5% FALL IN THE TRANSPORTS DEAD AHEAD!

BREAKING DOWN THE TRANSPORTS
I've been watching the transports closely since FedEx (FDX) and Norfolk Southern (NSC) both lowered earnings expectations last week.  The transports chart ($TRAN) looked weak, but today's action including the big rollover into the close caused me to want to put a chart up for your examination.

5% MORE AT LEAST?
Based on a couple of key things, I think we will see another 5% drop in the transports to bring us at least to the 4700 level where we'll hit the lower portion of the descending channel and also the previous upper resistance line that should now serve as support (look at April of 2010).

WATCH YOUR ALTITUDE FEDEX
FedEx had a big failure and now must hold this $84 level or $75 could be a realistic target on the short side.

The weekly chart of FDX pictured above also shows that the 14 day EMA has crossed over and below the 40 day EMA which is a longer term swing trade indicator suggesting a decline.

NORFOLK SOUTHERN (NSC)
Although not pictured here, a break of $62.75 on NSC should usher in a drop to at least $57.00.


WHERE IS THE GOOD NEWS?
A global slowdown seems undeniable at this point and the turn in the transports signals at least a 5% move lower.  With all the positive news like the Fed announcement, this round of ECB lies, and the APPLE 5 release, where will the positive news come from to reverse this move?

I have had more "bullish" conversations with friends over the last two weeks than I have had in four years.  It would seem that the Apple 5 release has brought the bulls out of the woodwork and they literally have no fear and certainly no desire to lock in gains.  I would suggest we are really ripe for a rip lower to rob Mom and Pop of 10% to 20% just to remind them who runs the show.  Queue another Flashcrash Wall Street!

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/

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/

A LITTLE INFLATION AIN'T SO BAD AFTER ALL...

And so it begins.  In our discussions over the last two years we've described the tendency for central banks around the work to talk a tough game but always resort to liquidity providing measures when push comes to shove.  All developed nations do it, all emerging nations do it, and yes, even the Germans, those steadfast, disciplined, hard-working, determined wunderkinds will fall back on printing and inflation when the cracks in the Euro become too great to ignore.

A LITTLE INFLATION AIN'T SO BAD AFTER ALL......
In the linked article above we are beginning to hear the change in tone of Germans as Peter Bofinger, adviser to the German government, suggests that perhaps a touch of inflation isn't so bad after all.

Here are a few snippets from the interview in Der Spiegel.  Notice how the notion is now becoming more tolerable to allow inflation into the system since this is the only option left for central bankers.  Remember, inflation equals devaluation of the currency.

"SPIEGEL: In 2011, prices in Germany rose by 2.3 percent. Should we fear higher inflation? 

Bofinger: No. During the years of the Bundesbank (before the introduction of the euro), the average loss of purchasing power stood at 2.7 percent per year. We are still far away from that figure. Despite a strong economy, the inflation rate currently stands at just 2.1 percent. And even if prices rose by more than three percent, it would not be a disaster. The logic of the euro-zone is that the booming regions have higher inflation than those that are growing more slowly."

Notice how he suggests that just "a little" inflation would be just fine?

"SPIEGEL: Can faster price growth in Germany help stabilize the currency union? 

Bofinger: Absolutely. If our wages were to rise faster than in the past, thus slightly increasing the inflation rate, that would be a good way to help us get out of the euro crisis. To boost the competitiveness of crisis countries, they can cut their salaries, which is a very painful step -- or, alternatively, our wages could increase further."

This statement actually addresses one of the major concerns that Germans have had for years.  As their wages have been stagnant for the last 5 years they have watched salaries in the weaker Eurozone countries increase 10% - 25%.  How frustrating is that?


WHY IS THIS SIGNIFICANT?
The German government is about as willing to accept inflation as the Chinese are open to accept an uncensored internet.  If you are beginning to hear highly respected advisers suggest that inflation wouldn't be the end to the Euro, it is similar to George Bush stating that "We have to abandon free market principles to save the free market".  In other words, options are limited and now we are willing to try things we know are not consistent with our values and that haven't ever worked before.  Another way of saying it is that they are beginning to become desperate.

So what is an investor to do when central banks and governments begin to take actions that are doomed and  can only result in bad things?  The only answer is to invest in commodities.  As we've mentioned over and over central banks ultimately end up seeing printing and devaluation as the answer to every problem, and the only thing that will protect the average Joe will be a healthy holding in hard assets.

HARD ASSETS / WHAT ABOUT GOLD?
As I examine the chart of gold, there really isn't anything here I'm happy about.  Gold's chart looks as though it is now breaking down pretty hard, breaking through support.  Chinese inflation is abating and this spells further doom for commodity bulls.  So how could one disregard technicals and even macro-related indicators?  Simple, what is the one action that can defeat technicals and macro-related events in the short-term (meaning 1 to 3 years)?  Central Bank action of course!  We do need a sudden and major whoosh down in the markets and a little QE3 action by our Fed along with some inflationary targeting by the ECB and we'll see a pretty significant turnaround in hard assets.  Don't go out there and blow your whole wad in one purchase!  I am still sticking to my plan that I will add to my gold at $1,400 and silver at $26.  As you keep hearing how gold and metals are dead, remember that it is when everyone repudiates an asset is when you want to buy it, not the other way around.  I have a sense that this will be the last good chance to accumulate these assets before a significant market dislocation.  No matter what, create a plan and stick to it.

Everything about gold looks nasty here as it has broken down through support and its 14 day EMA is now below the 40 day EMA on a weekly chart.  This is a very bad long-term signal.  There are only two reasons to add gold here.  First, you believe it is a form of insurance.  Second, if you believe in the unfaltering stupidity of central banks to respond with emergency liquidity and printing.  Be aware that if you are a US investor you could be correct in terms of a direction of gold and assets relative to the Euro, but be a net loser if the USD climbs higher.  Be careful adding here and make sure you have a trading plan.

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/

NEW YEAR - SETTING THE TONE - GET PHYSICAL AND PROTECT YOURSELF

Thanks for all of your patience as I have made it through the busiest time of year for my business.  I am beginning the 2012 Outlook and will also do a post on the 2011 Review in the coming days and weeks.  Before we get to that, I want you to take a moment and read or listen to the interview between Jim Puplava and Ann Barnhardt.

