RANDOM THOUGHTS

There is so much going on right now I have very little time to manage and update the blog as this is a very busy time of year.  Despite my absolute craziness, I find myself scanning items and thinking, "I have to write something about that!"  Frankly, there is no time for long-winded notes about all of the complete non-sense that is happening in the world and in markets so I think I'll just post a list with a sentence or two of comment and then as we get deep into the holiday week, I will pull some details out.

WORLD POLITICS - IF YOU DON'T THINK THIS IS HAVING AN IMPACT YOU ARE NOT PAYING ATTENTION.


RUSSIA
Putin's party faces allegations of outright fraud and manipulation to hold power.  Opposition party Prokhorov billionaire says he will challenge Putin in March elections.  Let's cut to it right away, Putin is not a friendly guy and Prokhorov will find himself in jail soon enough.  Even if Putin somehow lost elections a circle of leadership exists in Russia that dates back 30 to 40 years and they run the show.

Funny, that is what world citizens are learning daily.  There was once a liberalization of thought that people actually had a voice in government and had self autonomy.  Unfortunately, that is untrue in Russia, Egypt, the EU, and the USA.  While it is an odd collection of nations grouped in my sentence it should be striking that we all exist in different stages of realization of our lack of individual control over our governments and our own self rule.  Sadly, I think we are actually all more alike than we'd admit.

If the challenge to Putin becomes more serious, be prepared for an orchestrated uprising and terrorist attacks in the homeland, in Russian vassal states, and even overt attacks on NATO forces by Syria and Iran.  These of course will be diversionary moves as Russians needs a bad guy, and I'm sure they will find one.

CHINA
The Chinese economy looks to be rolling over hard.  What can a country do with 300,000,000 poor people that don't have jobs?  Better find something to occupy them and focus their attention on stuff outside of their horrible conditions.

EUROPE
The financial collapse in Europe is now in the final stages.  Each political move continues to be found impotent to deal with reality and mathematical fact that spending more than your take in over many years leads to collapse.  As the final collapse draws near, I can only expect outright attacks in Syria and Iran.

PAKISTAN
Can this situation get worse for the US?  We hear that the Pakistanis are making nice-nice with the Taliban.  It won't be long till Obama engineers a caliphate in India's backyard.

ISRAEL / IRAN
Odd that tensions are rising isn't it?  Israel is running out of time to deal with the nuclear problem in Iran.  Lots of weird explosions and stuff are happening in the Persian country.  The USA lost control of a sophisticated surveillance drone over Iran and we state that we lost control over neighboring Afghanistan.

Isn't it convenient how every country needs a diversion at the same time?

US TOTALITARIANISM
Don't forget the good old USA.  We continue down a slippery slope in the name of fighting terrorism where our "leaders" erode any protections we have as US citizens from the abuse of power and creation of a totalitarian state.  The USA government continues to act without any check as we have assassinated US citizens abroad, can now detain anyone without charges with no set time frame, and also have our government actively monitoring social media for dissent and even comments about our economic leadership (the Fed).  Look at this interview with Larry Wilkerson regarding a new defense bill that is going to be passed soon.

AND BEFORE YOU FREAK OUT AND CALL ME SOME NUT JOB, remember, all it takes is one power hungry individual to change your life completely.  Imagine One SWAT team that accidentally comes to your home rather than your renter neighbor's, a reckless police officer that arrests you or kills your wife in the assault.  Our militarized police forces are now equipped to put down any peaceful protest or deal with any resistance and they typically respond with overpowering force and ask questions later.  Unfortunately that usually isn't good for the average innocent citizen that is caught up in the incident..





US POLITICS
Newt, Obama, Romney, Perry?  My goodness.  Romney's Obama-esque strategy of saying nothing and not having any real positions had almost worked.  He is being dragged into the fray by Rick Perry who fills the role of comedic relief in these debates.

Seriously, we have a sitting President that had no experience and is a complete ideologue with a Socialist or even Marxist bent and yet he somehow has a chance against an amoral smarty like Newt or a Liberal lefty in Romney.  Newt was for all for Obamacare and Fannie and Freddie when he was on the payroll and essentially Romney was the universal healthcare champion too.  Isn't there someone out of 307,000,000 citizens that can represent us better than any of these three?  Chris Christie where are you?


