DIVERGENT REALITY - MARKET UPDATE

Somehow, someway, the markets simply keep moving up.  Perhaps they are climbing a wall of worry.  Perhaps stimulus that is coordinated and assisted by loose monetary policy simply keeps all the plates spinning.  At some point, gobs of stimulus will meet the headwinds of a global financial slowdown in Europe, an inflationary overheating and under performing Asia and Pacific Rim, and a flight to safety from risky assets as smarter money says, "screw this".

ISLAND BACKGROUND
Quickly, let's review a little about Cyprus.  The tiny island attempted to create its own niche economy in Europe by becoming a financial haven.  They offered very low tax rates and an even lower concern for the origins of the global cash horde that was being deposited within their banks.  Cyprus become an outsized financial powerhouse and a haven for money laundering.  Russian gangsters like Putin and his crony oligarchs have hidden massive amounts of stolen money in Cyprus.

Bankers were all too happy to take the money and of course, they had to invest in bonds of other Euroland sovereigns.  They purchased a ton of Greek debt, which of course has been a disaster.  Cyprus' financial condition has been a known problem for a while, but clearly, the ECB desired to act.  As little as a month ago, financial and political leaders in Cyprus stated emphatically that bank institutions were fine and depositor money was safe.  This weekend, this all changed as Cyprus posted documents outlining the "bailout" where the ECB would step in and give approximately $10 billion in funds, but it required depositors to kick in a total of about $7 billion.  Now think about this.  This isn't the bank getting crushed.  This isn't some bond holder or stock purchaser, this is someone that was saving and simply putting money away.  Depending on how much you have, you'd potentially pay anywhere from 7% to 12%, in a sense, you just took a pretty big haircut for being dumb enough to save and trust a bank.

LOCKED OUT
Over the weekend, the people started hearing about a bank lock up and started sharing information about the vote about the fate of their money that was going to be held on Monday.  Clearly the upset people took to the street and wouldn't allow politicians to steal their money and give it away.  As I type, political and financial leaders in Cyprus attempt to walk a very small line where they can somehow appease the ECB and global banking syndicate and yet keep their heads as they have awoken a very interested and angry population.  The Cypriot legislative body will attempt to forge a solution that placates the bankers and limits the impact on regular folk that never had anything to do with Cyprus banking institution's purchases of Greek bonds with their deposits.

Don't forget too that the Russians are the ones that will take a huge hit in this "bailout".  Possibly the ECB calculated that the funds were illegally garnered, but my guess is that Putin and his buddies will not take kindly to a 12% or greater haircut of their stash.  The ECB is screwing around with these guy's personal cache of money, they better watch it.

THE GLOBAL BANK DEPOSITOR'S DILEMMA 
Banks essentially removed the "haircut" from bank accounts almost immediately, and therefore the effective "tax" was confiscated.  As a depositor, what would you do now?  Can you trust the bank?  As a citizen in a Euroland country like Italy, Spain, or even Portugal, are you certain that this would not happen to you?  The outright theft of deposits is simply too easy for governments when they can shut a bank down electronically and remove funds before anyone has a chance to prevent it.  The Cyprus example is surely a scary test case.  So what will they do?  We are hearing that there is calm in other Euro countries and no one is rushing to take their funds.  The better question in my mind is WHY AREN'T THEY?  It only takes a few people to start a panic, reasonable depositors should be calmly removing funds.  Do you think they wouldn't do something similar in the United States given extraordinary circumstances?

I've often advocated that you should have some cash on hand in case banks were suddenly inaccessible and you should also couple that with some physical metal holdings like gold, silver, or even palladium.  Make a trip to the bank today and get enough cash to ensure you could make it through a couple of weeks with no problem.  I'll do another follow post about metals, but is there any way this cannot be bullish for them?

INVESTMENT IMPLICATIONS - EMB:TENZ -

Despite what you are told and what we are seeing, the global financial markets don't like this.  US markets somehow keeps levitating, but that divergence is getting way out of bounds of what it should look like.
Take a look here at the EMB:TENZ ratio chart.  Remember, this is a measure of the emerging markets stocks versus the ten year treasury.  Essentially, this is a measure that show when investors desire risk versus when they want safety.  Emerging markets have been really under performing and in a sense, the 10 year treasury is beating on a relative basis.  If investors were feeling risky, they'd want to go long emerging markets.  As you can see in this view, the ratio of EMB:TENZ has been very good at tracking the SPX (black line behind the red/black ratio) and probably even leading it up and down.  Now look what has happened recently.  The ratio has cratered suggesting that investors don't want emerging risk at all.  Despite the risk-off move, SPX continues to power higher.

RISK ON?  RISK OFF?
This is a slightly different look, which might be better.  It is still the same concept charted with the MSCI Emerging Markets Index against the Dow Jones Treasury Index.  I provided a monthly view and I think it shows how strikingly in sync this relationship is.  The only two questions we should be asking is how long can the divergence remain, and which direction will it resolve?

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

WEIRD STUFF IS HAPPENING....CREDIT

BONDS ARE SIGNALING WHAT?

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

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

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

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

TLT : IEF - 

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

EMB:TENZ - http://scharts.co/WaVg83

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

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

TLT - http://scharts.co/XOhqLJ

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

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

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments athttp://www.goatmug.blogspot.com/

BUBBLE FACTORIES MAKE BUBBLES - FOMC PRESS CONFERENCE ANALYSIS

I wanted to provide a video feed of yesterday's historic post FOMC meeting press conference.  This was a brief review of the FOMC decision and a question and answer session where the FOMC Chairman Ben Bernanke addressed the nation via a few questions from reporters.  Unfortunately there was not a real opportunity for meaningful follow up questions nor any real journalists that would actually press the Chairman about the destruction that he is causing.  Anyway, here is the video.  Below I've captured a few highlights that I've summarized and also pulled out a few notes and quotes from the exchange.

Bernanke Video




The first 13 minutes or so are his summary of the FOMC press release.  I think it is worth the time it takes to watch it.

THE FED'S ROLE

• "As long as we have low resource utilization we will have a low Fed Funds rate."   
• GOATMUG TRANSLATION - (As long as the economy is sluggish and showing slack, our friends at the Fed will be more than happy to provide extra-ordinary measures to assist the economy).

THE FED'S PROJECTIONS (LONG-TERM)

• "The Fed has a long term outlook for growth for the US economy at 2.5% to 2.8% with a long term unemployment rate of 5.2% to 5.8%." 
• GOATMUG VIEW - Are you kidding me?  There is absolutely no way we will hit 5.8%!!!!

INFLATIONARY CRAZINESS

• (6:40) Inflation from commodity pricing has increased significantly recently, BUT measures of underlying core inflation has only risen moderately.  Inflation remains subdued and long term inflation expectations remain stable.  (7:13)As increasing commodity prices moderate, inflation should decline."  (9:13)  If inflation is not passed through to consumers and households then inflation will remain tame.
• GOATMUG THOUGHTS - I don't think there is enough space on blogspot for me to write about these amazing statements!  First of all, inflation from commodity prices have increased, but because we use a fake measure of core inflation that excludes energy and food, of course it has only risen moderately!  That too is about to change as we have seen annoucements from companies like Kimberly Clark and others that state they are raising prices.  Second, long term inflation expectations are not remaining stable unless of course you are looking at the bond market to suggest that things are great.  Many financial pros suggest that treasury rates have not exploded higher, therefore, inflation expectations remain in check.  I would counter that the FED is buying those treasuries and is obscuring the true price of those bonds.  Next, Bernanke says that commodity prices increases should moderate..... how?  Finally, if inflation is not passed through to consumers, inflation will stay low.  Well, since we are now seeing price increases flow through, don't you think that confounds the entire argument? 

