly that anyone that wants to go into Social Work should only do so by obtaining an education at a public higher education institution (not private) and only based on receiving grants and other scholarships.  This is a fine helping career, but it isn't one that cannot support a living, especially if that student takes on $125,000 in debt to finance it from a private school.  Remember these two clowns?.... -Social Workers with $240,000 in loans-.

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/

DRIVING JUST GOT MORE EXPENSIVE. WHEN WILL THE FED STOP?

TAKING A DRIVE, WHAT IS THE COST?
As I drove the kids to school today I noticed that once again fuel prices are high.  Unfortunately I have one of those cars that takes only the super premium 93 octane blend of gas, so I am always looking at the most expensive level of gas pricing when I drive around town.  This morning's damage in my neighborhood store was $4.11 for the super premium grade.  While I'm sensitive to the cost of filling up the car, I'm fortunate and blessed in that I make enough money where it doesn't harm me and it gives me something to complain about and blog about.  On the other hand, there are people that are getting brutalized daily by the effects of the speculative froth that is caused by loose monetary policy and it's famed QEII debacle.

Quickly I'll review, the Fed buys bonds from dealers and they in turn are using that money to park it in assets that are more likely to provide some type of return.  In addition, since hedge funds and other investors cannot find investments that will compensate them for the risk they are taking (try living on the interest created on a bond portfolio), they are forced into other securities and investments that at least attempt to reward you for the risks.  Thus, the Fed's aim has been wildly successful.  Market participants have shunned safe assets and been driven like a herd into risky assets like stocks and commodities.  And there you have it, investors are buying commodities because they can't get paid anywhere else.  Speculators have bought gold, silver, wheat, corn, cotton, oil, and gas.  Almost every commodity has been on fire.  Remember the summer of 2008 where investment banks had oil tankers filled to the brim sitting off the coast to speculate on the surging price of black gold?  Recall the $148 oil spike?  I'm not hearing the same stories of excess, but we are seeing a mass flood into these alternative assets to flee poor rates of return and a declining value of the dollar.

WHAT WILL BE THE IMPACT OF RISING GAS PRICES? -
http://www.foxnews.com/us/2011/04/11/drivers-start-cut-gas-prices-rise-1546568875/

I'm not sure how Americans will ultimately deal with rising gas prices, but over the last several weeks as prices have soared, drivers have been constraining their fill ups.  As the article notes, drivers bought 2.4 million gallons of gas less than last year at this time.  The average price for gas in the nation was $3.77, remember that the all-time high in July of 2008 was $4.11.

This article says that some folks have been walking more, riding public transportation, and simply not going places.  Other reasons that we've seen a reduction in the consumption of gas may be that Amerikans have bought more fuel efficient cars that require less gas.

CONFUSING DATA - DECLINING GAS CONSUMPTION BUT INCREASING CONSUMER SPENDING?
The foxnews article also keyed on one interesting point here that for me speaks to a larger macro-economic shift. 

"The decline is somewhat puzzling because Americans typically curb their driving only as a last resort, after sacrificing other forms of discretionary spending, like shopping for new clothes, or going to movies, concerts and restaurants.



But demand for gas is falling while other types of spending are on the rise. Retail sales rose 2 percent in March compared with a year earlier, surprising economists who were expecting no increase or even a decline."

So, consumers are curbing gas consumption, but someone is out there spending away.  What is the answer for the data?  I think it clearly shows that the divide between classes is growing AND we can only thank our friends at the FED for the disaster and attack on the poorest who can ill afford to handle the assault on their wallets.  To clarify, the poor working class folks are getting crushed since fuel is a significant portion of their pay checks.  On the other hand, the Fed strategy has been successful driving 401Ks and brokerage account values higher, so the wealthiest of individuals are back spending and engaged in business as usual (let's go out to dinner and a movie!).

Not buying it?  How about the quote here? -

"About two and a half days' worth of Whitney Shaw's pay each month goes just to fill up her 2001 Hyundai Accent. The administrative assistant is thinking about taking the bus for her daily commute, 50 miles each way between Branford, Conn., and Hartford.


"It's three hours of pay from work just to fill up my tank even once, so I'm definitely feeling it," Shaw said while filling up for $3.61 a gallon at a Valero station on the Berlin Turnpike."

Let's assume that it costs $75 to fill up and as Whitney Shaw describes, is 2.5 days of her monthly pay.  Assume also that she works 5 days a week or a total of 20 days a month.  Given all of that, Whitney is making $600 a month, clearly she isn't wealthy and obviously $75 is a large portion of her monthly take home pay, essentially 12.5% of her take home pay.  Perhaps just one year ago, the cost was $55 to fill up?  That is $20 a month less to spend on essentials, pay down debt, or splurge for a movie. 

