Monday, November 1, 2010 – Election Trick or Treat?

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SgtWs

Monday, November 1, 2010 – Election Trick or Treat?

Post by SgtWs »

As the coming election looms I cannot help but wonder if we can expect a Halloween trick or treat? I'm hopefully optimistic, but I am not gonna try and guess what will happen. Just watch the price action and take my cues from there.

I’m still invested 25% S and 25% C, 50% G.

C Fund Chart – I’m actually neutral on this chart; neither bullish or bearish. The price action is going sideways while the MACD and RSI are both trending down. If this were a bearish chart the price would be drifting down too. Currently it seems that trading is drying up while the market waits for the election.

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S Fund Chart – I feel the exact same way as the C Fund.

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F Fund – I’m gonna go out on a limb here and say that I feel that the F Fund has seen its highs and will soon start falling.

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One of my friends offered this suggestion to newbies at trading.......

"I have a niffty little experiment I want to play with here and see what happens in real time with every one.

The Plan: Use two exponential moving averages (EMA) to confirm the direction of the trend.

An up trend is when the 10-day EMA is above the 40-day EMA.

A down trend is when the 10-day EMA is below the 40-day EMA.

A congestion is when the 10-day EMA and 40-day EMA cross each other repeatedly."


If you try it and it works, please share with the rest of us.........now I'm just gonna go from the hip......

I've been listening to all the hype in the news lately about a 'slow down' in the Chinese economy, China raising rates, etc......and it really baffles me. No matter what measure you want to work with, if you step back and take a look at the big picture, you should ignore the day-to-day headlines and focus on the long term. The long term structural growth story is and will remain robust for as far as the eye can see. Chinese growth is being driven by its massive scale of its rapid urbanization and industrialization, as well as its increasingly strong domestic consumption. Forget the day to day, look at the long term. I currently own BIDU (China's Google) and it has been on a tear! I love it!

The F Fund - unless we start crashing I'm calling the long run up in the F Fund officially over. It might meander sideways, but I believe it is done, and when an economic recovery does occur it will drop significantly.

I still don't like Japan or the thought of investing there. Yea, I'm reading the articles, but I'll pass. They are has beens..........

Oil is cheap now, so if your willing to buy an oil ETF and hold on to it, eventually it will pay off. Demand will continue to grow, especially if worldwide economies rebound, and were getting less and less out of the ground.

There has been a lot of hoopla over the massive amounts of insider selling at many large corporations. I think some are looking too much into this as a doom and gloom indicator for the markets. I speculate they expect the Bush Tax Rates to expire by year end and are locking in gains at a better tax rate.....that's all.

Housing sucks and will continue to suck for the foreseeable future........what else can you say?

Succinct Summation of Week’s Events (10/29/10)

By Peter Boockvar - October 29th, 2010

Positives
1) Chicago, Richmond and Dallas PMI’s better than expected
2) Initial Jobless Claims show big drop
3) New Home Sales touch above estimates and Existing Home Sales at 3 mo high (caveat looking forward being foreclosure issues)
4) UK Q3 GDP at 3.2% rises twice forecasts and consumer confidence hangs in
5) French, German and Italian consumer confidence hold at good levels
6) Personal consumption and equipment and software spending good in Q3 GDP.

Negatives
1) UoM confidence falls to lowest since Nov ’09
2) Conference Board confidence reveals still weak labor market
3) Q3 GDP ordinary overall as exports lag
4) Core Durable Goods orders unexpectedly fall, inventories creep higher
5) Interest rates move higher, has Fed lost QE2 battle before it officially begins?
6) CRB touches 2 yr high
7) PIG CDS move higher
8) AAII says Individual investors get giddy on stocks.

Be Careful What You Wish For
Be Careful What You Wish For
October 29, 2010
By John Mauldin

People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them..
- Jean Monnet, father of the European Union


This week we turn our attention to the elections and their aftermath. Long-time readers know I am a Republican, but I offer some sobering advice to my friends on my side of the aisle: Be careful what you wish for. It’s one thing to get a few votes. It’s quite another to live up to promises that simply can’t be kept. We will start our analysis by looking at the GDP numbers that came out today, and we will end by pointing out that there will be no easy choices. And then we can turn our attention where it should be, to the World Series here in Texas.