TRADES


GOLD IS GETTING SLAUGHTERED
In dollar terms that is.  Didn't I post last month that you needed to get long gold in Euro terms?  That trade is still a good one, in fact it is probably still a good one in dollar terms as well, you'll just have to wait for the collapse of the USD.

$SPX SHORT TERM TARGET 1185

MS TARGET $9


GETTING READY TO LIKE OIL AGAIN
We've discussed this many times in the blog that there is a season trade on oil and I've liked the refiners during this time as well.  While conventional wisdom exists that it is best to own oil during the summer months, I posted a story last year about the statistical wisdom of that and how it actually is a very good bet to sell your oil by the first week of May.  I mention this because it is probably time to dust off that strategy, especially with Iran practicing their wartime drills on how to close the Straights of Hormuz.

DIVIDEND PLAYS / DEFENSIVE RECESSION STRATEGIES
I just wanted to revisit the plays we've discussed all this year of trying to get in front of money managers that need to be invested even though many are calling for a recession.  The plays I outlined early in the year were XLV (healthcare), XLP (consumer staples), PPA (defense and aerospace), and XLU (utilities).  Those plays still look decent, but you need to be mindful of defense and healthcare cuts that may come as a result of the Super Committee's  failure to find meaningful resolutions to the debt and budget cuts.  Of course those cuts are over 10 years, so they are absolutely immaterial, but that doesn't mean that the defense and healthcare etfs won't over-react to the downside for a month or two.


RECESSION OR NOT?
My favorite bloggers and money managers are completely mixed in their outlooks for the domestic economy.  The best longer term trend watcher and money manager is Chris Puplava wrote "Bill Gross - Wrong on Bonds Again?" last week and we need to pay attention to his great article.  Chris is brilliant but has been faked out as much as anyone during this year.  While he has pretty conservative positions, he has made some bearish comments that have been reversed, and has made some bullish comments that he's had to pull back as well.  His longer term indicators suggest that we are actually heading toward expansion and that the recession is not going to stay.


Am I sold on what Chris is selling?  I don't think so, only because he isn't considering the impact of Europe's collapse in his article.  I think things get much uglier before they get better and there is a better time to position for the long side coming up.  His summary suggests that Bill Gross may get clobbered by rising US government debt rates as the economic outlook domestically improves.  That might happen if you take the Euro crisis away, but we all know that Greeks won't suddenly be able to stop spending and we also know that the ECB won't suddenly find a solution to the unsolvable either.

That's it for now.  As I have more I'll use the same format over the next couple of weeks till things settle down.

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/

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/



HERE WE GO AGAIN (QE 3)?

Bloomberg had a post up this evening that is going to probably be the first of a string of commentaries and interviews from Fed leaders that state that"Now is just not the right time to stop stimulus".

LOCKHART WANTS TO KEEP THE STIMULUS -
http://www.bloomberg.com/news/2011-05-15/atlanta-fed-s-lockhart-says-it-s-too-soon-to-consider-exit-from-stimulus.html

Atlanta Fed President Dennis Lockhart stated that the Fed should remove stimulus only after the recovery is much more sustainable!  Are you kidding me?  Hasn't he recession officially been over for 2 years?  Haven't we stimulated the economy with trillions upon trillions of wasted worthless dollars already?  So the thought is now that the recovery is not sustainable?  What amount of time would sustainable be?  3 years?  5 years?  According to their definition we'd need to apply stimulus until growth finds its way into the system despite the highest corporate tax rate in the world and a regressive system that continues to make business evil. 

STIMULUS JUNKIES
As a trigger or a condition for pulling back, Lockhart wants to see expansion and health growth.  Just like a drug addict, the economy is showing us now that it is entirely dependent on stimulus to function.  In the same fashion as a user, the US economy now is fixated solely on getting that next high.  Withdraw it or threaten to withdrawal it and you get a serious reaction and tantrum. 

In addition, Lochart commented on the inflation in commodity prices and claims that indeed he agrees with Chairman Bernanke that rising commodity prices are simply just transitory.

