February Update

Ok, here's a quick update for February.

RAILS - (from Railfax) - http://railfax.transmatch.com/
The next few weeks will reveal how much of the recovery is real. As you can see, rail traffic is now on the verge of a breakout over last year's levels. To this point, all of the talk about recovery has been forward looking and full of "Hope". We will see the truth in the next two to three weeks.

Commercial and residential building is not showing up here in the shipping of lumber and crushed stone. It is very interesting to note though that home builders did not break through their lows in the correction over the last two weeks, and we are seeing lumber prices really catch a bid.

LUMBER PRICING
See futures trading charts.com - You'll see lumber prices have moved much higher and there is quite a bullish trend underway. They do not give permission to copy their charts so I have included a link here.

http://futures.tradingcharts.com/chart/LU/W

The question I am asking here is simply this - Does this move in lumber prices indicate some type of increase in demand that will translate into greater production for homebuilders and commercial development? Someone is buying so we should be looking at these types of investments. It is interesting to note the the XHB (homebuilder's etf - I'll add a chart later)

has not really broken down terribly over the correction of the last couple of weeks. This should be on our radar as a potential bullish breakout if the overall market gains traction.

Once again, KSU is back over last year's trendline in shipping. We might review how the stock is trading and attempt to go back to the well one more time.

Click on the chart for KSU - I see $29.00 as pretty strong support here. I might look to purchase the stock in the low $30.00 level with a target for exit at $33.50. Fundamentals coupled with the channel that remains intact will produce a good opportunity for a 8% to 10% move higher. As I mentioned, set stops at $29.00

BALTIC DRY INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY%3AIND

The Baltic Dry Goods Index is continuing to make higher highs and higher lows. We'll continue to monitor this trend which indicates that a recovery in commodities and shipment pricing power is underway. It is important to note that a decline here below the $2200 level would indicate that commodity demand is drying up.

FINANCIAL CONDITIONS INDEX - http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND

The Financial Conditions Index dropped back below zero (0) last week with the market correction. The message here is that we are not out of the woods yet and the recession is not completely over. A strong move over zero would allow us to declare everything is better. As you know, I question the FCI simply because more than 1/2 of its components are Fed liquidity driven, meaning that the slosh of funds provided by our generous Federal Reserve are being captured in many of the inputs here.

US DOLLAR INDEX - http://www.bloomberg.com/apps/quote?ticker=DXY%3AIND

The dollar has been the beneficiary of strength due to the concerns with the debt of several European countries - namely Portugal, Greece, & Spain. Recall we had similar issues with the debt of Dubai just a month or so ago. As investors fear uncertainty they flood back to the good old greenback and typically buy US treasuries. They aren't buying treasuries because they yield a bunch or as we've discussed, compensate them for the actual risk they are taking, they are merely buying the dollar because it is the best of the bunch.

What has been the result of this 2 weeks of dollar buying? The obvious answer is just what we noted would happen. When the dollar gets stronger, EVERYTHING else gets beat up. That has included the overall equity market, the corporate bond market, gold, silver, and any other commodity.

TRADING FOR THE MONTH
Well, what is the strategy for this month? I think the best approach for this month is to recall the ranges we've previously discussed. Remember we've highlighted the upper boundary for the range at 1150, well we punched through the 1110 area on the S&P and now have a lower area of 1060 as a lower boundary.

As traders become more concerned about risks, they put more bearish bets on and that is bullish and portends a rebound in the market.

Greece is the near term catalyst for a bounce. If an announcement is made that protects or guarantees their debt we may see a jump. The EU needs to be concerned though because this will set in motion a precedent for further actions for Spain and Portugal which both are very sick.

If you have dry power left you might consider putting to work some of it here and looking at the same old items we've mentioned before (commodities and emerging markets). Don't forget that KSU trade either because it seems like a good set up. Finally, if you bought the VXX (fear index) I mentioned you made great money, you need to get rid of that because if the market bounces you'll start losing.

View of S&P 500 - look for support at 1018

TOP OF THE RANGE

Ok, just a really quick post here. I have been sitting on pins and needles for the last couple of days trying not to get too convinced of anything as the market has given and taken away. As I am typing the market is down 18 pts in the S&P and to sound more scary- down 172 in the Dow.


What does this mean? Maybe nothing, but you must keep your eyes open and also be aware of the ranges we have discussed. In my last post I added the following comment in the trading wrap up section....


"The market is still within its trading range. We can look for us to sit within the 1110 to 1150 range on the S&P500 unless we have a catalyst to push us in one direction or the other. In the very short term we could have a pullback, but through the end of March I'm looking for a melt up higher. "


Well guess what, we got to the top of the 1150 range yesterday and we have a following smack down with the S&P trading now at 1132. Could we move to 1110? Yes. Should you be watching? Yes.