Ann Barnhardt was a commodity futures broker that was quite successful that suddenly quit her business in November as MF Global collapsed.  The fall of that company and the theft of client funds to her was the final straw that indicated that our financial system was a complete sham and would result in losses of her customer's money.  With the release of an open letter, she wrapped up the firm and quit the business.

Jim's firm runs the amazing website www.financialsense.com and I highly recommend their work.  As I've mentioned often, Jim's son, Chris Puplava is one of my favorite bloggers and I read him every Friday without fail.

Please use the following link to read the transcript of the interview between Jim and Ann; other than some of the Kyle Bass interviews I've posted, this has to be the best of 2011.
AWESOMENESS - BEST INTERVIEW OF 2011

To hear the interview, you can go to the site and select the player you desire or download it in mp3 format.
HEAR THE INTERVIEW

If you don't want to click away, I have cut and pasted the text of the interview here, please note this is the property of www.financialsense.com and not the work or product of Goatmug.

Transcript for Ann Barnhardt Interview

---

Jim Puplava: Joining me as my special guest on the program today is Ann Barnhardt, formerly of Barnhardt Capital Management. And Ann, you were a commodity broker for eight years and then you formed your own independent brokerage for six years. A couple of weeks ago you made the painful decision to shut your doors because you felt your clients’ money and positions were no longer safe. What led you to draw those conclusions?

Ann Barnhardt: Well, obviously, it was the MF global collapse and more specifically the fall out after the MF Global collapse and the reaction by the CFTC, the SEC and most especially by the Chicago Mercantile Exchange [the “Merc”]. The actions, specifically by the Merc after the MF Global collapse were unprecedented, unfathomable and completely and totally intolerable. The Merc itself basically did the equivalent of sticking a nine millimeter in their mouth and pulling the trigger by not stepping forward, backstopping the MF Global client accounts and at the very least, the Merc should have allowed the MF Global customers to liquidate their accounts and then transfer to other firms. What the Merc did was the worst possible thing—they froze those people out of their accounts and didn’t allow them to liquidate while the markets continued to trade. And I cannot over-emphasize the importance of that, the risk that those people were exposed to in the cattle business (and my forte is cattle. I am actually a cash cattle person. My brokerage business was geared almost exclusively towards livestock and grade. I have a lot of contacts in the cattle industry who didn’t necessarily do their futures business with me but were contacts of mine who did do business through brokers that cleared through MF) who lost tens of thousands of dollars on hedge positions that they wanted to get out of but could not get out of in the week and a half after the MF Global collapse.
This has never happened before. This was a complete breach of fiduciary duty by the Chicago Mercantile Exchange itself to the point that it literally has destroyed the entire paradigm. I got to the point where I could no longer tell my clients that their free cash customer funds, not even exposed to the market place—just their cash sitting in their account, non-margined—was not safe. I couldn’t tell them that their money was safe. At that point it was morally incumbent upon me to get my client out of this completely dysfunctional, basically destroyed marketplace. Get them off of those railroad tracks and get them away from the risk. Now, I didn’t clear through MF, but with the European collapse and knowing what we know about how these financial entities are leveraged in European paper and the cascading nature of all of this I had to act before the proverbial poop hit the fan because if you sit around and you wait until after the poop hits the fan it is too late. You wouldn’t get anybody out. To me, it wasn’t really a painful decision. It was a complete no brainer.

Jim Puplava: In the past, when firms went under customer funds were intact and the exchanges would step in, as you mentioned earlier, to backstop everything to keep customers 100% liquid. And normally, a quick transfer from the bankrupt firm, the bankrupt firm would be immediately replaced. Why do you think they did not allow that to happen this time?

Ann Barnhardt: You tell me. I will use the word again, it is suicidal. What they did was suicidal. So you are absolutely right. Up until last month on Friday, October 31^st, the customer segregation of funds rule was utterly sacrosanct. Even when Refco imploded and imploded quite dramatically in 2005, no customer funds were gone. It was on the prop trading side of the company but the customer funds were there, were accounted for, and it is the onus of the Mercantile Exchange to audit these FCMs [Futures Commission Merchant]. MF Global was under the auspices and under the supervision, of the auditing supervision, of the CME. And I believe that MF was audited not just annually, but quarterly. Also, there is the question of how in the world can the Merc miss the margin being posted. The Merc is supposed to be moving equity and doing margin wire transfers twice a day every day. How could those customer funds be “missing”. They aren’t missing. They were stolen. They were stolen by Jon Corzine and his cadre of associates at MF Global. So yes, again, to your listeners who may not fully appreciate the gravity of this, this has never, ever happened before. Nothing even close to this has ever even happened before and it is the function of the Mercantile Exchange itself—the reason why the exchanges exist is that they stand in the middle of every transaction and they act as the de facto counterparty to every single transaction so that, for example, my clients never had to worry about the credit worthiness of the other individual, whoever it might be, who is on the other side of any trade that they did.
Now, for every buyer there is a seller and it is a one-for-one, zero-sum game; but to ensure the credit worthiness and the integrity of the market, the function of the Mercantile Exchange itself is to stand in the middle of every transaction and be the guarantor. So a year ago when Terry Duffy held a press conference [watch it here] and said never in the history of the Mercantile Exchange has a customer ever, ever lost funds resulting from the collapse of a firm, he was telling the truth a year ago. Everything changed on Halloween of this year though. And that's why I had to shut the doors of my brokerage because I could not in good conscience continue forward knowing that the Mercantile Exchange was no longer going to fulfill their fiduciary duty.

Jim Puplava: In the futures market, which is highly leveraged, if you open up a futures contract you are usually leveraged 10-to-1, so they require an exceptional firm base on which to function. And the major integrity of the whole system is the segregation of customer funds. That was breached by MF Global. And let’s not sugar coat this, Ann, basically management stole all of the non-margin cash, invested it in highly speculative securities and what has astonished me has been the reaction of the exchange and regulators—where is the investigation into Jon Corzine?

