TREND CHANGE IN THE WORKS? LOWER COST GOVERNMENT CHEESE?

WHERE'S MY CHEESE?
The monthly release of food stamps recipients didn't change it's trend one bit (still heading higher), but the proverbial rate of change certainly is slowing.  The January 2011 SNAP program data released last week indicates that we have over 44.18 Million folks receiving food stamps in our country, which includes some 20.7 million households.

GOOD NEWS?
If there is good news to be found in the report, we'll find it in two places.  First, the annualized cost for the program dipped below December's number so the annualized cost of the program is now pegged at $5.7 Billion dollars!  (Not much more than a few hundred Tomahawk missiles eh?)  More importantly though, the rate of growth of the number of people utilizing these benefits is actually slowing.  In January, the increase was a paltry +.24% or a monthly increase of 24 bps.  This is the slowest rate of increase since February of 2008!

Before we get all giddy, the print for January 2011 is still a 12.1% increase from last January, but heck, I'll gladly applaud any metric that shows that things ARE getting better and less people are drawing on benefits that provide only a subsistence living.  We need folks back to work as soon as possible and we need these SNAP figures to decrease.

FOOD INFLATION / DECLINING COST OF SNAP?
I'm not really sure how we pulled off an increase in participation in the program and a decrease in costs, but heck who am I to disbelieve any government data release?  Odd that the cost of the program would go down when we are seeing significant food cost inflation too?  As usual, government numbers confound me, I'm just here to report the errrr..... facts.

Be careful!

GOATMUG 

PRICE HIKE ON EVERY ISLE? INFLATION, WALMART, & THE FED

WAL-MART SIGNALS AN END TO EVERYDAY LOW PRICES?

USA Today featured an interview with Wal-Mart's CEO Bill Simon.





At 3:34 in the video the Mr. Simon discusses inflation and outlines where he sees it coming from.

DOES THE FED HAVE IT'S EYE ON INFLATION?
So we have Fed Governor Bullard suggesting that inflation may be a problem as outlined in the post from several days ago (MINISTRY OF DISINFORMATION - BULLARD SPEAKS) and now we have the interview with a leading retailer stating that prices of everything are about to go up. 

What next?  Well today we have an article in the WSJ highlighting more misdirection from the Fed in the following note;
DUDLEY - WHY WHAT HE SAID MATTERS.

In the WSJ article by Matt Phillips we note that the President of the Minneapolis Fed, Narayana Kocherlakota, said he expected “a big upward movement” in core inflation — inflation excluding volatile food and energy prices — from about 0.8% late last year to about 1.3% by year-end.

The market needed to snap to attention because this comment combined with Bullard's earlier speech in France started to indicate that the Fed may be signaling some sort of return to a less accommodative policy for interest rates and markets.  Now Kocherlakota isn't seen as an inflation hawk so this also adds to the importance of the statement.  But before we get too excited that the Fed might step off the accelerator of the car that is careening toward the edge of a cliff like Thelma and Louise, we had another statement that just seems to make you wonder what planet these guys live on.

JOBS DATA SAYS KEEP ON PRINTING!

Bill Dudley, President of the NY Fed (the only one that matters) stated today;

“Even if we were to generate growth of 300,000 jobs per month, we would still likely have considerable slack in the labor market at the end of 2012,” he said, adding “the unemployment rate is much too high.”

Dudley is a close ally to Bernanke and is seen to be steadfastly in his camp in terms of their view on interest rates.  So go ahead Bullard, Plosser, Hoenig, and Kocherlakota, spew out your logical double speak about how the Fed is actively watching for signs of overheating and inflation, the NY Fed and Bernanke are the only members that matter and we know they are committed to driving this convertible over the edge in a blaze of glory.

Thelma and Louise Final Scene -



Be Careful!

GOATMUG

GETTING CRAMERED - WHAT A DOWNER!

Have you ever been in on a really hot fad like owning OP shorts, parachute pants, or even a wearer of those cool yellow Lance Armstrong wrist bracelets when you are shocked to learn that the biggest loser or dork is wearing them too?  Suddenly the trinket or item isn't so cool huh?  Remember that feeling, cause that is how I felt when I saw this video from Business Insider featuring one of the most famous investors that have a knack for making terrible calls at the worst of times.  (Bear Stearns anyone?).



