MELTDOWN?

Today's 70 point drop in the Dow drop the index down to the low 15,000 area, a full 600 points off the highs of recent months.  Overall, things look really interesting in a bad way as 10 year bond yields are flashing higher, quickly and the stock market isn't exactly reacting well.  Remember, it isn't the actual 10 year bond rate that is concerning as it is still freaking low at 2.88%!  What is concerning is the speed in which it moved to the 2.88%.

Look at the HUGE move since May!

Here's the 30 Year -

WARNING SIGNS
What we really need to be watching is the equity and bond market interaction given their independent moves.  For example, if stocks continue to slide, but yields in long bonds arrest their slide (yields go down instead of up and prices of bonds go up), then it will signal a level in which bond buyers feel they are compensated for their risk AND this could mean a big exodus from equities.  Think about this for a moment, even with equity weakness, traders, fund managers, and retail guys have asked themselves...."If I get out of equities, where can I go, bonds suck, so I might as well buy dividend paying stocks".  BUT, if we get to a level where managers and traders rationalize that bond yields are decent enough to be a safe haven to potentially miss out on some equity movement, the markets are in trouble as stocks have pretty much been the only game in town for almost 6 months.

Having said that, if both equity markets and bonds go down too, you better hope you locked in gains when they were easy as I think everyone but Joe 6 Pack has been identifying exits and ensuring they aren't the last out the door.  Remember, Mom and Pop probably just entered this market fully in the last six months, it is probably time to let them have it.

MELTDOWN?
Emerging markets are struggling now and India is certainly in a total meltdown.

The Dow certainly looks like it could drop a minimum of 200 to 300 points here to get back to the lower support at 15,750.

And, speaking of meltdowns, I am no tree hugger, but I'm simply awed by the silence of the commie media when it comes to the potential threats of something that is going on right off the left coast.  I am concerned about this as I'm looking to schedule a trip to Hawaii next summer.  If any readers have some guidance for what to do and where to go, please share them via email or in the comments.

Some light hearted stuff for Monday night.....
Professor Christopher Busby speaks with the RT on the anniversary of the Chernobyl nuclear accident to discuss the ongoing Japanese nightmare in Fukushima.  Like most important and real happenings in our country and in the world, you almost have to go to a foreign source for news to get a decent perspective on reality.  In the US media we'll discover that Beyonce got booed and that everyone needs medical marijuana or each boy and girl deserves to make a choice of what sex they are for that day, but we'll never hear anything meaningful about our constitutional rights being whisked away or the absolute destruction that is occurring in the Pacific Ocean right now.




Word is that the damming of the area and continuous pumping of water into the fuel holding areas has caused the underlying ground and sediment to subside.  Millions if not trillions of gallons of contaminated water are leaking into the ocean which is a nutshell, isn't good.


Have a great week, and you'd better figure out where the nearest exit is....

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.com/

RETURN OF REALITY? (US BOND MARKET UPDATE)

NIRVANA IS SHUTTING ITS DOORS?
In the past four years we've all lived in a sort of Nirvana-like state where equities go up everyday and somehow government bond yields go lower too.  For sometime, I've been troubled by the weird relationship many markets have maintained because the activity of the "new-normal" period we've had just doesn't conform to historical norms.

We've had strange intra-market relationships between US government bonds and equity markets, US currency and the stock and bond markets, and even odd performance relative to emerging markets.  In the past week or two though, some interesting developments have occurred which probably tie closely to the Fed hinting that they may taper or begin to taper purchases of bonds and mortgage backed securities.

SELL EM IF YOU'VE GOT EM!
To get the work week started, please take a look at the following screenshots of the government bond price action this morning.  While stock markets are moving up (as they should) when government prices are going down (yields are up), I'm a bit alarmed as these are HUGE moves.  The ten year treasury moving 5% in any direction is massive and can't be good for those hedge funds and insurance companies that are leveraged and positioned the wrong way.

Not to be out done, Japanese bonds are also getting clobbered.  I wonder if the Japanese Central Bank has unlimited QE ready, it looks like they are going to need it.

US Tips (Treasury Inflation Protected Securities) are also getting smacked around too, so it would seem there is nowhere to hide in government bonds today.