Ann Barnhardt: Well that is the point of this. We are now living in a lawless,  Marxist, Communist, usurped, what used to be a representative republic but is no more. This is no longer a nation of laws. This has now transformed into a nation of men. It doesn’t matter what crime you commit. In the case of Jon Corzine, this man has stolen in excess of a billion dollars. I think by the time it is all panned out it is going to be closer to $3 billion of customer funds that he stole. Why did he do it? Is he stupid? Well, of course he’s not stupid. This is a former head of Goldman Sachs. This man doesn’t have a low IQ per se. Why in the world would a man wake up in the morning one day and say you know what, I think I am going to steal all the customer seg funds in this FCM that I’m running, which is the biggest FCM in the country. Yeah, that sounds like a good plan. No. Why would a man like that even engage in a nefarious plot like this? Because he knew going into it he could get away with it. And the reason he could get away with it is he is in tight with the Obama regime. He is one of Obama’s highest fundraisers. Earlier this year Jon Corzine had a fundraiser dinner at his New York City apartment for Barack Obama where it was charged at $35,000 a plate. Okay? He bundled high six figures for Obama in one evening! He is a crony of the regime. This is Marxist Communism. There is no rule of law. And these people, these poor MF customers are just sitting out here helpless to do anything because there is no law enforcement because this is no longer a nation of laws. The rule of law no longer exists. There is no longer justice in this nation. And no nation, no culture, no society can survive if there isn’t a foundation of justice. That is why we are teetering on the precipice of collapse and I foresee civil war coming within the next several years.

Jim Puplava: You know, we had Gerald Celente on this program and he had an account with Lynn-Waldok, which was eventually taken over by MF Global, and he's been trading futures in gold. He had a plan when he built up enough he would eventually take delivery. Well, they stopped him out of his trade, sequestered his margin (or his cash) and forced him out of a trade and closed his account.
[Click here to listen to Gerald Celente's MF Global experience]
So what you are talking about—because the exchange did not backstop and then froze customer accounts—is they forced, would you say, millions if not hundreds of millions of dollars of losses on these customers?

Ann Barnhardt: Absolutely. If we are talking several billion in customer seg funds then the losses that were incurred could easily by the customers in that week, week and a half that they were frozen out could easily, easily get into the hundreds of millions it might even breach into the low billions. No question about that. And yeah, and even with options. You know, I talked to cattleman who have put options on as hedges to put a floor underneath the price of the cattle in case—so imagine this, you buy a put option four months ago, you pay the premium. You post that money. Then this happens, you are frozen out of your account. Your account gets transferred to another firm, without your consent. By the way, none of the customers were allowed any input into this. Their accounts were just sent to RJ O’Brien and other firms like that without their consent. And then once the positions were transferred, even if it was a risk limited position like a long put option, then the new clearing firm called them the next morning after the trade settled and said there was no equity in your account because all that money got stolen. So you are going to have to pay the premium for this put option again. So it's doubling the cost essentially for a lot of these people out here who are dealing in what is supposed to be the very risk limited paradigm of long options. The entire situation could not have been handled any worse. In fact, I would take it a step further. It was handled so poorly I can’t imagine that these people are that stupid at the Merc and at the CFTC and so forth. I can’t believe that the bankruptcy trustee is that stupid. This almost seems like it was so bad that it had to have been nefarious.

Jim Puplava: You know, Ann. You believe that MF Global is just the tip of the iceberg. That there is massive industry exposure to European sovereign debt. In fact, the day you and I are doing this interview the Fed just engineered a major swap with central banks. It was a central bank love fest on Wednesday of group money printing. That tells me that central banks acting in unison the way they did shows they are afraid that there's something big out there that is about to happen and that they are trying to maybe plug a hole in the dyke.

Ann Barnhardt: Well, if anybody out there understands fourth grade arithmetic you know from metaphysical certitude that Europe is done. Europe is mathematically impossible. It cannot be saved. You want to make a start. You even want to make a start at trying to bail out Europe we are talking $25 trillion just to start. And it would then—if you were going to bail out the entirety of Europe—you would now be talking about hundreds of trillions of dollars. Okay, people, there isn’t that much wealth or money on the surface of the earth. The total gross domestic product of the entire planet earth is I think just under $70 trillion. And we are talking about in excess of $100 trillion to bail out Europe? This is now mathematically impossible. These people have so leveraged themselves and so leveraged these governments in these countries giving their brain dead citizenry free hand outs and entitlements that it is now mathematically impossible to save the paradigm. It's not a matter of if the global financial system is going to collapse. Oh, it's going to collapse. You better trust and understand that. It's just a matter of when. And these piddling little maneuvers that these people are making that the Fed is doing. Oh, we are going to give Europe some money. Okay. What I saw this morning, what the Fed is getting ready to do in terms of Europe, is keep Europe going for another seven days. Well, fantastic. Thanks for that. That is literally the brain dead mindset of these politicians. All they are doing is looking to kick the can down the road. At first it was kick the can down another 10, 12 years. Then it is kick the can down the road for another year. And then it was well, let’s kick the can down the road for another few months. Now we're literally to the point where all we can do is kick the can down the road for a matter of a few days. It's not going to make it. I will be very surprised if we make it until Christmas.

Jim Puplava: You know, one would have thought Ann, after the 30 to 40:1 leverage leading up to the financial crisis of 2008, pre-Lehman, that financial firms would have learned. And especially a guy like Jon Corzine that saw Goldman have exposure to AIG with $13 billion in credit default swaps which we bailed him out 100 cents on the dollar. Apparently, this lesson was not learned at MF Global because the leverage, what was the figure? I think it was 100:1—it was just astounding.

