IT'S NOW A CON....CONFIDENCE GAME

We don't have time for long posts and rants about the stupidity of politicians, the Fed, ECB, and US Treasury so I'll be very quick about where we're at and what I expect.

WHAT WAS WITH THE DROP LAST WEEK
Last's week drop was about Europe (Italy and Spain) and how the leadership of the European Central Bank, IMF, and leading countries are fractured and have no solution to the debt problems in the Eurozone.  Trouble has moved from the PIIGS to the inner circle and the bond market has called BS on the entire Euro structure.  Because the leadership in these organizations came  out with three different versions of solutions and all of them were half-baked and incoherent the equity markets got blasted globally.

RATINGS DOWNGRADE A NOTHING BURGER?
Yes, the ratings downgrade was about 3 years overdue.  Yes the Tea Party forced the issue.  Yes the Democrats and RINOS agreed to much more, but the agreement was a sham just like the final agreement.  None of that mattered, the ratings agencies should have downgraded the US a long time ago and Standard and Poors was sending a much needed message to the politicians that they need to get our situation handled fast.  Democrats will say we need taxes, Republicans will say we need tax cuts.  I will say we need a flat corporate tax at about 20% that will unemploy hundreds and thousands of accountants that game the system and we need to start with GE.  We can also tax folks a bit more if they make more than $1.5 million a year and raise that rate to 40%.  We need to cut SS benefits, Medicare, and cut all foreign aid by 75%.  We need to have 10% cuts in every department in the Federal government to start.  We need to put Congress on a 401K and put them on a normal health plan and finally set two term limit maximums for Senators and three term limits for Congress.

WHAT WILL HAPPEN NEXT WEEK
The real answer is, "I don't know".  From the perspective of the European leadership,what needs to happen is that the ECB, IMF, and entire Eurozone with backing of the FED need to come out with a strong statement saying that they have a plan to buy up all the sovereign debt on the market and they are a backstop and will not let bond yields go above some number.  Yes, this takes huge firepower in terms of money but its all digital money anyway isn't it?  I'm writing this in a tongue in cheek fashion, but IF they want to have some market stability the only thing that can help is coming out swinging with a limitless plan that is overwhelming.  If the markets detect any weakness or fragmentation then all bets are off and those evil "bond vigilantes" will come back with a vengeance.  Let me be clear, this is not a real solution, nor is it viable for a sustained recovery, but these guys are just trying to keep the system alive.  The real answer is bond investors taking haircuts and losing billions of dollars, but so far the leadership in each area of the world has tried to prevent this needed solution from happening. 

This may only buy them a few weeks or months, but this is what must happen to prevent a total meltdown tomorrow. 

If the financial leaders come up with a solution as I suggest, we could actually see markets trade MUCH higher over the coming days.  If there is no solution or the sharks smell the blood of a divided Eurozone with no German backing, a market rout is sure to play out. 

Overseas markets in the Middle East traded down significantly this weekend.  Futures just opened up and the Dow Futures are down 270 as I'm typing, but there is lots of time left for the IMF, ECB, the Fed, US Treasury, and the President to do their overnight magic and work markets higher. 

MONEY MARKETS ARE STILL A HUGE CONCERN
I have received a couple of emails this weekend about where investors can hide in this mess.  The trouble is that most average investors don't have good places to "hide" because the money market funds they would normally go to could be much riskier than some of the non-money market options.  If you can short, then short and be careful, but I'm writing the following information with Joe-6 Pack investor in mind.

With that warning made, you could consider some short term investment grade corporate bonds as an alternative to money markets.  This strategy is not without risk, BUT there are positives here in the sense that investors will shun stocks for treasuries and corporate bonds if things get really nasty (nastier).  Companies have a lot of cash on their balance sheets and sometimes you'd rather risk the event risk associated with one company over taking a gamble on what time bomb is held in a money market that you have no control over.

I hate to say it but you need to stick with the ideas I posted several days ago in the midst of the total rout of the market, because if indeed this ship is righted you will need a "relative value play" for some of your money.  Please read GOLD IS GOOD, SOME COMMODITIES, THEN THE REST.

The thrust of that post is simply this.
1)  The Un-Currency (Gold) is probably best especially in the event that the ECB subverts national power and usurps the individual nation state's power and begins to issue Eurozone bonds.  Couple that with a QEIII being unleashed in some form and it is a place to not only hide but to gain.  Physical holdings are better.

2)  Selective commodity plays may also be winners however the entire global growth story is crashing to an end, so therefore you must only buy commodities that may be in short supply like agricultural commodities.  Oil will be subject in the short run to a fall.