After the briefing, Bernanke took a few questions from the stooges that were lined up.  Here are a few of those questions.

CRITICS SAY THAT FED POLICY HAS DRIVEN DOWN THE VALUE OF THE DOLLAR AND DECREASED THE AMERICAN STANDARD OF LIVING.  WHAT IS YOUR RESPONSE? (15:00)

• "First, the Federal Reserve believes in a strong dollar, just like Sec. of the Treasury Timothy Geithner.  Over the medium term we are trying to remain stable inflation.  We are also trying to get a stronger economy through maximum employment.  In our view if we do what is needed to achieve the dual mandate we will create fundamentals that support the dollar.  The dollar retains a high standing in the world.
• GOATMUG RANT - Really?  Yes, there was a safe haven effect that caused the US Dollar to spike in 2008 and in 2010.  However have you noticed that since May 2010, the dollar has gotten crushed.  I haven't seen any of the policies that you highlight as successes that have influenced the direction of the dollar in a positive way.  In fact, the creation of QEII has been absolutely connected to the decline of the value of the dollar and the increase in "asset values".

WHAT CAN THE FED DO ABOUT THE HIGH COST OF GASOLINE? (17:50)

• “There’s not much the Fed can do about gas prices. After all the Fed can’t create more oil. We don’t control emerging markets. What we can do is try to keep higher gas prices from passing into other prices, creating a broader inflation. Our view is that gas prices will not continue to rise at the recent pace.”
• GOATMUG DISCUSSION - Ok, remember that for once Bernanke says that the Fed can't do everything!  However, I think this is a subtle shift where Bernanke usually highlights how effective and powerful the Fed is at controlling everything in the financial world, but then suddenly becomes impotent when it comes to the price of actual hard assets.  I don't buy it.  This line of response essentially says that the emerging market economies are responsible for all the increased oil demand in the world and that this coupled with the unrest in the Middle East is causing gasoline prices to increase.  There is not one mention that it really is the relative cost of the gasoline that is killing people in the US due to the destruction of the US Dollar.  Not even a whiff of that here.  Finally, later we'll see that the Fed takes credit for the increases in asset prices, the problem is that we at the Goatmug Blog realized early in January that gasoline was an asset!  Therefore I suggested that it might be a worthwhile consideration to buy a whole bunch of UGA to get ahead of the crowd that might also see gasoline as an asset. (look to the very bottom of this long post).  So, indirectly and directly, we have Mr. Beranake to thank for our huge increase in asset prices!  Thank you FED!

HOW IS IT THAT ENDING OF QEII PROGRAM WON'T IMPACT THE ECONOMY?

• The ending of QE II won't harm the economy because we have telegraphed the end of the policy and the market expects it.  Second, it is not the pace of ongoing purchase, but the size of the portfolio.  The amount of securities we hold will remain approximately constant.  The amount of monetary easing should remain constant.  Early in our exit process, it is very likely an early step will be to stop reinvesting securities that will be maturing.  This is a tightening.  We would do this based on economic outlook. 
• GOATMUG REMARKS - So, what you are saying is that turning off QE won't impact the market. (What about what happened at the termination of QE 1?)  Secondly, although you won't buy more than the allotted $600 Billion in QEII and you say that you are terminating the program, you even suggest that you'll continue to buy securities as maturing ones roll off.  So, in other words, you are going to keep QE II going forever.  Ultimately when life support can be removed, you'll then start selling.  Hopefully the patient won't be dead when that happens.

IS IT IN THE FED'S POWER TO REDUCE UNEMPLOYMENT MORE QUICKLY?  29:00

• The Fed took extraordinary measures to stabilize the economy.  We have created new ways to to change monetary policy.  The Fed has a dual mandate.  The Fed needs to worry about inflation.  The cost of future inflation on employment could be high.
• GOATMUG RETORT - No, while the Fed talks about creating jobs as an indication that the economy is recovering, the FED doesn't have any ability to create jobs and the fact that it has taken this long for someone to realize it is just a sad commentary on how poor the main stream media is at actually providing quality analysis and a statement that Joe 6 Pack and Mom and Pop are doomed.  Notice the shift here.  The Fed's intent was to get asset prices higher to save the banks and now that they've done all they could, they want to exit stage left.  J6P thought he'd get a job out of it, but all he got was a foreclosure notice.

QEII HASN'T DONE MUCH TO HELP THE ECONOMY?  30:40

• "The second round of securities purchases was effective.  We saw this first in financial markets.  We saw this in increases in stock prices, decreased spreads in credit markets.  We saw the same responses as we saw in QE 1.  We did get very significant easing.  You would expect from decades of financial experience that it would lead to improving economic conditions.    We didn't say this was going to be a panacea.  We never said that it would solve the enourmous jobs problem.
• GOATMUG - So there it is.  The metric for the measurement of the impact of QE is if financial markets and asset prices (stocks) go higher.  This is no revelation for me as I've highlighted this stinking thinking for more than a year now, but it now seems that Bernanke has simply given up on the notion that alluding to a recovery in other parts of the economy matter (jobs, housing, manufacturing).  Clearly Bernanke has settled in to the thought process that simply stock price increases an indication of a job well done.  See, that was always the game.  The FED has always tried to ease to prop up the next bubble.  The only problem is that this bubble has been one that has been of great size (huge increase in asset prices over the last two years), and it has been so fast.  The last bubbles (housing and tech) took years to pull off and were like slow moving freight trains.  The resulting crash from this Fed bubble will be much more messy due to the size and speed at which it has been formed.  So, that is what is striking, I see Bernanke shrugging here and simply saying, "Well, we did what we could and stock prices rose, it's just too bad the jobs didn't materialize with it". 

WHY DON'T YOU DO MORE QE?

• "The problems are getting tougher due to inflation risk."
• GOATMUG - Bernanke is saying, "That's it, NO MAS!"  In other words, they are trapped and he knows it.  Of course he doesn't come flat out and state that he created all of this inflation.  Of course he doesn't say that housing is going to implode even more.  Of course he doesn't say that he can't do anything about jobs.  He simply is saying, we're done, we can't do anything extra other thank keeping asset purchases at the same level.  See, if Bernanke does the Son of QE (III) we will see commodities go even more nuts and the US dollar simply collapse.  Recall, I've always stated that the US Dollar destruction was purposeful and choreographed like a dance.  A collapse is not the best form of art, so this is where we could see a skillful move on the part of the Fed to hit stock markets with a few blows (corrections) and move the dollar higher.  You can't just have the dollar fall through the floor.  Once there is a reprieve, we could see some sort of emergency stimulate program put in place again.

FOMC NUGGETS
Let me wrap it up there. The press conference didn't tell us anything we didn't know, but give us a few hints as to the mindset of the Chairman.  This is important because what he says goes, the other Fed Governors are simply a distraction.  I'll just bullet point the key items.

*  Inflation is showing up, but somehow it will moderate.  (How?)
*  No more QE, except for the $600 Billion they have on and whatever else they decide to do later.  (A promise)
*  Jobs no longer are under control of the Fed, they can only indirectly create an environment where that happens. (Sorry)
*  Asset prices have increased, so that means the Fed did a good job.  (Bubble factories only know how to make bubbles).