Ann Barnhardt: The only lesson that these criminal degenerates learned from the 2008 situation was that they could do anything they want and that pimp daddy government would bail them out. You have to understand, people like Jon Corzine, these are evil, evil people. He went into MF Global looking to rape that company personally for his own good. And that's what the motivation of a lot of these people are. You have to get your heads around this. You have to get your heads around the fact that there are truly evil people in the world who do not give a crap about anyone or anything except themselves, their own personal wealth and their own personal power. And they would sell their grandmother to the Nazis for a nickel without hesitation if they thought they could get away with it. It's the same with people like Jon Corzine, and then we have talked about the fact that Jon Corzine is tied into the Obama regime. And we now know that the government is absolutely stuffed to the gills almost exclusively with this same type of moral degenerate culture. These people that are in the government—not just the Congress and Executive Branch but also in the bureaucracy—they are in it for themselves. They are in it for the money. And two weeks ago when we had the 60 minutes exposé on the insider trading, those of us who have been in the business have known intuitively that that was going on for a very, very long time. We knew that there was front running going on by politicians. A great example of this is someone like Harry Reid. When he entered Congress, Harry Reid had a low six-figure net worth. He now has an eight-figure net worth. And he's never done anything except be a United States Senator. The salary I think of which is something like $170,000 a year. How does that happen? How does a man with $170,000 a year salaried position go from having a six-figure net worth to an eight-figure net worth? That doesn’t make any sense unless he is doing nefarious, illegal, insider trading type deals.
It is obvious what's been going on. You have to start acknowledging these people for what they are, and that is moral degenerates who are basically sociopaths and psychopaths. Meaning they don’t feel any sympathy or empathy for other human beings. The only thing they care about is themselves. They will do anything. They will steal. They will lie. They will cheat. They will lie to your face. They will look in the camera with this tremendous earnestness and lie with fork tongues through their teeth in order to advance their wealth and power. And if we, as a people, don’t get real about this, if we keep having these Pollyanna visions that these people are all on our side and they are really looking out for us. And they are doing the best they can. We will be cork screwed into the ground and this nation will be reduced to a smoldering rubble. You've got to wake up.

Jim Puplava: I would like to go back to MF Global for a second. There is something even worse as you look into the details—it's been hinted and that there could be possible clawbacks. I’m wondering if you might explain that possibility and what a clawback means for, let’s say you had an account at MF Global and, I don’t know, you didn’t feel comfortable with the commodities market—the volatility. So you pulled the money out. There is a possibility they can go after you.

Ann Barnhardt: Oh, absolutely. Clawback is a fairly common tactic in bankruptcies. And what it is is looking at the bankrupt entity and looking at the money that went out of that entity in the time period immediately preceding the collapse. And I don’t know what time frame they would look at MF. I don’t know if it would be 30 days or 60 days or 90 days—I have no idea. But the trustee has in the last two weeks said that yes, clawback is on the table. So what that means is, let’s say for example, you are a savvy individual and you are a good steward of your money. And you are doing business with a firm that clears through MF Global. You are looking at MF Global’s publicly available bond yields. And you see in the six weeks before the collapse that their bond yields spiked parabolically [see chart here]. They went from 6% to 18%. That is a sure, sure sign of massive trouble. And so being an intelligent, informed, aware person who is a good steward of their wealth, what do you do? You say I’m getting out of this company. I am getting my money out of MF Global because something bad is about to happen looking at these bond yields. You can also do the same thing looking at the stock price. You could do the same thing looking at downgrades by the ratings agencies. There's all kinds of ways that you can come to these conclusions.
The other thing is if you're a hedger. If you are a bonafide hedger—if you had positions on and the market moves in favor of your hedge position on the futures side, you don’t leave that equity sitting in your account. What your broker like me does is they wire that money home because you are using that money probably to either offset a cash transaction or to pay down a revolving line of credit. You're not getting any interest on your money sitting at MF Global so you might as well get that equity out of there, send it home and pay down your line of credit so you are not paying interest on that money. So there would organically have been lots and lots of money flowing out of that company in the period immediately before the collapse. Either due to natural hedges, organic in and out functions or due to intelligent people looking at the bond yields and saying uh oh we better get out of here. The bankruptcy trustee can legally claw that money back. Say okay, I am going to go and I am going to dive into your pocket now. And I am going to claw back your money which you, in your responsibility and in your good stewardship pulled out of a company that you knew to be in trouble. Oh yeah, so these MF customers will essentially be raped three times—they will have their cash stolen out of their accounts, they were then locked out of their position so they couldn’t trade and were fully exposed to market risk, paralyzed, unable to do anything for excess of a week. And then, number three rape, is having the bankruptcy trustee come back and literally seize money out of your own personal checking accounts and business accounts and so forth. And clawing it back to feed this bankrupt entity. And you know what the cherry on top of the sundae of all this is? And this is what blows my mind—the bankruptcy trustee, right now, as this is being recorded on the 30^th of November. The bankruptcy trustee is still allowing MF Global to trade proprietarily for itself, for the company proper.
It is unbelievable. The rule of law is dead in this country.

Jim Puplava: You know, adding to this just prior to that was the restructuring of Greek debt, where the derivatives association announced that it was a voluntary restructuring so therefore the bankers didn’t have to pay out on credit default swaps. So what you have here, Ann, I believe is a system where the government is protecting the too-big-to-fail at the expense of the customers. And with it, the rule of law is thrown out to protect Wall Street, what does that say about the integrity of the system? It is no wonder people are losing faith.

Ann Barnhardt: There is no integrity in the system. And let’s make it simple—it is not just about the government protecting the “too big to fail banks". It is about criminal oligarchs as individuals protecting each other. They don’t give a crap about the customers of JP Morgan or you know, Citi or Goldman or anything. What they care about is each other. The Obama regime is protecting Jon Corzine proper, the individual. Because he is one of them. He is one of these criminal oligarchs. And for your listeners who may not remember, Jon Corzine is a former congressman. But immediately preceding MF Global he was the Governor of New Jersey and he just cork screwed Jersey into the ground. It is Chris Christy who beat Jon Corzine to become the governor of New Jersey. So yes, this Republican, Chris Christy, was elected in New Jersey—uber liberal, blue state New Jersey—because Corzine financially destroyed this state. And again, this guy Corzine is former head of Goldman. He is not stupid. You have to stop thinking that these people are just misguided or that there is some sort of a difference of opinion on economic theory. These people are nefariously trying to destroy everything in this country. It's called the Cloward-Piven strategy. Go in and destroy and collapse the entire economy, everything and then rebuild a new Marxist, Socialist, fascist state out of the burning rubble of this destruction. This is intentional. This is nefarious. This is not a function of incompetence. It's a function of malice of forethought and conscientious theft and destruction.