PLAYING THE MEDIA NOW -
Remember, this is probably just the beginning of the media blitz where we are told that the only why that we can keep things going is to have more intervention from the Fed.  We are told by Bernanke now that we must raise the debt ceiling or else we'll face doom.  We are told that the recession will come back if we don't supply as much liquidity as possible.  We'll see more Fed Presidents and more government officials telling us that we must be saved by the Fed's actions.  I guess I must ask what good have they done if all we have gotten is a delayed effect of what we have tried to avoid all this time?  Where are the jobs?  Where is that sustainable growth?  The Fed can make us "feel" like we are going somewhere, but we are certainly not getting anywhere.  We're doing a lot at a huge cost to accomplish nothing. 

GOATMUG

SEPTEMBER CFO SURVEY - DOUR MOOD RETURNS?

The quarterly Duke CFO survey was released and what can we say, CFOs just aren't as excited as they were.  Somehow the kool-aid has not made it to the interior offices of the corporate towers where the bean counters are usually nestled. 

Here are the highlights......  http://www.cfosurvey.org/10q4/PressRelease.pdf

OPTIMISM PLUNGES


Optimism about the overall economy fell at 53 percent of U.S. firms and increased at only 14 percent. The optimism rate of 49 is a level not seen since the first quarter of 2009, when CFOs rated the economy at 40.


“The CFO optimism index has proven to be an accurate predictor of future economic performance,” said Julia Homer, executive vice president for content at CFO Publishing LLC. “Therefore, this dramatic drop in optimism bodes poorly for the economic outlook. Half of CFOs say there is only a six-month window -- and another one-fourth believe it’s a 12-month window -- during which they can maintain current levels of business activity without improvement in the overall economy.”
 
CREDIT - WHERE'S THE PROBLEM?
 
“The math is simple. A) Banks are sitting on cash because of their poor health and general uncertainty. B) Small and medium-sized firms have employment-generating projects that they cannot get financed because banks will not extend credit. C) In usual circumstances, small and medium-sized businesses account for the majority of employment growth. A+B+C implies we are stuck at 9 or 10 percent unemployment,” Harvey said.


Harvey added that “recent regulatory reform has not helped. Only 5 percent of CFOs consider the Dodd-Frank legislation as a positive -- and that number excludes all firms in the finance industry. The main concerns about the recent reform are that it will lead to increased compliance costs and make borrowing more difficult. CFOs also expect higher banking fees. Some of these increased costs and fees will be passed on to customers, and others will hurt the bottom line.”
 
The CFO's are telling you that all is not fixed.  What made their outlook change from just a few months ago?
 

Reports like these continue to give me pause on joining in the full blown bullish party.  We've positioned ourselves well since Fed President Bullard's speech in the first week of August, but this type of data continues to reinforce exactly why the FED is continuing its drum beat and repetition of the mantra that they will continue to provide liquidity and will continue to step on the gas.  Clearly they are not going to stop the beating of the dollar either!  The Fed sees this type of stuff way before we do and this is a great data point to remind us that all is not really better.  All stock markets may be heading higher, although it isn't because there is growth or real value, it is because the dollar is being debased. 

One last comment on the dollar.  Remember how I allude to the dollars decline as a well choreographed dance to the bottom?  Well, that is exactly how I see it.  We've tumbled very far very fast and now it seems about like it is time to make a measured move higher just to give all the other central bankers some relief.  That of course means that we may see a pause in the gains in shiny things like gold and silver.  Personally I would not add to my metal and commodity positions here and I would not be short the dollar.  Just a warning.

GOATMUG



ROBERT SCHILLER DISCUSSES THE DOUBLE DIP POTENTIAL

Robert Schiller speaks about the possibility of a double dip recession.   I'm not sure if I can agree with any of his prescriptions for "New Deal" type plans to foster growth since it clearly requires more misguided government intervention.  Haven't they done enough?  About when did they become the solution for anything.  Perhaps Robert should read my take on the government myth here - GOVERNMENT MYTH

I get the sense that like most economists Schiller really doesn't know how to answer the question, "How would you fix it?" because his comment is prefaced with"it is really complicated".  The first suggestion he makes is to spur hiring by the state and local governments with a thought to hire millions of teacher's aides and get them in the classroom.  Interesting idea, but not realistic and not gonna happen.  Also, creating more government agencies to waste money is not the trick.