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/

RECOUPLING....T-BOND REVIEW (TLT,TBF, XLU)

I've posted a number of charts in the past months that examined the amazing experience we had in 2012 where typical market relationships melted into nothing and became completely useless.  One old notion that treasuries acted inversely to the equity markets was one of these.  In 2012, we witnessed treasuries increasing in value (yields falling) and equities rising, frankly, this isn't normal.

We've speculated as to why this happened, but without fail we always came back to, "Fed manipulation" as the key distorting factor.  Is it really that foreign investors needed safe sovereign holdings and continued to by US bonds without regard for yield?  Maybe.  Was it that Joe 6 Pack was abandoning his fear and rushing headlong into the equity market.  Possibly, with a portion of his holdings.  Each answer may be correct as the Fed's insatiable desire to buy up mortgages and treasuries has artificially suppressed yields and also forced Grandma and pension managers to elect for riskier assets with "new" money in an attempt to make something.  I think this is why our equity leadership has been focused like a laser in dividend paying stocks in defensive sectors.  The average investor doesn't trust this rally and hasn't, so as he holds his nose he buys utilities, consumer staples, and healthcare and shuns small caps and technology.

Don't think utilities have been a safe-haven?  Check this out.  I haven't sold my XLU yet, but is is on the agenda.

As 2013 dawned, we've seen a recoupling of the old relationship in the first few months, and I for one, am very happy.  Yet, as happy as I have been, an odd sense of dread kicked in as the relationship over the last few weeks started to break down.  Perhaps it was Cyprus, or perhaps the huge rally in the first quarter just needed a breather, but bond yields started floating lower, yet the equity markets just continued to press higher and float out in space to new highs.  I 've highlighted the chart of TBF (which is the etf that shorts treasuries which shows the relationships I've been watching).  In this chart, TBF should move in lock-step with the equity market (SPX) which is the black line behind the TBF chart.

A month or so ago I put this chart up and called for a change in direction for the stock market, but it didn't come.  The weakness in TBF suggests that a healthy correction is in store for stock markets.

Don't get too bearish and over extended here, but certainly the chart suggests a bit lower in equity markets.

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 END OF NORMAL? - TBF

I think 2012 was one of those years that made you just say, "What the heck?".  Examine the following chart of TBF (short 20 year treasuries) and SPX in the background.

DECOUPLING?
The "normal" relationship between stocks and bonds suggest that when the bond price falls (yields rise) and stock indices will actually increase as you assume that money flows out of bonds (sending prices lower) and into stocks (chasing prices higher).

In the graph below, which includes TBF (the short version of treasuries)  we see that in 2010 and 2011, these two charts moved in tandem, just as expected.  Suddenly, in 2012, the relationship turned on its head and did just the opposite.  In 2013, we have a resumption of the old co-movement.

TBF and SPX - http://scharts.co/WHPScS

INVISIBLE HANDS
What could have caused this divergence from the normal relationship?  What caused it to come back into alignment?

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/

WEIRD STUFF IS HAPPENING....CREDIT

BONDS ARE SIGNALING WHAT?

I'm pretty much the last guy in the world to expect an implosion in long dated treasury bonds, and this week has really been amazing to watch long bonds get smacked around.

In the past, I stated strongly that treasury bonds weren't going anywhere and in fact we'd see 30 year mortgages at sub 3% levels.  I still believe that the Fed will fight and fight to keep rates low as they don't have any choice but to purchase their cocktail of MBS, and mixed treasuries, or else the whole US economy my tank (isn't that what they say every month?).  This week, Tim from SlopeofHope.com made a great post with a very bearish call on bonds.  I was bold enough to post a picture of TLT and suggested that a gentleman's bet was in order and that we'd see $130 on TLT before we see his number of $100.  Could either happen?  Of course, but I also suggested that Tim would get some quick confirmation and that it would reinforce that he was correct in the short term, but this would only serve to make his beat down more painful, and ultimately he'd have to hand over my dollar.

Anyway, the biggest move that I am concerned about in terms of the longer term stock market is NOT the move in the 20 Year Treasury all by itself.  No, the issue is the recent strange action in the spreads between different types of bond maturities and also different fixed income assets like emerging market bonds, treasuries, and even high yield bonds.

Examine some of these relationships and take note that credit often signals big bad moves while the stock market happily rockets up 150 points on a crappy jobs report.  Bonds are usually managed by the smart money.  We'll see just how smart they are.