Jim Puplava: What would you advice? I am a long term believer in the bull market in commodities, but how do you play commodities when the futures market is no longer secure? And what does this do to the proper functioning of the markets? In other words, now that you've closed your firm because you don’t believe in the integrity of the system and we just listed a series of reasons why—not honoring contracts, appropriating funds, not allowing trades to go off. Not one investigation, in fact, this goes even further than that. We had Bill Black on the program recently, who helped make prosecutions in the S&L scandal. And at that time, 2,000 individuals went to jail. There has not been one criminal charge brought by the justice department since the 2008 crisis. So given that this is where we are, what do you advise and what will you do personally?
[Listen to Bill Black's tell-all interview on why no one has gone to jail]
Ann Barnhardt: Well get the hell out. Get out of all paper and it's not just the commodities markets. This is going to cascade through everything. It is going to get into the equities. It is going to get into 401ks and IRAs, it is going to get into pension plans and so on and so forth. Total systemic collapse. Get out! I don’t know how I can be anymore plain about this. I say this over and over and over again and then I get scads of emails saying, well I can’t get out of my 401k. Yes, you can. Yes, you can. Take the penalty and get the hell out of there. What would you rather do? Would you rather pay the 10% penalty or would you rather have it all go up in smoke? Because that's what we're staring down the barrel of. Number two, we seem to have this backwards. In terms of what I do, cattle and grain specifically, the futures markets are the derivatives. The futures markets are derived from the actual cash commodity market. Now, I am blessed because my area of expertise is actually in the physical cash market, actual cattle on the hoof. So I have a consulting firm and I'll continue to teach cattlemen how to trade actual physical cattle. But, yeah, to all the people out there listening—you are going to have to get away from paper and get back into physical commodities, the real deal. Anything that is on paper anything that involves a promise or a commitment is no longer valid because as we said there isn’t a rule of law anymore. People can steal from you. Your money can be confiscated. And think how easy now it is to confiscate people’s wealth. Most of our wealth in this society exists as zeroes and ones on a computer server. It takes no effort whatsoever to steal zeros and ones on a computer server. So what I have been telling people is you need to get into physical commodities. And the rule of thumb is if you can stand in front of it with an assault rifle and physically protect it, then it's real—it's a real commodity. That includes food, that includes water, that includes long guns and ammunition. That includes fuel. That includes precious metals—gold and silver coinage. Most especially silver coinage because silver is the metal of barter and transaction and currency. Gold is the storage metal because it's so valuable per ounce. And also, silver is extremely undervalued relative to gold because that market has been synthetically suppressed for the last several years by again, these nefarious actors. So yeah, reallocate into physical commodities.

Jim Puplava: How do you know that somebody like just as we saw in 2008 or recently with MF Global—that is somebody like a Goldman, a JP Morgan that is writing credit default swaps on European debt—how do you know if you have an account with this group that they pledge your assets for collateral or they comingle them with the firm’s assets and then what do you do?

Ann Barnhardt: Oh, exactly. Corzine isn’t alone in this. The reason the MF Global situation happened the way it did is as we eluded to earlier because Corzine had that company just suicidally leveraged. He took those customer funds and then leveraged it into European, sovereign, junk paper at about 100:1 ratio. Massive. Massive leverage. That is why his collateral call was the first one to come and why it took him out because he was so heavily leveraged. Don’t kid yourself. These other entities are doing the same thing. It is just that they are not as heavily leveraged as Corzine was. So yes, the entire paradigm is no longer trust worthy. There is no meaningful government or industry wide regulation and I have been saying this for years. That regulation in the financial industry in the United States both government based and private regulation—private industry regulation—is a monstrous, monstrous joke. The top tier of those organizations are evil, nefarious people. The mid level are halfway stupid, halfway evil who again, are just there to collect their salary paycheck and will say and do anything that they are told and who really don’t understand the business that they are trying to regulate. And then the lower level, the grunts, the actual auditors who go out on site, a lot of those people are super incompetent, affirmative action hires. And yes, I said it and I am not ashamed of it. They are affirmative action hires. They have no business being there doing what they are doing. They are also hiring a lot of kids 15 minutes out of college who are literally reading off the script and couldn’t audit a company if their life depended on it.
So what they do is they send these incompetent people out into the field and into lower management. And then when the poop hits the fan, they blame them. It is absolutely evil and it is a complete joke. And Madoff was the first proof of that. There have been other ponzi schemes since Madoff happened that haven’t gotten as much notoriety, but there was a big one in the futures industry that all of the FCMs were invested in. And the regulatory body of the futures industry the NFA, they audited that Ponzi scheme, they totally missed it. They even admitted that they signed off on it because they really didn’t understand what they were doing. I mean, that is the level of incompetence and evil that we are talking about in terms of these regulatory bodies. The only way to fix this is to shut the whole damn thing down and start from scratch. I am personally looking in the next decade for the emergence of a new exchange within the United States [that is, a replacement of the Chicago Mercantile Exhange]. Word on the street is it might happen in Dallas and I would be fully in favor of that. Start over from scratch.

Jim Puplava: Alright. Well the message: get physical and protect yourself. We have been speaking with Ann Barnhardt, formerly of Barnhardt Capital Management. Ann, I want to thank you for coming on the program and sharing your thoughts.

Ann Barnhardt: Thank you for having me, it's been a pleasure.

Hmmm, an industry pro completely shuts down their business and all they can say is buy physical commodities and get some guns and ammo.  Makes you think that she is a nut job or she really knows something.  I am betting against the former and wagering heavily on the second option.

Please check back soon, I am getting started on the other items as life has finally slowed a bit.

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/

GOLD IS GOOD, SOME COMMODITIES, THEN THE REST

Here are a few comments from Faber.  I think I'm in agreement with him but there are limits to this.  I think timing is everything now and we are in for more ups and downs that will make the casual observer sick to their stomach.  I give the stock market 6 to 8 months and we will then begin our descent to challenge the market lows from 2008 and 2009 in calendar year 2012.