*  The strong dollar is important to the FED.  (We believe in the Loch Ness Monster too).
*  The Fed didn't impact increasing gas prices (obviously it isn't an asset), that is the fault of emerging markets. (uh huh.)
*  The Fed is stuck.  They are at the end of the rope and they know that they are creating inflation.  (The dirge is playing).
It is telling to me that the Fed is winding things down.  The theme we've discussed all year is that stock markets could begin to fall in May which historically has been a very poor month.  Thanks for sticking with this post.  It is a bit weird in its structure, but I think that we can pull a few interesting tidbits from the remarks how the Chairman responded to the questions.


TRADING UPDATE
Since I mentioned it, I might as well make a comment about the on-going UGA trade.  Things have obviously gone very well in this trade since the original post on 1/17/2011 when UGA was trading at $40.00.  $14.00 in gains is nothing to sneeze at and I do think that it will continue to be a positive trade.  Having said that, it is nice never to give back hard fought gains.  Therefore I advocate putting a stop in around $53.00 (I'd do it 5 cents below) to ensure that you don't blow a great trade.  There was a gap up that took place around June of 2008 where UGA blew through $60, I have that as an upside target for this trade.  This is also a good way to trade this since I posted that article from FMXconnect.com where they suggest the best trade here is to sell on May 1 or May 15.  Either way, we can let the market just take us out around $53 or get us to the target. 

GOATMUG



12 for 2011 - Outlook and Comments for the New Year

2011 OUTLOOK – A RESURGENT USA OR JUST A LACK OF BETTER ALTERNATIVES?


GENERAL ECONOMIC OVERVIEW –

As I started putting together this year’s outlook I’m reminded of the axiom that says that the economy is not the market. What this saying is getting to is that you may have a firm understanding of the components of the broader economy but at the end of the day investors are going to do what they are going to do. Investors may be motivated by seeking opportunities they perceive will be performing in 6 months and therefore front running hot areas, investors may be moving as a herd and bidding up a specific sectors, or investors may be sheltering all of their money in cash-like instruments in total fear like we saw in early 2009. The framework we’ve lived in for almost all of 2010 was one where investors heeded threats and actions by the government to spur the investment markets and they also saw improving fundamentals for corporations. As a result of both of these key variables, investors put money to work and drove the SandP 500 and DJIA up around 11%. As we know, one key factor that helped provide outsized gains is that the Fed helped to engineer a movement of money flows from cash to other assets as it attempted to make safe money worth less and as is the case it typically forced money to seek higher returns as compensation. So, is everything bad in the economy? No! Is everything coming up roses? No! It is clear though that we have more disconnects or divergences in the economy that will be the source for opportunities for gains and tremendous losses in the coming year.

TWO DIFFERENT WORLDS – CORPORATE / CONSUMER

As we enter 2011 we must note that there are two distinct worlds within the US economy. We have a corporate environment where big business has outperformed modest expectations and is squeezing more out of less, while we have a consumer world where folks endure actual unemployment or the threat of it, diminished household savings, and little opportunity for income growth. The last two years has destroyed the store of wealth for many Americans as housing values have continued to flounder. It is easy to see why the stock market’s appreciation is important to the Federal Reserve as an increasing market gives us the feeling that our invested wealth is growing which can ease fears.

Large corporations obviously had to reduce headcount in the downturn, but have yet to increase their employee rolls significantly. In addition, they have taken the opportunity to raise massive sums of money by issuing debt at historically low interest rates, allowing corporations to have record amounts of cash on the books. This capital will allow them to make acquisitions or endure a downturn that may come. The main challenges I see in 2011 for corporations are that they must get consumers back to their old habits of spending, they must be able to pass on price increases or suffer margin compression, and they must be able to manage government imposition in their industries.

Consumers have noticed a slight uptick in their situation of late with an improvement in job opportunities and a reduction in personal debts. The challenge for the average Joe is to keep to his new found religion and somehow continue reign in his pent up desire to spend himself back into debt oblivion. Is the average person back to their 2007 and 2008 way of life? No, not hardly. We have somewhere around 9.5% unemployment with the prospects for these levels to hang around for many more years. According to Fed Chairman Bernanke, these high levels could remain intact for 4 or 5 more years. When he gives us this timeframe he is suggesting it will take that long to get back to an average 5.5% or 6.0% unemployment rate. Finally, Joe-6-Pack must attempt to keep up with the inflation that the Fed Chairman wishes to saddle him with.  Of course the worst harmed folks are those that are older and poorer. Those will be the collateral damage from Bernanke’s efforts to spur inflation and resuscitate the financial and banking systems.

FEDERAL RESERVE


I know that it is clear that I’m not a fan of the Federal Reserve. I am a big believer in the notion that our central bank is the cause of the wild boom and bust cycles we’ve endured. The Fed’s very nature is corrupt and makes it aligned with interests that are not the same as the interests of the US citizenry. The Fed is supposedly an independent body that works to provide price stability and maximum employment. As you examine the work of the Federal Reserve in the longer term you see that they have delivered very little of either of these goals. Since the crisis in 2008 and 2009 the Fed has uncorked extraordinary measures to save the financial system. Even today in 2011 we see that they labor to provide enormous liquidity to credit markets and prop up asset values. Ben Bernanke and Alan Greenspan have talked at length that the best way to fix the crisis is to increase the perceived values of stocks and bonds. The Fed is prepared to do anything and everything to avoid the grips of deflation as it has manifested itself for the last 20 years in Japan or how it did in our country in the 1930’s.

EMERGING MARKETS

I’ve been a big advocate for emerging markets for the last year and a half. In fact, I still like a few of them, but the truth is that I like less of them every day. Emerging markets have hit the ball out of the park with amazing returns in countries like Singapore, Malaysia, and Chile in recent years, but the stress of all of that growth is bubbling to the surface. Further, the countervailing approach of the US FED is at odds with their interests. I wanted to write a much larger summary of my views of the brewing “economic war” between these countries and the US, but in the interest of getting this document done I will simply suggest that I’ll post this later. Overall there will still be emerging winners, but I choose to reduce exposure from the over-weighted positions I’ve had and move to other areas to capture those better risk-adjusted gains.

12 FOR 2011

1) US MARKETS - Dow / SandP500 +6%. I fully expect that US domestic investment markets will move higher in the year, although I believe that they will fulfill the old adage that you can “Sell in May and Go Away”. I believe that US corporations will continue to post strong financial numbers however they will detail that they do not have the power to raise prices in the current economic environment. They will see margin compression resulting from increasing commodity prices and an inability to charge higher rates to end users will be the reasons for a mid-year end slide in index performance that will be substantial. The US will perform well on a relative basis since we’ll continue to see that other areas in the world are full of their own land mines. Global investors will seek US companies as a safe haven and a relative value trade in comparison to other global opportunities (which I’ll cover below). Large companies which pay dividends and multi-nationals will do better in this environment.

2) JOBS – We will end the year at a 9.0% jobless rate. The increase will be lauded as real improvement, but those out of work will be much poorer. Obama will gain traction in a re-election bid due to the overall improvement in the job market.

3) HOUSING – The housing mess will remain with us. Foreclosure problems will still not be cleared and we will finally begin to see our enforcement bodies begin to prosecute the outright fraud that took place by banks, mortgage companies, and investors. Overall national housing prices will fall another 5% to 10% from year end 2010 levels. The home builders have been destroyed and out of favor for more than 3 years now. Homebuilders may actually be a safe haven as they can be seen as having nothing left to destroy in a downturn in the markets. Finally, the housing markets in China, Canada, and Australia are set for a complete meltdown ala 2008 and 2009 in the USA. I advocate moving out of positions in Australia and Canada if you hold one of those ETFs.