3)  Dividend paying equities will also be relative winners.  Remember long only funds must go somewhere so by choosing these positions you may also lose, but the bet here is to lose less than the broader market.  I don't like this strategy, but some folks just feel like they need to be in the market 100% at all times (and remember those money markets can be and are risky too!).  These dividend paying stocks also compensate you while holding them.  Think firms like Phillip Morris (MO) and Campbell's Soup (CPB).

4)  I also outlined a longer term strategy of owning dividend paying commodity producing stocks.  Now this is going to be very volatile in the short run, but from a longer term perspective I think this is one of those long term home runs since they own everything that will go up in value as the dollar continues to crater.

I still haven't gotten a total body count on the damage that last week did to hedge funds.  Last week's volatility and commodity destruction surely blew up a few trading firms. 

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com

STANDARD AND POORS DOES THE OBVIOUS - DOWNGRADES US DEBT

BLAME THEM AND THEY START DOING THEIR JOB.... UH OH!
It is very interesting what happens when you start blaming people for financial meltdowns and saying that they were complicit in the near collapse of the financial system.  They start doing their job and actually making tough downgrades that no one wants them to.  Lawmakers and everyone else have yelled and screamed that the rating agencies didn't do their job but quietly they've been bribing them and nudging them to not do their job on the US sovereign debt for ages.

Well here it is.  I've been writing about this now for right about 2 years and the unthinkable has happened.  Is it the end of the world, probably not.  In the case of Japan and Canada both countries actually saw their yield on debt drop after downgrades, BUT you never know.  When you are the most secure and stable credit in the world and it suddenly isn't, who knows what will happen.  I will do another post this weekend with some guesses about what will be next.  Until then, here is the press release;

http://blogs.wsj.com/marketbeat/2011/08/05/sp-downgrades-u-s-debt-rating-press-release/

Here is the Standard and Poors 8 page Credit Report - GLOBAL CREDIT PORTAL
BLOOMBERG INTERVIEW
Here is an interview Tom Keene had with David Beers who is a Managing Director with Standard and Poors that was just completed.  Bloomberg cut off the interview in the last minute or so.  There isn't much meat here, but I wanted to make it available.



TEA PARTY TO BLAME - (YES, BUT NOT IN THE WAY LIBS THINK)
I read an article on a liberal website just before posting this that blamed the Tea Party for the downgrade!! Standard and Poors does reference in the release that they felt like the parties were so far apart that the atmosphere was not one that gave them confidence, but we must remember that the truth is that Standard and Poors told the CONgress on the front end before any legislatio­n was passed or the debt ceiling raised that they needed a total of $4 TRILLION in budget cuts to stave off a rating downgrade.  Did we get $4 Trillion?  NO!  We got something like $1 Trillion and I'm sure most of that is totally fake!


I provided my opinion several times over the last couple of weeks that the Republicans and Democrat politicians were completely tone deaf to the reality that the rating agencies were serious. These agencies are serious now that they are being blamed at least in part for the financial collapse of 2008 and 2009. Of course they are going to take action to drop the USA against the backdrop of a collapsing Eurozone. I think the US leadership didn't seriously consider the ramificati­ons of politics as usual and the impact on the USA when they disregarde­d the warnings. While the liberals may feel like the Tea Party was busy trying to win a battle these few CONgressme­n and women were the only ones listening to the debt rating agencies. They were essentiall­y fighting for exactly what S&P was telling them to get done  My only regret is that these Tea Party members caved in and didn't believe in their convictions.  If they would have hung tough we may not have avoided a downgrade, but we certainly would have had more cuts than we got.

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

1.1 MILLION NEW GUESTS INVITED TO THE PARTY! (SNAP DATA)

WOW!
That is pretty much all I can say this month as we get a view of the monthly SNAP (Food stamps data for May 2011).  Wasn't it just one month ago when I was gushing all over this recovery saying that this could potentially be the inflection point that we all had been looking for?  Didn't the trustworthy data from the Ministry of Truth show a decline of SNAP costs in April?  Wasn't the slowing pace of growth in January, February, and April the affirmation that our hopes had finally found a home?  Well, clearly, the answer is NO! 

RECORDS YOU DON'T WANT TO BREAK
SNAP data for May shows that plan enrollment increased by a whopping 1,105,217 people which is an increase of 2.4% over the preceding month.  This is the second highest participant growth reading in my six years worth of data AND is the highest monthly percentage increase ever in that time frame!  The greatest increase was in September of 2008.