Jim basically says that silver is hot and the demand for silver is insane and his comments are a real downer.
http://www.nbc.com/saturday-night-live/video/debbie-downer/32806

WARNING #1
I would agree with Jim as I noticed this week that the markup over spot for Silver American Eagles at one of the lowest mark up dealers (that I've bought a lot from) is now at $3.60 per ounce over spot!  This actually changed from just one week ago when they were  at $2.60 over spot.  (mind you I'm talking purchases of more than 500 ounces at a time for this price).    I thought it odd on their website because they said they would not sell Silver Eagles because they felt that the mark up was too high.  I guess they felt the pressure.  So, if there is this kind of pressure to buy at any price, we know that we should probably be looking for an exit.  These kind of manias can go on longer than we think, but this is a BIG WARNING that people are buying at any cost. 

So, we have warning #1 - we see dealers marking up the cost to buy AND there is still a crazy demand (say bubble with me).

WARNING #2
As I mentioned earlier today in the post about Fed Governor's comments about inflation, copper is looking sick and it will take down the rest of the commodities complex with it.  Silver and gold will not be immune to a copper crash.
WARNING #3 - (AND PROBABLY THE SCARIEST OF THEM ALL)
Jim Cramer is actively commenting and favorable on a position in physical silver.  This should cause you to call your precious metal dealer and arrange for UPS delivery to them right now.

There may be room to run on silver, but most of all, it seems to be getting a bit crowded.  BE CAREFUL!

GOATMUG

MINISTRY OF DISINFORMATION - BULLARD SPEAKS

http://www.bloomberg.com/news/2011-03-26/u-s-1st-qtr-gdp-may-not-be-as-strong-as-expected-bullard-says.html

Fed Governor Bullard spoke earlier this week in France and as usual he has been tapped to attempt to send out feelers about future Fed policy.  What I've noticed is that Bullard is sent out to discuss future Fed strategy to test the reaction of markets and sentiment.  This speech is no different as he makes efforts to spin that the economy is improving and perhaps we just don't need the remaining QEII.

From the Bloomberg article -

"St. Louis Federal Reserve Bank President James Bullard said policy makers should review whether to curtail a plan to buy $600 billion in Treasury securities, noting that the U.S. recovery may not need that much stimulus.

“The economy is looking pretty good,” Bullard said to reporters in Marseille, France, on March 26. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short,” he said, referring to the second round of so-called quantitative easing.

I'm not buying what Bullard is selling here, or probably better stated, I'm not buying the suggestion that the Fed is desiring to remove QE from markets because they are healthy and ready to get back on track.  I believe that the Fed is actually concerned about commodity prices and the impact it is going to have on corporate margins and also the ability of the market to function with $100 oil.

OIL IMPACT
Bullard continues

"The oil price increases so far are “not enough to derail the U.S. recovery at this level,” Bullard said. “If oil prices stabilize where they are, we’ll be fine.” Prices would have to go substantially higher for there to be a “significant and material effect,” he said.



“We have to weigh those in the decision” on whether to stop the Fed’s QE2 program earlier than planned, Bullard said.

Hmmm.  So if you are the FED and you are concerned about higher oil prices that could impact the recovery what would you do?  Right!  You might talk about how you are going to end the one program that is the cause of all of this commodity inflation!  You don't have any intention of stopping early, but you would at least send out your lacky to talk about the possibility. 

FED STRATEGY
So, if Bullard is trying to signal that the FED may begin to wean the markets of its fiat version of crack, what would be their steps to attempt to detox the market and kick the habit?

"While the economy may still suffer shocks, the “balance sheet should be contingent” and the Fed should be ready if the economy turns down, he said.

“If the economy is as strong as I think it is then I think it may be reasonable to send a signal to markets that we’re going to start withdrawing our stimulus, and I’d start by pulling up a little bit short on the QE2 program,” Bullard said. “We can’t be as accommodative as we are today for too long, we’ll create a lot of inflation if we do that.”

If the Fed opts to start withdrawing stimulus and tighten policy, it should start with the “balance sheet” by selling bonds first, then changing its wording about keeping interest rates near zero for an “extended period” and then raising interest rates, Bullard said.


Bullard has warned since last July about a risk of Japanese-style deflation in the U.S. while calling for purchases of Treasury securities to reduce the threat. Bullard, 50, voted in favor of the Treasury purchase program in November and has rotated this year into an annual non-voting position.

You need to read that statement again --- "We'll create a lot of inflation if we do that".  Yes, for once Bullard and I are in total agreement.   If the Fed doesn't act they will create a lot of inflation (have created a lot of inflation).  What he doesn't say is that they have already created a lot of inflation in asset price terms (stocks and commodities) and we've discussed how this has led to the two year rally from the depths of the abyss and also led to the oil and food price rallies that have caused unrest and misery throughout the world.  Recall that Bernanke likes to say that he can inflate stock prices, but never admits to the inflation of food and fuel prices. 