But first, let me congratulate Jon Sundt and his team at Altegris Investments, who last week announced they had been bought by Genworth Financial, a Fortune 300 company, for a rather tidy sum. It is a tribute to their hard work and the quality of their team that Genworth not only bought them but required management to stay on with no changes in direction or purpose, simply adding distribution and financial backing. In a real sense, they bought the people and not the company.

And that is the same reason I am proud to have been their partner for over seven years. We have a common sense of purpose in helping investors find quality alternative investments in this turbulent world. And let me say that every one of my partners around the world have that same purpose and quality team. If you are known by the quality of people with whom you associate, then I am not in a bad league at all. You can learn more by going to http://www.accreditedinvestor.ws and signing up. That is for accredited investors (net worth $1.5 million or more) in the US, Canada, Europe, and Latin America. If you are not an accredited investor and in the US, you can see about alternatives available for you at http://cmgfunds.net/public/mauldin_questionnaire.asp. (In this regard, I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.) And now to our letter.

It’s Softer Than It Looks

The GDP number came in at a rather soft 2% growth, up slightly from last quarter’s 1.7%. From the standpoint of creating new jobs, 2% just doesn’t cut it. We need about 100,000-125,000 new jobs a month just to keep up with population growth, and a 2% GDP will not give us half that, as we saw last quarter. Most economists say you need about 3.5% GDP growth to get solid job reports.

And the prospect for getting that robust a number any time soon is not looking good, as the soft number mentioned above looks even softer when you delve into the details. 70% of the total growth in GDP came from growth in inventories, up by over 40% from the second quarter. Now normally a build in inventories is a positive, as it shows confidence on the part of businesses. But business confidence surveys have not been all that good, which suggests that businesses may be cautious, as this cycle does not seem to resemble past cycles.

(Well, except for Apple. Everyone’s going to get an iPad for Christmas. You haven’t got one? It is so way cool. My new favorite toy and fast becoming an indispensable business tool.)

How likely are we to see that same type of growth in inventories in the last quarter? Not very, I think.

Sidebar: For the non-geek reader, when inventories are increasing, that is a “plus” for GDP. When those inventories are sold, that reduces GDP. That may seem backwards, but that is just the way the math works. So if inventories are sold in the 4th quarter (think Christmas sales), that will be a drag on the GDP numbers.

In every previous post-recession cycle, GDP growth would typically be around 5% at this time. But this is not a business-cycle recession; it’s a deleveraging, credit-crisis recession. Thankfully, those do not show up all that often, but sadly one has come home to roost in much of the developed world this decade. The aftermath of credit-crisis recession is a slow growth period of 6-8 years, punctuated by more volatility and more frequent recessions.

What economists call the “final sales” portion of GDP has just been growing at less than 1% over the last 18 months. That is a lukewarm number, to say the least. That is not the stuff of a strong GDP.

And export growth is slowing, which rather surprises me, as the dollar has been weaker. If imports rise and exports do not rise as much, as has been the case, that is a drag on GDP. State and local governments reduced GDP by 0.2%, and this12 % of the economy is likely to be under continued pressure, not adding to GDP for quite some time.

It would not surprise me to see GDP growth be closer to 1% in the 4th quarter, unless we start to see evidence of more inventory building. That is not good for jobs, personal income, tax collections needed to cover deficits at all levels, or consumer confidence. My worry is, what if we get some kind of shock to our economic body when growth is so anemic?

Not Finer for the “99er”

I had dinner last Sunday night with David Rosenberg. He is beginning to look at the possible effects from what he calls the “99ers” going off extended unemployment benefits. I knew this was coming but had not really looked into the fine print. He wrote me later:

“The looming expiry of the emergency unemployment benefits in the U.S. poses a very large risk to aggregate personal income over the next few quarters. Currently, combined with state programs, someone who loses their job is entitled to 99 weeks of unemployment benefits (a “99er”). However, the extended benefits are set to expire on November 30th, and our back-of-the-envelope calculations shows nearly a million 99ers will be cut off in December alone, with the remainder (about 3 to 4 million) falling off the rolls by April.

