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

RISK, IT'S NOT JUST A GAME YOUR KIDS PLAY

Just a quick note regarding commentary by Jeff Saut from Raymond James. His notes come out every Tuesday morning and I like to read him. I always remember that he doesn't get paid to be bearish, however he has a great style and he has been pretty good in last year's surge, by being bullish and bearish throughout the year..

His best quote is found here, which summarizes my thoughts about this market as well. On a relative basis, I'm still concerned about the dollar even though the first two days of the trading year are showing us it is back to usual on the weak dollar, long commodities trade.

Last Monday we wrote, “As we enter the New Year, we are once again turning cautious because the Treasury market is breaking down (higher rates) and the U.S. dollar is rallying. . . . Therefore, we think it prudent to ‘bank’ some trading profits and hedge some investment positions as we approach the new year.” Moreover, one of the lessons we have learned is that the beginning of a new year is often punctuated with head fakes, both on the upside as well as the downside. One of the greatest upside head fakes was in January 1973 when in the first two weeks of that year the DJIA rallied to a new all-time high of 1051.70 before sliding ~20%. While we are clearly not predicting that, what we have indeed experienced since the March “lows” is the second greatest percentage rally (69%), adjusted for time (nine months), since the 1933 rally. Following that 1933 explosion of 116% in just five months came a pretty decent downside correction. Since we tend to be “odds players,” prudence suggests some caution is again warranted.

Goatmug

Outlook from the Moutain Top for 2010

Predictions are interesting because they allow us to really document and work through what we think and feel. We'll revisit these predictions throughout the year to measure how we're doing. No matter how negative I want to be, I still understand that the Fed is spewing its flood of funds at a pace that has not been seen before. The massive liquidity has been the fuel for the ascent back to the 10500 level in the Dow, an amazing almost 4000 point run up in the index. Our government is committed to see assets increase in value no matter the life-style cost in the longer term. Remember, this asset value increase is so important to re-establish confidence in the financial system. If J6P (Joe six-pack) doesn't believe in the integrity of the system a key player has left the table. Much of the moves of the government are meant to get him back in the game.

One last note - don't forget risk. It is really neat to see the huge gains the market posted last year. Don't make the mistake of forgetting that the entire financial system was almost destroyed in the process. The market is still down some 35% from the Oct 2007 highs. Yes, you can go to Vegas and plunk down your entire net worth on red or black and make an easy fortune, the problem is that this is a tremendous risk as well. What significant changes have been made in the market to remove the risk from the system? What would embolden you to take more risk now.

Let me hear from you on the comments section. I'd love to know your perspective.

I will make a new post regarding year-end / month end analysis over the next couple of days to set up trades for the coming month.

2010 PREDICTIONS

ECONOMY

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.



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.



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.



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.



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.



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. The US dollar will actually fall relative to the South Korean won, Australian dollar, and many other commodity based economy currencies. The dollar will strengthen against the yen.



Small business lending and personal credit will continue to decline through 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.

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.

FOREIGN POLICY

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.



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.



US POLITICS

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.



Obama names a replacement for Justice Ginsberg who retires in 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.



NATIONAL SECURITY / PERSONAL RIGHTS

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).



RELIGION
Christians continue to be attacked for their beliefs (read by the secular world as intolerance) and there will be several prosecutions of Christians for their beliefs. This will of course continue in Europe, but will also begin in the United States.

There they are. I reserve the right to add more as I see them, but I'll add them to the bottom and date them so they will be easily identified.

Give Us Something To Believe In

I wrote this article and submitteed it to Tim Knight's Slope of Hope. He usually will post my contributions only on the weekends because they are so long, so I will go ahead and publish it here in case it doesn't fit with his year-end line up. I will post a very quick (I know-I promise it will not be lengthy) updates on where I think the market is from a trading perspective and how to look at the positions we've mentioned in the past. Right now other than the last piece of my KSU that I exited this morning I have no positions.