TLT : IEF - 

(This is the ratio between long bonds and 10 year treasuries).  Look at that complete collapse of the spread.  I've put the SPX behind it for you in black.  In this market environment, even though treasuries are seen as a quality safe place to hide in a panic, investors will shun the 20 and 30 year bond, they will all cram into the 10 year.  The IEF is gaining traction relative to the TLT (20 year).

EMB:TENZ - http://scharts.co/WaVg83

Here is another one that Michael Gayed uses.  I follow him on twitter;

EMB:TENZ (Ratio of Emerging Mkt bonds to a ten-year bond eft)  This one is good, because the drop in the ratio often indicates a flight to quality.  It also leads many of the drops in the SPX which is behind in black.  I've circled the recent action where the ratio is falling hard, but the SPX has just powered higher.  Which is right?

TLT - http://scharts.co/XOhqLJ

Finally, here is the TLT chart I posted on the Slope comments section.  TK looks like he's in the money......for now.

As usual, we'll hold our breath and wait for the equity market turn.  At least the credit markets have begun to show there may be trouble brewing in paradise.  Have a great weekend!

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 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/

NEGATIVE BOND YIELDS, MATTRESSES, AND FRAUD

MORE DISTRUST
Yesterday I penned a post called, COMPLETE COLLAPSE OF TRUST that outlined a few of the significant events that I believe have created a market environment that is bereft of morals and "doing the right thing" and is focused on simply taking every last cent (ok even fraction of a cent) from investors.

I guess there are two other ones that come to mind as well;

*Co-location of HFT computers at the trading centers so they can front-run trades and also step inside of the bid/ask and steal from investors.

*The Facebook IPO disaster where Morgan Stanley and other underwriters destroyed RETAIL investors in the over-hyped initial offering of a declining company.  Further, I think it will come to light that management and the underwriting team hid information that the company's health was getting worse (growth rates of subscribers) and this frankly amounted to selectively sharing inside information.

The list could probably go on and on.  Is there any wonder why every day investors shun this market?  You must have really thick skin to wade into this environment.

MARKET INSANITY?
As I wrote yesterday, we have had a common theme for investing over the last couple of years that have worked out pretty good.  The main idea is to purchase large dividend paying stocks and then also to selectively buy commodity type names in the period of January to May and then sell.  That has worked great.

I also mentioned that perhaps we are really slowing down and with that, all boats will sink, the use of defensive dividend payers might just help you lose less.  I also lamented the issues with fixed income approaches as the entire credit spectrum is a risk/reward screw up as the Fed's actions have managed to destroy all traditional fixed income methods for examining risk in markets and causing investors to make really bad choices.

One example of fixed incomes complete irrationality can be found today where Bill Gross tweeted about 2 year government bonds....

WHY CONTINUE TO LAMENT ABOUT THE STATE OF THE FIXED INCOME MARKET?
The reason I continue to prattle on about the fixed income markets is that they are huge and typically have been known to be the truth-teller or the only adult in the room compared to the equity markets.  Since the Fed and US Treasury and every other central bank have been buying bonds and instituting their ZIRP policy, they have blown up any normalcy and any accurate representation of reality.  How can we make rational decisions about where we are or where we are going if everything is made up and screwed up?  I need only to point to Pimco's Bill Gross to highlight that people are BUYING government bonds from Germany, the Netherlands, and Switzerland and LOSING money because the yield is negative.  They are PAYING the governments because they desire their money back more than they desire earning any interest.  This is damning and this reflects the total disaster that our global investing environment is in.

ARE WE SLOWING DOWN?  WHAT TO WATCH FOR
Finally, I found a nice summary from Barry Ritholtz of The Big Picture Blog.  He made a post called,
THE 7 FACTORS TO WATCH IN A SLOWING ECONOMY (link above in the Big Picture Blog).  I think this is a nice list and it affirms what we've talked about for a while.  In addition, it highlights many of the macro-indicators I watch when I do the monthly macro update.

• Transports have been very soft and confirm slowing global trade. Pay attention to UPS, Fed Ex, and Rails.
• A corollary is energy prices and the shifting revenues of the major oil companies.
• Retailers often feel the bite first. Middle market retailers, than luxe goods. Watch for signs of improvement amongst the discounters like WalMart, Target and the dollar stores as consumers feel stressed.
• Defensive issues such as Utilities and Consumer Staples attract buyers (but should not see big changes in revenues)
• Pay attention to visibility and revenue expectations from companies. I expect the uncertainty trope to be in full flower;
• More  important than that, watch S&P500 Quarterly earnings growth; Is the rate of growth (2nd derivative) slowing?
• Valuations remain reasonable but not cheap; See where the SPX ends after earnings season is over.