4) USD – The US dollar will continue to fall for the next several months, but as with all of these predictions I suggest that the USD will strengthen against most currencies (Swiss Franc, Euro, and Yen) near the the April and May months.  We’ve had a specific theme over the last year where I described the purposeful devaluation of the dollar as a choreographed dance conducted by the Fed. There has been a rhythmic wax and wane in value, but the intent has been to send the value down. The willful destruction of the dollar’s value is a by-product of the printing and easing employed to boost asset prices. Trouble in Europe and in emerging countries will over-ride the Fed’s artfully controlled slide of the dollar.

5) INTEREST RATES – Higher then lower, then a move higher. All of that to say that we end up exactly back to these levels at year end on the 10 Yr, let’s call it 3.5% to 3.75% which is about 40bps higher than today.

COMMODITIES

Overall, I believe commodities will be a very volatile bunch this year (as if they aren’t already). In general, I believe in the short-run we will see a strong spike in almost all commodities including oil, gas, silver, gold, grains, copper, sugar, coffee, and cocoa. This short-run blast will be the backdrop for a correction in the April and May time frame. Essentially we’ll see the move higher and then we’ll again see commentary that high priced oil and gas will dampen economic growth and destroy the resurging consumer. Those highs in April and May will be the top for equities and commodities. Once we endure a correction of 10% to 15% the equity markets will resume their climb, but I believe the damage will be done for the commodity bull market for at least the remainder of the year. (The commodity bull market is not over, but won’t reach highs again in 2011.)

6) OIL - $105 to $110 will be the high for the year with a drop to the high $70’s or $80’s in the following correction. Energy etfs like XLE and KOL will be a good target for this early run but timing an exit is critical.

7) WHEAT, GRAINS, CORN, HOGS, CATTLE, AND SUGAR – Like oil, I predict a big ramp higher in the short run. Unlike oil though, we’ll see a less significant correction here. This area is still a long term buy based on consumption and demographics in emerging countries. There is no way to keep the new middle class in India, China, and other emergent countries from eating more meat, grains and sugar. Increased demand will force higher prices.  Isn't great we still have all of those cool ethanol subsidies to ensure that farmers grow all that corn for a wasteful non-green green energy?  The point here is that the ethanol mandate contributes to the consumption of farmland that could actually be used for food rather than an inefficient fuel.  Those politicians sure did get the message didn't they?

8) GOLD AND SILVER – As much as I love gold and silver I believe that we’ll see the blow off top run here in the next few months. I think silver easily gets to $35 and gold could hit $1,500. I am prepared to sell my positions in both and even my physical metals that I have in the safe-deposit box. I fully realize that if a Euro collapse does hit then there will be a total parabolic blow off beyond anything we can really grasp. At that point silver would likely be $100 and oz and gold near $3,000 or more. While I calculate that part of the reason that commodities will fall will be more significant issues in Europe in April and early May, I reason that another stick save will be provided by the ECB, IMF, and US FED. Could this happen? Yes, of course, this is why I posted the video below because if views like these become more prevalent then we could see a country like Italy or Ireland doing what they should do (default) rather than chaining their citizens to unpayable debt and a life of financial slavery. Again, gold has traded as its own currency and stress in Euroland makes gold more valuable.

EDIT - 1/14/2011 - Just to be clear, I still think gold and silver run higher, but then fall back in the same pattern as the overall market and commodities like oil.  Therefore, this is why I'm prepared to sell as the blow off top pushes the metals to euphoric highs.  I just wanted to make this clear since I got a few emails asking me why I'd sell if they really did move that high.  I don't expect that "sugar high" to last....(actually I do expect sugar to go nuts and stay high for a while, just not the shiny metals on a sugar high).

9) COPPER – Emerging market central bank’s efforts to combat inflation will work this year to make copper a loser in this battle. While we’ll see the same type of action I’ve described above, but copper will be impacted more and we could see copper in negative territory for the year despite an early move higher.

FINANCIALS

10) BANKS – The steep yield curve benefits banks and I look for the biggest beneficiary in this environment to be the regional players like Regions and Zions Bank. These will become M and A targets and they have already largely dealt with their real estate messes on balance sheets because regulators forced them to. Big money center banks will still do fine, but not as well. While we’d all like reality to come home to roost for the JPMorgan, Bank of America, and Wells Fargos, the fraudclosure mess won’t impact them, no matter how disturbing the news is regarding the way they sold and securitized loans I’m afraid this will be a big nothing-burger. Last, it is clear that the “Fed has their back” so if things were to somehow implode we know that there is a backstop out there called the US Taxpayer and he has a bottomless pocket to save all financial institutions. XLFit and KRE are +8% at least.

11) MUNICIPAL BONDS– We’ll see continued pressure on many municipalities as they will need to face the stark reality of their budget crisis. There will be opportunities to buy municipals to capture outsized gains but don’t be fooled, there are real risks and we will see municipal defaults. Typically this has not been common, but the problems with underfunded pensions and poorly negotiated contracts will force city and state leaders to do what they need to do and default. Personally, I’d avoid them since most munis are long dated and you are taking serious interest rate risk on top of the credit risk of municipal institutions that are run by political hacks.

12) CORPORATE BONDS – Wait for commodity and market ramp. That move higher will continue to push corporate bond prices lower and finally put them in an pricing area where they again become interesting. Please note that I usually target buying corporate bonds that are less than 7 years in maturity. I do not subscribe to the hyper-inflation theories and therefore I do believe that a chance to buy solid company bonds yielding a 6%, 7%, or 8% rate will be great. (No, I haven’t seen these yet, but I expect good opportunities). I look to add to bond positions in April and May near the height of the commodity and equity euphoria.


BONUS - DOMESTIC POLITICS

HEALTHCARE REPEAL – FAILURE - Republicans have no stroke and can’t repeal the beast. They may be able to starve some provisions of the reform and hold it hostage, but frankly I don’t believe that they are truly committed to anything like that.

The Tea Party will be angered as they realize they have been co-opted and the RNC leadership simply adopted their speech and changed nothing. 2011 will open the way for new “radical” independents that will further sweep out Democrats AND Republicans that will all be seen as tools of industry and fixtures of the political class.

FOREIGN POLICY

After two years in office Obama’s Utopian ideals and naive hopes should now be completely dashed. If he hasn’t realized that there are really bad people on earth that should not exist; he clearly is not a smart guy. Obama’s new approach to Gitmo does make me somewhat hopeful that he is beginning to get it as we have not heard much more about Gitmo other than it isn’t going to close. His stupid and uninformed criticism of Bush’s approach to the problem of detainees during his election campaign has clearly revealed itself to be without merit. Obama’s worldview that the USA is bad and should apologize for ever coming to the Middle East or interacting within that society is ultimately one that positions our country in weakness. One cannot change what has happened in the past and likewise our very presence in that portion of the world has brought light and the idea of liberty to people in darkness. This issue (Gitmo) will be a huge issue with left leaning folks that will be absolutely disappointed with Obama’s broken promise. Don’t Ask Don’t Tell Reform in this lame duck session was an attempt to appease this faction for the Gitmo miss-step.

