NOVEMBER UPDATE - MAN DO I FEEL RICHER!

IN FED LANGUAGE, PRICE STABILITY MEANS A BLOW OFF TOP

Call it QE II, monetization, printing, or the precursor to QE III, call it what you like but just don't fight it.  The FED's overt action to inflate asset prices at any cost have trumped all market fundamentals and created an asset price surge into the stratosphere.  Chairman Bernanke states that he wants price stability, yet his definition of price stability must not include a normal ebb and flow, it must only include a moonshot ramp job.  I would contend that we have anything but price stability at the current moment.

I've captured a few sentences from Fed Governor Mishkin in a 2007 speech.  In this message he highlights the dual mandate that the Federal Reserve has in its role. 

"According to this legislation, the Federal Reserve's mandate is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." Because long-term interest rates can remain low only in a stable macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal Reserve seeks to promote the two coequal objectives of maximum employment and price stability. In the remainder of my remarks today, I will describe how these two objectives are consistent with our ultimate purpose of fostering economic prosperity and social welfare. I will then talk about some important practical challenges in implementing these goals. "

Let's examine how we are doing with those goals?  Maximum employment --- QEII and low interest rates have done nothing for this goal.  Stable prices?  We'll dig more into this, but this is absolutely false and prices are getting more out of whack.  How about moderate long-term interest rates?  I'm going to suggest that this is also missing the mark.  QEII is about reducing interest rates so the US can meet its debt obligations and keep the illusion of US solvency intact.  If and when there is a rationalization to normal interest rates there will be no such thing as moderating interest rates.  Strike three in my opinion on the mandates and target goals of the Federal Reserve.

What's the purpose of all the QE?  You must know that Chairman Bernanke and former Chairman Alan Greenspan believe that greater stock prices will lead consumers to buy more and borrow more as the "wealth effect" creates in their mind a sense of having more money.  The notion that asset prices are increasing caused many in the early 2000's to lose all sense of rational expectations and believe that housing prices would always go up, that houses were the equivalent of ATM machines, that living off of one's credit cards is ok, and that all people deserve and are capable of being rich.  While the mistakes and poor thinking in the 2000's were quite real, I am optimistic that Amerikans have learned some lessons and won't fall for the old asset price wealth effect trick again.  Perhaps I'm naive, but I think many are now focused on living within their means and paying off debt, not incurring new and larger obligations.

September and October have provided almost all markets with out sized gains and have posted record results.  Clearly the economic fundamentals must reinforce and justify the rocket launch right?  Let's dig in and see where we are at.



RAILS - http://railfax.transmatch.com/  and http://www.aar.org/NewsAndEvents/~/media/aar/railtimeindicators/2010-11-rti.ashx


Total Rail Traffic continues to outpace 2009 levels for the current week.  We are about 10% higher than those levels, yet are still down 4.2% from 2008 numbers.

RECESSION INDICATORS
Waste and Scrap shipments are on par with last years levels.  These shipments don't give us a clear indication of strength or weakness.  Motor vehicle shipments are greater than 2009's dismal levels, but this should give us reason to pause and temper our elation.

Food Stamps - SNAP PROGRAM - http://www.fns.usda.gov/pd/34SNAPmonthly.htm

As I mentioned an earlier post this week, the Food Stamps Program continues to see greater and greater participation.  The SNAP data continues to highlight how bad things have been on mainstreet.  More families are drawing on the resources of the federal government and taxpayer for their food needs.

COMMERCIAL REAL ESTATE DATA - http://web.mit.edu/cre/research/credl/rca.html

Moody's MIT Transaction Report - Commercial Real Estate
The CPPI continues to decline and show an erosion of value in the national commercial property price index.  The figures released for August show another 3.3% decline in values in actual transactions.


 

HOME PRICE INFORMATION / LEADING INDICATORS - ECRI - http://www.businesscycle.com/resources/

The ECRI data on home prices continues to show no improvement in this critical area of the economy.  Real prices continue to reel and go lower through the August data release while leading indicators suggest that the pricing is simply flat.

MONSTER EMPLOYMENT INDEX REPORT - http://about-monster.com/employment-index
Jobs reports last week were surprisingly good and we see improvements in the weekly data.  Unfortunately we are not seeing an improvement in the unemployment rate at more workers that just gave up are now coming back in search of job opportunities.  Our unemployment rate is still at 9.6% and is quite sticky at that level.
Despite the good release, the Monster.com Employment Index dropped from a level of 138 to 136 in October.  Why new job listings on the web would decline here is actually interesting.  This is a really good report to watch and get some indication of where we are going. 