LOW LIGHTS 

• This month's data shows a 3.5% year-to-date increase in participants.
• Costs for the SNAP plan increased by $172 million this month to $6.1 Billion.
• 45.8 million people are in the plan which is now 14.9% of the nation.  That is 1 out of every 7 people on the government dole.

THE BIG PARTY!
Apparently the government is inviting everyone to this awesome party.  We've got 1.1 million new guests all decked out and ready to celebrate the greatness and largess of the good old USA.  One out of every 7 people in the US!  I guess the only question we have to ask ourselves now is who is this party for?  Who could possibly mobilize so many people and create such excitement?  The party is obviously for our wonderful President!  He does turn 50 after all and no one wants to miss a beautiful occasion and an opportunity to fawn over our beloved leader.  The guests just can't get enough of the party favors and goodies, it almost seems like they could do this party every month, and why not?  It doesn't cost them anything? (Last rant here I promise.   Are you kidding me, people really celebrate his birthday!?  Are we done with the worship of him yet?)

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

GOLD IS GOOD, SOME COMMODITIES, THEN THE REST

Here are a few comments from Faber.  I think I'm in agreement with him but there are limits to this.  I think timing is everything now and we are in for more ups and downs that will make the casual observer sick to their stomach.  I give the stock market 6 to 8 months and we will then begin our descent to challenge the market lows from 2008 and 2009 in calendar year 2012.



So we've retraced all of the gains for 2011 and the S&P500 today went back into negative territory for the year for a few hours.  Buyers returned and they clawed their way into positive territory for the 2011.  In the midst of this, a lot of damage has been done to charts AND to the psyche of many investors. 

LAST WORDS ON DEFAULT AND THE DEBT CEILING (FOR NOW TILL SEPTEMBER)
Many are howling that the Congressional radicals had something to do with this and the argument over the debt ceiling and potential default put our country at risk and harmed the market.  Truthfully, the entire process was a theatrical production that was crafted and twisted to "get the deal done", but also jam folks into treasuries (we can't have interest rates getting out of control can we?).  The best way to get investors to have an appetite for treasuries is a good sell off in stocks.  Guess what we got?  A good sell off in stocks! 

I want to also dispel a myth about the impact of a credit downgrade in the USA.  First of all, a downgrade is going to happen.  At some point even the rating agencies can't ignore the glaring truth of math or they will get their fill of arm twisting and bribery and finally do what is necessary.  Once we do get downgraded, the world won't end.  In fact, much to the surprise of many, we'll probably see our yields for treasuries go even lower!  It sounds absurd, but it has happened in Japan and Canada.  Now having said that, it isn't all a nothing burger, there will probably be many, many nasty ramifications that come in the "unintended consequences" bucket with a downgrade.  The after shocks are probably why we are seeing a huge hesitation from Moody's and Standard and Poors.  The overnight repo market and the money markets could have some significant disruptions as changes to the US Government's AAA ratings could create havoc.  Remember, mutual funds and pension funds often have limitations on the types of instruments that can be held, including the types of collateral and credit rating of the issuer.

Last thing about the title of this section.  You may have wondered why I mentioned that this is the last mention of the default and debt ceiling talk till September when we just got a deal done that will take us through 2012.  Well two things.  First, we are spending money way too fast and will burn through the appropriated $400 Billion that has been allocated for 2011 well before the end of the year.  Second, the Super Congress subcommittee is required to make their report known by Thanksgiving and an up or down vote must be held.  We'll begin to hear about out of control spending and default again by then.

POSITIONING TODAY FOR THE 6 MONTH PERIOD
So what are we to do?  Are we to hide away and wait for the beginning of the fall?  Maybe.  But realistically we must find some way to make money between now and then and there are going to be some good opportunities in the midst of the decline.  Faber's calls for investments in precious metals really is another call for investing in UN-paper currencies.  He sees the USD and the Euro falling and it seems this has been the trend for a while. 

Think this through.  Many think that if we see a strong dollar we cannot have an increase in commodities.  Perhaps that is not true, in fact we saw a preview of this on Tuesday with the large sell off in the markets.  The USD increased and gold also rocketed higher.  In conjunction with this we saw the Euro fall as the bond market continued to worry about the solvency of the Eurozone.   I have another post in the queue that supports this and highlights that people are pulling their money out of anything and everything in Europe and buying gold.  Their act of repudiation of the Euro in favor of gold is pushing the metal higher and the Euro lower.  While the Euro falls other more stable currencies are moving higher.  The Swiss central bank intervened today attempting to get people out of the Swiss Franc by lowering interest rates today.