Other developments -


Keep your eyes on the following items that are of note.



TREASURIES - A LONG BOND BUYER EMERGES?

Someone suddenly has been buying long term treasuries in big quantities over the last two weeks. What does this mean - it means that institutions are starting to bet that interest rates won't rise. This would happen if the market sold off significantly and these buyers stand to gain tremendously if scared investors flood back to treasuries. Remember, everyone believes that interest rates will rise and the dollar will fall. If tons of buyers come back to treasuries, the dollar will also increase - this means trouble for our commodity laden portfolios.

What is our mantra? If everyone is leaning to one side, a careful investor might slip over to the other side or at least move to the middle to avoid the herd.




SENTIMENT -
Remember what we wrote in the January update - "Bullish sentiment was extremely high". I personally had 2 conversations with traders and they were so concerned with getting in that they never once mentioned that the market could fall and they could lose their money. These conversations are the ones that get me very worried.

GREECE

Greece is in some serious trouble. Their credit default swaps are pricing much higher (read as much greater risk of default). This will put pressure on the EU and the Euro. This also probably explains movements in treasuries and the dollar. - This picture is from Zerohedge - http://www.zerohedge.com/article/greece-cds-hits-fresh-record-funding-crisis-now-official

Defaults from EU countries will drive folks to safety and remind investors that there really is risk out there (something I think they have tried to forget).















PE RATIOS -
I've included a picture posted by Karl Eggerss at http://keggerss.wordpress.com/2010/01/19/are-stocks-getting-too-expensive/. This graphically describes that earnings had better improve dramatically and quickly to adjust the P/E ration back into some normal territory. As we all know, stocks have advanced in a huge rally on the expectation and understanding that the world was not coming to an end and that the world and the US consumer would again go back to the binge buying and credit enslavement.















I like Karl's approach here and this graphic is very telling.

Ok, so what do you do? Watch that 1120 support in the range. If you are in cash, this could be your buying opportunity. If this level falls, perhaps an exit might be in order. As you all know, these have been opportunities to add to positions. Remember July, September, and November? At some point the buy the dips won't work and the ranges will fall apart, until then, keep on your toes.

JANUARY UPDATE - STILL IN THE RANGE

Sorry for the delay in getting the update done this month. As usual, life doesn't wait for the blog!

I will make these comments brief and will add new stuff in another post over the weekend or early next week. Things should slow down.

CFO SURVEY - http://www.cfosurvey.org/


Optimism stats by Duke University were released as of December 2009. CFOs seem to be a tad bit less excited about the prospects for recovery. It is evident that during the credit collapse they were pessimistic and then suddenly felt much better. We notice a dip here as I believe CFOs are getting a picture that the stories of a recovering consumer may be overdone or much delayed. This is something we need to watch as this a a group that isn't positive based on "spin", they see the data within their firm and then make informed decisions as to what reality is. CEOs tend to be much more positive and I have said before that I trust the CFOs more. It is also of note - (not on this picture - go to the link for more) that European CFOs are the most pessimistic of the world and the survey produces results for them that indicates that a recovery from previous levels is very far off.
















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













Total rail traffic has met and begun to exceed levels from 2008. What is interesting to note is that the easy comparisons are now baked in the cake and while the headlines will look good, we are not seeing a significant recovery over those levels. In other words, a total collapse took place last year and we've been told that we are in the full throws of recovery. Some other indicators show that we are probably out of the recession completely. Given this information we should begin to see levels on the chart that show the blue lines ABOVE the green of 2008. This fact that we are not above significantly is concerning and could portend the double dip or W economic path I've discussed for months.


Same story below. Recall that we use Crushed Stone and Lumber shipments as a proxy for commercial and residential construction to try to obtain leading indications that a turn may be coming. Crushed stone is actually falling and lumber is still drifting downward. No recovery in the books for this month.

















KSU - If you were playing along with the trade we discussed in KSU, total shipments are still outpacing last year's but now isn't on the trajectory we noted last month, hence our call in posts to exit in the $34 area. KSU has remained in this range. I like that the 20 SMA has moved up to provide support in this $33 area. Major support still is in the $28 area, with an upside target in the $39 area. Volume is dropping in KSU, so be watchful. (no positions in KSU)















INVESTOR SENTIMENT - (http://thetechnicaltakedotcom.blogspot.com/2010/01/investor-sentiment-no-comment-needed.html )













My friend Guy Lerner's post of investor sentiment clearly shows that everyone is bullish and this should be a signal for folks to be on high alert. Not only are folks bullish, the VIX (volatility index - known fondly as the fear index) is now trading in the 16 area. These areas indicate that investors have been lulled to sleep and there is little concern in the market. As Guy points out in his post, the bullishness is beginning to hit extremes and as the VIX glides lower, it will be indicating extreme levels of "non-fear". Just because levels are here doesn't mean that this week we'll encounter a sell off, but if the VIX falls more toward the 10 level, you can be assured of seeing a dramatic drop in markets. For the active traders that can't put the mouse down, a trade using VXX might be in order (for speculation only). The VXX bets that the volatility in the market will increase.