I think it would be almost cleaner and simpler if all businesses were awarded 100% tax credits for all expenses related to new employees for a year or two.  First, it would not involve a new or another government agency.  Second, it would get businesses focused more on growing and utilizing a "no cost" employee.

Second, I'd keep all the Bush tax cuts in place for at least 2 more years.  This would give us a few more years before uncertainty comes back into play.

Finally, I'd halt the Health Care Reform Act measures.  Just to make things realistic and doable, I'd keep all items that have come gone live already, but would kill the rest of the bill making the 2014 date a non-event.

If a company would be in a position to hire today, they would have no reason to not hire based on uncertain economic times.

At around 8:33 in the video, Schiller discusses an uncertainty with CEOs and he says that they really can't describe why they aren't ready to move forward with growth plans.  Normally I like Schiller, but it seems as though he doesn't want to state the obvious which is the Obama Administration's policies are damaging to business.

We should be worried about Schiller's thoughts on housing prices as he says that there is a real concern that prices could go down for the next 5 years based on the pricing curve that was in place over the last decade.  It seems as though he doesn't agree with forecasters in his Case Schiller Market Survey. (15:45 in the video).

Finally, Schiller discusses Japanese style deflation around 17:25.  My read on his comments here is that he thinks we are repeating the Japanese outcome (he didn't say it, I'm simply trying to discern what he is not saying).  Also, this fits too with his statements about a bond bubble in his closing remarks in 17:40 where he tends to agree that there is not a classic bubble where folks are excited about the potential returns for an investment.  He does seem a bit conflicted here because he does back off from that statement at the end.




There are some good tidbits in the interview overall, I like his analysis, but don't like his "solutions".  I think they involve more of the same that you get from economics professors and Utopians rather than pragmatic business leaders.  Jobs are the key to solving the problem, but government is not the mechanism for the implementation of creation with the exception of the tax legislation to get it going.
Enjoy -   If the video has trouble loading simply click on this link to go directly to the hosted site (ROBERT SCHILLER WSJ)

GOATMUG

WHAT WE'VE GOT HERE IS A FAILURE TO COMMUNICATE

(As usual, please forgive the weird spacing issues on this site - The Blogger Editor is up to its old tricks again!  I've tried to fix the spacing issues by placing dots and bullet points to make the site readable.
                                                                                                                            
We did recover right?

• ECRI DATA - http://www.businesscycle.com/resources/

The ECRI released its weekly data from 7/16/2010 yesterday and it is now showing a drop or growth decline of -10.5%.
Declines of this magnitude are absolutely indicative of a recession.  Now as I've mentioned, officially the NBER has not called the recession over, (I guess they have mental images of President Bush on the aircraft carrier), however by any stretch of the imagination economists should have declared the recession over with the managed recovery we've had.  Of course little things like employment and housing that have not recovered shouldn't stop a few economists and administration officials from stating the obvious right?

IF they did declare the recession over, this data would tell us that we were going to double dip with all doubt removed.  However, now that our friends have held off from declaring victory we may have the fabled L shaped non-recovery.

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

Other indicators of slowing are showing up.  I will not post the data here, but rail tonnage is slowing and with carriers are even seeing declines versus last year.  Can you say WHAT?  I thought last year things were terrible and everything this year was all better?  I thought the US consumer was back and commodities were on a tear?  Me too.  Last week almost all categories of shipments were down when compared to 2009's easy levels and this week a few of the categories remain slow again (coal, autos, and food), that is slower than 2009 levels and much lower than 2008 levels.  KSU's shipping declined significantly and so did KSU in Mexico. 

• EUROPEAN STRESS TESTS - STRESSED NO MORE?