So we've retraced all of the gains for 2011 and the S&P500 today went back into negative territory for the year for a few hours.  Buyers returned and they clawed their way into positive territory for the 2011.  In the midst of this, a lot of damage has been done to charts AND to the psyche of many investors. 

LAST WORDS ON DEFAULT AND THE DEBT CEILING (FOR NOW TILL SEPTEMBER)
Many are howling that the Congressional radicals had something to do with this and the argument over the debt ceiling and potential default put our country at risk and harmed the market.  Truthfully, the entire process was a theatrical production that was crafted and twisted to "get the deal done", but also jam folks into treasuries (we can't have interest rates getting out of control can we?).  The best way to get investors to have an appetite for treasuries is a good sell off in stocks.  Guess what we got?  A good sell off in stocks! 

I want to also dispel a myth about the impact of a credit downgrade in the USA.  First of all, a downgrade is going to happen.  At some point even the rating agencies can't ignore the glaring truth of math or they will get their fill of arm twisting and bribery and finally do what is necessary.  Once we do get downgraded, the world won't end.  In fact, much to the surprise of many, we'll probably see our yields for treasuries go even lower!  It sounds absurd, but it has happened in Japan and Canada.  Now having said that, it isn't all a nothing burger, there will probably be many, many nasty ramifications that come in the "unintended consequences" bucket with a downgrade.  The after shocks are probably why we are seeing a huge hesitation from Moody's and Standard and Poors.  The overnight repo market and the money markets could have some significant disruptions as changes to the US Government's AAA ratings could create havoc.  Remember, mutual funds and pension funds often have limitations on the types of instruments that can be held, including the types of collateral and credit rating of the issuer.

Last thing about the title of this section.  You may have wondered why I mentioned that this is the last mention of the default and debt ceiling talk till September when we just got a deal done that will take us through 2012.  Well two things.  First, we are spending money way too fast and will burn through the appropriated $400 Billion that has been allocated for 2011 well before the end of the year.  Second, the Super Congress subcommittee is required to make their report known by Thanksgiving and an up or down vote must be held.  We'll begin to hear about out of control spending and default again by then.

POSITIONING TODAY FOR THE 6 MONTH PERIOD
So what are we to do?  Are we to hide away and wait for the beginning of the fall?  Maybe.  But realistically we must find some way to make money between now and then and there are going to be some good opportunities in the midst of the decline.  Faber's calls for investments in precious metals really is another call for investing in UN-paper currencies.  He sees the USD and the Euro falling and it seems this has been the trend for a while. 

Think this through.  Many think that if we see a strong dollar we cannot have an increase in commodities.  Perhaps that is not true, in fact we saw a preview of this on Tuesday with the large sell off in the markets.  The USD increased and gold also rocketed higher.  In conjunction with this we saw the Euro fall as the bond market continued to worry about the solvency of the Eurozone.   I have another post in the queue that supports this and highlights that people are pulling their money out of anything and everything in Europe and buying gold.  Their act of repudiation of the Euro in favor of gold is pushing the metal higher and the Euro lower.  While the Euro falls other more stable currencies are moving higher.  The Swiss central bank intervened today attempting to get people out of the Swiss Franc by lowering interest rates today.

Is it tough to buy gold here at its record highs?  Yes, of course it is.  I can only recommend purchasing over periods of time rather than loading up all at once.  Like Faber mentions, if gold drops, take advantage of the price opportunity (ask buyers of silver at $32).

COMMODITIES
If US growth is slowing and China and Brazil and all the emerging markets are waning how can purchases of commodities be a good bet?  All of those things are true, but I'm still convinced that there are going to be opportunities in "hard stuff" that performs relatively well despite a fall of global markets.  Remember central banks are in a race to zero and the Fed can win at that game.  If they continue with stimulus like QE III, QE IV and more in all of their manifestations, the dollar will fall.  Dollar denominated commodities will at least counteract that drop with a rise (yet there may be a fall due to declining emergings I know).  Oil, grains, livestock, fertilizers, and those rare earths might be the play. 

EQUITIES?
The falling currency gives us another reason to pick up some select US and global equities that have two characteristics.  First, we are interested in companies that work with these commodities and own them.  Second, we want to obtain those companies that pay decent dividends.  RIO, BHP, COP, CVX, FCX all fit in this category.  How have earnings this quarter been so decent in the midst of a US slowdown that seems to be accelerating?  The reason is that many of these large companies are so diversified that they are truly global in nature.  A good example is Intel.  (No, don't buy this one!)  Intel sells more than 80% of its products outside the US!  Intel is no longer a US company and we must remember this.

OTHER THOUGHTS
Now I know at least one reader that will retort that higher oil and gas prices will cause a bigger stall in the US economy as it will be a significant headwind to any growth.  He is absolutely correct, but as the dollar falls there is only one direction for oil and gas, and that is up.  Clearly this all factors in to my assertion that we are winding down the "good times" and only have a limited period before a sustained decline begins.

I did end up buying some other stuff today as well and I will post some thoughts on those trades in the coming days.  We all need to use stops and even if we have a sustained bounce all traders must keep the Euro contagion issue in mind.  We are very close to unraveling over there and you must have risk controls on at all times.   

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/

ECONOMY ROLLING OVER OR SLOWING DOWN? JULY MACRO UPDATE

The July report is full of great data but as usual we find that the information leads us to mixed conclusions.  I've added an additional indicator this month that may be helpful in providing us a clue about the economy's direction over the next quarter or two.   The last eight to nine weeks as an investor have been anything but easy.  We've seen a mild correction in markets that lasted almost two months suddenly turn into a blistering buying rampage that resulted in the markets pushing to new highs within 7 or 8 days.  We've seen Europe appear to be in collapse mode only to be rescued from the jaws of death.  We've seen US markets erupt in optimism and rally expectantly into the coming earnings season.  It is so important for us as investors to note that the economy is not the market and sometimes it is better to stop being right and simply but a saddle on the beast and ride it.  Have I thrown in the towel and dropped the notion that the economy and markets will retest their 2009 lows?  Unfortunately the answer is no.  But just like I posted in August 2009, there is a time to simply ride the wave like an agile surfer less we face the awesome power of the ocean's fury and get beat to death.  Ultimately this may mean that you trade small and look for significant points of support and resistance to enter trades to reduce risk and maximize gains.  Please enjoy and don't forget to leave your questions and comments, I really enjoy them.

