SOTHEBY'S SAYS WELCOME TO THE NEXT COLLAPSE

DOES THE AUCTION HOUSE SHOW US WHERE THE MARKETS MIGHT GO?
I've followed Sotheby's for a couple of years as it has been said that the stock has marked the tops of markets as it rolls over.

Take a look at this monthly chart for BID and you can see quite clearly that the first peak was March of 1999 which was followed by a drop of about 65% in the stock.  The second top was October of 2007 in the financial crisis which fell by 89%.  April of 2011 was the top of Sotheby's in the latest bull run and if the two previous instances can guide us at all we might see a drop to the 20 level.  We'll dub this latest collapse "THE LEADERSHIP CRISIS".

IS IT TOO LATE?
Now you may say, "Goat, that is great, you put this post up after a 20% drop from the high in the overall markets, how can this help?"  Well, my answer is simply this, that these top marks are confirmation that we need to wait for a bottoming in BID to turn bullish on the market again.

In all of these previous times, BID topped out first and fell hard.  I've used SPY in comparison and we find that each peak to trough was a fall of at least 50%.  If we see that same sort of fall over the next weeks or months or a year, this indicator could have us on the look out for a 680 SPY level as a bottom target (137 was top of this last run for SPY).

Just thought you'd find this interesting.

TRADING
Just an update.  I personally did not add any long positions today related to the post of adding more gold, commodities, or dividend players.  I did try to go long some SPY calls and was immediately stopped out.  Just another reminder not to get too cute when a bear freight train is flying down the tracks.  That small trade cost me little, but reinforced to me how it is not worth trying to catch the exact bottom, patience will be rewarded.  Having said that, the BID chart suggests that the real bottom my be way down the road.

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

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/