European Stress Tests were released today and the US markets caught another surge higher.  The uncertainty is gone for now, but the weekend will give traders and portfolio managers time to examine the sparse details and released information provided in the sham tests.  Are we going to feel better about the solvency of the banks when they really didn't stress them and didn't analyze the cost of default of sovereign debt on their balance sheet?  The potential of country debt defaults is exactly what exposes these banks to their very death!  If Greece, Portugal, Spain, or Italy don't have debt problems then these banks don't have problems (don't even mention mortgage assets - that is so 2009, even though it hasn't been addressed, but don't let reality stop a rant!)  Isn't it ridiculous to think that the regulators ran this test and show the results like they've accomplished something?  Isn't it funny to think that 7 banks in Europe failed anyway?  Isn't it funnier to think our markets rallied on this news?

• LIBOR -

No matter what, the real test for the veracity of this exercise will be the cost of funding between banks on Monday. If we see declines in funding rates, then we must believe that the farce had at least some meaning between other bankers. If we see Libor move out more, this will be the tip off that this wasn't the magic elixir that the regulators had hoped it would be. I'll be watching this chart and I'll have a post on Monday.  We've seen a decline of 6 bps over the last several weeks as stress levels have declined. We'll want to see this come down even more to verify that banks trust each other.  (LIBOR)

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I'll leave you with the optimistic quote of the day from someone on CNBC right after the release.
"It's not that the banks are failing, it is that the banks have failed a level of stress, and they are taking steps to improve it".
Yes, I guess that is one way to look at it. To test how this view works with other applications, let's run it through the British Petroleum version of the stress test.

Say this with me ------"It is not that BP is failing to be a good company and manage the environment effectively, it just failed a level of stress, and they are taking steps to improve it". Feel better about the Gulf of Mexico don't you? I thought you might! Perhaps I'll begin to look at all failures with this view! It's not that they have failed, it is simply that there is a failure to communicate!

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Have a great weekend!
GOATMUG

CFO SURVEY - JUNE UPDATE

Duke and CFO Magazine have again released their CFO Survey.  As I always state, the CEO is the sales man and the CFO is the guy we need to pay attention to.  (Yes, I'm biased I worked in Corporate Finance for years).

http://www.cfosurvey.org/10q3/PressRelease.pdf

HIGHLIGHTS -

CFO SURVEY--Chief financial officers in the U.S. say they have limited plans to hire over the next 12 months, although nearly 60 percent won’t return their staffing to pre-recession levels until 2012 or later. Benefits and wages also remain at reduced levels at many firms, and credit is still tight for small firms, which is hindering hiring plans and constraining growth.

GOATMUG INTERPRETATION- Ok, get this.  The recovery is not going to include hiring.  Only 40% of CFOs are projecting getting back to pre-recession levels (if everything goes well) by 2012!  Oh yes, and if you still have a job or will be one of the lucky ones getting rehired, you might expect lower pay or reduced benefits.


CFO SURVEY--The recovery is not completely stalled, however, as CFOs predict strong business spending and earnings growth.
 
GOATMUG INTERPRETATION - Businesses are hoping and praying for a rebound although they are not confident enough to bet on it (hire).  As I've mentioned, my belief is that during the peak crisis months company's quit reordering to replace inventory.  Ultimately we had a situation where firms HAD to reorder and begin acquiring materials for their products just to replenish them.  We've done that, now let's hope we have someone to buy all of this new inventory.
 
CFO SURVEY--Borrowing conditions remain tight, with roughly an equal split between firms reporting that credit conditions have tightened and those saying credit has eased. One-third of micro-firms (100 or fewer employees) say credit conditions have worsened in the past six months.


GOATMUG INTERPRETATION - Lending is still a problem?  Either banks aren't lending or the loan officers are suddenly looking a realistic levels for debt and requiring firms and borrowers to actually be credit worthy.  I think this is got to be a very accurate piece of data in that I'm sure 50% of the firms are actually decent credit risks while I'm sure another 50% are scary and probably don't deserve the lines of credit they previously consumed.  I guess this is why we see that credit is actually worse than 2009 in many cases.  I'm sure there will be a rollout of a new Federal loan program that loses billions of your tax dollars to bail out credit starved firms that "deserve" all the credit they can handle.