I've documented the history of actions that caused our crisis and outlined the steps our government has taken to "bail us out". You may find the most recent post at Goatmug's Blog where we discuss The Best Cup of Coffee Ever and how it seemed wonderful and solved all of my problems, yet ended up bitter and disappointing. As I've mentioned, I believe many of the steps taken have either not worked at all, created other problems, or simply hidden the problems. Let's take a few of the items I pointed to in the last post and review the impact and results of their actions

A) The Federal Reserve and Treasury along with other world central banks stepped in and offered their fiscal support and immediately lowered rates again to near zero. Remember, these are front month rates and are the interest rates the government charges banks for overnight money. The Fed voted in recent weeks to keep rates stable at effectively zero percent interest. They voted to do so some 18 months since the beginning of the crisis and 9 months after the beginning of what we now know as one of the largest rebounds in stock market history. In spite of the rally we are still around the 10,500 level on the Dow which is where we traded in January of 2006 and well below the lofty 14,000 area of October of 2007. Am I saying that we cannot return to these areas? No, in fact if the Treasury department remains committed to devaluing the dollar, I can paint a scenario where that might be a real outcome. I doubt it seriously, but it could happen.

Timothy Geithner gave an interview last week on NPR that should put us all on notice. In his words, we will not have a retest or slowdown after this recession. Although many of his other predictions have been flat out wrong, I have a strange sense that he is committed to not letting that happen no matter what. http://www.npr.org/templates/story/story.php?storyId=121778778

Mr. Geithner is only speaking of a short term pull back that he'll help us avoid, for it is too obvious that the Fed and Treasury actions create bubbles and meltdowns and they are coming with increasing speed. I liken this to a drug addict. At first there is pleasure in the use of the substance. Next there is dependency, and then an increasing need for the larger portions of the drug in greater frequency. Think about friends, family members, and others that fit this drug addict description. It usually never has a happy ending does it? I think what we're about to experience is "tough love" provided by our investors. Our friends, (Chinese, British, folks in the Middle East), are about to hold a frightening intervention with the addict and therefore we will be told that we need to shape up and cut out our drug abuse. Unfortunately, I don't think the addict will listen. It is too tempting to let all of that debt go to waste and too hard to cut spending and cut promises and entitlements.

So what are the results of these actions? Interest rates are still low and creating asset bubbles. - Banks and other bank holding companies...er investment banks and insurance companies can now borrow at zero overnight and buy stocks, bonds, and commodities. Is there any wonder why all markets are screaming? What happens when that money is taken back? Remember, this money was intended to buttress balance sheets and also intended to be lent out to companies and consumers, not find their way to the casino!

Banks receive this money and will lend. - NOPE! This has not happened. This I believe is one of the greatest lies that has been made in this crisis. Why would any smart banker lend in the teeth of a nasty, jobless recession? Would you? If you looked at a firm that is asking for credit and he tells you that their business is slowing and they need a loan to make payroll, do you think they are a good risk? Asking bankers to lose money on bad loans is not a solution to the crisis. On a positive note, I am hearing some of my clients being contacted by banks that are desiring to lend on decent terms now. This may be an indication of some thawing.

B) The Fed also bought toxic securities outright from troubled financial institutions and traded those assets for treasuries. Our government offered the TARP funds to help institutions and even made outright purchases of banks and insurance companies. (AIG, Citbank, etc.) We even used these to buy and lend stakes to great car companies like GM! We keep reading that many of the banks and insurance companies that we lent TARP money to have repaid us and we (the US taxpayer) may have actually made some money on these loans. The reality is that we may have made some money on loans that have been repaid, but we have taken a bath on the loans that will never be repaid. Making AIG a government controlled entity makes certain that more losses are headed our way. The Treasury Department and Fed's lack of negotiation with AIG's creditors should be enough to convince anyone that the well connected firms like PIMCO, Goldman Sachs, and Blackrock were feasting on the carcasses of weakened and dying financial firms. In addition, these same favored companies have become the mechanism by which the FED and Treasury actually implement their policies. These companies are providing transaction support (spreads), participating in deals, and also offering consulting services

So what are the results of these actions?
AIG is a mess and still 85% owned by the US. Isn't it great we are in the insurance business?
GM - is still GM.
Goldman, Blackrock, and PIMCO are killing it .