I need to do an monthly macro update as very interesting things ARE going on in the economy.  While we continue to hear over and over again that the collapse is coming and that a recession is on the horizon, many indicators ARE showing a slowdown, but then some others just aren't.  There truly is a non-economic factor in play (call it political and policy driven) that could ensure a recession or save us from a recession.  I plan on expanding on this more in a post in the next week or so.  Until then, thanks for stopping by!

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/

HAPPY THOUGHTS - MACRO UPDATE FOR FEBRUARY

IT JUST FEELS BETTER 

Clear your mind for a second and forget that there are these things called bonds, that there is a European economic zone called the EU, and that a small little island country called Greece owes a boat load of money to just about everyone.  Don't you feel calm and relaxed?  I thought you might.  Now that you've erased from your consciousness any troubling aspects related the global economic reality, we can focus on good thoughts and ponder just how great things are getting in the USA.  Are you ready?  Let's hit it!

MONSTER EMPLOYMENT INDEX - http://www.about-monster.com/employment/index/15

The Monster.com Employment Index is a metric I like to follow because it gives us a pretty good look at what Monster.com is doing when it comes to on-line job listings.  January is usually a down month, so we can't get too worried about a decline following the year-end holiday.  Despite the drop, we have see a pretty consistent improvement in year-over-year terms where listings have been on a steady 8.5% to 9% increase over the previous year.

It is critical that we don't see a continued slowdown in the trend here through February as it usually marks the turning point for online job listings for the year and typically we see a peak in the late summer and early fall months.

SCRAP COMPOSITE INDEX-
The Maestro, Alan Greenspan, watched the prices on scrap metal as an indicator of financial expansion.  Who are we to argue with the greatest money printer and bubble blower of all time?  Scrap prices were in a serious decline until December when almost every asset on the planet caught a bid.  The move up may indicate that global inflationary forces are at once at work within our economic system.

FOODSTAMPS - SNAP DATA
I wanted to include this information without further comment.  If you missed the recent post on this data, please go to the link at - WHAT'S UP WITH THE PO' FOLK

BLOOMBERG FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/quote/BFCIUS:IND
The Bloomberg Financial Conditions Index is still below the 0.00 level which highlights in some improbable way that the economy and markets are still in contraction mode.  How is this possible when market indices are nearing October 2007 levels?  Who knows, but the Financial Conditions Index simply reveals that we are still in a recessionary mode, although we are very close to breaking out into the clear again.  Interestingly, each time we have approached a level that was positive or near 1.00, our markets have corrected significantly.

USD INDEX -
The USD's travels to the lower right corner of my chart below puts the US situation in a pretty clear light as we can really evaluate the longer term trend of our currency.  Don't ever question whether out-going Treasury Secretary Geithner wants a strong currency....(cue Chinese student and Goatmug laughter!!).  Another interesting point is that the USD is near the level we saw in October 1, 2007 at $77.81 right as things US markets attempted for a retest of equity highs achieved in July of 2007.  (On 1/31/12 we ended at $77.86)

USD (CON'T) - http://www.bloomberg.com/quote/DXY:IND
Here is a 1 year view of the USD Index.  The fall of the USD in the last two months has been the fuel for much of the stock market rally.  What happens if the fall doesn't continue?

BALTIC DRY GOODS SHIPPING INDEX - 
I'm about to throw the Baltic Dry Goods Index in the pile of "Who Knows What is Happening Here" as we continue to see a monster decline in spot shipping rates for global dry goods transport.  We have heard all of the reasons for the decline, that there is an over-supply of ships coming into the market, depressing the spot price.  We've heard that China is no longer importing commodities at the rate they did previously.  The one serious take away one can make is that shippers are enduring quite a collapse in prices as this index just a few years ago was over $100,000.  It is hard to imagine any company being able to withstand an implosion of 95% of their pricing.  Did I mention these firms are more debt than Greece?  Can't be a good recipe.