“Given that the average weekly unemployment cheque is about $300/week, this amounts to nearly $80 billion (annualized) loss of aggregate income over the next few quarters. This means that personal income could fall by 1.0% QoQ annualized for each of the next three quarters, starting in Q4. The 2% QoQ real GDP estimates pencilled in for Q4 2010 to Q2 2011, will look far too optimistic if such a loss of income does occur. Given that material downside risk to growth going forward, we intend to do more detective work on this file.”

Government checks of one form or another are about 20% of total personal income in the US. Will the lame-duck Congress extend those benefits? Will they extend the Bush tax cuts? I just (literally) got off the phone with Suze Orman. She said she thinks they should raise the limit to $500,000 or $1 million. That higher number would be a reasonable compromise, in my humble opinion. Will the Republican Congress and Senate agree when they come back?

I don’t want to get into the small-business person making $300,000 and living in a very volatile business climate where they feel the need to save rather than invest and create new jobs. These guys need all the working capital they can get. And let’s be clear, this year’s “profits” becomes next year’s working capital when you are a small business owner. Your credit line at the bank just isn’t cutting it anymore.

Be Careful What You Wish For

Everyone by now is predicting the Republicans to take the House and pick up anywhere from 6-8 Senate seats. We’ll see. This is going to be a very interesting election, as there is a whole new dynamic in place.

Let’s look down the road. I think we will at best be in a Muddle Through Economy for the next two years. Unemployment is going to be above 8%, best-case, in 2012. If the
Bush tax cuts are not extended, in my opinion it is almost a lock that we go into recession next year, unemployment goes to 12%, and underemployment gets even worse. That is not a good climate for Obama and the Democrats in 2012. It is especially bad when you look at the number of Democratic Senate seats up for re-election that are in conservative states. The Republicans could take a serious majority in the Senate.

And then what? Right now Republicans are running on promises that they will not cut Medicare and Social Security, but are going to reduce spending and get us closer to a balanced budget. But everyone knows that the only way to get the budget into some reasonable semblance of balance will be to either cut Medicare benefits or increase taxes.

There are only the two options. Yes, you can reform medical care, and I think much of Obamacare should certainly be repealed, but that does not get us anywhere close to dealing with the real issue, and that’s a fact. There are tens of trillions of unfunded liabilities in our future, which must be dealt with.

Let me be very clear on this. I am not really worried about the supposed $75 trillion in unfunded Medicare liabilities in our future. That is an impossible number. If something can’t happen it won’t happen. Long before we get to that apocalypse, we find a bond market that simply refuses to fund US debt at anywhere near an affordable cost. Crisis and chaos will ensue. Remember the quote that led this letter?

People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them.
- Jean Monnet


The simple reality is that if We the People of the US want Medicare, in even a reformed and more efficient manner, we must find a way to pay for it. It will not be cheap. Raising income taxes on the “rich” is not enough. You have to go back and raise income taxes on the middle class, too. Oh, wait, that will be a drag on the economy and consumer spending. And in any event it will not be enough.

The only real way to pay for those benefits will be a value-added tax, or VAT. And while it could be introduced gradually, let there be no mistake that it will be a drag on economic growth. Government spending does not have a multiplier effect on the economy. It is at best neutral. What creates growth is private investment, increases in productivity, and increases in population. That’s it. Tax increases have a negative multiplier.

A significant VAT along with our current income taxes will give us an economy that looks more like the slow-growth, high-unemployment world of Europe. Can we figure out how to deal with that? Sure. But it is not growth-neutral.

Republicans in 2013 will be like the dog that caught the car. What do you do with it? The last time they (embarrassingly, we) really screwed it up. The defining political question of this decade will not be Iraq or Afghanistan, or the environment or any of a host of other problems. The single most important question will be what do you do with Medicare? Cut it or fund it? Reform it for sure, but reform is not enough to pay for the cost increases that will come from an increasingly aging Boomer generation.

