THE FINAL WORD ON DEFLATION - MUST READ

DEFLATION OR INFLATION - THE FINAL WORD
Last evening I read one of the best pieces in the blogosphere on the financial direction of the economy and what to do about it.  If you haven't read anything from the blog FOFOA, you have been missing out.  I found his site about two years ago and have frequently checked his posts to ensure that I am reading one of the deepest thinkers out there is predicting.

This post is not for the casual reader, nor is it a post that you can skim and get the gist of.  It is one that you must pour over and over and steadily get through so that you savor each morsel.  You may wonder if I agree with everything.  The answer is, no, but overall I believe the direction is correct and that direction will be driven by the motivations outlined in this amazing post.

http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

Interestingly, since I stayed up way too late reading it last night, I am dragging, but am more convinced than ever that the overall outlook that I've had for the economy for this year is absolutely correct and it reaffirms that my longer term outlook also is on a solid foundation.

A REBUTTAL OR A WHITE FLAG?
Finally, if you don't believe me, I found this post this morning from Rick Ackerman, a committed Deflationist.  He gushes about the FOFOA post and also suggests perhaps that he too is a HyperInflationist after all.  I think this is the compelling part of this article, is that it addresses all of the concerns that Deflationists have and even suggests that many of the symptoms of deflation really are actual results of hyperinflationary processes.  You must have your "I'll look at every asset in terms of relative value to gold (replace gold with hard assets like oil, silver, gas if you like.)" glasses on when reading the arguments.  If you do, you too will be convinced that FOFOA is right. 

http://www.zerohedge.com/article/finally-hyperinflation-argument-persuades

Now, I've read enough of FOFOA to know that he only advocates physical gold, this is where I differ with him.  No matter, I think his overall direction is in agreement with mine and his ability to plod through the analysis and description is amazing.  When I write articles half as long as his, I become bored with my own writing and can't ever tie the bow up as well as he does. 

If it takes you a few sittings, do it.  I think it would be worth your time.  On that note, I am off to buy my store of freeze dried food!

Finally, I am curious to see what Mish says about this.  Mish is a committed deflationist and is one of the resources I rely on to distill that perspective into clear points.  I would wager that we'll see a post on this in the coming days from him.  I'll link to it as soon as we see it.

GOATMUG

TIM GEITHNER, MAN OF FEW TRUTHFUL WORDS

http://www.bloomberg.com/news/2011-04-26/geithner-says-u-s-will-never-weaken-dollar-to-gain-an-advantage-in-trade.html

You have to love this story on Bloomberg that highlights Tim Geithner's commitment to a strong dollar policy.  Now that the dollar has broken long term support, you would expect the head of the US Treasury to come out and defend our currency right?  Wouldn't he detail the plan for stabilizing the fall and highlight that the US needs a stronger dollar to be successful as the leader of the world of global finance?

Perhaps you'd expect that, but this is what you got instead.

“Our policy has been and will always be, as long as at least I’m in this job, that a strong dollar is in our interest as a country,” Geithner said in remarks at the Council on Foreign Relations in New York. “We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage.”

Hmmm.  Statements like this want to make me laugh.  Please play the clip below.
(Link) View more The Simpsons Quotes and Sound Clips and Nancy Cartwright Sound Clips

See, even if you believed for a moment that Mr. Geithner was actually telling the truth it would not matter much because while he is busy talking about how a strong dollar is in our best interest, you have several other parties that could care less.  Those three parties of course are the CONgress, the Fed, and those in the office of the President.  Since Congress and the President gleefully spend, spend, spend, and US Treasury and the Fed joyfully participate and facilitate their stupidity, we receive results that stand in stark contrast to the words of Timothy Geithner.

Our Executive and Legislative branches spend and our Fed and Treasury support "asset prices" through crushing the US Dollar.  Anyone see where much of the increase in the market indices gains come from?  Yes, since March 2009 the overall markets have rebounded significantly.  However, see where that performance started to flatten out last year?  That was when the latest version of QE was announced.  Suddenly the SP500 rallied another 100 points or so and the dollar got shelled for about 12% in declines.   

Geithner didn't disappoint though, he did tell us what this miracle strategy should look like. 
Geithner said today that the U.S. needs a “credible strategy” to reduce its budget deficits over time, without moving too quickly and choking off economic recovery.

“You have to commit to bring the budget deficit down to a level that will put our overall debt burden on a declining path as a share of the economy,” he said. The Obama administration wants to move onto that path by about 2015, he said.

Wait there are even more nuggets of brilliance!