TRAPPED BY A CREATION OF THEIR OWN MAKING
The next few months are going to be entertaining as the Fed starts with their balance sheet like Bullard suggests.  We'll see exactly how much appetite there is in the world market for over-priced treasuries that provide below market interest.  The FED is in a box and we'll get to view what impact selling bonds has on the market while the Treasury is trying to sell more and more bonds to meet the budget requirements of the ever-growing beast called the US Government.  The Treasury and goverment needs rates to remain low because we cannot service the debt if interest rates rise to market based rates, and I believe that we'll be able to witness just how handcuffed the Fed is once they try to remove themselves.

SINCE WHEN DOES THE FED TIME ANYTHING CORRECTLY?
We should all be very worried about Bullard's last statement below.

“It looks like inflation is bottoming out and if we continue that, I think we will have gone past” the worst, he said. “We seem to be turning the corner there, but I would want to see more data on that.”

I haven't seen a Fed Chairman that has been able to engineer a move in the economy that didn't overshoot one way or the other by injecting too much liquitity or tightening too much.  It is frankly just too hard.  If Bullard says that we are at the bottom of the inflation turn, it is probably more accurate to state that we have already made the turn and it is too late.

This week the FED did sell $2 Billion of their bonds yesterday under the TOMO program.  This is a very small amount, but could be construed as a test sale in the market.

http://www.newyorkfed.org/markets/omo/dmm/temp.cfm?SHOWMORE=TRUE

I believe that the best FED approach would be to announce that they see significant improvement in the economy and that the QEII program will be strategically altered by changing their allotment of allocated money.  This would be done by reducing the remaining purchases on a monthly basis,  but should then suggest that the progam is not ended, in fact, it is extended through year-end with the remaining portion of the $600 Billion as ammunition.  In addition, they plan to begin asset sales from the balance sheet with the expectation that they will raise interest rate at the end of the year or early 2012.  By proceeding in this manner, they essentially make the statement that the economy is getting better, they will try to improve their balance sheet, but they stand ready anytime with already approved liquidity to step in if markets seize up (or in the eyes of the Fed, if stock markets decline).


TRADING UPDATE
What are markets thinking about the notion that Bullard says that inflation might be around the corner?

TIPS

USO

 

Today and tomorrow make up the period we often call "window dressing" period where portfolio managers begin buying the hot stocks and selling the losers because they are required to disclose their positions at the end of the quarter.  Portfolio Managers don't want to answer questions like "Why didn't you own NetFlix?" if they can help it, so they go out and buy those stocks that have performed well and they sell the ones that haven't.  This has the effect to push up the market leaders over the last few days of the quarter.  It is often noted though that these same managers unwind those same positions near the beginning of the quarter.  If you don't like it, sell it!  I mention this so that we are clear to avoid getting sucked into the bullishness of these next couple of days.

I am concerned about commodities right now and therefore suggest that you do not add to new positions over the next couple of days.  Copper is extremely weak and most commodities follow the trend created by copper.  There are some very fundamental and specific reasons (specific to copper), but that doesn't mean that a big drop in copper won't bring the rest of the commodities market down too.  There are rumors of Chinese businesses buying copper and storing it in warehouses in the effort to then borrow against that asset because they cannot get traditional bank financing as the government has tightened loan availability.  There is talk that there is a huge amount of copper supply just sitting essentially as a funding source.  If copper declines significantly there will be effectively a margin call against those copper supplies and businesses will be forced to sell at the prevailing market rate to get out of their positions.  This squeeze could get really ugly really fast.  This is just another item to watch over the next couple of weeks.

JJC (copper etn)

GOATMUG

 







 

CHARLIE SHEEN, GASOLINE, AND OTHER THINGS

We've had a few headlines over the last few weeks that have moved markets.  We've seen a tremendous drop in assets after the earthquakes in Japan and the following nuclear drama that continues to unfold.  Since the initial drop we have seen a swing back to the upside which has bears in knots again and dip buyers loving life.

