WHERE ARE WE? (Sector Rotation Models)

I suppose that I could lavish you with lots of thoughts about how were are stuck in some crazy feed-back loop of Fed induced mirages and half recoveries yet it would only be tired old cry that prattles on about how the deception will work well, till it doesn't.

So, instead of singing the same old tune and holding my nose and buying those stocks that have been defensive and leading this nutty rally for the last year or so, I'll simply provide a snapshot of the old sector rotation model that we've examined before.  My guess is that we are nearer to the far right side of this image which would suggest that the equity markets have topped AND we are in early recession.  The only fly in the ointment if you will is that I have been holding utilities, healthcare, and consumer staples for almost two years and these stocks have been our leaders!  This segment of the equity markets usually doesn't maintain leadership for this long, so as usual, there are new, weird, and unknown forces at work in this screwed up Fed driven market.

If we think we really are progressing along the economic cycle, you might dip a toe in the finance area, (which I did when I bought some regional bank stocks several months ago).  Those are about flat still, so I guess we'll see how long it takes for the economy to finally break down in a real way and have those interest rates rise, bringing helpful and healthy rising net interest margin...... hold  your breath about rising rates, it probably won't ever happen.

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/

GEITHNER PROTESTS DEVALUATION WHILE DEVALUING

Everyday I am amazed at how prescient authors like George Orwell and Ray Bradbury were in picturing the odd reality we'd face here in 2010. 

Geithner warns in a Bloomberg report that currency devaluation is dangerous and damaging.  This is pretty funny given that the powers in charge have managed to crush the value of the dollar some 7% JUST IN SEPTEMBER! 

Obviously other countries are not going to sit idly by as we essentially put a tax on their currency and make their goods more expensive (meaning less purchases by us).  China, Brazil, Europe, and others cannot stand to have us continue our policies lest we damage their exporting economies.  Japan has tried like crazy to stop the trend as the Yen is at a 15 year high relative to the USD.  Imagine the heads that are rolling in the currency management department in China where they have lost almost 7% on their treasury holdings this month simply due to the currency moves!  A $100,000,000 loss in a month sort of hurts I would guess.

This is funny to watch as we are seeing a full measure of double speak, but this is the stuff that trade wars and essentially currency wars are made of.  Our actions to devalue have very real consequences for other countries and it is now a situation where it is every country for themselves.  Expect tariffs on manufacturing producers like Boeing and Caterpillar as this heats up.

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