Geithner also said Congress needs to act by June to raise the debt limit, saying it would be “irresponsible” and “unacceptable” not to act. “The idea that the United States would take the risk people start to believe we won’t pay our bills is a ridiculous proposition,” he said.

That's another one that has you scratching your head.  When you are running a deficit of $1 Trillion, or $2 Trillion dollars, does anyone believe that you are paying your bills?  No, I don't think anyone thinks we are paying our bills or actually have the ability to do so in the future.  I think we all know that this is going to end very, very badly.

I think this graphic of UGA (Gasoline) says it all.  UGA is up more than 100% since the March 09 lows too.
I can't wait for tomorrow's barrage of truthfulness from Ben Bernanke.

GOATMUG

GASOLINE TRADING UPDATE - SELL IN MAY?

Just wanted to drop a new post in here and touch base.  I am one day away from being back in the saddle and being able to make much more frequent posts.  I've been absolutely slammed with projects and the amazing moves in the market.  This post is important because I have a large position in gasoline on and this post would suggest that it would be appropriate to close the position on May 1st or May 15th of the coming month.  While this is about a month or so earlier than I had anticipated I am open to hearing reasons why I should exit and these guys have a great long term track record.  The posting is from FMXconnect.com and appeared on Zerohedge.

I did not post the entire article, you can click on the zerohedge link below and find it for yourself.  It continues to elaborate on other timing trades on the gas trade and on crude in general.

Funny, the sell in May theme is sounding it's alarm again.  If you recall in the 2011 Outlook I suggested that this clearly is a year to sell in May.

http://www.fmxconnect.com/ and http://www.zerohedge.com/article/guest-post-crude-oil-gasoline-seasonal-tendencies

Overview: Crude Oil and Gasoline Seasonal Tendencies

As we start this new year, a number of events are likely to occur along with the normal changes in the weather. January gasoline is typically the lowest in any year and, despite the common mythology, gasoline consumption does not normally fall steeply after Labor Day and then recover miraculously after Memorial Day.

We do see an element of driving disappear after Labor Day, as drivers in the 16 to 25 year-old age bracket tend to drive less, or at least more predictably. Family vacations are also over by that point, as a general rule. But, there are pockets of demand during foliage sighting season and Thanksgiving Weekend is always the best four-day driving period in any year in which July 4th does not fall on a Tuesday or Thursday.

There is usually good driving through the month of December into New Year’s Eve, but it traditionally falls off a cliff right after the champagne glasses touch to ring in a new year. People park their cars and drive to work and school and to appointments. But it is not until March or April that more discretionary driving normally returns.

Refineries know this and they typically plan maintenance turnarounds from January through April or early May. During this period, there is a definite tendency for gasoline inventories to be drawn down; even though demand starts the year at its lowest levels, the maintenance usually goes on long after demand has started to mount a comeback.

Market Reaction

The market reaction is not what most people might believe. Regardless of the overarching trend, prices have a long history of advancing from early March through the middle of May. Despite the fact that the so-called “Driving Season” starts with Memorial Day and peaks on Independence Day, most of the buying has come into the market long before the end of May.

Gasoline Seasonal Trade

We are now trading “RBOB,” but it is effectively “unleaded gasoline,” and we include its history in all its various incarnations, from leaded regular to unleaded to oxygenated to RBOB. The tendency for prices is to advance from early March. Following the loose guideline of buying in the first two weeks of March and selling sometime before May 15th, the seasonal tendency has worked in 25 out of 26 years - or 96.15% of the time. It is the strongest and most reliable seasonal tendency of any commodity futures contract.

Over the years, various specification changes seem to have helped. In 2003, prices rallied through March - in the leadup to the invasion of Iraq on March 19th of that year - and they then dropped into May. We advised against following this seasonal that year, as we saw prices advancing in January and February as it became clear that war with Iraq was coming.

Despite 2003, buying in March has yielded profits consistently. The buying part is a great deal easier than the selling part, but profits are there to be realized if one uses money management techniques and starts to take profits as soon as prices get overbought in May.

The following table shows whether one could have bought June gasoline futures on March 1st and then have been able to sell it at a profit at some point in the first two weeks of May. As one can see, there were profits available in May every year except 2003.