RISE OF CHINA AND RUSSIA – REALIZATION OF THE TRUE NATURE OF OUR ENEMIES – Use of 3rd Party proxies will increase and further illustrate the impotence of the US in global theaters and the strategic failure of our military and politicians to realize the coordinated global threat that these two powers represent. North Korea, Iran, and Venezuela will continue to be thorns in our side and the two Communist powers (Yes, Russia is still run by these goons – they just call themselves different names) will ensure that the USA is entangled in skirmishes and wars that will bleed us to death (in terms of soldiers and financially). Note that these attacks will be in the form of military confrontations, digital attacks, and even economic sabotage.

WRAP UP

There you have it. Up, then down, and slight up again is the direction I see things. Volatility will be the name of the game and the theme will be that everywhere else in the world is laden with risk, so US and global investors will fall in love again with US stocks more as relative value and relative risk trades.

The drum beat of financial war will increase in intensity as the US attempts to devalue its currency therefore strangling emerging countries that are dependent on exporting. Other than China, these protests from the likes of Thailand, Brazil, and Chile will fall on deaf ears. Foreign central banks are in a tough position as they try to balance strong growth against killer inflation. Unlike in the USA, these countries citizens actually riot and remove governments when their central banks screw up.  So, the stakes are high for these nations and the inflation monster is real and scary.  As we continue to pressure them with attempts to devalue the dollar we will see more outrage and attempts to control capital inflows into their countries.  Chinese and Indian leaders will try to slow their economies to combat out of control inflation but I do not see them able to slow their markets in a gentle fashion. These efforts will lead to abrupt corrections in those emerging countries and this will have serious negative repercussion in commodity markets.

Europe is still the overhanging wild card. Let me highlight, it isn’t the unknown that the current format of EU will collapse and the Euro will be destroyed, it is more about the timing. The revolving door of “who’s imploding” will continue until one smart player finally opts out and outright defaults. Once they default they will essentially quit the EU and the Euro and resume their own currency. This will be a scary and tough time for the world and for that brave country, but that country will emerge stronger and more capable due to the shedding of the mess of their own making. If this event happens in 2011 then the gold and silver trades I mentioned will happen and a parabolic spike will occur. I don’t believe it will happen this year and this is why I have only mentioned it. Until that time we’ll see Portugal, Spain, and Italy come under attack from bond traders and more bailouts will be a certainty. Riots will also come with the deals to “save” the countries and “bail” them out.

EUROPEAN CRACKS





Finally, don’t assume because I’m suggesting the US stocks will outperform others that I believe we have a healthy market. I am not saying that at all. In fact, I think we are over-valued from a historical perspective at this moment using the lens of the Shiller SandP P/E ratio model, AAII Investor Sentiment, and Put/Call ratio. In addition, we have tremendous structural issues related to government overspending and a scary Federal Reserve that has tremendous interest rate risk on its balance sheet. Despite those concerns I don’t think that they will impact the overall outcome this year.

Having typed all of this I know the moment that I publish it, we'll slam down 3% to 5% simply because the market is over-bought!  The message here is that despite a coming dip we'll see buyers come in an thrust this market higher through April or May.  These are just overall market ideas and my thoughts organized to give me a framework and benchmarks to note as we move through the year.  Please share your thoughts and give me your predictions.

GOATMUG

DECEMBER MACRO UPDATE - RALLY ON THE FED'S DIME!

DECEMBER

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

Last weeks' rail data continues to show overall strength in rail shipping compared to 2009 and 2008 . There are new "red" levels however that may be signs of slowing, but as usual I'll watch and not get too worried or excited.  Autos do pop out as an issue especially since the volumes are just so poor.  I heard over the last week that at least one of the automakers (GM) was going back to their old games of stuffing tons of inventory on the books of the dealer lots and this was allowing them to make it look like production was strong and sales great.  Think about it, wouldn't you do anything and everything you could to enhance your numbers going into an IPO?  As that surge has hit, perhaps that is a reason for the slowdown in auto shipments.

TOTAL RAILS - (4 WK ROLLING AVG) - http://railfax.transmatch.com/
2010 has been a much stronger year for rail shipping as you can see in the 4 week rolling average comparisons.  We also see that the 4th quarter is one that will lead to a decline in volumes. 

AUTOS - http://railfax.transmatch.com/Perhaps I'm just believing the stuff I hear on CNBC that suggests that everything is better in the world, but I am shocked to see that the auto shipment data below is highlighting an early "cooling" in the auto space.  Obviously there is a seasonal component to this, but it looks to have come a bit early compared to last year (and 2008 too).  

WASTE / SCRAP HAULING - http://railfax.transmatch.com/

No real changes here.  We'll see some data later on in the post that still continues to show scrap prices that are increasing.

(NEW INDICATOR) - PULSE OF COMMERCE INDEX - http://www.ceridianindex.com/
As many of you know I've been wanting to find a good index for tracking of trucking metrics.  I've found one here I believe where much of the work is done for us.  Ceridian in connection with UCLA produces real time data on the pumping of diesel fuel for inter-state commerce trucking.  They put those figures into an index level we can track. 

The key reason that I want to track this metric is that I believe that much of the improvement in rail shipping is a result of a purposeful attempt by truckers to use intermodal shipping to become more efficient.  In the beginning stages of the recovery we heard often that the increase in rail traffic was simply due to the fact that the economy was getting so much better.  I started to doubt this because I was seeing more and more traffic on a rail crossing near my home that contained more and more JB HUNT tractor trailer containers.  Yes, I've seen this before, but not in these volumes. 

My thought was simply that JB HUNT was making smart business decisions to avoid paying drivers and shipping those containers across the country.  This all makes sense as long as fuel costs are high and rail shipping rates are low.  I'll continue to monitor these levels and post them monthly.

Here is the key takeaway.  The October data shows the first 3 month decline in activity since the recession levels of January of 2009.  WE SHOULD NOT BE SEEING A DECLINE IN OCTOBER, IT SHOULD BE THE STRONGEST MONTH OF THE YEAR in anticipation of the holiday retail sales season.  This is an indication that the first quarter industrial productivity and other metrics will be lower than expected!

Finally, while I spend a ton of time looking for these data sources, my friend Carzz at http://blog.rebeltraders.net/ sent me the link and I appreciate it.  If you find an indicator you think is worthwhile, send me an email.

MIT/MOODY'S - http://web.mit.edu/cre/research/credl/rca.html
Property prices in September did rebound on the MIT/Moody's National Transaction Index for Commercial Real Estate.  While I'm very giddy that we continue to maintain a base here, I simply am awestruck by the magnitude of this drop.

NAR AVERAGE HOME PRICE - http://www.realtor.org/research/research/ehsdataExisting home sale prices rebounded a few hundred dollars in the latest report from our friends at NAR showing October prices.  As I've mentioned quite a few times it is so distressing to see how negative the impact the government's program of the housing stimulus was on buyers.  In June and July of this year home prices rocketed up to an average of $230,000 per home as the tax incentives were being doled out.  Now, just a few months later we see that home prices have fallen to right at $219,000 or a shocking $11,000 decline from the artificially high watermark.  So the take away from the entire program is that buyers received $6,000 or $8,000 in "credits" in order to buy a home that was overpriced by at least $10,000 while the taxpayer ultimately provided those "credits".  What a great stimulus.  What a disaster.  And we believe that any ideas to get this economy going by these clowns are going to work?