On a separate note, Monster reported excellent earnings a couple of weeks ago.  I should have been on this as an investment possibility as the huge surge in the index would and should have been a tip off to the potential rebound in earnings for the company.  I'll continue to keep that in mind as I track this and highlight it as a potential trade in the future.

6 MONTH EURIBOR - Euribor rates continue to climb.  Some of this increase is a result of the European nations holding firm and refusing to follow the stupid policies of our Federal Reserve.  The lack of "relative" stimulus provided in Europe is marked by higher interest rates.  Having said that, there are still real problems in Europe with countries like Ireland and Portugal, and don't forget our old friend Greece.

No matter what, it is unmistakable that there are "interesting" things going on in the last month as the 6 month Euribor rates have climbed about 15 bps or 10%.  This is an inexact gauge but it is an item I watch every day in an attempt to measure stress in the banking system worldwide.



CDS SPREADS -  http://www.markit.com/cds/cds-page.html


To continue on the thread that sovereign debt is still an issue, I wanted to include some data related to the CDS (Credit Default Swaps) pricing to offer protection against a default of one of these countries.  You must recall that earlier this year CDS prices exploded as the European debt crisis was unfolding again.  I am absolutely certain this will happen again just about the time when everyone forgets that these countries are really insolvent (like the US and every large bank).  For those that aren't accustom to looking at these, note that the spread is 992 which means that a person would pay 992 basis points (bps) for protection against a default in a specific bond issued by the Venezuelan government.  992 bps is 9.92% a year!  I personally never traded country specific CDS, but did do significant amounts of CDS in your investment grade corporate bond environment.  Back in the early 2000's we would write protection on names like General Mills and Kraft for around 40bps (for very short time frames (1 year).  While Venezuela is improving over the last week and month, Ireland, Spain, and Portugal CDS spreads are going nuts.  Increases of 25% are an indication of stress in the system!  DO NOT GO TO SLEEP ON THIS!  Remember April, when every thought we were going to keep going higher and then we hit this little debt crisis?  Can you say "DO OVER?"

Venezuela
Spread  992
Daily Change  28.55
Weekly Change -91.92
28 Day Change -24.08

Ireland 
Spread - 607
Daily Change  17.69
Weekly Change 109.17
28 Day Change  182.55

Spain
Spread 264
Daily Change  15.98
Weekly Change  39.83
28 Day Change  56.18

Portugal 
Spread   464
Daily Change  14.89
Weekly Change  70.65
28 Day Change  78.57


WLI DATA - FROM ECRI -  http://www.businesscycle.com/resources/Last week's WLI Data shows continued improvement in the leading indicators.  As I examine this data I find that since June 18th of this year the actual WLI data is showing a change of around 1% from that time.  At the same time though, the S and P 500 is up more than 6% from those levels.  It is clear that there might be improvement here in as shown by the WLI, but the market's rally may be ahead of itself.

 
COPPOCK TURN INDICATOR
The Coppock Turn Data continues to signal a turn south in the markets despite the exponential run in markets.  The turn indicator has been wrong for two months now, but since it is a lagging indicator we must expect that and use this as just another warning.  As usual I've tried to project levels in which it would actually signal a continuation of the positive trend, that level is at 12,300 on the Dow.  I don't put much weight on this indicator, but include it as another data point.

 
FINANCIAL CONDITIONS INDEX- http://www.bloomberg.com/apps/quote?ticker=BFCIUS:IND
As you all know, I like the Financial Conditions Index provided by Bloomberg because it is a composite of many fixed income and monetary (liquidity) measures.  The FCI is showing a value today of .15 which is once again over the critical 0 level.  This is an indication that there is an expansion in the economy, but probably more accurately there is a huge expansion in the amount of liquidity in markets.  We are nearing the  0.5 level we saw in April and this is going to either be a level of strong resistance coupled by the resurgence in a market correction, or it will give us an indication that the economy is truly recovering and going to be the basis for even greater levels in the stock and "asset" markets. 

 
BALTIC DRY GOODS INDEX - http://www.bloomberg.com/apps/quote?ticker=BDIY:IND
With the ever-increasing prices for copper and other commodities, one would think that spot rates for transporting these goods around the world would also be increasing.  In this case, that is actually not happening.  As I've posted many times, the BDI is subject to many issues other than simply that commodity prices are going higher.  First and foremost, I think the issue is that there is a ton of supply of ships available to move this cargo as shipping companies continued to order ships several years ago.  I have seen a few comments about purchasing some of the dry bulk shippers like DRYS.  Based on the chart I'm seeing, the thought of picking up a few shares might not be a bad one considering that there has been a recent breakout and it was confirmed with the move above $5.00 as I type.  I also like that the increase has come on increasing volume.  A very conservative trade could call for a stop to be placed at $4.90 and an upside target of $5.70.