Extremes in sentiment occurred in August 2008 which was several months prior to the collapse in October of 2008


BALTIC DRY GOODS INDEX - from Bloomberg


I am going to begin including a quote on the Dry Goods Index simply because so much of our discussions involve commodities and the dollar trade. As we see other economies ramp up and recover (China, India, Brazil, etc) we should expect to see this index of the spot price of bulk shipping increase. On the other hand, if we don't see a continued improvement this should be a warning that the global recovery is hitting headwinds. We are seeing higher highs and higher lows since March of 2009. If this trend continues this is positive. If we see a breach of pricing on that 2000 level, it will be another indication that the recovery is a mirage.
















FINANCIAL CONDITIONS INDEX - from Bloomberg
The Financial Conditions Index breached the 0 mark in mid December. This data suggests that the recession is over and we are in the midst of an expansionary phase. I have often pointed out that more than 1/2 of the component pieces of data in the FCI measure "levers" of the Fed and are therefore are more of a measurement of Fed liquidity flows than anything else. This may be true and is not lost here. It is important though to use it and note what it tells us. It will be for us to discern and the market to absorb the liquidity and do something with it. We all know that banks still are not lending as outstanding consumer credit still continues to nose dive. The Fed can print all the dollars they want or as it has been said, "Helicopter Ben can shower us with as much cash from his helicopter as he wants." I would challenge this notion and say that if the dollars that fall down are swept back up into the rotors or the dollars get stuck in trees then the liquidity measures will not prove fruitful. Essentially my thoughts are exactly that - that the Fed has showered the banks with currency in amounts never seen before, however the dollars have not reached the hands of businesses that would use the credit and therefore the liquidity has become a instrument of interest rate arbitrage for banks rather than a tool of fractional reserve fuel for the economy.















If we hear more stories of businesses receiving funds or banks lending for projects and investments I will feel more comfortable.


US DOLLAR - Bloomberg











The dollar had a recent surge and now the Fed and Treasury are back to business in driving it lower. I am looking at these upward corrections (counter-trend rallies) as opportunities to build positions in overseas holdings and commodities. Longer term interest rates will rise and commodity pricing pressures will increase not abate.

TRADING FOR JANUARY


The dollar weakness trade is back. Look for rallies in commodities, especially gold, silver, natural gas, oil, and ag commodities.

Other trades should be considered that focus on investments outside the US. I've mentioned the country ETFs I like in past posts.

Look at the graph on the double inverse dollar UDN -













While I can't capture it here, the weekly chart of UDN shows that there is building momentum in UDN (dollar weakness). The action here should be good for commodities.

HOME HOME ON THE RANGE
The market is still within its trading range. We can look for us to sit within the 1110 to 1150 range on the S&P500 unless we have a catalyst to push us in one direction or the other. In the very short term we could have a pullback, but through the end of March I'm looking for a melt up higher. The challenge in the market could come in late March when the Fed says that it will stop its process of Quantitative Easing. Q.E is the process where the FED actually buys our own Treasuries that they are attempting to sell. The reason they are doing this is to create a false market for our debt and CONTROL the prices (interest rates). If the FED had not stepped in to pursue QE, our interest rates would be much higher. As you know I've stated will be continued in my opinion no matter what the Fed says, because they will be shocked to find that no one wants US Treasuries for 30 years at 4.375% interest!

This is just another reason that we suggest that if you own bonds that are have maturities of longer than 10 years (probably even 7) you should consider exiting. As interest rates rise you the price of bonds will decrease. Even if you do not sell them and simply continue receiving the coupons the interest you earn will be less because inflation will consume more of your return.

Be vigilant as we enter earnings season. If everyone is bullish it is reason to maintain an eye for the exit.