Remember too big to fail? - As a result of the forced marriages between JPM and Washington Mutual, BAC and Merrill Lynch, Wells Fargo and Wachovia, we now have a greater concentration of larger institutions. Seems like the US government has now created larger risk pockets and concentrated more power in less hands. Finally, the repaid TARP money is being used like a slush fund now. The administration and Geithner said they had "extra TARP money" that they could use! Excuse me, just because it is appropriated doesn't mean we need to use it if everything is all fixed, right?
C) In concert with these actions our government also looked to perform direct support (cynics would call it manipulation) in the mortgage market and the treasury market. By guaranteeing and supporting the FHA the US taxpayer became the lender/insurer to 80% of the post-collapse mortgage market. With the announcement of quantitative easing by the Fed we began buying our own treasuries to try to keep prices low and contain rising interest rates.

While short-term manipulation has been successful, it is just that - short term. The bond market is bigger than any one central government and the bet made by Bernanke is going to be called. Once that happens interest rates will climb (and as I type this we are seeing 30 year mortgage rates 10bps higher in one day last week!). THIS IS A HUGE MOVE BY THE WAY! Who will step in to fill the void of the government in this volume at these rates? Stabilizing the home market is job #1 - The government has artificially lowered interest rates and become the dumping ground for all banks to offload their paper on the US taxpayer. Few banks are doing direct lending to residential borrowers without FHA backing. Home sales look to be moving up, but we must ask how long this will continue if rates jump substantially, cash for houses go away, the FED stops buying MBS (stops being the market), or banks actually release the huge backlog of foreclosures that they have kept on their books.

Don't get me wrong, the government is having an impact here and this is positive for the economy. I'm very concerned that this could change if any of the government "help" is removed or investors demand higher rates and push mortgages rates over 6%. For example, in November we were to have the final expiration of the first time home buyer credit. Sales were pulled forward and suddenly we have a reported drop in new home purchases in November. The following Bloomberg article demonstrates what the threat of pulling stimulus does. A mad rush of buyers that would have bought anyway step forward to take advantage of the taxpayer-paid windfall, and then demand dries up in the following months (Cash for Clunkers anyone?). http://www.bloomberg.com/apps/news?pid=newsarchive&sid=al3GTnIut0Ao

Obviously I'll have this prediction in my top predictions for 2010, but I'll suggest here and now that we have a dip in the sales trend in existing homes as much of the inventory that has been clearing has been foreclosures and investors (not occupants) have been swooping in to pick them up. Hopefully those investors have been buying smart and have deep pockets because I will predict that we'll see the new generation of home flippers that have emerged get sunk in 2010. They'll find that there won't be many buyers for these homes when mortgage rates hit 6% or 7% since we're all spoiled and believe that 4.75% is what we should expect! These investors will also get hit hard when banks like Wells Fargo and Bank of America actually release their piles of inventory instead of letting them trickle out. Look for these inventory clearances after 1st quarter reports come out.We were told that housing is the key to recovery - housing has not recovered yet, so I guess there is no recovery yet.

D) The Obama administration got in the act and began programs like the Housing Tax rebate for first time home buyers, Cash for Clunkers, and now Cash for Caulkers. In addition, the federal government has continued its payment of extended unemployment benefits. In addition, as a country we are now running a huge fiscal deficit (nothing new, just the magnitude of it is) and our government's expansion has required us to raise the debt ceiling (allowable debt of the country) to $1.8 Trillion Dollars! This doesn't even account for the addition of any new health care program or new stimulus. As I've mentioned several times, I believe that the Fed and Treasury must be cussing the administration for their interference. The Obama administration has kept to their strategy that they wouldn't waste any crisis and by goodness they haven't. In the hysteria they have continued to plunder the US taxpayer and add more programs and benefits to the entitlements for anyone that will take them.

We are now seeing that COBRA subsidy benefits are being extended to the unemployed (they have been offered for 9 months) and will be provided for another 6 month period. The program pays 65% of the premiums that someone that has been laid off of work must pay to keep their health insurance. It seems odd to me that the US Government and US taxpayer would pay for health plans at rates that are significantly higher than what can be obtained by families in the open market with individual policies. Of course we shouldn't be amazed at all about this, this is what happens when government makes decisions. This one example illustrates how the new health reform plan cannot and will not be an improvement or a cost savings for anyone.