DRYS CHART

USD INDEX - http://www.bloomberg.com/apps/quote?ticker=DXY:IND
The USD index continues its assault on lower levels despite 2 days in a row now of being up.  Since the May/June peak around $88, we've seen an almost uninterrupted dive to $76.  Imagine that, a 13% drop in the value of the dollar and a move up in the overall markets of around 16%!  Clearly the move higher in the markets is not due to improving economic fundamentals and a healthier environment.  The unsustainable recovery in index asset levels is purely a move derived from US dollar debasement.

The FED's announcement last week of the use of $600 Billion of newly minted QEII to "stabilize" our economy has essentially created an environment where everything simply goes up.  As the dollar goes down, asset prices in stocks, commodities, and everything else have simply risen to keep value somewhat constant.   And if you didn't believe that Bernanke and the FED were serious, there is the overt threat that there is even more liquidity behind the $600 Billion in case it is needed. 

While there is no proof that any of the QE will actually provide sustainable jobs or expansion in the economy, that doesn't mean that we won't have the facade of growth by way of ever increasing valuations of stocks.  Of course when you value those stocks in terms of foreign currencies or in hard assets you find that we are getting nowhere.

The area we are in is pretty critical and the $76.00 level must hold or else we will see a real fall in the USD and a tremendous surge (even greater than we've seen) in gold and silver and other anti-US currencies.  As stated previously, the gold and silver trades are now more than just commodities, they are trading as their own safe haven currencies and have taken on a life of their own.  Yesterday the dollar was actually up and we saw silver go nuts.  It is on days like these that I wish there was an easy and quick way to sell my physical silver as we've seen an almost 20% move in silver in two or three days.  I've heard several stories as to what is going on with these moves from a massive short squeeze to the filing of inquiries and court actions against JPM for silver market manipulation.  No matter what the cause, it is almost enough for me to want to exit.  I simply haven't due to the trouble associated with packing it up and sending it out for sale.  (Anyone want to buy some silver?)

NOVEMBER TRADING UPDATE
As much as the broader economy's recovery is still in doubt for me, there is little doubt that the FED is acting to not only buoy this market but to attach a rocket pack to its back and propel it to the loftiest levels.  The policies that are being executed are making it impossible for one to remain in less risky assets like money markets and also makes one very cautious to hold on to other fixed income type holdings as the specter of run away pricing erosion becomes more real.  What I mean here is that despite the notion that I still believe that we do not have inflation, there is rampant asset speculation in all the old standbys.  Oil, copper, wheat and grains, sugar, coffee, cotton, and more all are going parabolic.  I will say it again that this doesn't mean we have inflation, but it does mean that we have speculation like we did in June/July of 2008 where oil reached $147 a barrel.  No one can suggest that that price in oil was caused by actual demand, but it was caused by loose monetary policies that brought our economy to its knees.  It blows me away that we can have a FED that will sit idly by and allow it to happen again.  What kind of recovery will we have if my $100 a barrel target for oil is hit?

Despite my protests, the FED has promised QEII and will promise more of QEIII as the second version fails.  As a result our old trades are extremely profitable and are still ones that I highlight as winners.  We need to remain in commodities like DBA, DBC, JJG, SLV, GLD, and more.  We need to continue to trust in emerging markets for the reason that they are ACTUALLY growing at a pace well beyond the US's 2% AND are investments that are outside of the USD.  Countries like Chile,  Singapore, Malaysia, and Brazil have been my favorites.  They have been winners for me for sometime and that trend has not been stopped.  While there is every temptation to harvest gains, the real question needs to be....."And go where?" 

As we have discussed, the potential canary in the coal mine here is the stress in the European countries as measured by Euribor and also by the sovereign debt CDS that I pictured above.  If these continue to blow out this could derail the heroin induced rally the Fed has us on, just like what happened in April of this year.  I don't want to get too excited about any drop in the market though because we have rallied so much in such a little time with NO pullback.  We must expect some drop simply to digest the recent gains.  WATCH THESE CDS AND WATCH THE EURIBOR RATES THEY WILL BE THE INDICATION THAT SANITY IS RETURNING TO THE MARKETS!