CFO SURVEY-- Earnings are expected to rise 12 percent and capital spending 9 percent in the next 12 months. Research and development and tech spending will increase 4 to 6 percent. 
 
GOATMUG INTERPRETATION -  They better!
 
 

TOP CONCERNS

 


CFO SURVEY - The top two concerns for U.S. CFOs are weak consumer demand and the federal government’s agenda. U.S. CFOs, who expect to raise the prices of their products by 1.5 percent, are also worried about price pressure from intense competition. Maintaining employee morale is among the top company-specific concerns.

GOATMUG INTERPRETATION - Wait a minute, we have growth forecasts and profit expansion predictions, but our top concern is the anemic consumer demand and the not so invisible hand of the government?  On top of that, CFO's say that management can't raise prices because price competition, these guys are trying to spin this.  I'm not buying it and I don't think they even believe it!
CFO SURVEY - Health care costs also have reappeared among the top four concerns for U.S. companies, with corporate health care payments expected to rise 8 percent in the next year.
 
GOATMUG INTERPRETATION - Healthcare costs an issue?  Just wait for 2011, 2012, 2013, and 2014.   That is 4 and 1/2 years for the insurance companies to prepare (increase prices) for the national healthcare system.  Employers with 50 or more employees will suffer most in the business community right along with the tax payer.
 
 
All in, I don't think this is a very positive report.  This should be a report that suggests that CFO's are seeing increased momentum and better long term visibility about revenue growth and margin expansion.  We should not hear that CFO's are concerned about weak demand and a lack of pricing power.  In addition, boards and executive teams are worried about our government's plans for business.  It is incredibly hard to predict and create strategic plans when you don't know where big government will decide to regulate or takeover within the business world. 
 
A closing word on credit.  We are really hearing two stories when it comes to credit.  Strong firms are being lavished with amazing opportunities to borrow at ridiculously low prices (interest rates).  In fact this will be a monster year for highly rated corporate bond issuance (at least so far year to date).  This is driven by the fact that overall the FED and central banks have lowered the alternative lower risk yield so much that investors are DRIVEN to take more risk just to outpace inflation.   On the other hand, smaller firms or high yield firms are facing tremendous problems funding their operations and rolling debt.  Europeans are also having a terrible credit funding year.  The market has dissected the risk and is punishing poor creditors (forcing them to pay much higher rates) and rewarding good creditors (giving away cheap money).  At least the system is starting to appropriately price some risks! 
 
I think the CFO's are hedging their bets and remain totally cautious because they know that demand is falling and they may have one more quarter of upside and then down we go.  June's update shows that the rate of change on many metrics is absolutely falling and the actual real levels have also dropped from their peaks.  No amount of government stimulus is working and the economic disaster in the Gulf will only increase the speed of the double dip.  We had all better be praying a hurricane or tropical storm does not form in the Gulf. 
 
Having said that beware, our government is still involved in the house bubble it is trying to reflate.  Hence we see a tremendous mispricing of residential home mortgages where we can obtain a 30 year $400,000 loan today for at 4.8% in Baton Rouge, LA with zero points!  They will attempt to roll out any plan to keep the plates spinning.  I fully expect the Fed and Treasury to execute Quantitative Easing Part Deaux within one or two more months.   They will blame it on the crisis in the Gulf as we remember that they never waste a good crisis.
 
TRADING UPDATE
This market is and has been really hard to trade.  If you are a short term trader, you are being ground up as moves of plus or minus two to four percent a day will ravage you.  If you are a longer term investor you are either back to where you were in August of 2009 or have been crushed if you bought after that period. 
We could still see a rally here to the 1140 area, but I ultimately believe that we'll end lower for the year.  I've made it a point to highlight those posts that are simply suggesting that you get out of the market because you need to see these.  If you don't get out, you need to have some protection in investments that will get you out if possible or at least earn you interest or dividends despite things going down (dividend paying stocks or bonds).  Several indicators I watch are beginning to confirm a rollover in the market and if we end June under 10,000 in the Dow, we'll have a confirmation.  These are traditionally very long term signals too, so I'm sitting up in my chair and waiting for them to trigger.  If they don't trigger, I'll still be sitting up watching.  Be very careful.  The Dow was up today almost 80 points and then ended down  20 - just another 1% reversal - nothing to see here!
 