Clearly the only winners in this debacle were the mortgage companies, banks, realtors, appraisers, and inspectors.  Guess what, these were the same winners from the last round of real estate fraud we just endured in 2003-2007.  We won't learn.
  

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

The Monster.com Employment Index for November was released and we continue to see a decline in job offerings on the web.  This "leading" indicator should be worrisome as it is a reversal of the employment picture that we need to keep the economy afloat.  The is the second monthly decline since the September high of 138.

WLI - ECRI - http://www.businesscycle.com/resources/
The weekly leading indicators report from ECRI shows a tick up in again as we are in the area of the index at 125 where we were in May of this year.  The WLI is indicating that improvements are coming.

SCRAP METAL COMPOSITE INDEX - http://www.scrap.net/cgi-bin/composite_prices.cgi?id=100000&num=5
Scrap metal continues to make new highs and we should be taking notice.  Our old mentor Alan Greenspan taught us quite a lot about blowing bubbles and this indicator was one of his favorites.  We must also assume that since Mr. Greenspan felt like it was an important indicator, that he must also feel strongly that it's direction must also be up and to the right to signify that there is health in the economic market.  Therefore, Mr. Greenspan and his younger protege Ben Bernanke must be giddy with the conditions they are seeing now (at least without any corrections for the declining value of the dollar).

COPPOCK TURN INDICATOR -
The Coppock 14-month average indicator is still signaling bearish warnings although it has done so for quite a while.  As with every month I warn that this indicator isn't great in the short run.  To give you perspective, the Dow would need to hit 11,900 by December's close for the indicator to actually signal a buy.

BLOOMBERG FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
The Financial Conditions Index again went positive this week as the slosh of liquidity and ever levitating assets in the markets continue their move.  The index's move above 0 reinforces the idea that we are in an expansion phase (not recessionary).  As we have seen all too many times recently the improvement is quite fragile and any shock to the system could put the recovery in doubt as signaled by the BFCI.

BALTIC DRY GOODS SHIPPING INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
The spot rate for shipping bulk dry good commodities across the world is back down again.  It would really stink to be a shipper with high amounts of debt, of course there are none of those out there in the world, so carry on!  There were some good things going on with shippers like DRYS as they reported good earnings and that they had locked up shipping rates for almost 80% of their fleet for 2011.  I guess that is good news since the index rates are dropping.

USD - http://www.bloomberg.com/apps/quote?ticker=DXY:IND
The USD Index below shows that the work of the FED has been quite successful since the scare back in May of this year.  Remember in April when we were so worried that a little country like Greece could destroy Europe and the Euro?  Those days seem like forever ago don't they?  With a few clicks of the key board Uncle Ben has printed the USD into the abyss and pushed asset prices up, up, and away.  In November, we had a bit of fear return as a little country named Ireland came into the news.  Concerns over their banks and balance sheets have caused the USD to gain some traction.  Never fear though, all is well in Europe and all it has taken is a few days in December for the USD's plunge to continue.  There is no doubt that there may be a few more countries at risk in Europe, but a steadfast IMF and FED can do anything to bolster our confidence. 

Here's a very quick summary.  We've got the WLI and BFCI moving higher but those are often simply derivative metrics that show the power of liquidity provided by FED.  Trucking and employment are slowing and then we had that interesting employment report on Friday.  Despite the mixed signals, it doesn't matter, as long as USD dives, all other assets rise.  Nothing to see here folks!



DECEMBER TRADING UPDATE -
The FED set the tone last month with the reaffirmation of the QE II strategy.  As bearish as you want to be you cannot avoid the coordinated global efforts of the FED and central bankers to push markets higher.  Whenever there is  a move to adopt some sort of reasonable approach to fiscal responsibility, a crisis like those in Europe seem to raise their heads and force leaders to cow to the religion of more liquidity.  Last month was one of those key months where I felt like I was finally getting back in tune with the market where I was anticipating moves down and feeling strongly that they were opportunities just to add more.  The first few days of December have validated those convictions and my purchases of commodities and emerging markets in the face of these corrections have been rewarded. 

There is no doubt that there are issues in China and other emerging countries as they try to step on the brakes to keep from overheating as inflation is clearly hitting.  Due to this it is important to watch continuously and is the reason that I have not added to my emerging markets positions in November.  In my opinion, the overall trends in the US market and commodities markets are still higher (based on a falling dollar of course) so I'll continue to beat the drum of metals, energy, and commodities.  Remember, we have at least 4 or 5 months more of QE II right? 


While the signs of contagion in Europe have been contained for a day or two we know that this problem is not solved.  I can think of a scenario where we begin to see another crisis in February and March along with an undeniable slowdown in the US from a terrible holiday season.  This is where I am looking to see the correction that has so far been non-existent and long over due.

The headlines and concerns we are reading about the Bush tax-cuts expiration are a story to watch, not because I believe they will not be passed, but in the fact that this story may be the catalyst for another downward move in the markets which will provide yet another opportunity to add to positions or reposition poorly allocated investment dollars.  If Congress does not approve the cuts by 12/31/2010, the incoming House will simply pass a measure and retroactively date them to keep them in place for at least another year or two.  The Obama Administration will hate it, but will sign the measure.

I have two updates on individual positions.

VLO
Take a look at this long-term weekly chart of VLO. The 14 day EMA just crossed over the 40 day EMA (200 day MA). This should be quite bullish. I have no position just yet, but it is compelling. As we see a strong follow through move here over $21 will have me looking for a gain to $24.00.






 

NFLX
Followers on Twitter noted that I made a call to short NFLX right as the FCC Chairman stated that he supported the idea that distributors of content on the web should or could be made to pay for their consumption of bandwidth on the web and couldn't simply force it down the pipe and consume the infrastructure and resources of the highway providers (ISPs).  Immediately I decided to short NFLX since they provide huge packets of data and flow them downstream to end users without paying for the cost of the highways to folks like AT&T and Comcast. 

The trade was entered at $202.50 and I have a target of $179.00 and $165.00 for exit.  As always, when I have decent gains I begin to get focused on harvesting them.  At $179 I will sell (buy) half of the position back and look for a further drop to the $165 area. 

BE CAREFUL!

GOATMUG

BANKS LIE AND DEFAME THEIR EMPLOYEES TO KEEP THE FRAUD PLATES SPINNING

Check out this article from Bloomberg this morning.  B of A continues to deny (like all banks) that there was a problem with the way they handled the securitization process in rolling these into MBS.  Based on the testimony of a team lead in the mortgage litigation department at B of A, Linda DeMartini, we see that it was routine for B of A to hold on to the promissory notes and keep them in their name (possession) despite the fact they were required to sign the documents over and physically transfer the paperwork to the trustee (MERS).

Is it any wonder that MERS cannot produce the actual mortgages for all of these foreclosures?  Is it any wonder that some properties have been foreclosed upon by several banks?  Is it any wonder that NO documents can be found?

Of course B of A fired back that this lady was wrong and she didn't know what she was talking about.  All I need to know is if in fact she is wrong, where is the deed?  They haven't been able to produce one!