INTERBANK LENDING RATES - 6 MOS LIBOR -
Below is a picture of a 25 year history of 6 month Libor rates.  At .75% we can see the affect that this prolonged period of stress has had on lending rates.  In an effort to provide extreme liquidity in the face of bank distrust, central banks have driven inter-bank lending to historic lows.

Euribor also gives us a tip that something coordinated is going on with the banking environment.  Notice in November rates began going down.  As central banks goosed the system we've seen lending rates decline and equity markets rise.  Coincidence?  Probably not, recall that equity market have simply risen without a red day for the last 2 straight months.

TED SPREAD - http://www.bloomberg.com/quote/!TEDSP:IND/chart
Building on the theme from the Euribor chart above we examine the Ted Spread which is another stress or fear indicator.  According to the Ted Spread, everything is just getting finer!

TRADING UPDATE

The year has progressed right along the path that I anticipated it would and as I laid out in my 2012 Predictions post titled CONFIDENCE LOST; 13 For 2012.  What I mean by, "it's progressed like I laid out", I mean that we are moving much higher in the indices and we are making a strong run into the late April or May top we'll see.  Does this mean that there won't be a few down days?  Can it be possible to have a 5% drop here and still keep this thesis in tact?  Of course, in fact, I am looking for a  drop here as even the $SPX is up 8% year-to-date.  If anything, we'd really have to question what would propel the market higher in such a short time wouldn't we? (Tongue and cheek of course!)

I looked back at a few of the items that I was really centered on in the predictions post and I highlighted a few that have easily hit their targets.  WNR and UGA have already hit $17 and $54 respectively.  Each of these have posted pretty respectable gains since I put those on.  I mentioned that VLO could go to $27 and I still believe that is easily in the cards, but it has clearly lagged WNR, (which was and is my favorite).  Here is the deal though, with almost a 50% gain in WNR and a health 20% profit in UGA, is there any reason to press my luck?  No!  In fact, a drop here would be a perfect set up to leg in and rebuy my positions for a move higher into late April and May.  Profit is profit!

I am still very bullish on gasoline and am staying with that slant through the next few months.  I still think there is a possibility that we move as much as 8% to 10% lower in the next couple of weeks.  

TIRED RALLY?

I am trying to keep an open mind about several positions that look very suspect.  I've played around with very small positions on XHB trying to find a successful entry on a short position, but have managed to take a few flesh wounds in the process and have been glad to have stops all the way up as XHB defied gravity last week.  The open mind here comes in play in that this housing etf could very well scream higher to $23 which is the September 2008 level.  XHB bulls are saying that new housing looks to be improving, that the mortgage settlement will clear the path for more new homes, and housing financing rates are low.  A bear might just hear that and say that lots more housing supply is coming online and no one can get financing anyway.

From a chartist perspective I see that XHB has pushed above resistance at the $19.90 level, but has dropped back through it over the last two days AND was trading previously at a level 2 standard deviations above the 50 day SMA on this 3 Yr Weekly Chart.  I like to think that stocks that trade that high above the overall trend will fade back down to at least the overall trend line, so this has been the basis for my short attempts.  

Finally, I don't have the courage to short this one, but if there is a chart that shows something WAY above it's trend and trading well above 2 standard deviations, it would be this little company.  Everything in me says to short it, the last 3 years of history keep me from doing it.

Domestic economic stuff looks pretty good right now and perhaps the US economy is getting on track.  In early January I anticipated a continued improvement in economic metrics in the first half of this year.  I was a bit worried when two of my favorite writers disagreed fully with my analysis and made projections that the first half of the year would be flat and the back half of the year would be strong.  I think both writers felt that the election cycle would come into play and markets would rally.  I feel almost vindicated as Chris Puplava has intimated that he actually sees a reversal setting up in his outlook where the first half is good and the back half is....not so good, which aligns with my stated market direction.  My other favorite writer also has altered his forecast so there I'm not surrounded by folks that agree with my way of thinking.  (Perhaps it is time to change my view?)

For me, the key is that if we have continued Federal Reserve action we will see gasoline surge higher. As gasoline exceeds $4.00 in early April and May, we will see an immediate drop in US domestic economic activity and all these happy thoughts we've been training ourselves to have won't mean much as our growth grinds to a halt.  I've have more on this topic this weekend.

Be Careful!