 
GOATMUG

BP KILLS INDUSTRY AND GOVERNMENT PIPE DREAMS IN ONE SPILL

I haven't hidden my thoughts about the oil spill and its ultimate impact on the Gulf Coast.  I believe it will be devastating and we can lay the blame right at the feet of BP.  I have heard that they did not have proper safety equipment or redundant systems in place to stop this blow out - I can't confirm or deny that, but rather than linger on who is to blame, we unfortunately have the results that continue to billow up in the form of barrels and barrels of crude. 

I feel so badly for those that are fishermen, hotel owners, and anything that has to do with the vacation industry.   I think the image below says everything.  So far, many have received a small bit of compensation, but let's face it, many will be put out of business and no amount of "compensation" can replace a person's way of life.

http://www.stevequayle.com/News.alert/10_Photo_of_Day/100609.photo.of.day.html

ORIGINAL CAPTION: River Shay, 13, stands in the front yard of his camp with his dog "Smash", while his father Patrick Shay, a seafood business owner from River Ridge, Louisiana, digs grave sites "In Memory of all that is lost courtesy of BP and our Federal Government," at their fish camp in Grand Isle, La, on Memorial Day, Monday, May 31. (Sean Gardner / Reuters)


So there you have it, the accident in the Gulf will destroy many industries and put much of the Gulf into a recession, but I've been pondering what other things the spill is going to do.  As with any big "black swan" event, many first looked for our government and President to step forward and resolve the issue (cause that is what we do when you are in a Nanny State).  I guess it is that so many people think that because the government has access to an unlimited checkbook (not unlimited really - we'll soon find out), that it can swoop in and save us from anything.  Perhaps it is because our politicians and the government tell us that it can do anything and has the answer to all the things in life that are wrong or unfair.  Perhaps it is because we are looking for a savior, or we as a nation are just soft and think that someone should bail us out when ever we get in a mess.  Heck, if you remember back to the election with the woman that flat out stated that Barrack Obama would pay for her gas and her mortgage when he became President (wonder how she's doing now?).  Since I'm writing this, I'm guessing that you might know that I have a different opinion.  I believe that government's actions are often the very cause of many of our problems.

In fact, I think recent history shows us that actually government is not able to perform well as a savior in any respect and in fact is just a huge consumer of time and energy.  Let's think for a moment when we've drawn on the resources of the US government to save us.

2007-2008 (Financial Crisis) - Despite the fact that the Fed helped cause it  / NOPE - Current cost is greater than $2 Trillion and we are still discussing how we may be in a double dip recession and how the world's credit markets are worse than they have ever been.

2005 - Hurricane Katrina - This for me is the big one.  This event was George Bush's Waterloo.  The entire country looked at the government to save New Orleans from the hurricane only to find that the government could not manage anything.  The scope of the problem was so large and the complete collapse of local government destroyed the ability of the federal government to manage this situation.  Clearly lack of planning and total corruption of local Louisiana government complicated matters.  No matter the reasons, the federal government received an F for its handling of the crisis.

Finally, we have this terrible environmental destruction.  Obviously the government doesn't have the equipment or the expertise to take over and plug the leak, I don't expect them to.  The point of my discussion here is to highlight that what we are hearing is the government should "DO SOMETHING" and our President tells us he needs to know "who's ass to kick".  No amount of regulators or moratoriums will help "fix" this situation in the gulf.  The reality is that I'm shocked that big leaks like this haven't happened before.  I am not looking for the administration to do anything, but ensure that the Coast Guard has the ability to coordinate the cleanup.  Seeing the President in Florida and Alabama for the third, fourth, or fifth time does nothing to impress me.  Cries for him to show his outrage are a waste as well.

Ultimately, when we do not have expectations, we are not disappointed.  I think this is the issue that we are seeing come to a head....again.  The BP catastrophe is destroying the Gulf and the false idea that government is the answer to anything. 

GOATMUG

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

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

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

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

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

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

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

Goatmug