I’m Back!! Catching Up

Ok I’m finally back. I was very busy taking care of some personal/professional business, which took all my time away from research and maintaining the weblog, however, I am back and ready to get down to business.

Let’s Start With Some Thoughts

1) Although most are writing off Dubai and Greece, keep an eye out for the beginning of something quite nefarious. The effects of these sovereign related problems must be watched closely.

UK bond yields are already rising and are the highest in a month while the US has had a couple of sloppy Treasury auctions (@ home, Illinois is having its credit rating downgraded and is now looked at as the next state to follow California to the fiscal dog-shed). The point is that we have done absolutely nothing to eliminate this “zombie debt” except sweep it under the rug and hope that we outgrow the problem. While unprecedented gov’t action has saved the economy from falling over the precipice, it has not eliminated the problem and we can expect to see more nasty surprises such as sovereign defaults in our future. All we have done is move the crap debt from the private business sector to the gov’t’s so now the gov’t is infected with this stuff (mind you households still have to deal with it). When these problems spring loose is anyones guess, but the problem is not gone, rather the economy and financial markets have just been morphined. In due time, the effects will fade and the problem will be staring us in the face once again.

2) The most potent portion of the stimulus is now starting to fade. While some of the components have been extended (homebuyer credit), the bulk has begun to subside. A large portion of the stimulus is still in the pipeline for 2010, however this will be more based on maintaining our GDP level, not boosting it. This portion will be more based on infrastructure projects rather than free money to buy a car or house or appliance, or whatever other consumption gimmick is out there.

3) Job losses have receded, but then again, what did you expect? You need bodies to get things done right? Now for the second side of the equation (we need this side too if we are going to get the V-shaped recovery priced in the market). In a word: “Sludge”. There are no signs of a strong revival in hiring. Why? Because no one has any money to spend, which would induce business owners to expand production. Why doesn’t the majority of the population have money? Because they have debt (recurring theme right?). The match to light up the fire has been struck (Stimulus: cash for clunkers, cash for appliances, homebuyer credit) and usually it would be enough to light the fire. This time though, it will simply burn out. While we might have job gains as early as January of next year, they will be small and not enough to justify the high multiples in our markets right now.

4) The true state of our Housing Market will be on full display come January when December numbers are published. We had roughly a month between the expiration of the original homebuyer credit and its extension. After its expiration, mortgage applications subsequently plunged and recently have been picking back up. Another sign included the NAHB Housing Index dipping just before the expiration and pending home sales taking a dive. Folks we can’t have credit after credit to support housing and is the reason why I think we are prolonging the inevitable, a second leg down.

5) Thus far holiday shopping season has left MUCH to be desired given all the stimulus we’ve had. This next week could be what breaks the damn into panic mode. (see “deflation” below)

6) Iran/Israel continues to worsen. This is a huge geopolitical risk which would effectively end whatever “global recovery” we had on our hands.

Some Links

Stimulus? Inflation? What I see is deflation.

Even though politicians promise to avoid protectionism, it’s not what’s actually happening

It’s not all bad though. We are seeing improving conditions abroad. What bothers me is that it’s all stimulus induced (and is potentially bubblelicious). We can’t be all exporters in this world. The development of domestic sectors in economies that have been export reliant for decades cannot be created in a span of one year, more like a decade.

More warning signs on the next big problem.

But I’m starting to be more open to other views…not that I espouse them. My response to this article? “So the biggest credit contraction in the history of man, the largest and most intense permanent job loss environment ever, the biggest bust of the biggest debt load we have ever seen is just going poof? It’s all just going to go away?” It just doesn’t make any common sense to me. Just more of the same to me….”stocks are going up up up!”

This guy is the shit. HE is what we need. I agree 1000% with his comment regarding “financial innovation”. It has been one giant mirage.

I agree with this guy too.

If Citigroup pays back its TARP, that could be its death wish. If we have a double dip or another scare anywhere and a subsequent risk aversion trade (all very likely in my view), are they seriously going to come back for more money? I think the taxpayer will revolt at the thought of it. This little nugget screams contrarian.

A real good sign…debt destruction. More dollars will be destroyed than created over the course of the next couple of years.

The sweet smell of Ricardo-Barro Effect can be found here. The rich are footing the bill in the future folks.

Market Thoughts

Main uptrend lines have been broken in many currency pairs as well as the Nasdaq and the DJ Transports. While the S&P and DJIA continue to follow their trend lines, volume continues to decrease. Bearish.

All indices for the last few weeks have been range trading and is indicative of a market struggling for direction.