There is no free lunch. At some point, you cannot run on “no cuts in Medicare” and “no new taxes” and be honest. At least not this decade. Maybe when we have cured cancer and Alzheimer’s and heart disease and the common cold at some future point, medical costs will go down, but in the meantime we have to deal with reality.

You may be able to fool the voters, but you will not be able to fool the bond market. Not dealing with reality will create a very vicious response. Ask Greece.

And that is the national conversation we must have with ourselves. There is a cost to government. There is a cost to extended Medicare benefits. (I am blithely assuming we deal with all the “easy” stuff like Social Security, and make real cuts in other areas.)
And for my international readers, this is an issue that the entire developed world must deal with. We all have our problems created from years of very poor choices, overleveraging, and deficits. It will not be easy. I must admit to smiling when I see the protests in France over raising the retirement age from 60 to 62. Really? Amazing.
And while France causes me to smile and shake my head, the refusal on the part of the US leadership to give more than lip service to solutions that might disrupt their slim majority of voters is maddening.

This election next week will change very little in real terms, the things that matter, like whether the US economy can grow or will face a very real crisis and a true depression.

That potential is in our future, and it is coming at us faster than you think.

Philly, London, and the Rangers

This is a sports- and family-filled weekend. Tonight I go with good friend Barry Habib (who hosted us at the Yankees-Rangers playoffs) to a Dallas Mavericks game. Then I have tickets near my old outfield offices for family and a few friends on Saturday and Sunday for the Rangers-Giants World Series. I admit I was very privately hoping sweep, so I could see the final game in Texas on Sunday, but so far the sweep is not going the way I hoped! I am really pulling for my Rangers to turn it around for the next three games.

Then it’s off to Philadelphia for a speech on Tuesday morning for my partner Steve Blumenthal and CMG, then the train to New York, a few meetings, and a midnight flight to London, where I will spend the next four long days with co-author Jonathan Tepper of Variant Perception, finalizing our book, The Endgame, which will be out early next year from Wiley. And maybe we’ll throw in a few fun dinners. But when I get back on the plane on Sunday, I intend to have the book finished. It will be good to have this two-ton gorilla off my back.

The book will deal with the realities we face all over the world. We are trying to write a book that even politicians can understand. The choices we face are not fun, and not without costs, but to avoid making them means that we really do drive the car into the ditch.

My bet? We figure out how to Muddle Through. Maybe that makes me a Pollyanna, but I think that here in the US we will get through. The choices are tougher if you are Greece or Spain. But even then, individual responsibility must take over.

Time to hit the send button. For once, it is not midnight and some fun awaits me before I go to bed. I will have to find out how the World Series ends when I wake up in London. The election results, too. Here’s hoping we take the Series back to San Francisco. Have a great week!


John Mauldin
John@frontlinethoughts.com Copyright 2010 John Mauldin. All Rights Reserved

Cumberland Advisors
2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236
614 Landis Avenue, Vineland, NJ 08360-8007
1-800-257-7013 http://www.cumber.com
Not More QE?
October 29, 2010

Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at http://www.cumber.com. He may be reached at Bob.Eisenbeis@cumber.com.

The topic of quantitative easing has been beaten to death. Speculation has raged about how much large the Fed’s purchases will be. What the duration of those purchases will be. What the impact on yields will be. Will they be 3 basis points or 30 basis points? Pseudo-econometric analysis has been done attempting to justify whatever predictions are made. As we have written before, these estimates are subject to wide confidence bands, are developed from data that don’t include scenarios like we are currently experiencing, and are based essentially upon output-gap/Phillips-curve models that have been discredited.