SOLAR FLARES OR JUST THE BOILING POINT?
As I've taken a few days to review the coming end of the first quarter, I can only shake my head and affirm that something other worldly is going on.  A few days ago I postulated that perhaps it was an increase in solar flare activity that has the world going nuts.  I mention this in jest, but there is a lot of study that has been conducted that does find a correlation between solar activity and human unrest, natural disasters, and even serious market corrections. ( http://journal.borderlands.com/2000/sunspots-and-human-behavior/ ) Think about it, we have absolutely no idea what affects the masses or provokes them to take action at a specific date and time.  The seeds for all of the things that have been going on have all been there, it just happens to all be going nutty at once.  Here is a partial list of the maniac behavior being exhibited on the earth currently;

A)  Charlie Sheen is absolutely freaking bonkers.  It may have been a media hype job, but there is some piece of absolute wackoness in that guy and the switch just got tripped.
B)  Riots in just about every country on earth with the exception of nations filled with fat sheep (USA comes to mind - but of course I forgot about the non-sheep unionites in Madison that are rioting because their ability to rip off the taxpayer is being removed).
C)  Union riots in Madison
D)  Japanese earthquake
E)  President Obama is more of a war-monger than the Bushes.  How about attacking Libya and their tyrant and then getting cold feet?  Ooops!  How many civil wars will we start through Fed policy and foreign policy blunders?
F)  Irish interest rates push through 10% and people still own the stuff?  I'm sure they are good for it just like Portugal, right?

(UGA) - TRADE UPDATE
I wanted to do a quick post that would highlight several of the areas I've been in and also positions that I'm watching.  As I highlighted back at the beginning of the year, energy and commodities would be themes I felt would benefit from the continued use of QEII.  All the way back on January 17th, I identified that one of my favorite trades for the year would be UGA.  http://goatmug.blogspot.com/2011/01/january-macro-update.html (go to the end in the TRADING UPDATE section).

We all know the reasons for this trade;
A)  Weak dollar
B)   Emerging country use of cars is growing exponentially
C)   US Summer price fundamentals (seasonal increase) through the first half of the year and $4.50 gas is reachable.
D)  Technical chart strength at the time as price action went through the $40 level.

What has occurred since that time has been exactly what I highlighted but the trade has also benefited from the Middle East unrest.  This really isn't a post about how great the call was, especially since I did not anticipate the riots and think that we are way ahead of where I thought we'd be after just two months.  At this point we see oil at $105 and gasoline is trading at $3.05.  I've included a link here from Yahoo News that shows that US gasoline inventories have actually declined for several weeks.

(UGA) - RISKS
The risks to the trade are that we continue to see rising oil reserves and that translates into larger stockpiles of gas.  Other risks include that idea that uncertainty and unrest go away, all rioters are placated with billions of petro-dollars, and also that the US dollar catches a bid. Given that I actually see a case for an announcement that QEII will be extended to late August (not more money, but more time), I think that the dollar bid catching is not a worry, and if anything our foreign policy actions will create more unrest in the Middle East in the coming weeks and months.  Even the collapse of Ireland or Portugal may have the impact of driving up the dollar, but I don't think it does much to stifle the move up in gas during the next few months. 

(UGA) - TARGETS
Previously I had indicated that $40.00 was our support and the initial price target for UGA was $52.00.  Please examine the chart below and find that the upper range of the trade is $67.00.  I personally won't be around to see $67.00 in the trade, because I will have a forced time stop here where as we reach the middle part of August I will begin selling.  No matter what, I do believe now that $60.00 is in the cards for this trade.  Levels to watch include the minor overhead resistance at $50.00 and also at $52.00.  I have a stop set for $45 on this trade.

WEEKLY CHART (3 YR)

EMA 14/40 CHART / WEEKLY

HOMEBUILDING - WHAT A GREAT BUSINESS!

Meanwhile, we have seen new home sales continue to go lower as the competing inventory of existing homes and tough credit standards impairs the ability of the new construction market to improve.

http://finance.yahoo.com/news/New-home-sales-slowest-in-at-apf-1641198396.html?x=0

I've included a chart for the homebuilders (XHB). These guys have rallied strongly since the summer of last year (what didn't?) but have stalled over the last month.  The bulls really need to push this to $19 and even through $20 to make this chart workable for me on the bullish side.  From a longer term perspective I like that the 14 EMA is way above the 40 day EMA (in the weekly chart below).  On the other hand, if $17 were to be penetrated here, $14 is a meaningful target.   

From a fundamental perspective this trade may be one where investors are betting that the homebuilders just can't do worse, so you might as well buy them.... that worked well back in 2009, I guess it could still hold true.  My concern for homebuilders though is that the inventory of existing homes continue to get cheaper and there is going to be a point where buyers just don't or can't justify building when there are perfectly good used homes with all the window hangings and landscaping done already.  I think the really wealthy are still building their dream homes, but poor folk and middle class folks are just doing perfectly fine with better priced alternatives.  If commodities continue to sky-rocket, construction costs for homes will make the choice a no-brainer (not to build.... I think we are pretty close to being there already - welcome to the new normal right?). 

BE CAREFUL!

GOATMUG