TABLE (http://www.zerohedge.com/sites/default/files/images/user5/imageroot/Screen%20shot%202011-04-24%20at%204.30.24%20PM.png)

Have a blessed Easter, knowing in your heart and mind that Christ died for us to save us from our sin.  Without the shedding of His blood we would not be restored to the Father.  We did not deserve the sacrifice and it was not earned, it was given out of love.  His sacrifice was made out of obedience and submission to the Father that knew you and loved you before you were born.  I proclaim faithfully and with great joy, HE IS RISEN!  It is only through a relationship with Christ that Goatmug is alive today.  Thank you Jesus for your love and obedience. 

DRIVING JUST GOT MORE EXPENSIVE. WHEN WILL THE FED STOP?

TAKING A DRIVE, WHAT IS THE COST?
As I drove the kids to school today I noticed that once again fuel prices are high.  Unfortunately I have one of those cars that takes only the super premium 93 octane blend of gas, so I am always looking at the most expensive level of gas pricing when I drive around town.  This morning's damage in my neighborhood store was $4.11 for the super premium grade.  While I'm sensitive to the cost of filling up the car, I'm fortunate and blessed in that I make enough money where it doesn't harm me and it gives me something to complain about and blog about.  On the other hand, there are people that are getting brutalized daily by the effects of the speculative froth that is caused by loose monetary policy and it's famed QEII debacle.

Quickly I'll review, the Fed buys bonds from dealers and they in turn are using that money to park it in assets that are more likely to provide some type of return.  In addition, since hedge funds and other investors cannot find investments that will compensate them for the risk they are taking (try living on the interest created on a bond portfolio), they are forced into other securities and investments that at least attempt to reward you for the risks.  Thus, the Fed's aim has been wildly successful.  Market participants have shunned safe assets and been driven like a herd into risky assets like stocks and commodities.  And there you have it, investors are buying commodities because they can't get paid anywhere else.  Speculators have bought gold, silver, wheat, corn, cotton, oil, and gas.  Almost every commodity has been on fire.  Remember the summer of 2008 where investment banks had oil tankers filled to the brim sitting off the coast to speculate on the surging price of black gold?  Recall the $148 oil spike?  I'm not hearing the same stories of excess, but we are seeing a mass flood into these alternative assets to flee poor rates of return and a declining value of the dollar.

WHAT WILL BE THE IMPACT OF RISING GAS PRICES? -
http://www.foxnews.com/us/2011/04/11/drivers-start-cut-gas-prices-rise-1546568875/

I'm not sure how Americans will ultimately deal with rising gas prices, but over the last several weeks as prices have soared, drivers have been constraining their fill ups.  As the article notes, drivers bought 2.4 million gallons of gas less than last year at this time.  The average price for gas in the nation was $3.77, remember that the all-time high in July of 2008 was $4.11.

This article says that some folks have been walking more, riding public transportation, and simply not going places.  Other reasons that we've seen a reduction in the consumption of gas may be that Amerikans have bought more fuel efficient cars that require less gas.

CONFUSING DATA - DECLINING GAS CONSUMPTION BUT INCREASING CONSUMER SPENDING?
The foxnews article also keyed on one interesting point here that for me speaks to a larger macro-economic shift. 

"The decline is somewhat puzzling because Americans typically curb their driving only as a last resort, after sacrificing other forms of discretionary spending, like shopping for new clothes, or going to movies, concerts and restaurants.



But demand for gas is falling while other types of spending are on the rise. Retail sales rose 2 percent in March compared with a year earlier, surprising economists who were expecting no increase or even a decline."

So, consumers are curbing gas consumption, but someone is out there spending away.  What is the answer for the data?  I think it clearly shows that the divide between classes is growing AND we can only thank our friends at the FED for the disaster and attack on the poorest who can ill afford to handle the assault on their wallets.  To clarify, the poor working class folks are getting crushed since fuel is a significant portion of their pay checks.  On the other hand, the Fed strategy has been successful driving 401Ks and brokerage account values higher, so the wealthiest of individuals are back spending and engaged in business as usual (let's go out to dinner and a movie!).

Not buying it?  How about the quote here? -

"About two and a half days' worth of Whitney Shaw's pay each month goes just to fill up her 2001 Hyundai Accent. The administrative assistant is thinking about taking the bus for her daily commute, 50 miles each way between Branford, Conn., and Hartford.


"It's three hours of pay from work just to fill up my tank even once, so I'm definitely feeling it," Shaw said while filling up for $3.61 a gallon at a Valero station on the Berlin Turnpike."

Let's assume that it costs $75 to fill up and as Whitney Shaw describes, is 2.5 days of her monthly pay.  Assume also that she works 5 days a week or a total of 20 days a month.  Given all of that, Whitney is making $600 a month, clearly she isn't wealthy and obviously $75 is a large portion of her monthly take home pay, essentially 12.5% of her take home pay.  Perhaps just one year ago, the cost was $55 to fill up?  That is $20 a month less to spend on essentials, pay down debt, or splurge for a movie. 