The market is stuck in a vice in my view. Bad news would call into question the vitality of the recovery (given that some pretty large cash flow growth rates are priced in already), while good news would bring speculation of rate hikes, inflation fears, or simply a mop up of liquidity all which would lead to a stronger dollar (the gas that has set the market on fire). Case and point: what happened after the awesome jobs report this last Friday?

I do not believe Santa will be com
ing this year due to the large gift already bestowed upon us and the fact that everyone and their mother is expecting a Santa Rally.

Gold tanked (8% in a week that must have made Paulson quite flustered considering over half his portfolio is in the precious metal)…it has more to run down in my view as the dollar is getting ready for a pretty big rally taking it up to the mid 80s.

One piece of good news that can’t be ignored is that the Dow Transports are about to break to a new high which would, under “Dow Theory” support the case for higher prices.

Overall, I am neutral with a little bearish bias to finish the year off.

Upcoming Economic Indicators
Not On My Watch List:

(I don’t expect big surprises from these indicators. If they indeed do come out positive, consider that oil was plunging fast last year and we are at higher prices than at that time. What we are looking for is the “Core” readings which will continue to show benign inflation readings to the chagrin of the inflation hawks. There is simply no pricing power on the part of companies to increase prices. If they do, they will suffer a drop in sales, it’s that simple.)

Existing Home Sales
New Home Sales
(These reports should be great and the usual spin on “how we hit bottom” will abound. Funny what free money will do to any market right? Next month I believe will show the housing market’s true state)

On My Watch List

Empire Manufacturing: Was down last month, but still in healthy positive territory. I will be interested to see if there are any signs of fatigue from the global inventory bounce (it’s Tech sensitive). The SOX (Semi Conductor Sector) has been looking pretty toppy since September and almost rolled over in October only to spring back to life in November (I swear the bulls are starting to remind me of zombies that seem like they are almost dead then BOOM pop right back up. I guess it all makes sense since we are living in a zombie nation at this point right?)

Capacity Utilization: Should show an increase reflecting further capacity usage from in November. Auto production continues strong from what I’ve read and should lead to a better reading in this indicator.

Housing Market Index.: Could show an increase in expectations once again as the homebuyer credit was extended. This would be the first reading since it’s extension.

MBA Purchase Apps.: More good news from this indicator is expected as people continue to take advantage of the extension. I think this trend will continue till April when the credit is over (will they extend that one too?). A mini thesis that I have been pondering is that the purchase applications do not match the performance over the last few months. Homebuying expectations from the University of Michigan Consumer Confidence plunged last month as the rush to take advantage of lower home prices and free money continues to fade. You can only pull demand from the future for so much.

Housing Starts: Could go either way but I’m thinking down. Seasonality usually is bearish at this point due to how freaking cold it is in the winter months (it is 6 degrees with a negative wind-chill in Chicago as I write this). I’m not sure if the positive effects of the extension make their way into this metric at this point. Next month most likely.

FOMC Meeting: More “we are keeping rates down for an extended period” here and thus more impetus for higher stock markets using free money. A deviation from the “extended period” verbiage would cause fireworks to the downside. It’s really all a house of cards that could be toppled from one misplaced word….is this really what sustainable bull markets are made of?

Leading Indicators: This should be interesting. They have been positive for over 4 months but have been depending more and more on gov’t provided stimulus helping the “stock prices” and “Bond Yields” portions of the metric higher. Meanwhile more economically important sections of the reading have been slumping more and more. I’m looking at a downside surprise here.

Consumer Sentiment: Will the announcement of a lower unemployment rate and possible increases in jobs in addition to a 60%+ rally in the stock market and an incessant media-induced pounding of how crap will get better turn consumer sentiment? Maybe. I’m thinking the holiday cheer takes over at this point and could produce a positive surprise. Don’t count on this continuing though…it’s the debt stupid!

Personal Income and Outlays: Downside surprise in my view. November has not produced the “Bargain Friday”, high foot traffic, higher sales promise that economists/Analysts have been predicting…I think this and next month will begin to show the serious cracks in the V shaped recovery armor.

Durable Goods Ord: Another downside surprise coming in this one. Core Capital goods have only had 1 positive reading in the last 5 months. Last month’s reading was piss poor and non-positive holiday sales will make purchasing managers think twice about entering large orders. The signs of the ending of the manufacturing bounce will start to show up.

GDP Revision Q3: Another downward revision is what i’ve been hearing, but I have no in depth opinion here. It’s in the rear view mirror at this point.

Whew! That’s about it. Coming up next will be my trade ideas and predictions for 2010. I hope to be at least somewhat close. But everyone has a right to make their predictions, however dumb or bold they might be. Happy holidays!

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