While Obama has added his pork to the budget, the US treasury buyers will not tolerate the bloated debt of the USA. The market will require higher rates of interest and this will cause significant pain for all of us.
Crisis Management- Administrations have added pork laden projects and plans to the backs of taxpayers as an excuse to stimulate the economy. There are no plan for fiscal restraint or management of the budget. What simply blows me away is that I hear Obama speak about finding waste in government programs to pay for more stuff! Where is the idea that you cut costs and if necessary, benefits?

I'll comment more about the health care reform bill in another post, but you need to understand that the winner here is the health insurance industry (for now). As these bills are written they will have a captive audience of buyers. Many of you know that I own a health insurance brokerage and I saw a huge swing in commentary by insurance companies. If you don't think they are giddy, you are WRONG! Check out this email link I received from Aetna. These guys were hammering the Senators and then suddenly came out with this gem. Mind you, if this goes through I hope to sell everyone one of you a policy because I would hate to see you go to jail or pay stiff fines, but everything about this stinks and reeks of over promising and under delivering at a terrible cost to tax payers. A key provision in the plan is the elimination of pre-existing conditions as a basis for exclusion or rating up. Once this exclusion provision is removed we will witness the elimination of INSURANCE! Why would you obtain insurance till you have something serious now? GDP was revised downward and we are seeing that the government is responsible for most of the production for last quarter. I understand that

For all of these programs, what are the results? - We were told we need these programs to stimulate the economy- all have been short term and have done nothing to change the fundamental situation. We still have 10% unemployment and 17% U-6 unemployment. We were told that everything would begin to get better once housing is stabilized, we haven't seen housing stabilize and won't for a while. More appropriately we'll see things stabilize when people have jobs.

E) The accounting standards board (FASB) bowed to pressure from financial institutions and our government by suddenly recommending that accounting standards be thrown out the window. The accounting standards board have been complicit in this crime against investors as the boards were threatened and frightened into thinking that they would be responsible for imploding our economy. Where is the leadership in our country? I am afraid that the move to take a time out on reality simply makes it easier to do it again. The accounting standards board should have stood up and emphatically stated that accounting standards don't change or take a time out because the truth hurts! Future collapses will be much worse because the ponzi schemes the government and banks have set into motion were not stopped here. Clearly now that the banks are bigger and risk more concentrated similar meltdowns will be even more destructive. Accounting standards were thrown out resulting in a lack of understanding of true value of banks and insurance companies.

Where are we now? We still don't know what banks are worth and they are still raising capital and still lying about the risk on their balance sheets.

F) Finally, as we saw in the previous October post called Public Enemy #1-Deflation we see that the Fed and Treasury unleashed its last desperate weapon, Dollar Devaluation. The dollar devaluation trade is simply a move to destroy the value of the dollar relative to other currencies. This makes our dollars worth less and hence our debt worth less. We could also argue that it makes our goods cheaper as we hope to sell them abroad. The Fed has been true to its words that it would implement this strategy if faced with the prospect of deflation. When the government went to work in March the DXY was at $89.20 and they did not disappoint. They have moved the value down by as much at $15.00. The DXY is now trading at 77.64, well off its lows of $74.27 in late November and early December. So as the dollar has been pelted since March, EVERYTHING has gone up. Think about it, stocks, bonds, bread, gas, oil, gold, and the kitchen sink have all increased. http://www.marketwatch.com/investing/index/DXY/charts?chartType=interactive&countryCode=us So now, we've been told that everything is better and that we are recovering. In fact about 3 weeks ago, we had a surprisingly strong jobless claims report that stunned the market and boom, the dollar reversed course and interest rates began to rise. They rose because the strong jobless report indicated that things were stronger than expected and the Fed might need to remove stimulus (increase interest rates or as we know it, take the drugs away from the addict). Since that day there has been a resurgence of the dollar. Bernanke tried to tell the market that they would not raise rates because there were no indications of inflation in the market. Fed governors tried to tell us there was no evidence of inflation, and now Geithner has come out and told us that there is not a chance that we'll have a double dip.