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/ 

RESISTANCE IS FUTILE (MAYBE) - CHART FIESTA

It's Friday, why not look at some charts and have a chart fiesta (party for you gringos).  Many charts are showing signs of hitting resistance and most in the market segment areas also have been going higher on lower and lower volume.  Housing is the only exception, which has rocketed higher on higher volume (XHB).

I am not going to give any additional commentary, cause I've laid out the case in the 2012 Outlook for most of these items.  It's as big as the Great Wall of China, but I think it will help you if you take the time to read it.  The charts below will help you compare the commentary to what I believe I see in these charts!

OH YES, AND ONE NOTE AND PROMOTION FOR WHY YOU NEED TO USE GOOGLE CHROME AS YOUR BROWSER!!! 
If you use Google Chrome as your browser and you click on the charts to get a full page view, all you need to do is page down or even possibly roll the mouse down if you have a roller ball and it will allow you to move to the next chart!  WOW!  Easy and awesome.  It took me a long time to convert to Chrome, but I almost use it exclusively now and this is an example of why!

MARKET SEGMENTS

XRT - RETAIL

XHB - HOUSING

XLP - CONSUMER STAPLES

XLV - HEALTHCARE

XLU - UTILITIES

IYT - TRANSPORTS

LQD - CORPORATE BONDS

HYG - HIGH YIELD BONDS

PPA - DFS/AEROSPACE

SECTOR / COMMODITY CHARTS

WNR (REFINER)

JJC - COPPER

JJG - GRAINS

POT - POTASH (FERTILIZER)

SGG - SUGAR

UGA - GASOLINE

There you have it, lots of charts and lots of topping and a little opportunity mixed in there too.
Have a great weekend.  Send me an email or leave a comment if you have thoughts or questions about any of them.

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/

2 HEADED MONSTERS - BILL GROSS' BINARY WORLD

I read the 2012 outlook from Bill Gross this week and wanted to make it available and make some clarifications about his thoughts and also highlight how powerful it is that this controller of literally hundreds of billions of dollars has gone so negative on the outlook for the global economy.

Below is the link;
TOWARDS THE PARANORMAL

In this post, Bill Gross revisits the term "New Normal" that Mohamed El-Erian had made common place when referring to a low growth, stagnant global economy.

"The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012."

Where Gross is really focusing on is this idea of a distribution curve where there are two really bad outcomes at each side of the distribution of events.  Unlike the unforeseen black swan eventst, Gross is suggesting that the probability of the worst outcomes is increasing and therefore he references the "fat tails". (In a normal distribution the tails are small).

THE PARANORMAL
Gross describes where we are as we enter 2012;

"The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,” standby to redefine “New Normal,” and welcome to 2012’s “paranormal.   

Perhaps the first observation to be made is that most developed economies have not, in fact, delevered since 2008. Certain portions of them – yes: U.S. and Euroland households; southern peripheral Euroland countries. But credit as a whole remains resilient or at least static because of a multitude of quantitative easings (QEs) in the U.S., U.K., and Japan. Now it seems a gigantic tidal wave of QE is being generated in Euroland, thinly disguised as an LTRO (three-year long term refinancing operation) which in effect can and will be used by banks to support sovereign bond issuance. Amazingly, Italian banks are now issuing state guaranteed paper to obtain funds from the European Central Bank (ECB) and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another."

Not exactly mincing words is he?  Gross continues to state that in reality, global credit markets are actually EXPANDING mildly rather than what should be happening through normal events we've been through.  Extra normal intervention of central banks and politicians is having the effect to push credit expansion rather than contraction.  Gross explains that INFLATION is one side of the distribution; one of the "fat tails".

THE FED SURE LOVES ITS INFLATION DOESN'T IT?
On the other side of the curve we have the following;

"At the other tail, however, is the potential for “implosion” and actual delevering. To the extent that most sovereign debt is now viewed as “credit” in addition to “interest rate” risk, then its integration into private markets cannot be assured. If only Italian banks buy Italian bonds, then Italian yields are artificially supported – even at 7%. If so, then private bond markets and non-peripheral banks in particular may refuse to play ball the way ball has been played since 1971– purchasing government debt, repoing the paper at their respective central banks and using the proceeds to aid and assist private economic expansion. Instead, fearing default from their sovereign holdings, any overnight or term financing begins to accumulate in the safe haven vaults of the ECB, Bank of England (BOE) and Federal Reserve. Sovereign credit risk reintroduces “liquidity trap” and “pushing on a string” fears that seemed to have been long buried and forgotten since the Great Depression in the 1930s."