$5.00 GAS?  IS THAT A POSSIBILITY?
I love the Foxnews article because it simply drops in that most analysts are looking for $4 gas, and some $5.  The way the quote is couched makes it seem like there is no chance that we'll be at $5.00 gas.  I think that $4.00 is absolutely figured in and that $5.00 is easily within reach.  What are the factors that prevent $5.00 gas from arriving?  Where are the forces that will make global demand for oil abate?  Is peace suddenly breaking out in the Middle East?  Probably most importantly, is the US Dollar getting stronger here?

In the article by CBS News - Gas Prices Climbing Toward $5 we get a mind blowing picture of the thought processes of folks that live in Chicago, the home of our President. 

Drivers Monday morning were practically numb to the price spikes.

"“What are you going to do?” said Shannon Thompson. “We’ve become so gas-dependent in this country. There are so many SUVs. I mean, I’ve had a hybrid. It worked great. Right now, I’m just going to deal with it.”


Prices at some gas stations outside the city were still below $4, a bargain compared to the $4.29-$4.40 range at some service stations downtown."

What drives me crazy here is the acceptance of the situation.  I can almost see them shrugging saying, that's the breaks!  "I guess we're stuck with high gas.  I bought a hybrid so that's all I can do!  Yeah OBAMA, just give him a chance!"

Are you kidding me, it's all about the policy?!   We have a Presidential administration that believes that our best course of action is to buy more oil from Brazil rather than exploit our own resources.  We have an environmental policy that holds us hostage to Middle Eastern despots, radicals, and UN pacifists, and we have a FED that is driven to destroy the US Dollar in the name of suspending market principles to save a bankrupt system.

For another perspective I've added an interview here with Stephen Schork, president of the Schork Group.  Stephen talks about the outlook for oil prices and mentions his thoughts on natural gas in the last few moments too.




TRADING UPDATE
So what's the point besides noting that gas is higher and no one has a clue that the Fed is the cause and there is no stopping it?  Well, since January 17th I've been suggesting that we need to buy gas and energy related stocks.

As we look at the trading view, we must examine oil first.  I've used USO here as a proxy for oil, but we all know there are tracking issues with that etf.  Having said that, it gives us a general idea of what we're up against, if you assume that all the fundamental items we discussed (Fed, global demand, summer driving season) are all still in play.

Based on the action here, there may be a drop in USO to the $41.14 area, but this area of previous resistance should be support.  USO has a lot of room to run with a target of $47 and $53.00 

Since USO looks pretty bullish here, that leads us to examine UGA which is the US gasoline etf.  If we are going to see oil move even higher, US gas prices too should inflate.

I've presented the 4 year weekly view of UGA and clearly we are at a point of resistance at $52, although I believe it will be minor.

The 3 Year UGA view is also good as it shows the area of support near $48.00.  I dropped the resistance line at the $52.00 area, but please note, it is there. 

As I review it, I believe that the target for UGA is still right at $64 or so, but I'd be out around $60.00 or by late June or early July (next earnings season in July may be a killer) whichever comes first.  The $60.00 target may not seem like that much from here, but if you'll recall we highlighted this target in January when UGA was trading at $39.50.

That is the update, please be careful and of course limit your driving cause it is going to cost you.

GOATMUG

AMERICA IS NOT BROKE! -

Please read the following article where the newest genius in Wisconsin states anything but the obvious.  Michael Moore profoundly declares that "America is not broke". 

http://host.madison.com/wsj/news/local/govt-and-politics/article_8a60e128-4791-11e0-9892-001cc4c002e0.html

As usual Michael Moore is seeing America through his own distorted lens, but this time he is just flat wrong.  Oddly, I usually feel some sort of respect or admiration of Michael Moore in each project he does for no other reason than he really believes earnestly in his views and is willing to put them out there.  I can usually even put on a raging liberal hat and see his perspective despite my absolute disagreement with him.  In this case however, I just have to declare that he is completely off his rocker.

 Later in the article he notes that "America is not broke," Moore said "the country is awash in wealth and cash ... It has been transferred in the greatest heist in history from the workers and consumers to the banks and the portfolios of the uber-rich."  Once again, Moore gets some of the truth out there and then goes to work to distort the facts.  First, Americans were broke well before the financial crisis in 2007 and 2008, the media and the markets were too busy believing the lies and watching "Flip This House" to believe that we weren't rich.  Second, the same banks that Michael Moore claims are rich are actually completely bankrupt, leaving me to wonder who really is rich there Mike?

What this really is about is Michael Moore interjecting himself into Wisconsin politics on the side of unions.  Wouldn't it be great if he actually did a story about the destruction of the middle class due to unions creating uncompetitive landscapes for companies?  Wouldn't it be great if Michael Moore exposed the corruption of the unions?  Wouldn't it be amazing to see this guy on the right side of any angle?

If Wisconsin and all the other states aren't broke then I am not sure what constitutes being broke.  Unfortuantely I think we will ultimately see what happens when a "not-broke" country like Greece. Ireland, Portugal, or a US state like Wisconsin does end up being exposed as broke.  When at long last the endless money supply and unlimited debt comes to an end, we'll see that the conditions that are being displayed by Wisconsin are in fact an indication that America is broke.

GOATMUG