So why are rates starting to rise and the dollar increase? How have we seen the dollar rise and the markets increase? First we have had some credit issues with Dubai, Greece, and Spain. All of those have reminded investors that there really is risk in the credit market and we aren't fully recovered. Scared investors tend to go to safety, and therefore we have seen a flight to safety in the dollar. Having said that, treasuries are a poor investment as the Fed has made sure to destroy any reality in that market (and value too). Therefore it is easy to see how liquidity could move to other dollar denominated assets allowing for the strengthening dollar AND rising equities and bonds (at least here in the last few weeks). Remember, this move up in interest rates and increase in the value of the dollar is contrary to what the Fed and Treasury desire (even though they say they want a strong dollar for the sake of our Chinese buddies). The increase in rates immediately translates to greater borrowing costs for the tax payers AND devalues the value of the treasury assets we already own. The government states that it wants to keep rates low to stimulate lending, but I can also see that we need to keep rates low to keep from blowing our own foot off since we have been purchasing our own debt through quantitative easing. Zerohedge has another good post that captures exactly what I've been saying and leading up to here.

What are the results? - So we have an administration that says they want a strong dollar, but we have a Fed Chief that has stated his strategy to save the economy would rely on a devaluation of the dollar. We have had an engineered rally in all asset classes and treasury rates that are way too low for the risk and duration of the trade. In essence we have a bubble in Treasuries!
My isn't it obvious, where ever we see the footsteps of the Fed, we see bubbles? So what is on the horizon for the Fed and Treasury? In 2010 we will see greater rates as buyers decide to wait it out and purchase their mis-priced treasuries at a better risk-reward. The greater rates will hurt bond holders and most of all the US tax payer. The bond market at some point will change the behavior of our current administration and the corrupt politicians that look to hand out entitlements and lack the idea of being representatives of the people.

We will see drastic cuts in city and state budgets and services before we see anything on the Federal side, but cuts will come at the national level.

If the Fed and Treasury want to keep the charade of low rates going then a fall in the equity markets will be the mechanism to deliver lower funding rates, unless they announce a new set of Q.E.

To wrap this up, we see that in each instance the failed efforts of the government to fix the situation have either simply done nothing or helped to kick the can down the road. As we've elaborated since our first post in August, the game of extend and pretend has been in full force. The problem is that at some point (2010, 2012, or 2015....) there will not be a way to extend it and a creditor will call our bluff and call in our debts. What I am really longing for is for a responsible leader to stand up and say NO, we won't offer this entitlement, no- we are actually going to cut services. Americans are going to be forced to live through these boom and bust cycles at an increasing level of speed and magnitude because our current leadership will not speak truth. The best result of all of this crisis is that average Americans are beginning to wake up and live a paradigm based on their needs and not their wants, based on their own ability and assets, not based on what their neighbor has. I am seeing a genuine reversion to true values of healthy financial management in peoples financial lives and in their businesses. Unfortunately, they had better be ready quickly because our government is saddling them with more debt and taxation to pay for promises and entitlements we can't afford. As an example of the crisis that consumers are facing check out this closing study.

Almost half (46%) of 2,148 consumers surveyed recently said they weren’t confident they could come up with $2,000 within a month in a crisis–from savings, family, friends, credit cards or other sources.Even among those earning $100,000 to $149,000 a year. almost 25% doubted they could raise it, according to the survey conducted by research firm TNS with academics from Harvard Business School and Dartmouth College. “We wanted to know if people could fix a broken car or furnace,” says Harvard finance professor Peter Tufano, who adds that most studies he has seen measure “how much cash people have… not how much they can access.” The survey results surprised him. “The ability to cope with emergencies is much less strong than we might have thought.”

I saw this in reality as people in the South dealt with Hurricane Ike. After 1 day people were cashless and without resources to make it through this terrible emergency. Americans need to wake up and save and communicate to their leaders that it is unacceptable to continue in this fashion. We had a final emergency and the US leadership chose to fake it till they made it rather than employ real fundamental solutions to problems of our own creation. At the end of the day I feel like the Bush Administration, Obama Administration, Treasury, and the Fed have just tried to spin whatever story we would fall for in order to get us to give them time. What they have figured out is that we just want them to give us something to believe in to quote a favorite from Poison (yes, I'm still into 80's hairbands). Guess what, they've given us a few tales, let's hope that no one actually figures out that what we've believed in isn't worth the trust we've placed with them.

Goatmug