DELEVERAGING  IS A NICE WAY TO SAY DEFLATION
Here, Gross suggests that the other side of inflation is the repudiation of ponzi debt and the notion that central banks efforts to stave off credit implosion through debt purchases could result in absolutely nothing meaningfully good, and ultimately tax-payers eating a lot of defaulted debt.

 Well, central bank efforts have worked previously, why not now?  I've discussed this reason many times, the Fed has worked itself into a box of zero interest rates now, and that amounts to them trapping themselves with little room to work.  If rates are 25bps how much farther can they go?  If the Fed dropped rates to zero and the ten year US Treasury fell to 1% through additional bond-buying activities (QE) does that buy them incrementally anything?  Does more liquidity available do anything at all when the world is swimming in USD?

NO, zero bound money makes yield investors freeze and these buyers state that all they would really desire to do is keep their money safe given that when they deploy it and invest, they are really taking significant risk adjusted risk for very little return.  Why is that?  When was the last time your broker told you that money markets could lose money?  When was the last time you thought about your brokerage firm freezing your money in accounts like an MF Global situation?  Situations like these make investors that rationally examine risk state that they will forego investing in anything to ensure the safety of their money.  Essentially, the desires of the central banks to stimulate asset demand ultimately can have a chilling effect on investing that is exactly opposite to what they intend.

So what does Bill Gross say the Fed will do about this growing conundrum?  He says that they will actually signal in their January meeting that they intend to hold interest rates low even longer, perhaps as long as 3 years!  

INVESTING OUTLOOK
What does Mr. Gross say investors should do in response to the 2 potential outcome disaster scenarios?

Bond Investors -
1)  Extend out maturities and bond duration.  With a signal from the Fed it won't raise rates for even longer, essentially you are protected from rising rates and the losses on bonds this imposes.
2)  Invest in US Treasuries, not Europe.  Go 6 to 9 years out, not less because you get paid nothing.
3)  If you are buying long dated US Treasuries, they better be TIPS
4)  Corporate bond holdings should be in the higher grades of debt, not lower.  Again, he suggests some financials here and I think he is off his rocker.
5)  Munis could be a good opportunity --- PERSONALLY I THINK HE IS NUTS, but then again, Pimco has to invest in long maturity bonds, but I wouldn't touch them.
6)  No EU bonds.

Stock Investors -
1)  High yielding dividend payers is what he says to go after.  Look for companies with stable cash flows like utilities and big healthcare (pharma).
2)  Commodities - Gross is basically flipping a coin here saying it could go either way.

Currency -
He gives us no real insight, simply saying that in deleveraging the USD is awesome and in inflation, it sucks.

SUMMING UP - DID HE REALLY SAY THAT?
Finally, Gross puts it all in perspective with this last parting shot;

"For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable."

What?  Investors had better begin to expect 2% to 5% returns from all asset classes?  Is he serious?  I presume he is dead serious and this is the real issue.  I still have discussions with friends that expect 10% returns or 12% returns and I ask them where you plan to get that?  The reality is that yes, you can get those returns, but the amount of risk you take in the investing environment today is off the charts.

THEY BOUGHT US TIME, NOT MORE ROPE
I will say it again, daily moves up and down 3% indicate that the market is having a death-rattle event, not that it is healthy and invigorated.  I am suggesting that the very underpinnings of the market itself is heaving and struggling and these are the last gasps and fits of life in this dying beast. It seems as though Bill Gross agrees.  Gross doesn't say it, but I think he is calling BS on all work of the Fed and realizing that they have gained us absolutely no material and meaningful improvement for lots and lots of bailouts and manipulation.  We are at the end of our rope and essentially the Fed has only bought us time over the last three years, not more rope.

NOTHING IS BETTER, THE BIG ONE IS COMING
In a way, I feel like the comments of Bill Gross echo the sentiments of a video interview Kyle Bass did a couple of months ago, where Bass lamented that we are in a "Binary Outcome" situation with the Euroland.  Bass described the Euro situation as a scenario that results in either the implosion and collapse of the financial system or they are saved.  While Bill Gross extends a bit more of the "curve" in between nasty outcomes, the thrust of the statement is the same, nothing is better, and the big one is coming.

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/