Is it tough to buy gold here at its record highs?  Yes, of course it is.  I can only recommend purchasing over periods of time rather than loading up all at once.  Like Faber mentions, if gold drops, take advantage of the price opportunity (ask buyers of silver at $32).

COMMODITIES
If US growth is slowing and China and Brazil and all the emerging markets are waning how can purchases of commodities be a good bet?  All of those things are true, but I'm still convinced that there are going to be opportunities in "hard stuff" that performs relatively well despite a fall of global markets.  Remember central banks are in a race to zero and the Fed can win at that game.  If they continue with stimulus like QE III, QE IV and more in all of their manifestations, the dollar will fall.  Dollar denominated commodities will at least counteract that drop with a rise (yet there may be a fall due to declining emergings I know).  Oil, grains, livestock, fertilizers, and those rare earths might be the play. 

EQUITIES?
The falling currency gives us another reason to pick up some select US and global equities that have two characteristics.  First, we are interested in companies that work with these commodities and own them.  Second, we want to obtain those companies that pay decent dividends.  RIO, BHP, COP, CVX, FCX all fit in this category.  How have earnings this quarter been so decent in the midst of a US slowdown that seems to be accelerating?  The reason is that many of these large companies are so diversified that they are truly global in nature.  A good example is Intel.  (No, don't buy this one!)  Intel sells more than 80% of its products outside the US!  Intel is no longer a US company and we must remember this.

OTHER THOUGHTS
Now I know at least one reader that will retort that higher oil and gas prices will cause a bigger stall in the US economy as it will be a significant headwind to any growth.  He is absolutely correct, but as the dollar falls there is only one direction for oil and gas, and that is up.  Clearly this all factors in to my assertion that we are winding down the "good times" and only have a limited period before a sustained decline begins.

I did end up buying some other stuff today as well and I will post some thoughts on those trades in the coming days.  We all need to use stops and even if we have a sustained bounce all traders must keep the Euro contagion issue in mind.  We are very close to unraveling over there and you must have risk controls on at all times.   

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/

WHAT DID THOSE FINANCIAL TERRORISTS GET?

$3,850,000,000,000

As we come to the end of the debt ceiling debacle for 2011 and 2012 it is important to highlight what our fine leaders and representatives accomplished for us hard working folk.  I only want to highlight the key points and I'll add some thoughts below the summary.  In addition, I'll talk about market direction in the TRADING UPDATE section.

DEBT CEILING HIGHLIGHTS -

• The compromise allows the debt ceiling to increase by as much as $2.4 trillion dollars in total. Included is an immediate increase of $400 billion dollars. President Obama would be permitted to request another $500 billion increase in the coming months, which Congress could vote to disallow by a veto proof two-thirds margin. A further increase of between $1.2 trillion and $1.5 trillion would be available after a special committee identifies matching levels of additional spending cuts.
• The agreement calls for cuts of more than $900 billion over ten years in spending from programs, agencies and day-to-day spending. It would include security-related and non-security-related cuts. According to the Congressional Budget Office, "discretionary" spending would be decreased by $21 billion in 2012 and $42 billion in 2013.
• The agreement creates a 12-person House and Senate special committee to identify further spending cuts. The committee must complete its work by Thanksgiving - November 23 - and Congress must hold an up or down vote on the committee recommendations by December 23. The committee could overhaul the tax code or find savings in benefit programs like Medicaid, Medicare or Social Security. Congress could not modify the committee's recommendation.
• Should the special committee deadlock or should Congress reject the committee's recommendations, then automatic across the board spending cuts of at least $1.2 trillion would go into effect.
• The agreement requires that the House of Representatives and the Senate vote on a Balanced Budget Amendment to the Constitution, although its passage is not guaranteed.
• The deal also includes changes to Pell Grants and student loan programs. Pell Grants will receive a $17 billion increase for low-income college students, which will be financed by the elimination of subsidized student loans for most graduate students

Ok, here's a little refresher before we get started.  The 2011 budget is slated to be a total of $3.85 Trillion and of that it includes borrowing almost half of the sum to meet those requirements.  That borrowing represents a $1.65 TRILLION deficit.  Stated another way, we are spending almost double what we are bring in.

OVERVIEW -
I'm fine with bullet one where they parse out the amounts over time.  Clearly the President got what he wanted which was a deal to get him through the 2012 election cycle.  Hasn't the guy ever heard about serving the public?  Who cares about the election, fix the problem!