RAILS - http://railfax.transmatch.com/
Rail traffic continues to trend higher against the 2010 postings.  The week showed gains in every group except coal and autos.  Grain shipments were significantly higher.

BNSF
Regular readers know that I often look at individual rail shipping tonnage in an attempt to spot trend changes or relative under or out performance.  I wanted to highlight BNSF because it is showing signs of weakness here and beginning to trend below last year's number.  Unfortunately Warren Buffett bought this target last year and added to Berkshire Hathaway's conglomerate of holdings so we can't add this railway to our watch list of potential shorts, but heck since BRKA is doing so poorly perhaps we should add it too our lists anyway.  The decline in production here in BNSF isn't going to fix problems there.  CP and CSX look weak too, but not as potentially bad as BNSF.  BRKA is posting a negative 3.1% return so far year to date as of 7/7/2011.  YUCK!

CRUSHED STONE
The movement of crushed stone often gives us insight into commercial real estate construction.  Crushed stone tonnage is tracking right on par with 2010's levels so I'm not expecting an overwhelming surge in commercial real estate building numbers.  We'll look at transaction pricing for CRE later, I'd personally expect to see a ramp up in those prices on existing buildings and then expect to see a follow on as investors and developers take confidence in higher prices.  Clearly we aren't seeing any of that. 

CHEMICALS
The transportation of chemicals is great to examine as we look at manufacturing in the US and the world.  Chemical usage is a barometer of the health of the general economy.  So far, the relative position of the amount of chemicals transported is a parallel shift higher than 2010 so things continue to look positive.  Over the next couple of weeks we'll need to watch closely to ensure that volumes turn up to keep pace with last year's recovery trend.

MOODY'S / MIT TRANSACTION BASED INDEX - COMMERCIAL REAL ESTATE - http://web.mit.edu/cre/research/credl/rca.html
The April numbers were recently released for the Moody's/MIT Transaction Based Index.  This index includes actual commercial real estate transactions for the period.  Unfortunately we continue to see that commercial real estate prices in total are falling still.  April deal prices notched a 3.69% decline for the month.
 

COSTAR - COMMERCIAL REAL ESTATE - http://www.costar.com/about/article.aspx?id=9979
Just as the MIT data suggests, Costar also reports that commercial real estate continues to fall.  While the information is dismal, there are some areas of the nation that are actually showing improvements in transaction price in past months.

I wanted to highlight some key points for April CoStar data.

Sales volume is rising.  Perhaps sellers are finally going to puke out their bad investments from the 2005 to 2007 period where they simply overpaid.

In April, 793 transactions were on properties that were "repeat" sales, meaning that this is a great source of data for them to examine real pricing trends.  We not only can see price, but can also see when the seller acquired the asset (or liability in this case!).  CoStar’s Composite Commercial Repeat Sales Index declined by 1.7% in April 2011.  It is now 13% below the same period last year and 38% below its peak in August 2007.

Here is the staggering part!
In April 2011, over 77% -- or more than 3 out of every 4 of the properties previously bought at the 2005-2007 peak were sold at a lower price. Comparatively, 46% of the properties that were purchased before or after the 2005-2007 period were subsequently sold at a lower price in April 2011.

Now we are seeing some traction here.  We are seeing an acceleration of the amount of deals that are getting done and prices are falling.  Perhaps, just perhaps those banks, insurance companies, and investors have finally decided just to take the loss on these deals and get over with it.  If this happens we may see more significant drops in price, but this would be healthy in the longer term for commercial real estate.


NAR EXISTING AVERAGE HOME SALE PRICES - http://www.realtor.org/research/research/ehsdata
May average home prices moved up substantially by almost a full 2% from April.  Homes sales in the South and Northeast drove the gains.  While this move up is great, we are still below the December 2010 average home price of $217,900.

ECRI WEEKLY LEADING INDICATORS - http://www.businesscycle.com/resources/
WLI data continues to show weakness. 

SCRAP COMPOSITE INDEX - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Scrap pricing has fallen quite a bit since March 7th of this year.  Over the last month we've seen a mild improvement in pricing, but this item should be examined closely over the next month or two.  As we've noted often, Alan Greenspan used scrap pricing as one of his best indicators for financial health in an economy.  It is very interesting in that context to note that scrap has been falling for nearly 4 months now. 

CERIDIAN / UCLA PULSE OF COMMERCE INDEX - http://www.ceridianindex.com/
The Pulse of Commerce Index continues to flash warning signs to us that the broader economy is not as vibrant as our amazing stock markets would suggest.  The PCI has now shown declines in four of the past five months of 2011 and it is clear that rising fuel prices are having a dampening effect on growth.  Recall that the PCI is derived from real time fueling data from commercial long-haul trucks.  This information is a powerful indication of how much stuff is moving across our nation and how those goods translate into consumer consumption levels. 

MONSTER.COM EMPLOYMENT INDEX - http://about-monster.com/employment-index
The MEI released this morning continues to show good things are happening on the job front.  The index level that measures the number of online job listings hit a level of 146 which is the highest point since October of 2008.  I do find it interesting that the annual growth rate on the MEI is only 4% meaning that the improvement is not a great one and the rate of change is falling fast.  I would not be shocked to see this report come in lower next month.  Oil and gas jobs, utility employment, and mining ventures continue to lead the charge in hiring while public administration jobs continue to get the ax.

MONEY ANXIETY INDEX - http://moneyanxiety.com/Blog/page1.aspx
I've added a new indicator to our monthly list called the Money Anxiety Index.  Thanks again Carrz as he is so good at pointing out these cool macro-economic health indicators.  Thanks also to Dr. Dan Geller, the creator of the index for allowing us to use the data and charts, we're happy to have one more item to analyze!