Given the tsunami of liquidity and threats of more liquidity we will continue to see more of the same for the next month as the FED continues to debase and devalue our currency in an attempt to make us all feel richer.   Man, do I feel richer, don't you?

Be Careful!

GOATMUG



ADMINISTRATION LIES TO HIDE FED LIES - (CPI NONSENSE)

Please examine the following interview of Austan Goolsbee (White House Economic Council of Advisors Chair) and Erin Burnett.  First, it is important to give Erin some praise since she is really a flaming liberal and typically serves up softballs and never challenges folks (unless they are hating on the US Treasury like Michael Pento).  While I wouldn't go so far as to say that Erin challenges Goolsbee, she does ask the questions we simply see that Goolsbee cannot answer it a straightforward manner or even close to truthfully.

We are witnessing the completion of a full circle where lies have required more lies and those lies have created the need to lie more.  The key here is that the CPI measures a basket of goods that exclude food and energy!  Of course the CPI is measurement stick as the basis of government payment increases or decreases for programs like social security.  Clearly the government is incented to manipulate this data and throw out anything that is really going up like food and energy.

At :40 seconds in the interview Erin asks the question about regular folks hurting due to the Fed's influence on driving up asset bubbles in commodities.  Goolsbee is a very good liar in that his response is "I don't know if the CPI shows that.  CPI is the stuff that we use".  Now, I'm not sure if Goolsbee means that the CPI is the stuff we use for economic misrepresentation and distortion of facts or if he is suggesting that CPI is a measure of the real cost to live, but whichever it is, it is complete nonsense.





The point of the post here is that the FED is blowing speculative bubbles as they have primed the pump with liquidity and every investor (large or small) has had to make decisions to deal with the environment that they have created.  Many of those choices have been to exit the USA altogether like I've discussed regularly while others have bought grains, cotton, oil, sugar, coffee, and anything else that is somehow unrelated to the value of the US dollar.  Senior citizens and the poor are the victims of this all out war as they are relying on fixed income investments or the generous hand of the government to assist them in meeting their daily living requirements.  While the Administration states there is no inflation as measured by the CPI, we all know that gas is now $1.00 higher than it was last year, coffee, sugar, bread, and all food is going higher.  The poor are going to suffer more and feel the increase to a much greater degree.  As I think about this I am disgusted because the Administration and liberals always tell us how much they care about these people, yet they would rather lie and cover up the farce of the CPI than tell the truth.

The FED is driving this unsustainable top in commodities and they need to stop.  They have driven us all to more risky assets and have destroyed lower risk products that serve people in need of predictable cashflows.  QEII is not going to produce more jobs, it is going to produce more price increases in these commodities and it will ultimately lead to a collapse (just like in June / July of 2008).  We are seeing the Administration lie to cover another lie and it isn't going to stop till it ends badly for many.

GOATMUG

Test

SNAP DATA - AUGUST - More Families Join The Party

Once again we review the monthly (SNAP) Foodstamp Data from August.  We see no change in the trend as more of your neighbors slip on to the roles of those that are dependent in some way on our government handout machine.  As I look at these numbers and how they continue to increase, it is almost like there is some kind of party going on and its popularity just keeps on growing.

AUGUST DATA
The highlights include;
42.4 Million receiving benefits which is a monthly gain of 1.3%.  So far year to date, we've managed to add 8.8% additional recipients.  Compared to last year the numbers show a 16.1% YOY gain in those participating.  Almost 20 million households are obtaining this assistance.

http://www.fns.usda.gov/pd/34SNAPmonthly.htm

 

While this data is backward looking it is quite easy to see that there has been no let up in the trend of dependency creation and worsening conditions for Americans.  We currently have a bit more than 307,000,000 US Citizens, which indicates that more than 13.5% of all people in the US are able to obtain some type of subsidy for their food.

WAR ON THOSE THAT CAN'T FIGHT BACK

It is a good thing that CPI data suggests that there is no inflation because these folks would have a tough time in the face of rising costs for a "basket" of goods that reflect the cost of living! (HA!!)  Have you looked at the increases in prices for food, gas, oil, and anything else that is a real cost?  I am expecting more and more terrible data from this report in the coming months.

GOATMUG

BIG WEEK = BIG FLOP?

I want to drop a quick note here.  This is a really, really, really big week. 

ELECTIONS
We have elections in the US for mid term positions where it is widely anticipated that voters will reject the unfettered spending of the current administration, Congress, and Senate.  (Don't forget Bush was also a complete idiot when it came to fiscal controls too and should be held responsible for his completely insane implementation of Medicare Part D which is the worst and costliest entitlement program ever!)