Putting all that aside, the market seems to be providing fairly surprising answers with potentially important implications for the FOMC. First, it now appears that the decision to engage in more quantitative easing, which seems to have been made before the upcoming FOMC meeting, has been more successful in affecting the inflation outlook than might have been expected – for both good and bad – in an extremely condensed period of time. Markets quickly digested the news and responded by raising both equity and bond prices. However, this initial reaction is now being reversed. Most notable were the results of the TIPs auction, which suggested a huge upward shift in inflation expectations, greater than the nominal yields on 5-year Treasuries. Rates across the spectrum seem to be drifting up a bit, also consistent with the acceleration in inflation expectations. Note that none of the rhetoric coming from the Fed talked about interest-rate increases that would accompany more quantitative easing. But in the last couple of days, things seem to be backtracking as more and more uncertainty creeps into those initial market reactions, equities pull back, and skepticism grows that the huge volume of purchases that some commentators argued for have begun to seem less and less likely.

Everyone has run ahead of the FOMC, but now find themselves less and less sure because of the lack of specifics. All of this means that the Fed can’t simply sit pat and let the market do its work for it. The FOMC not only has to deliver but must do so with sufficient specifics that markets gain more certainty about the future course of policy. This, however, is where the “bargain with the devil” that Kansas City Fed President Tom Hoening so strongly warned about comes into play. Failing to deliver on expectations will be more damaging than to actually deliver, but delivering will simply signal that the worst (that is a return to higher interest rates) is yet to come. When that will happen, no one knows. Surely, it will be some time yet before an unwinding is perceived as necessary, especially with the fixation of the current FOMC on employment rather than inflation risks.

Just to suggest how deep the hole is that the FOMC has dug for itself, consider the portfolio implications of more quantitative easing that can be derived from the CUMB-E index that we have been publishing for some time on our website. That index is an attempt to estimate how much flexibility the FOMC has to raise interest rates before the capital losses incurred exhaust its equity capital. The following table uses estimates of the duration of the Fed’s portfolio to calculate how many basis points the term structure can rise before the economic value of the Fed’s portfolio goes to zero, given alternative volumes of purchases and where along the term structure those purchases occur. The analysis makes no attempt to take into account price or market effects that such purchases may have.

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The results are quite striking since, even prior to a purchase of $500 billion, the estimate was that the policy margin was already thin at 67 basis points. That margin is cut by 50% if only $500 billion in purchases are concentrated in the over-ten-year maturity class. There is virtually no cushion if the larger amounts that some have urged are kept on the table.

With such uncertainty and the exit costs so high, one wonders why the FOMC is going down this road, when it isn’t even clear that they will or can have a measurable impact upon employment.


Bob Eisenbeis, Chief Monetary Economist

Forget The Foreclosures, Here’s The Simple Thing That Is Crushing The Banks

A JPMorgan analyst suggests that the current maelstrom surrounding banks could cost the industry somewhere between $50-$120 billion, but arguably the fears here are being overblown.

But there is a clear threat that is very easy to see: the economy is weak and banks don’t have the business volume to make a lot of money.

As credit specialist David Goldman observers, banks are still plowing more and more money into government securities — the opposite of real banking activity.
What should worry investors, rather, is the simple question: how can the banks make money when no-one wants to borrow and asset returns are imploding? The absence of viable investment opportunities for the banks is illustrated most poignantly by one data point, namely banks’ accelerating purchases of Treasuries.

Bank purchases of treasuries spiked upward during the past several weeks just as the yield curve flattened and Treasury returns collapsed. It was one thing for banks to borrow at next to nothing and buy 2-year notes at 1%. The trade doesn’t make sense now. It is risky for banks to go far out the yield curve, but they seem to be doing so.


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Thanks for reading! – Rodney

TSPKip
Posts: 1225
Joined: Mon Sep 27, 2010 7:34 am

Re: Monday, November 1, 2010 – Election Trick or Treat?

Post by TSPKip »

The market tigers [day traders] smell much prey ['all in' scent] at 2 pm each day and will now fill their bellies on the staked out domesticated goats [TSP market in play who can't get away due to the 4 hour delay to close] eating until full [to the limit of their own stock portfolios.] It happened to me yesterday, though, fortunately, I got loose and made it bake to the barn [left the market with but a scratch.]
Seek Wisdom where it can be found.

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