$5.00 GAS?  IS THAT A POSSIBILITY?
I love the Foxnews article because it simply drops in that most analysts are looking for $4 gas, and some $5.  The way the quote is couched makes it seem like there is no chance that we'll be at $5.00 gas.  I think that $4.00 is absolutely figured in and that $5.00 is easily within reach.  What are the factors that prevent $5.00 gas from arriving?  Where are the forces that will make global demand for oil abate?  Is peace suddenly breaking out in the Middle East?  Probably most importantly, is the US Dollar getting stronger here?

In the article by CBS News - Gas Prices Climbing Toward $5 we get a mind blowing picture of the thought processes of folks that live in Chicago, the home of our President. 

Drivers Monday morning were practically numb to the price spikes.

"“What are you going to do?” said Shannon Thompson. “We’ve become so gas-dependent in this country. There are so many SUVs. I mean, I’ve had a hybrid. It worked great. Right now, I’m just going to deal with it.”


Prices at some gas stations outside the city were still below $4, a bargain compared to the $4.29-$4.40 range at some service stations downtown."

What drives me crazy here is the acceptance of the situation.  I can almost see them shrugging saying, that's the breaks!  "I guess we're stuck with high gas.  I bought a hybrid so that's all I can do!  Yeah OBAMA, just give him a chance!"

Are you kidding me, it's all about the policy?!   We have a Presidential administration that believes that our best course of action is to buy more oil from Brazil rather than exploit our own resources.  We have an environmental policy that holds us hostage to Middle Eastern despots, radicals, and UN pacifists, and we have a FED that is driven to destroy the US Dollar in the name of suspending market principles to save a bankrupt system.

For another perspective I've added an interview here with Stephen Schork, president of the Schork Group.  Stephen talks about the outlook for oil prices and mentions his thoughts on natural gas in the last few moments too.




TRADING UPDATE
So what's the point besides noting that gas is higher and no one has a clue that the Fed is the cause and there is no stopping it?  Well, since January 17th I've been suggesting that we need to buy gas and energy related stocks.

As we look at the trading view, we must examine oil first.  I've used USO here as a proxy for oil, but we all know there are tracking issues with that etf.  Having said that, it gives us a general idea of what we're up against, if you assume that all the fundamental items we discussed (Fed, global demand, summer driving season) are all still in play.

Based on the action here, there may be a drop in USO to the $41.14 area, but this area of previous resistance should be support.  USO has a lot of room to run with a target of $47 and $53.00 

Since USO looks pretty bullish here, that leads us to examine UGA which is the US gasoline etf.  If we are going to see oil move even higher, US gas prices too should inflate.

I've presented the 4 year weekly view of UGA and clearly we are at a point of resistance at $52, although I believe it will be minor.

The 3 Year UGA view is also good as it shows the area of support near $48.00.  I dropped the resistance line at the $52.00 area, but please note, it is there. 

As I review it, I believe that the target for UGA is still right at $64 or so, but I'd be out around $60.00 or by late June or early July (next earnings season in July may be a killer) whichever comes first.  The $60.00 target may not seem like that much from here, but if you'll recall we highlighted this target in January when UGA was trading at $39.50.

That is the update, please be careful and of course limit your driving cause it is going to cost you.

GOATMUG

UPDATE ON AAPL & RIMM. SHORT TERM REVERSAL LONGER TERM FAIL

Several days ago I made a case that AAPL might be in for a decline.  While that post certainly had a day-trading (go short) aspect to it, I really was making the case that longer term, there would be headwinds that would cause AAPL to slow its march higher and ultimately reverse.  APPLE RESTING OR "SHIFT" IN PLAY?

Please examine the chart below.  I've drawn an additional line or two to show where we might see some major support at $305.  Again, I am looking at the play from a longer term strategy view (I think these are the ones I'm best at).

Some Slopers are currently taking a shot on the long side of AAPL, and when you take a look at the daily chart here, you can see why they would go after it.  If I were playing that trade, I think I'd lighten up at $340 if I got there.  I think there could be a short term bounce, but ultimately a failure back at the $330 level and a fall to test my $305 level. 

So there you have it, a bounce here, and then over the next several weeks a drop through the $330.00 to visit $305.  As for my RIMM play.  I'm keeping that one short. 

GOATMUG