The Money Anxiety Index attempts use economic measures to quantify the human behavior associated with those levels of stress, fear, comfort, or confidence.   Since MAI captures early signs of consumers’ financial anxiety, it can be used as a barometer to consumers’ behavior related to various economic activities.  The level of consumers’ spending and savings is impacted by the level of financial anxiety.    

The MAI is at a very critical spot.  Based on the data, the anxiety level for consumers is at a level not seen since the 1980 recession.  In addition to this, the model also has a solid track record of predicting recessions when the anxiety level increases for 5 consecutive months.  As of the end of June we had seen 4 straight months of increased anxiety.  If next month's number show more worry, this will be a significant indication of a coming recession. 

Check out Dr. Geller's blog and sign up to follow the Money Anxiety Index on Twitter.  (Thanks again Doc!)

COPPOCK TURN INDICATOR -
The Coppock Turn Indicator ended June providing us a buy signal for the markets as the DOW roared past the 12,350 level and closed above it.  Coppock will stay bullish and long unless the Dow rolls back over and drops to 11,800 by July's month end, which seems all together unlikely.  While I include the Coppock for entertainment purposes only, it would seem as though it nailed this last move or got part of it (for once).

6 MONTH EURIBOR - http://www.homefinance.nl/english/international-interest-rates/euribor-interest-rates.asp
6 Month Euribor continues to move higher and higher.  Nothing to see here folks!  While the Euribor rate is actually fine, it really isn't when compared to the 6 Month USD Libor chart below.  My only question is, "Which one of these is mispriced?"

6 MONTH USD LIBOR - http://www.homefinance.nl/english/international-interest-rates/libor/libor-interest-rates-usd.asp
Hello, Houston, do we have a problem?  6 month rates haven't even moved up at all which indicate some sort of financial health.  What the heck is going on here?  We are lower than we were a year ago!  Really?  Everything is just fine!

BLOOMBERG FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
The FCI was looking very bearish just a week and a half ago and then suddenly out of nowhere a tsunami of stock market liquidity and gains blasted the index higher out of near recession level numbers.  The handy work of the last week has revealed that the recession is off the table for the moment according to this market index.  Remember the FCI is comprised of data that captures the health of equity markets, bond markets, and money markets.  The rebound in the Financial Conditions Index is certainly to be expected after the blow out week we just had.

BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
Dry Goods Index prices continue to languish.  The oversupply of ships is simply killing these businesses.  These guys are a disaster.  Have you looked at the charts for DSX, EGLE, DRYS, and PRGN lately?  Ouch!  Leverage kills doesn't it?

USD - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The USD continues to fall, but we are at the base that has been trying to form.  We'll need to watch the USD Index to ensure that the mid $73.50 level is not breached.  If the dollar falls significantly we'll see a pop in all commodity prices and at least initially we'll see stock prices rise as well.

WRAP-UP
Still have some indicators that are flashing warning signs that the overall economy is weakening.  The key ones to watch are the PCI, Money Anxiety Index, scrap prices and chemical rail tonnage.  The measures paint a broad picture that the rate of recovery is absolutely slowing, if not topping.  I will be very interested to see the new numbers posted on the MAI in the coming week from Dr. Geller. 

I plan to do a post on this later next week, but the European farce is just about to go too far.  I have been waiting for the rating agencies to do what they've needed to do and now that they are finally finding their mojo (they are finally evaluating bonds and rating them appropriately for the risk they carry) the EU and ECB are stepping in stating that they will ignore the ratings!  In other words all the rules are off to achieve the desired result.  The economic and political leadership have used the agencies as useful idiots and now that the agencies now longer are willing to be bought off, there is no need for them.

While equities shot up, commodities seemed to be in the crosshairs of those central banker bounty hunters.  The IEA's coordinated release of oil supplies looked like it was going to finally break the back of commodity bulls, yet after one week we've seen amazing rebounds in oil and gas.  In fact, gas futures are ABOVE the price before the SPR release!  As much as I've been a bull on commodities including gas, I am not taking advantage of this momentum move higher.  I believe that we'll see a move up and then more downward pressure on everything from oil, gas, silver, and gold. 

As I was about to finish up this monthly wrap-up I scanned a headline about Warren Buffett and his notion that there will be no double dip recession.  Now Mr. Buffett has incredible information about the economy because he sees all of the data for all of the pieces that comprise Berkshire Hathaway.  While I noted earlier in the post that BNSF appears to be underperforming last year's tonnage I tend to focus much more when we get talk like this from folks that have big money in the pot at the poker table.  Call me a cynic, but I often believe that guys like Warren Buffett are talking their book more than they are really sharing their insight about the direction of the economy, the market, or a specific investment.  When I hear the Chairman of Berkshire state something like this, I hear that he needs the market to stay out of a recession or else he'll feel some pain.  Clearly Berkshire is leveraged to the homebuilding and construction market with all of his furniture makers, carpet manufacturers, and brick companies.  He needs a turnaround in housing to build a base for improving performance.  I've shared many times that I find it difficult to believe that home building will be a great place to invest for a while.  In my area a new home cost significantly more than the cost of a used home because commodity input prices are so high.  Many of those first-time home buyers cannot justify the additional expense to have the luxury of a new home.  There is also this little problem of a huge inventory of foreclosed homes that make the competition even tougher.  In other words, I don't see the home construction business turning around anytime soon.  As for the economy getting back to 6% unemployment within a few years, there's not a chance.

Earlier in the rails section I mentioned BRK.A, and how it had turned in a negative year-to-date record so far.  Let's take a closer look at the B shares of Berkshire (BRK.B).  I like this one simply because it is affordable!  In terms of setting up a trade here, I really like the action in BRK.B, and especially find it interesting because of the drop resulting from this morning's employment report.  I think this trade could take us easily to a $71 or $72 level for a nice shorting opportunity with an entry here around $76.75.     

Here are two views of BRK.B that I'm watching. 

5 YR WEEKLY (BRK.B)

DAILY 100 DAY CHART (BRK.B)

Finally, the Weekly view below shows the 14 Day EMA under the 40 Day EMA, this "death-cross" view indicates that Berkshire has no momentum and validates the notion that it is a potential short.

That's enough for now, please continue to check in with us and leave your comments.  Have great luck and 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/