Cuts of $900 Billion in ten years are a complete farce.  There are so many problems with the approach that these clowns took with this deal it is simply appalling.  First 2012 and 2013 cuts amount to around $70 Billion.  These are cuts that likely will happen, but amount to about 2% of the freaking budget!  Who runs a budget like this?  In other words, this $900 Billion is a complete joke.

The Special Committee is something that I feel is dangerous.  While I like the idea of a group getting together to actually work AND having their ideas implemented, it is dangerous in terms of who will be on the committee and who won't.  Effectively we already know that to be considered for the committee you must  have voted "YES" for the debt ceiling agreement.  That means that many of the fiscal conservatives in Congress will not be allowed to participate.  Ron Paul and others that actually vote based on conviction will be excluded, and he is exactly the one person that should be on the panel.

I do like that cuts will be enacted and if not, across the board cuts will come.  This is REALLY what has the Democrats shaking in their boots.  If the Republican caucus really wants to find cuts they can simply vote the recommendations down and the hammer will come.  Of course we all know that the Republicans talk a good game but don't really have a real desire to change anything so we'll see some other compromise that will keep the status-quo going for a little while longer till the house of cards completely implodes.

The Balanced Budget piece has no teeth.  It is interesting that almost all politicians say that they want a balanced budget, but somehow it never gets put to a vote.  My guess is that we'll have about 99% absenteeism on the day that vote is held.  That issue is one where everyone likes to affirm it, but no one wants it really.  If we had a balanced budget amendment, the government ponzi scheme would face limits and that can't be good for anyone that derives power from an unlimited and insatiable government.

Finally, the Pell Grant thing is also pretty laughable.  We are going to continue down the road of getting our young folks all going to college so they can get in line with the other unemployed folks with useless liberal arts degrees.  I actually would support this measure IF and only if Congress required these students to self-fund their expenses until they actually received their degrees (yes loans, working, etc) to make the cost to taxpayers riskless.  Second, the government Pell grants would only reimburse students that earned degrees in engineering, science, and other hard-core programs that were technical in nature.  Upon earning degree AND working for 2 years in the field the Pell grant would pay off or reimburse a student for books and tuition up to a maximum amount.  This would ensure that the taxpayer only pays for success and doesn't pay for Jimmy to "find himself in college" and also makes sure that the graduates that earned the degrees are employable contributors to society.  While it sounds tough, too bad.  WE HAVE ENOUGH UNEMPLOYED LAWYERS, LIBERAL ARTS LOSERS, AND DROP OUTS in this program, enough is enough.  It is our money and it is time to demand responsible stewardship of it.

And yes, all of those scientists could work to create the next generation of these (see video below) which just happen to be some of the coolest planes ever.  I really put them here to show you what $1.5 Billion will get you.  Now contemplate this, you could buy 650 of these awesome flying wings for just under 1 trillion.  My guess is that when all is said and done, we won't have anything to show for our use of $1 trillion in deficit spending this year, so if I have to spend an extra trillion or two I'd rather have the B-2s.

WHO WON?

My first take on this deal is that the Democrats won.  Yes the media is howling and stating that the Republicans won and the Tea Party members are terrorists, but that is foolish.  The Republicans caved just like I said they would.  Essentially they could have gotten anything they wanted if they were willing to push things to the limit, they weren't.  The President gets to push this issue out past 2012 so he can concentrate on the election and continue telling everyone that he inherited a financial mess.

While the Tea Party may have scored some points by getting the balanced budget onto the map and even getting the special subcommittee to make cuts, they have allowed themselves to be characterized as a radical fringe group of nut jobs willing to take down the USA to accomplish their goals.  They need to be more forceful and vocal stating that they love this country and that the politicians on the left and right simply are part of the political class that could care less about the nation and its people.  They must state this emphatically every time and demand recognition that the past policies of Bush and Obama are failures and don't work.  The liberals hate the Tea Party and attempt to label them and marginalize them in order to attempt to make others discount them.  It has worked so far, but they must fight on.

Unfortunately Republicans are the the guys that are attempting to play the game of politics the best.  You can see it in the old veterans.  They are loving having a "bad cop" group that they can blame for being on the fringe and then they can go to their constituents and blame the liberal left.  They proudly sit in the middle playing both sides off each other.  I can tell they believe that they will rise to power in 2012.  The problem is though that many of us recognize this game and the time for life-long politicians is waning.  We need leaders that make hard choices and choose the side of long term financial strength for our country rather than another election cycle victory. 

Here is a list of those that voted for and against the bill in Congress -

Here is a list of those that voted for and against the bill in the Senate -

I will do a trading update this evening.  Please drop by again to view this post.  http://www.goatmug.blogspot.com/

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/