Enjoy - BofA Mortgage Morass Deepens on Promissory Notes Issues


TRADING UPDATE
As much as I think we are winding down this dump we've had since we highlighted issues in Euribor and CDS widening, the contagion that is bad fiscal policy in Europe has some pretty strong tentacles.  We are now hearing more about Portugal, Belguim, and others being targets of concern.  It won't be long till it is the USA.  Emerging markets and commodities have been whacked as we anticipated and for nimble traders heeding warnings you've done well.  For those that have toughed out the drawn down, you are ok as these currencies fall we'll see hard assets and the emerging markets rebound.  Be aware that emerging currencies will be the targets of their governments who will try to stem the flood of assets coming their way trying to get away from the disaster that is the Euro and the USD.  Rate hikes, capital flows taxes, and more will come so don't be surprised.  Personally I bought a large slug of silver in this weakness over the last week.  I anticipate that over the next year that this will prove to be one of my best trades.  It is a very long term and ill-liquid position so I won't provide much of an update other than once or twice next year.

GOATMUG

 

Mid Year Predictions Review & Trading Update

2010 PREDICTIONS REVIEW


Well, we are more than half way through the year.  The market, if you can believe it, is just about even with where we started, and there is only one word to describe the action, volatile.  If you are trading daily and you are lucky, you are probably breaking even.  If you are not lucky, you are being ground up in the daily, unreasoned swings that occur because the high frequency trading computers run the show.  Call them Skynet (Terminator reference) or Hal 9000, they are doing a job on most active traders.  Unfortunately those that are buy and holders aren't doing any better.  Is it any wonder that treasuries and corporate bonds are the best performers this year?

I have been busy on several projects and that has kept me from writing, but I have had this topic on my mind to review where I thought things were going.  I really love looking at this because it provides great information as to how right and wrong one can be at the same time.  It also allows me to tweak my longer term thesis and review if there has been a significant change that has an impact on my outlook.

Let's jump into it shall we?


INTEREST RATES - (-1)

I SAID - 1/3/2010 - Interest Rates will rise, but not at the direction of the Fed. - The market will demand a more just compensation for the risk it has taken in Treasuries. The 30-year will hit 6%. The market is predicting a rise in the Fed Funds rate coming in August, but I think they will delay raising rates overtly until November or December at the earliest. Any slow down in the economy will be another excuse not to raise them at all in 2010.

REALITY - 7/20/2010 - Ok, interest rates on the 30 year are more like 3.95% so we don't look like we are in danger of hitting my more reasonable 6% target.  So why are we not at a reasonable 6%.  I think for two reasons. 
A)  There is still tremendous fear in the market and investors would rather buy certainty (that they get paid back their money) rather than risk it in the markets.
B)  I think that there is actually a level of true Quantitative Easing being done despite the fact that it officially has stopped.  What I saying is that there have been a number of buyers of treasuries that have been buying in size that don't really typically opt for these instruments.  So while other buyers of our debt have reduced their consumption, the United Kingdom somehow has stepped up mightily and has purchase somewhere near $200 Billion in treasuries over the last several months.  These guys are massively mired in debt and running deficits.  Where'd they get the cash to buy our T-Bills? 

Doesn't matter, I've missed it so far, and frankly, I've changed my tune on this one, we won't see those 6% rates till there is a shock where investors absolutely shun the USD and Uncle Ben will do anything to stop the move up in rates, cause he has to.  I expect that we will see a 30 year mortgage at 3.5% by mid 2011, so give me a -1 to start out the 2010 Predictions Mid Year Update.



QUANTITATIVE EASING - (+1)
I SAID - 1/3/2010 - While the Fed stated they will stop Quantitative Easing in March of 2010, they will not be able to stop because losses on their book will be immense.


REALITY - 7/20/2010 - We as you look above, the question really is, did they really stop?  I would bet they haven't, and we'll actually see more public admission that they are going to publicly do it.  Uncle Ben this week in his testimony on the Hill stated that they are committed to extraordinary steps to keep the fragile economy afloat (my words not his, but that was the meaning).


HOUSING - (+1)
I SAID - 1/3/2010 - Housing issues will improve through April at which time the impact of increasing interest rates will force the hands of banks and they will begin to release their inventory of "non-foreclosed homes" on the market pushing the new wave of speculators underwater teaching them that falling knives are tough to catch. Some are pointing to the HAMP requirements that state that banks that had home owners that modified mortgages and failed to keep the terms of the deal (make their payments) must release this inventory and use short sales as the tool to divest themselves of the inventory as another reason for a coming drop in home prices. I don't see it that way, I see the government changing their minds again and lifting this requirement when they figure out that it could hurt the recovery.


REALITY - 7/20/2010 - I think this pretty much was nailed.  Check out today's report by NAR about the surge in predicted annualized sales through April and guess what, it is going in the tank.  Ummm, look at that inventory build there too.  Isn't government stimulus effective?

Annualized Sales Data from NAR - http://www.realtor.org/research/research/ehsdata
MONTH       Annualized Sales    Supply
2009 Dec       5,440,000   7.2 Month Supply


2010 Jan        5,050,000    7.8 Month Supply

2010 Feb       5,010,000    8.5 Month Supply

2010 Mar       5,360,000    8.1 Month Supply

2010 Apr       5,790,000    8.4 Month Supply

2010 May      5,660,000   8.3 Month Supply

2010 Jun       5,370,000    8.9 Month Supply




CURRENCIES (-1)
I SAID - 1/3/2010 - We will see at least 2 currency devaluations in 2010. These will manifest themselves in the form a North Korea style announcement where you will wake up and the currency will be declared -10% less in value or more. These devaluations are necessary to continue each country's desire to sell goods cheaply abroad. The US' motivation of course is simply to reduce the relative amount of the crushing debt that we continue to heap upon ourselves.

REALITY - 7/20/2010  - We haven't seen this yet, but effectively, the rise in the USD has helped prevent this situation.  If we see Geithner and Uncle Ben resume the significant devaluation in the dollar as a measure to inflate and get us out of this mess, we will see these in the back half of the year.  I'm conceding this as a miss.  Note that Argentina is essentially defaulting on debt to bondholders by forcing an exchange, it isn't a currency adjustment, but sure is sucky if you're told to take new bonds (less bonds).

EURO - (+1)
I SAID - 1/3/2010 - The Euro will face continued pressure, the US dollar will rise significantly against the Euro from the 1.432 level it is as of this writing.

REALITY - 7/20/2010 - Problems in the Eurozone will not go away even if they can pull off a US style sham with the bank stress tests.  They still have major issues of spending too much and promising too many benefits in the nanny state.  Need a preview of where our government is taking us?  Look no further than the week Euro, out of control spending, and a detachment from math that is temporary.  Ultimately Europe and the Euro fail.

YEN - (-1) 
I SAID - 1/3/2010 - The dollar will strengthen against the yen.

REALITY - 7/20/2010 - Hasn't happened.  The Fed and Treasury have had been luck keeping rates low and Japan has not been as effectively using QE as I thought relative to the US.  Remember, this is a race to zero and Japan has been in deflation for 20 years.  I will patiently wait for this, but they are clearly worse than the US.

GSEs - (+1)
I SAID - 1/3/2010 - Fannie Mae and Freddie Mac will become the dumping ground for all private mortgages loans made in 2009 and 2010. The banks will avoid taking losses and pass all of them to the US taxpayer. The Christmas present (uh-unlimited losses) that the government gave the US tax-payer on Christmas day is unbelievable. For the next 3 years the loss limits on these two organizations have been lifted and we are backing them with a blank check.

REALITY - 7/20/2010 - Ok, I'm not sure if this was really a stretch in predicting anything.  These companies are toast, and we the US taxpayer are unwillingly footing the bill for complete insanity.

LENDING - (+1)
I SAID - 1/3/2010 - Small business lending and personal credit will continue to decline through 2010.