FOMC
Probably more important from a market and economic standpoint we also have a Federal Reserve FOMC meeting on Wednesday.  This is the meeting where Ben Bernanke has purposely timed the unveiling of their plans for additional stimulus spending which has been named "QE2" for Quantitative Easing 2.  The purpose of this program is to continue to spew liquidity in the form of electronic dollars all over the global economy to ensure that asset prices will rise.   As Alan Greenspan has stated, "nothing will help cure the economic conditions as much as a rising stock market!"  The real impact of all of this money sloshing around though is that the value of the dollar drops with each keystroke on the economic printing press.  QE2 is synonymous with dollar debasement.

DOLLAR DOWN MAKES GROCERIES RISE
Is it a wonder why you are going to see grocery costs rise?  Sugar, wheat, corn, rice, and coffee are rocketing higher.  Clothes prices are going to rip higher as cotton is at an all time high.  Oil and gas are vaulting upwards and it is suddenly possible to see my $100 oil price target prediction actually be met this year.  We are seeing all of these hard goods increase in cost, yet personal incomes are dropping.  If you hadn't realized it yet, it is almost like this is a war on the poor as these are the ones that will get squeezed the most in this environment.  Thank you Federal Reserve, US Treasury, and President Obama.  It is odd that the President sits idly by as the Fed rips up and destroys the purchasing power of the poor and the middle class.  I guess this achieves his goals though as more and more marginally middle class will slip into poverty and he can be their benevolent care-taker.  He can continue to promise to take from the wealthy and give the poor their fair share of hope.  The President should be slamming Bernanke and Geithner now and demanding that they quit destroying the value of the dollar.  Instead, he tells us that he inherited this mess and that fixes take time.  Very directly Mr. President, it takes no time to make a phone call and demand that Bernanke quit this now! 

TRADING UPDATE -
Ok, so what do I expect?  I expect that the elections will be exactly what has been predicted.  Congress will go to the Republicans and the Senate will remain in the hands of the Democrats.  The Fed will announce that they will do another $500 Billion of QE 2 and they are going to add more when and as needed with no cap.  This announcement will be less than the markets expect, but the added sentence that they will do more when needed will be somewhat of a life preserver.  The market should sell off some 3% to 5% (individual stocks could go down 10% or more).  At that point, that will be the signal to buy.  The Fed is essentially the market's put (floor) and therefore they will step in and buy and float this thing no matter what.  In a 1930's analog, this is about the time when the market dropped another 30% to 40% because the FED did not provide stimulus and Congress became budget hawkish and tried to reign in spending.  Bernanke will not make this mistake and in fact will go overboard attempting to overwhelm the stagnant real economy.  This annoucement is half the real deal and half a promise that there is no end to the intent to provide as much massive stimulus as needed.  He will signal with overwhelming confidence that there is no lack of desire or willingness to blow as much money as need to reflate the US stock market.

After the temporary drop in the market due to a smaller than expected stated amount, we will be buying anticipating a huge stimulus inflow courtesy of the Fed.  Of course our old favorites will be the targets with a couple of additions.  I still like emerging markets, but I will add SLV and DBA.  I am more positive on silver than gold right now and I like the agriculture commodities.  In addition, although the fertilizer names have run it is possible to see an even bigger move there.

Be careful ------ AND WAIT FOR THE PULLBACK!

GOATMUG

THIS IS A CANCER - CHRIS WHALEN ON THE MBS FRAUD

Chris Whalen is interviewed on Bloomberg about the MBS issue and the ramifications for investors.  Chris details how he thinks these losses will ultimately be put into an RTC type vehicle.

What is catching about this 7 minute interview is that he suggests that this will be a non-event driven event, meaning that there won't be some big implosion, but rather a cancerous attack on bank earnings.

I'd love to have more details on what he mentions here, but he also suggests that JPM did a very good job of doing their paperwork.  He doesn't say more than that, but as you know, I love long/short plays.  I don't think I'd actually pull the trigger and go long JPM and short someone like BAC, but it is an interesting thought.

Ultimately he ends with the idea that investors in MBS might just have no recourse whatsoever if they cannot amass at least 25% of the issue.  If an investor can obtain 25% then they can compel the trustee to sue the creator of the security, otherwise, no recourse may be the result.  YUCK!  Can you imagine buying a complete fraud only to find out that you have no ability to do anything about it?

Enjoy!





Be Careful! (Hat tip to Karl D)  If you want to drink from the fire hydrant on this continuing issue, please check out his site daily. - http://www.market-ticker.org/

GOATMUG