Goatmug

Misdirection and Slight of Hand - Health Care Reform

Just a quick post to provide you information on the health care reform trends.Click below to read what United Health Care has summarized as what they believe will be the final version of the coming changes to health care over the next few years.

http://www.ezrespond.com/Healthflash.pdf

Specifically, in the next 6 months, insurers will need to adjust their treatment of the following;

1) Get rid of any waiting periods of greater than 90 days to begin insurance that is approved.
2) Stop rejecting children under 19 for pre-existing conditions.
3) Stop canceling insurance policies except in the case of fraud (this is overdone - in 7 years I have never seen a policy dropped for someone making valid claims.)
4) Provide preventative care (wellness visits) without cost sharing. - Many insurers only pay $300 or $400 a year, but require a client to pay 25% of the cost. For example they pay 75% of wellness visits up to $300 out of the insurance company's pocket.

All of these changes are good and right, however they will raise rates, so hold on to your hat!

UHC also highlights other changes they expect in 2011 and 2014 so read away.Here is my take on the entire deal.

STRUCTURE
You must know how the structure is set up to understand the fraud that is being put in place.
A) Taxes begin immediately.
B) Cuts in Medicare coverage begin (After mid-term elections)
C) In six months, the changes above are effective
D) 2014 - The big reform is schedule to hit - Individuals are required to have coverage or pay a penalty of the greater of $750 or .5% of their income if they don't purchase insurance.

IMPACT

HIGHER RATES
As I mentioned, the impact of these changes will be immediate. Insurers now are required to take children that have pre-existing conditions in the near term and these "sick" kids will be an immediate drain on profitability and an increase in cost. Is there any doubt that kids that are very sick will hurry to buy insurance? Is there any doubt that insurers will adjust rates on all new policies sold and also on all existing policies when they have a chance?

TIME LINE
Ok, so here is the real deal. The administration's efforts here are to begin paying for this plan with increased taxes today. In addition they begin cutting Medicare benefits, require insurance companies to make changes immediately add sick folks to the insured roles (read as decrease profits and increase costs - or simply put hurt their businesses significantly). Finally in 2014 we have everyone come on the plan. Kind of strange timing isn't it?

WHAT WILL REALLY HAPPEN
A) Oh yes, please look at the 2014 stipulations as well. Employers will ultimately drop their coverage and stop offering it if they employ more than 50 employees. Think about it, they will cut costs significantly in the form of premiums (they will have to pay a $750 fee per employee fee when not offering a plan) and will be able to tell their employees that they have health care available through the government exchange plan. -- You don't think they'll do it? Right now, most employers pay 1/2 of the health plan costs per employee, just assume that that is $200 a month of a total of $400 a month. The break-even is just at 4 months. Cash strapped employers will absolutely push their employees off into the new plan.

B) Over the course of the next 3 years, people will sue the federal government and it WILL be declared unconstitutional to require a person to enter into a contract with a third party to obtain insurance.B) In that 3 year period, private insurers will have had their business margins slashed and profitability will have been destroyed. With the high court ruling that the health reform act is unconstitutional, we will see a final destruction of these firms as the trend to buy insurance will be broken and good healthy clients will drop policies, while sick folks will retain them.

C) As a result of the court action, the federal government will step in with the only solution - a national health plan that is a one payer system (GOVERNMENT HEALTH PLAN). This will be the only fix as the collapse of private insurance plans will be complete.

It sounds ominous and sounds like a conspiracy doesn't it? The answer is clearly "YES" it does and guess what, it is all planned. Remember, the administration says they don't care what gets passed, just as long as it is passed. This is the gateway for the end goal of national health care. The first step is only a first step.

Do I think the system needs an overhaul? Yes, of course. I speak with people every single day that are declined by insurers.

Do I think this is the answer? No way.

Long term, you as a patient and consumer will pay more, have less choice, and ultimately wait much longer for medical services. Government is inefficient and is never the answer. In addition, all of the assumptions by the CBO and the administration don't account for the massive exodus from employer plans to the new government plan. This will be the major reason for massive cost overruns.

We have been told that the model for these plans are the VA system and Medicare.Remember two or three years ago when President Bush was blasted for the conditions and treatment of soldiers in the VA system during the Iraq conflict? Remember how the Democrats told us how terrible things were and how bad the hospitals were maintained? Ask a veteran that goes to the VA how quickly treatment is provided? This is the model?

Finally, if you think that government can run things well why is Medicare absolutely broke? Why would we model anything after this plan. The system is filled with fraud and costs are out of control. The government almost creates an environment where over billing is the norm because they reimburse providers at less than 50%. If you owned a practice wouldn't you do an extra procedure, lab, or other test simply to cover the cost of the haircut you'd receive?

Bookmark this post, I'm certain of only a few things in life, but I am sure this is a disaster waiting to happen. In the meantime, I'll rejoice as I'll sell a lot more policies and insure many of the kids that I've had declined previously. I better save my money though because the future is certainly dim over the long term unless the government allows for the sale of supplemental coverage to sit on top of the government run plan we are sure to have.

Goatmug