REALITY - 7/20/2010 -Lending is still extremely tight.  The administration and Congress just past legislation in an attempt to get small business lending going.  While I applaud this, this probably means an abandonment of conservative lending principles and we'll see losses in this area of government generosity as well.



GOLD (No Rating Yet)
I SAID - 1/3/2010 - Gold will actually decline to the $950 area and then move higher later on in the year when it becomes increasingly obvious that Bernanke and Geithner have no intention of pulling liquidity. This will be the opportunity to add more to the position. Gold ends the year in the $1150 to $1200 range. Longer term, gold is still a buy.

REALITY - 7/20/2010 - Gold is still at $1192 as of this update (7/23).  The gold market has not dropped as much as I anticipated, but certainly hasn't ramped up higher.  I am still looking for the move down to the $950 to $1,000 area though after an anticipated ramp up again.  You could potentially buy it and then sell it higher, but you face serious risks in timing it.

EQUITY MARKETS (+1)
I SAID - 1/3/2010 - US equity markets will end the year slightly positive (meaning less than 5%). This year will be volatile and gains should be harvested when they are acquired. This means that there will be periods of gains and you need to take advantage of the ranges in the markets and buy at the low end and sell at the high end. I still maintain that the Fed will support this market directly or indirectly at all costs. As housing reverses, be prepared to see unexplainable increases in equity markets. Bernanke knows the conventional thoughts that the collapse in 1937 occurred because the Fed increased rates too soon, he'll be sure not to repeat that lesson. This is how we'll be sure to over inflate and also create the next collapse in 2011 or 2012.

REALITY - 7/20/2010 - Pretty right on so far, but I would actually look for a move up in markets over the next month or two and then a slide down in the months of October and November.  There will be no rate increases by the Fed.


FOREIGN POLICY - (No Rating)
I SAID - 1/3/2010 - Middle East tensions will boil over. The US will give Israel the green light to defend herself and presumptively attack Iran. Russia and China will condemn the attack and they will choose the side of their trading partner against Israel by selling arms and providing material support.  Upon attacking Iran, Syria and Lebanon will engage Israel on their northern fronts.

REALITY - 7/20/2010 -  Tensions are mounting.  The longer we languish economically I believe we will see an increase in tensions in the Middle East.


OIL - (No Rating)
I SAID - 1/3/2010 - Oil moves to $100 this is based on the continued debasement of our currency through the actions of the Fed and Treasury and also geopolitical tensions.

REALITY - 7/20/2010 - Oil is now back up to $79.  A move to devalue the dollar any will result in meeting my $100 projection.


US POLITICS (No Rating)
I SAID - 1/3/2010 - Republicans sweep away the majority held by the Democrats in the mid-term elections. The third-party movement continues to garner support but is quashed by the two party system.

REALITY - 7/20/2010 - This looks as though it is moving in the direction I thought, however, I am looking at the impact of the Tea Party Movement which is being marginalized by it's inability to speak through the labels that both the Republicans and Democrats are throwing on them.  Unfortunately the Republicans have swept in and made efforts to identify with the Tea Party (and I'm sure some do), but the cost of allowing Republican incumbents to take the Tea Party mantle is that there is no real and lasting change and you continue to have the same political elites in power.  In a sense for me the Tea Party movement is about new leadership and fiscal responsibility, not the same old structure and system with new faces.

SUPREME COURT - (+1)
I SAID - 1/3/2010 - Obama names a replacement for Justice Ginsberg who retires in 2010.
REALITY - 7/20/2010 - Ok, that was an easy one.


HEALTH CARE REFORM - (+1)
I SAID - 1/3/2010 - Obama is able to pass some sort of health reform. He passes the reform knowing that it is unconstitutional. The strategy is to destroy the health care industry as we know it in the next several years. When the high court determines that the legislation cannot stand, a one-payer system (government) medical system will be the only option left to pick up the pieces. The final step will not take place till 2013 or 2014. No matter what, abortion will be a major component of the bill and will not be removed.

REALITY - 7/20/2010 - Yes, this reform was passed.  We do need change, but this is a mess and more importantly, it is a financial mess.  I've written at length that the cost is out of sight and I am not being over the top.  This is a disaster.  Abortion is a component of this bill and despite the "Executive Order" lie that was provided by our president, we are paying for these with tax payer dollars.  I have rethought my notion that the Supreme Court will strike down the legislation.  It will not, this system is here for good.  The losers are the US consumer and tax payer, the winners are big government advocates and big pharma.


NATIONAL SECURITY / PERSONAL RIGHTS (+1)
I SAID - 1/3/2010 - Despite failed terror attempts our personal rights and privacy will continue to be eroded in the name of our safety. Our government will continue to take measures to protect you after each attempt (meaning safety measures that will waste your time and add little to your safety).

REALITY - 7/20/2010 - Little erosions continue.  We have now discovered in the health care bill that all purchases made by businesses over $600 must be recorded and issued a 1099.  This is far reaching and an encroachment of personal privacy.  The impact is also being felt by gold and silver dealers that now must record and issue a 1099 on all purchases of gold or silver in excess of $600.  What is the purpose of this?  Tax revenue generation, but also a deeper view and insight into the personal transactions of the person in the US. 

OK, thats a wrap.  For those of you keeping score at home, the mid-year update has a score of +6 total.  The tally looks more like this.  +9 Correct right now.  -3 are incorrect now.  4 with no rating.  So 9 out of 17 so far.  This isn't about being right or wrong, it really is about making a statement of what I think will happen and why.

TRADING UPDATE
Over the last several months we've seen markets trade within a 200 point S&P500 range (20%).  As of completing this post today, we are waiting on the European stress tests to come out and convince us that all European banks are healthy and the markets should feel really good about the global economy and recovery.  I personally believe that we will rally for the next month or so and then more reality will set in.  I've written a lot about the possibility of a double dip recession and what is interesting is that we've had no formal announcement from NBER that the recession is even over.  I guess this is a way to hedge your bets and state that there is no double dip - you just never get out of the quicksand in the first place.

I've been laying the ground work for a strategy on the next drop in markets that I will employ and I'll share just a few thoughts about it.  US growth is estimated to be a 2% to 3%.  Emerging market growth is obviously predicted to be much higher somewhere in the 8% to 12% range.  These countries would includes Vietnam, Malaysia, China, India, Brazil, and more.
As we look at this, you must ask yourself where you think the best stock market performance is going to be.  Obviously, you would expect many of these countries to outperform. 

How do you put it together?  First, the easy one, you simply buy those countries.  Second, if you want to give yourself some protection, you could take steps out short US and go long these countries in a relative value trade, hoping that the countries go better.  This gives you some downside protection if they all go down, but you will still suffer.  Ultimately, I think very long term, this will be a home run strategy as millions and millions of new world citizens rise to the ranks of the middle class.  This also makes sense on so many levels as it removes our dependency on our government to actually make responsible decisions and somehow navigate us out of the mess we are in.  If, as the Fed and Treasury desire, they are able to devalue the USD, you'll also win on the currency bet side of things as well.  If deflation in the US takes hold, this strategy my hurt you on the currency side of things as the USD rises in value, but you will hopefully also receive rewards from getting out of the US equity markets into ones that actually will grow.

Ok, enough rambling on this post that has taken a few days to write.  I will develop the relative value trade more and put out some charts to examine.  I'll also do something on gold.  I've thought for a long time that our government would do everything in its power to stop the gold increase and I believe the healthcare bill is just one step to crush the move higher in gold long term.

GOATMUG